Stabilis Solutions Inc (SLNG) 2017 Q3 法說會逐字稿

Good day, and welcome to the American Electric Technologies Third Quarter Earnings Conference Call. Today's call is being recorded.

Certain statements contained in this conference call that are not descriptions of historical facts are forward-looking statements as such term is defined in the Private Securities Litigation Reform Act of 1995. Because such statements include risk and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. The factors that could cause results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in filings made by the company with the Securities and Exchange Commission. Many of those factors that will determine the company's future results are beyond the ability of management to control or predict. Listeners should not place undue reliance on forward-looking statements, which reflect management's views only as of the date hereof. The company undertakes no obligation to revise or update any forward-looking statements or to make any other forward-looking statements whether as a result of new information, future events or otherwise.

At this time, I'd like to turn the conference over to Mr. Charles Dauber, President and CEO. Please go ahead.

Thank you. Good morning, everyone. I'd like to welcome you all to the American Electric Technologies Third Quarter 2017 Earnings Call. Joining me today is our Senior Vice President and Chief Financial Officer, Bill Brod. For our call today, I'm going to start with a review of our third quarter results. Bill will then walk you through some additional financial details, and then I'll come back and share my thoughts on where we are so far in the year. We'll then move to a question-and-answer session coordinated by the moderator.

As you saw from our earnings release this morning, AETI announced revenue for the quarter of $13.3 million, up 52% from the $8.7 million reported in the third quarter of 2016 and up 2% compared with the second quarter of this year. Both our top line and bottom line results in Q3 were significantly impacted by Hurricane Harvey. As you all know, the Texas Gulf Coast region was seriously impacted by Hurricane Harvey at the end of August and the beginning of September. Our Houston and Beaumont communities, our employees, suppliers and our customers were impacted and many in the regions still have months or even years to complete full recovery.

Harvey impacted M&I in a number of ways. First, we had 14 members in Houston and 16 in Beaumont that incurred serious damage or complete destruction of their homes. Although our Beaumont manufacturing operation did not sustain any damage, production was halted and we were idled for 12 days as Harvey impacted our employees' ability to get to work and our materials from being delivered. This impacted every one of our customers' technical products -- projects, including many projects where the customer couldn't even get their people back to work, to work with us to push the projects forward.

All told, Harvey's impact on revenue in Q3 was approximately $2.5 million.

Even with this $2.5 million impact on technical products revenue, our technical products group still held even with Q2 and the company saw increases in our U.S. services business in Q3 as our Beaumont and Houston services groups assisted Gulf Coast industrial customers with Harvey recovery efforts.

The company also saw Brazil hit its second highest quarterly revenue, which I'll discuss later.

Gross margins for the quarter were $1.1 million, up $0.3 million from Q2 and up $1.5 million from Q3 last year. The company reported that EBITDA, a non-US GAAP measure, improved to a loss of $565,000 from a loss of $700,000 in Q2 and up from a loss of $2.3 million in Q3 last year. Hurricane Harvey-related EBITDA impact was $600,000. So without Harvey, it would have been EBITDA positive in Q3.

The company reported quarter ending backlog of $23.5 million, up 3% from the end of Q2, primarily based on continued bookings of our turnkey power delivery solutions to the midstream and power generation sectors.

With that, I'll now turn the call over to Bill Brod for more financial details, and I'll come back with more comments afterwards.

Thanks, Charles. Good morning, everyone. The company reported fully diluted loss from operations per share for the quarter of $0.13, the same as the second quarter 2017 and an improvement of $0.20 per share from the fully diluted loss of $0.33 per share reported in the third quarter of 2016. The company reported a net loss of $1.1 million for Q3, flat versus Q2 of this year and an improvement of $1.6 million from a loss of $2.7 million in Q3 of 2016.

Consistent with last quarter, our quarterly fixed cost continue to run in the $3 million to $3.5 million range, which suggests we need to be in the $50 million to $60 million annualized run rate range depending on revenue mix for profitability.

Moving to the balance sheet. We ended the quarter with a cash position of $1.1 million, down from the $3.2 million at the end of Q2 due to an increased use of cash in operations and resulting from an increase in both accounts receivable and our cost in excess of billings work in process, which [were held to] combine $1.8 million from Q2.

