Earnings Call Transcript - SLNG Q1 2021

Operator, Operator

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 security laws. These forward-looking statements are based on the company's beliefs and expectations. As of today, May 6, 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 the press release announcing the company's results. Investors are cautioned not to place undue reliance on any forward-looking statement. I would now like to welcome you all to the Stabilis Solutions Q1 2021 earnings conference call. Today's call is being recorded. At this time, I turn the call over to Jim Reddinger, President and CEO of Stabilis Solutions. Please go ahead, sir.

Jim Reddinger, President and CEO

Thanks, Matthew. 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 want to welcome everyone to our first quarter 2021 earnings conference call. It's great to be here today. This is maybe my favorite quarterly earnings call that we've had during my time at Stabilis, because we're here to report a lot of great things, including record revenue, record earnings, some great new customer contracts, enhanced liquidity for growth, and a major exchange listing for our stock. Let me go through each of these items one by one in my prepared remarks, and then we can discuss in more detail during the Q&A session. After ending a turbulent 2020 with record fourth quarter performance, I'm pleased to report that Stabilis produced another record in the first quarter of 2021. The company achieved its highest ever quarterly revenue, beating our previous record from the first quarter of 2020 by 28%. In fact, we've reported three of our five highest revenue quarters over the past 15 months, and our strong growth trajectory continues into 2021. We continue to see broad-based demand for our energy transition services across our customer base. During the quarter we delivered 13.4 million gallons of LNG and secured long-term sales contracts for over 40% of our production from our Texas-based LNG facility. We also recently extended one of our largest customers for what we believe will be an additional six to 18 months. In addition to hitting record revenues, I'm also pleased to announce that the first quarter of 2021 produced record quarterly EBITDA of $2.7 million and was our first profitable quarter, indicating that the business has begun to grow into its infrastructure and is creating operating leverage. Our next major achievement for the quarter was securing a $10 million credit facility to fund our working capital needs. This credit facility will give us access to the capital we need to continue to grow the business. And last, but certainly not least, I'm extremely pleased to report that we are now listed and trading on NASDAQ. We believe this move is a key milestone for Stabilis, as it will further enhance our visibility in the marketplace, expose our company to a larger audience of institutional investors, increase trading liquidity, and allow us better access to the capital markets to execute our growth strategies. We started trading on NASDAQ a week ago today, and so far the results on trading volumes and price have shown significant improvement for the company and for our investors. We're off to a great start this year, and I'd like to thank the Stabilis team for their dedication and hard work. These are all your achievements, and we really appreciate everything that you do. Later on the call, I'll discuss our growth outlook, but first I'll turn it over to Andy to review our Q1 2021 financial results. Andy.

Andy Puhala, Senior Vice President and CFO

Thank you, Jim. As Jim mentioned in his opening remarks for the first quarter ended March 31, 2021, Stabilis reported its highest ever quarterly revenue of $17.7 million, a 29% sequential increase from the quarter ended December 31, 2020, and a 28% increase from the first quarter of 2020, Stabilis' previous record quarterly revenue. The year-on-year increase was largely driven by growth in power generation projects, continued expansion of the company's Mexico operations, and increased activity with aerospace customers. Revenues from Stabilis' LNG segment totaled $16.1 million, a 33% sequential increase from the quarter ended December 31, 2020, and a 29% increase from the first quarter of 2020. The company delivered 13.4 million gallons of LNG to customers during the quarter, a 29% increase compared to the fourth quarter of 2020, and a 12% increase compared to the first quarter of 2020. The power delivery segment's revenue decreased 5% sequentially to $1.5 million, due entirely to an unfavorable fluctuation in the exchange rate, but increased 18% versus the first quarter of 2020. Had the Brazilian currency not weakened over the course of the last year, this quarter's revenue in U.S. dollars for that segment would have been 32% higher in Q1 of 2020, which shows that the underlying business is growing. In terms of operating expenses, we experienced approximately $600,000 of one-time higher gas, electric, third-party LNG, and transportation costs as a result of the Texas winter freeze in February, which reduced the profit contribution from our record revenues. Adjusted earnings before interest, taxes, depreciation, and amortization, or adjusted EBITDA, grew to $2.7 million or 15% of revenue during the first quarter, a 14% improvement sequentially, and a 78% improvement over the first quarter of 2020, marking our best EBITDA performance. These improvements in profitability were made in spite of the extraordinary costs related to the winter freeze. Net income for the first quarter of 2021 rose to $0.2 million, compared to net losses of $0.1 million in the fourth quarter of 2020, and a loss of $1.1 million during the first quarter of 2020. Cash and cash equivalents as of March 31 were $3.1 million as compared to $1.8 million reported at December 31. As previously announced, the company secured a $10 million credit facility during April, which provides us with ample working capital and liquidity to execute our growth plans. With that, I'll turn it back over to Jim to discuss our outlook.

