Gulf Island Fabrication, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Gulf Islands Conference Call to discuss fourth quarter and full year 2022 results. All participants will be in a listen-only mode for the duration of the call. This call is being recorded. At this time, I would like to turn the floor 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 2022 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 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 most recent Form 10-K and subsequent SEC filings. Please also note that management may reference EBITDA, new project awards, and backlog on this call, which are financial measures not recognized under U.S. GAV. As required by SEC rules and regulations to the extent used, These non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in our press release. Today, we have Mr. Richard Hupp, President and CEO, and Mr. Wes Stockton, Executive Vice President and CFO. Mr. Hupp?

Thank you, Cindy. Good afternoon, everyone, and welcome to our fourth quarter results conference call. 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 today's call, I'll provide key takeaways from the quarter, a review of segment performance and in-market trends, and an update on the progress we have made on our strategic initiatives, including our key priorities for 2023. Wes will then discuss our fourth quarter results in greater detail. We will then open up the call for questions and then with some closing remarks. The improving business momentum we experienced throughout 2022 continued into year end and as we reported strong fourth quarter results with total revenues increasing nearly 50% owing to continued strength in our services division and small scale fabrication business. In addition, we continue to make important progress on our strategic transformation initiatives And as a result, we're well positioned to take advantage of the favorable demand trends that are benefiting the key end markets in our Gulf Coast region. Last quarter, we announced that we were awarded a large fabrication contract and we began initial work on the project during the fourth quarter. However, in late February, we received direction from our customer to suspend all project activities with no timeline provided for potential recommencement of the project. We're hopeful this is simply a delay in the project timing, and we are taking measures to minimize the impact of the suspension on our business. While we were clearly disappointed to receive this news and hope to resume work on the contract, it is important to note that we still remain extremely encouraged by the bidding activity in the large fabrication market and the long-term outlook for our overall fabrication business. We continue to pursue new project opportunities and are in discussions with a number of customers regarding attractive large fabrication opportunities that we hope can convert to a new award before the end of the year. Now turning to our segment's results. First, looking at the services division, our fourth quarter services revenue grew 60% and EBITDA more than doubled compared to the same period in 2021. driven by contributions from the DSS acquisition and strong trends in the offshore market in the Gulf of Mexico. Expanding and diversifying our services business is a key pillar of our strategic transformation, and I could not be more pleased with the progress we have made against this initiative in a relatively short period of time. The acquisition of DSS doubled our services workforce and we have been able to essentially maintain our craft tech count during 2022, which is an important accomplishment given a very competitive labor environment, especially in the offshore services market. While the labor market is expected to remain competitive in 2023, we still anticipate continued growth in our services division driven by the strength of our core Gulf Coast market, increasing cross-selling opportunities amongst our various services business lines, new strategic partnership opportunities, and growth in our new Spark Safety business line. We're excited about the progress of Spark Safety, which provides welding enclosures that create a safe environment for work to be carried out without the need to shut down operations. We were awarded our first project in the fourth quarter and commenced our second project in January. We feel that our Spark Safety system has a competitive advantage which incorporates an improved crunch control system with additional safety features which is being recognized in the industry. We're confident that Spark Safety will be a strong contributor to our services operating results in the coming year. The addition of the strategic business line where we are providing a value-added service is a key factor in our overall growth strategy. Overall, I believe we have built one of the premier services operations in our region, and with the strong in-market trends and scarcity of labor, we expect to build on our strong platform going forward. Now, moving on to our fabrication division. where we generated 60% top-line growth during the fourth quarter, driven in large part by the continued strength in our small-scale fabrication business. The continued momentum in our small-scale fab business is a function of the ongoing favorable demand trends in our core markets, combined with our strategic location in Houma, strong customer relationships, and track record of quality and on-time completion of projects. The outlook for this business remains positive as we move into the new year and we expect further growth in small-scale fab in 2023. While the decision by our customer to suspend activities on our large fabrication project was disappointing, we remain very optimistic about the longer-term outlook for the broader fabrication market. While there clearly could be a timing issue if work under our large fab project does not resume in a timely manner or if the project is ultimately terminated, Bidding activity in the market remains robust, and industry capacity is still limited, which gives me confidence that we will have success with a large fabrication project award to help mitigate the impact of the suspension, particularly in the latter part of 2023 as we move into 2024. And as we have stated many times in the past, we will not chase growth, and we are committed to remaining disciplined to ensure that any large contract award is consistent with our financial and risk objectives. Finally, turning to our shipyard division, we continue to make progress toward an efficient and safe wind down of our shipyard operations. With respect to our 70 vehicle ferry project for the