Q4 2023 Stabilis Solutions Inc Earnings Call

Participants

Andy Puhala; SVP, CFO & Secretary; Stabilis Solutions Inc

Westervelt Ballard; President, Chief Executive Officer, Director; Stabilis Solutions Inc

Martin Malloy; Analyst; Johnson Rice & Company L.L.C.

Barry Haimes; Analyst; Sage Asset Management

Bill Dezellem; Analyst; Tieton Capital Management LLC

Spencer Lehman

Presentation

Operator

Welcome to the stability Solutions' Fourth Quarter and Full Year 2023 Results 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, please press star one on your telephone keypad. And if at any point your question has been answered, you may remove yourself from the queue by pressing star two, so others can hear your questions. Clearly, we ask that you pick up your handset for best sound quality. Lastly, if you should require operator assistance, please press star zero I would now like to turn the call over to Andy Holland, Chief Financial Officer. Mr. Kumar, you, please go ahead.

Andy Puhala

Good morning, and welcome to stability Solutions' Fourth Quarter and Full Year 2023 Results Conference Call on Andy Hall, our Senior Vice President and CFO of Stabilus. And joining me today is our President and CEO, Westy Ballard. We issued a press release after the market closed yesterday detailing our fourth quarter and full year 2023 operational and financial results. This release is publicly available in the Investor Relations section of our corporate website at stability dash solutions.com.
Before we begin, I'd like to remind everyone that today's conference call will contain certain 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, March seventh, 2024, forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected 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 and 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 it. I'll hand the call over to Westy Ballard for his remarks.

