Koil Energy Solutions, Inc.
Q1 2021 Earnings Call Transcript
Published:
- Operator:
- Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Deep Down's First Quarter 2021 Conference Call. During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, you will be invited to participate in a question-and-answer session. As a reminder, this call is being recorded today, Tuesday, May 11, 2021. A detailed disclaimer related to Deep Down's forward-looking statements is included in the press release issued Monday afternoon and filed with the SEC. It is also available on the company's website, deepdowninc.com, or upon request. A reconciliation of non-GAAP financial measures used in the press release and on today's call is included in the press release and on the website.
- Charles Njuguna:
- Thank you, Rein. Good morning and thank you for joining us today. With oil prices holding steady above $60 per barrel, optimism is increasing for a modest recovery of the oil and gas industry. However, many industry projections still call for a stronger recovery possibly in 2022. Despite the macro-events of the past 15 months, we were able to generate positive net income during the first quarter of this year for a second consecutive quarter of positive profitability that first time we've been able to do so since the first and second quarters of 2017. I would like to note that at the time our revenues were 48% higher. This positive trend is evidence of our team's efforts to better utilize our limited resources. As we mentioned during our investor call a few weeks ago, our service teams are now able to travel to most international jurisdictions, which enabled us to successfully perform different offshore scopes of work during the first quarter. With increasing prevalence of vaccines, we are cautiously optimistic that travel restrictions will continue to be lifted. Looking towards the rest of 2021 and beyond, we are seeing a marked increase in bidding activity, especially for smaller scopes of work. As we previously discussed, there is an increased need for maintenance work as our customers work to extend the life of their assets. We have also seen increased interest in our carousels and other rental equipments. However, given the prevailing uncertainties in the industry, many of our customers are still holding off on committing to larger new projects. Another challenge we are facing is significant increases in the prices of raw materials. For example, we are seeing more than a 50% increase in the price of certain steel components just since July of 2020, which unfortunately we are not able to pass on to our customers. While this is not isolated to us, our hope is that prices will normalize sooner rather than later. Otherwise, this could further delay the full recovery of our industry due to increased project costs. As we look at the broader energy industry, we are continuing to evaluate opportunities around the transition to a higher proportion of nontraditional energy sources.
- Trevor Ashurst:
- Thank you, Charles. For the 3 months ending March 31, 2021, Deep Down generated revenues of $3.9 million, which represents a 9% increase when compared to revenues of $3.6 million for the 3 months ended March 31, 2020. This increase is a result of having a more consistent level of project activity throughout the first quarter of 2021 versus 2020, which is mainly due to our customers working through their backlog of projects that were previously delayed in 2020 due to the pandemic. Gross profit as a percentage of revenues increased to 44% in the first quarter of this year, which represents a 13% increase in gross margin compared to the 31% we generated in Q1 last year. This increase in gross margin was primarily driven by having a larger proportion of higher margin service work and equipment rental in this quarter. Selling, general and administrative expenses decreased 9% to approximately $1.6 million for the first quarter 2021 compared to approximately $1.7 million in Q1 of 2020. This decrease in SG&A expenses was primarily due to the cost reduction initiatives implemented by the company last year. We remain motivated to pursue opportunistic cost containment measures to improve profitability, while being mindful of supporting the growth and operations of our business. Turning to net income, the company reported net income of $148,000, or $0.01 per diluted share for the first quarter of this year. This is compared to a net loss of $637,000 or loss of $0.05 per share for the first quarter of 2020. The improvement in net income was mainly driven by higher revenue and improved gross margin in Q1 of this year compared to the same period last year. Our capital structure includes $4.7 million in cash and $5.2 million in working capital as of March 31, 2021. In early March, we received the second $1.1 million PPP loan, which has allowed us to strengthen our workforce as we fund working capital. As Charles mentioned before, we continue to await guidance from the SBA regarding its decision on the forgiveness of the entire balance of our first PPP loan. We expect to receive this SBA decision at some point during the second quarter of this year. We also expect to apply for forgiveness of our second PPP loan once the covered period has been satisfied.
- Charles Njuguna:
- Thank you, Trevor. That concludes our prepared remarks today. So I'll turn the call back to the operator to take investor questions. Rein?
- Operator:
- Thank you. Your first question comes from Walter Schenker from MAZ Partners. Your line is open.
- Walter Schenker:
- Actually, there'll be 2 questions. First, as a substantial portion of your revenues, at least at this point, are service related, I'm trying to get a little more color on your cost increases on materials, and how significant that really is, given the current mix of business.
