Stabilis Solutions, Inc.

Good morning, ladies and gentlemen, and welcome to Stabilis Solutions' fourth quarter 2021 earnings conference call. Joining us today are Westy Ballard, President and CEO, and Andy Pujala, 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 1995 and other securities laws. These forward-looking statements are based on the company's beliefs and expectations as of today, March 10, 2022. 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 Rusty Ballard, President and CEO of Stabilis Solutions. Please go ahead, sir.

Good morning, everyone, and thank you for joining us today. 2021 was a busy and transitional year globally, and our company was no exception. With a persistent pandemic, stressed supply chains, and inflationary pressures on the rise, uncertainty abounded. 2022 doesn't seem like things are slowing down either with the Eastern European conflict, soaring commodity prices and jittery capital markets. Despite all of this, I want to say how grateful I am to the incredible men and women of our company who've persevered through these trying times. And I remain in awe of their hard work and commitment on your behalf every day. Since joining the company in late August, our team has focused on several key initiatives that I feel are very important to the future success of the company. And I would like to update you on two specific areas. The first is the enhancement and optimization of our existing LNG business. And the other is advancing our strategy for the expansion of LNG into new and what I feel are really exciting markets. Along the optimization front, Think of this as managing the short-term while we continue to develop and deliver long-term strategies to add significant value to all of our stakeholders. In doing so, we continue to aggressively implement programs to increase efficiencies and productivity across almost every part of the company. It is our goal to institute a variety of ways to enable us to better predict outcomes versus react to them as we did during the latter part of 2021. In the fourth quarter, we refocused managerial roles and responsibilities, streamlined our commercial approach, and designed more effective tools to better track customer progress. During the quarter, we also realigned responsibilities in our operations and technical groups to ensure seamless collaboration between our organization and our customers. In 2021, inflationary pressures were on the rise, and transportation and labor were most meaningfully impacted at Stabilis. These higher costs contributed to margin decline throughout the year. However, beginning in the fourth quarter, through our efforts, we were able to better control costs as well as engage in meaningful interactions with our customers around price increases. As we progress through 2022, we will remain focused on recovering inflationary cost increases through our pricing programs and through aggressive management of our cost structure, where I can tell you that no stone will be left unturned. Our commercial teams continue to work diligently on executing 2022 pricing plans, and we have recently witnessed a considerable number of customers renew at favorable increases. On the cost front, several initiatives are underway to optimize our vendor base as well as to improve our labor efficiency. As we progress through the year, I am optimistic that we will continue to make great progress along these fronts, but also know that this is a continuous exercise. always with our focus on maximizing the return on our asset base and enhancing liquidity in our existing LNG business. While we have worked hard on our current business, also in the fourth quarter, we worked diligently to lay the groundwork for the expansion of our LNG business into two transitioning sectors, maritime and aerospace. These two platforms are really exciting to us and have enormous potential to drive scalable long-term value. Regulations are a key driver for lowering emissions across a variety of geographies and industries, and in the shipping industry, the International Maritime Organization, or IMO, is arguably the most influential regulator. With the world's fleet mostly powered by fuel oil, in January 2020, the IMO implemented a key regulation requiring ships outside certain designated emission control areas to limit the sulfur and fuel oils used to 0.5%. a significant reduction from the previous limit of 3.5%. Within these designated control emission areas, coastal areas of the U.S. being one of them, an even stricter limit of 0.1% has been implemented. With roughly 90% of the world's trade moving by sea, this is a considerable task to reduce emissions, requiring ship owners and operators to quickly identify ways to become compliant through meaningful investments in their existing fleets and or adopt alternative fuels for propulsion. The adoption of any alternative fuel for shipping will face challenges, and the severity of each challenge will vary. Key considerations include energy density, technological maturity, emissions, cost to retrofit, cost of new fuel sources, availability, and refueling infrastructure or bunkering. As carriers explore their alternatives, we believe LNG will be the choice of many, and signs indicate the market is rapidly escalating. Currently, the market is dominated by conventional fuel oil with alternative fuels representing less than 1% of the total fleet. However, that paradigm is rapidly changing as alternative fuels represent about 12% of total new-build ship orders and LNG representing a little more than half of that. With roughly 269 LNG-fueled vessels in the world, that number will grow considerably to a little over 700 over the next few years, a number that has potential to further increase. In addition to fuel oil, access to refueling points is another key consideration. Current global LNG bunkering consists of about 125 ports and bunkering vessels and another 100 or so developing capabilities. Heavy concentration is outside of the U.S. However, given the U.S.' 's favorable competitive positioning in natural gas, supply, reliability, security, and price, the U.S. has tremendous potential to be a premier bunkering hub for LNG-fueled vessels. Needless to say, we're pretty excited about this market and meaningful impact the switch to alternative maritime fuels can have on our company, so stay tuned. Moving to aerospace, driven by declining launch costs, advances in technology, and rapidly growing interest in the private sector, the race to space's final frontier is moving quickly, and the market is estimated to reach as high as $1 trillion by 2040. Space exploration is a tricky endeavor, however, requiring superior components and propellants for successful travel. Stating the obvious, propellant in space exploration is arguably one of the most crucial components of spaceflight, as without it, the rocket is grounded. Rocket fuel performance is measured by a property called specific impulse, which is essentially how efficiently the rocket is using its propellant to create thrust. So choosing the right liquid to mix with oxygen is paramount. LNG is increasingly becoming a leading choice for fuel source, given its overall positive characteristics compared to other fuels. LNG's combination of high energy density and low volumetric storage requirements result in more efficient and cost-effective space flights. LNG is also considerably easy to work with when storing because it doesn't require as large a tank infrastructure, and LNG is easier to transport. Production of LNG is cheaper and easier to produce than competing fuels and is safe and reliable. As we continue to build out this growth platform, we will continue to explore avenues to support not only primary propulsion needs of the industry, but for other launch vehicle propulsion and some component manufacturers using fuels in their test labs. Both the maritime transition and cleaner fuels and the new genre of space exploration are in early growth stages and not without their own set of growing pains. However, as they mature, we feel our numerous competitive advantages position us well to service these two rapidly growing platforms safely and efficiently. Aside from owning two strategically located liquefaction plants, Our comprehensive commercial, technical, and logistical capabilities also offer clear competitive advantages, allowing us to rapidly respond to customer requests across the entire U.S. As time progresses, we also look forward to collaborating with current and prospective customers to develop proprietary insights and capabilities to further their energy transition goals, including a variety of forms of LNG and hydrogen. Before I turn the microphone over to Andy, it's important for you to know that though we are a relatively new and small public company, we are absolutely dedicated to aggressively growing our company. In doing so, we will be thoughtful in our approach to methods of financing our growth, and when necessary, a variety of options will be explored, all with the unwavering goals to maximize stakeholder value and to make Stabilis a legitimate, investable security for many years to come. With that, I'll turn it over to Andy to discuss fourth quarter year results.

