Gulf Island Fabrication, Inc.

I would like to welcome everyone to Gulf Island Fabrication's 2011 Fourth Quarter Teleconference. Please keep in mind that any statements made in this conference that are not statements of historical fact are considered forward-looking statements.

These statements are subject to factors that could cause actual results to differ materially from the results predicted in the forward-looking statements. These factors include the timing and extent of changes in the prices of crude oil and natural gas, the timing of new projects and the company's ability to obtain them and other details that are described under Cautionary Statements Concerning Forward-Looking Information and elsewhere in the company's 10-K filed February 28, 2011.

The 10-K was included as part of the company's 2010 annual report filed with the Securities and Exchange Commission earlier this year. The company assumes no obligations to update these forward-looking statements.

Today, we have Mr. Kerry Chauvin, Chairman and CEO; Mr.

Kirk Meche, President and COO; and Mr. Roy "Buddy" Breerwood, our Interim CFO.

Buddy?

Thank you, Deborah. I would like to review Gulf Island's press release issued for the fourth quarter of 2011.

The press release consists of 2 pages, Page 1 is text, and Page 2 is an income statement. I would like to review Page 2, which is the income statement first.

The following are the results of operations for the 3 months ended December 31, 2011 compared to the 3 months ended December 31, 2010. Revenue was $88.4 million compared to $43.0 million.

The cost of revenue was $83.2 million compared to $40.8 million. Gross margin was $5.2 million or 5% -- 5.9% of revenue compared to $2.2 million or 5.1% of revenue.

The increase in revenue for the quarter is mainly contributed to the increase in pass-through cost and increase in man-hours worked. The increase in man-hours worked also contributed to the increase in gross margin.

Although gross margin increased by comparison, we experienced some delays in our production hours at our Texas facility due to delayed drawings on one of our large projects while still incurring staffing costs and facility maintenance costs in preparation of both our facilities and staffing levels to accommodate our large increase in awards.

General and administrative expenses were $2.4 million or 2.7% of revenue compared to $1.9 million or 4.4% of revenue. Operating income was $2.9 million compared to $300,000.

We had net interest income of $455,000 for the 3 months ended December 31, 2011, compared to net interest income of $2.7 million for the 3 months ended December 31, 2010. The net interest income for the period ended December 31, 2011 is related to the financing agreement with one of our customers regarding the collection of an $11 million retainage balance on a completed contract, whereas the period ended December 31, 2010 is related to the financing arrangement we had with ATP on the fabrication of the MinDOC hull.

On November 29, 2010, our financing arrangement with ATP was completely settled following the sale of our limited overriding royalty interest. Other income or expense was an $8,000 loss resulting from the sales of miscellaneous equipment in the period of 2011.

A loss of $40,000 from last year was also from the sale of miscellaneous equipment. Income before taxes was $3.3 million compared to $3.0 million.

Income tax expense was $1.5 million compared to $1.3 million. The income tax rates were 46.6% compared to 43.1%.

The income tax expense rate increased because of the decrease in our federal qualified production activities deduction in 2011 and also an increase in our Louisiana state income tax apportionment in 2011 as compared to 2010. Net income was $1.8 million compared to $1.7 million.

Basic and diluted earnings per share were $0.12 for both periods.

Weighted average and adjusted weighted shares outstanding were 14.4 million shares for the period ended December 31, 2011. Weighted average shares outstanding were 14.3 million shares and adjusted weighted average shares outstanding were 14.4 million shares for the period ended December 31, 2010.

Depreciation expense was $5.5 million compared to $4.9 million. We declared and paid cash dividends of $0.06 per share during the quarter ended December 31, 2011, compared to $0.01 cent per share during the quarter ended December 31, 2010.

The following are the results of operations for the 12 months ended December 31, 2011 compared to December 31, 2010. Revenue was $307.8 million compared to $248.3 million.

The cost of revenue was $303.3 million compared to $225.0 million. Gross margin was $4.5 million or 1.5% of revenue compared to a gross margin of $23.3 million or 9.4% of revenue.

Included in our 2011 gross margin was a $7.7 million pretax charge in the first quarter related to the impairment of an insurance claim. Also we experienced some delays in our production hours at our Texas facility due to delayed drawings of one of our large projects while still incurring staffing costs and facility maintenance costs in preparation of both our facilities and staffing levels to accommodate our large increase in awards.

General administrative expenses were $8.2 million or 2.7% of revenue compared to $7.9 million or 3.2% of revenue. Operating loss was $3.7 million compared to operating income of $15.3 million.

We had net interest income of $902,000 compared to net interest income of $5 million.

Again, the 2011 net interest income is related to the financing agreement with one of our customers regarding the collection of an $11 million retainage balance on a completed contract. Whereas 2010 is related to a financing arrangement we had with ATP on the fabrication of the MinDOC hull.

