Gulf Island Fabrication Inc

NASDAQ:GIFI

Earnings Call Analysis

Gulf Island's Q3 Results Show Growth Despite Challenges

In the third quarter of 2024, Gulf Island reported a consolidated revenue of $37.6 million, significantly up from $5 million a year prior. Adjusted EBITDA grew 11% to $2.9 million, reflecting resilience amid project delays in its Services division, which suffered a 12% revenue decline. However, the Fabrication division thrived with a 14% revenue boost thanks to small-scale projects. The company expects to achieve an adjusted EBITDA between $11 million and $13 million for full-year 2024, leaning towards the lower end due to ongoing challenges. With $67 million in cash, Gulf Island is well-positioned for future investments and potential stock buybacks.

Strong Growth Despite Challenges

In the third quarter of 2024, the company reported impressive results, with an adjusted EBITDA growth of 11% year-over-year. They generated adjusted EBITDA of $2.9 million, up from $2.6 million in the previous year. Despite facing challenges—such as project delays due to customer issues and adverse weather conditions affecting operations in the Gulf of Mexico—they demonstrated resilience in their operating model, highlighting strong free cash flow conversion.

Segment Performance Overview

The performance varied across segments. The Services division saw its revenue drop by 12%, amounting to $20.2 million, primarily due to project delays and hurricanes impacting operations. However, they maintained an EBITDA of $1.9 million. In contrast, the Fabrication division exhibited a robust increase in revenue of 14%, climbing to $17.1 million, partly driven by heightened activity in small-scale fabrication. Here, adjusted EBITDA nearly doubled to $2.7 million, fueled by better resource utilization.

Future Outlook and Growth Initiatives

Looking ahead, management is optimistic, albeit cautious. They expect the full year 2024 adjusted EBITDA to land in the range of $11 million to $13 million, likely leaning towards the lower end due to ongoing project delays. Significant investments are being made in the Cleaning and Environmental Services (CES) business line, aimed at capitalizing on decommissioning activities in the Gulf, which are anticipated to grow over the next 8 to 10 years. This segment is estimated to represent a market of $400 million to $600 million annually.

Strategic Focus on Diversification

The strategic positioning of the company is noteworthy, with intentions to diversify beyond oil and gas. They are focusing on markets such as clean energy and infrastructure, aiming to capture opportunities like the NASA fabrication project, which showcases their capability to enter new sectors. Management emphasizes a commitment to expanding into these areas, anticipating further bids and potential awards in 2025.

Solid Financial Position and Shareholder Returns

From a liquidity perspective, the company ended the quarter with approximately $67 million in cash and investments, a rise of nearly $4 million from the previous quarter. This solid financial footing allows flexibility for growth investments. They have also resumed share repurchases, buying back 111,000 shares for $606,000, with intentions to extend the program through December 2025. This reflects their confidence in potential returns for shareholders, alongside planned capital expenditures of $500,000 to $1 million for the fourth quarter.

Leadership Transition

Finally, a noteworthy internal change is the transition of the Board Chair role, with Richard Heo assuming the position in December 2024. This change is set to provide continuity in strategic direction, as Heo continues his dual role as CEO, potentially fostering a robust leadership approach moving forward.

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Gulf Island's conference call to discuss third quarter 2024 results. [Operator Instructions] This call is being recorded. At this time, I would like to turn the floor over to Cindi Cook for opening remarks and introductions. Cindi, please go ahead.

[Cindi Cook, executive]

Thank you, and good afternoon. I would like to welcome everyone to our third quarter 2024 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 7:00 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 most recent Form 10-K and subsequent SEC filings. Please also note that management may reference EBITDA, adjusted EBITDA, adjusted revenue, new project awards and backlog on this call, which are financial measures not recognized under U.S. GAAP.

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 Heo, President and CEO; and Mr. Wes Stockton, Executive Vice President and CFO. Mr. Heo?

[Richard Heo, executive]

Thank you, Cindy. Good afternoon, everyone, and welcome to our third 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 end market trends and an update on the progress we have made on our strategic initiatives. Wes will then discuss our third quarter results in greater detail and provide some commentary on our outlook for 2024.

