U.S. Markets close in 14 mins

Edited Transcript of AETI earnings conference call or presentation 15-May-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 American Electric Technologies Inc Earnings Call

HOUSTON May 22, 2017 (Thomson StreetEvents) -- Edited Transcript of American Electric Technologies Inc earnings conference call or presentation Monday, May 15, 2017 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Charles M. Dauber

American Electric Technologies, Inc - CEO, President and Director

* William Brod

American Electric Technologies, Inc - CFO, SVP and Secretary

================================================================================

Conference Call Participants

================================================================================

* William J. Dezellem

Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the AETI to report Fourth (sic) [First] Quarter 2017 Conference Call. Today's conference is being recorded.

This press release contains forward-looking statements as defined in Section 27A of the Securities Exchange Act of 1934 concerning anticipated future domestic and international demand for our products and other future plans and objectives. While the company believes that such forward-looking statements are based on reasonable assumptions, there can be no assurance that such future revenues, profits, plans and objectives will be achieved on the schedule or in the amounts indicated. Investors are cautioned that these forward-looking statements are not guarantees of future performance. Actual events or results may differ from the company's expectations and are subject to various risks and uncertainties, including those listed in Item 1A of Form 10-K filed with the Securities and Exchange Commission on March 30, 2017. The company assumes no obligations to publicly update or revise its forward-looking statements, even if experience or future events, make it clear that any of the projected results expressed or implied herein will not be realized.

At this time, I'd like to turn the conference over to Charles Dauber, President and Chief Executive Officer, AETI. Please go ahead, sir.

--------------------------------------------------------------------------------

Charles M. Dauber, American Electric Technologies, Inc - CEO, President and Director [2]

--------------------------------------------------------------------------------

Thank you, Chris. Good morning, everyone. I'd like to welcome you all to the American Electric Technologies First Quarter 2017 Earnings Call Joining me today is our senior Vice President and Chief Financial Officer, Bill Brod.

For our call today, I'm going to start with a review of our first quarter results. Bill will walk you through some additional financial details, and then I'll come back and share my thoughts on where we are so far in 2017. We'll then move to a question-and-answer session coordinated by the moderator.

As you saw from the earnings announcement this morning, the company reported revenue in Q1 of $8 million, down 14% from Q4 and 3% from $8.3 million in revenue, we reported in Q1 of 2016. The revenue reduction was primarily related to lower revenues in our marine and industrial market sector and the timing of the new orders in the oil and gas and power generation market that we received in the quarter. The orders we received in Q1 were really not reflected in revenues in Q1 due to the timing of those projects awards in the quarter and how much work we could complete on those by the end of March. All of the new orders we received in the quarter will be recognized for revenue starting in Q2 and on into the rest of 2017. I'll discuss the components of our revenue later, when I get into the sector reviews.

Based on those reduced revenue levels, the company reported an EBITDA loss of $2.2 million for the quarter, compared with an EBITDA loss of $1.4 million in Q4 and improved from the EBITDA loss of $2.7 million in Q1 last year. We also reported today that our strong bookings in Q1 resulted in a 97% increase in backlog. Q1 ending backlog was $26.6 million, our second highest backlog we've ever reported and the highest since Q3 of 2014, when oil was trading above $80 a barrel. This backlog growth was primarily driven by orders in the midstream and downstream oil and gas and power generation markets, which I'll talk more about later in my comments.

With that, I'll turn the call over to Bill for more financial details and will come back after with more comments on the business.

--------------------------------------------------------------------------------

William Brod, American Electric Technologies, Inc - CFO, SVP and Secretary [3]

--------------------------------------------------------------------------------

Thanks, Charles. Good morning. The company reported a fully diluted loss from operations per share of $0.31 for the first quarter compared to a fully diluted loss of $0.21 per share in the fourth quarter of 2016 and compared to a fully diluted loss of $0.36 per share in the first quarter of 2016. The company reported a net loss of $2.6 million for Q1 compared with a net loss of $1.8 million in Q4 of last year and a loss of $3 million in Q1 of 2016.

Our fixed cost currently run $3 million to $3.5 million per quarter, so we need to be in the $50 million to $60 million annualized run rate depending, of course, on our revenue mix to be profitable.

Moving to the balance sheet. We ended the quarter with a cash position of $1.6 million, which is exactly flat from where we were at the end of the year, and had $6.7 million of total debt at the end of the quarter.

