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Edited Transcript of GIFI earnings conference call or presentation 27-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Gulf Island Fabrication Inc Earnings Call

HOUMA May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Gulf Island Fabrication Inc earnings conference call or presentation Thursday, April 27, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cindi Cook

* David Scott Schorlemer

Gulf Island Fabrication, Inc. - CFO, EVP of Finance and Treasurer

* Kirk J. Meche

Gulf Island Fabrication, Inc. - CEO, President and Director

* Todd F. Ladd

Gulf Island Fabrication, Inc. - COO and EVP

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Conference Call Participants

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* Jeffrey Richart Geygan

Global Value Investment Corp - President, CEO, and Chief Compliance Officer

* John Eric Deysher

Bertolet Capital LLC - President, Chief Compliance Officer, and Portfolio Manager

* Martin W. 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 Q1 2017 Gulf Island Fabrication, Inc. Earnings Conference Call. (Operator Instructions) This call is being recorded. At this time, I would like to turn the conference over to Ms. Cindi Cook for opening remarks and introductions. Cindi, please go ahead.

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Cindi Cook, [2]

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Thank you, Allen. Good morning. I would like to welcome everyone to Gulf Island Fabrication's 2017 First Quarter Teleconference. Please keep in mind that any statements made in this conference that are not statements of historical facts are considered forward-looking statements. These statements are subject to factors that could cause actual results to differ materially from the results predicted in the forward-looking statements. These factors include the timing and extent of changes in the prices of crude oil and natural gas, the timing of new projects and the company's ability to obtain them and other details that are described under cautionary statements concerning forward-looking information and elsewhere in the company's 10-K filed March 2, 2017.

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?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [3]

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Thank you, Cindi, and good morning to all of our listeners. After my opening remarks, we will follow our standard format with David providing the breakdown of the financials, followed by Todd as he provides an update on existing projects.

I will have closing comments before we open it up to our analyst for questions.

Yesterday afternoon, we announced our first quarter results for 2017. The net loss for the first quarter was the result of several factors. The first is continued weakness in the Oil and Gas industry which continues to affect much of our customer base across all of our operating divisions.

Second, included in our first quarter results, is $1.9 million of depreciation expense incurred by our fabrication division with only $2.9 million in revenue generated from our South Texas facilities as we wrap up fabrication projects there. Third, included with our result for this quarter is approximately $1 million of reoccurring holding costs for these facilities while they are being marketed for sale.

And finally, we had a higher than anticipated cost associated with completion of several offshore vessels, as we come to the final stages of delivery. Now let me break down each of these statements into further detail.

The market downturn as it relates to offshore Oil and Gas sector continues to be challenging. However, as offshore upstream Oil and Gas projects are limited, downstream, specifically petrochemical projects, are increasing as evidenced by most of our bidding activity today being focused on petrochemical and non-Oil and Gas projects. We don’t anticipate any real movement in the near-term as it relates to offshore investment and related project activity but we do expect petrochemical projects and other non-upstream projects, including government transportation and renewable energy to drive new demand for our services in the near to medium term.

From a marketing perspective, we continue to increase our focus on fabrication projects outside the Oil and Gas sector, including certain large petrochemical plant module construction, alternative energy projects and other projects that are less susceptible to fluctuations in oil and gas prices, and may actually benefit in the longer-term from a reliable, lower or stable cost environment of commodity prices. We are currently fabricating complex modules for the construction of a new petrochemical plant. This market pivot away from a concentration in upstream Oil and Gas is now well underway.

We have seen improved bidding opportunities, particularly outside the upstream Oil and Gas sector, including petrochemical fabrication work, passenger cruise vessels and government contracts.

We believe that we will be successful in obtaining new backlog awards in 2017. However, most will not materialize into new work at our facilities until mid-2017 and possibly early 2018.

We hope to be in a position to announce some of these projects in the coming quarters. We also continue to market our Aransas Pass and Ingleside, Texas properties for sale. We have listed these properties with a broker and have already received significant interest. We have significantly progressed our ramp up and consolidation of all work at this facility. As we move forward, depreciation will no longer be recorded. However, we expect ongoing quarterly holding cost of approximately $1 million per quarter.

