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Edited Transcript of GIFI earnings conference call or presentation 5-Nov-19 3:00pm GMT

Q3 2019 Gulf Island Fabrication Inc Earnings Call

HOUMA Jan 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Gulf Island Fabrication Inc earnings conference call or presentation Tuesday, November 5, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cindi Cook

Gulf Island Fabrication, Inc. - Executive Assistant to CEO

* Kirk Meche;President and CEO

* Westley S. Stockton

Gulf Island Fabrication, Inc. - Executive VP, CFO, Treasurer & Secretary

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Conference Call Participants

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* Evan Wax

Wax Asset Management, LLC - Founder

* James Philip Geygan

Global Value Investment Corp - VP Advisory

* John Eric Deysher

Bertolet Capital LLC - President & Chief Compliance Officer

* Martin Whittier Malloy

Johnson Rice & Company, L.L.C., Research Division - Director of Research

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Presentation

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Operator [1]

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Good morning, and welcome, ladies and gentlemen, to the Gulf Island Fabrication, Inc. Third Quarter 2019 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.

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Cindi Cook, Gulf Island Fabrication, Inc. - Executive Assistant to CEO [2]

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Thank you, and good morning. I would like to welcome everyone to Gulf Island's Third Quarter 2019 Teleconference. Our results were released yesterday 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 later today.

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 2018 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 issued yesterday afternoon.

Today, we have Mr. Kirk Meche, President and CEO; and Mr. Wes Stockton, Executive Vice President and Chief Financial Officer. Mr. Meche?

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Kirk Meche;President and CEO, [3]

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Thank you, Cindi, and good morning to all of our listeners. Results for the quarter reflect revenue growth on a year-over-year basis, benefits of our cost-reduction efforts and improvements in utilization of our facilities, especially on the latter part of the quarter. During the quarter, we were awarded a 70-vehicle ferry from the Texas Department of Transportation with delivery scheduled for 2021.

Our Fabrication Division delivered a MET tower to an offshore wind customer, and our Shipyard Division completed its fifth harbor tug. While our results continue to realize improvement from the better utilization of our facilities and ongoing cost-reduction efforts, our quarterly results were negatively impacted by several events, one being Hurricane Barry that affected the entire Gulf Coast. We incurred cost to prep all our Louisiana facilities in advance of the storm and to get the yards operational after we were clear of danger as we ceased operations in advance of and during the storm. Our Services Division was further impacted as we evacuated our offshore personnel.

While this impact was unfortunate, the bigger impacts during the quarter were cost increases on our harbor tug projects and icebreaker vessel project within our Shipyard Division and a charge on our project in our Service Division. I will address each division and the project impacts separately.

With respect to the Shipyard Division, as it relates to our harbor tugs and the overall 10-tug program, during the quarter, we completed the fifth tug and are on schedule to complete the sixth tug by the end of this month, with the seventh tug at the end of this year. The eighth tug is scheduled to be completed in the first quarter of 2020, with the final 2 tugs scheduled for completion in the second and third quarters of 2020.

While I'm proud of the quality of the tugs we have delivered and the progress we are making on remaining tugs, we continue to be impacted in our Jennings facility by labor challenges in the Gulf Coast area, including the required use of nonoptimal contract labor mix. The labor challenges have not only impacted us on our self-perform work but have also impacted our subcontractors.

Specifically during the quarter, the fifth and sixth tugs were impacted by poor performance of a third-party paid subcontractor, requiring us to supplement and reperform the scope of work. This not only resulted in additional costs for us to reperform this work but also caused disruption and delay.

To address this risk going forward, we have terminated all third-party subcontractors for the remaining vessels and are performing the paint scope in-house, using our own paint crews under our own supervision. This strategy has already shown signs of improvement, and our results are trending within our estimated man hours to complete the scope of work on remaining tugs.

In addition to the impacts of the paint subcontractor on the fifth and sixth tugs, during the quarter, our forecast costs were impacted by increasing cost estimates from a subcontractor for the electrical and instrumentation work scopes on the final 2 tugs. The higher cost estimates reflect the previously mentioned ongoing labor challenges based on our subcontractors. The higher E&I cost estimates did not impact the first 8 tugs as our subcontractors had already committed to the E&I scopes. However, this was not the case for the final 2 tugs because execution is not scheduled until later in 2020.

