Stabilis Solutions, Inc. Q2 FY2024 Earnings Call

Greetings, and welcome to the Stabilis Solutions Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. And a question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Andy Puhala, Chief Financial Officer of Stabilis Solutions. You may begin.

Good morning, and welcome to Stabilis Solutions second quarter 2024 results conference call. I'm Andy Puhala, Senior Vice President and CFO of Stabilis. And joining me today is our President and CEO, Westy Ballard. We issued a press release after the market closed yesterday detailing our second quarter operational and financial results. This release is publicly available in the Investor Relations section of our corporate website at stabilis-solutions.com. Before we begin, 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 expectations and beliefs as of today, August 8, 2024. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. The company undertakes no obligation to provide updates or revisions to the forward-looking statements made in today's call. Additional information concerning factors that could cause those differences is contained in our filings with the SEC and in the press release announcing our results. Investors are cautioned not to place undue reliance on any forward-looking statements. Further, please note that we may refer to certain non-GAAP financial information during today's call. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures in our earnings press release. Today's call is being recorded and will be available for replay. With that, I'll hand the call over to Westy Ballard for his remarks.

Thank you, Andy, and good morning to everyone joining us on the call. We delivered a strong second quarter performance, thanks to the continuous hard work of our entire team, enabling us to transition our company into one of North America's largest providers of liquefied natural gas fueling, production, storage and last-mile delivery solutions for many of the world's most recognized high-performance brands. Our team has worked hard to optimize our existing operations to focus on longer-term customer relationships that support higher asset utilization, more predictable cash flows, improved liquidity and a healthier leverage profile. During the quarter, our revenue increased by over 44% year-over-year, supported by a 60% improvement in utilization at our flagship plant in Texas when compared to the second quarter of last year. We generated over $5 million in operating cash flow in the second quarter and ended the period with nearly $16 million in cash and availability under our credit agreements and a net cash positive balance sheet. Our strengthening liquidity position provides considerable flexibility to fund our operations and has enabled us to reinvest in our infrastructure to meet rapidly growing demand in our key end markets. Strategically, we remain highly focused on continuing to leverage our proven business model to further the development and delivery of a portfolio of growth opportunities across our marine, commercial and industrial business platforms. Within our marine market, we continue to deliver outstanding performance on our LNG fueling contract with Carnival Corporation, the first of its type in Galveston, which began late in the fourth quarter of 2023 and contributed to the improved plant utilization rate at our George West liquefaction facility. Our unique supply chain is the only one in the market capable of delivering LNG volumes at scale to large vessels along the Gulf Coast and not only is it the continuation of our considerable resume of bunkering operations across the U.S., but it also represents the evolution of the LNG supply chain to the waterfront for both our company and the industry. We are delighted to have an established relationship with a world-class cruise operator like Carnival and viewed Galveston and the surrounding region as an exciting area for continued marine bunkering expansion on the waterfront. To that end, over the last year, we have been actively developing plans to build the first dedicated waterfront LNG bunkering facility along the U.S. Gulf Coast. Thanks to our successful track record of developing and operating greenfield liquefaction plants, our team of experienced industry experts and the key components of the liquefaction train that we purchased in 2023, we feel that we can rapidly build and commission the first phase of our expansion once we make the final investment decision to proceed over the next few months. Expansion in this market is a natural extension of our existing Texas LNG fueling operations, which afford us considerable strategic and operational advantages and will be another important milestone in our company's history. As the only small-scale bunkering provider capable of executing multiple modes of delivery to our customers, we are well-positioned to capitalize on the growing demand for LNG fuel from the maritime industry beyond the Gulf Coast, and we continue to actively evaluate opportunities to expand our operations to strategic ports across the entire United States. Within our commercial and industrial markets, we have a strong core business serving about eight different sectors across the U.S. and Mexico. Going forward, we see a tremendous opportunity to further expand our business in emergency power delivery as well as enter the primary and backup power generation for the data center sector. During the quarter, we announced a 14-month contract extension of an LNG supply agreement for primary power generation, and we continue to further expand our operations with the expectation to deliver more than 235,000 megawatts of energy in 2024 to peak load, intermittent, distributed and emergency relief power customers across multiple industries. Moving forward, the data center sector is expected to experience meaningful demand growth with recent projections estimating that electricity load demand increase by as much as 10% in certain markets. As a provider of fuel for decentralized on-demand power, Stabilis is uniquely positioned to meet this demand through our integrated system-based solutions, and we expect to further invest in our operational capabilities and infrastructure to support the considerable demand growth ahead. Beyond the power generation vertical, demand for high-purity LNG as rocket propellant has continued to grow. This growth comes as the U.S. accelerated commercial rocket launch activity. During the quarter, we continued to expand our customer base, strengthening our position as the preferred provider of LNG for commercial space use with the addition of a new customer in this sector. Aerospace revenues are expected to increase approximately 75% over 2023 levels and will represent approximately 10% of our annual sales for 2024 and will be a source of continued growth over the next 12 to 24 months. Looking ahead, we see demand catalysts materializing across multiple end markets, and we continue to evaluate opportunities to deploy capital and enhance our ability to meet the increasing demand for our product offerings across all of our platforms, including marine, power generation and aerospace. During the quarter, we commenced a phased expansion that will more than double our storage capacity at our George West, Texas facility from 270,000 gallons to 630,000 gallons. The expansion will grow our robust LNG supply and logistics network across the Gulf Coast region and will give us added flexibility to support the continued expansion of our supply and logistics network. As we evaluate the best way to scale our platform to meet demand, we are prioritizing a capital structure that will maximize return on invested capital and yield sustainable, profitable growth. As we've said in the past, our decision-making framework for incremental capital investments in our business will balance longer-term ratable offtake agreements that maximize return on investment and our comfort in assuming merchant risk to ensure infrastructure development meets the growing needs of next generation low carbon fuels like LNG. We look forward to keeping you updated on plans and our continued execution in the quarters ahead. Thank you. And with that, I will turn it over to Andy.