On November 29, 2010, our financing arrangement with ATP was completely settled following the sale of our limited overriding royalty interest. Other income or expense was a $309,000 gain in 2011, resulting from the sale of miscellaneous equipment compared to $1 million in 2010 from the settlement of claims relating to damages incurred in connection with the hurricanes of 2008, whilst before taxes was $2.4 million compared to income before taxes of $21.4 million.

Income tax was a benefit of $644,000 compared to an income tax expense of $8.3 million. The income tax rates were a benefit of 26.3% for 2011 compared to an expense of 38.7% for 2010.

The income tax benefit rate decreased in the current year because of the decrease in our federal qualified production activities deduction in 2011 and an increase in our Louisiana state income tax apportionment in 2011 as compared to 2010. Net loss was $1.8 million compared to net income of $13.1 million.

Basic and diluted loss per share was $0.13 compared to basic and diluted earnings per share of $0.90. Weighted average shares and adjusted weighted average shares outstanding were 14.4 million shares for 2011 compared to 14.3 million shares for 2010.

Depreciation expense was $20.7 million compared to depreciation expense of $19.3 million. We declared and paid cash dividends of $0.24 per share for the 12 months ended December 31, 2011, and $0.04 for the 12 months ended December 31, 2010.

Please refer to Page 1 of the press release for a review. We had a revenue backlog of $614.5 million with a labor backlog of 4.6 million man-hours remaining to work at December 31, 2011 as compared to revenue backlog of $486.1 million with a labor backlog of 3.8 million man-hours remaining to work at December 31, 2010.

Pass-through costs were 42.0% of revenue compared to 30.8% of revenue; man-hours worked were 832,000 compared to 443,000; deepwater revenue represented 59% of revenue compared to 3% of revenue; foreign revenue represented 16% of revenue compared to 13% of revenue. Other financial information for the 12 months ended December 31, 2011, compared to December 31, 2010, consist of: Pass-through costs were 4-point -- 45.3% of revenue compared to 36.1% of revenue; man-hours worked were 2.7 million compared to 2.4 million; deepwater revenue represented 40% of revenue compared to 7% of revenue; foreign revenue represented 16% of revenue compared to 3% of revenue.

Other financial information for December 31, 2011, compared to December 31, 2010, consist of: Revenue backlog was $614.5 million compared to $486.1 million. Remaining man-hours to work was 4.6 million compared to 3.8 million.

Revenue backlog for deepwater was $509.8 million or 83.0% compared to $343.4 million or 70.6%.

Of the backlog at December 31, 2011, we expect to recognize revenues of approximately $537.2 million, not including any change orders, scope growth or new contracts that may be awarded during 2012. And approximately, $77.3 million of backlog is expected to be recognized as revenue in 2013.

We had approximately 19 -- 1,950 employees and 90 contract employees compared to 1,250 employees and 10 contract employees. CapEx for the 12 months of 2011 was $41.5 million.

Approximately $36.0 million of expenditures are planned for 2012, which consist of approximately $14.0 million for the purchase of equipment and $22.0 million for additional yard and facility infrastructure improvements. We are approaching our desired employment levels at our Texas facility, and although we experienced delays in receiving some drawings on one of our large projects, production hours increased in the fourth quarter of 2011.

We expect to further increase in production in the beginning of 2012 as additional workforce is added and drawings are received. We still have large amounts of material to purchase which will keep pass-through costs relatively high.

I would now like to open the call to questions of analysts.

Could you talk a little bit more about the timing of the ramp up and receipt of the designs that you need to move forward thus far in the first quarter? And can you give us any help in terms of how this might ramp up in the first half of this year?

Sure, Marty. This is Kerry.

Look, we have received, as of probably the last couple of weeks, the bulk of the drawings that we need. So we're in pretty good shape now.

We're waiting on some material to come in at this point in time. Employment levels as of Monday, of course, we've ramped up to about 2,240 employees and we have 114 contractors, which gives us a total workforce of about 2,354, if you count the contractors.

So now this is as of Monday. So we've been ramping up for January and all through February.

We will see a taper off in that in the next 2 or 3 weeks and we'll try and maintain our employment levels somewhere between this 2,240 and upwards of maybe getting into about 2,350 workers or employees. So we will try and maintain that at that point in time.

But basically, the bulk of the drawings are in, still a few material delays because the drawings were so late, but other than that, we should be working at pretty much full capacity starting March.

Okay. And then as far as future bidding opportunities for deepwater topsides for the Gulf of Mexico, could you talk about the timing and maybe number of potential bidding opportunities that are out there?

Sure, Marty. Basically, we see, probably, 2 deepwater projects to be bid in the second half of 2012.