I would like -- I would now like to note that all remaining subcontracts for the tugs have now been fully committed. Lastly and represent about half of the increase in our forecast cost in the tugs of the quarter is a change in our assumption regarding future improvements in productivity. Specifically, we had anticipated improvement in our productivity as we progress from one tug to the next, which is consistent with our historical experience when we have contracts for multiple vessels.

However, as we have ramped up the executions of projects, the labor mix and productivity has not improved. We are still optimistic that our newly installed management team and the changes they have implemented will provide improvement on the latter tugs. However, given that we have not yet experienced the improvements anticipated, we believe adjusting our forecast costs for the remaining tugs to levels that are consistent with the results achieved in the last completed tug to be appropriate at this time.

Actual results of remaining tugs are tracking consistent with these revised forecasts. Rest assured, we are not satisfied with just achieving our revised forecast. Our management team continues to look for opportunities to improve our execution, including reducing our overhead -- overall headcount from recent peak levels to improve efficiencies in our remaining tugs.

I would like to also note that based on our current forecasted schedule delivery dates for the ninth and 10th tugs, we would be entitled to early delivery incentives if these delivery dates are achieved. We have not reflected these potential incentives in our estimates.

The other projects in our Shipyard Division that experienced forecast cost increase was our icebreaker vessel in our Houma facilities. As communicated last quarter, the project was impacted by deficient subcontracted production engineering that resulted in construction labor rework and schedule extensions. This extension of schedule resulted in launching a vessel during a period in which the water levels within the navigational canal were at a lower levels.

Consequently, we had to add additional buoyancy via airbags and incur additional third-party costs to safely launch the vessels. Further, although the project is scheduled for completion in the fourth quarter of this year, we're required to deliver the vessel in Canada. So we cannot deliver the vessel until the first of quarter 2020 due to winter seaway restrictions, thus incurring additional anticipated costs associated with the delay.

I would like to note that this vessel is the deepest draft vessel we have within our backlogs. We do not anticipate similar launch impacts for any other projects in the backlog. Further, the remaining vessels in our Houma backlog are delivered at dock side, and accordingly, the risk associated with delivery at other locations is minimized.

Although I'm clearly disappointed with the charges associated with these projects, the impacts are the result of specific items, and we do not anticipate similar impacts on the remainder of our backlog. Specifically, 70% of our total backlog and over 80% of our shipyard backlog is related to the construction of our 3 research vessels and 3 Navy vessels. These vessels are constructed in our Houma facility, and we are focused on the production engineering risk that affected the icebreaker vessel.

I would like to point out that the primary reason for the delayed ramp up of these 3 research vessel projects was a collective decision between us and the customer to spend more time on production engineering, to provide assurance that all factors are incorporated and checked prior to production joints being released to the field. As part of this decision, the customer extended the schedules for the projects to account for the engineering delays.

As it relates to the construction of the 3 Navy vessels, you will recall that the construction of the first vessel was impacted by a partial stop-work order due to a competitor's challenge of the award. We received a favorable ruling on this matter and proceeded with the construction of the vessels.

The important thing to note, however, is that during the partial stop-work order, we were still allowed to progress with production engineering and procurement. And the schedules were readjusted after the partial stop-work order was canceled.

In addition, although resources and labor productivity are always a risk in our business, please note, we have not encountered the same labor challenges in Houma that we are experiencing in our Jennings facility.

Further, we have customers for these projects who are actively involved throughout all phases of the projects. Additionally, the proximity of our Houma location to our other operations enables us to have the right resources focused on these very important projects, as we understand the need to execute the projects on schedule and within budget.

Moving on to our Service Division. We currently are experiencing more competitive maintenance-related T&M work and less fabricated products and services work associated with offshore subsea tiebacks. This has resulted in lower margins as subsea tieback services and smaller fabricated products have historically provided higher-margin opportunities. We expect a similar mix of work for the fourth quarter 2019, but expect a shift back to more offshore tiebacks and fabricated products as we move into 2020.