At the end of March, as you may know, we filed an 8-K disclosure announcing we closed on the new $7 million credit facility with Hunting Dog Capital out of San Francisco. This financing allowed us to refinance all of our existing bank debt, along with providing approximately $1 million of working capital. This new credit facility has an 11.5% fixed coupon rate. The loan has a 4-year term coupon, and we have the ability to pay off the debt after 1 year without penalty. The loan has only one principal payment of $500,000 due in June of this year, June 30, which coincides with the timing of our annual dividend payment from our Chinese joint venture, BOMAY.

Working capital at the end of Q1 was $3.5 million compared with $3.3 million at the end of Q4.

With that, I'll turn it back over to Charles for some additional commentary and outlook on the business.

--------------------------------------------------------------------------------

Charles M. Dauber, American Electric Technologies, Inc - CEO, President and Director [4]

--------------------------------------------------------------------------------

Thanks, Bill. I'd like to start by taking you all through a brief breakdown of our business by sector. I'm going to start with the oil and gas market sector. And as we previously discussed, the majority of our focus here is in the midstream and downstream parts of that market. The entire oil and gas market remains very competitive with strong pricing pressure across the entire sector. In Q1, we announced several very interesting project awards. First, we announced a $6 million worth of contracts with a leading midstream pipeline operator to enhance electrical safety for their Permian crude pipeline and terminal projects using M&I's IntelliSafe arc-resistant switchgear. We announced another break-in win at a top-5 largest EPC firm or engineering procurement and construction firm. This time it was a $5 million project for a new chemical plant being built for a $40 billion global chemical company.

Revenue for the oil and gas sector was $3.9 million in Q1, up from the $3.4 million we reported in Q4. Quarter ending backlog for the sector was $21.4 million, up 230% from Q4, where we reported $6.5 million in backlog.

Regarding the drilling market. We are seeing an increased level of rig activity, as rigs are being put back to work in places like the Permian region. We've also started to see an increased level of service opportunities as those rigs need to be restarted or in some cases, upgraded for the new drilling contracts. Although we've seen an increase in opportunities, those have not translated into material results yet. And I expect to continue to report on that progress with our new Head of Drilling and Marine, Doug Williams, who we hired in Q1, as we progress throughout the year. Internationally, the M&I Electric Brazil team tops our revenues in Q1 of $1.2 million, which was down 17% from Q4, but up 88% from Q1 last year.

We continue to see growing opportunities for M&I in the oil and gas and power generation markets in Brazil and are also pursuing projects in the industrial and energy markets with a new Sales Manager from GE that we hired in February.

For our joint ventures, in Q1, BOMAY had revenues of $4.2 million, and we recognized 40% of their profits as equity income, which was essentially breakeven. We expect BOMAY to continue at this reduced run rate given the Chinese energy market environment in 2017.

Our Singapore joint venture is still in hibernation mode while the oil and gas market downturn in Southeast Asia continues.

Moving on to the Power Generation sector. Our progress on the power gen and distribution market in 2016 was remarkable. Based on great sales work and strong customer satisfaction, the power generation distribution sector was up 57% year-over-year, and in Q1, represented over 1/3 of our overall company revenue. Power generation is a critical part of our company strategy, and we had revenues in Q1 of $2.8 million, up 57% from Q1 last year, but slightly down from the Q3 in -- from $3 million in Q4.

We continue to book orders in the Power Generation sector and saw backlog of $3.9 million. We feel positive about our market penetration in the sector and see ample opportunities for additional projects this year.

Moving to the Marine and other Industrial sectors. This was actually the worst-performing group in the company in Q1. Revenues were down 57% from Q4 and down 10% from Q1 last year. This was a combination of not having any marine and industrial products-oriented projects, but we also faced some cyclicality in our U.S. services businesses that are focused on the industrial and marine segments as well. We think that there will be a recovery in the industrial services going forward and are also moving resources into the marine services market, including hiring a new sales person to get our business there back on track.

If I take a step back and summarize where we are as a company, we've proven our ability to execute in our target midstream, downstream and power gen sectors and that our investments in new products, capacity and people have resulted in market share gains and a very strong backlog.

Although our markets remain very challenging, we just need to continue to book business and execute those projects to keep our new break-in customers happy.

Our services business needs to continue to ramp, both in the U.S. and in Brazil. The salespeople we've added in those markets are starting to make progress that we think will result in growth as we continue throughout this year.

