Deep Down Incorp

Q1 2021 Earnings Conference Call

5/11/2021

spk01: Thank you for standing by. Welcome to the Deep Down's first quarter 2021 conference call. During the presentation, all participants will be in a listen-only mode. After the speaker's remarks, you will be invited to participate in a question-and-answer session. As a reminder, this call is being recorded today, Tuesday, May 11, 2020. A detailed disclaimer related to Deep Down's forward-looking statements is included in the press release issued Monday afternoon and filed with the SEC. It is also available on the company's website, deepdowninc.com, or upon request. A reconciliation of non-GAAP financial measures used in the press release and on today's call is included in the press release and on the website. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. DeepDOWN also undertakes no obligation to revise any of its forward-looking statements to reflect events or circumstances after the date made. At this time, I'd like to turn the call over to CEO, Charles Sukuna. Please go ahead.
spk05: Thank you, Rain. Good morning, and thank you for joining us today. With oil prices holding steady above $60 per barrel, optimism is increasing for a modest recovery of the oil and gas industry. However, many industry projections still call for a stronger recovery, possibly in 2022. Despite the macro events of the past 15 months, we were able to generate positive net income during the first quarter of this year for a second consecutive quarter of positive profitability the first time we've been able to do so since the first and second quarters of 2017. I would like to note that at the time, our revenues were 48% higher. This positive trend is evidence of our team's efforts to better utilize our limited resources. As we mentioned during our investor call a few weeks ago, our service teams are now able to travel to most international jurisdictions, which enabled us to successfully perform different offshore scopes of work during the first quarter. With increasing prevalence of vaccines, we are cautiously optimistic that travel restrictions will continue to be lifted. Looking towards the rest of 2021 and beyond, we are seeing a marked increase in bidding activity, especially for smaller scopes of work. As we've previously discussed, there's an increased need for maintenance work as our customers work to extend the life of their assets. We have also seen increased interest in our carousels and other rental equipment. However, Given the prevailing uncertainties in the industry, many of our customers are still holding off on committing to larger new projects. Another challenge we are facing is significant increases in the prices of raw materials. For example, we have seen more than a 50% increase in the price of certain steel components just since July of 2020, which unfortunately we're not able to pass on to our customers. While this is not isolated to us, Our hope is that prices will normalize sooner rather than later. This could further delay the full recovery of our industry due to increased project costs. As we look at the broader energy industry, we are continuing to evaluate opportunities around the transition to a higher proportion of non-traditional energy sources. While some of these sources appear to provide lots of promise for the future, the timing of cash flows continues to be uncertain. Speaking of cash, We continue to await a response from the Small Business Administration on our application for forgiveness for the Initial Paychecks Protection Program loan, better known as PPP, which we received back in April of 2020. At this time, we still expect to get most, if not all, of it forgiven. We have not yet begun the forgiveness application process for the second loan, which we received in March, but we expect to do so as soon as our covered period for the loan is satisfied. These loans have provided us with a much-needed buffer, especially as some of our customers have prolonged their payment terms to us. Trevor will discuss our financial position further in a moment. Our consecutive quarters of profitability also moves us one step closer to being able to secure a credit facility with our bank, as the bank needed to see consistent evidence of our improved financial stewardship. Finally, we recognize that in past periods we often published the backlog of of in-house projects we are working through. Given the heavy proportion of service work we currently have and foresee for the remainder of this year, we are hesitant to set any expectations based on this number. While we currently have close to $10 million of committed work on the books, most of which is currently slated for this year, we are also aware that some of these projects could easily be pushed to next year. On the flip side, our track record of being extremely nimble and responsive to our customers' needs continues to bear fruit when our customers are faced with emergencies. A case in point was an oil company that had a situation develop at an offshore facility in the Gulf of Mexico early this past Saturday morning. By Saturday afternoon, we had developed a plan of action, had some of our personnel come into our shop late Saturday to evaluate materials on hand, and we were waiting on the customer to pursue one final option offshore before we started on our recommended solution. Early Sunday morning, our customer's offshore team determined that their efforts in the field would not resolve their issue and they would need our proposed solution. We then had some of our personnel coming to work that morning, and by 10 p.m. on Sunday night, we had a unit built and ready for testing yesterday morning. As we speak, the unit is headed towards the dock along the Gulf Coast, followed closely by members of our team who will be providing further services to the customers. Such projects cannot be included in our backlog since we are not able to foresee them, but they happen frequently and are a key part of our financial results, and we expect this trend to continue for the rest of the year. Our focus will therefore remain on the levers within our control, which are strategically managing our cash flows and our cost structure as we relentlessly pursue opportunities to further grow our business. With that overview, let me now turn the call over briefly to our Vice President of Finance, Trevor Ashurst for a quick review of our financials. Trevor.