Our shipyard division experienced some continued cost overruns on contracts that were assigned in the LEEVAC acquisition, and we have incurred holding cost related to a completed vessel that was delivered in February 6, 2017. However, it was refused by our customers citing certain technical deficiencies.

We are constructing a second vessel for the same customer which will be delivered in May of this year. Further, this same customer has announced in their earnings release their efforts to restructure their balance sheet and remain in default of their debt covenants. We disagree with our customer concerning these alleged technical deficiencies and have delivered notice to require arbitration to maintain our rights under both of these contracts.

As of March 31, 2017, approximately $4.6 million remained due in outstanding from this customer under the construct for the first vessel. The balance due to us upon delivery for a second vessel which is expected in May of this year is approximately $4.9 million. We completed our consolidation of shipyards in Houma, which included moving all work out of the rented shipyard facilities into our own facilities in Houma's west yard.

Lastly I want to focus on our future opportunities in a very challenging market, which is perhaps the worst both in severity and duration in the company's history.

We remain debt-free and as of the end of the quarter have $34.7 million in cash. We are currently bidding on large products for future work across a variety of industries outside of traditional upstream oil and gas markets. In a period where so many of our customers and competitors are challenged, we believe that we would be able to emerge from this downturn making a significant market pivot into industries less impacted by Oil and Gas prices.

In fact, many of the customers, with which we are bidding new work, will thrive in an environment where commodity prices are lower and supplies of Oil and Gas are reliable, as in the case of the United States today. I will expand on this in my closing comments. Now let me turn the call over to David, who will provide a more detailed earnings and segment breakdown.

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David Scott Schorlemer, Gulf Island Fabrication, Inc. - CFO, EVP of Finance and Treasurer [4]

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Thanks, Kirk, and good morning to everyone. Yesterday, we reported a net loss of $6.5 million on revenue of $38 million for the first quarter ended March 31, 2017, compared to net income of $1 million on revenue of $84 million for the first quarter ended March 31, 2016. The decrease in revenue and corresponding gross loss for the period is primarily attributable to overall decrease in work experienced in our facility as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions.

The company had a revenue backlog of $113.2 million and a labor backlog of approximately 1.1 million hours at March 31, 2017, compared to a revenue backlog of $133 million and a labor backlog of 1.3 million hours reported as of the year end 2016. Backlog includes formal commitments received through April 24, 2017, which Todd will expand on later in our call.

Our backlog by segment at March 31, 2017, includes fabrication which represented $54 million, shipyards representing $45.6 million and services representing $13.6 million.

Now let me break down the segments of our company. For our fabrication division revenue was $10.2 million for the first quarter ended at March 31, 2017, and $23.8 million for the same quarter of 2016, down 57% on a comparable basis.

Gross loss was $3 million for the quarter versus a gross profit of $86,000 for the comparable quarter in 2016. Operating loss was $3.8 million compared to a loss of $709,000 for the comparable quarter in 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed Oil and Gas prices in the corresponding reduction in customer demand for offshore fabrication projects. This is particularly true for our South Texas assets which we have marketed for sale.

As Kirk mentioned above, included with our fabrication division's first quarter results is depreciation expense of $1.9 million during the first quarter until we were able to classify these as assets held for sale.

Additionally, we continue to incur operating cost to maintain these properties in their current state until sold. As we move forward, depreciation expense will be suspended for those assets held for sale. However, we expect ongoing quarterly holding cost of approximately $1 million per quarter.

For our shipyards division, revenue was $18.4 million for the quarter and $34.1 million for the same quarter of 2016, or a decrease of 46% on a comparable basis.

Gross loss for the quarter was $1.7 million versus positive gross profit of $2.4 million for the comparable quarter in 2016. Operating loss was $3.1 million for the first quarter of 2017, with operating income of $1.1 million for the quarter ended March 31, 2016. Our shipyards division has continued to experience some cost overruns on contracts that were assumed to us in the LEEVAC transaction and we have incurred holding costs related to a completed vessel that was delivered on February 6, 2017. However, it was refused by our customer citing certain technical deficiencies as well as experiencing significant liquidity challenges, as Kirk mentioned earlier.

We continue to monitor our work performed in relation to our customer's status and its ability to pay under the terms of these contracts. As of March 31, 2017, approximately $4.6 million remains due and outstanding from our customer under this contract. The balance due to us for our second vessel will be approximately $4.9 million, which will be invoiced upon reaching our delivery milestone expected later in May.