After that, in 2013, there's probably an additional 3 that could be bid somewhere in maybe the first half of 2013. Of course, this could slide to the right depending on our clients and their drilling activity at this point in time.

But basically, we see 2 and of course in 2013 -- beginning in 2013, we should also see a substantial amount of modules potentially for the Alaska slope. So we possibly could have some bids coming out on that.

And there are a couple of small shallow water projects that could develop too, within the next 3 or 4 months that might be beneficial for us on the second half of 2012.

And are you seeing any module opportunities for projects along the Gulf Coast, chemical, petrochemical-type projects?

Probably not, Marty. That has dried up, and there was an overexpansion of most of the refineries and some of the chemical plants probably about 2 or 3 years ago, and I don't see a lot of that happening.

There is a new plant going up on the Mississippi River, however, a steel plant that we have a potential of bidding some modules and some construction work on site. But that has still pre-material on that, but we might see some of that coming about sometimes in the next 90 to 120 days.

Just curious on the design delays. It sounded like on the third quarter call, you felt pretty good about getting those delays in the near-term and you expected to burn about $99 million of your backlog in the fourth quarter at that point in time.

Could you give us a little sense of what specifically changed following the third quarter call? And then could you compare your visibility or confidence in getting back on track today versus what you saw back then?

Sure. Basically, we all thought we'd get these drawings in but needless to say there was more delays and so that pushed some of the work into 2012.

Now most of the work that we thought we'd do in the fourth quarter will -- will happen in 2012. So we're not as concerned about it.

It did affect us in the fourth quarter but going forward, we think that we're in pretty good shape, drawing-wise. A few little material discrepancies that we're looking at now, but that should correct itself sometimes in the first quarter and we should be hitting on also on this going forward.

Thanks, and then is there any possibility of recouping from your customer some of the increased staffing and facility maintenance costs that you incurred in the fourth quarter when you expected to be able to ramp up more on the project?

Well, we're negotiating that right now so I can't give you very much information on that, but it certainly is something that we're under negotiations and discussions.

Great, thanks. And based on your comments about kind of getting really back on track more in March.

Would it be safe to assume that these delays had some impact on the first quarter but that we should still expect some ramp up in the first quarter versus the fourth quarter?

Exactly, Matt. That's correct.

Thanks, and then just last question. Could you give us an update on the CFO transition or the search process right now?

Well, we are going to have a search for a new CFO. And of course, Buddy, who is here with us today, his name is certainly in the hat for that particular search, but the Board felt that they wanted to go ahead and do a search.

And so we're going to move forward with that. Of course, getting the 10-Ks and everything we have to do at year end, it was impractical to run the search prior to filing our 10-K.

So we will start that process in the near future and hopefully we'll have some resolution on that, sometimes within the next 30 days, or definitely the next 60 days.

Just a quick question on G&A as you guys kind of ramp from roughly 2,000 employees up to 2,300, 2,400 as you get on a full barn [ph] rate. How should we be thinking about kind of G&A, the first half of the year?

And maybe, perhaps it's a question for Buddy. I mean, should we ramp it towards the 2.5 per quarter a little bit higher, just trying to get a little more granule over there on your G&A expectations, as you guys staff up here?

Well, G&A should remain relatively flat now. There are costs associated with possibly increased earnings potential that could add to our G&A.

But just by their nature, we're pretty ramped up as far as administrative and those sorts of costs go.

Joe, the main thing on our G&A that would cause it to fluctuate like Buddy said, is our executive bonus situation because we, as executives, get a very small percentage of the pretax earnings of the company. So that will be the fluctuation.

But the basis for the G&A should stay the same. We don't expect to hire any more people on a G&A level.

We did experience some costs, however, in staffing up in the fourth quarter, but more the manufacturing level. When you bring new employees on the payroll, there's additional expenses you have to go through whether it's preemployment, physicals, hire -- buying a lot of equipment and tooling to be able, more or less, outfit these employees.

As well as you have some downtown -- it would be downtime with these employees which is an overhead expense, which is basically going through orientation and training, and things of that nature. So when we were staffing up and getting to this level, there was a considerable amount of expenses, a concern with the staffing up that we didn't break out.

But we should see a reduction in those type of expenses going forward.

All right, that's helpful. And then, in terms of tax rate, obviously, you're moving parts in the fourth quarter, but to a high 30% level, sort of a good run rate within our models?

I would say about 37%. We should reach closer to our normal tax apportionment between Texas and Louisiana, once all -- we're hitting on all cylinders.

Okay, helpful. And last one for me.

Kerry, anything new on the Marine side? Anything relative to OSV hull work?

Tow boats? Any signs of that picking up at all?

Well, there's a lot of talk out there right now. And of course, there's a few contracts that were put out here early.

