SLNG - NASDAQ

To all sites on hold, we appreciate your patience, and we ask that you please continue to stand by. Welcome to the Stabilis Solutions Third 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 at any point your question has been answered, you may remove yourself from the queue by pressing star two. So that others can hear your questions clearly, we ask that you pick up your handset for the best quality. Lastly, should you require operator assistance, please press star zero. I would now like to turn the call over to Andy Puhala, Chief Financial Officer. Mr. Puhala, please go ahead.

Good morning, and welcome to Stabilis Solutions Third Quarter 2024 Results Conference Call. I am Andy Puhala, Senior Vice President and CFO of Stabilis. Joining me today is our President and CEO, Westy Ballard. We issued a press release after the market closed yesterday. This release is publicly available in the Investor Relations section of our corporate website at stabilis-solutions.com. 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 expectations and beliefs as of today, November 7, 2024. 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. Additional information concerning factors that could cause those differences is contained in our filings with the SEC and 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 will hand the call over to Westy Ballard for his remarks.

Thank you, Andy, and good morning to everyone joining on the call. We have a lot of great stuff to talk about today, really building off the momentum since I joined as CEO a little over three years ago. In doing so, I outlined two primary strategic objectives. The first objective was to stabilize and optimize our equipment to support both our core business as well as the business we would seek to build in the years ahead. Over the last 24 months, we have demonstrated our commitment to a disciplined, returns-focused approach towards capital allocation while positioning the business to scale within both established and emerging growth industries in search of cleaner fuel alternatives. In the third quarter, we delivered more than 15% revenue growth while continuing to shift our revenue mix from spot sales toward longer-term contractual agreements. To that end, 68% of our third quarter revenue was under ratable contractual agreements, up from 43% in the previous year. This pronounced shift in the quality and consistency of our revenue mix and the enhanced gas processing capabilities we deployed last year to address feed gas consistency issues resulted in exceptional utilization of our two owned LNG production facilities and has contributed to a significant improvement in our margin realization consistent with our strategic focus on driving improved operating leverage. Given our improved margins and operating leverage, we ended the third quarter with $15.6 million of available cash and liquidity and a net cash position on our balance sheet versus $8.6 million of total liquidity in the year-ago period. Our improved financial foundation and strong liquidity profile have enabled continued investment of operating cash flows to grow the business.