Jim Reddinger, President and CEO

Thanks, Andy. We're excited about our first quarter performance and are now focused on how we can continue to build on these results. First, we will continue to build and improve our existing business. As you can see from our recent results, the needs of the energy transition are driving our customers across all sectors to find what we call enlightened energy solutions. These are solutions that meet their customers' environmental sustainability goals, but they also provide economically viable and reliable energy solutions. LNG, and increasingly hydrogen, provide these enlightened energy solutions. Remote power generation services are becoming an increasingly important growth market for us, and we see potential opportunities with multiple customers in the sector. Most power generation companies are moving away from diesel fuel to improve their emissions profile, and LNG is well-positioned to capture a large part of this market as it transitions to natural gas fuel. As an example, we recently won a contract renewal with our largest domestic remote power generation partner, which uses natural gas fuel to provide power generation to a remote location that does not have grid access. We expect that work from this contract extension will last at least through the end of 2021, but it could be significantly longer. We expect to provide more details on this award soon. Mexico also continues to be a key growth factor for us, and we are currently providing LNG to one of the largest mining companies in Mexico for mine haul fuel truck and power generation consumption. We've recently added to our Mexico sales and field service teams and continue to increase our capabilities and presence in the market. Our pipeline of new sales and development opportunities remains strong, and we look forward to having additional project and customer wins to discuss with you in the near future. And per our announcement earlier this week, we continue to work hard on expanding our presence in the emerging marine fueling market, which we believe is a tremendous growth opportunity for Stabilis. This week, we announced that we have entered into a memorandum of understanding with the Port of Corpus Christi to develop an LNG marine bunkering infrastructure at the port. The Stabilis role will be to provide marketing, technical and operating expertise to the venture, while the port authority will provide access to initial fueling sites and access to customers. Our mutual goal is to create momentum for LNG bunkering in the port, which will quickly justify the installation of capital assets to serve markets such as LNG bunkering vessels and potentially LNG production. This MOU is a great step forward for us in demonstrating our capabilities and becoming an innovator and leader in the LNG marine bunkering sector. We're in discussions on several other opportunities in this space as well. To sum up our outlook, we're well-positioned to continue to take advantage of opportunities across multiple sectors for LNG and hydrogen fueling solutions. We look forward to continuing to provide you updates as we have new project wins to announce. The energy transition is moving forward quickly, and we believe Stabilis is well-positioned to provide the enlightened energy solutions that the market requires to be cleaner, as well as more cost-effective and more secure. With that, I'll open up the line for calls and for questions. Matthew, please go ahead.

Operator, Operator

Your first question is from Craig Shere from Tuohy Brothers Investment Research.

Craig Shere, Analyst

Good morning. Congratulations again on the strong quarter, two quarters in a row.

Jim Reddinger, President and CEO

Thanks, man.

Craig Shere, Analyst

So any update on Mexican contracting and permitting prospects? Could we see the 25,000 a day liquefier and storage deployed by year-end? And as Mexican contributions ramp over the next couple of years, any thoughts around hedging Forex risks?

Jim Reddinger, President and CEO

Yes, we don't have any definitive guidance on timing, but I can confirm that we continue to push forward on all the Mexican projects that we've discussed in the past. We'll provide timing updates as soon as we can, but we need to navigate that process before we provide any firm guidance on it. In terms of FX risk, we certainly have looked into it, and as our exposure grows, we'll continue to evaluate it. But at this point in time, we don't have anything in place.