Westervelt Ballard

Thank you, Andy, and good morning to everyone joining us on the call. Let me start by thanking our employees for their many contributions during what amounted to a historic year for stimulus. Our success was a collective effort that culminated in our first full year of profitability since becoming a public company. While our full year profitability was an important milestone for our entire team. We remain in the early stages of a multiyear value creation story. You see not only are we building a profitable, clean fueling solutions platform of scale we're at the forefront of emerging blue skies sectors characterized by significant opportunities for sustained asymmetric growth. And as we look across the competitive landscape here domestically, we believe we are the only company in the small-scale LNG universe that has built the infrastructure, operational and technical capabilities and customer relationships capable of advancing an increasingly sophisticated growth platform that further enhances our unique value proposition and competitive mode.
Looking back over the progress we made in 2023, there were several highlights worthy of note, including the following. Commercially, we continue to shift our business model from commodity spot sales toward longer duration, take-or-pay contractual revenue. We believe this approach ensures further optimization of our asset base and increases the visibility of cash flow generation, positioning us to opportunistically invest in the people, systems and infrastructure required to support future growth.
In our Marine business, we made measurable strides where we completed a six month LNG bunkering contract in Port Canaveral, Florida and conducted multiple LNG bunkering operations for a large container carrier in the Port of Long Beach, California. In December, we commenced our previously announced multi-year marine bunkering contract with Carnival Corporation and Galveston Texas. Carnival is a pioneering global cruise line committed to the decarbonization of their fleet through the adoption of LNG and alternative fuels. And the first cruise line to introduce LNG-powered cruise ships in North America. Our relationship with Carnival is an important use case that further solidifies our position as a premier provider of comprehensive and scalable marine LNG fueling solutions in the market. Revenue from our marine customers in 2023 represented roughly 14% of total revenue.
And our outlook for 2024 has marine revenue increasing to roughly one-third of total 2024 revenue beyond Carnival over the last two years, we have engaged full project development management, engineering support, personnel, supply and operational services for the successful delivery of more than 2000 loads of LNG fuel container ships, cruise ships and offshore supply vessels. And our team's efforts during that period have been impressive with marine revenue growing at a compounded annual growth rate of 122%.
Looking ahead, our marine strategy will focus on expanding our capabilities directly to the waterfront of hotshot ports across the U.S. And doing so, we will continue to optimize our portfolio of owned and third-party supply sources, infrastructure and logistical assets to provide comprehensive and scaled solutions to current and future customers along those lines.
Operationally, we continue to enhance our logistical capabilities to become the only small-scale LNG bunker provider capable of delivering multiple modes of delivery to our bunkering customers, whether that be bunker barge to vessel truck to bunker barge or truck to vessel across all three U.S. coastal markets. This operational and geographical flexibility affords our current and prospective customers, the ability to validate a variety of trade lanes throughout the US, knowing they will have a reliable fuel supply with us throughout the year. We're also the beneficiaries will be a strong activity across our other diverse end markets, primarily led by aerospace, electric, utilities, mining and oil and gas sectors.
Within the aerospace sector, our high-purity methane continues to become the preferred fuel for space rockets, resulting in sales volumes of LNG to aerospace customers of approximately 3.4 million gallons in 2023 or 7% of total volumes for the year entering 2024, we are seeing a significant increase in quoting activity that points to a positive demand inflection within both our marine and aerospace markets. Given these favorable underlying demand conditions. We expect that by mid 2024, our two owned liquefaction plants will effectively be sold out for the remainder of the year and well into 2025.
With respect to the question now what in answering that question, it's important to remind everyone that our proven ability to rapidly source LNG at scale from our extensive supply network to the ongoing incremental growth in customer demand, while we proactively evaluate a variety of opportunities to expand our assets and operations.
On that note, allow me to share a few comments on our capital allocation over the last year, and we are focused in on 2024. In 2023, we deployed more than $7.8 million toward growth related investments on marine capabilities by acquiring the critical components for new LNG production train and associated storage and equipment for waterfront expansion. Even after the significant level of investment in ongoing business. We ended the year with more than $11 million of cash and availability under our credit facilities to fund our ongoing operations and a net leverage ratio of 0.6 times 2023 adjusted EBITDA.
Looking ahead, we intend to further optimize our existing asset base and supply chain while PRODUCT prioritizing scalable investments in incremental new capacity and infrastructure capable of supporting demand inflection within our marine aerospace and other diverse end markets, both in the US and abroad. To accomplish this, we are routinely evaluating a variety of prospective sources of capital with heavy emphasis on focus and focus on those partners that know our industry, our company and recognize the significant upside potential in our operating model. Importantly, our decision to proceed with new infrastructure investments will correspond directly with our demonstrated ability to secure long-term ratable offtake agreements that derisks our investment over a multiyear period.
With that, I'll turn it over to Andy.

Andy Puhala

Thank you, Westy. Let's move to a discussion of our fourth quarter and full year performance, together with an update on our balance sheet and liquidity exiting 2023 our fourth quarter 2023 results reflect 18% sequential revenue growth and the first quarter of profitability since Q1 of 2023.
During the fourth quarter, our George West plant returned to full production rates. And that, combined with several new projects resulted in a strong sequential performance during the second and third quarters of 2023, operations that our George West facility were impacted by a series of investments we made to enhance our ability to utilize a wider wider range of feed gas stock. With this project work reaching completion in the third quarter. Our George West facility operated at 95% of capacity during the fourth fourth quarter and continues to operate at a similar level into the first quarter of 2024. We generated $1.3 million of cash from operations in the fourth quarter and $6.7 million for the full year.
This strong cash generation helped us fund $10.3 million of total capital investment through the year while maintaining our strong liquidity position. At December 31st, 2023, stability had total cash and equivalents of $5.4 million, together with $5.6 million of availability under our credit facilities. Total debt outstanding as of December 31st was $9.4 million resulting in a ratio of net debt to trailing 12 month adjusted EBITDA of 0.6 times. Given the recent activity in some of our higher growth target end markets, we are actively considering potential avenues for capacity growth. Our current liquidity position and balance sheet provides us with the optionality to pursue select organic investments as we meet an inflection point in demand for our solutions as we look out over the coming years, the exponential growth opportunity for our business, which may warrant further capital investment beyond what our current balance sheet can support for such investment. We are actively evaluating multiple pathways for financing, but our top priority in doing so continues to be protecting and maximizing shareholder value.
That concludes our prepared remarks. Operator, please open the line for questions.

