Q&A
with
John Dane III
President, Chairman & CEO
MARINE LOG: The Halter Marine Group has experienced phenomenal growth since it went public, moving from 10 shipyards to more than two dozen. What has been the goal behind these acquisitions?
DANE: The idea was to diversify out of just boats with a little bit of repair. Our strategy was to get into higher margin businesses. The rig business, historically, has had higher margins than the boat business. The repair business has higher margins than new construction. And engineered products, again, it turns out, has higher margins than the boat business and also plays in well with our vertical integration strategy. So those were the strategic decisions and the plan to do that. All of that we can take with our good capital structure and engineering expertise. The timing was very good on [the acquisitions of] both TDI and Amclyde because those deals were made before the market turned up. The returns to the company have been very good on those purchases.
ML: What are some of the problems that the company has had to confront as a result of this growth?
DANE: Growth has been not only in acquiring those facilities, but also in building up skilled labor in each new facility as well as in those facilities that we already owned. This compounded the problem. And up until just recently there weren't a lot of skilled employees available. This meant we had to invest in training. For a while, it seemed every headline in New Orleans concerned a shortage of people. So labor has been a problem. Just assimilating all those new people has hurt our efficiency. Some of our lower margins are due to the use of less skilled labor. They are taking longer to do the manufacturing. But we are working on that. We've opened up new training facilities. The people are on board now for longer and they know what their job is. So we're working our way through those problems. But labor was a significant problem.
ML: Is that what the ABC initiative is all about? Can you tell us about that?
DANE: The ABC initiative concerns a number of areas. One is scheduling and planning. The second is the manufacturing process. And the third is engineering. Although we are working on those three areas separately, in the end, they all combine together to build a boat. Coming up with the integration of the purchasing and the engineering and getting the parts and pieces on time. It's just plain old process improvement. It's how you go about continuing to improve each and every function that everybody's got. We're really working on those four areas right now. We believe there's upwards of $50 million can be saved over a three-year period when we get the processes down.
ML: Will it involve the application of any addition CAD/CAM technology?
DANE: Oh, we have the computers. Some of it is just getting every department coordinated on a timely basis. When they have to do their part on each project. Engineering, they could be designing great but if they don't get the drawings to the yard in the time that the yard needs to order the material, to then build the boat to get the delivery date--then it's useless. A fully integrated systems is going to take some time to do. We do it manually now. We're getting that master schedule put on the computer. Even though we talk about scheduling, I think we had three boats out of 98 that were contractually late. That's a pretty good record. The fact is, we do everything we can to meet our delivery dates but that costs us money. So, what we are trying to do is schedule and plan better. We'll still meet our dates, but we'll do it more efficiently, and our profit margins will go up. That's part of the whole plan.
ML: When you announced your record backlog of $989 million at the end of the the first quarter of this year, some $700 million of it was attributable to the offshore energy sector or about 70%. Is that a concern going forward?
DANE: That's a big concern with the low oil prices and the obvious downturn that follows in dayrates. We do not see energy orders filling up the backlog as quickly as we are working them off right now. That's because the service companies are taking a pause-and-wait attitude, while they're seeing what's going to happen with drilling and what's also going to happen with the supply of rigs and boats coming onto the market. So we see that area slowing up somewhat. It is not dead; we're still bidding large specialty type boats. There's some specialty type construction rigs out there and semis that we're bidding.too. So there is some bidding activity, it's just not as feverish as it was before. Our backlog in the offshore energy area will probably shrink some. However, one of the great strengths of Halter is that we are diverse. For instance, we are in patrol boat markets. The world is less stable today from the point of view of wars and political stability. We are now seeing patrol boat inquiries increasing. Additionally, we will be signing some contracts to retrofit single skin barges to double hulls. Very big jobs. And passenger vessels, like Delta Steamship's overnight cruise vessels. And you saw the E-CAT. it's area where we were big in, but we had other work. You only have so much capacity. So we'll reenter some markets that we've kind of stayed away from because we prefer being in other markets first and foremost. But they are in our repertoire and we can go back to those markets.
ML: Speaking of the E-CAT, it seems to be a bit of a departure for Halter. Is this a new direction for the company?
