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Edited Transcript of GIFI earnings conference call or presentation 1-Mar-19 3:00pm GMT

Q4 2018 Gulf Island Fabrication Inc Earnings Call

HOUMA Mar 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Gulf Island Fabrication Inc earnings conference call or presentation Friday, March 1, 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 J. Meche

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

* Westley S. Stockton

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

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Conference Call Participants

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* James Philip Geygan

Global Value Investment Corp - VP Advisory

* 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 Fourth Quarter 2018 Results 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, Sandy, and good morning. I would like to welcome everyone to Gulf Island's Fourth Quarter 2018 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 2017 Form 10-K and subsequent SEC filings. Today, we have Mr. Kirk Meche, President, CEO and Director; and Mr. Wes Stockton, our Executive Vice President and Chief Financial Officer. Mr. Meche?

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

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Thank you, Sandy, and good morning to all of our listeners. Our results for the quarter had several factors that are noteworthy, which I would like to address before Wes discusses our financial results for the quarter.

First, as discussed in our press release, we experienced forecast cost adjustments on our 10 harbor tug projects related to challenges we incurred during the installation and testing of the piping systems on the projects. Specifically, the problems incurred are related to the type of connection required for the entire piping system. Our estimate, which was performed at our Jennings facilities, was based on historical results achieved on similar vessels constructing that facility. However, we underestimated the impacts of differences between the specifications associated with the interconnectivity of the piping systems. These differences added increased complexity to the installation, testing and subsequent repairs required during the commissioning phase of the projects, and accordingly, resulted in increased labor cost and schedule impacts.

The full impacts of these issues were identified during the fourth quarter 2018 and early 2019 as we completed the piping installation and the hydro testing of the systems on the first and second vessels. The first vessel was delivered in the fourth quarter 2018 and we anticipate delivering the second vessel in the first quarter 2019.

Our forecast cost increase reflects the impact on these 2 vessels as well as revised estimates remaining 8 vessels based on our actual experience in the first 2 vessels. We are taking actions to mitigate the cost impacts of the remaining vessels by applying lessons learned from the first 2 vessels.

More broadly, we have taken corrective action to improve our estimating function by centralizing all estimating efforts in our Houma shipyard, which was the -- which has proper resources, processes and procedures to prevent such an oversight in the future.

In addition to the impacts on the harbor tug project, the quarter was impacted by the underutilization of our facilities within our Fabrication Division, and to a lesser extent, our Houma Shipyard Division during this quarter. This underutilization was not unexpected and it represents an improvement in overall utilization from a year ago and on a sequential quarterly basis. We anticipate continued improvement in our utilization as our backlog ramps up specifically in our fabrication facilities.

Now let me discuss projects that were awarded during this quarter. We received an award for 2 passenger vehicle ferries for the North Carolina Department of Transportation. Also during this quarter, we received notification that the Court of Federal Claims entered the judgment in favor of the U.S. Navy as it relates to Navy T-ATS program, thus allowing us to commence fabrication upon completion of specific engineering and receipt of material.

In addition, yesterday, we received a letter of intent for our Fabrication Division for the construction of a jacket, deck and piles for a structure to be installed off the coast of Trinidad. This work is consistent with our traditional historic work for the Fabrication Division and we are thrilled to be a part of this project.

As it relates to our Shipyard Division and construction delivery of 2 MPSVs for our customer, we have nothing significant to report this quarter as we continue to work with the bonding company towards resolution. The vessels and associated equipment and material continue to be in our care and custody at our shipyard in Houma, Louisiana.

I will now turn the call over to Wes, who will provide details of our results and segment breakdown. 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. I would now like to provide some additional details on our results for the quarter.

Consolidated revenue for the fourth quarter of 2018 was $60.2 million with a net loss of $4.7 million or diluted loss per share of $0.31. This compares to revenue for the fourth quarter 2017 of $37.3 million and a net loss of $24.3 million or diluted loss per share of $1.63. Our revenue for the quarter reflects an increase in construction activities for our Shipyard Division, offset partially by a decrease in activity for our Fabrication Division.

Our operating results for the quarter were primarily impacted by low revenue volume for our Fabrication Division and associated partial under-recovery of our overhead cost and forecast cost increases of $5.8 million on our harbor tug projects in our Shipyard Division.

These impacts were partially offset by continued strong results for our Services Division, a $2.8 million benefit in our Fabrication Division from the recovery of a bad debt that was reserved during the third quarter 2018 and a net gain of $1.2 million from the sale of our Texas North Yard and impairments of certain inventory and assets that are held for sale.

