Stabilis Solutions, Inc.

Good day, everyone, and welcome to the Stabilis Solutions first quarter 2024 earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, press star and zero on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue simply by pressing star and two. So that others can hear your question clearly, we ask that you pick up your handset for best quality. Also, to ensure that we have time for everyone's question, we ask that you limit yourself to a single question as well as a follow-up, and then you are invited to re-signal for a question. Now it is my pleasure to turn the floor over to our host, Andy Pujala, Chief Financial Officer. Mr. Pujala, please go ahead.

Good morning, and welcome to Stabilis Solutions' first quarter 2024 results conference call. I'm Andy Pujala, Senior Vice President and CFO of Stabilis, and joining me today is our President and CEO, Westy Ballard. We issued a press release after the market closed yesterday detailing our first quarter operational and financial results. This release is publicly available in the investor relations section of our corporate website at Stabilis-Solutions.com. Before we begin, I'd like to remind everyone that today's conference call will contain forward-looking statements within the meaning of the Private Securities Reform Act of 1995 and other securities laws. These forward-looking statements are based on the company's expectations and beliefs as of today, May 8, 2024. The forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. The company undertakes no obligation to provide updates or revisions to the forward-looking statements made in today's call. Additional information concerning factors that could cause those differences is contained in our filings with the SEC and in the press release announcing our results. Investors are cautioned not to place undue reliance on any forward-looking statements. Further, please note that we may refer to certain non-GAAP financial information on today's call. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures in our earnings press release. Today's call is being recorded and will be available for replay. With that, I'll hand the call over to Westy Ballard for his remarks.

Thank you, Andy, and good morning to everyone joining us on the call. We delivered a strong first quarter performance, building on commercial momentum demonstrated in the latter half of 2023. Net income increased 36% in the first quarter, supported by an 8% increase in LNG volume sold when compared to the year-ago period. We generated nearly $4 million in operating cash flow in the first quarter and ended the period with nearly $13 million in cash and availability under our credit agreements and a trailing 12-month net leverage ratio of 0.1 times, even after deploying significant capital toward discretionary growth investments over the past several quarters. Over the past 24 months, we've transitioned our business model toward firm, longer-term customer relationships that support higher asset utilization over sustained periods, resulting in more predictable cash flows from operations. More recently, we've announced a transformational marine bunkering supply contract, extended an agreement with a major power generation customer, and continue to expand our presence as a leading fuel supplier to the commercial space launch industry. To that end, our own liquefaction capacity is expected to be fully utilized through 2025, providing us with a high degree of visibility over the next 20 months. However, in addition to our own capacity, we maintain an extensive third-party LNG supply network, which allows us to meet ongoing incremental growth in customer demand while pursuing expansion of our internal liquefaction capacity. With our marine market, the first quarter of 2024 was our first full quarter of LNG fueling operations and related services for Carnival Corporation, representing a milestone achievement for Stabilis. This win is also a significant development for the domestic marine fueling market, representing the first ever LNG bunkering operation in the Port of Galveston, Texas. Moving forward, we will continue to enhance our logistical capabilities as the only small-scale LNG bunker provider to the marine industry capable of executing multiple modes of delivery to our bunkering customers. The focus of our efforts will be on rapidly expanding our bunkering operations directly to the waterfront of strategic ports across the continental United States. These efforts will be supported by our robust inland LNG supply and logistics network, which remains a clear competitive advantage for Stabilis for several key reasons. First, combined with our extensive experience in designing, constructing, and operating multiple liquid action plants, it significantly de-risks greenfield expansion activities. Second, it allows us to immediately execute new bunkering contracts as we can provide LNG bunkering fuel today anywhere in the U.S. utilizing our diverse third-party LNG supply network. Third, it affords us the option to supplement waterfront LNG production on a temporary or permanent basis to support incremental demand. And finally, our operational flexibility provides our current and prospective customers the ability to consider a wide variety of trade lanes throughout the U.S., knowing they will have a reliable LNG fuel supply with Stabilis. We remain in advanced discussions with several potential marine customers currently seeking LNG as a lower cost, cleaner burning bunker fuel alternative for the growing inventory of LNG fuel vessels. Given the importance of this initiative to our customers, our history of successfully executing LNG bunkering operations on three U.S. coasts gives these customers tremendous confidence in our ability to deliver an actionable, credible, best-in-class bunkering solution for their long-term needs. Within our commercial and industrial markets, we continue to capitalize on a multi-year investment cycle in infrastructure and electrification as data centers, cloud computing, emerging technologies, and emergency power needs give rise to increased demand for behind-the-meter power generation solutions. At the same time, our nation's aging electric grid lacks the reliability, capacity, and resilience to effectively support this rapid growth in power consumption. As we move closer toward a world where the electrification of everything requires reliable access to both central and remote power sources, Stabilis is uniquely equipped to provide decentralized, on-demand power through our integrated system-based solutions. For example, several weeks ago, we announced a 14-month contract extension, which solidifies our position as a leading clean fuel solutions provider for behind-the-meter energy installations and further enhances our growing position in this space. For context, the power generation sector represented approximately 25% of our total revenue in 2023, and we expect this opportunity to accelerate as domestic energy demand continues to grow over the next decade. Looking ahead, we intend to further optimize our existing asset base and supply chain while prioritizing investments in incremental capacity, infrastructure, and product offerings capable of supporting increased demand across our entire franchise, which includes our marine, power generation, aerospace, and other diverse end markets, both in the U.S. and abroad. To accomplish this, we are routinely evaluating a variety of prospective sources of capital. with heavy emphasis and focus on those partners that know our industry, know our company, and recognize the significant upside potential in our operating model. Decisions to proceed with new infrastructure investments will balance longer-term, rateable off-take agreements that de-risk our investment over a multi-year period, and our comfort in assuming merchant risk to assume timely and critical infrastructure is in place to sufficiently address the rapidly advancing needs of next generation fuels like LNG. In closing, while you've heard me discuss how Stabilis is uniquely positioned to capitalize on the significant asymmetrical growth opportunity we see within last-mile clean fueling solutions across a diverse range of end markets, it's also important to highlight how we, as a microcap equity, provide an incredibly compelling value proposition for energy transition investors. Today, Stabilis is one of only a handful of profitable, well-capitalized, proven operators in the energy transition market, as demonstrated by our actions over the last 24 months, and more recently, as demonstrated by our strong first quarter results, which included a significant increase in available liquidity and a net leverage ratio around zero. We're patient investors building a platform for growth that, over the next decade, will continue to become the last mile fueling solutions platform of choice for a growing roster of industry-leading, high-performance brands. Like you, we are shareholders, and we're committed to driving long-term value creation. We're glad you're on this journey with us and look forward to delivering, on our next phase, a profitable growth. And with that, I will turn it over to Andy.

