Stabilis Solutions, Inc.

Good morning, ladies and gentlemen, and welcome to Stabilis Solutions' third quarter 2021 earnings conference call. Joining us today are Westy Ballard, President and CEO, and Andy Pahala, Chief Financial Officer. 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 beliefs and expectations as of today, November 11, 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 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. At this time, I'd like to turn the call over to Westy Ballard, President and CEO of Stabilis Solutions. Please go ahead, sir.

Thank you, and good morning, everyone, and thanks for joining us today. Considering this is my first conference call as CEO, I thought it would be helpful for me to provide a few initial observations as well as how I feel our company fits into the grand scheme of our world's environmental transformation to one that is cleaner and more sustainable. In doing so, one thing that remains abundantly clear to me is that a variety of solutions will be required to make this happen. Each of these solutions have their own unique characteristics and have and will continue to garner significant investment of time, intellect, research, capital, and political thought. Regardless of the industry or application, realizing a cleaner and more sustainable environment is about efficiency. It's about the transformation of how products are designed, delivered, and used. And it's about the drive to renewables. Renewable solutions will undoubtedly be the primary source for new power generation globally. And while there has been progress to date, many challenges, including legislative volatility, uncertainty of global participation, unreliability, and economic viability continue to inhibit and greatly postpone their comprehensive and widely accepted adoption. But that's not the case for all solutions, and one solution, natural gas, is available now. This fuel is sustainable, secure, reliable, and economically viable and will play a key role in the bridge to renewables. It is important to note that while liquefied natural gas is our current offering, We do not view it as the end game, but rather it's the starting point. As many of you know, I joined the company in late August and albeit a short period of time, my time here has only reinforced my initial thoughts on why this is such an exciting platform. And it starts with our people. Stabilis is incredibly blessed to have a really good team with talent spread across every aspect of the organization, commercial, technical, financial, and operations. I've had the good fortune of working with a variety of talents throughout my career, and I'm pleased to say that ours is exceptional. And I look forward to leveraging their skills and capabilities to support our current business and beyond. We're also blessed to have a fantastic customer base. It is our intention to remain close with our customers as well as to continue to design and develop commercial and operational strategies to better anticipate their needs and those needs of prospective new customers as well. And with this team and our wonderful customers, I feel there are focused strategies to build upon here at Stabilis. As you know, today we are one of the largest turnkey providers of liquefied natural gas solutions in all of North America. We produce, source, store, and transport via virtual pipeline, also known as trucks, LNG to customers in approximately 25 states and Mexico. We have a robust commercial and technical competency, that extends well beyond just the LNG solution. We have a consistent track record of safe and reliable delivery, having delivered in excess of 285 million gallons of LNG since our inception. Our approach is highly differentiated given our ownership of two strategically located liquefaction plants, which ensure better reliability, control, and consistency of our product, all complemented by our technical engineering and support offerings. In the US alone, more than half of the natural gas pipeline infrastructure was built prior to 1970, and with this aging infrastructure and a louder chorus opposing any material new investment in expanding that infrastructure, an increasing number of industries will face challenges in having access to this critical bridge fuel. Given our capabilities, our company is in a fantastic position to address these challenges. Practically every industry on the planet has a need for our products and services, as evidenced by an already diversified customer base spanning across many sectors. Beyond our legacy in-market participation, we feel that we can further expand our offerings into additional exciting growth drivers in sectors like maritime, airspace, and technology. Over the last several months, we have announced partnerships with key ports along the Gulf Coast to offer LNG fueling solutions for the global maritime industry. LNG bunkering infrastructure is much more mature internationally. However, given the recently enacted IMO 2020 mandate by the International Maritime Organization requiring significant desulfurization of ocean vessels, we think there are interesting opportunities to grow the LNG bunkering capability in the U.S. as well. While global demand for LNG marine fuel is expected to quadruple over the next three years alone, and the number of new-build LNG-fueled vessels on order is expected to double the fleet by 2023, we are also evaluating other low-carbon fuel sources as they become more viable and plentiful. We feel our experience and technical know-how will play an extremely important role in their adoption too. I'm also very excited about the Race to Space. Given its high energy density, along with a variety of other attributes, natural gas will likely play an increasingly important role in powering our nation's next generation of rockets into outer space. And like the maritime industry, by leveraging our robust commercial, technical, and operational capabilities, we will be well positioned to participate in what has promised to be an exciting growth driver. We also think there are interesting opportunities in the international markets, and our company has leadership with a considerable experience operating in foreign geographies. In the past, we have specifically discussed Mexico as our largest growth opportunity. We operate there today, and I can say that Mexico, along with other countries, present potentially exciting growth opportunities to expand current and future offerings. Many countries are in high demand for a variety of energy solutions across a variety of applications, and each of these have goals for lowering carbon emissions, and we will thoughtfully continue to evaluate our role in foreign markets and our best path forward. Operating internationally requires scale and significant balance sheet capacity. As we grow, it stands to reason that the international markets will become of increasing interest to our overall story. Beyond our current business, there are a variety of other solutions that are natural extensions of our company to drive future growth. Along the gas continuum, compressed natural gas and renewable natural gas each have very interesting facets. Tax subsidies and better understanding of the ability to scale R&G feedstock will play key roles in its sustained viability. Further down the renewable spectrum, momentum for hydrogen has increased largely driven by North America, Europe, and more recently, Australia. Similarly to RNG, governmental policies will play a key role in how companies think about their hydrogen strategies, but on a high level, this molecule possesses many, many interesting applications. In fact, earlier this year, we were engaged by West Coast Maritime Company to assist in fueling design and operational procedures for the bunkering of hydrogen for one of their passenger ferries. This has been a fantastic project, and we feel just the beginning of additional and exciting avenues we're evaluating in order to play a larger role in hydrogen. In addition to fuels, we're also evaluating a variety of other technologies and capabilities like emissions management to capture, sequester, repurpose, and or eliminate emissions. Those mentioned will be evaluated both organically and inorganically to further solidify our standing in facilitating this world's environmental transformation. And as these growth strategies become more developed, rest assured, we will be eager to share them with you. I am excited about our current and future developing plans. I am excited about our team. I am also excited about our positioning to be a significant contributor to what I believe is one of the most exciting new market opportunities of our lifetime. I believe this is only the beginning, which is why I think that our company is a tremendous growth story and one that warrants legitimate investor consideration. As a small and relatively new public company, we are committed to working tirelessly to help investors understand what is driving our business, why we are unique, and how we plan to deliver long-term value to all of our stakeholders. And with that, I will turn it over to Andy to discuss the third quarter results.