In addition to the impact of our lower-margin backlog mix for the quarter, the major contributor to the loss for the quarter for our Service Division was associated with the project for a subsea pipeline structure that will be placed in an extremely corrosive environment. Due to this corrosive nature of the chemicals and products that will flow through the pipeline, the wells for the project are subject to stringent welding procedures and specifications to ensure the well holds up under these conditions.

The procedure we anticipated would be used had been used on other subsea structures that had similar but different requirements, which we believe would meet our customers' criteria. As part of our quality process on all projects and upon review of the bid, we included cost to perform sample wells and have been tested. Our initial wells passed all requirements, and we proceeded with fabrication activities.

However, our initial wells on the structure itself did not pass, requiring a full investigation as to the root cause of the problem and delay on the project. As time is of the essence, we could not wait for another well test to be performed and determined that the best solution was to invest in the existing procedure that required significant and costly third-party services and support to meet the customers' requirements. Had we not implemented this revised plan, production would have been further delayed, which would have resulted in additional schedule delay and associated liquidated damages.

With respect to our Fabrication Division, we continue to make progress on this construction of projects in our backlog, rationalize our cost and improve the utilization of our facilities. Further, we continue to focus our business development efforts on petrochemical and industrial fabrication opportunities. This market continues to be competitive, and we are very focused on the risk-versus-reward equation as we evaluate and pursue such opportunities.

Unfortunately, in this competitive landscape, our risk evaluation and the delay in timing of several large projects has not resulted in large new project awards. However, our bidding activity continues at a high level and the value of identified project opportunities, that are targeted for award by the owners and contractors through the end of 2020 and into 2021,is approaching $800 million.

Clearly, we will not be successful in all these pursuits, and the projects may not be awarded in the time frame communicated or at all. However, this new award pipeline is an indication of the size and market and opportunity base for our Fabrication Division.

With respect to our pending litigation, a mediation occurred during the third quarter for our previously completed jacket change order dispute. However, it did not result in any agreement amongst the parties, and accordingly, the dispute continues to be hit at the trial in January 2020.

As it relates to our MPSV dispute. In May, the court denied the customer's motion to obtain possession of the vessels. However, during the quarter, the customer filed a second motion for summary judgment, reurging its previously denied request to obtain possession of the vessels. A hearing on the customer's motion is scheduled -- is currently scheduled for today. With that said, we continue to retain possession of the vessels as we work through legal processes.

With that, I'll turn the call over to Wes, who will provide additional details of our results and segment breakdowns. Wes?

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Westley S. Stockton, Gulf Island Fabrication, Inc. - Executive VP, CFO, Treasurer & Secretary [4]

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Thanks, Kirk, and good morning, everyone. Let me provide some additional details on our results for the quarter.

Consolidated revenue for the third quarter of 2019 was $75.8 million with a net loss of $6.8 million or diluted loss per share of $0.44. This compares to revenue for the second quarter 2019 of $80.5 million and a net loss of $5.3 million or diluted loss per share of $0.34. This also compares to revenue for the third quarter 2018 of $49.7 million and a net loss of $10.9 million or diluted loss share of $0.73.

Our decrease in revenue for the quarter, relative to the trailing period, reflects a decrease for our Services and Fabrication Divisions primarily due to the timing of awards, and the increase in revenue relative to the same period of 2018, reflecting increase in activity across all our divisions.

With respect to our consolidated operating results. The loss for the third quarter 2019 was due to charges of $3.9 million related to the previously referenced projects in our Shipyard and Services Divisions; an impairment of $324,000 in our Shipyard Division for an asset held for sale that was sold last week; and the partial under-recovery of our overhead cost, primarily associated with the underutilization of our fabrication facilities; and an approximate $400,000 impact from the hurricane -- from Hurricane Barry due to the cost of hurricane preparation and the hurricane's impact on our operations and personnel.

The increase in operating loss for the quarter, relative to the trailing period, was due to the project and Hurricane Barry impacts and the asset impairment, offset partially by the trailing period, including charges of $2.3 million for projects in our Shipyard Division. The lower operating loss for the current quarter compared to the same period of 2018 was due to higher revenue, increased recoveries of our overhead costs, a higher margin mix for our Shipyard Division absent the current quarter project impacts, lower incentive plan, Board of Directors and legal costs, and the prior period including bad debt expense of $2.8 million for an accounts receivable reserve.