We'll then open up the call for questions and end with closing remarks. The third quarter results demonstrate the improved durability of our operating model as we generated 11% year-over-year growth in adjusted EBITDA and strong free cash flow conversion despite headwinds in Our Services division, which included customer-driven project delays and lost revenue due to hurricane activity in the Gulf of Mexico during the quarter.

We are very proud of these results, which would not have been possible if not for our strategic decision to build a more stable, operating foundation made up of our small-scale fabrication and services business. Our fabrication-adjusted EBITDA nearly doubled from the prior year, and while our Services division continued to face some headwinds during the quarter, the business still generated nearly $2 million in third quarter EBITDA, highlighting the resilience of this business.

Now turning to our segment results. First, looking at our Services division. While the overall spending environment in our key offshore services market remains relatively strong, we continue to be impacted by customer-driven project delays for our Spark Safety business. As we discussed last quarter, these projects have not been lost, but the project start dates continue to be delayed due to some customer-specific issues.

In addition, we were impacted by lost revenue during the third quarter due to the hurricane activity in the Gulf of Mexico in September. Luckily, we did not experience any significant damage to our Houma facility from the recent hurricanes, including Hurricane Francine that made landfall less than 50 miles from our facility as a Category 2 storm. But our services operations were impacted due to the temporary removal of our personnel from customer offshore platforms as the storms approached and passed through the Gulf.

While we are disappointed by the recent impacts in Services, we remain encouraged by the strategic positioning of our Services business and we continue to invest in our key growth initiatives to further strengthen our competitive position and ensure that we can endure customer and market-driven fluctuations. To that end, last quarter, we highlighted our decision to make incremental growth investments in support of our new cleaning and Environmental Services business line or CES. This new offering expands our service portfolio to better support decommissioning activity in the Gulf of Mexico, which we believe represents a meaningful potential opportunity for our company.

Bidding and project activity for our CES business line is beginning to increase, and we are poised to benefit as the decommissioning activity in the Gulf of Mexico inevitably gains momentum. Now turning on to fabrication, where our revenue increased 14% from last year, driven by continued strength in our small-scale fabrication business. The demand environment and small-scale fab remains active, including pull-through fabrication from our services customers, and we benefited from improved facility utilization during the quarter, driving our third quarter fabrication adjusted EBITDA to nearly double compared to last year.

Our fabrication bid activity remains strong, and we expect the positive momentum to continue into 2025. A key priority and longer-term focus for our fabrication business is expanding our exposure to markets outside oil and gas, such as infrastructure, clean energy and high-tech manufacturing. Our contract for the fabrication of structural components for NASA highlights the potential benefits as we expand our end market focus outside our traditional oil and gas markets. These end markets place a premium on quality and [ schedule ] certainty areas where we have proven record of delivering.

As it relates to the large fabrication market, unfortunately, there has not been much of a change. We believe that there are a lot of capital decisions that have been put on hold given the uncertain political landscape and we're hopeful that today's election will remove the uncertainty and benefit the bidding environment. Overall, our optimism for the large fabrication market has not changed as the favorable structural drivers remain in place.

There is limited capacity in the market, and there are numerous potential large capital projects that could be moving forward in our backyard. While it remains difficult to predict timing, we remain optimistic in our ability to secure a large award. And in the meantime, we will build on the foundation of small-scale fabrication while we wait for the right large project opportunities. As it relates to our Shipyard division, as we have discussed, we substantially completed our remaining operational shipyard obligations during the fourth quarter of last year, with the warranty periods for our ferry projects being the final remaining items associated with the wind down of the business.

The warranty period for our 70-vehicle ferry project ended in the third quarter of 2024. As it relates to the 40-vehicle ferries, the warranty period for one of the ferries ended in the second quarter of this year and the last vessel's warranty period ends in the first quarter of 2025. Last quarter, we noted that we submitted our final claim to the North Carolina Department of Transportation. Our claim was rejected, which was not a surprise, and we have moved forward with legal avenues to recover previously incurred costs associated with the 40-vehicle ferry projects resulting from the customers' design efficiencies on the vessels.

