Koil Energy Solutions, Inc. (KLNG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Deep Down's Fourth Quarter and Full Year 2019 Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, Tuesday, March 31, 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 our press release and on our 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 Njuguna.

Thank you, Jewel. Good morning, and thank you for joining us this morning. With me on the call this morning is Trevor Ashurst, our new Vice President of Finance, who despite being in the company for only 2 months, has already made meaningful contributions to our organization. You will hear from him in a few minutes as he reviews our 2019 results. While our 2019 results showed an improvement over 2018, the progress we are making as we began 2020 has been impacted by the global coronavirus pandemic and the concurrent oil price crash. As a service provider in one of the 16 critical infrastructure sectors as have been defined by the Department of Homeland Security, we are continuing to support our customers' critical infrastructure activities. As a case in point, right now, we have 2 teams of personnel offshore, working on 2 different operators' assets. We also have testing going on here at our facility for that customers' equipment, which we built and which is currently scheduled to be installed in the Gulf of Mexico during the second quarter. I spent some time with this customer yesterday, and they indicated that the project was proceeding as planned with no immediate plans to hold off. At a macro level, what we are seeing in light of everything going on is an immediate impact in our customers' onshore activities and more of a wait and see attitude on the offshore side. Over the past week or so, I have spoken to most of our key customers and the prevailing team has been warned of accessing all of the activities in order to determine the most critical activities to proceed with and the activities to defer until later. To strike the right balance between continuing to provide support for our customers, while complying with all of the governmental restrictions, we have implemented a raft of measures to do our parts towards slowing the spread of the virus. These measures include requiring our administrative staff, our engineers and our project managers to work remotely and only come to the facility when needed. The only personnel walking on sites are essential production personnel, whose activities cannot be performed remotely, and we have modified our operations to comply with social distancing guidelines, we have increased cleaning and sanitizing of our facility, and we are diligently screening our personnel to verify their health before they head offshore. The travel bans have also had an impact on our business given that our teams cannot travel as we normally expected. To provide an example, we are scheduled to have a large team in Trinidad during the second half of March for about 10 to 14 days but have not been able to travel due to the restrictions. However, our equipment left before all of the restrictions were implemented, so we have worked out an equitable arrangement to the customer due to the prolonged rental period. We also have 2 other large teams currently scheduled to head to West Africa and Singapore within the next few months, both of which are contingent on easing of their travel restrictions. We will continue to work closely with our customers as they define the activities they deem most critical. Thankfully, our experienced service personnel deal with unknown factors all the time, and their ability to adapt to the current environment will be no exemption. They are always ready and willing to do what it takes to meet our customers' critical needs. In light of the current developments, our immediate focus is on managing our cash flow as we continue to focus on returning to our core business. Despite the nonrecurring expenses we incurred in the year 2019, we were able to generate cash flow from operations, and we intend to continue striving to generate free cash flow despite the recent headwinds in the industry. Talking of cash flows, while Trevor will delve deeper into our financials, I would like to briefly touch on a couple of key metrics. Out of the $4.5 million we have in accounts receivable as of December 31, 2019, we have received close to $4 million to date, and we have commitments from our customers for the rest of it. Fortunately, with the exception of 1 new customer who owes us about $20,000, the rest of it is mainly from large, well-known customers we have worked with before or customers who have paid most of their outstanding invoices. Additionally, most of the $10 million worth of in-house projects we have is from customers we regularly do business with and/or customers with sound financial footing. However, we will be watching all of our customers' operations and announcements closely given the current environment. And going forward, we'll be working diligently to ensure early payment for new projects, especially when working with new customers. To further ensure we maintain adequate liquidity, we have also started engaging our suppliers and service providers in order to further lower our cost structure, and we have restricted any capital expenditures to only maintenance-related expenditures. While we were able to realize the benefits of our cost containment efforts in 2019, we have now made it part of our culture to continuously review our cost structure to identify opportunities for further improvement. Despite the current global pandemic, our teams have been engaged in discussions with different customers and future projects, and we do see opportunities for us once the economy begins to return to some form of normalcy. Specifically, as our customers scaled back their current operations, there are already some discussions about defined maintenance that will need to be performed. We will also be keeping a close eye on available operational challenge as companies rightsize their organizations. As we've continued working through the transition, we've been engaged with existing and new customers and we've identified our niche or our reputation for service work, and we do intend to fully capitalize on the service opportunities that will be before us. These opportunities are in addition to some current prospects we have, one of which I hope to close out this afternoon. This is with a customer we haven't worked with in many years and is down to final clarification discussions around intellectual property. Our team also had a call with a different customer last night to close out some outstanding technical and commercial clarifications on different new projects. In all of these projects, we'll be striving to ensure we execute them [ preliminarily with their results ] and increased profitability and cash flow. Speaking of results, let me now turn the call over briefly to Trevor Ashurst for few introductory comments and a review of our 2019 financial results. Trevor joined us in January from Dril-Quip where he most recently held dual roles as the Manager of Financial Planning and Analysis and as Manager of Investor Relations. Prior to that, he was a Finance Manager for a recently acquired subsidiary after having been involved in that acquisition as part of Dril-Quip's corporate development team. Before joining Dril-Quip, Trevor worked as an auditor and in investment banking. Welcome, Trevor.