spk00: Thank you, Charles. For the three months ending March 31st, 2021, DeepTown generated revenues of $3.9 million, which represents a 9% increase when compared to revenues of $3.6 million for the three months ended March 31st, 2020. This increase is a result of having a more consistent level of project activity throughout the first quarter of 2021 versus 2020, which is mainly due to our customers working through their backlog of projects that were previously delayed in 2020 due to the pandemic. Gross profit as a percentage of revenues increased to 44% in the first quarter of this year, which represents a 13% increase in gross margin compared to the 31% we generated in Q1 last year. This increase in gross margin was primarily driven by having a larger proportion of higher margin service work and equipment rental this quarter. Selling general and administrative expenses decreased 9% to approximately $1.6 million for the first quarter of 2021 compared to approximately $1.7 million in Q1 of 2020. This decrease in SG&A expenses was primarily due to the cost reduction initiatives we implemented by the company last year. We remain motivated to pursue opportunistic cost containment measures to improve profitability while being mindful of supporting the growth and operations of our business. Turning to net income, the company reported net income of $148,000, or one cent per diluted share, for the first quarter this year. This is compared to a net loss of $637,000 or a loss of 5 cents per share for the first quarter of 2020. The improvement in net income was mainly driven by higher revenue and improved growth margin in Q1 of this year compared to the same period last year. Our capital structure includes $4.7 million in cash and $5.2 million in working capital as of March 31st, 2021. In early March, we received a second $1.1 million PPP loan, which has allowed us to strengthen our workforce as we fund working capital. As Charles mentioned before, we continue to await guidance from the SBA regarding its decision on the forgiveness of the entire balance of our first PPP loan. We expect to receive the SBA's decision at some point during the second quarter of this year. We also expect to apply for forgiveness of our second PPP loan once the covered period has been satisfied. So, in summary, we began to see positive signs of increased market activity in the fourth quarter of last year as commodity prices gradually recovered to healthier levels. This translated to increased orders in the fourth quarter of 2020, and that trend continued in the first quarter of this year and we encourage this recovery will carry on throughout the rest of the year. Looking forward, our balance sheet positions us well to capitalize on this trajectory of measured growth and allows us to make strategic investments when appropriate to increase our capital efficiency. With that said, thank you for your time, and I will now turn the call back over to Charles.
spk05: Thank you, Trevor. That concludes our prepared remarks today, so I'll turn the call back to the operator to take investor questions. Rain.
spk01: Thank you. As a reminder, to ask a question, please press star, then the number one on your telephone keypad. Again, that's star one to ask a question. Please stand by while we compile the Q&A roster. Your first question comes from Walter Shanker from MAZ Partners. He'll answer one.
spk06: Actually, there'll be two questions. First, as a substantial portion of your revenues, at least at this point, are service-related, I'm trying to get a little more color on your cost increases on materials and how significant that really is given the current mix of business.
