Gulf Island Fabrication, Inc.

Good afternoon and welcome, ladies and gentlemen, to GOFILAND's conference call to discuss fourth quarter 2020 results. All participants will be in a listen-only mode for the duration of the presentation. This call is being recorded. At this time, I'd like to turn the conference over to Ms. Cindy Cook for opening remarks and introductions. Cindy, please go ahead.

Thank you, and good afternoon. I would like to welcome everyone to our fourth quarter 2020 teleconference. Our results were released this afternoon, and a copy of the press release is available on our website at gulfisland.com. A replay of today's call will be available on our website after 7 p.m. this evening. Please keep in mind that the press release and certain comments on this call include forward-looking statements, and actual results may differ materially. we would like to refer everyone to the cautionary language included in our press release and to the risk factors described in our 2019 Form 10-K and subsequent SEC filings. Please also note that management may reference EBITDA, adjusted EBITDA, and backlog on this call, which are financial measures not recognized under U.S. GAAP. As required by SEC rules and regulations, These non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in our press release. Today we have Mr. Richard Huff, President and CEO, and Mr. Wes Stopton, Executive Vice President and CFO. Mr. Huff?

Thank you, Cindy. Good afternoon, everyone. Welcome to our fourth quarter discussion of the results, business trends, and outlook. I'm happy to be here with you this afternoon. and I hope that each of you and your families are continuing to stay healthy and safe during this difficult time. On today's call, I'll first provide some overall commentary on our fiscal 2020 and fourth quarter results. I will also discuss some of the near-term actions we're taking to address these challenges and provide an update on the progress we're making on some of our key initiatives. I will then discuss the key factors that impacted the results and the current business environment potential new in-market opportunities, and several actions we are taking to enhance our customer value proposition. Wes will then discuss our fourth quarter results in greater detail, as well as our backlog and liquidity position. We will then open up the call for questions and conclude with some closing remarks. This past year brought unprecedented challenges, including the effect of COVID-19 pandemic on labor availability, and productivity negatively impacting our results, as well as crude oil volatility, which reduced the volume of work in our traditional end markets. Adding to these challenges, there were a record level of hurricanes impacting our facilities and employees, disrupting our operations. While our fourth quarter results reflected several of these headwinds, longer term, we believe we have substantially strengthened our foundation over the past year through the consolidation of our resources and process improvements, implementing changes in certain management and functional leadership, and driving initiatives to expand our in-market focus to reduce our reliance on the offshore oil and gas industry. During the quarter, we completed our final two harbor tugs and delivered the last tug in January 2021, which allowed us to successfully close our Jennings and Lake Charles facilities consolidating all of our shipyard division operations into our Houma, Louisiana location, which will further improve our resource utilization, centralize key project resources, and deliver additional cost savings. Our consolidation efforts were not limited to our shipyard division. A year ago, we announced a combination of the fabrication and services business segments, and in the second half of 2020, we took additional actions to consolidate our resources and assets within the division. For example, our pipe mill, a large facility used for fabricating large pipe, primarily supporting our fabrication and supported services division, but was located within our shipyard. This required us to maintain fabrication and services resources in a separate yard and incur costs and inefficiencies associated with significant material handling, including barging pipe across the home and navigation canal between the two yards. During the fourth quarter, we completed the relocation of the pipe mill and other assets from our shipyard to our fabrication and services yard, further driving efficiencies and delivering additional cost savings by reducing material handling. The previous pipe mill facility has been converted to a large warehouse, providing us necessary storage for our shipyard division to support its existing backlog. Our fourth quarter results for the fabrication and services divisions reflect the progress we're seeing on several fronts from the initiatives we are implementing. In the fourth quarter, fabrication and services reported positive adjusted EBITDA for the second quarter in a row with adjusted EBITDA of $1.9 million as we further leveraged cost savings and process improvements, coupled with strong project performance. Our offshore services activity was stable in the fourth quarter and we have seen this trend continue into the first quarter of 2021. We are still seeing lower than traditional volume of quick book and burn type of activity in both offshore services and small