- Charles Njuguna:
- Walter, good morning, thanks for the call. Thanks for the question, sorry. While we do have a fair amount of service work, the service work includes us building equipment, which we then install, or which we then use for service. And so, in our case in point, we have our projects with a certain oil company that we need to build certain units you're going to use for offshore installation. The units themselves are probably about $300,000 worth, and the overall project will be $1 million. And we had close to $100,000 increase in the cost of materials on that project, which was already committed. And we talk to the customer, but they are seeing it across their project, right. So there is no opportunity for a variation order. So we are fortunate that we have more service work, a high proportion of service work right now. But that is still a significant hit to the company.
- Walter Schenker:
- And given that trend and I realize revenues are very important, it's a competitive environment, is there an ability going forward to price a contract for materials at time of when you use it or some sort of protection going forward?
- Charles Njuguna:
- We are having discussions internally about that. One of the things that was - it was a perfect storm, because we had some projects, where the pricing was committed last year. But then as things are opening up nice and we are executing. And so, it's been harder.
- Walter Schenker:
- And the second question, the rental lease, whatever the right semantics is, on the carousel, those revenues were minimal in the first quarter and will mostly be in the next couple of quarters. Is that a correct statement?
- Charles Njuguna:
- Yes. Yes.
- Walter Schenker:
- But that will be completed this year.
- Charles Njuguna:
- Yes, there is significant - the biggest - we currently expect the biggest proportion of revenues within the third quarter. But there will be some in the second quarter as well.
- Walter Schenker:
- And while there are expenses relating to that, it should be good margin business given we've written off the carousels.
- Charles Njuguna:
- Yes, sir.
- Walter Schenker:
- And what have you done to get the other carousel employed, ha-ha?
- Charles Njuguna:
- We actually - interestingly, we actually have quite a bit of interest, but I'm not going to make any promises. But I do hope to give you a call again at some points.
- Walter Schenker:
- Remember, I'm getting - I'm getting older, Charles.
- Charles Njuguna:
- You've got a long time to live, Walter.
- Walter Schenker:
- And just lastly, I understand it's been - life has been very difficult. But we are building cash. I really thought it came from the second PPP loan. But do you have any sense does the board have any sense on - at some point returning some of that cash I realized not immediately and would be surely happen if we got a carousel, but how much cash do you really feel you need to just run the business?
- Charles Njuguna:
- So to answer the first part of your question, I think, obviously at this point, we haven't been forgiven any of them, so too much. One thing we do want to, we touched on it in our comments is that we are also seeing our customers begin to push to really prolong out their payments, so some of the bigger customers are pushing us heavily towards net 90. And, therefore, we need the cash to fund that. As far as when the time it would be I'm not ready to make any commitments on timing on a buyback or any of that. But as we're able to, we'll have that discussion with the board. But if we do sell a carousel, yes, that would be definitely on the table.
- Walter Schenker:
- Okay. Thanks a lot, Charles.
- Charles Njuguna:
- Thank you, Walter.
- Operator:
- Your next question comes from Chris Doucet from Doucet Capital. Your line is open.
- Chris Doucet:
- Hey, Charles. It's Chris Doucet.
- Charles Njuguna:
- Hey, Chris. How are you doing?
- Chris Doucet:
- Congratulations on your progress. So I just wanted to touch a little bit, the previous caller asked a couple of the questions I had. But the only question I had was on your backlog. How big is your backlog? What percentage of that can you actually execute given COVID? And how does that backlog compare to historical backlogs?
- Charles Njuguna:
- Hey, Chris, thanks for the question. Yeah, like we touched on earlier that our backlog right now is close to $10 million. If everything was - if heavily depend on the customers determining when we can do it. For instance, we do have $1.5 million that would entail some international travel, which as jurisdictions open up customers also have their own decisions to make around that. Again, this could easily move into next year. So like we said earlier, we're not able to commit to a definite timeline on it. But all factors being constant, we're optimistic that we'll be able to execute on all of it as of today.
- Chris Doucet:
- Okay. All right. Thanks. Good luck with the quarter.
- Charles Njuguna:
- Thank you, Chris.
- Operator:
- There's no further question at this time, you may continue.
- Charles Njuguna:
- Thank you, Rein. And I thanks to all of you who joined our call today. We appreciate your interest and support of Deep Down and look forward to speaking with you about our progress on the next earnings calls. So let's conclude today's call. Thank you all.
- Operator:
- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.