DANE: If you go out to the state of Washington, you'll see that we delivered two passenger vessels that are working there now. The problem is that all the people are worried about the wakes and the environment. This is an area where Halter has a reputation for leading edge technology. So this R&D project to go develop something that no one else has to that extent is something that we can see, where we take our R&D money and fill a market that we see is needed. We think it's leading edge. Getting back into a business we participated in.
ML: Halter has been building alliances all around the globe. What is Halter getting from these joint ventures?
DANE: We are actually adding technology to those yards. In all three yards--in China, Philippines, and Argentina-- exporting our designs, our technology, and our management experience. In return, we've gained several advantages. First, in China, is less expensive labor. Second, in Argentina, is that we're building vessels for the Mercosur free trade zone. it's similar to our NAFTA free trade zone. So, if we built them in the U.S., there would be a huge import duty once they were brought into Argentina or Paraguay. There's an advantage of building in-country. We add financial stability to Argentina as well as our customers. Our customers look to us. Third, in the Philippines, our venture there is building patrol boats for the Philippine Navy, who wanted to build them in the Philippines. That's part of a co-production plan. So There's three really different reasons why we're in each area. But long term, we have to be cost-competitive and lower labor costs will help that.
ML: How has the Asian crisis impacted your Chinese joint venture, Halter Yantai Raffles?
DANE: We signed our first contract with that yard last night. We can not tell you who that is with. We will build the vessel there. It will probably be announced within the next few weeks. We still think that the cost for labor in China is less expensive than Korea or Japan. And we think with the things we have to make the yards efficient weíll have a competitive advantage there. That's what we're looking for.
ML: There was talk that you would build hulls at the Raffles yard and outfit them at your U.S. yards. Is that still in the plans?
DANE: We were talking about doing that if we got into FPSOs or drill rigs. The type of vessel we're talking about is a 244 ft vessel. They'll build the entire vessel. If it's a large enough job, like a rig or a semi or floating production, the idea would be to build the hulls there then use our Texas Drydock people, who are used to doing rig work and processes on some of the production units they've done to date, to outfit the units more efficiently.
ML: What about your government work? It accounted for about 15% of your backlog in the first quarter. Do you see it increasing?
DANE: I'm not sure it's going to increase. You know our government business has been stable, staying at between $100 to 150 million a year. It might shift from U.S. government to foreign government. We are in the hunt for some foreign patrol boats right now which we expect to sign up shortly.
ML: The Halter-Bollinger team was not selected in the Phase I of the Coast Guard's Deep Water Program. Do you see yourselves participating as a subcontractor?
DANE: We, the Halter-Bollinger team, have been in serious talks with one of the groups about being the subcontractor for them. We are now in the negotiation stage as far as what part we might play and to what extent. But at the end of the day, all the players realize that Halter and Bollinger have built more vessels than anybody else in the country in the likely size that the Coast Guard is going to have to replace . So it makes sense for them to look to us when they are going to have to have a cost competitive total system to offer to the Coast Guard. So we expect we are going to end up on somebody's team.
ML: What impact did Hurricane Georges have on your facilities and production schedule?
DANE: We were fortunate. The whole afternoon they were talking about 10 to 15 ft tides coming to the Gulf Coast.In our western Mississippi yards we probably got about a 7 ft tide. In the eastern Pascagoula yard we got closer to a 10 ft tide. But most of our facilities are 7 or 8 ft above sea level, so two out three of our Pascagoula facilities were 2 ft under water. And fortunately we were prepared. The new Pascagoula yard was actually the first yard up and running in Mississippi, a day and a half later, even though it was 2 ft totally under water. In all, seven of our yards were effected, some with roof damage or blown in doors, but none of the vessels [in those facilities] were harmed. This has been a bad quarter because of a bunch of storms that were either headed to Texas or the Gulf and we had to secure our facilities. So definitely the weather impacted us.
ML: In closing, what do you envision for Halter Marine's future?
DANE: When they talk about the "Big Six," we are now actually the fourth largest shipyard group in the country in terms of employment with over 9,400 workers. it's been a fun ride. We are working on some other strategic alliances for the future. These might involve boat operators or other shipyards that have certain technology we might want or shipyards that want our technology. Either way, these ventures will enable us to generate additional revenue from our designs. And we're looking at some further potential consolidations or acquisitions in the areas that we operate right now. we're looking for ones that make sense at the right price. ML