Because these vessels have been completed, or are substantially complete, we believe that they have significant fair value and that we will be able to fully recover any amounts due us should we be required to do so.

Based on the evaluation to date, we do not believe that any loss on this contract is probable or estimatable at this time.

For our services division, revenue was $10.7 million for the quarter and $26.6 million for the same quarter in 2016, for a decrease of 60% on a comparable basis. Gross profit was $33,000 for the quarter versus gross profit of $3.4 million for the comparable quarter in 2016. Operating loss was $0.6 million during the quarter compared to operating income of $2.7 million for the same quarter in 2016. Gross profit and results of operations decreased over the comparable quarter due to completion of a large offshore campaign ongoing during the first quarter of 2016, along with weak industry conditions during the first quarter of this year.

Noncash depreciation and amortization expense for the quarter was $4.7 million, compared to $6.6 million for the first quarter of 2016.

The decrease is primarily attributable to management classifying out South Texas assets as held for sale and suspending ongoing depreciation expense on February 23, 2017. 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 machinery and equipment for our fabrication division.

We expect capital expenditures for the remainder of 2017 to be within the range of $6 million to $8 million, primarily related to improvements at our facilities. As of March 31, 2017, we have $34.7 million in cash and remain debt-free with only $4.6 million in letters of credit issued.

The availability under our revolver was $35.4 million. Our cash decreased during the quarter by approximately $16.5 million, primarily related to the following; operating losses for the quarter in excess of noncash depreciation and amortization, impairment and stock compensation expense of approximately $3.7 million, payment of year-end bonuses related to 2016, progress on liabilities from assumed contracts in the LEEVAC transactions. While our purchase price for the acquisition of the LEEVAC assets during 2016 was $20 million, we received a net $3 million in cash from the seller for assuming the net liabilities and settlement payments on ongoing shipbuilding projects of $23 million that were assigned to us in the transaction. We have significantly progressed these contracts which in turn, has resulted in utilization of the working capital and settlement payments received during 2016. Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refused delivery of a vessel and has not paid. We have initiated arbitration proceedings during the quarter to enforce our rights under our construction contract.

And finally, buildup of costs for contracts in progress related to a customer and our shipyard division with significant milestone payments occurring in the later stages of the projects, which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018. As noted in our earnings release, we are currently in discussions with one of our financial institutions to enter into a new revolving line of credit with comparable availability but with less restrictive financial covenants, reduced fees as compared to our current revolving credit facility and greater flexibility to pursue project opportunities in our current pipeline. We expect to close on this new revolving credit facility and terminate our existing facility in the second quarter of 2017. The company is working through a trough in backlog and activity from recent declines in our historical primary market, upstream oil and gas, and as we execute our disposition strategy of certain underutilized assets and make a pivot to new markets and petrochemical construction and shipbuilding for a variety of other markets it is important for us to retain strong credit support during that process.

We're pleased to know that we have institutions willing to provide that support and we hope to make an announcement later during the second quarter in that connection.

Additionally, in the anticipation of the proceeds from the sale of our assets in South Texas, we have engaged in a strategic financial analysis project with advisors to determine the appropriate use of proceeds from this transaction. We will be evaluating a mix of options, including tactical capital improvement projects, strategic growth investments opportunities that support our business plan, stock buybacks and/or dividends and working capital reinvestments. With that, I will now turn call over to Todd who will provide an update on our operations and major projects. Todd?

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Todd F. Ladd, Gulf Island Fabrication, Inc. - COO and EVP [5]

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Thanks, David. And good morning, everyone. I'll begin with our fabrication division.

Our South Texas facilities have successfully refurbished and delivered tendon buoy modules for a project down for the Gulf of Mexico, along with the completion of tendon support buoys for the Hess Stampede project which are in phases of delivery. Miscellaneous fabrication, associated with plant expansion projects in the Corpus Christi area, have completed with small add-on scopes of work being accomplished.

Our Louisiana-based fabrication facilities have completed fabrication and is delivering piles for a river offloading terminal during the quarter, the assembly of 4 large petrochemical modules destined for the Lake Charles area is well underway with delivery expected sequentially in the fourth quarter 2017, first quarter 2018 and second quarter 2018.