And again, like our philosophy is, we're kind of going -- we're going to wait until a little late in the cycle before we pick up too much work in that area. But we are in discussions with several customers about supply boats and other types of vessels, similar to that.

So hopefully, we could pick up some work. But again, I think that particular work will come around, probably about the summertime, is when we'd be looking at picking up that type of work.

Just a follow-up on Joe's last question. I think you normally kind of think of the Marine business or you've told us in the past maybe it's a $75 million to $100 million a year type of business.

Is that something, and then recognizing it is seasonal as you just mentioned, is that something that's a fair thought for just kind of modeling for this year?

I'd say that's correct. We're probably going to be on the low end of that number only because we may have to allocate some of the Marine employees back to oil and gas projects to make sure we stay on schedule.

But we're going to attempt to at least get in somewhere around the $75 million to $100 million range.

Okay, that's helpful. And I think last quarter you said at the time you were expecting about $565 million of your backlog to runoff in '12.

Obviously you've had some delays. Kind of what are you thinking about that now and as you ramp up in -- beginning in March, do you think you can kind of pick up some of the slack from the delays or is that number going to get pushed to the right a little bit?

No. A lot of the work pushed into 2012 will be performed in 2012 with some -- and this is Buddy, with some of the revenues pushing into 2013, with the -- some of that other projects that are just late at the start, a little later, like early 2012.

Jim, we stated earlier that about $537 million of our backlogs should runoff in 2012. Not counting any change orders or additional work that we might pick up.

Right, and is that stuff getting pushed off in the next year, mess you up at all in the ability to bid on these projects? You mentioned it might come second half or not really?

No, not really. We will be ready to go on these other projects.

In fact, we do have some space available for starting on some projects probably around the third quarter of this year.

Very helpful. And last one, just thoughts on CapEx for 2012?

And where are you spending it?

Let's see. Well, we broke down to about $14 million in equipment, $22 million in yard improvements.

We've got a lot of -- we got a little more detail in our 10-K which we're filing later on in the week.

I was wondering if you could talk about the competitive landscape, not that there's a slight lull in bidding activity? But you have a bunch of competitors that are fairly full on capacity right now and utilization is probably going to be pretty high through 2012 and into '13?

If you're seeing any changes or anything that might impact the bidding, as you move in to those projects later this year?

No, Will. I think things are pretty much business as usual.

Our competitors apparently have some work at this point in time, but I think we're all in about the same mode at this point in time and we'll be looking for work to replace some of the work we're working off now.

Okay. And the same hold true for hiring, speciality employees while there's scalfadors [ph].

If you're looking at a stronger U.S., maybe commercial and industrial or manufacturing market, that might utilize some of those people? Is there any change there?

Well, our laborers have been still very difficult to get even with unemployment nationwide running at a relatively high rate. The unemployment in Louisiana, especially in our area is very, very low, and we're having a somewhat of a difficult time in Louisiana hiring additional personnel.

In Texas, however, the market is a little better for labor in Texas but it's tightening up in Texas, also as more people are going to work. But we've been very fortunate to get in kind of free upswing cycle in employment and put quite a few people on the payrolls, which really helped us out.

But our -- as far as getting additional employees, I think it's going to get harder and harder for us to be able to do that as the overall economy improves.

Okay, if you were to see a handful of these U.S. LNG export projects go forward, would there be a fair amount of module fabrication work you could bid on for those types of projects?

Probably not for us. We will pursue that, but I would think that it's not an area that we have a lot of expertise in, especially when you get into cryogenics and things of that nature.

So I think probably oil and gas and modules for other areas such as Alaska and possibly the tar sands of Canada are more likely for us at this point in time.

Okay. And maybe just a follow up, since you mentioned Canadian oil sands.

What your view is there and maybe just a history lesson of what you maybe have done in the past?

Well, we haven't done very much but we are seeking, of course, some work from that area but our history is pretty slim in that area. We have a better history in Alaska than we have in Canada.

Hey guys, I just wanted to follow-up on kind of the bookings run rate. It's been close to $40 million the past couple of quarters and I think you've done a pretty good job for a while now indicating that your big opportunities this year are more second half-weighted.

But you made some comments about your Marine opportunities, some smaller projects, that it sounds like it could hit in the first half. So I was just wondering, should we be assuming kind of the booking state down at this $40 million level?

Or do you think that some of these smaller things could add up to a higher level in the first half?

No, I don't think it will affect us very much in the first half. I think what we're looking at is probably second half-type work.

Because even if we got awarded it towards the -- end of the first half, by the time we got drawings and receive drawings and to receive material, most of the work would start somewhere in the, probably, the third quarter, towards the end of the third quarter.

Well, we just appreciate everybody calling into the conference call. And we're going to close this call out, and we'll talk to everybody next quarter.

Thank you.