Texas Department of Transportation, the construction phase of the ferry is substantially finished and the ferry is in the water for the final outfitting stage. During the quarter, We recorded a $900,000 charge due to increased materials and subcontractor costs and duration-related costs due to the extension of schedule, including forecast liquidated damages. These impacts were primarily due to equipment issues identified during testing, some contractor delays, and the U.S. Coast Guard's determination that the vessel's wood consoles, which were contractually specified by the customer, must be modified with metal consoles. we're continuing to work with the customer to minimize the financial impact of these delays as we work toward final delivery, which is now anticipated in the second quarter due to the required console modifications. With respect to our 240 vehicle ferry projects for the North Carolina Department of Transportation, our teams continue to make progress. Unfortunately, we continue to encounter performance issues in both the construction and commissioning of the two ferries, due to previously discussed design deficiencies. As we previously discussed, we entered into a change order with the customer for modifications to the propulsion system to rectify certain performance issues, which resulted in greater than anticipated construction delays for both vessels. We successfully completed the modifications for the first vessel, and following successful sea trials in the fourth quarter, the vessel was delivered to the customer and conditional acceptance was received in January. However, final acceptance has been delayed as we work with the customer to address an equipment issue resulting from the design deficiencies. For the remaining ferry, we're targeting completion and delivery in the second quarter 2023. Although completion had previously been anticipated for the first quarter, it has been delayed due to the design deficiencies which have continued to result in deflection issues within the plating of the vessels, which, in addition to the propulsion system modifications, has resulted in schedule delays and cost increases for the quarter. As such, during the quarter, we recorded a $1.1 million charge, resulting primarily from increased craft labor costs and duration-related costs due to the extensions of schedule, including forecast liquidated damages. Separately, our lawsuit in North Carolina State court seeking damages regarding the design flaws for the vessels and the resulting delays is ongoing. As a result of the completion delays for the two remaining ferries, we now anticipate the wind-down of the shipyard operations to be completed in the second quarter of 2023. Regarding the MPSV lawsuit with Hornbeck, on February 1st, we filed an 8-K disclosing that the trial court granted Hornbeck's motions for partial summary judgment, dismissing the claim by Gulf Island Shipyards that Hornbeck wrongfully terminated the vessel construction contracts. Shipyards appealed the trial court's decision, and on March 2nd, the appellate court reversed the court's decision, thereby reinstating Shipyards' wrongful termination claim. As a result of the appellate court's ruling, The trial previously scheduled for March 6, 2023, has been rescheduled to begin on October 16, 2023. I'd like to wrap up my comments with an update on our strategic transformation, and importantly, I want to highlight some of our key areas of focus as we look forward to 2023. During 2022, we continue to make an important progress on the second phase of our strategic transformation, which was focused on positioning the company to pursue stable, profitable growth. The key aspects of our strategy were based on pursuing growth opportunities in UN markets, as well as in our traditional offshore markets, growing and diversifying our services business, further strengthening project execution, and expanding our skilled labor workforce. I'm very proud of our successful execution against our strategic initiatives during 2022, which has culminated in a strong fourth quarter financial performance. As we look to 2023, our strategic priorities will be squarely focused on continuing to generate profitable growth and building our success in 2022. Some of our notable achievements during 2022 and key areas of focus for 2023 include the following. First, We significantly expanded our services business and skilled craft headcount during 2022, driven in large part by the DSS acquisition. We exited the year at an annual revenue run rate of roughly $90 million with double-digit EBITDA margins. We expect continued growth in our services business during 2023, driven by a focus on pursuing strategic partnerships, the benefit of our recently launched Spark Safety business, and finding creative ways to expand our craft labor headcounts. Second, we positioned our fabrication business to pursue growth in our traditional offshore markets, as well as new growth in markets. We generated strong growth in our small scale fab business during 2022 with four quarter revenues growing 60% and continued new award momentum. As we move forward, we are focused on taking advantage of our strategic location and the limited industry capacity to pursue large fabrication awards at terms consistent with our financial and risk objectives and are in active dialogue with customers for large fabrication work to mitigate the impacts of the suspension of our large project that will provide us continued momentum going into 2024. Lastly, we continue to maintain bidding discipline and strengthen project execution with projects performing consistent with or better than our as-sold estimates during 2022. As we enter 2023, we remain committed to focusing on execution and bidding discipline in order to ensure we grow our margins while managing risk, particularly given the ongoing inflationary pressures and challenges with availability of skilled labor. In closing, I'm happy with our progress during 2022. We have a lot to be proud of, but we're still in the early innings of our plan. While I'm disappointed by the delay in the completion of our ferry obligations and the suspension of our large fabrication project, I'm confident about our future. As I look forward, I remain very encouraged by the demand trends in our key markets and how Gulf Island is positioned to take advantage of these trends. As a result, We anticipate continued growth in our services division in our small-scale fabrication business during 2023 and remain optimistic about the outlook of our fabrication division. I will now turn the call over to Wes to discuss our quarterly results in greater detail.