Overall, we're pleased with our third quarter results as our ability to generate year-over-year EBITDA growth and strong cash generation despite several market headwinds, highlights the resilience of our operating model. We remain optimistic regarding the market drivers of our small fab and services business, and we are excited by the potential for our Spark Safety and CES offerings. In addition, we are in an extremely, attractive financial position with over $60 million of available liquidity to pursue our growth initiatives.

This provides us with several avenues for potential value creation. And as we continue to execute on our strategic plan, we're committed to pursuing the best path to deliver shareholder value, which could also include capital return opportunities if we're not able to find sufficient growth investment opportunities that satisfy our risk-return hurdles.

Prior to turning the call over to Wes, I'd like to comment on our announced Chairman of the Board transition. Our current Board Chair, Bill Chiles, will retire at the end of term in May 2025, and we expect to reduce our board size to 5 directors at that time. As a result and consistent with our goal of rightsizing our Board and maintaining an optimal leadership structure, on November 30, I will assume the Board Chair role, along with my current CEO duties. My assumption of the Chair role next month, along with Bill's continuation on the Board through the end of his term, will provide for an orderly transition of his responsibilities. I'd like to express my gratitude to Bill for his commitment to Gulf Island for over a decade, and I look forward to working with the Board to continue to advance the company's strategic initiatives.

I'll now turn the call over to Wes to discuss our quarterly results in greater detail.

[Westley Stockton, executive]

Thanks, Richard. Good afternoon, everyone. I will discuss our consolidated results and then provide some additional details regarding our segment performance, putting in context the factors mentioned by Richard and their impacts on the quarter. I will then conclude with a discussion of our liquidity and full year financial outlook. Now turning to our quarter results. .

Consolidated revenue for the third quarter of 2024 was $37.6 million compared to consolidated revenue of $5 million for the same period of the prior year. Excluding the impact of the Shipyard Division, which included negative revenue for the 2023 period associated with the resolution of our MPSV litigation, adjusted consolidated revenue for the third quarter of 2024 was $37.2 million, essentially flat from adjusted consolidated revenue of $37.7 million for the third quarter of last year, as growth in our fabrication division was offset by lower revenue for services.

Adjusted consolidated EBITDA was $2.9 million for the third quarter of 2024, up from adjusted consolidated EBITDA of $2.6 million for the prior year period. Specifically for our Services division, revenue for the third quarter of 2024 was $20.2 million, a decrease of 12% compared to the third quarter 2023. The decrease was due to lower new project awards, driven by delayed timing of certain Spark Safety project opportunities and lower activity due to delays caused by hurricanes Francine and Helene in September. Services EBITDA for the third quarter of 2024 was $1.9 million or 9.3% of revenue, down from $3.1 million or 13.4% of revenue for the prior year period.

The decline was primarily due to lower revenue, a lower margin project mix and ongoing investments associated with the startup of the division's CES business line. For our fabrication division, revenue for the third quarter 2024 was $17.1 million, an increase of $2.1 million or 14% compared to the third quarter 2023 due to higher small-scale fabrication activity. Adjusted EBITDA for the third quarter of 2024 was $2.7 million, up from $1.4 million for the prior year period, primarily due to higher revenue and improved utilization of facilities and resources associated with our increased small-scale fabrication activity, offset by a lower margin project mix.

And for our corporate division, EBITDA was a loss of $1.7 million for the third quarter compared to a loss of $1.9 million in the prior year period. With respect to our liquidity, we ended the third quarter with a cash and investments balance of approximately $67 million, up nearly $4 million from the end of the second quarter, highlighting a strong free cash flow conversion on EBITDA of $2.9 million for the quarter. Given our NOLs, strong balance sheet and anticipated lower capital needs going forward, we continue to expect a high EBITDA to free cash flow conversion rate.