Our loss decreased relative to comparable period due primarily to increased revenue for our Shipyard Division and the comparable quarter including changes in estimates on our MPSV projects, which have been suspended. The loss also decreased due to reductions in overhead cost and improved recoveries of our cost across our divisions, the benefit of the previously mentioned bad debt recovery in our Fabrication Division and the prior period including net charges associated with impairments of certain inventory and assets held for sale.

To provide a little more insight into our operating results for the quarter, let me provide some additional details by operating segment. For our Shipyard Division, revenue was $29.7 million for the quarter versus $900,000 for the comparable period of 2017. Operating loss for the quarter was $6.6 million compared to an operating loss of $27.5 million for the same period of 2017. The increase in revenue was due to increased construction activities for our 10 harbor tug vessels and our icebreaker tug and due to the prior period reflecting a significant reversal of revenue associated with our 2 MPSV projects as a result of changes in estimates on the projects, including reductions in project price. The operating loss for the 2018 period was due to the aforementioned $5.8 million charge on our harbor tug project and an impairment of $1 million related to assets held for sale. The decrease in operating loss relative to the 2017 period was due primarily to higher revenue, reductions in overhead cost and improved recoveries of our cost and the prior period including the aforementioned changes in estimates on the MPSV projects.

For our Fabrication Division, revenue was $9.8 million for the quarter versus $15.4 million for the comparable period of 2017, representing a decrease of 36%. Operating income for the quarter was $2.2 million compared to an operating loss of $9.8 million for the same period of 2017. The decrease in revenue was due to the prior period including significant activity for our module fabrication project that was completed in the second quarter of 2018 with the current period reflecting reduced revenue as construction activities were just commencing for projects awarded in the third and fourth quarters of 2018.

Operating income for the 2018 period benefited by $2.8 million from the recovery of the previously mentioned bad debt that was reserved during the third quarter 2018 and a net gain of $2.2 million from the sale of our Texas North Yard and impairments of certain inventory. These benefits were partially offset by the end of recovery of our overhead costs. The improvement in operating results relative to the prior period was due primarily to the benefit of the bad debt recovery during the 2018 quarter and the prior period including impairments of inventory of $6.7 million. We expect to see an increase in revenue and improvement in the revenue -- in the recovery of our overhead cost as the recently awarded projects in our backlog progress through their construction phases.

For our Services Division, revenue was $21.5 million for the quarter versus $21.7 million for the comparable period of 2017. Operating income for the quarter was $2.1 million or 10% of revenue compared to operating income of $1.5 million or 7.1% of revenue for the same period of 2017. The increase in operating income and associated margins was due to increased recovery of our overhead cost.

For our EPC Division, revenue was $451,000 for the quarter versus $198,000 for the comparable period of 2017. Operating loss for the quarter was $488,000 compared to operating income of $41,000 for the same period of 2017. Revenue for our EPC division continues to consist of pricing, planning and scheduling work for the SeaOne Project. Our loss for the period was due to cost incurred that are not fully recoverable and our current scope of work authorized by SeaOne.

Now let me provide a few comments regarding our income taxes and our backlog and liquidity as of year-end. Our tax expense for the 2018 quarter reflects only state income taxes as we have not recorded any federal income tax benefit for our losses due to GAAP limitations on recognizing deferred tax assets. Although we've not recorded a tax benefit in our results, we will receive a cash tax benefit on future taxable income.

Moving on to backlog. At December 31, 2018, our backlog totaled approximately $357 million, representing an increase of $135 million from our year-ago backlog. Our year-end backlog by operating segment was $282 million for our Shipyard Division; $64 million for our Fabrication Division; $11 million for our Services Division; and $400,000 for our EPC Division. Please note the backlog excludes approximately $14 million for a new project award within our Fabrication Division that was received subsequent to year-end. Backlog also excludes options on contracts within our Shipyard Division, which, if exercised, would increase our backlog by approximately $534 million and includes project deliveries through 2025.

With respect to liquidity, we ended the year with cash and short-term investments of $79.2 million, an increase of almost $25 million from September 2018 and an increase of $70 million from our balance at prior year-end. Our increase in cash and investments for the quarter was primarily the result of net proceeds of $27.4 million for the sale of our Texas North Yard, offset partially by negative operating cash flows of $1.7 million and capital expenditures of $1.1 million. Although we experienced negative operating cash flows for the fourth quarter, we realized positive operating cash flows of $6 million over the last 6 months of 2018. In addition, at year-end, we had $2.9 million of outstanding letters of credit and no borrowing on our credit -- no borrowings on our credit facility, providing $37.1 million of availability for additional letters of credit for borrowings.

