Koil Energy Solutions (KLNG) 4 Nov 242024 Q3 Earnings call transcript

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Koil Energy's Third Quarter 2024 Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, Monday, November 4, 2024. A detailed disclaimer related to Koil Energy's forward-looking statements is included in the press release issued Monday morning and filed with the SEC. It is also available on the company's website, koilenergy.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. Koil Energy 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, Erik Wiik. Please go ahead.

Good morning, ladies and gentlemen. Thank you for joining us today. In this briefing, I'll provide an overview of our third quarter performance and update you on our ongoing strategic initiatives.

Following my review, Trevor will deliver a detailed analysis of our financial performance.

Next, I'll provide an update of our strategic road map and how Koil is positioned for future growth.

Finally, I'll be happy to answer any questions you may have. We delivered another quarter of robust performance, highlighted by year-over-year growth and driven by a proactive growth strategy. Compared to the third quarter of last year, revenue grew 27%, gross margin increased to 40% and adjusted EBITDA improved from a loss to a margin of 13%.

We have so far generated a free cash flow of approximately $1 million. Thanks to effective collection, cash at the end of Q3 was at $3 million. Despite an increase in revenue from service contracts, our overall revenue decreased by 10% sequentially quarter-over-quarter due to lower percent of completion, POC, on our fixed price projects caused by delayed deliveries from our machining suppliers. This outcome falls a bit short of expectations as we aim to demonstrate consistent quarter-over-quarter growth to our shareholders, especially given our strong backlog and adequate internal production capacity, expanding the capacity of our supply chain is crucial to our growth strategy.

We have since restructured our projects and supply chain management organizations. And moving forward, we are committed to managing this component much more effectively. Consequently, the deferred percent of completion revenue is forecasted to be recognized in Q4.

Our clients continue to give me great feedback on our team's performance.

For instance, during Q3, our engineering team completed the design of a 1,000 ft. gas lift steel tube flying lead. This unique innovation was developed in close collaboration with our clients.

Another example is the design and fabrication of a Drift Frame, a concept developed to solve an expensive problem for our client. This solution reduces the need to mobilize vessels and can also be applied to similar future campaigns. Perhaps the pinnacle of our accomplishments this quarter was the comprehensive installation campaign of subsea equipment in the Gulf of Mexico, which included a rapid turnaround of an Intervention Logic Cap to address an issue the client was having with the existing subsea equipment. From the moment that the problem was identified offshore, our team took less than 24 hours to design, approve, source parts, build and successfully pressure-tested device. The enthusiastic feedback from the client's team regarding Koil's performance on this turnaround continues to pour in.

During the third quarter, we were awarded a significant contract to provide Bend Stiffener Latchers to an operator in the new region.

Our proprietary solution is designed to secure a subsea umbilical cable to a top side facility without the need for diverse. This contract award is a recognition of our team's endeavors in continuously developing our product, enabling growth in new markets and underscoring Koil's strong technology position in the global subsea industry.

We also announced that we secured a significant contract to provide maintenance services on an offshore production platform for an international oil and gas company. The scope of work includes the removal, welding, termination and commissioning of specialty alloy tubing used for chemical injection and hydraulic control as well as the termination and testing of electrical cables. Koil has been awarded an increasing number of similar termination projects, demonstrating the company's expertise in managing critical repairs in confined spaces. This expertise includes identifying and mitigating risks and hazards before work begins, ensuring a swift control and safe startup to resume well production. Planning engineering and procurement activities have already commenced for both projects at Koil's facility in Houston. And with that overview, I'll now turn the call over to our Vice President of Finance, Trevor Ashurst.

Thank you, Erik.

We will now take a minute to review our third quarter results in more detail.