Thanks, Westy, and good morning, everyone. For the fourth quarter of 2021, Stabilis reported another quarter of record revenues. Q4 revenues were $23.7 million, 21% higher than the third quarter of this year and 73% higher than the year-ago quarter. Revenues from our LNG segment of $20.9 million were also a record, a 17% increase from the third quarter of this year and 73% higher than the year-ago quarter. In the fourth quarter, we delivered a record number of LNG gallons to customers, consisting of broad-based increases with customers in Mexico, the energy and aggregate sectors, and aerospace. These increases were partially offset by fewer gallons delivered to power generation customers due to the seasonal decline in electricity needed for cooling in the southeastern U.S. Our revenues also benefited from higher gas prices during the fourth quarter of 2021. Generally, we pass these gas commodity costs through to our customers. Sequentially, our revenues benefited by approximately $4.3 million due to a higher gas index. Year over year for the fourth quarter, the impact of higher gas prices on our revenues was approximately $4.1 million. Revenues from our power delivery segment were $2.9 million, an increase of 49% from the third quarter of this year, and 77% higher than the year-ago quarter as our Brazilian subsidiary is seeing increased demand for their products and services as Brazil emerges from severe COVID outbreaks and restrictions over the past two years. Net loss for the quarter was 2.3 million compared to 4.6 million in Q3 and 0.1 million in the year-ago quarter. Adjusted EBITDA for the quarter was 0.9 million compared to 1.4 million in the third quarter of this year and $2.3 million in the year-ago quarter. For the full year of 2021, revenue increased by 86% from the prior year as the company resumed its growth trajectory that was interrupted by COVID in early 2020. Stabilis reported full-year 2021 revenues of $77.2 million and LNG segment revenues of $69.2 million, both of which were company records. For the full year, we saw a significant increase in demand for LNG across multiple sectors, particularly around remote power generation. Our Mexico business continued to grow and mature in 2021 and was responsible for approximately 14% of our total revenues. Power delivery segment revenues were $8 million for the year compared to $5.3 million in 2020. Net loss for the year was $7.8 million compared to $6.8 million in 2020. Adjusted EBITDA for the year was $5.5 million, an improvement of 60% compared to the $3.5 million reported in 2020. During the year, we generated positive cash flows from operating activities of $4.9 million, a significant improvement over the $1.3 million generated in 2020. We ended the year with 2.1 million of cash on our balance sheet and 2 million of available capacity under our bank agreement with AmeriState Bank. Additionally, in March of 2022, we executed an amendment to our term loan with MG Finance, which extends the maturity to December of 2023, reduces our interest rate, and reduces our debt service requirements in 2022. The combination of our anticipated 2022 operating cash flows cash on hand, capacity under our bank agreement, amended term loan, and limited 2022 CapEx needs will provide us adequate liquidity to execute our 2022 growth plan. With that, let's open the call for questions. Moderator?