As a result of the aforementioned, our liquidity remains strong with total cash investments and availability under our credit facility of approximately $116 million at December 31, 2018. And please note our current liquidity excludes any potential proceeds from the sale of machinery and equipment, totaling $18.9 million, that remains held for sale at year-end.

So with that, I'll now turn the call back over to Kirk for final comments.

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

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Thanks, Wes. Although we are not pleased with the negative impact on the tug project, we were applying lessons learned to remaining work and future opportunities within all of our divisions. We continue with our strategic plans for recovery of our underutilized overheads and targeted projects, and we remain positive and optimistic with respect of future opportunities for all of our business lines. The award of several projects during the quarter, along with the award for our Fabrication Division of the jacket, deck and piles, proved that our efforts are on target. Again, for another quarter, our divisions continue to see significant bidding activity.

Sandy, 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) We will take the first question from Martin Malloy at 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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Could you maybe spend a little time talking about how you expect the pace to ramp up for your work on the Navy vessels -- or the Navy vessel right now? I guess, none of the options have been exercised. And then also the Oregon vessels, and I guess, the potential for further awards of both types of vessels.

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

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Sure, Marty. So let's start with the Navy vessels. As we reported, we've got -- the Navy had a positive, I guess...

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

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Ruling.

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

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Ruling, thank you, as it relates to the protest. So we're currently negotiating with the Navy to reset targets and start times and actual cost and whatnot, but we probably anticipate that starting somewhere later this year, we still have engineering that was going on. But now that we've got the final green light, we can proceed on the final engineering as well as ordering material. So I would anticipate [Navy storing] probably somewhere in the third quarter or fourth quarter this year. And again, we'll get more specifics as we get our contracts finalized and negotiations completed with the Navy. The remaining -- there are, as we talked about, there are remaining 7 options that we believe that there may be 2 options that may be intimate within the next couple of quarters. We anticipate, hopefully, no one is [stomping] on vessel number 2 and 3 within second quarter of this year. As it relates to the Oregon State University projects, again, we have 2 vessels that we have under contract. The second vessel, the keel-laying ceremony will actually be held in the second quarter this year. And as it relates to a third option on it, I believe the option would be probably sometime later in this year as well. So we're on track. We believe that there is some synergies in terms of both customers' options as it relates to those 2 projects. But again, there's no guarantee going forward. But we are getting positive comments from the customer as we try and get our way through, especially the Navy T-ATS on the first vessel.

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

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Okay. All right. And if we look at the fourth quarter results and back out some of the onetime-type charges, you're making a lot of progress towards profitability. How should we think about turning profitable here in '19 and the timing of that?

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

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Marty, this is Wes. What we expect to see is -- and we mentioned this. I think the last time we talked is the early part of next year, the shipyard, it's no longer an overhead utilization story. So we will recover our overheads. We're still going to be dealing with the lower margin -- some of the lower-margin backlog including, of course, the tug that we'll have revenue with no associated margin on them. And then in the fabrication business, it'll still be more of a challenge from a recovery perspective but one of the things to note this quarter versus last quarter is we're going into this quarter with $64 million of a backlog plus the recent award that Kirk mentioned. When we went into the fourth quarter -- I mean, third quarter of last -- third quarter of this year, we had little to no backlog in the fab business. But that work is ramping up. So as we get into the latter part of 2019, we expect to start finding ourselves back in the black as it relates to operating income or EBITDA. Does that answer your question?

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Martin Whittier Malloy, Johnson Rice & Company, L.L.C., Research Division - Director of Research [8]

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Yes.

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Operator [9]

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The next question will come from JP Geygan at Global Value Investment Corporation.

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James Philip Geygan, Global Value Investment Corp - VP Advisory [10]

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I'm hoping you can put some color around the changes you had with the tugs and talk about either margins or profitability on a per vessel basis or the overall project. And then secondarily, what are you doing to mitigate changes like this because it seems like they've been involved in the few projects recently.

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Kirk J. Meche, Gulf Island Fabrication, Inc. - President, CEO & Director [11]

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Yes. So let me address what we're doing to address the issues that are evident within these tugs. As I said in my opening remarks, we are centralizing, estimating efforts. We moved that to our Houma location, where there's greater amount of resources available to put estimates together and make sure that we're completing checks and balances as it relates to the projects and the similarities between past projects and the one that we're bidding on. That's the biggest change we have going forward.