spk05: Walter, good morning. Thanks for the call. Thanks for the question, sorry. While we do have a fair amount of service work, the service work includes us building equipment which we then install or which we then use for service. In our case in point, we have a project with a certain oil company that we need to build certain units we're going to use for offshore installation. The units themselves are probably about $300,000 worth and the overall project will be over a million. And we had close to $100,000 increase in the cost of materials on that project, which was already committed. And we talked to the customer, but they're seeing it across their project, right? So there's no opportunity for a variation order. So we are fortunate that we have more service work, a higher proportion of service work right now, but that is still a significant hit to the company.
spk06: And given that trend, and I realized, Revenues are very important. It's a competitive environment. Is there an ability going forward to price a contract for materials at time of when you use it or some sort of protection going forward?
spk05: We are having discussions internally about that. One of the things that was a perfect storm because we had some projects where the pricing was committed last year. But then as things are opening up, now is when we're executing. And so it's been harder. As we look towards the future, we are putting in wording in our contracts to protect us to an extent. However, we're also in an environment where bigger customers who are not willing to participate in smaller projects are doing so for the sake of keeping their people active. So there's some price pressure as well. So it's a fine line we're balancing. But yes, we're looking to do everything we can to protect ourselves.
spk06: And the second question, the rental lease, whatever the right semantics is, on the carousel, those revenues were minimal in the first quarter and will mostly be in the next couple of quarters? Is that a correct statement?
spk03: Yes.
spk06: But that will be completed this year?
spk05: Yes. The biggest, we currently expect the biggest proportion of revenues will be in the third quarter. but there will be some in the second quarter as well.
spk06: And while there are expenses relating to that, it should be good margin business given we've written off the carousels.
spk03: Yes, sir.
spk06: And what have you done to get the other carousel employed?
spk05: We actually, interestingly, we actually have quite a bit of interest, but I'm not going to make any promises yet. But I do hope to give you a call again at some point.
spk06: Remember, I'm old and I'm getting older, Charles.
spk02: You've got a long time to live, Walter.
spk06: And just lastly, I understand life's been very difficult, but we are building cash. I realize a little of it came from the second PPP loan. But do you have any sense, does the board have any sense on – at some point returning some of that cash, I realize not immediately, and it would surely happen if we got a carousel, but how much cash do you really feel you need to just run the business?
spk05: So to answer the first part of your question, I think obviously at this point we haven't been forgiven on any of them, so we can't say too much. One thing we do want to, and we touched on it in our comments, is that We are also seeing our customers begin to push to really prolong out their payments. So some of the bigger customers are pushing us heavily towards net 90, and therefore we need the cash to fund that. As far as when the timing would be, I'm not ready to make any commitments on timing on a buyback or any of that, but as we're able to, we'll have that discussion with the board. But if we do sell a carousel, yes, that would be definitely on the table.
spk06: Okay. Thanks a lot, Charles.
spk05: Thank you, Walter.
spk01: Again, to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from Chris Deshay from Deshay Capital. Your line is open.
spk08: Hey, Charles. This is Chris Doucette. Congratulations on your progress. So I just wanted to touch a little bit. The previous caller asked a couple of questions I had, but the only question I had was on your backlog. You know, how big is your backlog? What percentage of that can you actually execute given COVID? And how does that backlog compare to historical backlogs?
spk05: Hey, Chris, thanks for the question. Yeah, like we touched on earlier, our backlog right now is close to $10 million worldwide. If everything was... It's heavily dependent on the customers determining when we can do it. For instance, we do have a million and a half that would entail some international travel, which as jurisdictions open up, customers also have their own decisions to make around that. Again, this could easily move into next year, so like we said earlier, we're not able to commit to a definite timeline on it, but All factors being constant, we're optimistic that we'll be able to execute on all of it as of today.
spk04: All right. Thanks. Good luck with the quarter. Thank you, Chris.
spk01: Again, to ask a question, please press start and the number one on your telephone keypad. There is no further question this time. You may continue.
spk05: Thank you, Rain, and our thanks to all of you who joined our call today. We appreciate your interest and support of Deep Down and look forward to speaking with you about our progress on the next earnings calls. And so let's conclude today's call. Thank you all.