At September 30, our debt obligation associated with the resolution of our MPSV litigation remains at $20 million with annual payments of approximately $1.7 million beginning on December 31, 2024. So our first payment will be made in the fourth quarter. Our cash balance and the long duration of our debt puts us in a strong liquidity position and provides significant flexibility to pursue our growth objectives. Further, during the third quarter, we repurchased 111,000 shares of our common stock for $606,000 under our share repurchase program.

And at quarter end, we had remaining authorization to purchase approximately $4 million of our common stock. Our share repurchase program, which was previously set to expire in December 2024 has been extended to December 2025. And given our strong financial position, we are evaluating additional opportunities to return capital to our shareholders.

And finally, turning to our earnings outlook and capital requirements for 2024. Our prior full year 2024 indicative guidance was for adjusted, consolidated EBITDA of $11 million to $13 million. We continue to expect our full year adjusted consolidated EBITDA to be in this guidance range with results likely to be at the lower end of the range due to the continued project delays impacting our Services division, combined with lost revenue resulting from hurricane activity during the quarter, partially offset by anticipated higher small-scale fabrication activity.

With respect to our capital requirements, our capital spending plans for 2024 continue to approximate our previous full year expectations, with capital expenditures for the fourth quarter anticipated to be $500,000 to $1 million. This concludes our prepared remarks. Operator, you may now open the line for questions.

[Operator]

[Operator Instructions] Our first question is from Martin Malloy with Johnson Rice.

[Martin Malloy, analyst]

Congratulations on the nice quarter. My first question I wanted to ask about in the commentary about the fabrication segment, you mentioned the bidding activity being pretty strong. And also looking at some non-oil and gas areas, clean energy, infrastructure, Hi-Tech, I know you've done the NASA work before. And on the infrastructure side, I think you've done some locks and drydocks before. Just kind of curious if there's any more information you can provide with respect to the types of projects and what's giving you the confidence that that these areas are going to be pay off potentially for you in terms of awards?

[Richard Heo, executive]

Yes. So some of the end markets that we've recently been chasing in the past couple of years that we targeted, Marty, with regard to small fab has continued to pick up. And it's all of the kind of what I call marine and civil infrastructure upgrades. That market is still robust. Subsea, albeit in kind of 2024 was a little softer than our forecast. It's starting to look pretty good for us in 2025.

And then on the infrastructure side, with our kind of strong execution on the NASA project, we're getting a lot of opportunities to bid similar types of projects outside of that NASA contract. So we feel really good about where fabrication sits today and the opportunities that we're bidding in 2025.

[Martin Malloy, analyst]

Okay. And the second question I had was just, we shared your optimism on the decommissioning [ P&A ] market for the Gulf of Mexico. Anything more you can add to that -- to what you're doing there in terms of investment or visibility on the work for next year?

[Richard Heo, executive]

Yes. I think as you know, in the Gulf of Mexico, there are essentially 2 large players with regard to operators, Exxon and Chevron that have large assets that have boomerang backed as a result of some of these bankruptcies, right? And if you listen to their earnings and forecast, I mean, this activity is an 8- to 10-year program, potentially plus. Our component is relatively small, Marty, in that whole decommissioning life cycle.

But we feel that with our cleaning and environmental services and again, our long history of having performed the safe out, the decommissioning component that historically, we've shown that we can demonstrate or we've demonstrated that we've shown we can execute safely, we feel like there's a good opportunity for a very small portion of that estimated $400 million to $600 million a year in the next 8 to 10 years. So we feel that our positioning with the cleaning and environmental services, along with our history of decommissioning activities and then also our fabrication capabilities that that is a component of that safe out, we feel like we're in a good position to take some of that market share.

[Operator]

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Richard for closing remarks.

[Richard Heo, executive]

In closing, I want to thank our customers and shareholders for their continued support as well as recognize our employees to continue to demonstrate a commitment to Gulf Island success. For those on the call, thanks again for your interest in Gulf Island. And please note will be attending the Sidoti Virtual Investor Conference on November 14. If you're not able to make -- if you're not able to connect during the quarter, I look forward to speaking with you on our next conference call and updating you on our progress. Be safe and take care.

[Operator]

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.