These benefits were offset partially by the current period project impacts, a lower margin mix for our Services Division, absent the project impact, and higher professional fees and other costs related to the evaluation of strategic alternatives and other business initiatives.

Now let me provide some additional details of our quarterly results by operating segment. For our Fabrication Division, revenue was $19.5 million for the quarter versus $22.4 million for the trailing period and $3.4 million for the comparable period of 2018. The operating loss for the quarter was $848,000 compared to an operating loss of $1.2 million for the trailing period and an operating loss of $8.3 million for the same period of 2018. The decrease in revenue relative to the trailing quarter was due to lower activity on our paddle wheel riverboat project. The significant increase in revenue relative to the comparable period of 2018 was due to progress on our riverboat, vehicle ferry and jacket and deck projects, which were not under construction in the prior period.

With respect to operating results, the loss for the third quarter 2019 was due to the partial under-recovery of our overhead cost. However, in spite of this partial under-recovery, EBITDA for the current quarter was approximately breakeven. The decrease in operating loss relative to the trailing period was due to higher recoveries of our overhead cost, a higher margin mix and lower incentive plan cost. The lower operating loss for the current quarter compared to the same period of 2018 was due to higher revenue, increased recoveries of our overhead cost, lower cost associated with our former EPC Division, lower legal cost related to customer disputes as these costs are reflected within the Corporate Division in the 2019 period, and the prior period including bad debt expense of $2.8 million for an accounts receivable reserve.

For our Shipyard Division, revenue was $39.4 million for the quarter versus $37.6 million for the trailing period and $24.5 million for the comparable period of 2018. Operating loss for the quarter was $3.3 million compared to an operating loss of $3.6 million for the trailing period and $2.5 million for the same period of 2018. The slight increase in revenue relative to the trailing quarter and significant increase in revenue relative to the comparable period of 2018 was due to progress on our research vessel projects and our towing, salvage and rescue ship projects, offset partially by lower revenue for our harbor tug and icebreaker projects.

With respect to operating results, the loss for the third quarter of 2019 was due to charges of $2.4 million associated with the previously referenced projects, the partial under-recovery of our overhead cost and a previously mentioned impairment of $324,000 related to an asset held for sale. The decrease in operating loss relative to the trailing period was due to high recoveries of our overhead cost, offset partially by the impairment.

The impact of project charges was not significant between the 2 periods as the trailing period included comparable project impacts. The higher operating loss for the current quarter compared to the same period of 2018 was due to the project charges, offset partially by higher revenue, increased recoveries of our overhead costs and a higher margin mix for the balance of our backlog.

For our Services Division, revenue was $17.5 million for the quarter versus $24.1 million for the trailing period and $22.6 million for the comparable period of 2018. Operating loss for the quarter was $407,000 compared to operating income of $1.7 million or 7.2% of revenue for the trailing period and $2.5 million or 11% of revenue in the same period of 2018. The decrease in revenue relative to both the trailing quarter and comparable period of 2018 was due to the timing of awards and materials representing a lower percentage of revenue.

With respect to operating results, the loss for the third quarter 2019 was due to a charge of $1.5 million associated with the previously referenced subsea project and a $200,000 impact related to Hurricane Barry preparation and the hurricane's impact on the utilization of our facilities and personnel. The operating loss for the quarter relative to income for both the trailing period and comparable period of 2018 was due in part to the project and Barry impacts in the current quarter.

Aside from these impacts, operating income was lower than the trailing period due to lower revenue volume, and operating income was lower than the comparable period of 2018 due to a lower margin project mix for the reasons previously discussed by Kirk.

Our Corporate Division operating loss for the quarter was $2.3 million compared to an operating loss of $2.3 million for the trailing period and $2.5 million for the same period of 2018. Operating loss for the quarter was consistent with the trailing period. However, it was lower relative to the comparable period of 2018 due to lower costs associated with supporting our former EPC Division and lower incentive compensation and Board of Directors costs, offset partially by higher legal fees due to changes in the classification of certain legal costs between our corporate and operating segments and higher professional fees and other costs related to the evaluation of strategic alternatives and other business initiatives.