Along our strategic focus of strengthening the durability of our business and liquidity profile, we established a second objective, which was to identify, prioritize, and pursue key growth initiatives that can drive long-term shareholder value. Fueling large marine vessels, providing power for data centers and for emergency response situations, and fueling high-performance rocket boosters in the aerospace arena are incredibly exciting end markets for expansion as they gravitate toward cleaner fuel sources that are reliable and cost-effective. In evaluating growth opportunities, a key criterion was our ability to leverage our capabilities to expand into new markets that are at the forefront of considerable growth. Not only is our scalable, cost-effective exit, but also being an incumbent supplier in many markets positions us for further market share growth as these are large-scale LNG production nor alternative fuel sources are feasible or economically viable for most of these customer applications. While we are encouraged by the growth in these markets, they are in early stages of what we anticipate will become a significant increase in demand. The annuity of these types of projects consists of a wide array of variables across commercial, operational, and financing fronts, so they take time. We recognize that. Notwithstanding, over the past 24 months, we have made tremendous progress along this front, as evidenced by our LNG bunkering operations in Port Canaveral, Florida, and the Port of Long Beach, California, and the award of a multi-year LNG bunkering contract to fuel Carnival Corporation's newest LNG-fueled cruise ship, the Carnival Jubilee, in Galveston, Texas, in the fourth quarter of 2023. During the third quarter, we realized a threefold year-over-year increase in revenues within our marine and aerospace growth markets, which now comprise approximately 40% of total revenues compared to 11% in the third quarter of last year. Within our marine business, Stabilis is the only provider of marine bunkering solutions with experience executing LNG bunkering operations using multiple modes of delivery on all three coasts. Since identifying expansion in the marine market as a key growth strategy, we have spent an enormous amount of time and energy further developing our commercial relationships with the world's largest and most dynamic owners and operators of vessels. Throughout these discussions, several consistent themes have arisen as to why we are a highly thought-of leader to develop the modern marine bunkering infrastructure in the United States. These include our extensive experience supported by our deep bench of regulatory, engineering, project management, and operational teams ready to execute. We are a low-risk and execution-ready choice given our existing redundant and reliable supply chain and ability to deliver LNG volumes at scale. As a NASDAQ-listed company, our customers value the transparency and stability we provide as a financial counterparty. This is evidenced by the award of our LNG bunkering contract with Carnival Corporation. Our team has done an excellent job in the execution of the Carnival contract, and we are excited about leveraging our first-mover advantage to further scale our LNG marine market and supply chain to the waterfront on the Texas Gulf Coast. We are moving quickly along this front and feel that we are competitively advantaged when compared to concept company competitors. We have invested in design, engineering, and feasibility assessment, identified a proposed site, purchased the major components of a 100,000-gallon-per-day liquefaction plant, and we present a de-risked value proposition to prospective customers not only due to our experience but by virtue of our ability to leverage our existing operational South Texas and Louisiana liquefaction plants as backstop or supplemental supply points to ensure redundancy and continuity of supply. Beyond the Texas Gulf Coast, we are actively evaluating opportunities to build upon our experience on the East and West Coasts, as well as expanding outside the US to the Caribbean, Central America, and South America. Our goal is to have a robust and highly optimized portfolio of production and delivery capabilities to service a broad array of exciting growth opportunities for marine bunkering and power generation applications across these markets. Turning to our commercial industrial markets, we see strong structural tailwinds driving incremental power demand. Applications include data centers, the onshoring of manufacturing, and vehicle electrification, all of which are expected to increase US power consumption by at least 55 gigawatts between now and 2030. Of the 55 gigawatts, data centers are anticipated to consume around 40% or 22 gigawatts. To put that into context, that is equivalent to roughly 23 billion incremental gallons of demand per year or, said differently, nearly 650 additional Stabilis South Texas liquefaction plants. This incremental power demand poses a litany of challenges for utilities to service this incremental demand as the addition of new power generation capacity is highly regulated. It will require significant investment that may not be appropriated and will take considerable time to build. Reliability, scalability, cleaner, and more sustainable power supply are critical needs for data centers, and the constraints are causing data center infrastructure providers to proactively take control of their own power destinies. This dynamic is creating considerable opportunities for new power generation solutions in the market to support this incremental load growth and put Stabilis in a wonderful position to address these needs. It is our intention to empower data centers to do just that: control their own power destinies. We want to bring energy to where they need it. To do so, we intend to deploy a suite of capabilities across several fronts. We provide front-end power strategy development and project management services consisting of our highly trained engineering, technical, operational, and project management personnel to assist customers with planning, permitting, licensing, site design, natural gas pipeline sourcing, and access. We will also provide 24/7/365 storage and delivery of LNG to support the Five9s, which is 99.999% reliability for behind-the-meter power to natural gas generators or turbines, primarily in new-build data centers where there is a time lag between data center power demand and when both base load grid power is available at the data center site. We will also provide backup and peaking power generation at data center locations as well. To support this, we provide ancillary and critical back-end services consisting of continuous methane emissions monitoring, renewable natural gas (RNG), and other alternative energy solutions sourcing supported by our highly trained operational and field service technicians to assist customers with mobilizing, commissioning, monitoring, and reliably operating on location. We are extremely excited about the potential in this market, which is a natural extension of our considerable power generation resume where we have delivered over 12 million kilowatt hours of dependable natural gas-fired power for critical mushroom applications since our company's inception. In closing, I want to leave you with this message: With Stabilis, we provide shareholders with a business that can capitalize on significant upside evident across our growing underserved clean fuel markets while de-risking the model through an increased mix of high-quality contractual revenue and a disciplined approach to capital allocation. Simply put, we have effectively combined the remarkable growth potential of a successful startup without the risk profile of a startup. It is an incredibly exciting time for our business, and we are just getting started. With that, I will turn it over to Andy.

Thank you, Westy. Let's move to a discussion of our third-quarter performance together with an update on our balance sheet and liquidity exiting the third quarter. Third-quarter net income was $1 million or $0.05 per diluted share on revenues of $17.6 million. Our revenues grew 15.1% compared to the prior year period, driven by strong LNG demand and improved utilization of our owned liquefaction facilities. The improved year-over-year utilization was due to the resolution of the feed gas composition issues which hindered our production at our South Texas LNG plant in the third quarter of last year, increasing by $2.1 million compared to the prior year period. Adjusted EBITDA of $2.6 million was a record for the third quarter. Adjusted EBITDA margin increased to 14.6%, up from 3.5% in the third quarter of last year. We generated $2.6 million of cash from operations in the third quarter, and this strong cash generation contributed to building on our solid cash and liquidity position, which we intend to leverage as we invest in growth going forward. As of September 30, 2024, Stabilis had total cash and equivalents of $12.4 million together with $3.2 million of availability under our credit facilities. Total debt outstanding as of September 30, 2024, was $9.8 million, resulting in a negative ratio of net debt to trailing month adjusted EBITDA of negative 0.2 times. Through the first three quarters, we have invested $3.6 million in capital expenditures on a cash basis, with $1.3 million incurred in the current quarter. This amount is expected to rise in the fourth quarter as we complete several payments, including those for the expansion of storage capacity at our George West LNG production facility, which we highlighted last quarter. For the full year 2024, we anticipate CapEx to total between $8 million and $10 million, subject to the timing of specific projects. I would like to emphasize that ongoing maintenance CapEx for the company remains relatively minimal. On the growth side, an increase in CapEx will reflect positive progress on several of the key initiatives we have outlined in the call and will require additional financing. To address this, we are routinely evaluating a variety of prospective sources of capital with heavy emphasis on those partners that know our industry, our company, and recognize the significant upside potential in our operating model. That concludes our prepared remarks. Operator, please open the line for the Q&A session.