Thanks, Westy, and good morning, everyone. I'm pleased to report that for the third quarter of 2021, Stabilis reported its highest ever quarterly revenues of $19.7 million, 23% higher than the second quarter of this year and 118% higher than the year-ago quarter. Revenues from the company's LNG segment were also a record of $17.8 million, a 24% improvement from the second quarter of this year, and 132% improvement over the same quarter last year. The company delivered a record of 15 million gallons of LNG during the quarter, 10% higher than the second quarter of this year, and 82% higher than the year-ago quarter. Plant utilization of our two LNG plants was combined 73% during the quarter. Our ability to further improve this utilization along with our network of third-party LNG providers, allows us to further grow the organic revenue base to support some of the exciting growth opportunities that Westy mentioned in his opening remarks. Revenues from our power delivery business were $1.9 million in the quarter, 16% above the segment's Q2 revenues and 42% above the same quarter last year. SG&A expenses were $6.2 million during the quarter, primarily due to approximately 3 million of charges related to severance, legal expenses, and immediate vesting of long-term incentives related to our CEO transition during the quarter, which should not be recurring. Without these costs, our G&A would have been approximately 3.2 million, 17% lower than Q2 of this year, in part due to cost control initiatives currently underway. SG&A for the comparable quarter last year was 2.3 million, as our cost structure was significantly reduced to support the lower revenues during the height of the pandemic. The company also recorded an impairment charge of $376,000 during the quarter related to the termination and settlement of the lease for our previous corporate headquarters. Earnings before interest, taxes, depreciation and amortization, or EBITDA, was a loss of $2 million in the quarter, primarily as a result of the CEO transition costs and impairment charge mentioned earlier. Adjusted EBITDA after removal of these items was $1.4 million for the quarter, 162% improvement over the $0.5 million recognized in the second quarter of this year, and a 274% increase compared to an adjusted EBITDA of $0.4 million during the same quarter of last year. Net loss for the quarter was 4.6 million. As many of you are aware, inflationary pressures have impacted a wide variety of companies over the last several months, and we have experienced these same headwinds in gas feedstock, transportation and logistics, and personnel costs that have compressed our margins over the past several quarters. We are focused on cost controls and cost reduction opportunities, as well as reviewing our customer pricing to ensure our revenue is commensurate with any aforementioned cost pressures to protect our margins. We finished the quarter with $2.9 million of cash on hand and $3 million of availability on our advancing loan with AmeriState Bank, which, along with our anticipated cash flows from operations and available financing options, should provide us sufficient liquidity to build on our record revenues and support our organic growth plans. With that, I'll turn the call back over to Westy for some closing remarks.