Thanks, Richard, and good afternoon, everyone. I will discuss our consolidated results and then provide some additional details regarding our segment results. Putting in context the five factors mentioned by Richard and their impacts on the quarter, I will then conclude with the discussion of our liquidity. Consolidated revenue for the fourth quarter of 2022 was $38.1 million, a 48% increase from the fourth quarter of 2021, with the year-over-year increase attributable to strong growth in both our services and fabrication divisions. Consolidated operating income for the fourth quarter was $380,000, and EBITDA was $1.7 million. Our consolidated results reflect a positive contribution from our services and fabrication divisions, including a gain from Hurricane Ida insurance recoveries, offset by costs associated with our corporate division and legal and advisory fees and project losses attributable to our retained shipyard operations. Specifically for the services division, revenue for the fourth quarter of 2022 was $21.6 million, an increase of $8.1 million, or 60% compared to the fourth quarter of 2021. The increase was driven by a full quarter contribution from the DSS acquisition and continued strength in our legacy offshore services business. Fourth quarter services revenue was down sequentially from the third quarter due to the normal seasonality of the business, such as the winter weather and the year-end holiday season, which impact our billable hours. Services EBITDA for the fourth quarter was $2.6 million, or 11.9% of revenue, up from $1.2 million, or 9.2% of revenue for the prior year period. Operating results for the quarter benefited from a more favorable project mix for our legacy services business and the contribution of the DSS acquisition. As mentioned by Richard, we expect continued organic growth and strong operating results for the division in 2023 based on the strength of our end markets, favorable competitive position, and contribution of our SPARC safety business lines. However, the level of annualized growth will be more normalized during 2023 as we achieve the one-year anniversary of the DSS acquisition in the fourth quarter of 2022. For our fabrication division, revenue for the fourth quarter of 2022 was $16.4 million, an increase of $6.2 million, or 60%, compared to the fourth quarter of 2021. The increase was attributable to strong growth in small-scale fabrication and progress on our large fabrication project, all set partially by the completion of several larger fabrication projects that were in progress in the prior period. Fabrication EBITDA for the fourth quarter was 5 million versus a loss of 3 million for the prior year period. Operating results for the fourth quarter of 2022 included gains of 3 million from insurance recoveries associated with damage previously caused by Hurricane Ida, while operating results for the fourth quarter of 2021 included charges of $3.1 million associated with Hurricane Ida damage and project improvements of $1.2 million. While our volume levels continue to be below capacity, the Division's utilization has improved in recent quarters due to the increase in our small-scale fabrication work. We expect our results in the first quarter to be consistent with or better than the fourth quarter and are working to mitigate the impacts of the suspension of our large project on the remainder of 2023. For our shipyard division, revenue for the fourth quarter of 2022 was entirely related to our 70 vehicle ferry and two 40 vehicle ferry projects, which as discussed by Richard are nearing completion. Our loss for the quarter was related to the previously mentioned project charges and legal and advisory fees associated with the NPSB litigation. For our corporate division, general and administrative expense was $2.4 million for the fourth quarter of 2022, compared to $1.7 million for the prior year period, with the increase due to higher incentive plan costs and expenses associated with initiatives to diversify and enhance our business. The higher incentive plan costs were due to the accelerated amortization of compensation expense for our performance-based equity awards. With respect to our liquidity, We ended the fourth quarter with a cash and investment balance of approximately $45 million, an increase of $7 million from the end of the third quarter due to positive operating results for the quarter, as well as expected working capital improvements, offset partially by capital expenditures primarily associated with investments in our SPARC safety business line. This concludes our prepared remarks. Operator, you may now open the line for questions.