Question and Answer Session

Operator

Have a question or comment, please press star one on your telephone keypad. If at any point your question is answered you may remove yourself from the queue by pressing star two. Again, we ask that you pick up your handset when posing your questions to provide optimal sound quality. Thank you.
Our first question comes from Martin Malloy with Johnson Rice. Please go ahead.

Martin Malloy

Good morning.
Congratulations on the strong fourth quarter and all the progress that you made in 23. I'm first question. I just want to follow up on that some of the topics you touched on in your prepared remarks on growth potential multiyear contracts out there. Could you maybe help us with what kind of milestones we should look for and this you would need to have before you have pulled the trigger on expanding liquefaction capacity on the on the contractual side whether it be marine, bunkering or aerospace? And then on the aerospace side, I guess what's the term out there that people are looking for and in terms of LNG supply from a contract?

Andy Puhala

Yes, thanks. Good morning, Marie. I think the way to think about this these two buckets, one, the marine and the other aerospace, I'll start obviously with the marine in that we are. I think we've been pretty clear that that as we think about capital deployment, we're not averse to put money to work speculatively. We did that in the third quarter. We bought some of those first train and the associated equipment for almost $8 million of expenditure in marine. So we're comfortable with that. But I think for us to really deploy scalable dollars. We're going to want to have some more commercial meat on the bone and making sure that we've got a comfort level with term and ratability for some of these recontracts, we're in a a variety of discussions across multiple ship owners and operators. And if you just look at that tidal wave of demand in 2023 and now into 2024. We've got over 500 ships as addressable market, and that's up to twofold from just two years ago and 15 times from six years ago. So this market has got a massive, massive demand. And so we're being thoughtful in these discussions. And so we'd like to have some more certainty ratability before we start announcing the expenditure and so look for that, but we're not afraid to also do some on spec as we demonstrated in Q3 last year. I think on the space side, those contracts vary on I think that as we think about those contracts, they can be not dissimilar to Marine. They can be anywhere from six months to two years to five years. And certainly we're working diligently to have those as some as ratable and long term as the economics and operations makes sense. So that's really really how you should think about the aerospace side of it .

Martin Malloy

Okay. And then just to my follow-up question, I just wanted to ask about operations. George West. I know you made some investments in '23 on I'm kind of pretreated the inlet gas. It looks like from the fourth quarter results and things have the utilizations doing very well and everything. But can you just maybe talk about how those investments are playing out in the utilization?

Andy Puhala

Sure. Yes. So so I think if you go back and look at kind of midyear last year, we're in the kind of the 40s and 50% utilization. That was some of the disruption that happened. We spent not a lot of money, but about $1 million to go ahead and rectify that. And we wanted to be thoughtful in our approach. And I'm proud to say that as well in our rearview mirror, it doesn't mean that we're not other things won't happen. We don't foresee anything that have or will happen. And so I think the way to think about that is very high kind of mid-90 utilization rate. Now that a little ebb and flow based upon some predetermined downtime for maintenance and the like. But that plant has in Q4 and continue through certainly the first part of 2024. It operates in that mid to high 90% range and it's firing on all cylinders and we're really excited about that.

Martin Malloy

That's great. I'll turn it back. Thank you very much.

Andy Puhala

Thank you. Our next question comes from Barry Haimes with Sage Asset Managers. Please go ahead.

Barry Haimes

Thanks very much for taking my questions. And first of all, I wanted to clarify the money spent on growth capital and was that all on marine bunkering equipment or was some of that long lead time on that long lead time items for the new train that you've talked about in the past?