Thanks, Andy. As Andy mentioned, we have some work to do on the incremental pricing side of the equation to ensure that we are keeping pace with cost inflation and to reverse those year-to-date decremental margins. This will definitely be a focus of ours in the coming quarters, and we look forward to updating you in future calls on our progress on both our cost controls and all of our exciting growth opportunities that we believe we have in front of us. So with that, I'll open it up for questions, moderator.

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset, if you're listening on speakerphone, to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. We do ask that participants please limit themselves to two questions, then re-enter the queue. Your first question is coming from Barry Hames from Sage Asset Management. Your line is live.

Thanks so much and welcome. So I just came back to the pricing for a second. Is there anything in the marketplace from a competitive point of view or a customer resistance point of view that would make it tougher for you to get those price increases through or Does it look like you've got the pricing power to be able to execute on that? And assuming you do get it through, what's the customer lag time? So is it a month, a quarter, or longer? Just a feel for that. Thanks very much. Yeah, no, thanks, Barry.

I'll take that. So when you think of just kind of the composition of our customer mix, the contracts usually aren't long-term contracts. They're called less than a year, and many of which are kind of on a monthly basis. Think of it by month. And so I think the real risk here is lag time. And so we, we don't think there's a lot of resistance. Certainly we'll go customer by customer to make sure we're being thoughtful in our approach, but we don't think there's going to be a lot of resistance from the customer's perspective. They too are facing inflationary pressures like everybody else. It's just really more of a lag. And it's hard to say, because as I mentioned, the turnover of our customers could be anywhere from a month to three months. And so not a lot of latitude. and those contracts that are in existence. But as they roll off and new ones roll on, rest assured, we'll address appropriate increases to more than offset the inflationary headwinds that we've realized since the beginning of this year.

Great. Thanks very much.

Thank you. Your next question is coming from Bill DeZillum from Titan Capital. Your line is live.

Thank you. I have a group of questions. First of all, let's start with the overall strategy Westy you you laid out some of your initial thoughts how does your strategy differ from from what from the strategy prior to your arrival yeah I don't I don't know that my strategy right now differs holistically certainly we want to continue to optimize and enhance our core business we think there are a lot of interesting drivers in the US alone

some of the things I've mentioned that should do so. I think that not too dissimilar to how the company's been thinking about some of those incremental growth drivers, whether it's in the marine bunkering as well as in some of those space initiatives. So I don't know that it's totally different there, but I think as we think more broadly down that continuum, thinking about what are some of the other broader capabilities we can add to the portfolio, whether it's in the renewable side of natural gas, on the compressed side of natural gas. And then I think it's the further leveraging of our technical competency and kind of commercial capabilities to think even further down the spectrum with hydrogen and all those other, I'll call it pre-combustion fuels, hydrogen obviously one of them. I think also we're going to be thoughtful around kind of, I'll call it the post-combustion, and that's that carbon capture side. And are there organic and inorganic opportunities to add muscle and that aspect of our portfolio too. And so I think there are similarities. The company was doing a good job and I think a thoughtful job in their approach, but I think there are also some other areas further down that spectrum that would also arguably be natural extensions and continuation of what we do pretty well.

That's helpful. And then you did mention in your opening remarks that Mexico is It's historically listed as the single largest opportunity. How are you viewing Mexico now?

Yeah, so I think my position, I have quite a bit of experience operating internationally. And internationally, it requires scale and it requires balance sheet capacity. And so, Bill, we want to be very thoughtful in our approach to going internationally. Mexico is an exciting opportunity, and I think there's some areas that we can really win But again, we want to be thoughtful in that approach. And I don't know that we want to necessarily be overly measured, but we certainly want to make sure that we are thoroughly evaluating the pros and cons of extending that balance sheet into international markets. It doesn't have to be Mexico. It could be Mexico or beyond. So it's exciting. But again, we want to be careful and, as I keep saying, thoughtful in our approach.

Thank you. And then in the press release, there was a quote that goes something like, exciting growth drivers intended to expand our portfolio of products. Would you discuss that, or have you already done that relative to the CNG, the hydrogen, potentially carbon capture? Is that what that was referencing or something else?

That's what that's referencing.

Okay. Then given that, I'm going to hit you with a couple – couple questions relative to the quarter. The LNG product gross margin decline that you experienced, was that the cost factors that you're referencing here in the discussion, or does that have something to do with bringing the Port Allen facility on that maybe we don't fully understand yet?

No, it's the former. It's driven by inflationary pressures in transportation, labor costs, just liquefaction costs, kind of the aggregation of all those costs, and really our now, I think, impetus to go ahead and offset those with incremental price increases. As I mentioned earlier, I think it was to Barry, about our strategies and ability to do so. So it's really driven by some of those non-Port Allen costs. It's just more... third-party cost.