Thank you, Westy. Let's move to a discussion of our second quarter performance, together with an update on our balance sheet and liquidity. In the second quarter of 2024, our revenues grew to $18.6 million, up 44.1% compared to the $12.9 million reported in the second quarter of last year. The growth was driven by strong demand resulting from new long-term customer agreements and improved utilization of our South Texas liquefaction facility due to the resolution of feed gas composition issues which hindered our production in the second quarter of last year. Net income for the quarter was slightly above breakeven compared to a net loss of $2.2 million in the second quarter of last year. Adjusted EBITDA for the quarter was $2.1 million, an improvement of $2.2 million from the prior year period. The adjusted EBITDA margin of 11.3% reflects improved operating leverage as a result of the higher utilization rates. Each year, the second quarter has historically been the company's slowest quarter primarily due to seasonality associated with the end of winter peaking activity and demobilization in the Northeast. With that in mind, the second quarter of 2024 was the company's first-ever second-quarter profit and highest-ever second-quarter adjusted EBITDA, demonstrating the progress being made in the business. Generated $5 million of cash from operations in the second quarter and continued to build on our strong liquidity position, which we intend to leverage as we invest in growth going forward. As of June 30, 2024, Stabilis had total cash and equivalents of $11.5 million, together with $4.4 million of availability under our credit facility. Total debt outstanding as of June 30, 2024, was $8.6 million, resulting in a net positive cash position. During the back half of the year, we expect to increase CapEx as the expansion of our South Texas LNG storage capacity is brought online. However, we expect to maintain our solid liquidity position through 2024. That concludes our prepared remarks. Operator, please open the line for the Q&A session.

Thank you very much. At this time, we will be conducting a question-and-answer session. Thank you very much. Your first question is coming from Martin Malloy of Johnson Rice. Martin, your line is live.

Good morning and congratulations on all the progress you're making on a couple of different growth platform fronts. I wanted to maybe try to get some additional details about the dedicated waterfront bunkering facility you mentioned and being able to quickly construct that once FID is issued. Could you maybe talk a little bit about the cost financing for that? Is there any additional contracts that need to be announced in terms of offtake that you think are needed to get this project to the finish line?