Thank you, Westy. Let's move to a discussion of our first quarter performance together with an update on our balance sheet and liquidity exiting Q1. We delivered record first quarter net income of $1.5 million, or 8 cents per share, driven by strong LNG demand, improved utilization of our own liquefaction facilities, and improved operating leverage. Our first quarter 2024 results reflect 10% sequential revenue growth and continued improvement in both profitability and free cash flow. The sequential improvement in our overall quality of earnings is a result of the directed shift in our business model towards steady and predictable offtake agreements. We generated $3.9 million of cash from operations in the first quarter, representing a conversion of over 100% of our EBITDA for the quarter. This strong cash generation continued to build our already favorable cash and liquidity position, which we intend to leverage as we invest in growth going forward. As of March 31, 2024, Stabilish had total cash and equivalents of $8.3 million, together with $4.3 million of availability under our credit facilities. Total debt outstanding as of March 31, 2024 was $9.2 million, resulting in a net debt to trailing 12-month adjusted EBITDA of 0.1 times. As we continue to approach full capacity utilization, we're evaluating the deployment of internal capital towards high return investment opportunities to grow capacity within our key end markets, in addition to larger prospective capital infusions on more transformational growth opportunities. That concludes our prepared remarks. Operator, please open the line for the Q&A session.

Thank you, gentlemen. The floor is now open for questions at this time. If you have a question or comment, please press star and 1 on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star and 2. Again, we ask that you pick up your handset when posing your question to provide optimal sound quality for our audience. Thank you. We'll allow just a moment to assemble our roster. We'll take our first question today from Martin Malloy at Johnson Rice. Please go ahead, sir. Your line is open.

