Stabilis Solutions, Inc. Q2 FY2021 Earnings Call

Ladies and gentlemen, before we begin today's call, I'd like to remind everyone that today's conference call will contain forward-looking statements within the meaning of the Private Securities Reform Act of 1995 and other securities laws. These forward-looking statements are based on the company's beliefs and expectations as of today, August 5, 2021. Forward-looking statements are subject to the risks and uncertainties that may cause actual results to differ materially from those projected. The company undertakes no obligation to release updates or revisions to the forward-looking statements made in today's conference call. Additional information concerning factors that could cause those differences is contained in the company's filings with the SEC and press releases announcing the company's results. Investors are cautioned not to place any undue reliance on any forward-looking statement. I would now like to welcome you all to the Stabilis Solutions Q2 2021 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Jim Reddinger, President and CEO of Stabilis Solutions. Please go ahead, sir.

Thank you, and good morning, everyone. Thanks for joining us today. Again, this is Jim Reddinger, the President and CEO of Stabilis. And joining me on the call is Andy Puhala, our Senior Vice President and Chief Financial Officer. We're here to report a lot of great things today, including our best second quarter ever and a number of exciting growth initiatives that took shape in the quarter. After I review some of the highlights of the quarter, Andy will jump in and discuss our financial results, and then we'll follow up with a Q&A session. I'm pleased to report that Stabilis has continued its strong momentum from the first quarter of this year to produce yet another record performance in the second quarter. The company achieved its highest ever revenue for the second quarter of $16.1 million, representing a year-over-year increase of 221% from the second quarter. This was the fourth quarter out of the past six that we have set a record revenue, either overall or for the comparable quarter. We also set a record for LNG gallons delivered in the quarter with 13.7 million LNG gallons delivered in the second quarter. This record performance demonstrates the increased interest in LNG we are seeing from our customers every day across a lot of sectors. LNG provides our customers with a cleaner, reliable and cost-effective fuel alternatives as they navigate their business through the energy transition. And the marine fueling industry provides a great example of some of the tremendous growth opportunities ahead of us. Several industry sources project that the use of LNG as a marine fuel will grow at a 30% per year rate over the next five-year period as more and more ship owners and operators use LNG to meet their emissions targets. As such, we expect the marine bunkering market to be a significant growth driver for Stabilis over the coming years. In addition to the LNG and hydrogen marine bunkering activities on the West Coast that we have discussed on previous calls, Stabilis is building a network of marine bunkering hubs that will allow us to provide LNG marine bunkering services throughout the Gulf Coast. On May 4, we announced an MOU with the Port of Corpus Christi to develop and market LNG marine bunkering services. And just this week, we announced a second LNG marine bunkering Memorandum of Understanding with the Galveston Wharves, also known as the Port of Galveston, giving us two major LNG fueling locations on the Gulf Coast. At these locations, Stabilis will use our existing cryogenic equipment fleet and LNG supply network to provide shorter LNG bunkering services to marine vessels today. We are currently in discussions with several major marine LNG customers and plan to have our first LNG fueling events completed in 2021. As these fueling events increase in size and frequency, we plan to work with our port partners and our industry partners to install custom-built LNG marine bunkering solutions such as bunkering barges in various ports across the country. In addition to the significant progress we made in the LNG marine bunkering market, Stabilis also recently completed the acquisition of its second LNG production facility in Port Allen, Louisiana, which is right across the river from Baton Rouge. The Port Allen facility is strategically located in the Gulf Coast region and will support some of our largest industrial customers. In addition, Port Allen currently supports marine bunkering for the largest LNG-powered offshore supply vessel fleet in the Gulf Coast. The facility has a production capacity of 30,000 LNG gallons per day, which increases our total production capacity by approximately 30% and provides us further runway for organic growth. It also provides production diversification and flexibility between the Port Allen facility and our George West facility to better serve our customers. This state-of-the-art plant was acquired at a cost per LNG gallon of production that is significantly less than it would have cost us to build a new facility. And the site layout and pipeline access provide us future opportunities for expansion on that site. The Port Allen acquisition is expected to be accretive in 2021, and we project the incremental annual EBITDA to be between $2.5 million and $3 million due to both increased operating leverage across the business and incremental revenues. We believe there are other LNG production facility acquisition opportunities available that will allow us to expand our production capacity further, and we will continue to take advantage of these opportunities when the value and strategic fit is compelling. To complete my review of the second quarter, we also secured a $10 million credit facility that will provide working capital to fund our growth. And of course, we were listed on NASDAQ and began trading in April. Overall, we feel like we're off to a great start this year, not only by improving the performance of our base business significantly, but also by investing in key growth markets and key growth opportunities. And as always, I'd like to acknowledge and thank everyone on our outstanding Stabilis team for their continued dedication and hard work. Every great business starts and ends with a tremendous team and a tremendous team effort. And at Stabilis, we're blessed with both. Later on in the call, I'll discuss our growth outlook. But first, I'll turn it over to Andy to review our financial results. Andy?