And then continuing down the Port Allen path, you had a sequential decline in third-party volume. Was that a function of switching that volume to Port Allen, or is there another dynamic present?

Yeah, I think it's the former. I think the more that we can absorb our own molecules, the better. We have a much more reliable, cost-effective fuel source. And to the extent that that's an option, we are going to do that. And if you remember, in the second quarter, we didn't really bring Port Allen on until really the latter part of the quarter. And so now you're getting the full velocity of that infrastructure throughout the third quarter.

Great. Thank you. And then lastly, you had really good sequential volume growth. As you've noted, the profitability wasn't at historic levels, but really good volume growth Would you discuss the drivers behind that?

Sure. So when you think about really just overall, you've got some of that is, or a lot of that is driven just by the expansion of customer demand. We had some bad weather that occurred in the quarter, and so that absorbed more capacity as a result of the hurricane. We also had some rental as well as other capacity absorption in Mexico, and so it wasn't You can't pinpoint it or attribute it to one thing, but certainly the market has picked up in the third quarter from a volume perspective. And as you mentioned, we're going to work hard to make sure that incremental margins follow along.

And so what about individual large pieces of business, whether it be frack fleet, mining, or some of these – aerospace or some of these other areas that can drive really big volume? Were there contributors there also?

No, I wouldn't single out one. I'll tell you, one of the things that I'm delighted about is that we have a diversified customer base, and we serve anywhere at any given time eight to ten sectors. And so I wouldn't attribute that spike to one customer over another. I think it was pretty widely dispersed across a variety of sectors.

Great. Thank you for allowing all the questions and the commentary. Of course.

Thanks, Bill. Thank you. There are no further participants in the queue at this time. Once again, ladies and gentlemen, if you have any questions or comments, please press star 1 on your phone at this time. We do ask that participants please limit themselves to two questions, then re-enter the queue. Your next question is coming from Eric Bedder from CG Capital. Your line is live.

Good morning.

Good morning, Eric.

Good morning. Could you talk a little bit about, you know, you've signed a number of agreements for Gulf Coast Marine bunkering with different ports. How should we be thinking about this in terms of as a driver and in terms of timing for some of these port agreements to start generating revenue?

Yeah, we, as you've, I think, noted, we've We've leaned into five ports along the Gulf Coast and think that our ability to expand that kind of US LNG bunkering is very interesting, as I mentioned. And in doing so, I think it's more of an iterative process. And so we'll start using molecules from our George West facility, truck them down to the port with what we think are some likely customers. But I don't think that that's a Q4. I think that's probably a Q1 endeavor. And I think look for that to build throughout the year, next year. We haven't completely modeled out the 2020 LNG bunkering scenario and we're working hard on that. So I think there'll be more to follow and kind of more commentary around that as we proceed into the first quarter. But I would say that's really more of a first quarter and then again escalating throughout the year next year.

And in terms of capacity and production, would you consider an acquisition of another facility as you did with Port Arthur? Excuse me, as you did with the Louisiana facility?

We would. We'd consider, I think, a variety of things. We'd consider not only an inorganic acquisition similar to Port Arthur, but I think we'd also look at if we reach inflection points that require additional CapEx for expansion in our George West facility. That George West facility is pretty busy these days, and And it stands to reason that there may be a point in time where we do reach an inflection point. So look for us to be, I think, open-minded about not only potential acquiring of additional capacity, but also the expansion of preexisting as well.

Great. Thank you. Good luck.

Thank you. Thank you. Your next question is coming from Bill DeZellum from Titan Capital. Your line is live.

Great. Thank you. During the quarter, there was an 8K that highlighted an extension or a change of Jim's consulting agreement. Would you discuss that change and explain what you were trying to accomplish there?

Jim Avalos is a tremendous resource for our company and has I think wonderful insight. And as a, as a new CEO transitioning, he's been a great sounding board. And I think just a really great leader across a variety of our, our, um, our, our departments. And so what I didn't want to do was lose that really institutional knowledge. And I didn't want to lose the ability to, to have him act, um, in a way that could be additive to the men and women who are, who are, um, you know, have a history with him. I think that, um, What we were trying to do is make sure that it was a much more streamlined and cost-effective approach. He is also a director of our company, and so we want to make sure that his remuneration was commensurate with what his service is. Great. Thank you.

Yep. Thank you. Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star 1 on your phone at this time. Thank you. There are no further questions in the queue. I will now hand the conference back to Westy Ballard for closing remarks.

Thank you, everyone, for joining us this morning, and we look forward to seeing you down the road in the next quarter.

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