fabrication to support our subsea market, but we continue to execute these projects effectively at or better than their as-sold margins, which also benefited the quarter. While current facility utilization and the lack of new projects reflect economic headwinds due to uncertainty caused by COVID-19 and oil price volatility, we continue to closely monitor the Division's resource requirements. As we evaluate our prospect pipeline and timing of awards, we are focused on identifying and implementing incremental overhead cost savings to further improve the Division's operating results. From a business development perspective, we are beginning to see an increase in project bidding opportunities with LNG and petrochemical activity picking up in Texas and Louisiana, with some prospects projected to be awarded in the back half of 2021. We are uniquely positioned for these opportunities due to our strategic location in Houma and our ability to serve multiple customers across the project lifecycle, from scope involving civil construction to proprietary process modules. As these projects reach their final investment decision, I am confident we can capture our share of the market. We are also continuing to review and expand our potential in-market opportunities for the fabrication and services division. We have begun to make the transition to green energy in markets to support our customers and their fabrication and services needs in renewable biofuel plant construction, as well as increasing opportunities in hydrogen production. We have added the necessary business development support to pursue this growing market opportunity, and as market activity picks up, we will be in a better position to benefit from this investment. We are also actively working with owners and engineering companies to identify opportunities where we can provide differentiated offerings. For example, we're evaluating strategic partnerships where the combined service offering will bring additional value to the customer and provide margin expansion for our services. Potential strategic relationships could include engineering companies that need an execution partner, construction companies that need a fabrication partner to reduce field risk, other fabricators that need the strength of our asset to improve their overall delivery. These collaborative partnerships will provide customers with a sole source provider and de-risk their projects, further improving our chances for success. We're also exploring opportunities to move up the value chain. Core to this initiative will be to bring key engineering capabilities in-house, ensuring that we have better control of our destiny and provide a compelling value proposition to our customers. Moving over to the shipyard division, the challenges for the quarter were primarily twofold. Our biggest challenge to project execution in the division continues to be the high level of turnover of craft professionals as we attempt to ramp up our headcount to required levels. This is not a unique problem to Gulf Island, but an industry-wide challenge due to the years of underinvestment in training of craft combined with continued uncertainty in the market. The second challenge is arising from the lack of appreciation of the complexities of build as these projects were bid and one with limited design details. As we progress engineering and get certainty of the remaining work fronts, we're getting more confident of the estimate of hours to complete the remaining backlog. Recruiting and developing our most valuable resource, our people, is one of our key strategic priorities. We are actively addressing this within shipyard division by hiring more frontline supervisors along with working on various programs to improve retention. We are also working closely with technical colleges in Louisiana and Texas to help train and recruit more capable personnel. We are also notified last week that as essential workers, the state of Louisiana will allow our employees to be vaccinated. We expect to see improvement in the stability of our workforce as our initiatives around our people continue to take effect and we reach a steady state headcount in the first half of 2021. Our shipyard division also continued to be impacted during the quarter by a backlog that is largely in a lost position and continues to be challenged as we have previously discussed. Specifically, our 240 vehicle ferry projects continued to experience lower than anticipated craft labor productivity and progress due to the impact of COVID-19 and reworked challenges due to deficiencies in design, which resulted in project charges. Specifically, During the quarter, we experienced additional challenges with the second ferry associated with deflections in the structure as it was nearing completion, which in turn caused us to conduct an evaluation as to the cause. In the course of that evaluation with a third-party engineering firm, we determined that there are inherent engineering deficiencies in the vessel design provided by the client that are creating ongoing structural challenges on the second ferry. As a result of these deficiencies in design, we believe that the first barrier was also impacted, which contributed to the rework and construction challenges discussed in previous quarters. The design impacts on the first vessel, combined with some of our own construction challenges and the overhead crane incident