As we restated in the earnings release, in April, we closed the financing with HDC Capital. As Bill mentioned, that financing provides AETI with incremental liquidity, which is important as our working capital needs continue to grow due to our increased order flow. We look forward to working with HDC, as we ramp up business through the rest of this year.

Before we proceed with the Q&A session, I'd like to conclude the prepared portion of my comments by thanking our employees for their hard work and thank our customers and shareholders for their support.

This concludes the prepared portion of my comments, and I'll now turn the call over to Chris for the Q&A section of the call.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We'll take our first question from Bill Dezellem with Tieton Capital.

--------------------------------------------------------------------------------

William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [2]

--------------------------------------------------------------------------------

Congratulations on the backlog. Let's start, if we could, with the chemical company that chose you in the quarter. Talk a little bit about that, when and why you were chosen versus anyone else they could have selected.

--------------------------------------------------------------------------------

Charles M. Dauber, American Electric Technologies, Inc - CEO, President and Director [3]

--------------------------------------------------------------------------------

Bill, so we've -- as you know, we've been focusing on the engineering procurement and construction companies for the last several years and we've got very strong penetration in those customers now in terms of being on the approved suppliers list. And so what's been happening is, as they get projects, we work with the EPC firm and the end user, the owner, on whatever the upcoming projects are. So for this particular project, this was a project for a large chemical company that's building a plant in the Houston area, and the engineering procurement and construction firm has been using an existing supplier in the market and had been having challenges relating to meeting project schedules, and frankly, just executing the project on time and on budget. And so they were -- and we came in and said, look, we have all the capabilities, we have the turnkey solution. We have all the project management and everything. They were excited and we got on the approved suppliers list for this particular project. We were approved by the owner and won the job.

--------------------------------------------------------------------------------

William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [4]

--------------------------------------------------------------------------------

Charles, if you execute this as well as you believe that you will, how much business annually does that particular EPC firm end up having in a soft environment like we're in today?

--------------------------------------------------------------------------------

Charles M. Dauber, American Electric Technologies, Inc - CEO, President and Director [5]

--------------------------------------------------------------------------------

Good question. This is one of the largest engineering, procurement and construction firms in our market. So I think they are numbered somewhere in the top 5 in the United States, and actually in the world, for this business. So I would tell you, there's multiple projects of this size that are in various stages of their process. So this one obviously made it through the process. Others, they are in the feed stage where they're working with potential customers on their side to work on project. Some are bigger than this project and some are similar size, but this is a very -- this is not an unusually sized project for these guys in any way, shape or form. And so we would expect that just like what we've done with our EPC customers, we broke into last year and 2 years ago, when we get a job and we execute the job and they're happy, then we get our second order, our third order and et cetera. We'd expect that same dynamic to happen here as well.

--------------------------------------------------------------------------------

William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [6]

--------------------------------------------------------------------------------

That is quite helpful. And continuing on, talk a little bit about the degree to which you believe the backlog in -- which you reported at the end of the first quarter to which it will benefit the Q2.

--------------------------------------------------------------------------------

Charles M. Dauber, American Electric Technologies, Inc - CEO, President and Director [7]

--------------------------------------------------------------------------------

Our backlog, as you know, typically, our projects run between 6 and, we'll call it 9, 10, 11, 12 months. And so the way that we recognize revenues on percent completion it's how much of the project that we get done in a particular period of time, and that's how we recognize the revenue. So I think there will be a significant impact on revenues in Q2 as a result of the orders that we book in Q1, and that will only continue as we progress through the remainder of those projects' duration.

--------------------------------------------------------------------------------

William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [8]

--------------------------------------------------------------------------------

And Q3 would benefit even more than Q2? Is that a correct assessment?

--------------------------------------------------------------------------------

Charles M. Dauber, American Electric Technologies, Inc - CEO, President and Director [9]

--------------------------------------------------------------------------------

Yes, the projects would normally recognize, who knows, 10% to 20% -- 10% to 30% of the project value in the first month or 2. And then it continues through the end of the project. But by 8 months of the way, 9 months of the way through the projects, these projects are mostly recognized other than the factory acceptance test stage and things like that. So you'd see based on this backlog an awful lot of work being performed in the Q2 and Q3 and on some of the projects even into the Q4 time frames.

--------------------------------------------------------------------------------

William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [10]

--------------------------------------------------------------------------------

Great. And then, although I know you oftentimes don't like to talk a lot about this. What can you tell us about the backlog today and the prospective backlog that you may be reporting at the end of the second quarter?