Thank you, Charles, and thank you for the kind words. I'm excited to have joined Deep Down -- the Deep Down team and look forward to playing my part in the growing organization. It feels like I've been with the company longer than just 2 months, which I attribute to the united vision to do what's necessary to grow the company to new heights. What's even more impressive to me is that this pursuit of excellence is not only shared by the management team, but it's shared by the whole company. A lot of organizations talk about their customer focus, but it's been refreshing to see such a strong commitment to provide solutions for customers, especially when the needs are unique. I'm excited to be a part of the team and part of what we are working on building here. Now moving to the financials. When we look at revenue, Deep Down's Q4 2019 revenue declined to $2.9 million compared to $4.5 million in the fourth quarter of 2019 -- sorry, compared to the $4.5 million in Q4 '18. However, full year 2019 revenue increased to 17% to $18.9 million compared with $16.2 million in 2018, reflecting a year-over-year improvement in general offshore activity. For the full year 2019, gross operating margin was 36%, which was an improvement from the 30% we realized in 2018. This increase in gross margin can be attributed to realizing higher economies of scale on increased revenue as well as realizing a larger proportion of higher-margin service and equipment rental revenue in 2019 compared to 2018. Moving on to SG&A expense. SG&A rose approximately $1 million in 2019 to $8.9 million, principally due to incurring several nonrecurring charges during the year. These charges collectively totaled approximately $1.3 million. Excluding these factors, we were able to reduce selling, general and administrative expenses in 2019 to 40% of revenue as compared to 48% of revenue in the prior year. This improvement in SG&A was largely due to the implementation of our comprehensive and ongoing cost initiative plan, which was one of the key takeaways from the strategic review concluded last fall. I'm encouraged with the direction our operating metrics are heading as we begin fiscal 2020. Our progress on gross margin and SG&A reduction has demonstrated that our refocused operational strategy is beginning to pay off. Looking at net income, we reported a net loss of $2.8 million or $0.21 -- a loss of $0.21 per diluted share for 2019. This represents a $2 million decrease over our 2018 net loss of $4.7 million or $0.35 per diluted share. Deep Down entered 2020 with a solid balance sheet with cash on hand of $3.5 million, working capital of $4.9 million and no long-term debt. Additionally, we pursued a disciplined approach to making capital investments in 2019 by limiting capital spend to just under $100,000. And we expect to continue exercising the same level of discipline throughout 2020 as well. Looking ahead, the recent outbreak of the COVID-19 pandemic has resulted in supply disruptions, pressure on commodity prices and uncertainty for the global demand of oil and gas. As Charles mentioned earlier, we are actively taking steps to mitigate the impact of these events on our business. We're committed to preserving our liquidity by continuing to pursue our cost containment initiatives and limiting capital spend to only critical items. With that said, I want to thank you for your time, and I'll turn the call back over to Charles. Charles?

Thank you, Trevor. And once again, just to reiterate, like Trevor has said, while we've been impacted in the short term with the global pandemic and the oil price crash, we are also evaluating opportunities available to us during the downturn and preparing for the return to come out stronger on the other end of it. And that concludes our prepared remarks today. So I'll turn the call back over to the operator to take investor questions. Jewel?

[Operator Instructions] Our first question comes from Walter Schenker with MAZ Partners.

Jeez, Charles, you took over and we lose money. I thought this was going to be a step up.

It's COVID-19, Walter.

All right. There's been a lot of addressing of COVID-19. You really didn't get into and you don't know answers $20 oil. I realized you're totally on production and not on exploration. So you're later in the program. First question is, what if any, it's hard to separate it from COVID effect that you're seeing on people who have already drilled up wells going into production in deepwater from oil prices?