Andy Puhala

It's one of it's a little both. It was it was if there was another 100,000 gallon, the critical components to another 100,000 gallon train that's yield small-scale world. It's modular. And so we could theoretically put it anywhere right now. We have sightlines or move it to the water for bring bunkering doesn't have to. But right now that's the intention but also part of that $7.8 million was marine bunkering associated equipment with some pumping skids and some other some other hard items that further facilitate the bunkering of ships and so you could look at it as all marine bunkering or maybe that trains. If an opportunity comes up since it's a very modular system, we can move it elsewhere for aerospace or the like that answer your question.

Barry Haimes

Yes. So following up on what would be the timing of the new trains coming coming off?

Andy Puhala

Yes, the timing is going to be predicated upon kind of the earlier question that we talked about with Marty Malloy, and that's really just the cadence of contracts as you think about really two big drivers for this company, the aerospace industry as well as the marine industry. Those are those are kind of nascent blue-sky markets and sectors. And so they're in their infant stages of growing. So understandably those sales cycles take a little bit longer to build out it within a new market. And so we've had considerable success along the marine front end space. But frankly, with the work we've done in Florida as well as California and now the Gulf of Mexico, we think that pace of play in marine picks up. We think the pace of playing space picks up, trying to put the definitions around that if that's in the next two months or six months or nine months, it's hard to say. But if you just look at the thing on Marine, the total number shifts, that's 500 ships now three years goes 200 ships and five years ago has 31 ships. And so we think that just the inertia in play now is going to inure to our benefit, but it's hard to put an actual time line on that. But we're aggressively and pedaling rapidly in 2024 with a lot of lot of discussions around those topics.

Barry Haimes

Right. And then so once once you have contract coverage and you make the decision to go forward, how long would it take to them build and finish up that trend just yet and months?

Andy Puhala

Roughly what the way the contracts are and we will disclose that. It's anywhere between 12 to 18 months. It just depends on the critical components for that first train. It will probably take us on a 14, 15 months from the time we say go on if we are starting and had to order new components, it might take 18 to 24 months. But the beauty of it is unlike the world-scale, this can be a very quick shot in the arm also, I think another way to think about this is we've got a critical vendor that's also a large shareholder of our Company, and that's Chart Industries. They are a logical provider of a lot of our our our our our CapEx. And so I think come we would we'd like to think that we've got some favored nation relationships there as well over anybody else. And so I could be, as I mentioned, 15, 16, 18, 24 months. It all depends on the scale and location.

Barry Haimes

Great.Thanks.That's helpful. And then I just wanted to others on different topics. And you talked about the movement to contract from spot. And Kevin, can you give us a rough feel for what that ratio was contract to spot 23 versus 22? And then if you have any sense for for this year? Thanks.

Andy Puhala

Sure. So I think that when you think about our assets, 2022 was predominantly of not holistically slots 2023. The vast majority of that was spot or short term, think six months or shorter type contracts. I think as we go into 2024 and into 2025, I think kind of 18 months to four year type our contracts, and that would be for like what percent of the contract, what percent of your volumes in 2014 you think would be under a contract like that versus continued spot business.
Yes, yes. So the variability is around our assets versus third party. Third party is a variable on that. So I'll just speak with our own balance sheet assets and our own plants. I would say that that our goal is to have 100% of our assets under some sort of term ratable contracts, whether that's one to four year type contracts versus in 2020 to 100% of that revenue was all spot and the vast majority of in 2023 is all spot. So what we're doing is we're pivoting from a spot inconsistent unpredictable market, and we're pivoting to consistent better visibility, better backlog, better planning, better planning because we've got better visibility, sightlines on cash flow and also better margins.

Barry Haimes

Great. And then on volumes this year on pen and motion production volume, how many gallons do you think you missed out on because of the issues at George West, so theoretically you could get those volumes back this year?

Westervelt Ballard

Yes, Barry, we've publicly we've discussed it in terms of EBITDA, and we think that the EBITDA impact of that was about $3.2 million, which you know, crossed both Q2 and Q3. So that's how we're kind of thinking about it.