--------------------------------------------------------------------------------

Charles M. Dauber, American Electric Technologies, Inc - CEO, President and Director [11]

--------------------------------------------------------------------------------

What I would say, as we continue to book orders in the products business, we continue to bid competitively and make sure we're continuing to fill the backlog, and we think that we've got good things going on here in terms of our market penetration and the solutions that we're offering. It's still a competitive market, so we have to stay aggressive. But we see good opportunities for continuing to close orders already in the quarter and through the end of the quarter and beyond.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

(Operator Instructions) And we'll take a follow-up question.

--------------------------------------------------------------------------------

William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [13]

--------------------------------------------------------------------------------

It's Bill Dezellem again, Charles. Would you talk a little bit more about Brazil and the ramp that you're experiencing there? And kind of what you foresee over the remainder of this year? And I think in your opening remarks, you mentioned that the first quarter was down a little bit from the fourth quarter. Is that something that we should be keying in on, or is that normal seasonality? Fill out that picture a little more completely, if you would, please.

--------------------------------------------------------------------------------

Charles M. Dauber, American Electric Technologies, Inc - CEO, President and Director [14]

--------------------------------------------------------------------------------

Sure. So yes, what I said earlier was that the revenues for Brazil was $1.2 million in this quarter, which was up 88% year-over-year, but down 17% from Q4. I think there's some seasonality to the business to our overall services business. I can't tell you, because that business is still relatively new in Brazil the services, what portion is the seasonality, but they're slightly down. They have an awful lot of opportunities in the oil and gas market and the power generation market. So we feel really good about our progress there and we think we're going to continue seeing strong growth for those sectors in Brazil in 2017. I'm actually on my way down there tonight, and I'll be in Brazil the rest of this week, working with the team and prospective customers. The interesting part about Brazil is that the third leg of the stool is our new initiative to focus on, what they call the industrial and energy markets, which is steel companies and commodity companies and general industrial companies in Brazil and that's why we hired that Sales Manager from General Electric in Q1. So I'll be going down to work on him, and pursuing some of these projects that we are -- that we're working on together. So we still expect strong growth from Brazil in 2017. And I don't think that there is necessarily an expectation that their market is going to dramatically increase. I think it's going to be flat to where it's been. We're just going to continue taking market share and growing the business. We're enthusiastic about the power gen market in Brazil right now from a services perspective, and so we feel good there.

--------------------------------------------------------------------------------

William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [15]

--------------------------------------------------------------------------------

And I recently read a -- just a headline that imply that Petrobras may be starting to get their wheels back under them again. Does that -- is that something that you have seen? And if so, what does that imply for possible business for you down there?

--------------------------------------------------------------------------------

Charles M. Dauber, American Electric Technologies, Inc - CEO, President and Director [16]

--------------------------------------------------------------------------------

We haven't necessarily seen any increases in business driven by Petrobras in the recent past. What I would say is that we probably have 80% market share for the drilling contractor still in Brazil. And we are increasing our market share for the offshore production. So we're in a good position there. So if he's going to start getting more work done from an investment perspective, that means we're going to start bringing more rigs back from our current customers, that would be very positive for us or increase the amount of production we're doing, that would also be very positive for us. We're seeing none of that yet. So that would all be additive to our current growth plan if that actually happened.

--------------------------------------------------------------------------------

William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [17]

--------------------------------------------------------------------------------

And I'm going to switch you and key off of your comments about rigs. West Texas has seen a dramatic increase in the number of rigs running. You made a general reference to that in your opening remarks. To what degree is that going to be a real opportunity, both on the product front and on the service front, and when? And I guess, I'm trying also to understand the degree to which the drilling contractors are cannibalizing rigs to fulfill whatever PDC needs they may have on their rigs.

--------------------------------------------------------------------------------

Charles M. Dauber, American Electric Technologies, Inc - CEO, President and Director [18]

--------------------------------------------------------------------------------

Okay, there's sort of a lot in there, let me try. If I don't say something, let me come back to it. So first, we're excited that there's actually people talking about drilling again. It's been, literally, years. We went and hired somebody back to the company, Doug Williams, who was with us for 15 years, then he was actually with 2 of our biggest competitors, National Oilwell Varco, and a company, OMRON, that was acquired by Schlumberger. So Doug came back to the company in Q1 to help head up our efforts to drive our business in the upgrade and retrofit and service, and hopefully, eventually, new builds for the drilling and the marine vessel market. So as I mentioned earlier, we are seeing rigs getting put back to work. These are the rigs that were stacked by some of the major drilling contractors in the downturn. Some of those rigs needed services, we got some projects awards on that. But we're actually expecting -- we were expecting more services along that, and so what's been interesting is the opportunities, we're seeing the opportunities, but some are happening, some aren't happening, and we've not seen a material increase in our services business as a result of that, yet. So we expect to see that business as more and more rigs get turned back on, we expect to see more services opportunities happen for us. And we've got to get the sales team and the service techs aligned to make sure, we're in the right position to get those as our customers are turning the rigs back on.