Total debt at the end of the quarter was $6.4 million, unchanged versus Q2. Working capital at the end of quarter was $1.9 million compared with $2.8 million at the end of Q2.

As Charles previously stated, during the quarter, the company's business operations in both Houston and Beaumont, Texas were adversely affected by Hurricane Harvey. The company maintains business interruption insurance and has filed a business interruption claim. It is anticipated that any proceeds resulting from this business interruption claim would be reported no earlier than Q4 of 2017 or possibly into the first quarter of 2018.

With that, I'll turn it back over to Charles for some additional commentary and outlook on the business.

Thanks, Bill. I'm going to begin with the sector reviews, and I'll start with the oil and gas market sector.

As we previously discussed, the majority of our focus here has been in the midstream and downstream portions of the oil and gas market, but there have been some new developments in the upstream market that I'll discuss as well. The overall oil and gas market remains very challenging, with strong competitive pricing pressure across the entire sector. While oil and gas business continues to drive the company's growth, increasing 236% to $12.3 million versus the third quarter last year and we were up 16% from the $10.5 million reported in Q2. These revenues came from a mix of midstream and downstream oil and gas projects and included revenue from turnkey solutions that are incorporate our IntelliSafe Medium Voltage Arc-resistant product.

We continue to book orders in the midstream and downstream market, resulting in quarter-ending backlog for the oil and gas sector of $15.4 million, which was down slightly from Q2, but remember that includes the Hurricane Harvey customer impact in the booking numbers as well. We see numerous good midstream and downstream oil and gas project opportunities to build our backlog. We are also encouraged by the successful project we completed with one of our largest engineering procurement and construction customers for the downstream business and what that means for us in terms of future opportunities.

Another positive development in the quarter was a significant increase in our drilling business for the first time since 2014. As previously discussed, our initial focus for the upstream market was to capture surface revenue by helping our land drilling customers get their rigs back to work, primarily in the U.S. shale, including in West Texas. We've had great progress there and have several techs working in the West Texas for the past several months and are pleased with the uptake and revenues related to that business initiative.

We've also recently seen an increase in drilling-related product opportunities. While the majority of those product opportunities are upgrades or retrofits to existing land drilling rigs, we've also started to see new-build opportunities as well. I'll look forward to sharing more updates with you on our land and offshore drilling business in future calls.

Moving to our joint venture in China, which is 100% focused on the oil and gas sector. BOMAY reported Q3 revenues of $6.1 million, and we recognize 40% of the profits as equity income which was $98,000 in the quarter. BOMAY has seen an uptick in orders but we are tempering expectation for BOMAY and expect them to continue at a reduced run rate for the near term given the Chinese energy market environment.

Our Singapore joint venture is still in hibernation mode, while the offshore oil and gas market downturn in Southeast Asia continues.

Moving to the power generation and distribution sector. Our power generation sector broken into 2 main pieces. The first is large global power gen OEM, or what they call original equipment manufacturers, a company that make reciprocating engines or natural gas turbines; and the other part of that business is projects we do directly with power generation-oriented engineering procurement and construction firms to build power plants, for example. The Q2 (sic) [Q3] power generation revenues were $0.5 million down from the $1.3 million in Q2 and down 85% from Q3 last year due to the lumpiness of the EPC part of the sector. In Q3, we saw a 32% increase in backlog to $5.8 million, primarily from the power gen OEM business. We expect continued lumpiness in the power gen EPC projects area, but are now also seeing opportunities for distributed power generation projects for additional bookings in the near term.

Moving to the Marine and other industrial sector. Revenues were $0.5 million, down 52% from Q2 and down 70% from Q3 last year, primarily due to reduced backlog for our Marine and industrial products-oriented projects. Interestingly, we have started to see some additional marine product opportunities. But overall, the Marine market, including services, is still weak globally with significant oversupplied offshore service and other offshore oil and gas-related vessels.

I'd like to now to move to discuss M&I Electric Brazil. M&I Electric Brazil's revenues split between the 3 sectors I've discussed previously. In Q3, M&I Brazil revenues were up 9% to $1.5 million, which is its second highest quarterly revenue ever and that's up 13% from Q3 last year. We continue to see opportunities for M&I Electric Brazil in the oil and gas and power gen markets and are also seeing a growing number of projects in the industrial and energy business. In the quarter, the industrial and energy team booked their first technical product order with a large industrial customer.