Now let me provide a few comments regarding our income taxes and backlog and liquidity as of quarter end. Consistent with previous quarters, our tax expense for all periods reflects only state income taxes as we have not recorded a federal income tax benefit for our losses. We will, however, receive a cash tax benefit on future taxable income.

With respect to backlog, at September 2019, our backlog totaled approximately $462 million, representing a decrease of $15 million from June 2019 and an increase of $105 million from year-end 2018.

Our quarter-end backlog by operating segment was $407 million for our Shipyard Division, $40 million for our Fabrication Division and $15 million for our Services Division. Our backlog excludes customer options on contracts for the U.S. Navy, which, if exercised, would increase this backlog by an additional $333 million.

With respect to our liquidity, we ended the quarter with cash and short-term investments of $71.4 million, a decrease of $4.6 million from June 2019 and a decrease of $7.8 million from year-end 2018. The decrease in cash investments for the current quarter was due to our operating losses for the period as our working capital was comparable between periods. We anticipate ongoing variability -- quarterly variability in our project working capital requirements, including a potential increase in working capital in the fourth quarter.

With respect to our overall liquidity at quarter end, we had $10.4 million of outstanding letters of credit and no borrowings on our credit facility, providing $29.6 million of availability for additional letters of credit or borrowings. As a result of the aforementioned, we continue to maintain a healthy liquidity position with total cash, investments and availability under our credit facility of approximately $101 million at September 2019. This current liquidity excludes potential proceeds from the sale of machinery and equipment totaling $18.5 million that remained held for sale at quarter end.

As mentioned previously, last week, we sold the dry dock that was held for sale for $600,000, leaving $17.9 million of remaining assets held for sale. We have had parties inquire about these assets and express varying levels of interest. However, we have not reached any agreements for sale and continue to actively market the assets.

I will now turn the call over to Kirk for final comments.

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Kirk Meche;President and CEO, [5]

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Thanks, Wes. As previously stated, I'm disappointed with the project impacts during the quarter. Because such impacts are the result of specific circumstances, we do not expect additional charges on the projects going forward and realize the importance of executing our projects on schedule and within budget.

As announced yesterday afternoon, the Board has completed its previously announced review of alternative strategies for the company that began in early May 2019. After careful consideration, the Board determined that the interest of the company's shareholders are best served if the company remains independent, and the Board focuses on executing our existing business plan, which includes enhancing the company's resources, processes and procedures to improve competitiveness, and overall project execution and consideration of organic and inorganic opportunities for growth.

Shelby, you may now open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Martin Malloy with Johnson Rice.

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Martin Whittier Malloy, Johnson Rice & Company, L.L.C., Research Division - Director of Research [2]

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Kirk, I've enjoyed working with you over the years, and best of luck in your future endeavors there.

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Kirk Meche;President and CEO, [3]

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Thank you, Marty. I appreciate the support over the years as well.

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Martin Whittier Malloy, Johnson Rice & Company, L.L.C., Research Division - Director of Research [4]

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I just -- maybe could you talk a little bit about how you expect next year to ramp up as -- or the work next year to ramp up on the research vessels and the Navy vessels? And maybe kind of how we should expect to progress through the year?

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Westley S. Stockton, Gulf Island Fabrication, Inc. - Executive VP, CFO, Treasurer & Secretary [5]

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Yes. Marty, this is Wes. We do expect them to just sequentially increase. By the time we get into the fourth quarter of next year, we would expect that the volume of activity flowing through the shipyard will essentially take us to -- not what I'd call full capacity, but optimal capacity. So from an absorption perspective, fully absorbing our cost and really hitting on all cylinders at that point from a volume perspective.

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Martin Whittier Malloy, Johnson Rice & Company, L.L.C., Research Division - Director of Research [6]

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Okay. And in terms of potential inorganic and organic growth that you spoke about, can you expand on that at all in terms of types of businesses or types of work that you might be looking for?

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Westley S. Stockton, Gulf Island Fabrication, Inc. - Executive VP, CFO, Treasurer & Secretary [7]

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Yes. Marty, I don't know that we're in a position to comment on that quite yet. But obviously, we're not going to look at anything that's outside of our core wheelhouse. I think, obviously, we need to focus, first and foremost, on getting profitable. We're not focused on the top line. We're focused on, at this point, execution and generating positive operating cash flow. But to the extent we see opportunities to supplement what we're doing and it makes sense, we would look at other opportunities. But it's going to be within the realm of either our services business and -- from a likely perspective because that's where we see opportunities for growth that we can't necessarily do organically. Beyond that, we'll have to see what's out there, but nothing on the horizon.