Barry Haimes

And then last question, are there is there anything happening with the export license that you guys got just a little update on whether that's kind of sitting on the shelf or whether there's some plans to utilize that.
Thanks.

Andy Puhala

Yes, there are absolutely plans to utilize that and feel the good news is it's a 28 year license. The bad news is there's some some short term deliverables that we need to be thoughtful around. I also think it's hard to contemplate the export right now, just given where natural gas prices are in Europe and Asia. But we don't think that's a long-term systemic. And we think that this is a very exciting tool for us to use in quick fashion, should those markets turn quickly. And so we are we are constantly in discussions with off-take internationally on that that can flip the switch pretty pretty quickly, but it's a really interesting tool, and we intend to leverage and utilize that not only for on demand in the power generation and the like industrially in Europe, but also we think that there are opportunities for us to put that on on on vessels and utilizing US gas, exporting that to European markets and bunkering ships there as well. So it's got a lot of lot of utilization utility for us.

Barry Haimes

Great. Thanks so much for for all the info and congrats on a great quarter.

Operator

Thank you. Our next question comes from Bill Dezellem with Titan Capital. Please go ahead.

Bill Dezellem

Thank you In your opening remarks, you referenced Long Beach marine bunkering project would you please detail the circumstances of that for us?

Andy Puhala

Well, that's a that's a relationship that we are providing engineering, project management and pumping services to a third party who is then fueling a vessel that's been going on for a couple of years. We also did that for another container ship from a separate containership company, very similar construct on where where we were providing engineering and management and service personnel to pump the LNG into a container ship on behalf of a third party.

Bill Dezellem

And that third party is the is the shipping company itself? Or is there a and a contractor between the two of you?

Andy Puhala

Yes. So specific to Long Beach, there's a contractor between us that that their responsibility was to source the gas and provide that to the containership. And we were providing the pumping services, project management, logistics, supply chain of picking up their gas and delivering it to their customer. That's that's that construct. That's I wouldn't look at that as being the business model across all the markets we're expanding to come. But that in that specific instance, that's that was the construct.

Bill Dezellem

And when actually tell us about the expertise that you bring to the equation that in that case, the gas provider themselves was not able to do or why they were not able to do that.

Andy Puhala

Yes. I mean, a lot a lot of people really kind of stick to their knitting. And I think we've we've positioned ourselves as a a turnkey provider of starting with the molecule and it could be our own molecule or we can source that for somebody or somebody else can source it on their own. We're fairly agnostic but we have the technical expertise, the rolling stock. In many instances, we have the the engineering, the commercial capability. We've got really kind of the the entire infrastructure to provide the permitting the licenses really all some of that qualitative stuff as well and some of the administrative stuff we've got, we've got a full capability of investment that we've made operationally and with our people and systems to deliver a turnkey solution from production all the way to last mile delivery, whether it's in our industrial business, aerospace business, our marine business, but no one else really has that no one else has that capability more. They've invested in that capability more. They've demonstrated the desire to invest in that capability.

Bill Dezellem

Great. Thank you. And in your opening remarks, you also referenced having both plants essentially sold out. You mentioned a timeframe and I missed I missed what that timeframe was. Would you please repeat that?

Andy Puhala

Yes. So it's based upon the color lens and we're looking through, we think that that it stands to reason that by mid point this year and well into 2025, our plants so we effectively sold our bill.

Bill Dezellem

And today the 95% capacity at George West, do you consider that sold out or and or do you still see more?You're really wanting to get up to 100% or more.

Andy Puhala

I want to get to 100% or more. And I think I'm optimistic that we're going to get there.

Bill Dezellem

Okay. Great. Thank you. And so when you take of both accounts or both both plants and put them together, what would the current utilization be running at, say in the fourth quarter.

Andy Puhala

Yes, if you take if you take George Weston Canada, the mid to high 90s and Andy put, Alan was kind of in the mid 80s, mid 80s.
It's probably the low low on a just kind of weighted average is probably a low to low mid 90%.