Good morning. Congratulations on the quarter, and thank you for taking my questions. Thanks, Marty. The first question, just could you maybe talk about the milestones we should look for that would result in giving FID for additional liquefaction capacity or a marine terminal or infrastructure that would assist in the support the bunkering?

Yes, sir. So, as you know, we're operating and have historically operated on three coasts, and each one of those geographies present different variables that need to be considered as we think about FID and then the ultimate deployment of capital. I think without going through each one of those locations, I think holistically it's important to recognize the balance, as I mentioned in our comments. We want to try and de-risk these investments to the greatest extent possible, but also balancing that with not overly thinking about uh commercial offtake and missing that opportunity and so i think that since we've got such a strong liquidity position we will continue to advance a lot of a lot of pre-fid initiatives with The understanding of property, lease or purchase. As I mentioned, we've already acquired another 100,000-gallon train. We acquired that last year. We're spending a lot of time with engineering and pre-deployment designs and configuration of different plants and different geographies. We are spending a lot of time and energy around building sufficient supply chain and infrastructure along several coasts. And so it's not one thing that you could point to. I think it's the narrative that we have about where we're spending our time and energy, not only on the pre-FID work that we're doing, but also on the commercial side. And these announcements, we think we're going to be able to leverage that Carnival contract beautifully. It's safe to assume that we're in discussions with other would-be off-takers. They think that we are a credible and interesting and safe operator. And so it's not one thing that's going to be a telltale sign for you, Marty. It's a variety of things on the CapEx side, but also on the commercial side.

Great. That's very helpful. For my next question, I just wanted to talk about providing gas for data centers or industrial manufacturers. We've heard a lot of stories in the from these companies that they're concerned about getting power in a timely manner and the quantities that they need and also about the reliability of the grid. Can you maybe talk a little bit more about what kind of solutions they're looking for in the role that Stabilis can play?

yeah they're they're they're at a tough spot and as you know and as we've mentioned 25 of our business in 2023 was in and around kind of that power gen business uh and as as we mentioned in our remarks that we've extended one of those contracts so we've got a lot of experience here i think what it's going to take is is really the aggregation of a wide variety of solutions as the vast majority of these cloud and data centers are eager to have as clean an alternative as possible. And we think that we can play a meaningful role on the front end as a lot of these data centers are being installed and trying to think through their their supplemental and redundant and backup power needs we think our solutions capabilities can can bring not only that natural gas but potentially aggregate other potential clean fuels as a package solution and so we'll continue to be i think involved heavily on the front end and assisting them, but also providing fuels that we currently offer or that we will in the future offer as kind of package solutions to supplement their behind-the-meter needs. It's really not so much primary power concern. It's that peak or supplemental or backup power that's of great concern to them. Thank you. I'll turn this back.

Thanks. Our next question today will come from the line of Bill DeZellum at Tyson Capital.

Great, thank you. I have a group of questions also. So first of all, were both of the plants fully utilized in the first quarter?

By and large, yeah. We had high utilization rates on our George West plant, and we had some maintenance items that happened in March, but by and large, fairly highly utilized.

Okay. In the spirit of the question, I was trying to understand if using the first quarter as a run rate is a reasonable starting point to your comment in the press release that you're going to be fully utilized through 2025.

Yeah, I think that's probably a good proxy. One of the things that you've got to remember, though, is we had some seasonality in our financials in that first quarter. Those will manifest themselves again in Q4. And so seasonality can make it a little bit tricky, but I think to your question about our own production capacity, it's not a false assumption for you to think that those both plants will be highly utilized. Obviously, our George West is a much larger plant than our Port Allen plant, but we think utilization should be high throughout the entire year as well as through next year.

That's helpful. And relative to that seasonal business in the Northeast, how much of the first quarter would be attributed to that?

The winter peaking revenue bill for the first quarter was about three-quarters of a million dollars.

So not a large portion of the quarter.

This year it wasn't that large, but it's revenue at pretty good margins because a lot of it's standby power, so it's solid business for us. We see that in Q1 and to a lesser extent Q4.

Okay, great. That is helpful. And then I want to circle back to the discussion about data centers that you were having before. I would have thought, and I'm just expressing my ignorance here, that most of these data centers would be in locations that they could tie into natural gas pipeline and not need to use LNG. Am I completely off base with that or does it really depend on the plant? Would you kind of put some perspective around that, please?