Thank you. Ladies and gentlemen, the floor is now open for your questions. Star two. Again, we ask that you pick up your handset when posing your questions to provide optimal sound quality. In the interest of time, we also ask that you limit yourself to one question and one follow-up question. We will pause for just a moment to assemble the question queue. Our first question comes from Martin Malloy with Johnson Rice. Please go ahead.

Good morning. Congratulations on the strong quarter and the progress you are making on a number of fronts here. The first question I wanted to ask about was on the marine and the Gulf Coast marine bunkering operation that you project that you discussed in the press release. Could you maybe talk about milestones we might be looking for here to reach FID for this project and any permitting milestones we should be looking for? And then maybe you have purchased a lot of the key items and long lead time items. Maybe time from FID to when it might be operational?

Yeah. Good morning, Marty. Thanks so much for the question. As I have mentioned, we are really excited about the Gulf Coast. We think that the macro thesis is incredibly interesting, and I think some of the milestones we have already, I think, demonstrated to the market by virtue of buying that first 100,000-gallon train. We have done quite a bit of preliminary feed study analysis, we have settled on a location that we think is highly actionable. Frankly, we are poised and ready to go and think about capitalizing this. But in doing so, there are a couple of variables that fall into play, one of which obviously is the commercial side of the equation. The other is the financing side. There is quite a bit of industrial logic to doing something like this on spec. But as you can imagine, a company our size, that is quite a bite to take, so we want to continue to firm that up. Milestones would be a little bit more meat on the bone in and around commercial activity. But it does not mean that we have to have a fully booked backlog. I think that if we can continue to see green shoots, we will be in the market raising capital, and I was some speculative because the backdrop is there. I think those milestones are going to be CapEx, the trading of larger quantums of CapEx, and or announcement of commercial activity or broader commercial activity than the success we have already had with that Carnival contract. I think when you talk about time, it depends. But as you know, we have a really good relationship with the majority of our vendors, and so we think that we have maybe not favored nation, but highly thought of nation status with many of them. So I think we think of timeline, that could be an 18 to 24-month from the time you say go to the time it gets rolled out. It is a pretty quick and expeditious rollout. That is one of the beauties of small-scale LNG. The modular aspects and the expedited ability, plus the ability for us to have a balance sheet that affords us the opportunity to buy that first train. That confluence of activity, I think, expedites this 18 to 24 months is probably a good rule of thumb.

Okay. And then for my second question, I wanted to ask about the data center opportunity. We have heard from other sources as well that they are serious about looking at LNG as a fuel supply for power generation. They are focused on timeline. Could you maybe give us a sense of the pace of discussions that you are having, and is it possible that you could get an offtake agreement from a creditworthy counterparty for a number of years that would give you the justification to maybe expand liquefaction capacity even further, or would you be sourcing from third-party sources?

Yeah. No. So the paradigm has changed. As you alluded to, it has changed quickly. Really over the last 18 to 20 months, you have seen a massive shift and notoriety of this AI and data center and cloud computing infrastructure or the need for such infrastructure. We think that, yes, there are opportunities for us really in several phases. The first of which is for us to have term contracts to bridge that gap between when the data center has been constructed and when the primary base load grid can show up to their location. That can be six, nine, twelve, eighteen, two, three years. It is hard to speculate, but there will be some term and ratability of that. That then amores into providing backup through what historically has been diesel generators, but really to we think moving forward, it is going to be natural gas and generate generation and turbine capability. Our volume of discussions even over the last 90 days has grown considerably. We are in the process of trying to enter nondisclosure agreements with many prospective customers to better understand their footprint and what their goals are and locations so we can better and more thoughtfully think about where we need to build our infrastructure service at. To answer your question, we might have a first wave where we source from third parties or we source from our George West plant or we double or triple or expand our George West plant. I think it is very likely or possible that we will build additional infrastructure in and around the US to adequately support a bit of a hub and spoke model where we will have liquefaction capacity, storage capacity, and then also distribute some of that smaller storage capacity at a cluster of data centers. It is an unbelievably exciting opportunity for natural gas and the natural gas paradigm to be a participant in the whole technological revolution that is before us. They are also very, very sensitive to emissions. Diesel is clearly not something that they are highly confident in using moving forward. They certainly, meaning the colocation and offtakers, are certainly aware of the challenges and costs around some of the more alternative solutions. Natural gas falls right in the sweet spot at scale. As I mentioned, if you have got 22 gigs just by the end of the decade that is coming online, and if we get even just a small fraction of that market share, it is an unbelievably exciting opportunity for Stabilis.