spk01: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. Thank you. you Bye. Thank you. you Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Deep Down's first quarter 2021 conference call. During the presentation, all participants will be in a listen-only mode. After the speaker's remarks, you will be invited to participate in a question and answer session. As a reminder, this call is being recorded today, Tuesday, May 11, 2020. A detailed disclaimer related to Deep Down's forward-looking statement is included in the press release issued Monday afternoon and filed with the SEC. It is also available on the company's website, deepdowninc.com, or upon request. A reconciliation of non-GAAP financial measures used in the press release and on today's call is included in the press release and on the website. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. Deep Down also undertakes no obligation to revise any of its forward-looking statements to reflect events or circumstances after the date made. At this time, I'd like to turn the call over to CEO, Charles Sukuna. Please go ahead.
spk05: Thank you, Rainn. Good morning, and thank you for joining us today. With oil prices holding steady above $60 per barrel, optimism is increasing for a modest recovery of the oil and gas industry. However, many industry projections still call for a stronger recovery, possibly in 2022. Despite the macro events of the past 15 months, we were able to generate positive net income during the first quarter of this year for a second consecutive quarter of positive profitability the first time we've been able to do so since the first and second quarters of 2017. I would like to note that at the time, our revenues were 48% higher. This positive trend is evidence of our team's efforts to better utilize our limited resources. As we mentioned during our investor call a few weeks ago, our service teams are now able to travel to most international jurisdictions, which enabled us to successfully perform different offshore scopes of work during the first quarter. With increasing prevalence of vaccines, we are cautiously optimistic that travel restrictions will continue to be lifted. Looking towards the rest of 2021 and beyond, we are seeing a marked increase in bidding activity, especially for smaller scopes of work. As we've previously discussed, there's an increased need for maintenance work as our customers work to extend the life of their assets. We have also seen increased interest in our carousels and other rental equipment. However, Given the prevailing uncertainties in the industry, many of our customers are still holding off on committing to larger new projects. Another challenge we are facing is significant increases in the prices of raw materials. For example, we have seen more than a 50% increase in the price of certain steel components just since July of 2020, which unfortunately we are not able to pass on to our customers. While this is not isolated to us, Our hope is that prices will normalize sooner rather than later, otherwise this could further delay the full recovery of our industry due to increased project costs. As we look at the broader energy industry, we are continuing to evaluate opportunities around the transition to a higher proportion of non-traditional energy sources. While some of these sources appear to provide lots of promise for the future, the timing of cash flows continues to be uncertain. Speaking of cash, We continue to await a response from the Small Business Administration on our application for forgiveness for the Initial Paychecks Protection Program loan, better known as PPP, which we received back in April of 2020. At this time, we still expect to get most, if not all, of it forgiven. We have not yet begun the forgiveness application process for the second loan, which we received in March, but we expect to do so as soon as our covered period for the loan is satisfied. These loans have provided us with a much-needed buffer, especially as some of our customers have prolonged their payment terms to us. Trevor will discuss our financial position further in a moment. Our consecutive quarters of profitability also moves us one step closer to being able to secure a credit facility with our bank, as the bank needed to see consistent evidence of our improved financial stewardship. Finally, we recognize that in past periods we often published the backlog of of in-house projects we are working through. Given the heavy proportion of service work we currently have and foresee for the remainder of this year, we are hesitant to set any expectations based on this number. While we currently have close to $10 million of committed work on the books, most of which is currently slated for this year, we are also aware that some of these projects could easily be pushed to next year. On the flip side, our track record of being extremely nimble and responsive to our customers' needs continues to bear fruit when our customers are faced with emergencies. A case in point was an oil company that had a situation develop at an offshore facility in the Gulf of Mexico early this past Saturday morning. By Saturday afternoon, we had developed a plan of action, had some of our personnel come into our shop late Saturday to evaluate materials on hand, and we were waiting on the customer to pursue one final option offshore before we started on our recommended solution. Early Sunday morning, our customer's offshore team determined that their efforts in the field would not resolve their issue, and they would need our proposed solution. We then had some of our personnel coming to work that morning, and by 10 p.m. on Sunday night, we had a unit built and ready for testing yesterday morning. As we speak, the unit is headed towards a dock along the Gulf Coast, followed closely by members of our team who will be providing further services to the customer. Such projects cannot be included in our backlog since we are not able to foresee them, but they happen frequently and are a key part of our financial results, and we expect this trend to continue for the rest of the year. Our focus will therefore remain on the levers within our control, which are strategically managing our cash flows and our cost structure as we relentlessly pursue opportunities to further grow our business. With that overview, let me now turn the call over briefly to our Vice President of Finance, Trevor Ashurst for a quick review of our financials. Trevor.
