Stabilis Solutions, Inc. Q4 FY2022 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Stabilis Solutions Fourth Quarter and Full Year 2022 Earnings Conference Call. Joining us today are Westy Ballard, President and CEO; and Andy Puhala, Chief Financial Officer. Before we begin, I would like to remind everyone that today’s conference call will contain forward-looking statements within the meaning of the Private Securities Reform Act of 1985 and other securities laws. These forward-looking statements are based on the Company’s beliefs and expectations as of today, March 9, 2023. 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 the press release announcing the Company’s results. Investors are cautioned not to place undue reliance on any forward-looking statements. Please also note that the Company may refer to certain non-GAAP financial information on today’s call. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures in the Company’s earnings press release. Today’s call is being recorded. Currently, I’d like to turn the call over to Westy Ballard, President and CEO of Stabilis Solutions. Please go ahead.

Thank you, and good morning, and welcome to all of you that joined our call. Let me start by congratulating our entire company for delivering a fantastic 2022 despite considerable geopolitical and financial instability around the world. We remain focused and deliberate and executed on two key areas that we outlined for you this time last year. One, the optimization and enhancement of our existing business and operating model; and two, the advancement of our strategy into new and really exciting markets. Along the operational front, our team did a tremendous job managing costs with power, natural gas feedstock and transportation as the main culprits. Behind the scenes, we also consolidated offices, divested non-core assets in Brazil and Mexico, closely monitored overtime and job site labor costs and streamlined our commercial organization. Also during the year, our commercial and operational teams developed and executed on strategies to rationalize our customer base, elevate pricing, enhance profitability and improve return on assets. We began laying the foundation for growth into the large and rapidly growing industries of marine and aerospace. We successfully executed bunkering operations on three coasts throughout the year and provided rocket fuel on two. Revenue across both sectors increased year-over-year to 24% of total revenue versus roughly 5% in 2021, which is noteworthy as we are expanding our revenue base into markets that are roughly 20 times to 30 times larger than our historical industrial business. In addition to bunkering operations, we developed an international export capability, and in September, announced that the U.S. Department of Energy granted us a 28-year license to export domestically produced LNG equivalent to roughly 52 billion cubic feet of natural gas annually. The DOE’s approval not only provides us with the ability to assist in the world’s lingering energy crisis, but is yet another wonderful opportunity for us to play a larger role in the world’s addition of cleaner energy sources over the long term. This capability is very exciting and appears the market agrees as evidenced by our trading value jumping from a daily average of roughly 7,700 shares to over 21 million shares on the day we made the announcement, pretty compelling. As you can see, our entire team's efforts really paid off in 2022, having delivered strong operating cash flow, resulting in a considerable increase in cash from $900,000 at the end of 2021 to $11.5 million at the end of 2022, which not only places us on dramatically better financial footing but also advances our company’s positioning for growth. In our industrial business, we believe we are the only true turnkey provider of last mile LNG delivery in North America through our considerable asset base and supported by our robust commercial logistical engineering, liquefaction and field operations capabilities. Aging U.S. natural gas infrastructure and high political barriers to any significant new pipeline construction outside of the Gulf Coast continue to drive demand for last-mile virtual pipelines to off-grid and off-pipeline gas customer locations, and we currently deliver this capability in 25 states and Mexico. This market is not without its challenges as U.S. commercial power industrial net natural gas demand is forecasted to remain flat through 2030. This demand profile will require us to utilize our ingenuity to build upon our current portfolio to stimulate profitable demand in new and incremental industries and geographies. As we progress, we will continue to focus on maximizing cash flow in this business through broadening our commercial strategies and creating efficiencies and economies of scale across all facets of our supply chain, operations, engineering and safety that will benefit not only this business group, but our entire franchise as well. In our aerospace business, advances in technology, declining launch costs and rapidly growing interest from private sector financing has elevated its profile. Broadband communications, the Internet of Things, earth observation, national security, weather and GPS are primary drivers of demand, resulting in the number of satellites in orbit expected to grow 10 times by 2029. This will require an enormous uplift in launches per year. And as you can expect, propellant is one of the most critical items needed for launching rockets and many launch providers are moving towards LNG as their fuel of choice over alternatives used in the past. This business has many similar characteristics to our industrial business, and we will continue to develop a variety of strategies to remain a market leader. Our marine business consists of two main components: one being marine bunkering and two, the ability to export LNG internationally. In the U.S., there are a variety of compelling drivers for vessels to bunker cleaner fuels here. Barriers to entry are high and for a supplier to be successful in bunkering, they must have the ability to source and deliver volumes and scale. They must have the ability to bunker in a variety of ports. They must have considerable technical and supply chain capabilities. And they must have the ability to deliver fuel simultaneously with vessels loading and unloading their respective cargo or passengers. Our unparalleled ability is to aggregate considerable fuel volumes utilizing both our production of LNG and third-party sources, along with our ability to deliver the last mile to ships' flanges as we did in multiple geographies in the U.S. in 2022, clearly positions us as a market leader. The outlook in our export business is positive as well. The world remains considerably short on energy and U.S. natural gas will play a vital role in addressing this imbalance. The marine industry continues to undergo considerable change since the International Maritime Organization required the lowering of emissions beginning in 2020, and this change takes time. But as the velocity of LNG fuel ship commissionings increases in early 2024, combined with the persistent volatility in global energy supply and demand, we intend to leverage our proven record to remain a major leader in this space. As I mentioned, there are a variety of actions in motion, and we see several green shoots on the horizon. To deliver on our expectations, in 2023, we expect to increase investment across a variety of fronts, including sales and marketing. We will also invest in key technical and operational areas of our company where the onboarding and training of these resources takes time to ensure future delivery of our solutions safely and efficiently to customers. Along the CapEx front, during the year, we expect to invest in liquefaction, storage and rolling stock to timely support all of our growth initiatives. We are still evaluating numerous locations and constructs, but one of the beneficial competitive elements in small-scale LNG is our ability to construct liquefaction in modules and with accelerated commissioning schedules. Clearly, the global macro challenges of 2022 have not ended. And I think it is safe to say that 2023 still carries considerable risk and uncertainty. So with this, many of the anticipated operating capital investments are variable, and we will be vigilant and thoughtful in our approach throughout the year. It is also important to note that while exciting, the markets in which we continue to focus on are still in their infant stages, and our revenue expectations and results are not linear as there is variability in the adoption and capital invested to support sustained growth in the marine and aerospace sectors. But looking out over the next several years, the future is really, really bright. And with that, I will turn it over to Andy to discuss the fourth quarter results and year-end results.