Craig Shere, Analyst

Understood. And on the potential for a lower-cost George West brownfield expansion, do you have to have material new offtake commitments in hand for that? Or is it simply an issue of securing the capital funding for this low-cost project?

Jim Reddinger, President and CEO

We would certainly like to have visibility on how the new assets would be used as we invest in them. To expand that facility, we'd have to have either pretty good visibility on our demand portfolio or some specific contracts that would take up enough of it to make it economically attractive.

Craig Shere, Analyst

Do you think such commercial opportunities would potentially be on the table this year?

Jim Reddinger, President and CEO

We're in a number of discussions that could make it viable. We don't have anything to announce at this moment, but I'd say it's something we're certainly open to if the contracts materialize.

Craig Shere, Analyst

Thank you.

Jim Reddinger, President and CEO

Thanks, Craig.

Operator, Operator

Your next question is coming from Bill Dezellem, Tieton Capital Management. Your line is live.

Bill Dezellem, Analyst

Good morning.

Jim Reddinger, President and CEO

Good morning, Bill.

Bill Dezellem, Analyst

Let me start with the Corpus Christi marine bunkering agreement. I think that you pretty well answered the question with your opening remarks. But I wanted to understand the magnitude and scale of that agreement. It sounds small for now, but if you are successful, it ultimately could be quite meaningful. Are you including the potential of LNG generation at that site?

Jim Reddinger, President and CEO

Yes. I mean the marine bunkering sector is growing quickly, but it's a bit of a chicken-and-egg issue with assets. What we're doing with the port is, Stabilis has an LNG production plant and a full yard of LNG distribution and storage assets about 50, 60 miles up the road from the port. So it's a great fit between the two of us. Phase 1 of the plan is to get some hard marketing going and encourage current LNG vessels to visit the port and fuel there using our Stabilis equipment and expertise, and to encourage conversions of vessels that could be LNG-fueled to start coming into the port. That will take some time to develop. Phase 1 is to use our existing capabilities and assets to conduct that. As we build momentum in the port, Phase 2 would be to invest in assets that can provide higher volume fueling services, which we think will come, hopefully, soon to the port.

Bill Dezellem, Analyst

So Jim, did I misinterpret your comments? I understood from your opening remarks that despite the proximity of George West to Corpus Christi, if the volumes are enough, you feel like you could have on-site production. Did I hear that wrong?

Jim Reddinger, President and CEO

It's a possibility, Bill. I mean we really don't know what the future is going to look like. It could be a situation where the port is fueled either directly into ships or into storage from the current or an expanded George West facility. It could be the case where Stabilis builds additional liquefaction on or near the port for the LNG bunkering. It could be that existing LNG supplies in the port could be used for bunkering. And it could be the case where a bunkering vessel fuels elsewhere and sails into the port. We're working with the port and with the customers to figure out how they're going to fuel their vessels and how we can best serve that. So that's really the phase we're in now.

Bill Dezellem, Analyst

Great. And Jim, one more question on this path before I move to another one. Since the second quarter is seasonally down from the first quarter—that's just normal—but you've signed contracts representing 40% of the George West volume. So should we be thinking about the second-quarter revenues being in excess of the first-quarter revenues now?

Jim Reddinger, President and CEO

No, we aren't. You know Bill, we haven't given guidance and we don't give guidance going forward. The first quarter has always been seasonally strong because of a lot of the winter peaking activities that we're involved in, which involves both LNG supply but also some high volumes of revenue on rental of equipment. As that rolls off, generally the second quarter misses that revenue. But you're correct, we do have some additional revenue coming in the system. I don’t have guidance for you right now as to what direction that’s going to go, but I think as we've seen in the fourth quarter of 2020 and the first quarter of 2021, we think it'll be positive momentum from past years into the second quarter of this year.

Bill Dezellem, Analyst

And then lastly, now that you've achieved break-even, is it a correct perception and assumption that profits from this point really accelerate, meaning you're in the beginning of that hockey stick phase? Because you have your fixed cost, and essentially, you have the incremental gross margin that falls to the bottom line. If I calculated it correctly, in the Q1 versus Q2, the incremental gross margin on LNG was 30% and was 64% on the rental business. Are we thinking about just the structure of where we're at in your life cycle correctly?