While the Brazilian macroeconomic environment remains challenging, we're positive about the progress the team is making, and I look forward to sharing additional announcements with you in the future.

If I take a step back and summarize where we are as a company. We've proven our ability to execute in our target midstream, downstream and power gen markets in a very tough environment and that our investments in new products, capacity and people have resulted in significant backlog and revenue growth this year.

Our services business including Brazil is growing. We are now seeing a recovery in our upstream drilling business as well. While our markets remain challenging, we need to continue to book orders and execute our backlog to keep customers happy. And if it were not for Harvey, we would have been EBITDA positive in Q3.

Before we proceed with the Q&A session, I'd like to conclude the prepared portion of my comments by thanking our employees for their hard work and thank our customers and shareholders for their support.

This concludes the prepared portion of my comments, and I'll turn the call now over to the moderator for the Q&A section of the call.

(Operator Instructions) We have one question in the queue. Please go ahead.

This is Bill Dezellem with Tieton Capital. And since I'm the only one in queue, I'm going to ask a number of questions, if that's all right. First of all, our gross profit dollars grew about [260, $80,000] on a $308,000 revenue increase -- I'm looking sequentially, so versus the second quarter. And that was in spite of the hurricane disruption. Would you talk a little bit about how you did that? And if you view that as normal leverage or if there was something unique to this quarter?

Bill, yes, I think there's 2 things. One is that the products business, I think, is sort of steady state in terms of the booked margins and what we're seeing from the pricing pressure in the market. I think the Q3 gross profit versus Q2 is really a result of the incremental services business. So we talked about this mix between products and services, and clearly when services has a reasonable quarter, there's a lot higher gross margin in the services side of the business and that then drops straight through to the gross profit line.

And I guess, taking that -- you've mentioned couple of different things, so I'll cue off that. First of all relative to the services, when do you expect the hurricane service work to be complete? And are you anticipating any product business coming out of the hurricane?

I would say that the services business had a lot of completion in Q3, but there are certainly still customers that are doing work related to the Harvey recovery in Q4 from a services perspective. There are also a number of smaller Harvey-related recovery projects that would need to be -- refurbishing of equipment that was water damaged, small -- other small upgrade projects or whatnot, and those are considered under the products, which would happen this quarter depending on the timing of when they do their turnarounds and their repairs, could stretch into next year as well.

And then pricing, is there any indication that pricing is firming higher overall or for IntelliSafe specifically?

So I think that the market -- if I think about the midstream and the downstream market for pricing in the power gen market for pricing. I think the pricing has stabilized in the last couple of quarters, and so we don't see any further pricing pressure. I think we know where the pricing -- where the markets are from a pricing perspective. I think that IntelliSafe does command price premium because of its premium functionality in the market, and especially when we can do a turnkey projects with customers where we take IntelliSafe and incorporate it with the rest of our turnkey power delivery solutions, we should be able to get some price premium. I think the market is still tough with these energy prices on those market sectors, which is the midstream, downstream market specifically. The drilling market is a little bit different even though there's price pressures there. The historical margins for drilling-related opportunities tend to be slightly higher. So we'll have to look at that and see what the blended margin looks like between those sectors as the drilling part of the business starts to come back online.

And is that business rebalance -- is it rebounding with traditional pricing or is it rebounding with depressed pricing?

It's probably not rebounding with 2014 level pricing. But the margin's there, so expected to be quite a bit above what they would be in the midstream and downstream portions of the market.

Great. And then you have mentioned in the release and in your opening remarks that there was about $2.5 million of lost revenue from the hurricane. Will that be caught up in Q4? Or is that really not how it works, it'll just -- just the kind of the total revenue stream will be pushed out?

So obviously, the revenue in Q3 was lost forever, right? And so what this really does is, it's all of our projects are impacted by somewhere between a month, 2 months whatever that timing is of those particular projects, some because the customers literally couldn't get back to work, couldn't get the project started again. And so we would, in general, envision a push of that number and even an impact in Q4 as some of those projects were impacted moving into Q1 as well.

And how about bookings, Charles? Did you find that some bookings that you anticipated in Q3 were also delayed simply because customers' attention was diverted?