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We do ask to please limit yourself to two questions at a time. We also ask, while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question for today is coming from Eric Better. Please announce your affiliation and pose your question.

CG Capital. Good morning. Morning, Eric. Interesting on the maritime and the aerospace. Could you give us an update? I know that you have a number of bunker agreements on the Gulf Coast, some in actual... operation and others were agreements to start eventually operating, where are we with those agreements and how do they fit into what you've been talking about here in terms of the opportunity for maritime?

Yeah, I'll take that really in a couple ways. We have, as you mentioned, several MOUs that have been executed in place along the Gulf Coast, and we are currently evaluating the best way to deliver LNG for bunkering purposes. But I think the way to think about really the whole marine business for us, it's an aggregation of a variety of locations, not only on the Gulf Coast, but around the U.S. And I say that because, as you know, there are other relevant bunkering ports on the East Coast as well as the West Coast. And what's interesting about us is while we have molecules in South Texas and Baton Rouge, We also have a very robust commercial and technical capability to deliver LNG bunkering services beyond just the Gulf Coast. So the way we're thinking about this is kind of an aggregation across America. Certainly we have a keen interest in delivering bunkering services along the Gulf Coast, and those are advancing. But this is really more of a U.S. play than that of just a Gulf of Mexico play.

I know you've talked about that long term.

When you look at 2022, what is the biggest near-term opportunity for expansion on the top line and in terms of expansion on the bottom line also?

Yeah, I think really that's two parts. On the bottom line, I think that's going to be in our pre-existing LNG business, that part that I mentioned where we're really enhancing and optimizing it. We were late to react to inflationary headwinds last year. I think we've reversed those. I'm optimistic that 2022 is going to yield considerably better results as a result of those initiatives on the cost as well as price increasing front. I think on the top line, I'm optimistic that you'll start to see signs of growth throughout both of those two really exciting sectors in maritime and aerospace. And so think bottom line, kind of return on capital employed. on a pre-existing business with some top line expansion in those two sectors.

Okay, good luck on 2022. Thanks, Eric.

Your next question for today is coming from Martin Malloy. Please announce your affiliation, then pose your question.

Marty Malloy, Johnson Rice, and thank you for taking my questions this morning.

Hey, Marty.

Hi. The first question I had, maybe if you could talk about how you think about potential capacity expansions. It seems as though the demand picture is very bright here, and could you maybe talk about some of the drivers that come into play as you think about potential capacity expansions in terms of the liquefaction?

Yeah, sure. Good question and kind of where the rubber meets the road to address some of these expansionary desires that we have. And we're currently evaluating a variety of different locations and capabilities. And so certainly one consideration is building out several more trains in our George West facility, but also potentially taking molecules for the marine closer to the water. And so if there are scenarios where we can kind of have infrastructure to not only capitalize on the growth in maritime, but also that of space, we certainly want to evaluate that too. And then when you start thinking about along the Gulf Coast, can you also have infrastructure that not only supports those two sectors, but can you start to take that infrastructure and those molecules south to the Caribbean or Mexico? So right now it's a little bit opaque. But I will tell you that we've got a variety of different things that we are evaluating in terms of best, most efficient use of capital, not only for the sectors, but also geographically. Don't be surprised if also we're not looking on the East Coast, whether it's the Mid-Atlantic or even in the Northeast as well for more permanent infrastructure. So stay tuned. Okay.

And my next question, I just wanted to maybe try to get a little more of a sense in terms of the direction of the margins with some of your shorter term. I think a lot of your contracts are shorter term. As you're having discussions with customers and passing through price increases to account for the inflationary costs, can you maybe talk about the timing of how that should impact margins?

Yeah, I can. So we, as we've mentioned, you've seen a margin increase decline from really Q1 to Q4 in 2021, and we were a little late in reacting to that, really starting in January. We spent a lot of time laying that foundation in the fourth quarter to reverse that, not only on the cost side, but more importantly on the revenue side to offset those inflationary pressures. So starting in the first quarter, you'll start to see the reversal and really more of an incremental margin coming off really what I'll call the bottom in Q4.

Great. That's helpful. Thank you.

Thanks, Marty.

Your next question is coming from Barry Hames. Please announce your affiliation, then pose your question.

Hi. Thanks for taking my questions.