in the third quarter, have led us to the conclusion that construction of a new hull is the most appropriate course of action for the first vessel, resulting in additional forecast costs on the project. We believe the impacts of the design deficiencies, which are causing current quality issues on the vessels, should be the responsibility of the customer. Accordingly, we have submitted a claim to our customer to recover the cost and extension of schedule associated with any design-related impacts. We currently expect the second vessel to be completed in the second quarter, and the construction of the first vessel is currently on hold as we determine a path forward with our customer. Our towing, salvage, and rescue ship projects were also negatively impacted in the quarter by lower than anticipated craft labor productivity and progress due to the impact of COVID-19 and employee turnover, along with higher cost estimates for subcontracted services. Late in the fourth quarter, we submitted a request for equitable adjustment to recover the increased forecast costs associated with the impact of COVID-19 and to extend our project schedules. While we were granted extensions of schedule, we have not yet received any additional commercial consideration associated with our cost increases. We'll continue to collaboratively work with the U.S. Navy to pursue cost recoveries associated with our COVID-19 impact but can provide no assurances that we will be successful in recovering these costs. Earlier this year, we entered into a change order to our contract with the Navy to provide the Navy with data access rights for future towing, salvage, rescue ships. The change order is approximately $13 million and a majority of the amount will be included within the contract price for our existing vessel projects and recognized as revenue on a percentage of completion basis. And the remainder will be recognized as revenue as we facilitate the transfer of the data rights during 2021. This change order is to support the Navy's decision not to exercise their options under our contract for the construction of three additional vessels. Instead, the Navy intends to contract with other shipyards to fabricate these vessels. There are a variety of factors that went into the Navy's decision, including a desire to accelerate the scheduled completion of the remaining vessels, which we could not do given the existing vessels in our backlog. We believe it is in our best interest to support this optionality for the Navy, and particularly given that the options would have largely been in a break-even position. We anticipate that the change order will result in a benefit to our operating results of $7 to $10 million in the first quarter of 2021. Our 70 vehicle ferry project was similarly impacted by increased craft labor and subcontracted service costs and extensions of schedule due to the impact of COVID-19 pandemic and our inability to achieve previously anticipated improvements in productivity. These impacts were compounded by additional complexities of build, especially around piping, that has been identified as we achieve further completion of production engineering. We are continuing to work diligently to deliver the ferry by the end of the year. On our research vessel projects, fabrication and erection are ongoing on a limited basis as we await the completion of production engineering from the customer. We continue to work collaboratively to identify opportunities for construction activities on certain work fronts in advance of full completion of production engineering to minimize the schedule impacts to the project. Earlier this year, we negotiated and executed a change order related to the delay in the customer-provided production engineering caused by COVID-19. The change order provided cost recoveries and extensions of schedules associated with these delays. While our shipyard division experienced operational challenges, we will realize the benefits of this investment we have made, including our enhanced key project management resources which have helped improve our processes and add increased visibility on project performance. We will continue to build on our key initiatives to improve our recruiting and retention for the shipyard division and make further investments in project leadership and frontline supervision to achieve a steady state operation as quickly as possible. Our focus for the shipyard division continues to be on the execution of our backlog maintaining and building strong relationships with our existing customers, and continued and marked emphasis on new-built construction outside of the oil and gas industry, and increased repair and maintenance work. In sum, the economic impact of COVID-19 pandemic and crude oil volatility remain near-term headwinds. However, our strategy and focus are clear. We will continue to focus on the variables that are within our control, including preserving our liquidity maintaining discipline and not only pursuing new projects but executing them rigorously, enhancing our processes and procedures, continuously hiring and developing our employees, and focusing on new market opportunities complemented by strong customer value propositions. We'll also focus on being good stewards of the business and giving back to the communities we serve. I will now turn the call over to Wes to discuss our quarterly results in greater detail.