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Operator [8]

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(Operator Instructions) We'll take our next question from JP Geygan with Global Value Investment Corp.

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James Philip Geygan, Global Value Investment Corp - VP Advisory [9]

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Can you quantify the early delivery incentives on the harbor tug projects and how you can achieve these without experiencing further complications on the project?

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Westley S. Stockton, Gulf Island Fabrication, Inc. - Executive VP, CFO, Treasurer & Secretary [10]

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Yes. It is, JP. JP, I'll answer it this way. Based on our current forecasted completion dates, we would be contractually entitled to incentives. That number is somewhere in the neighborhood of $300,000 to $500,000, depending on which dates we hit. And our current forecast as forecasted at the end of the quarter supports that schedule.

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James Philip Geygan, Global Value Investment Corp - VP Advisory [11]

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Okay. What additional -- is that $300,000 to $500,000 per vessel or in aggregate?

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Westley S. Stockton, Gulf Island Fabrication, Inc. - Executive VP, CFO, Treasurer & Secretary [12]

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In aggregate.

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James Philip Geygan, Global Value Investment Corp - VP Advisory [13]

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Okay. That doesn't...

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Westley S. Stockton, Gulf Island Fabrication, Inc. - Executive VP, CFO, Treasurer & Secretary [14]

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We wouldn't have to spend -- I will tell you this. Obviously, we have to execute, but we won't have to spend anything incrementally to chase those incentives. We just need to hit our forecast as they're currently -- as we're currently expecting as of the end of the quarter to earn those incentives and hit those delivery dates.

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James Philip Geygan, Global Value Investment Corp - VP Advisory [15]

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Okay. What additional detail can you provide about your strategic review process and specifically, as it pertains to how the Board of Directors evaluated your cash balance and how that might be utilized?

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Westley S. Stockton, Gulf Island Fabrication, Inc. - Executive VP, CFO, Treasurer & Secretary [16]

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Well, I'll answer it, I guess, 2 parts. One, as it relates to the future, the Board is planning its next strategic planning retreat to coincide with the hiring of our next CEO, where the Board will spend more time reviewing our strategic plans.

As it relates to your other question, which I think essentially is focused on an optimal capital allocation, presumably that's where you were going with that question, one thing to consider, clear -- we are focused on that capital allocation and what to do with the cash. But one thing I would like to point out that there is an intangible element and is actually ultimately tangible in having a strong balance sheet and a strong liquidity.

Obviously, we've had losses over the last several quarters in recent years. And with that, having a strong balance sheet is very important to our customers as we chase new work. And it's also very important to our surety providers and to our bank. So there's an element of that, that plays into why we are where we are in terms of wanting to maintain that strong balance sheet, but it is something that we'll continue to look at and the Board will continue to evaluate as it evaluates our overall strategy.

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Operator [17]

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We'll take our next question from John Deysher with Pinnacle.

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John Eric Deysher, Bertolet Capital LLC - President & Chief Compliance Officer [18]

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It seems like one of the continuing issues is the use of subcontractors, both on the production side, engineering side, and I realize labor is a problem. But where are we -- as of this point in time, where do we actually have subcontractors working for us? You highlight some of the work where you're using payroll employees, but where, at this point in time, do we actually have subcontractors doing work for us?

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Kirk Meche;President and CEO, [19]

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So this is Kirk. Primarily in our Jennings facilities. As you can imagine, the pressure in that area, that region with all the petrochemical explosion that has happened down there, and the labor has become very difficult for us to find. And so consequently, we had to go and look for contract labor. And we had gotten to the point within our Jennings facilities where contract labor percentages was nearing -- near 65%, 70% of the labor force. As we said, we think we're over the peak aspect of that. We've had a reduction in workforce in that Jennings facilities and primarily with our contractors. Contract labor now represents somewhere around 40% of the total number of employees. Obviously, that number is coming down. And again, as we said in the call, it not only affected us but the subcontractors in that area as well, which related to our painting subcontractors as well as our E&I contractors.