For the 3 months ended September 30, 2024, Koil Energy generated revenues of $5.2 million, reflecting a 27% increase compared to revenues of $4.1 million for the same period in 2023. This year-over-year improvement in revenues primarily stems from increased product-oriented fixed-price contracts and the manufacturer of subsea distribution equipment. Gross profit for the third quarter of 2024 was $2.1 million or 40% of revenues, representing a 7% increase in gross margin compared to $1.4 million or 33% of revenues in the third quarter of 2023, and this improvement was mainly driven by higher revenues and improved project margins. Selling, general and administrative expenses remained steady year-over-year at $1.6 million.

So moving to net income. We reported approximately $500,000 for the third quarter, which translates to $0.04 per diluted share. This is a substantial improvement from the net loss of $143,000 or $0.01 loss per share recorded in Q3 of 2023. This positive shift in earnings was primarily driven by revenue growth and increased gross profit due to higher fixed project activity.

Turning to our balance sheet. We had $4.9 million in working capital as of September 30, 2024, including $3.1 million in cash and $5.3 million in net receivables, this compares favorably to $2.6 million in net working capital as of December 31, 2023, which included $2 million in cash and $4.2 million in net receivables.

Our working capital investments from early this year have effectively converted to cash, resulting in a stronger cash balance by quarter end.

Additionally, we generated approximately $1 million in free cash flow in the first 9 months of 2024, further reinforcing our liquidity position. This concludes the financial summary for the third quarter. Thank you for your time, and I'll now turn the call over to Erik.

Thank you, Trevor.

Before we address any questions, I'll provide an update on our strategic road map and how Koil is positioned for future growth.

You can view a copy of our road map in the investor presentation on our web page.

During the first 9 months of 2024, we have grown revenue by approximately 50% year-over-year.

Our growth strategy continues to propel Koil's business performance with significant progress on our strategic plan. By focusing on increasing our share of spending with existing domestic key accounts, we have secured a backlog of product contracts and an increasing number of service contracts. This success has prompted us to invest in upgrading our pool of rental equipment.

Our targeted response to the growing demand for brownfield services has also led to an increase in bookings for the retermination of subsea umbilicals.

Another key strategy is to continue supporting our clients abroad, which is yielding positive results.

For instance, we are participating in the first deepwater subsea development in Mexico, providing support to our U.S.-based client. Furthermore, I'm pleased to share that we're already making progress with our international expansion, even though this was initially planned for next year. The strategy is to expand our client portfolio by targeting specific geo markets that align well with Koil's capabilities.

For example, in order to strengthen our presence in South America, we have hired a managing director to represent coil in Brazil. He's based in Rio de Janeiro and has already generated a pipeline of prospects currently being bid to clients in Brazil. Global demand for subsea equipment and services is on the rise.

We have expanded our sales team and are currently pursuing over 80 potential projects, both large and small, that Koil may be qualified to deliver.

Before we conclude, let me thank our shareholders for their support and continued interest in our company. I would also like to welcome aboard several new investors. Koil Energy is a great investment opportunity. We offer mission-critical deepwater solutions with a high barrier to market entry. Koil is a fast-growing company with a strong foundation and no long-term debt. We're experiencing an exceptional share price development. That concludes our prepared remarks today.

So I will turn the call back to the operator to take investor questions. Operator?

[Operator Instructions] And our first question comes from Sebastian Krog with Treasure Hunting.

So my first question is regarding the contract you announced in December last year, the Flying Leads in the Gulf of Mexico.

I think most of the -- basically all of the revenue in the press release back then you said it will be fulfilled in 2024. Could you give us maybe an update if this contract is already completely done and all the revenue is already collected? Or how many percentage of the revenue will maybe flow into Q4 this year?

Yes.

So I don't have the exact numbers for how that project is split up, but it's obviously commencing well. And -- but some of that work will be done in 2025, particularly the installation part of it.

Okay.

So you expect that a significant portion or maybe a small portion will be fulfilled in 2025 and other in Q4? Is that correct?

That is correct.

Okay. And then I mean, we saw from -- on a quarter-to-quarter basis, basically a decrease in fixed price contract revenues from Q1 onwards.