The suspension of a fabrication of a prototype power generating vessel has met some challenges but we are reengaged with discussions regarding potential start up, understanding there are no guarantees on this timing.

Opportunities remain active for additional petrochemical projects and other plant upgrades, as well as offshore wind power projects on the East Coast, and small structures for the Gulf of Mexico and overseas locations.

We continue to expect these markets to mature in late 2017 and early 2018.

Our services division is coming out of one of the slowest seasons for large offshore installation projects, but we are seeing an increase in activity with the cyclical summertime ramp-up of the offshore maintenance sector.

We continue to support various clients' daily needs with our offshore crews, as well as focusing the expansion of crews working onshore plant upgrades and maintenance. Our shipyard division continues with fabrication of 3 OSVs scheduled for delivery at various timeframes in 2017 and 2018. 1 OSV remains tendered for delivery to one of our customers after having completed sea trials earlier this year. Work associated with previous and additional awards of spud barges for 1 customer continues our Houma facilities with deliveries set for later this year.

Last, our dry docking and pier side repair work remains active, given suppressed margins at both our Lake Charles and Houma, Louisiana facilities. I will now turn the call back over to Kirk, for closing comments.

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [6]

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Thanks, Todd.

2017 will be challenging as we continue to see no significant improvement in the Oil and Gas sectors. However, strong opportunities remain for our shipyards sector for a variety of markets, including government, renewables, transportation and cruise vessels.

This is also true for the fabrication sector as we continue to receive bids for petrochemical plant expansions and new facilities. It should be noted, however, that should we be successful in any of these opportunities, work for our facilities will not commence until the third or fourth quarter of this year, and in some cases, not until perhaps the beginning of 2018.

Nevertheless, we believe Gulf Island is positioned well in accessing new markets to build backlog in the coming quarters. We look forward to sharing those opportunities when they become more tangible. Allen, you may now open the line for questions for analysts.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take a question from Martin Malloy with Johnson Rice.

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

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Could you provide us with an update in terms of expected timing of the process for selling the Texas facilities?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [3]

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I'd like to tell you we want to try and get that thing sold as quickly as possible but it's certainly not a fire sale in some respect, but there is quite a bit of interest in the facilities, and we knew that the market would be strong down there from different operators within the petrochemical side of the business as well as distribution of products and certainly that is true. There are quite a few interested parties that we've signed NDAs with and whatnot.

But again as we said, there has been no significant offer put on the table for us but the property remains very active and there is a lot of interest is being generated from both the North and South yard.

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

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The receivable that you spoke about that’s related to some milestone payments later this year, expected milestone payments, the customer that is involved there, are they -- is there a credit concern there?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [5]

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It was a mutual agreement that we had amongst the companies to push the deliveries of the vessels back. This is something I think we announced a couple of quarters back, and so the milestone payments -- in order -- when we pushed the delivery date back our intention was to slow work down on the process for the vessels. And again, as David had said, the first delivery of the vessel will take the beginning of 2018 and the second vessel, I believe, delivers in the second quarter of 2018.

So, no, it was a mutual agreement we had amongst the parties to really try and make sure the boat was where it needed to be, that we wasn't spending a whole lot of effort trying to get overtime hours to meet a delivery date that didn't make sense for either one of the 2 companies and so that's why we pushed the delivery date out, along with some of the milestone payments associated.

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David Scott Schorlemer, Gulf Island Fabrication, Inc. - CFO, EVP of Finance and Treasurer [6]

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This is David. We've -- actually have a number of different payments throughout the remainder of the year. We actually received a payment just a few weeks ago. So the customer is very much engaged. Todd has been dealing with them, visiting the ship and we don't anticipate any issues there.

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Martin W. Malloy, Johnson Rice & Company, L.L.C., Research Division - Director of Research [7]

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And just maybe getting a little bit more into some of the prospects outside the Oil and Gas industry that you spoke about.

Can you give us some more details maybe about just in general those type of prospects that you're looking at and the timing?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [8]

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Certainly, Martin. Again we talked -- by each division. The Fabrication division, as we said numerous times now, there is a lot of inquiries coming from the petrochemical side of the business. And whether that's bidding directly to owners or to third-party construction firms.

That is very, very active at this point in time. We anticipate the award of those projects a little bit later in this year. Certainly we have the 1 project in Houma that we're working on, which will take us all the way through the end of this year, and so hopefully the award of those remaining projects will be right on the heels of that one.

