Koil Energy Solutions, Inc.
Q4 2020 Earnings Call Transcript
Published:
- Operator:
- Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Deep Down's Fourth Quarter and Full Year 2020 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, Wednesday, March 31, 2021. A detailed disclaimer related to Deep Down's forward-looking statements is included in the press release issued Tuesday afternoon and filed with the SEC. It is also available on the company's Web site, 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 Web site.
- Charles Njuguna:
- Thank you, Joel. Good morning, everyone. While the oil and gas industry continues to be impacted by the global pandemic, the recent increase in the price of oil has provided some cautious optimism for our customers. Coupled with the gradual reopening of various jurisdictions and increased availability of vaccines, discussions about a slow resurgence are gaining prominence, though the timing of a full rebound is still uncertain. As a company whose products and services are primarily tied to the offshore industry, the oil price crash and the global pandemic had a significant impact on our business in 2020, resulting as such 1% reduction in revenue from 2019 to 2020. In response to this sharp decline, we took the opportunity to critically analyze our cost structure, and in the process reduced our selling, general and administrative expenses by 30% from the year 2019 to the year 2020. Another outcome of the economic disruption resulting from this black swan event was our decision to adjust the value of some of our equipments. During the second quarter of last year, we impaired the value of our carousels, but at the time mentioned that we did not expect this accounting adjustment to have an impact on future opportunities. We are, therefore, pleased to recently announce the receipt of an order for the rental of one of our carousels and associated services. Incidentally, this adjustment enabled us to get creative with our contracting strategy in order to help our customer lower their project costs and still have a profitable outcome for our company. When we held our third quarter investor call back in November, we also discussed increasing travel to perform service work during the fourth quarter. These projects combined with other engineering and manufacturing projects we have in-house enabled us to generate net income in the fourth quarter. Our ability to generate a profit despite the prevailing economic conditions is a testament to the efforts of our team. Heading into 2021, we have now been able to execute some more of the offshore campaigns, which were put on hold at the outset of the pandemic. A case in point is a project I mentioned during our full year 2019 call held a year ago today. At the time, we mentioned a team of our service personnel who originally scheduled to travel to Trinidad during the first half of March 2020. This team finally traveled this month, almost a year to the day since the originally scheduled date.
- Trevor Ashurst:
- Thank you, Charles. For the 12 months ending December 31, 2020, Deep Down generated revenue of $13 million, which represents a 31% decrease in revenues when compared to revenues of $18.9 million for the 12 months ended December 31, 2019. This decrease is primarily due to having a lower volume of projects in process in 2020 versus 2019, which is primarily due to the combined decline in oil prices and the impact of travel restrictions stemming from the coronavirus pandemic. However, revenues for the fourth quarter of 2020 increased to $3.5 million, which represents a 19% increase when compared to the $2.9 million in revenue for Q4 2019. Gross margin increased to 39% in Q4 of this year, which represents a 14% increase in gross margin compared to the 25% generated in Q4 of last year. On a full year basis, gross margin in 2020 was 38%, which represents a 2% increase compared to gross margin of 36% in 2019. The collective increase in gross margin was primarily driven by receiving rent abatements and having a larger proportion of higher margin service work in equipment rental in 2020. Q4 2020 operating expenses were $1.2 million or 35% of revenues. This is compared to Q4 2019 operating expenses of $3.2 million or 110% of revenues. However, the Q4 2019 figure includes a $396,000 charge related to equipment identified as non-strategic to the core operations of the business and an $850,000 charge related to an accrual for certain legal matters. So excluding these legal and impairment charges, operating expenses for Q4 2019 on an adjusted basis were $2 million or approximately 68% of revenues. So the $783,000 or 39% decrease in operating expenses was driven by lower payroll costs, lower legal costs, and ongoing efforts to reduce operating expenses during Q4 when compared to Q4 of '19.
- Charles Njuguna:
- Thank you, Trevor. That concludes our prepared remarks today. So I'll now turn the call back to the operator to take investor questions. Joel?
- Operator:
- Thank you. . Our first question comes from Walter Schenker with MAZ Partners. Your line is now open.
- Walter Schenker:
- Thank you and I’d say congratulations on breaking even or making money in the fourth quarter, which is a good thing. Could you walk me through the economics of a rental of a carousel where the asset has already been written off? Does that mean that the costs associated with that rental are reduced versus if it had not been written off?
- Charles Njuguna:
- Good morning, Walter. Nice to hear from you. Thanks for the fine comment. Yes. Essentially, because we have essentially no cost on the book for the carousel as far as depreciation goes, we are able to offer the carousel piece at a very low price to our customer and generate revenue from the associated services, which in this case will be spooling on or rather putting the large umbilicals on the carousel and therefore we have quite a bit of personnel costs. And because of the unique nature of these projects, we will incur some costs to strengthen the carousel itself to put it on the barge. However, we do expect to make some money on the project.
- Walter Schenker:
- To make some money means this would be similar to the profitability of the overall business or possibly somewhat less? I don't know what the normal profitability of your business anymore anyway.
- Charles Njuguna:
- Yes, I think it will be. It will be similar to a project where we provide installation services and installation equipment.
- Walter Schenker:
- Okay, so you didn’t give it away.
- Charles Njuguna:
- Not at all.
- Walter Schenker:
- Okay.
- Charles Njuguna:
- We’ve been operating lower than we would have if we hadn’t taken the adjustment.
- Walter Schenker:
- Charles Njuguna:
- I was expecting that question. As I touched on briefly, we're talking to multiple people about umbilicals in the oil and gas space. However, we are also seeing some opportunities in markets such as offshore winds. But I do want to throw in the caveat that many of those are fairly far down the road, potentially late 2022 or 2023 projects. I'm cautiously optimistic that the timing that it took for me to make the call to you will be shorter for the second one. I don't know exactly when that will happen.
- Walter Schenker:
- And just as a general comment, with somewhat higher energy prices with the balance sheet being in good shape, especially benefiting from the second PPP loan, are there opportunities beyond -- do we just sort of roll along it, we'll pick up something from the carousel but it's the base business. Largely as you look forward, breakeven or are there big enough opportunities to really move the needle and get this company back to a meaningfully higher level?
- Charles Njuguna:
- There are opportunities to really make a positive contribution to the stockholders that we see down the road. Here, obviously, because of our size, we do see opportunities.
- Walter Schenker:
- Okay. And with this point, since we finished years of these charges or write-off; litigation, except for one thing going back about eight or nine years, is largely all done with?
- Charles Njuguna:
- Yes. We do have cash flows from the other settlements, which will continue through the rest of this year. But knock on wood, our goal is not to have any more pop up.
- Walter Schenker:
- Okay. Thank you, Charles.
- Charles Njuguna:
- Thanks, Walter.
- Operator:
- Thank you. . 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.
- Charles Njuguna:
- Thank you, Joel. And thanks to all of you who joined our call today. Before we go, I'd like to take a final moment to recognize our team. As I mentioned earlier, it was a year ago today that we had this call to discuss our 2019 financials. At the time, I knew that the next day we would be pulling the trigger on a number of key decisions, which we felt were necessary for us to navigate the economic disruption before us. While I always knew that we had a good team in place, I was pleasantly surprised by how supportive everyone was, even when the decisions severely impacted them personally. I cannot adequately express how gratifying it has been to see our team step up during the past 12 months. We really do have the best team in the industry. And with that, let's conclude today's call. Thank you, everyone.
- Operator:
- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.