Great. Thank you. I will turn it back.

Great. Thanks, Marty.

We will go now to Barry Haimes with Sage Asset Management. Please go ahead. Your line is open.

Thanks so much. One quick housekeeping question. How many gallons did you produce the quarter? Could you remind us what the annual capacity is? That is the first question.

Yes. So very good morning. Thanks for the question. We do not disclose publicly gallons sold, and that is really for competitive reasons because most of our competitors are private. Our utilization, I can tell you in the quarter, was pretty good. It was close to 90% at George West and in the high seventies at Port Allen. The capacity there is 100,000 gallons a day for our George West plant and about 25,000 gallons a day for our Port Allen plant. Call it 45 million gallons a year from our own production, but that does not count third-party molecules that we also source through our commercial activities in our logistics department, which is about 30 supply points around the U.S.

Got it. And then second question, if I could do a follow-up on the data center opportunity. Could you sort of describe what your sweet spot is versus, you know, and I would think it would be relatively easier for the data center guys to, you know, if they are going to get power from natural gas, to get it off the pipeline if there is pipeline availability. There may be places where there is not. So I am just sort of trying to understand where you guys or your solution would fit, you know, what your sweet spot would be.

No. You are right on. It is just early indications by those that growing list of customers that we have started to have engagement with, and some it is just as much as half of their rollout, which might be several gigs over the next five years, are not on natural gas pipelines. The quantum is material. We are still in fairly early stages of trying to fully quantify that. But also, it is one thing to just rapidly respond to a location, but really, I think our perspective is rather than try and shoot from the hip, we want to better understand their entire portfolio. So we can be thoughtful in ensuring that they have got reliable, cost-effective bridge and redundant power generation for their needs. We are in the throes of doing that. But as I mentioned, it could be as much as half of these locations at these colocation and offtakers are rolling do not have natural gas pipeline access at all. Also, I will say that even if they did, on the backup and peaking side, natural gas pipelines sometimes can be challenged in many states. Look at Texas alone. Oftentimes, especially in the winter months, an intermittency in those natural gas pipelines, and sometimes they are either providing maintenance or unclogging those pipelines. Sometimes they have got to discontinue use commercially because you have had disruptions in the pipeline. Having a backup from LNG or a third-party source that has got a lot of storage that we can deploy that is not dependent upon a pipeline or that can weather a pipeline discussion, that is also fair game. I would not say it is entirely just a universe of prospects that are not on natural gas pipelines. That certainly is a large part of the universe, but there is also a universe of those that are on pipelines that also want to have that redundancy. This 99.999 or the five nines is real. It is something that they are very sensitive to about maintaining the ongoing flow of power and data generation out of these centers.

Great. Thanks so much. Lots of confusion. Good luck.

Yep. Thanks. Thank you.

We will turn now to Matt Dain with Teton Capital Management. Please go ahead. Your line is open.

Thank you. I wanted to ask about the aerospace market. Now it is curious how it has developed relative to your expectations. Then secondarily also, is the aerospace market an industry where we should expect long-term contracts to play a role over time?

So I will answer that. The first question is you actually has. It is playing out really along the lines of how we have expected. What I mean by that is we expected a little bit of lumpiness and volatility. There is certainly a main participant in that market right now who has got the lion's share of market share. As you can imagine, there are regulatory inputs and other variables that come into play when it comes to launching and R&D for rockets. I would say it is where we anticipated. We are fortunate to have a little bit of ratability and contractual coverage in our aerospace business. That is a new phenomenon that really occurred a few months ago. We are excited about that. We think we can build upon that. We think that over the ensuing years, not all roads will go through one company. There will be others, which there are now, but those others will enhance their capabilities and continue to need LNG to not only support their research and development activities but also their launch activity, maybe not the volumious amount per rocket launch that another provider does, but certainly a cluster of launches that if you aggregate can be a very exciting opportunity for us as well. As you know, we are a market leader. We have a track record of safe and reliable fuel supplying to these high-performance rocket boosters, and we expect to continue to maintain and protect that market position as this market continues to evolve over ensuing years.

Great. Thank you, Westy.

Thank you.

That will conclude the Q&A portion of today's call. I would now like to turn the floor over to Mr. Ballard for his closing remarks.

Thank you, everybody. We are excited about today, but certainly tomorrow, and we look forward to talking to you down the road.