Thanks, Westy, and good morning, everyone. For the fourth quarter of 2022, Stabilis reported revenues of $29.6 million, 15% higher than the third quarter of this year and 42% higher than the year-ago quarter. In the fourth quarter, we delivered a record number of LNG gallons to customers, largely driven by the marine and aerospace activity Westy mentioned in his comments. Net income from continuing operations was $0.2 million compared to $1 million in Q3 and a loss from continuing operations of $2.3 million in the year-ago quarter. Adjusted EBITDA for the quarter was $3.9 million compared to $2.3 million in the third quarter of this year and $0.7 million in the year-ago quarter. As we mentioned on our last call, we completed the sale of our Brazilian operations during the fourth quarter, and Brazilian results are shown as discontinued operations for all comparative periods. For the full year of 2022, we reported revenues of $98.8 million, an increase of 43% from the prior year, driven by improved pricing, additional LNG gallons delivered and stronger natural gas prices. Our full year results for 2022 included strong incremental margins. We generated an additional $0.24 of direct margin, defined as revenues less cost of revenues for every incremental dollar of revenue in 2022. If you normalize for the significantly higher natural gas commodity prices in 2022, which are a pass-through to our customers, our incremental margins in 2022 were 52% as a result of our work on pricing, customer rationalization and cost controls that was a major focus for us in 2022 and will continue to be. Net loss from continuing operations for the year was $1.2 million compared to $7.6 million in 2021. Adjusted EBITDA for the year was $9.6 million, an improvement of 86% compared to the $5.2 million reported in 2021. During the year, we generated positive cash flows from continuing operations of $13.6 million, a significant improvement over the $4.7 million generated in 2021. We ended the year with $11.5 million of cash on our balance sheet and $1 million of available capacity under our bank agreement. The combination of our anticipated 2023 operating cash flows, cash on hand and capacity under our bank agreement will provide us adequate liquidity to execute our 2023 growth plan. This concludes our prepared remarks. So, at this time, Kelly, please open the line for questions.

Your first question is coming from Martin Malloy with Johnson Rice.