Bill Dezellem

Great. That's a that's helpful. And the port Port Allen, does it have much volatility in its utilization and we just don't talk about it much or is it similar to the George Weston? It has its level and it's kind of holding there.

Andy Puhala

Now the latter is got very low volatility and we've got a very strong counterparty customer that absorbs the vast majority of that to that production.

Bill Dezellem

Great.Thank you and congratulations on a on a good quarter.

Andy Puhala

Thanks, Bill.

Bill Dezellem

Thank you. As a reminder, to ask a question, please press star one. We'll take our next question from Spencer Lehman.

Spencer Lehman

Good morning. Just a couple of quick questions of the current administration in Washington seem to be antagonistic to fossil fuels and specifically LNG. now with the of foreign exports and how you see that impacting you heard domestically and maybe in the future, are you worried about that?

Andy Puhala

I'm not overly concerned about it because if you think about it just a general low natural gas prices really are our friend. And if you think about the competitive landscape, certainly there may be other operating companies out there. But the real competition for me are oil prices for diesel on four or propane for or the other kind of maybe types of natural gas. And so we don't think it has a dramatic impact, not the least of which we've already got our permitting and licenses for export. So we're already grandfathered in. It might actually work to our benefit to the extent that others aren't successful. But also that's really a world scale phenomenon. And we have a world-scale you're getting 0.5 million to 2 million gallons of production a day and social years until OEMs and all these new kind of greenfield projects that are coming on for export, that's kind of, I think, more dramatically impact them than really the small-scale world where we participate, which is filling rocket ships for space exploration or marine bunkering for a large ocean vessels and cruise ships.

Spencer Lehman

Okay.
That sounds good.
And then the second question on hydrogen.
I mean, a lot of talk lately and it's sort of starting to heat up. And I guess you're looking for some kind of guarantee supply is a big issue comes in. And are you still are you guys still pretty excited about the future of hydrogen.

Andy Puhala

I think we're excited about a variety of things. I don't know since I joined the Company, and I know that there was some some thoughts around hydrogen with it predates me. I don't know that I'm just I'm as bullish on it. I'm not overly bearish, but I think that there are other other transitional fuels that are scalable, clean and readily available and secure and cost effective. The thing about hydrogen, if it's not green, it's not green need. And so if it's going to be blue or gray, then you're better off utilizing a resource such as clean natural gas. And so I think the scalability and profitability around green hydrogen is pretty far in the future so I'm not against hydrogen or methanol or ammonia or any of it. And we'll be thoughtful around not just LNG but other fuels as marriage fuels and our product solutions offerings but I mean hydrogen is one that's a little bit harder for me to get my head around at this point in time, kind of given the visibility that I see Got you.

Spencer Lehman

Okay, but you're ready to go with it if some breaks out?

Westervelt Ballard

I think I think we are it's absolutely something we would consider to the extent that there's scalability and green hydrogen and that will methanol or RNG and other kind of alternative clean fuels are our LNG is not an end state for us, it's beginning. And so all those other fuels would be fair game, but there's got to be I think they got to be clean. They got to be green and they've got to add incremental value, not only on the ESG side, but also on the on the scalability as well as cost side.

Spencer Lehman

Okay.
Got it.
Great.
And you guys are doing a great job and good luck.

Andy Puhala

Thank you.So much.Thank you.

Operator

This concludes the Q&A portion of today's call. I would now like to turn the floor over to Mr. Puhala for his closing remarks.

Andy Puhala

Thank you, operator. As well as all of those of you that joined us and for your time and interest in our company. If you have any further questions, please contact our IR team and we look forward to seeing you on the road. Take care.
Thank you.
This concludes today's two Business Solutions Fourth Quarter and Full Year 2023 Results Conference Call. Please disconnect your line at this time and have a wonderful day.
In fact, the Boom Boom Boom will start there.
No, no, on.