Jim Reddinger, President and CEO

Yes, I'd say two things, Bill. One is the underlying profitability of the base business continues to improve. If I'm looking at the base business configured now, the profitability of the revenue continues to improve. At the same time, and this has been happening over the last year and will continue to happen, we're investing in future growth. Many of the projects we've discussed, a good example being our effort at the Port of Corpus Christi in terms of people, equipment, and engineering to get that off the ground. So I think the base business profitability will continue to improve, but we’re also going to invest in future growth projects. If you look at the bottom line going forward, we'll continue to fund growth from the cash and profits we're producing. So that's a push and pull from that standpoint. We believe the bigger prizes are ahead of us. While we're optimizing profitability of the current business, we're also going to continue to invest in those bigger opportunities.

Bill Dezellem, Analyst

And Jim, what has been the driver of the underlying base business becoming more profitable? Could you talk and expand on that, please?

Jim Reddinger, President and CEO

Sure. I think fundamentally from a macro perspective, as we've consistently discussed, the energy transition and the fact that all our customers are looking for cleaner fueling solutions is crucial. At the same time, they need cleaner fueling solutions that are economically viable and secure. LNG and increasingly hydrogen really fit into that macro trend where the world wants to get greener and cleaner but also needs reliable and cost-effective fuel sources. That macro push continues to drive us forward. Over the last number of years, LNG as a fuel has been evolving and gaining acceptance in various applications, and that market adoption continues to accelerate. A great example is in the power generation sector, where many major power rental companies have announced plans to move away from diesel fuel towards natural gas and other fuels. We're seeing significant macro factors that are propelling LNG usage forward, which allows us to pursue new markets and create new demand, increasing both volume and profitability for what we're doing. It’s a very favorable macro environment for us, and while we saw this trend years ago, it has really kicked in now.

Bill Dezellem, Analyst

Congratulations on a great quarter. And thanks for taking all the questions.

Jim Reddinger, President and CEO

Thanks, man, appreciate the questions.

Operator, Operator

Your next question is coming from Craig Shere from Tuohy Brothers Investment Research.

Craig Shere, Analyst

Just a follow-up. You mentioned in your current remarks, Jim, growing into your infrastructure. How important do you view the ability to immediately deploy spare equipment to obtaining some of your recent commercial traction? Would you say you've got a year or more runway before running short of spare transport and storage equipment and that full capacity utilization, both from George West running over nameplate capacity through your transport and storage equipment? Could you ultimately post just on the assets you now have running full steam, could you ultimately post $20 million or more annually at the dock?

Jim Reddinger, President and CEO

Yes, I'd say a couple of things, Craig. One is, there's clearly infrastructure for the assets of the company, but there's also the public company investment in legal, finance, accounting, and all the support that goes into that. The growth company includes people, equipment, and technology that allows us to align with the project opportunities we've discussed. As we see with the Port of Corpus Christi agreement coming to fruition, that was several years of strategic investment to get that off the ground. Regarding equipment, we do think that there's more room to run on improving the utilization of both the plant and the rolling stock equipment. We also expect pricing will become more favorable as we get equipment into long-term contracted lines of business. While I don't want to give specific guidance, as evidenced by our record EBITDA quarter, we see significant room to expand that. As I mentioned earlier, we will continue to invest in growth initiatives. The base business is expected to perform well, generating cash flow returns, which will also go towards funding growth. So that's a balancing act. We believe the bigger prizes lie ahead, and we will optimize profitability while investing in those larger growth opportunities.

Craig Shere, Analyst

Great. Thank you.

Operator, Operator

There are no further questions in the queue at this time. I will now turn the floor back to our hosts.

Jim Reddinger, President and CEO

Great. Well, thanks everyone for being on the call. It's a great quarter to announce. I know we've had a flurry of news here lately, that's all been positive. We appreciate everyone following us and thank you for your support. We'll talk to you next quarter. Thank you.

Operator, Operator

Thank you, ladies and gentlemen, this does conclude today's event. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.