Thank you. And at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. And our first question comes from the line of Martin Malloy with Johnson Rice. Please proceed with your question.

Good afternoon. Can you tell us anything additional about the project, the large fabrication project that has been suspended? Any sense of the likelihood that this project could be unsuspended and go forward again? Any exposure you might have from a financial standpoint, anything like that?

Yeah, Marty, we are currently working with the customer as they evaluate all of their options and their path forward. And we hope to, in very quick time here in the next month or two, definitely before the earnings call, have more clarity on the aspects of the project and the customer's decision on the path forward.

Yeah, and Marty, as we mentioned on previous calls, it's a reimbursable contract, so our expectation is that at this point that any amounts that we incur should be recovered under our contract.

Okay, great. And just in terms of the bidding activity on the large projects in the Gulf Coast region, could you give us any more color there in terms of type of projects or level of bidding activity whether it be LNG, petrochemical, any other industries that maybe we're not aware of that there might be projects related to?

Yeah, Marty, one of the things that we have talked about how the market has recognized this whole value of modular fabrication, especially in light of what's going on in the market with labor availability or the challenges of labor and schedule kind of certainty Customers in all facets are looking for modularization. So the things that we are chasing currently that are kind of in the forefront are on the larger petrochemical projects and LNG projects that have made FID. And so those projects are more eminent. And then on a smaller scale, lots of revamp opportunities where modularization is coming into play. The other opportunities that we are bidding on have to do with some of the infrastructure upgrades that are happening more specifically with the CHIPS funding. There's some semiconductor plants that require lots of steel that goes into their facilities, and they are executing those on a modular format as well. So really a great set of opportunities for us on the large fab. It is, however, though, still very competitive, as we've talked about in our prepared remarks, and we're just being very cautious about what we're bidding in the current environment.

Thank you. I'll turn it back. Thanks, Marty.

All right. And again, as a reminder, if you have any questions, you may press star 1. Our next question is, comes from the line of Tom Spiro with Spiro Capital. Please proceed with your question.

Tom Spiro, Spiro Capital. Good afternoon.

Hey, Tom.

On the liquidity front, can you give us a sense of where you think the cash balance will be at the end of Q1?

Yeah, we think at this point our working capital is sustainable, generally sustainable. So absent the impacts of CapEx and EBITDA contribution or impacts, We think this $40 to $45 million cash balance should carry over into the end of the quarter.

That's helpful. Thanks. And your CapEx plans for the year? Can you give us a sense of that, please?

Yeah. Our guidance, and it's actually, we're going to file our 10-K this evening, and it'll be available in the morning. But in our 10-K, we did specify our expectations for next year. It's in the $3 to $5 million range. Well, in light of the suspension of the large project we talked about, we're going to do our best to kind of manage through that CapEx requirement and just make sure that we're aligning our capital needs with our market and demand.

Thank you. And as I recall, the party with whom we have the large FAB job was paying us a reservation fee so that we would have facilities, personnel available for them when they were ready to move forward. Now that they're reconsidering and sort of thinking, are they again paying us a reservation fee, or are we sort of waiting without compensation?

Yeah, at this point, we had moved from the reservation fee part of that contract into the full-blown fabrication contract. So we're operating under that contractual arrangement, and until at this point, The suspension is early on, so we're still evaluating that, and we'll see what happens over the next month or so.

I see. I see. I'm sorry.

Go ahead. Tom, just to be clear, as Wes said, this is not a fixed by slump sum contract. It is reimbursable. So we are, through this entire process, even today, covering our costs.

I see. That's helpful. Thank you. If another large job comes our way tomorrow morning, Can we take it? Do we have the facilities, the personnel, et cetera, or would we have to defer that because we may have obligations to the prior customer?

Yeah, so that's a great question. We would have to obviously have a conversation with the existing customer before we take it. But one thing that gives me a lot of confidence in these large jobs is that we were able to ramp up in preparation in the fourth quarter and part of the first quarter. And so, you know, I was happy with our ability to ramp up in the fab yard. So, you know, I feel very good about and confident about our ability to execute a large project. And if we were to get one, we would obviously look to take it, but obviously have to have a conversation with the existing customer to make sure that we're in line to do that properly. Okay.