So the region in itself has become very competitive. They're paying a lot of money in these plants for these guys. And so consequently, we had to resort to contract labor as opposed to just pulling labor from our Houma facilities, which, as you know, has sufficient work there.

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Westley S. Stockton, Gulf Island Fabrication, Inc. - Executive VP, CFO, Treasurer & Secretary [20]

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Were you also -- this is Wes. Were you also asking about our subcontracted scopes of work as well?

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John Eric Deysher, Bertolet Capital LLC - President & Chief Compliance Officer [21]

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Yes.

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Westley S. Stockton, Gulf Island Fabrication, Inc. - Executive VP, CFO, Treasurer & Secretary [22]

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As a follow-on to that, Kirk, if I might.

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Kirk Meche;President and CEO, [23]

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Yes. Sure.

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Westley S. Stockton, Gulf Island Fabrication, Inc. - Executive VP, CFO, Treasurer & Secretary [24]

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As you think about the production engineering challenges that we've had, one of the areas -- we're still going to need to subcontract big portions of that scopes of work on our ship side. That's just the nature of the business. But one of the areas we're focused on in terms of minimizing that risk is taking on more responsibility in-house in terms of responsibility and oversight, overseeing the execution, expediting the execution of the engineering to make sure it's moving along the way it should. So we're, for lack of a better term, beefing up our resources to oversee the engineering element.

And then on the subcontractor side, further to Kirk's point, we're not seeing the same subcontractor issues in Houma that we've been seeing recently in Jennings because they're not suffering from the same -- or being plagued by the same labor issues that we saw in Jennings.

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John Eric Deysher, Bertolet Capital LLC - President & Chief Compliance Officer [25]

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Okay. So are you telling us that subcontracting issues are behind us and won't bite us going forward in future quarters?

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Kirk Meche;President and CEO, [26]

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Well, we certainly hope not, John. As we said, our commitments to the subcontractors have been completed on the ninth and 10th tug. Again, now we're in the process of trying to manage the subcontract flow in the facilities. But certainly, we can't control whether our current labor force decides to stick with us or not. And that's really what varies between the contract and subcontract labor portion of it. But I do believe that we do have a handle on it at this point in time. As we said, 2 major areas, we had issues with. One was painting subcontractors. We have taken that scope on ourselves, as Wes had said, and the E&I subcontractor had an adjustment for the ninth and 10th tug as he was experiencing the same issue as we were.

So yes, I would hope that at this point, especially now that we're getting close to delivering tug #6 and 7 or shortly thereafter, I'd like to think that those issues are behind us. But again, we're always subject to the market itself. If the petrochemical industry decides to do something in terms of raising rates or whatnot, then we could have the same issues going forward. But right now, we don't anticipate any issues going forward.

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John Eric Deysher, Bertolet Capital LLC - President & Chief Compliance Officer [27]

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Okay. Good. That's helpful. And regarding the CEO transition, we're glad you're sticking around, Kirk, to help with that. I was just curious what the time frame is. I heard something about Board meetings, a strategic review. How soon do you expect or what's the timetable for having a new CEO at this point?

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Kirk Meche;President and CEO, [28]

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I don't know that Wes and I can give you a definitive answer at this point. The Board is engaged -- has engaged a search firm, and so we don't have any specific information as it relates to that.

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Operator [29]

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We'll take our next question from [Ben O'Shea] with Boenning & Scattergood.

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Unidentified Analyst, [30]

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I would like to go back to the issue of cash. And right now, if we view it on a per-share basis, it's roughly $5 a share, and that's where the market is valuing the company. So essentially, the market is saying that -- are valuing our business at 0. I would hope that that's not the case. I'm confident it's not the case. But why wouldn't we, as part of the strategic review, consider at this time to deploy some of the cash to buy back the stock when it's being offered to us at a price where we get the company for nothing?

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Westley S. Stockton, Gulf Island Fabrication, Inc. - Executive VP, CFO, Treasurer & Secretary [31]

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That's a good question. And as you can imagine, that's something that is being considered, has been considered, and will continue to be considered. But kind of further to something I commented on earlier, one of the very important elements as we think about our cash and overall capital allocation is the need to have a strong balance sheet. And again, with the recent period of losses, having that balance sheet is very important to our customers. It's very important to winning new work and it's important from a surety support perspective and our banks as well. So all that comes into play as we think about what to do from a stock buyback perspective. But it's something that's clearly being evaluated.