spk00: Thank you, Charles. For the three months ending March 31st, 2021, DeepTown generated revenues of $3.9 million, which represents a 9% increase when compared to revenues of $3.6 million for the three months ended March 31st, 2020. This increase is a result of having a more consistent level of project activity throughout the first quarter of 2021 versus 2020, which is mainly due to our customers working through their backlog of projects that were previously delayed in 2020 due to the pandemic. Gross profit as a percentage of revenues increased to 44% in the first quarter of this year, which represents a 13% increase in gross margin compared to the 31% we generated in Q1 last year. This increase in gross margin was primarily driven by having a larger proportion of higher margin service work and equipment rental this quarter. Selling general and administrative expenses decreased 9% to approximately $1.6 million for the first quarter of 2021 compared to approximately $1.7 million in Q1 of 2020. This decrease in SG&A expenses was primarily due to the cost reduction initiatives we implemented by the company last year. We remain motivated to pursue opportunistic cost containment measures to improve profitability while being mindful of supporting the growth and operations of our business. Turning to net income, the company reported net income of $148,000, or one cent per diluted share, for the first quarter this year. This is compared to a net loss of $637,000 or a loss of 5 cents per share for the first quarter of 2020. The improvement in net income was mainly driven by higher revenue and improved growth margin in Q1 of this year compared to the same period last year. Our capital structure includes $4.7 million in cash and $5.2 million in working capital as of March 31st, 2021. In early March, we received a second $1.1 million PPP loan, which has allowed us to strengthen our workforce as we fund working capital. As Charles mentioned before, we continue to await guidance from the SBA regarding its decision on the forgiveness of the entire balance of our first PPP loan. We expect to receive the SBA's decision at some point during the second quarter of this year. We also expect to apply for forgiveness of our second PPP loan once the covered period has been satisfied. So, in summary, we began to see positive signs of increased market activity in the fourth quarter of last year as commodity prices gradually recovered to healthier levels. This translated to increased orders in the fourth quarter of 2020, and that trend continued in the first quarter of this year and we encourage this recovery will carry on throughout the rest of the year. Looking forward, our balance sheet positions us well to capitalize on this trajectory of measured growth and allows us to make strategic investments when appropriate to increase our capital efficiency. With that said, thank you for your time, and I will now turn the call back over to Charles.
spk05: Thank you, Trevor. That concludes our prepared remarks today, so I'll turn the call back to the operator to take investor questions. Rain. Thank you.
spk01: As a reminder, to ask a question, please press star, then the number one on your telephone keypad. Again, that's star one to ask a question. Please stand by while we compile the Q&A roster. Your first question comes from Walter Shanker from MAZ Partners. He'll answer one.
spk06: Actually, there'll be two questions. First, as a substantial portion of your revenues, at least at this point, are service-related, I'm trying to get a little more color on your cost increases on materials and how significant that really is given the current mix of business.