--------------------------------------------------------------------------------

William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [19]

--------------------------------------------------------------------------------

And how about the cannibalization aspect?

--------------------------------------------------------------------------------

Charles M. Dauber, American Electric Technologies, Inc - CEO, President and Director [20]

--------------------------------------------------------------------------------

That's happening right now. What I would have said is, that the rigs that are getting turned back on are the rigs that were built most recently. And so there -- those rigs are normally okay, in terms of needing to be cannibalized. It's the next wave of these where they're really going to be looking at, okay, I've now got a rig that's 10 years old, I've got 2 rigs that are 8 years old, and can I take the best pieces of both of these rigs to get a rig going that will meet whatever the next contract requirement -- that, that drilling contractors got to go grab, usually somewhere in the West Texas. And so that's how I think about that. I'm still not anticipating a lot of new builds in 2017 at all. Okay, I think, there's going to be still a services, and then in the second half of the year, I think, we're going to start seeing some more upgrade and retrofit opportunities, and that would be where the cannibalization dynamic would come in.

--------------------------------------------------------------------------------

William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [21]

--------------------------------------------------------------------------------

That is helpful. And then finally, circling back to the backlog, how would you characterize the profitability of orders in backlog today versus profitability that you would have been experiencing 6 and 18 months ago?

--------------------------------------------------------------------------------

Charles M. Dauber, American Electric Technologies, Inc - CEO, President and Director [22]

--------------------------------------------------------------------------------

So the margins of the projects that we booked in backlog are going up very slightly. I'd have said in general, they're relatively flat, because the market has been flat. We've got to remain aggressive, but we are -- we have been able to get a slight increase in our booked margins for our project -- for some of these projects as we book them. We're pretty dependent on which sector it's in and who the customer is and who the competition is. It's not across the board. I would tell you, generally, the margins are flat, but there have been places we've able to command a slight margin premium over what we would assume 6 or 12 or even 18 months ago.

--------------------------------------------------------------------------------

William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [23]

--------------------------------------------------------------------------------

And finally, for now. How would you characterize your pipeline of opportunities today versus a couple of months ago? And really what I'm trying to understand is the degree to which you have consumed your pipeline of opportunities and they are now in backlog versus a full pipeline still ahead of you.

--------------------------------------------------------------------------------

Charles M. Dauber, American Electric Technologies, Inc - CEO, President and Director [24]

--------------------------------------------------------------------------------

I think we've got a full pipeline ahead of us. If I think about our sales team, we have instead of 1 opportunity per EPC firm, the first one, now that we're in there, we may not know about 4 or 5 of them, all the projects that we're working on, so that's going well. I think we're also seeing increasing increased pipeline opportunities based on the new salespeople -- so the new salespeople are bringing in little just more project opportunities. So the overall number of opportunities that's being entered into our CRM system every month continues to actually go up, which I think is a good thing.

--------------------------------------------------------------------------------

William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [25]

--------------------------------------------------------------------------------

So the backlog that you reported at the end of the first quarter, we should not consider that an anomaly, but the result of time and success with EPC firms and new people that you’ve hired?

--------------------------------------------------------------------------------

Charles M. Dauber, American Electric Technologies, Inc - CEO, President and Director [26]

--------------------------------------------------------------------------------

Yes, I think, there's a -- all the things we've been talking about for the last several years are happening right now, right? And so, we feel confident, we're still in the challenging market. We've got to stay aggressive and continue to execute. If we can do that, I think we're on the right path.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

(Operator Instructions) And with no additional questions in the queue this morning, we will conclude the call for today. Thank you for your participation, and you may now disconnect.

--------------------------------------------------------------------------------

Charles M. Dauber, American Electric Technologies, Inc - CEO, President and Director [28]

--------------------------------------------------------------------------------

Thank you.