Good morning, Marty. Thanks so much. I think breaking the question down into several components, I'll start kind of with the end. And the answer is yes. We certainly don't want to put capital to work with a 100% merchant risk. We certainly believe in not only that market, but a wide array of markets around the U.S. and certainly have an appetite for some merchant risk. But having an anchor or two in each market certainly makes all the sense in the world, and we would expect to have some commercial activity on the books before we truly reach an FID, but not 100%. Where that balance point is to be determined. But we are in advanced discussions with a variety of what we think are very strong interesting counterparts to partner with us to anchor that expansion, certainly in Galveston. But as I mentioned, not just unique to Galveston, but also in other ports in the U.S.

Okay. And then I just wanted to delve a little bit more into the commercial industrial area and backup power generation and I guess data centers or factories that are being restored to the U.S., could you maybe talk a little bit about how you see Stabilis playing a role in that market and timing of maybe any contracts there?

Yes. So we are unbelievably excited about this aspect of our platform, certainly love the Marine business, but also this emergency power, primary power as well as primary and backup power for data centers is a really, really materially large opportunity for us. And so I think the way that we can play this is certainly on the primary power generation. We're doing that now. We've been doing that for several years, but also primary baseload for data centers in areas where it's going to take a long time, if at all, ever for them to get connected to the grid, we think we can build infrastructure to become a primary power generation source for them. But also, we think we can be backup redundant power and displacement of diesel as well as some of the challenges around intermittency in solar and wind. And so we think natural gas is the clear leader for both primary as well as redundant power for emergency as well as data centers. We announced a 14-month contract extension in the emergency response as a primary power generation source. We are in multiple discussions with data center developers, hyperscale as well as cloud computing firms where the decisions are going to sometimes be made for build-out of 30, 40, 50, 100 megawatt, 500 megawatt data center locations. And we think that we can be a real player in the primary load as well as backup load in some of these facilities as well. It's exciting. And I think what's really exciting is this is not something that we haven't done in the past. It's a natural extension of what we've been doing since our company's inception in 2013, '14. And so it's just another sector that we're leveraging our capabilities into utilizing liquefied natural gas. We also think there are areas for us to galvanize not just LNG, but some RNG and other sources to bring to bear for a comprehensive primary and backup power solutions for this data center universe.

Great. Thank you. I'll turn it back.

Thanks, Marty.

Thank you very much. Your next question is coming from Barry Haimes of Sage Asset Management. Barry, your line is live.

Thanks so much and congrats on the good quarter. Just following-up on the backup and primary care discussion for data centers. Why LNG versus natural gas? I mean would this be data centers that don't have access to pipeline gas? So that's one question. And then my second question is, could you talk about when the new George West capacity is scheduled to come online? Thanks so much.

Yes. Sure. Thanks so much. So data centers certainly are fairly agnostic. They all consistently want to burn the cleanest, most abundant and safe fuel that they can, and certainly that speaks loudly for natural gas. Whether it's natural gas or LNG, they're interchangeable. But to answer your question, oftentimes, these data centers are not going to have access to pipeline gas. And if they do, it will be for years. In some instances, they will. So if there are areas we think there are numerous where the data centers don't have access to natural gas, we can run multiple hub-and-spoke operations where we can build the infrastructure and then spoke those out at scale to clusters of data centers around the U.S. There'll be other instances where we can be thoughtful in assisting their efforts and getting into the pipeline infrastructure, but that's not as simple. There are certain markets where there's an abundance of pipeline infrastructure, certainly along the Gulf Coast and some up in the Marcellus, Northeast. But there are a lot of areas where they just don't have access to the grid, and they don't have access to natural gas pipelines, and this is real. This is large and it's growing. And we think we can not only help with the pipeline aspect but also areas of LNG where they don't have access to pipelines. I think that was the first question. The other question was around...

George West.

George West facility. We've already started installing half of that capacity, and I'm proud to say, Sunday, it was up and running. For the second half of that capacity expansion storage, we expect to bring that online either later this year or the beginning of next year. But half of that is already up and running as of the weekend.

So that will, in effect, add to your capacity even in the current quarter then?

That's correct. Storage capacity, not production storage.

Storage. Okay. Got it. Okay. Thanks so much.

Yep.

Thank you very much. We appear to have reached the end of our question-and-answer session. I will now hand back over to Westy for closing remarks.

Thank you. As I mentioned, everyone, thank you to all for joining us on the call, and we look forward to seeing you on the road in the near future.

Thank you very much. This does conclude today's conference. You may now disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.