On the shipyard side, it's a little bit more diversified. It's opportunities we have within, as I said, river cruise vessels to government contracts to river towboats to lift boats to support alternative energy sources and whatnot.

The award of those projects could happen fairly quickly. We still have engineering phases associated with it, to get to work started so you know as I said, that probably wouldn't start until the latter part of this year. Perhaps the third or fourth quarter we'll get some things rolling. The majority of the uptick we're going to see views within these contracts we're chasing, because they are big contracts, will be in the first part of 2018.

And then our services group continues to -- they're real seasonable, as you can imagine, typically the summertime months are better for these guys as all T&M work is being done offshore.

We are seeing some uptick in that respect on the hours, and again, we don’t report those hours as backlog hours but we are seeing some increased activities.

And certainly within the services division, we're also looking beyond just traditional Oil and Gas where the services group will provide an [all-in] force, if you want to call it that, moving forward with some of this petrochemical plant installation onshore.

So we're going to use the same philosophy we had with offshore where we built the platforms, bring them offshore and let our services group do hook-up and commissioning. That same philosophy is going to be brought into the land sector. So there is still opportunities out there for those guys in terms of spooling pipe and whatnot. We anticipate a little bit of a ramp up in terms of their revenue in the next coming quarters.

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Operator [9]

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(Operator Instructions) We'll go next to John Deysher with Pinnacle.

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John Eric Deysher, Bertolet Capital LLC - President, Chief Compliance Officer, and Portfolio Manager [10]

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A couple of questions. First on the South Texas yards, how many employees are still on site there? And how does that decline over the year as work is wrapped up. In other words $1 million per quarter for holding cost, does that decline over the balance of the year? Or how does that unfold basically?

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Todd F. Ladd, Gulf Island Fabrication, Inc. - COO and EVP [11]

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It does decline over the timeframe but what I'll tell you, is like right now we're running somewhere in the neighborhood between 50 and 75 employees in the yard. Some of them are actual -- our employees as we need, we've actually had to bring in a couple of subcontract laborers just because, again, knowing the facility and what's going on, we are losing labor in the local market, so that happens and we have to compensate it. But with that, we will be taking the yard from completing the projects, to then going into an area where we're going to be taking some of our movable assets and transferring them back to other locations, along with materials and other things that have just been built up stock that's there. So that's going to take a little while. So even though the project will be complete, some of that labor workforce will stay on.

And then also going forward until we make the sale, we will have a substantial workforce there that's going to be maintaining the facilities. So all of the equipment that's there, the cranes, the overhead equipment, things like that, just the maintenance of what it takes, especially in that environment down there with being a lot of exposure to salt water and salt air. It takes a good crew that's going to down there maintaining it. So that will stay in place.

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [12]

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This is Kirk, just to elaborate a little bit more on what Todd said, he's absolutely right. We've 1 project that will be completed with load out activities in the latter part of this quarter, and so that's when we start to anticipate having the ramp down, as Todd said, getting into the mothballing facilities portion of it.

But majority of the cost that we have from a mothballing standpoint is not so much generated by employee pay, it's generated more by ongoing property taxes, insurance liabilities, utilities and whatnot.

And that's the driving factor associated with the cost. So you will see some cost reductions we suspect, a little bit in the second but more so in the third and fourth quarter, but again, just because we got a few more folks out of the facilities, you're not going to see a huge cost reduction. Taxes are really what's driving the costs associated with that facilities going forward.

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John Eric Deysher, Bertolet Capital LLC - President, Chief Compliance Officer, and Portfolio Manager [13]

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In terms of the modules for the [Axial latte] plant, where are we in terms of activity level there? In other words, what's the timing of that business? I know you said that it was going to be delivered I guess, mid-'17 and early 2018. When do the revenues from that project start to hit going forward?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [14]

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Well, I'm not sure we'd said mid-'17 for delivery on the modules, but it's going to be late '17 into the first quarter, second quarter of '18. Again they're staggered between the modules themselves.

But to answer your question, John, again, we were hoping to have a little bit more of a ramp up in the first quarter in terms of our man hours being still in the project. The owner has experienced delay in materials. They provide all materials for us. But we have ramped up and so I'll tell you that last month within the first quarter, we saw a pretty significant ramp up in our man hours being associated with the project and we suspect that ramp up to continue throughout the next 2 quarters.