Absolutely. Yes, as I said earlier, the bookings were slightly down in the oil and gas market. But that's entirely because people in Houston literally were not working for 2, 3 weeks, the companies basically just stopped, employees weren't coming in; companies were distracted on getting their plants back up and running and getting the people recovered. So considering that the backlog was actually up and the bookings were strong is actually good considering what we had to deal with for Harvey for a large amount of time in Q3.

That's quite helpful. And so would you anticipate that in the fourth quarter, you would receive not only the bookings would have anticipated in Q4, but also that catchup from Q3? Or are you sensing the bookings, somewhat like revenue, will also all just slide?

I think you're going to end up having more of the -- it's going to depend on the customer. If it's a Houston-oriented firm, I think all of that business was impacted and moved. If it's a firm outside of Houston, then there should be no issues and we would get incremental business from there, right? So power gen OEM projects were not impacted by that because those customers and decision-makers are outside of the Gulf Coast region, as an example.

And what are you hearing from customers in general as the oil price directionally works its way upward?

Well, that's a good question. So there's some dynamic where the price of oil tends to increase the mood in the Gulf Coast region and that means that as people are moving into the planning cycles for 2018, there's a confidence factor that I don't think was there a year ago. Oil is stabilized, both West Texas and Brent internationally. So we're seeing, I will tell you, just sort of an across the board, an increase in confidence from our customers and that's the midstream and downstream guys. There's nothing with power generation level, but midstream and downstream and then the international oil business. So a significant increase in opportunities for the drilling services in both the U.S. and in the Middle East. And the same thing on the product side for both the U.S. shale plays and the Middle East. Brazil, that's too early to call, I can't -- they've got sort of their own kettle of fish to fry with the -- with the political situation in Brazil. But the businesses where we interact directly with the customers in North America and the Middle East actually is relatively positive heading into Q4 and into next year.

And one additional question, you have referenced the E&C firms a couple of different times in the call. Would you please go into a bit more detail in terms of what you are hearing from those organizations and how you believe 2018 may look different with them versus 2017?

Sure. Okay, so let me just talk about what we're hearing from them in terms of their businesses. I don't think we are -- let's see how to say this -- I think there's an increased amount of confidence in the midstream part of the market for the EPC firms at this stage. More projects and the companies that we haven't done business with in a number of years, seem to be coming back online, which is positive. The largest EPC firms that are on these sort of downstream L&G projects, I don't think there's much change in where they are. Those are typically multi-year projects are not going to necessarily be impacted right now by the price of a barrel of oil. The part that's interesting about those the EPC firms in general is, as you know, because of IntelliSafe and our turnkey power distribution solution capabilities, we've broken into a vast number of those EPC firms over the last several years. And so as I mentioned earlier, as we start successfully delivering our first projects for these large EPC firms, that opens us up for a huge amount of new opportunities within those EPC firms because most of them are going to -- they'll work with us, they'll put us on the approved suppliers list because of our experience. But it's really the first project's success that's going to drive how much more business will they actually give us. And based on the success that we've had with these engineering firms -- because we do very good work, they're very pleased and it just opens the doors inside them, inside these customers, for significant potential opportunities as we head into 2018.

We have one more question. Please go ahead.

It's Bob [Blaumeiser], Blaumeiser Asset Management. Forgive me if you already addressed this I got temporarily disconnected from the call. But I was just -- I know you don't have your 10-Q filed yet, I wasn't able to see that. But I was wondering if you could address working capital going forward? Because if I look at the trajectory, it seems that within maybe a couple of quarters, 3 quarters, that it's going to be under a lot of pressure, I'm just wondering if you have some type of comment you could make about that or plans to address that.

Sure. I'll start and then we can decide to bring Bill in too. Look, if you look at the cash, we ended Q3, which just over $1 million of cash. Our business actually normally cash flows itself. So the way that our technical products projects work is there's milestone payments that go on throughout the projects when we get 20% down and 40% on major materials and, et cetera, et cetera, through the project duration. So the projects normally cash flow themselves. So our view is actually, we're reasonable on cash right now. We have a couple of large receivables that are in progress, some were delayed by Harvey because of the projects were impacted -- the receivable timing, things like that. And there's a large retainage receivables, which will convert to cash in Q1. And that's a $1 million retainage receivable that will pop back up in Q1. So we feel pretty decent about that.

It appears there are no more questions, which concludes today's call. Thank you for your participation. You may now disconnect.