Good morning. And congratulations on all the achievements you had last year. My first question was on some of these new markets, the space, the bunkering. Can you maybe talk about milestones that we should look out for, if any, in terms of progress in these areas? I’m just thinking aloud here, but announcements of bunkering facilities opening up or customer contracts or anything like that. What can we look out for?

Yes. Thanks, Martin. You kind of answered the question for me. I think there are several different leading indicators that you should be thinking about in and around really just that some of the announcements as we start to put more commercial meat on the bone and start to realize some of these green shoots that we see on the horizon, I think we’ll be more communicative to the market about the details around some of them. But also, I think as we start to put capital expansion plans, whether it’s our preexisting liquefaction capabilities or in kind of greenfield markets around the U.S., I think those will also be really good indicators of us starting to see signs of life on the commercial side. I’ve been kind of vocal in the past and that we don’t want to do everything on spec, but we’re also willing to take some reasonable commercial risk. So, I’m not looking for a complete backlog, but I’m not looking for a zero backlog to inspire me to go ahead and start building infrastructure. And that infrastructure can be liquefaction, it could be storage, it could be a variety of different strategies based upon the market.

Great. My second question, I just wanted to talk to you about your traditional industrial market and the impact of lower natural gas prices. What has that historically resulted in terms of volumes or margins? Can you give us any help there?

Yes. I’ll consider this from a few perspectives. One of my main competitors is alternative fuels, including diesel. Currently, the difference between our oil prices and low natural gas prices is beneficial for us. We are actively working to gain the support of our industrial customers, helping them recognize that our gas prices are relatively low, with the potential for future increases. We believe many customers are motivated to secure longer-term contracts, which provides some stability for our industrial revenue. We feel confident about our current pricing, and it can work to our advantage given the current spread between crude oil prices.

Your next question is coming from Liam Burke with B. Riley.

With your export license, have you had any customer interest or inquiry into availability of your LNG?

We have. We got an enormous number of inbounds back in September. And when we made the announcement, and subsequent to that, we’ve been in continuous dialogue. One of the challenges we’ve had over the last several months have been some of the lowering of the prices in Europe. Those prices have backed off considerably. But I think if you kind of step out of that and look more broadly, the macro still there, that supply-demand imbalance is still very prevalent and persistent, and the discussions we’re having are really longer winded about taking 1, 2, 3-year type offtakes. And so I’m optimistic that those conversations will bear fruit, hard to say when. But I think some of those potential offtake customers, certainly in Europe, were a little spooked by the dramatic drop in natural gas prices in Europe over the last several months.

Great. And on the marine bunkering front, could you give us a sense as to the types of customers that are attracting for LNG bunkering?

Yes. The stickier the customers, the better. When considering who those stickier customers might be, cruise lines are certainly one group because they operate on well-defined routes. Some containerships and car carriers also have clearly defined routes. The goal is to find as much predictability and consistency as possible for obvious reasons, which creates reliability. Therefore, these three areas are likely targets for us, along with chemical and crude tankers. However, we need a different approach for bunkering these customers since their port calls are less predictable. We need to be thoughtful about how we approach their bunkering needs. I believe these four areas present prime opportunities for us.

Your next question is coming from Barry Haimes with Sage Asset Management.

Thanks so much. And thanks for all the hard work last year. I have two questions. One, in the existing business, it sounds like you were making improvements as you went through the year. And so, if the world just stayed as it was right now, could you talk about how much more profitability you think you could generate in ‘23 versus ‘22? Again, just assuming the world as it is now. And then, the second question is, on the two new businesses of Aerospace and Bunkering, can you give us any sort of a revenue growth range you’re thinking about for the year? And what sort of incremental margins we might see? So, if revenues from those two sources go up $5 million, $10 million, whatever number we might pick, is there sort of an incremental margin associated with that? Thanks so much.