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John Eric Deysher, Bertolet Capital LLC - President, Chief Compliance Officer, and Portfolio Manager [15]

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So the next 2 quarters will be better than the first as related to that project?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [16]

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That's correct. Yes.

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David Scott Schorlemer, Gulf Island Fabrication, Inc. - CFO, EVP of Finance and Treasurer [17]

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Yes.

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John Eric Deysher, Bertolet Capital LLC - President, Chief Compliance Officer, and Portfolio Manager [18]

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Finally, the cost overruns on the business you inherited from LEEVAC, could you talk a little bit more about what's driving those? I guess we're a little surprised that beyond the fact that some of your customers are delaying payments that there's actually cost overruns that are costing us profits?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [19]

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John, a lot of what we're seeing there on those items is just the work scope that was there and the breakdown of the man hours that it would take to complete those particular scopes, and I will tell you, these are some pretty complicated vessels that we are finding that from the previous history of what it took to do work within the facilities and what they would see on some of those vessels, these have a lot more confined space type areas, if you want to call it, where there's a lot of equipment put in smaller areas and we're not able to work as efficiently as we have, and we've also had some items that again, being that we were part of the design on one of the vessels that it just has been a little bit more complicated and some rework has occurred in regards to getting all of this put into a small package. So it is a definitely very tight and complicated structure that we're putting together and that unfortunately was something that was not seen in the traditional forecasting of the man hours to these projects.

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John Eric Deysher, Bertolet Capital LLC - President, Chief Compliance Officer, and Portfolio Manager [20]

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So it was poor estimating?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [21]

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I guess, if you want to call it that. From an original standpoint. And probably an over-assumption on progress of completion on some of these items within these boats. And keep in mind also this vessel, they asked us to cut this vessel in half and add a section to it. So when you stop and start like that, you're going to have some rework and engineering on the fly that has to occur. So a lot of complexities with the project but I can tell you, we've been there in recent weeks and the customer has walked the vessel and they're very pleased with what's going on and we're definitely making progress.

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John Eric Deysher, Bertolet Capital LLC - President, Chief Compliance Officer, and Portfolio Manager [22]

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This is the second vessel for the...

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Todd F. Ladd, Gulf Island Fabrication, Inc. - COO and EVP [23]

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This is the second contract which is 2 vessels, John.

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John Eric Deysher, Bertolet Capital LLC - President, Chief Compliance Officer, and Portfolio Manager [24]

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So this is the other customer, I got it.

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [25]

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Yes, sir. This is the other customer.

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John Eric Deysher, Bertolet Capital LLC - President, Chief Compliance Officer, and Portfolio Manager [26]

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And the arbitration that you have initiated against the first customer who hasn't paid, does that include both of those vessels because the second one is not in default as far as we know.

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [27]

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That's absolutely correct. But yes, we have initiated arbitration for both vessels, citing sister ships and the philosophy on the first one is their stance on it then certainly it's going to be the stance on the second one. Yes, in order to our interest, arbitration has been initiated on both vessels.

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John Eric Deysher, Bertolet Capital LLC - President, Chief Compliance Officer, and Portfolio Manager [28]

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On both. And they're both in your possession still?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [29]

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Yes, they are.

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Operator [30]

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We will next go to Jeff Geygan with Global Value Investment Corporation.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [31]

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The Houma yard that's been vacated, what type of expense or liability remains with that?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [32]

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It'll be very little, Jeff, going forward. We actually are in the process of trying to negotiate a much reduced rate to store some of the dry docks that we have, assets held for sale. So it won't be a huge cost so it will actually be probably half of what we've experiencing when we're renting the full out facilities.

Hopefully, once we get those assets sold then we'll be able to release this property but it's very insignificant quite honestly as you try and look forward into future quarters.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [33]

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And how much expense savings will we have as a result of reducing our utilization of that asset?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [34]

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I guess, from a lease standpoint, as I said, it will be half of what we anticipate paying going forward but really where the savings should be realized is the over -- or the non-duplication of efforts in terms of supervision, as well as security, as well as office staff. All the has been consolidated now to the remaining facilities whether it's through Jennings or Houma.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [35]

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The $110 million in assets held for sale, what is your GAAP and tax basis on those?