spk05: Walter, good morning. Thanks for the call. Thanks for the question, sorry. While we do have a fair amount of service work, the service work includes us building equipment which we then install, or which we then use for service. And so, in our case in point, we have a project with a certain oil company that we need to build certain units we're going to use for offshore installation. The units themselves are probably about $300,000 worth, and the overall project will be over a million. And we had close to $100,000 increase in the cost of materials on that project, which was already committed. And we talked to the customer, but they're seeing it across their project, right? So there's no opportunity for a variation order. So we are fortunate that we have more service work, a higher proportion of service work right now, but that is still a significant hit to the company.
spk06: And given that trend, and I realized, Revenues are very important. It's a competitive environment. Is there an ability going forward to price a contract materials at time of, you know, when you use it or some sort of protection going forward?
spk05: We are having discussions internally about that. One of the things that was a perfect storm because we had some projects where the pricing was committed last year. But then as things are opening up, now is when we're executing. And so it's been harder. As we look towards the future, we are putting in wording in our contracts to protect us to an extent. However, we're also in an environment where bigger customers who are not willing to participate in smaller projects are doing so for the sake of keeping their people active. So there's some price pressure as well. So it's a fine line we're balancing. But yes, we're looking to do everything we can to protect ourselves.
spk06: And the second question, the rental lease, whatever the right semantics is, on the carousel, those revenues were minimal in the first quarter and will mostly be in the next couple of quarters? Is that a correct statement?
spk03: Yes.
spk06: But that will be completed this year?
spk05: Yes. The significant, the biggest, we currently expect the biggest proportion of revenues will be in the third quarter. but there will be some in the second quarter as well.
spk06: And while there are expenses relating to that, it should be good margin business given we've written off the carousels.
spk03: Yes, sir.
spk06: And what have you done to get the other carousel employed?
spk05: We actually, interestingly, we actually have quite a bit of interest, but I'm not going to make any promises yet. But I do hope to give you a call again at some point.
spk06: Remember, I'm old and I'm getting older, Charles.
spk02: You've got a long time to live, Walter.
spk06: And just lastly, I understand life's been very difficult, but we are building cash. I realize a little bit came from the second PPP loan. But do you have any sense, does the board have any sense on, at some point returning some of that cash, I realize not immediately, and it would surely happen if we got a carousel, but how much cash do you really feel you need to just run the business?
spk05: So to answer the first part of your question, I think obviously at this point we haven't been forgiven on any of them, so we can't say too much. One thing we do want to, and we touched on it in our comments, is that We are also seeing our customers begin to push to really prolong out their payments. So some of the bigger customers are pushing us heavily towards net 90, and therefore we need the cash to fund that. As far as when the timing would be, I'm not ready to make any commitments on timing on a buyback or any of that, but as we're able to, we'll have that discussion with the board. But if we do sell a carousel, yes, that would be definitely on the table.
spk06: Okay. Thanks a lot, Charles.
spk05: Thank you, Walter.
spk01: Again, to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from Chris Deshaies from Deshaies Capital. Your line is open.
spk08: Hey, Charles. This is Chris Doucette. Congratulations on your progress. So I just wanted to touch a little bit. The previous caller asked a couple of questions I had, but the only question I had was on your backlog. You know, how big is your backlog? What percentage of that can you actually execute given COVID? And how does that backlog compare to historical backlogs?
spk05: Hey, Chris, thanks for the question. Yeah, like we touched on earlier, our backlog right now is close to $10 million worldwide. If everything was... It's heavily dependent on the customers determining when we can do it. For instance, we do have a million and a half that would entail some international travel, which as jurisdictions open up, customers also have their own decisions to make around that. Again, this could easily move into next year, so like we said earlier, we're not able to commit to a definite timeline on it, but All factors being constant, we're optimistic that we'll be able to execute on all of it as of today.
spk04: All right. Thanks. Good luck with the quarter. Thank you, Chris.
spk01: Again, to ask a question, please press start and the number one on your telephone keypad. There is no further question this time. You may continue.
spk05: Thank you, Rain, and our thanks to all of you who joined our call today. We appreciate your interest and support of Deep Down and look forward to speaking with you about our progress on the next earnings calls. And so let's conclude today's call. Thank you.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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