Thanks. Just a couple more on the subject of LNG. As I read the newspaper, magazines, and such, my impression is that a number of LNG projects are moving forward as we speak. Contracts have been awarded over the last several months. They're being awarded now. I don't see that you folks have actually won anything, even though there seems to be lots to be won. Should that concern me?

No, so the LNG projects that you're talking about that have been made FID, a lot of the projects are not, you know, so essentially there has to be a relevant scope. And it's this modular fabrication or, you know, things that we can build in our yard. So it has to be appropriate in terms of the type of project and what the what the opportunity set is for the fabricated materials. So there has been a string of FID announced for LNG projects, and we are actively bidding on those projects that have recently been announced. I see.

And lastly, the turmoil in the banking sector over the last week or 10 days, I'm sure you've read about it as I have, I was curious whether you expected that to impact your business in some fashion, either some of the jobs that you're bidding or some of the jobs that you have in hand. What impact, if any, do you think that will have on Wolf Island?

I don't think it will have any impact in terms of the jobs that we're bidding.

Okay. Thanks very much.

Thanks, Tom.

Our next question comes from the line of Richard Grilich with REG Capital Advisors. Please proceed with your question.

Thank you. With regard to the MPSV litigation, if things were ultimately not to go your way, what would the liability or expense structure result in?

Yeah, this is Wes. I mean, as you can imagine, given this is litigation, we want to limit our discussion on this. Obviously, it's a jury trial, so the ultimate outcome is uncertain. It's fairly difficult to predict as well. We did provide some additional details of the litigation, our 10-K. I mentioned earlier that we'll file that this evening, and it'll be available in the morning. It's probably better to allow that because it'll give more context to our current thinking around the litigation.

Okay. Are there any sums on the balance sheet that would shed some light on that?

They wouldn't shed light on your early on question, but I will tell you what is on our balance sheet. We do have a receivable of $12.5 million. It's been on the balance sheet since the termination date. It reflects our contract position at the time of the termination, and it's in other long-term assets.

Okay. And if, well, let me kind of take it from a different angle then. So if that's the receivable and that doesn't become an actuality, so there's $12 million there, but is there any additional amount that you would actually have to pay then for that?

Well, like I said, they have claims against us. We have claims against them. And conceivably there could be amounts that are due to them, and conversely there could be incremental amounts that are due to us. At this point, we're not in a position to tell you the likelihood of what that might be or not be.

Okay. All right. Thank you.

And our next question comes from the line of David Wright with Henry Investment Trust. Please proceed with your question.

Thank you. Learn me up here. You talk about this being a reimbursable contract, and you talk about covering your costs. Does that mean that you don't get any profit on the business you've done so far?

No, when we say reimbursable, we mean it's reimbursable plus the margin that's been provided for within the contract.

Okay, and you said you were working on this in the fourth quarter and then you were working on this through late February.

That is correct. We made progress during the first part of the year. That's correct.

So you have business in the first quarter as well from this contract?

We will have some. We expect that about, and you'll see this again in our filing, we've got somewhere between 60 and 70 million of our backlog that we think will be impacted by the suspension and that will be subject to determination of where the customer goes going forward.

Is the customer currently present on its payables to you? I'm sorry? Is the customer present on its payables to you?

Generally, current, we haven't received all payments of all amounts that are due at this point.

Did the customer have an issue with the quality of the work that the company was doing?

No, it was not a quality. It wasn't a Gulf Island issue. They are evaluating collectively all the projects that they're executing and looking for a best path forward. in terms of the amounts of capital projects that they're working on.

Thanks for that context. And then is anyone presently paying you for reservation space? No, not currently. Okay. Well, thank you very much for taking my questions. Thank you, David.

And we have reached the end of the Q&A session, and I'll now turn the call back over to Richard Hale for closed remarks.

In closing, I want to thank our customers and shareholders for their continued support, as well as recognize our employees who continue to demonstrate a commitment to call finance success. For those on the call, thanks again for your interest, and I look forward to speaking with you on our first quarter results conference call and updating you on our progress. Be safe and take care.

And this concludes the Gulf Island Conference call. Thank you and goodbye.