It's a mix of both. And so you've got a wide array of locations where these data centers are plugging into. And it's not so much that they're not part of the grid. It's not so much that they aren't involved in natural gas pipelines, certainly where there is a large infrastructure of natural gas pipelines. It's when you get outside of the Texas kind of Gulf Coast corridor and you're in Virginia and you're in the Midwest, the availability isn't nearly as robust to have supplemental peak capabilities, not to some of the northeast in peak shaving times. And so as they come off kind of base load and they start to migrate towards peak or supplemental power, there isn't enough for them to have. And so they've got to think of alternative solutions to supplement their contractual requirements for massive redundancy and massive uptime rates. It's a real problem, and we think we can be a real solution for them.

So, Westy, to make sure that I'm clear what you're saying, so if you have a plant in the Midwest that – is based off of electricity it gets hot in the summer and and so a great proportion of the time the electricity and pulling off the grid is just fine but in those periods where it's extraordinarily hot or conversely super cold in the winter and it starts to put pressure on the grid at that point to maintain their high up time they need backup and that's what you're talking about here

That's exactly right. That's exactly right. It's that peak. It's not baseload of primary power. That's a market that we're going to – the utilities are going to do that. It's exactly right. The supplemental peak and non-baseload power demands they have is part A. Part B is just if you look at the general landscape of power demand, we think over the next five years the U.S. is short 30 to 40 gigawatts. And that's because you're just going to have this proliferation of multidimensional hyperscale data centers that are coming online, and there just isn't enough grid power to even suffice that. So those base loads won't be nearly – those new data centers coming on, the base load offtake won't be as high as the preexisting. So there's just – we're just short power.

Great. Thank you. And then would you please provide more detail on the power generation customer that you extended the contract with?

I can't give you the name, but it's a customer along the Gulf Coast that we've had a relationship with for quite some time now.

Is this a storm repair situation where the utility has not made the repairs as quickly as anticipated so your customer has a longer contract and therefore you have a longer life on this also? Yes. Okay, that is helpful. And then last question is the marine bunk bunkering. Would you please go into some more detail and discussing as much as you can about additional prospective marine bunkering customers and the process that they're going through to make their decision?

Sure. So if you think about really the addressable market from our perspective, it's really, really rateable and large offtake. That's kind of the sweet spot for us. And so when you more specifically think about that, it's those large cruise ships, it's those large container ships, large car carriers, large, voluminous, BUYERS, BUT ALSO IT'S THOSE THAT ARE AS STICKY AS POSSIBLE. WE LIKE THE CRUISE INDUSTRY BECAUSE THERE'S RATABILITY. EVERY FIVE, SIX, SEVEN DAYS THEY'RE COMING BACK TO PORT AND REFUELING BECAUSE THEY'RE ON AND OFF LOADING. THE CARGO CARRIERS ARE PRETTY PREDICTABLE. in their ports of call, as are the container guys. So those are really, really interesting offtakes because they're just so large and predictable. But every market's going to be a little different. You know, the Gulf Coast is going to have a heavier influence of tankers. West Coast has got that big trade lane coming out of Asia. It's a big cargo port at Port of Long Beach, L.A. It's one of the, if not the largest, busiest, most heavily trafficked port in the U.S., East Coast has certainly got its own interesting demand needs. And I think as these vessels start to come online more and more throughout the latter part of this year and the next year, the real inflection point hits. And these procurement teams are in desperate need of finding a U.S. domestic solution for liquefied natural gas. And we think that we've got the credibility and capability and and know-how to do greenfield infrastructural construction, commissioning, and operations of liquefied natural gas plants. And so we are in lots of discussions with a lot of prospective customers who recognize that and recognize our capability along that cruise, cargo, car carrier, large kind of offtake, big, big ships.

Does that help? It does. And then I guess I'll take that one step further. Are there, what are the key factors that they are looking for and what slows them down in their decision making?