Thank you, Jim. As Jim mentioned, for the second quarter ended June 30, 2021, Stabilis reported its highest second quarter revenues ever at $16.1 million. This represents a decrease from the $17.7 million in the first quarter but is a substantial year-over-year increase of 221% from the second quarter of 2020. Our business is seasonal, with the first quarter typically being strong due to winter peak activity, especially in the Northeast. This year-on-year growth was primarily driven by increased economic activity, including growth in power generation projects, continued expansion of our operations in Mexico, and increased activity with aerospace and oil and gas customers. Revenues from the Stabilis LNG segment totaled $14.4 million this quarter, an increase of $10.4 million compared to the second quarter of 2020, although this is $1.4 million below our record Q1 due to our business's seasonality. We delivered a record 13.7 million gallons of LNG to customers in the quarter, a 197% increase from the second quarter of 2020 and 2% higher than our previous Q1 record this year. Revenues from our Power Delivery segment increased 70% compared to Q2 of last year, totaling $1.7 million due to new projects. Sequentially, the Power Delivery segment was up about 8%. We are investing in our sales, marketing, and field service teams to meet the expected increase in activity levels later this year, which has led to an increase in operating expenses and SG&A during the quarter. Our earnings before interest, taxes, depreciation, and amortization (EBITDA) was $1.6 million for the quarter. We qualified for full forgiveness of our payroll protection program loan of approximately $1.1 million received early in the pandemic. Adjusted EBITDA, excluding the loan forgiveness, was $0.5 million compared to a loss of $0.8 million in Q2 of 2020. The net loss for the second quarter of 2021 was $1 million, an improvement from a loss of $3.5 million in the same quarter last year. Cash and cash equivalents as of June 30 were $3.3 million, compared to $3.1 million at the end of the first quarter. The company also has $3 million available under its credit facility with AmeriState Bank. Now I will turn the call back to Jim to discuss our outlook.

Thanks, Andy. I think the theme of today's call is growth. The growth in our base business has been tremendous over the last several quarters, including driving record revenues and record LNG gallons delivered. We expect to continue to post strong results in our base business in 2021 and beyond as demand for LNG across multiple industry sectors continues to grow. In addition to this growth in the base business, though, we continue to lay the foundations for step change growth in the business as the energy transition opens up new markets for LNG and the related products. As I discussed earlier, we are aggressively attacking the large and high-growth marine LNG market with both port and customer relationships. With several international organizations projecting 30% compound annual growth in demand for LNG as a marine fuel over the next five years, we're very bullish on this market segment. We believe that our market leadership and shorter ship bunkering will translate into large long-term customer relationships that will support our entry into more profitable LNG bunkering investments. We're excited by the many possibilities that our Port Allen LNG production facility opens up for us, and we believe the deal will be highly accretive to shareholders based on the acquisition price and our ability to sell fuel from that location immediately. Furthermore, we believe that additional accretive acquisition opportunities exist, and we'll be reviewing them as they become available. Finally, we continue to make progress on our Mexican distributed natural gas business. We have several exciting projects in the Mexican business development pipeline, including both LNG and CNG or compressed natural gas projects, and we hope to discuss those soon. Overall, Mexico remains a key growth market for Stabilis. We continue to make growth investments in all these businesses, such as adding marine LNG technical and business development personnel, adding to our sales coverage in targeted markets throughout the U.S. and Mexico and increasing our engineering and field service teams. These investments are critical to growing the top line and responding to the many opportunities we see in front of us. We're excited about our second quarter performance and are now focused on how we can continue to build on these results and improve on our existing business. The needs of the energy transition are driving our customers across all sectors to find what we call enlightened energy solutions, which are solutions that meet their environmental and sustainability goals, but also provide economically viable and reliable energy solutions. We look forward to updating you on our progress over the coming quarters. And with that, I'll open the line up for questions. Moderator?

Your first question is coming from Bill Dezellem.

A couple of questions for you. First of all, the press release stated that marine bunkering will be a significant driver in 2022. What's needed to convert the announcement to an actual increase in revenue? Or is it really referring to the Port Allen facility, which is up and running already?