Just following up on the inflation pricing issue that you just talked about, could you just go over a little bit um how the contracts work in terms of i think you mentioned you know natural gas is mostly a pass-through but um you know what were the cost buckets um that aren't pass-throughs in effect that that hurt you as we went through the year and um in terms of adjusting pricing uh you know are those often annual contracts so if we had way more inflation than 22 would that again, be a problem as we go through the year, or is there any ability to reprice more frequently? So that's my first question.

Yeah, so I'll take that in order, really. The first area that we've experienced the most pressure was really around transportation and kind of labor costs. Really, and that not only was labor and field labor, but just general higher elevated costs in our liquefaction process. And so you're right, it's generally, we don't take risk on the commodity. That's generally a pass-through. But but we needed to raise prices with our customers to offset, I'll call it our manufacturing or liquefaction process, our field labor inflationary pressures, as well as transportation costs, which elevated considerably. To answer your second question, contracts really, they're all over the map. We have some that are a little bit longer-winded and may be six to 12 months. We have some that might be two years, but usually there's going to be in some instances, some inflationary index in these contracts that afford us the latitude to go and reopen discussions, some of which we have unilateral ability to do so. So I wouldn't, the way you should think about this is not that if inflationary pressures continue, the way you should think about this is that we will still have the latitude in most cases to revisit those discussions with our customers.

Okay, terrific. That's great. That helps a lot. My second question is on maritime. When in time should we think about that showing up in revenues to where we can see it? Again, it's going to build over time, but when do we start to really see that?

I think you'll start to see signs of this really in the second quarter. I'm optimistic, at least, that you will. We've got a variety of initiatives and discussions that are underway some of which that we'll probably announce if we're successful. So I like to think we'll have to start to have demonstrable traction in Q2. And this is an iterative play for us. What I like about the maritime, it's a long, long burning fuse. This isn't quick, instant gratification. This is a 10- or 15-year earnings play for us with pretty hyperbolic scalability. So look at kind of Q2 and us to build upon thereafter. Great.

And then my final question is, you know, Wesley, before you got there, you know, Mexico was considered to be a growth opportunity for the company. And, you know, now that you're there and sort of evaluated the whole business, how are you thinking about Mexico? You know, would you say that the strategy is unchanged or would you say, you know, you see more opportunities and want to get more aggressive or, Are you seeing better opportunities elsewhere, and Mexico maybe is a little less aggressive part of the strategy? Thanks.

Yeah, the way I'll answer that is not only Mexico, but I like international. In my prior life, I ran a fairly large international business, and so I'm very bullish on international. I'm bullish on international for Stabilis. What I'm not bullish on is going international right now necessarily because in order to go international, you've got to have considerable infrastructure, and you've got to have scale, and you've got to have balance sheet capacity. Because oftentimes those contracts are very long, tenured contracts. They're three to five years. Consider about a balance sheet capacity in the forms of letters of credit and other types of credit and just working capital requirements. Massive infrastructure to make sure that you're appropriately managing risk, whether it's commercial risk as well as FCPA or other compliance laws, licenses. So it's not simple to just go international. So I like Mexico. I ultimately think there's a future for stability in Mexico. I just want to be thoughtful on our approach to Mexico, given our size and scale, and admittedly, other internal competition for capital, more specifically along those two sectors in the maritime and aerospace. So I like international. I like Mexico. I don't know that we're going to be speeding quickly to address those markets, but certainly they're on our radar.

Okay, great. And just one last follow-up. To one of the earlier questions on capacity, could you just reiterate exactly where annual capacity is now? And, you know, is there any unused capacity such that volumes in 22 could be greater than 21?

Yeah, so when you aggregate our capacity between our two liquefaction facilities in South Texas and Louisiana, it's about 130,000 gallons a day. And we could iterate and reallocate some of those molecules into some of these space and maritime. But ultimately, we're going to hit an inflection point. It's my hope, I'll say, that we hit an inflection point. And we're going to run out of capacity. And so we're going to, to answer that earlier question, we are already and will continue to need to think in advance of how we need to appropriately capitalize expansion. And I don't think that's a one-size-fits-all. I think there's some additional training capacity we build out in our pre-existing facilities as well as either Greenfield or M&A acquisition facilities throughout the U.S. to further bolster our capabilities to address the demand that we see in really kind of both of those sectors. Great. Thanks very much. Good luck on the year. Thanks so much.

Once again, if there are any remaining questions or comments, please press star 1 on your phone at this time. There appear to be no further questions in queue. I would like to turn the floor back over to Westy for any closing comments.

Great. Thank you. And thank you, everyone, for joining us on our call. And we look forward to seeing you throughout the year on the road. And talk to you next time. Thanks.

Thank you, ladies and gentlemen. 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.