Again, as it relates to each one of the tugs, I don't want to get too specific into each one of the tug. There's a pretty simple math. There's 10 tugs. And so as we said in earlier remarks, that -- we applied that loss across the board to all of them. There might have been a slight improvement towards the tail end of them, but the problem associated with what we did was -- it's recurring. It's not anything that's just going to happen on 1 or 2 of the tugs. Again, I don't want to emphasize that this is not an efficiency problem or it is not efficiencies in terms of the labor aspect. This is an underutilization -- underestimate as it related to the bid that we submitted, related to the piping systems.

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James Philip Geygan, Global Value Investment Corp - VP Advisory [12]

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Is that project as a whole across all 10 vessels still profitable?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - President, CEO & Director [13]

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No.

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James Philip Geygan, Global Value Investment Corp - VP Advisory [14]

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All right. It's good to see that you have some work in the Fabrication Division. Can you give us a sense of the scope of the jacket that compiles projects? I thought I heard $14 million but I might be mistaken. And then talk about how that affects utilization in the Fabrication Division and what kind of margins or profitability we might expect on that project qualitatively.

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Kirk J. Meche, Gulf Island Fabrication, Inc. - President, CEO & Director [15]

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Yes. So JP, what we -- I'm not going to disclose the value of the contract. I'll tell you, you're fairly close in terms of the size and complexity of this jacket, deck and piles. We're pretty excited about this. This is our core business. This is what we've done in the past. So we haven't seen much of that type of work in the last several quarters, much less probably almost a year now. I won't tell you that it is a renaissance because it's certainly not. It's a one-off project. But the relationship that we're establishing with the customer for the project, I think, may have some benefit from us -- for us in future quarters as they continue to pursue structures, not -- certainly not for the Gulf of Mexico, but overseas markets and primarily the [turning table] market. Again -- so we're very excited to have that in the facilities. As Wes said, it takes a lot of underutilization out of some of our factors, including our rolling mills, which have been pretty idle for a period of time now. We are going to get those things cranking back up. So it's -- as we said, it's a step in the right direction. We're very excited about the project and even more excited to have the relationship with the customer as they continue on with their projects in terms of trying to get these structures installed around the world. So that was good for us in that respect.

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

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And it will clearly help us with our utilization in the facility. And I don't want to give any specific numbers, but that's definitely a benefit for us. And just one follow-on to Marty's question because we do have a lot of noise in the quarter, unfortunately. But if we adjust for the various puts and takes, our EBITDA [is about a push] for the quarter and we're looking at something similar to that as we move into the first part of next year and with a goal towards kind of a breakeven operating income as we get to the back half of the year.

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James Philip Geygan, Global Value Investment Corp - VP Advisory [17]

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The award of projects in the Fabrication Division is certainly exciting. As you look forward, either in offshore oil and gas, domestically or internationally, or for projects like offshore wind or with SeaOne, can you provide some color around what you're seeing in the market and maybe specifically talk about your ongoing relationship with the SeaOne and the size of the EPC Division as it stands today?

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Kirk J. Meche, Gulf Island Fabrication, Inc. - President, CEO & Director [18]

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Right. So JP, let me address that. In my opening comments, I also said something about -- or maybe my closing comments, we talked about the levels of bidding activity in the facilities and it's been at an all-time high. The majority of that work that is in our estimating departments now, as we speak, deals with the petrochemical industry. It's a lot of these big projects that are finally coming to fruition. You've probably read that McDermott had gotten award of the Golden Pass but there's other projects out there that we're chasing with other clients including Driftwood, Cheniere and whatnot. So our bidding activities are ramping up and I think these guys are recognizing that the Renaissance is starting to come and so they're all trying to get pricing in and see if they can get contracts to secure as we move this thing forward.

As it relates to SeaOne, again, we're not really sure on the status of their financing. They told us it would be another quarter. But quite frankly, we're going to concentrate our efforts on the projects we see that has some validity as we try and get these facilities up and running, as Wes says. The overhead utilization down to where we need it to be. So not much to report this quarter on SeaOne. The team back there is being multitasked in some respect. We're letting them assist us with some of these bids because, again, it's quite a number of bids that are coming in the facilities, and unfortunately, at times, they all do it at the same time. So we're trying to pick and choose the ones we think that have, again, an opportunity for us to not only have better margins but to strengthen the relationship with the customer as we go forward.

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Operator [19]

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(Operator Instructions) There appears to be no more questions at this time.

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Kirk J. Meche, Gulf Island Fabrication, Inc. - President, CEO & Director [20]

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Okay, this concludes the Gulf Island conference call. We thank everyone for listening. Have a good day. Thank you.

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Operator [21]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.