We're seeing increasing demand for LNG bunkering, with a projected 30% compound annual growth rate globally. Currently, demand is at about 1 million tons per year, expected to rise to around 4 million in the coming years. There's already infrastructure for LNG bunkering in Europe and Asia, and the U.S. is actively building its own. By collaborating with the Port of Corpus Christi and the Galveston Wharves, we're aiming to enhance bunkering services along the Gulf Coast, which are not readily available at the moment. This initiative is already drawing LNG field vessels to the region. Historically, these vessels would fuel in European and Asian markets, but we are now engaging with several customers to facilitate fueling along the Gulf Coast as soon as the third or fourth quarter of this year. With the service now operational, shipowners can plan to refuel on the coast. These fueling events can require anywhere from a couple hundred thousand to 0.5 million gallons per event, making them significant occurrences, and we anticipate seeing them take place soon.

Jim, am I understanding correctly that unlike when my automobile needs fuel, I just pop into the gas station. This is actually a scheduled event, and they would be contacting you to be sure that you're prepared for delivering that couple hundred thousand or 0.5 million gallons? And so you have some line of sight going on? Is that correct?

Yes, you have some visibility. It varies depending on the operator and the situation, but it ranges from a few days to a few weeks regarding when it will happen. Eventually, this market will evolve into a model similar to gas stations, where availability is more flexible. However, in the early stages of development, as we deploy more assets, it requires more planning.

That's helpful. And what do you need to do at Corpus Christi? What's the physical activity that's still remaining to be prepared? Is there infrastructure that needs to be put in place? And so is this a construction project or kind of walk us through how we get from here to actually fueling ships, please?

Sure, sure. So the whole premise behind our strategy is we've got a fleet of cryogenic equipment, mobile cryogenic equipment. We've got a network of LNG supply, including our own supply. And our strategy is to put those things to work to provide the LNG bunkering services now as opposed to waiting for the market to develop to justify the larger investments that are going to need to happen eventually in bunkering vessels and on-port or in-port LNG supply. And so we're trying to get out in front of the market, offer the solution today. And then once the volumes build, we can back that up with further longer-term investments in these individual ports. So right now, there's a permitting process and an approval process to go through with fire marshals and Coast Guards and other agencies. But once we get through those processes, we'll be able to roll up to ports and do bunkering from our mobile equipment to the ships almost immediately.

So to make sure I'm clear, once the permitting is complete, you'll use your mobile assets or portable assets. But as time goes on and the activity level increases, that's when you will put more CapEx in place and have permanent infrastructure.

Yes. Exactly.

That's really helpful. And presumably, that's a model that's repeatable, whether it be a port on the West Coast, on the East Coast or the Gulf Coast or, frankly, in Mexico, I suppose, for that matter?

Yes. And then we're looking at opportunities in all those places now.

Excellent. And then one additional question, and this is really coming from a point of ignorance as opposed to being critical. Your gallons delivered in Q2 were slightly greater than the gallons delivered in Q1. So congratulations, I think it's a big positive. But yet the revenues were down $1.6 million sequentially. Can you talk through how that interplay between the Q1 seasonality into Q2 and revenues in gallons, how all that works?

Yes, yes, yes. So as we've talked about in the past, we've got a seasonal peak in our business that happens in the winter seasons, primarily driven by winter peaking activities at pipelines and utilities where they need to have LNG to supplement their pipelines when peak demand comes in the cold seasons. And so we have a very nice business across the country and primarily in the Northeast, where we have a lot of equipment rental and manpower engaged in those winter months to serve those winter peaking needs. And so when we get rolled from Q1 to Q2, there's a large equipment rental and labor component from those winter peaking jobs that comes down sort of in that February, March time frame. And so that gap in revenue that you're seeing is primarily consisting of that winter peaking equipment and labor component.

Great. I would like to ask one more question. In many of the previous calls, we’ve discussed announcements about significant project wins or progress related to mining or other large potential new customers. What update do you have for us today?

Well, I thought we did pretty well with the listings and all the things that happened in the second quarter. So I think we were pretty busy in the second quarter on the projects we talked about in marine and on the acquisition that we made on the relisting, etc. I'd say that we've had a pretty consistent growth in demand across a number of sectors, not just in one or two projects across a number of sectors that are growing this record revenue. And we continue to see that happening going forward. We are progressing on several projects, like I mentioned in the Mexico market that we hope to be able to come back with more information on soon. And yes, a number of other things in the pipeline that we'll talk about as soon as we can.

Thank you. There are no further questions at this time. I will now hand the conference back to Jim Reddinger for closing remarks.

Thanks much. I appreciate everybody getting on the call today, and we look forward to talking to you after we have another good quarter in the third quarter. Thanks much.