So how should we think about this in the future? What was the reason maybe for the extremely high revenue in Q1 and now the lower revenue on the product side in Q3? How is it -- so my question is basically, was Q1 in terms of product revenue, just outlier in the positive direction? Or is Q3 maybe going forward, an outlier in the negative direction?

Okay.

So Q1 and Q2 had a revenue of $5.8 million at the same level. We just didn't improve the profit in the second quarter.

Now what did happen in the third quarter was that we didn't manage our supply chain as well as we want to.

And so some of that revenue that we were expecting to be delivered and recognized in Q3 has now moved over to Q4.

Now how much of that will tally up in Q4? Obviously, we are executing that project right now. Will it push any revenue into Q1? We're not certain about that yet, but we're working really hard in order to maintain a high level of revenue and regardless of that revenue also to make sure that the profit is maintained at a high level.

So I'm not able to tell you what is normal.

We will have quarters that goes up. We'll have quarters that goes down. But I'll show you that what we are doing as a growing company is we're trying to pull in work. We're trying to execute everything we have available to us in the quarter. And we're trying to get the recognition of that through the percent of complete -- completion model.

And so we're working hard to make that happen. And that defines a growing company, right? So if we want status quo, we can let things slide. We don't like status quo. We're going to continue to grow.

So all I can say is, I'm going to assure you, we're going to work really hard in order to pull in the work and execute what is in front of us.

So did I understand it correctly that if the project would have not been delayed, then Q3 revenue would have been on a similar level as Q2?

Well, obviously, the gap there is $800,000. Would it be filled that gap? Maybe, very close perhaps. The work we put that was moved out would have certainly filled the majority of that gap.

Okay. And then one last question. The increase in SG&A on a quarter-to-quarter basis.

You -- was this due to the expanding of the sales team or more due to the expanding service revenues?

It really has to do with more of the kind of our growth strategy. We engaged a few professional services and contractors, et cetera, that were associated with like our efforts in Brazil. And then there are also some just some housekeeping efforts that we needed.

So there's a lot of attention being paid around like cybersecurity, for example.

And so we had some -- hired some services to help provide like a risk assessment there.

So just a little uptick in some contract cost there, but some are onetime or at least once a year time, and then some are ongoing.

Our next question comes from Mike Travel, as a private investor.

Back in the day when there was a deep down incorporated, they used to communicate out a backlog level. Are you all doing that now?

So yes, thank you for your question. That's something we have been thinking about. And as we are improving our financial system, our metrics, our forecasting and planning, we may consider that some time in the future. Currently, that is not a meaningful number and it's not even meaningful for us because we have a backlog that is long term.

We have some backlog that we get order intake and we execute the work in the same quarter.

We have a mix of products and services.

So at this moment, it's not a meaningful number for us or for you. But as I said, we will consider that in the future at some time.

Another question, you're saying you're pursuing about 80 projects. Was that just in Brazil? Or is that worldwide?

No, that's worldwide. That is worldwide.

Not being an industry insider, it seems like that's a lot of projects.

You've been marketing the company much better recently. Are people coming out of the woodwork and saying, here you go, let's do business or?

Yes. I mean, the strategy, as we shared with you earlier, one thing was to increase the wallet share with the current customers, which means that we are selling more and a wider portfolio to customers we have been dealing with for years.

So that is just to give them the necessary awareness of our capability.

Second, we also have improved our technology, standardize some of our solutions, which also made us more competitive, particularly on the lead time. And then what we're moving towards now is more to not only to follow our customers internationally, which we have always done, particularly in west of Africa for instance. What we're doing now and started recently is to pursue new markets with new clients, new subsea clients in South America, particularly that we have not done business with in the past that we are now being introduced to and clearly see that there is an opportunity for Koil to supply some of the scope of work.

This concludes our question-and-answer session. I would like to turn the conference back over to Erik Wiik for any closing remarks.

Thank you, operator. And our thanks to all of you who joined the call today. We appreciate your interest in Koil Energy and look forward to the next earnings call. This concludes our call. Thank you.

The conference has now concluded. Thank you for attending today's presentation.

You may now disconnect.