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Operator [32]

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(Operator Instructions) We'll take our next question from Evan Wax with Wax Asset Management.

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Evan Wax, Wax Asset Management, LLC - Founder [33]

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I just wanted to ask regarding the backlog if we expect now in Q4, if we execute, to start hitting EBITDA positive? Or is that something that is more a 2020 story?

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Westley S. Stockton, Gulf Island Fabrication, Inc. - Executive VP, CFO, Treasurer & Secretary [34]

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Evan, I'll answer it this way. I think it's likely into 2020. Having said that, during the third quarter, obviously, absent the project impacts and some of the other noise, we would have been approximately breakeven on EBITDA this quarter. That said, I think we'll have a few headwinds in the fourth quarter relative to the third quarter. The fab business, you'll note -- have noticed that revenue was down just a little bit relative to the trailing period, that's the American Countess project coming down, prior to some of the other backlog really ramping up. So whether or not we get -- we achieve breakeven EBITDA again in the fourth quarter for fab will be largely dependent upon that ramp up.

I think we'll still have, and Kirk mentioned that we'll still potentially have some softness in our margins on the services side due to the mix issue that we talked about. I do think we'll have some higher legal costs in the fourth quarter, given this change order -- I mean change order dispute that is going to go to trial in January. So that will impact us as well.

And then from a shipyard perspective, our utilization is getting close to being there. So that shouldn't be a problem. But with that said, could we be at breakeven again in the fourth quarter? The answer -- the short answer to that is yes. But I would look more into the early part of 2020.

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Evan Wax, Wax Asset Management, LLC - Founder [35]

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Understood. And then in terms of those -- I think you mentioned, Kirk, $800 million of bids outstanding that we have. On any of those, have we been selected pending an FID? Or are we still competing with other folks on a lot of those? What percentage of those have we been down-selected, maybe the finalists? Just curious for a little more color.

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Kirk Meche;President and CEO, [36]

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Yes. Evan, I don't know the process is quite where they select us and then we try and move forward. Certainly, if they select us, then we will put some type of announcement out. We'll ask for some type of letter of intent or something like that. But the $800 million was to provide a little color in terms of what we have identified and bid on in terms of the projects. Again, we're not going to get all that work but it's an effort to show the investors the pipeline of potentials. Now remember, this doesn't include any type of small work that we typically are awarded. And it may not include other projects associated with wind or other projects that may come along as we continue to move forward with a little bit of an upturn in the Gulf of Mexico. So -- but primarily, these are petrochemical-type projects that we have been identified on.

Again, I think that when you look at some of the larger projects, it's not to the point where it's 10 bidders on this thing. I think these companies are going out for competitive bidding from 3 or 4 different vendors. And so I'll tell you, I'm hopeful that we've got good relations with these guys. We will continue to have relations with them, and we hopefully, at some point, will be the preferred fabricator.

But again, we caution everyone, we're not just going to get the first project that comes along. We don't want to get a project that's got no margin, too much risk, and we end up in a position where we're trying to explain to the market why we took on these projects. So we are cautious in that respect. We realize we need work in the facilities, but at the same time, if there's sufficient work, in our opinion, to make sure that we get the right project that fits the needs of this company.

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Evan Wax, Wax Asset Management, LLC - Founder [37]

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Yes. I couldn't agree more. I mean I'm sick and tired of these write-downs, so it will be nice to see us when we do win work, actually be rewarded and start making money on it. Hopefully, 2020 is that year.

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Operator [38]

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

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Kirk Meche;President and CEO, [39]

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During the quarter, I announced my intention to retire effective December 31, 2019. I would like to take this opportunity to thank all the Gulf Island employees, the Board of Directors and our shareholders for your support over the last 23 years. And I want you to know that I am committed to assisting the Board and the company to ensure a seamless transition for the next CEO. Thank you for joining us this morning and your interest in Gulf Island.

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Operator [40]

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This concludes the Gulf Island Fabrication, Inc. Third Quarter 2019 Earnings Conference Call. You may now disconnect.