Well, I think the first one or two are obvious, it's availability. And then secondly, it's creating availability at scale. I think one of the interesting dynamics here is a lot of these procurement teams who have vessels traversing the planet, were not as, I think, in tune with the lack of liquefied natural gas infrastructure to support bunkering operations in the U.S. And so I think they've had to really think differently about, you know, A, there's trade lanes and where they're going to bring these ships in. to fuel their ships, and B, their contractual obligations. You know, obviously, a lot of people would love to just have a gas station every corner. And the optionality to refuel, that's just not the case in the U.S. And so we're very excited and bullish on the prospects of getting some rateability and some firmness to some of these contracts. It's not going to happen with all of them, but those discussions are ongoing. And as I mentioned earlier, we're going to balance that with some merchant risk based upon the tidal wave of demand that we see of ships that need fuel. And so that's really kind of the state of play right now.

Thank you and congratulations on another solid quarter. Thanks, Bill.

And a reminder to our phone audience, that is star and one if you would like to ask a question. Our next question comes from Barry Hames at Sage Asset Management.

Thanks so much for taking my questions and good quarter, guys. First question is the Carnival contract, which I think you said started in the first quarter. For the balance of the year, is it a similar run rate? Does it ramp? Could you just describe how the volumes might look across the year for them? Thanks.

Yeah, I think it's pretty range-bound for the balance of the year and certainly through the next year.

Got it. Okay. And then the extra 100,000 gallons of capacity, when does that equipment actually get delivered? Do you have a feel for the timing? Thanks.

Yeah, so one of the unique attributes of that is it's mobile and it's flexible and it's modular. And so we want to be thoughtful about doing that. So trying to pinpoint a timeline is difficult, but I think our predisposition is to have that on the waterfront. or at least have decisions made in the next quarter or so about where that's going to go in the waterfront in order to build out a first train for LNG capacity for bunkering operations, likely the Gulf Coast. And I think, you know, it's over the next few months we'd like to have a firm appreciation of where that's going to go. And once that happens, I think we'll articulate that to you all.

Okay, great. So just follow up on that, because that was my next question. When you say likely Gulf Coast, when you talked about the applications, you know, cruise ships, you know, I always think Miami, and to your point, the container ships, you know, L.A. Long Beach is the, you know, the biggest import spot for them. So why, since you're already in the Gulf Coast, why wouldn't you more likely look to, you know, one of the other coasts, if you will, that you've been looking at. Thanks.

No, no, we are. We're looking at a variety of coasts. It's just, I think, a couple dynamics in the Gulf Coast that I think are really important, first of which is our backyard. Secondly, we think we can successfully leverage that contract that we have now in Galveston. It's a suboptimal supply chain because we're taking LNG from an inland supply source, ours, and trucking it to the water and then bunkering their vessel. And moving that to the water is a much more scalable, efficient operation. Thirdly, we think that there's really some pent-up demand, not only in incremental cruise ships coming into the Galveston market, but also container and car carriers are also coming into this market as well. So we think it's an elegant location for us to strongly consider deploying that first train, recognizing there should and will be follow-on trains thereafter. But it doesn't mean that we don't reserve the right to put it inland if all of a sudden an aerospace customer comes with highly attractive needs or if data center needs are highly attractive as well that drive real earnings and high returns on capital. And so that's one of the benefits and attributes, as I mentioned, about having small-scale modular capacity that we've already purchased, lead times are long, so we've got a unique advantage here. I mean, I think to repeat myself, our first inclination is to leverage our success in Galveston and expand that capability because there's a tidal wave of demand in the Gulf Coast, West Coast, and East Coast.

Got it. No, thanks. That's very helpful. That explains a lot. My final question is maybe just an update on space. I know it's slumpy, but could you describe how that went in the first quarter and what your outlook is for the year?

um you know compared to last year thanks yeah i'll i'll i'll just say um qualitatively space is a really good business of ours and it's a great margin business for us and we're very excited and honored to be uh kind of the size participant we are in that that market and that market's growing um quantitatively andy you want to shed some light on that it's about six percent of our revenue in the first quarter

And as we've talked about in some of our releases, we expect that to continue to grow and become a more significant part of our business.

Great. Thanks, guys. Appreciate it. Yeah, thank you.

This does conclude the Q&A portion of today's call, and at this time I'm pleased to turn the floor back to Mr. Ballard for his closing remarks.

Thanks, everybody, for joining us, and we look forward to seeing you on the road in short order.

This does conclude today's teleconference and we thank you all for your participation. You may now disconnect