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David Scott Schorlemer, Gulf Island Fabrication, Inc. - CFO, EVP of Finance and Treasurer [36]

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The tax basis is $50 million and our book basis is $110 million.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [37]

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(inaudible) your stated book, but conceivably if you get booked for it, you'll have a $60 million cap gain, will that be treated as cap gains tax?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [38]

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We are able to offset that against earnings, so it won't be a full cap gain on that. So I think we'll be able to shelter some of that gain.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [39]

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Can you qualify that with the amount of shelter roughly 20%, 30%, 50% or more?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [40]

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I can't give you that number, but in our analysis that we discussed earlier, in my comments, we'll be taking that into consideration.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [41]

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I see. With respect to use of cash post-sale?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [42]

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Correct.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [43]

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Have you contemplated or has your Board contemplated a special dividend or a return to capital to shareholders directly in cash?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [44]

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We are evaluating all of our alternatives and we want to balance all of this interest for our constituents with the growth opportunities and making sure that we are able to support our business plans. But yes, we're definitely looking at all of those options.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [45]

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Great, well you'll be in an enviable position with a pile of cash at this time in the cycle, so I am eager to see you get the sale consummated. With regard to the alternative energy project that was put on hold, and I know during your prepared comments you made some reference but there was specific project that was kind of novel technology. Can you -- did you provide an update, and if not, can you?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [46]

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The update I can give you there, and again just a little bit more color on the project, again the technology and what was put in there is new technology of what's being looked at in the new renewable energy sector that's out there.

The actual way that everything was being designed was something that is I guess just being reevaluated at this point due to some technical items that were brought forth from our end and also from the client's end, and with that, they're going through some other reengineering and looking at just alternative ways to improve the item that they are looking to build.

With that, it is unfortunate that we don't have an exact timeframe but what we know that they're making it in pretty short order, so what they can do to get us back under construction. And we have been reengaged in all the discussions and look forward to that actually happening here pretty quickly in the next week or so, and we'll be able to relay on some more information as we find out more in the next upcoming weeks.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [47]

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Just to clarify, is that project then in or out of your backlog?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [48]

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The project is not in the backlog.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [49]

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I presume that you couldn't say how much that project would be if it were live today in terms of backlog?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [50]

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Not at this time, again, because the engineering -- we are not sure where this going to go.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [51]

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And the last question I guess, Walter Oil versus Tidewater. The Tidewater you're talking about arbitration. The Walter Oil I'm assuming is a litigation, are they in fact, the same? Or are there -- do we have different legal recourse with these 2 customers?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [52]

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We have different legal recourses. We have not named the customers and so I won't elaborate on either one of the 2. But they're both different. One has, as you said, litigation portion, the other one has the arbitration portion.

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John Eric Deysher, Bertolet Capital LLC - President, Chief Compliance Officer, and Portfolio Manager [53]

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With the former which was the litigation, have you provided any updates on the status of that?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [54]

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We have not, quite honestly. We are in discovery period for that and there is a court date I think we have said a couple of quarters back, the court date has been set for the first part of 2018. And so we're continuing on with our discovery processes as well as depositions and whatnot.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [55]

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As it relates to the second customer, where there is an arbitration. I'm under the impression that the value of these vessels far exceeds the amount that's owed on it. So logically, I would -- as an owner of Gulf Island, I'd expect the customer would ultimately pay us for the vessel, is that a fair expectation?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [56]

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Our expectation was he was going to pay for it the first time, but yes, it is our expectation. The balance owed on the vessels are quite honestly or probably less than 10% of the value the contracts. And so again, we find ourselves in what we think is a very favorable position going forward.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [57]

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You cited the $4.6 million and $4.9 million. If there is a cost to carry, we'll recoup that as well?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [58]

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Yes.

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Operator [59]

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(Operator Instructions) It appears there are no further questions at this time. I'd like to turn the conference back to our presenters for any additional or closing remarks.

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Kirk J. Meche, Gulf Island Fabrication, Inc. - CEO, President and Director [60]

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This will conclude our first quarter 2017 conference call. Again, we thank you for joining us and we invite you to join us for our second quarter 2017 call in July. Thank you, Allen.

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Operator [61]

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Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.