Good question, Walter. And we only briefly touched on it. What we are seeing from our clients is that on the deepwater projects that have already been sanctioned, they are planning to continue with those projects all through to completion. However, some of the execution-related activities are being impacted, especially by the travel bans. As far as the new projects that are slated for FID later this year, we are -- our clients are reassessing those projects, and in some cases, they've let us know that they're not sure yet which direction it will go. And there's a lot of uncertainty about how long the closures, the restrictions, and ultimately, the oil price, depending on the Saudi-Russia negotiations. So a lot of it is wait and see to see how long the standoff continues.

Okay. Jumping to the next question. The $900,000 litigation. This was something that had been referred to because I know there was litigation referred to in prior 10-Ks and stuff, but is this different?

Yes, this is the same litigation that has been referred to in prior years. What we've done in the last few months is we've taken a step back and we looked at it, reengaged our clients especially on the -- we've talked about the GE one in prior 10-Ks and on this 10-K. And there are some new projects coming up, which they have a new management in place. And we reengaged discussions to see if we can find a better way of working together going forward and agree to settle it and find ways to work in a better relationship, more cash positive for us as well as with...

So they don't expect you to be their bank going forward, hopefully?

Suddenly, they had an epiphany that we might not be big enough to be their bank. So we are hopeful about the future with them.

Okay. So there may be an offset going forward of -- with getting a client back?

Yes. Actually, we were scheduled to have a meeting this week with their new head of the subsea production systems, either here in the U.K., but neither of us can travel. So we are talking remotely and as both sides manage everything going on right now. So we look forward to more announcements in the future on that.

Given -- and this really isn't a question about earnings. Given that you collected $4 million on the receivables, at least through March, I should not expect your cash balance to go down?

We have made payments for the projects that we have in-house as well. And so without providing too much guidance and we'll be speaking again in about 45 days, our cash has gone down somewhat because of accounts payable and payroll, but our AR has continued to be relatively at the same levels. But we are very focused on collections, especially in light of everything going on right now.

Okay. And just -- I'm done with questions. I'm just telling you, I'm expecting your call.

Yes, sir. I continue to be very committed to let -- to give you a call about a carousel some time this year.

[Operator Instructions] Our next question comes from [ Mike Travis ], a private investor.

I guess the previous question touched upon the whole situation with the $20 oil. What's the industry dynamics of where the oil price is now versus with the timing of work that comes your way. If oil goes back to $80, does that mean that work just breaks out? But when it's at $20, everything shuts down? It doesn't sound like things are shutting down. These are long-term horizon type of projects. So what can you comment there?

Yes. On the -- as far as the new projects go, any projects slated to be sanctioned will likely be delayed at $20 oil. The projects that are already on track that have been sanctioned and are fully funded, we've had some of our clients assure us, those are continuing, contingent obviously on travel restrictions. The flip side, where we are seeing opportunities for ourselves is that as they delay new projects, there will be opportunities for maintenance on existing assets to try and extend the life of those assets. And we are looking actively at where we can capitalize on those discussions. Some of our service personnel have been involved in some discussions about some flushing of some lines and unblocking what's called hydro remediation. And not to get too technical, but we -- there are opportunities we are seeing based on defined maintenance that we'll be looking to capitalize on once there's some semblance of normalcy in the economy.

Okay. Okay. Second quick one. It was favorable that I saw that you -- the company had bought back some shares. Of course, that was obviously before the COVID-19. I mean that's a vote of confidence that you see that business was good and you had the cash. I don't know, hypothetically, did you wish that maybe you didn't buy those shares and you could have that cash as a cushion? Or it didn't really matter? It wasn't significant enough to really make a difference?

I think we -- Yes, that was the situation. We had a large holder who wanted to liquidate. We had some cash to do it. Looking back, I think it was -- we're able to provide some value for the shareholders. So we think it was a good decision. Obviously, as we watch our stock price hover in the 30s we wish we had a large -- if we had -- if we could sell a carousel right now, I could give Walter a call on the carousel, and we could buy a lot of shares.

But that was the one shareholder, you said?

Yes, it was one large holder who was looking to liquidate. And because we have some cash, we are able to do a transaction.

Right. Right. Okay. It sounds like you're showing some confidence that, assuming we can get past this rough patch, that the growth plans can be continued and carried out?

Yes, we have some cautious optimism about what the future could hold, obviously, subject to all of the factors beyond our control. But our key focus, again, just to stress is on preserving liquidity, and we're looking at all avenues to enhance our liquidity.

I'm not showing any further questions at this time. I would now like to turn the call back over to Charles Njuguna for closing remarks.

Thank you, Jewel. And thank you to all of you who have joined our call today. We appreciate your interest and your support of Deep Down, and we look forward to speaking with you in about 1.5 months and providing further progress at that point. And with that, let's conclude today's call. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.