Yes, there's a lot to discuss here. Let’s start with the first question. Ideally, I don't want things to remain the same because that would suggest a status quo situation. When we examine the industrial business, it represents less than a tenth of the size of the rapidly growing maritime and aerospace sectors. If it were to remain unchanged, I wouldn't expect significant improvement in margins. I believe we've likely reached our maximum potential there. This doesn’t mean we won’t keep working to enhance efficiencies, but the addressable market is only around $1 billion to $1.5 billion, which offers limited growth and would keep us in a fairly stagnant position. Therefore, it’s crucial for us to maintain an aggressive and strategic focus on these growth drivers. Instead of being limited to $1 billion to $1.5 billion, when we look at aerospace and maritime combined, we have nearly a $20 billion addressable market. That’s why our revenue growth of 19% year-over-year in a $20 billion market opportunity is noteworthy and exciting for us. We’re not particularly enthusiastic about the status quo. However, that doesn’t mean we won’t generate free cash flow and maintain good margins; it just means I wouldn’t anticipate any improvement in that area. Regarding our growth in aerospace and marine, it's challenging to provide a direct answer. Each market has its unique growth characteristics. For instance, our expansion in the Gulf of Mexico at our George West facility will come at a different cost compared to starting fresh in other markets. An acquisition in another market might deliver a different return on invested capital, margin, and revenue growth profile than if we pursue organic growth. It’s not that I’m avoiding the question; it's simply difficult to pinpoint. However, our current capabilities provide us with a significant advantage in expanding revenue and marginal opportunities. As we begin to roll out some of these initiatives, we'll be more open and specific regarding our revenue and margin expectations.

Your next question is coming from Spencer Lehman.

Yes. I have a couple of questions. First, regarding your approval by the Department of Energy a few months ago for export, how do you define exporting? Given your size, it seems like you're quite busy just focusing on North America. When you mention export, are you referring to Mexico or are you considering eventually expanding to Europe and Asia?

No, I think it’s probably the opposite. We have the ability to export LNG to essentially any non-OFAC country. So, whether it's a free trade or non-free trade country, we have the green light. I would suggest considering Europe and Asia. There’s significant interest from those markets that are not necessarily looking for large-scale capacity. However, ships with around 20,000 cubic meters and below are all reasonable assumptions for us to be engaging with at this time. Therefore, I wouldn't focus too much on Mexico since we’re already active there, but rather look towards international opportunities.

Yes, well, Europe is a key focus area, but do you currently have the facilities to handle that, or is it something planned for the future?

One of the unique attributes of our business is our strong commercial team. We can provide LNG from our own liquefaction plants and access over 30 supply points in America, which is not common among competitors, allowing us to aggregate those molecules quickly. We have the capability to bring a significant number of molecules to market very swiftly. Additionally, if we are successful in securing one or more of these exports, we will promptly begin expanding our organic liquefaction and manufacturing capacities. Therefore, we have several strategies at our disposal.

Okay. That’s encouraging. And a quick second question. You didn’t mention much about renewables or hydrogen or biofuels? Is that off in the future, or is that getting pretty interesting now?

The developments are in the future, but we are actively working on them now. As I mentioned, we will begin incurring costs this year to help establish that foundation. These costs will continue to be incurred throughout this year and into next year. I want to ensure that in 18 months to two years, we don't regret not having taken action. Therefore, we are considering RNG, hydrogen, ammonia, and methanol in a detailed and thoughtful manner. These initiatives are forthcoming. While it's difficult to pinpoint exactly when, we are focusing on them today rather than postponing the discussion.

Your next question is coming from Bill Dezellem with Tieton Capital.

First of all, would you discuss the magnitude of the peak power or baseload that you were doing in the Northeast this year versus last year, please?

Andy, you have that? We might have to do that readily.

Yes, I'm happy to have a follow-up discussion with you offline if you'd like. We continue to experience winter peaking in the Northeast, as you know. A lot of that is standby. I don't have a good update on this year's volumes compared to last year's at this moment.

Okay. Thank you. I wasn’t intending to stump you so we can talk later about that. The next question is, again, one of the historic industrial businesses, oil and gas fracing and frac sand. What are you seeing in terms of activity levels with those segments?

Currently, the market is strong, and we are actively involved through our George West facility in South Texas. However, I understand how quickly situations can change in this industry, so we need to be cautious about our level of exposure. While we do want to participate, I prefer not to place too much of our resources into that area. You may have noticed, particularly by following the Baker Hughes rig count, that some rigs are being pulled from certain markets. This hasn't significantly affected us in South Texas, but we are monitoring the situation closely.

We have a follow-up question coming from Barry Haimes at Sage Asset Management.

So my question is, the 24% of revenues versus 5% from the two new markets that you alluded to for ‘22. Is most of that from aerospace, or if bunkering was a meaningful part of the 24%, could you give us a feel for that? Thanks.

Yes. No, actually, I’d say most of that’s from marine.

There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Westy Ballard for any closing remarks.

Great. Thanks again for joining us this morning, everyone, and we look forward to seeing you on the road.

Thank you. This does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.