Earnings Call: Q4 2024

Apr 15, 2025

Morning, ladies and gentlemen. Thank you for standing by. Welcome to the Koil Energy's fourth quarter and full year 2024 conference call. During the presentation, all participants will be in the listen-only mode. After the speaker's remarks, you will be invited to participate in a question and answer session. As a reminder, this call is being recorded today, Tuesday, April 15th, 2025. 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, everyone. Thank you for joining us today and for your patience regarding our delayed earnings report. On March twenty-ninth, we identified a mistake just before we were scheduled to file our annual report. Although this constitutes material weaknesses in our internal controls of equity accounting specifically, it did not have a material adverse impact on our financial position or results of operations. We have since taken the necessary time to address this issue and ensure the accuracy of the 10-K report. In this briefing, I'll be presenting an overview of our financial performance for the fourth quarter and the entire year of 2024. I will also share an update on our strategic roadmap and discuss how Koil Energy Solutions is positioned for further growth. Finally, I'll be happy to answer any questions you may have. I'm immensely proud of the Koil Energy Solutions team for delivering an exceptional quarter, surpassing the revenue of the preceding three quarters. In the fourth quarter, we achieved revenue of $6 million and EBITDA of $1 million, resulting in a 16% margin. This represents a 48% increase in revenue and $1.6 million higher EBITDA compared to the previous year. For the full year of 2024, we achieved revenue of $23 million, marking a 48% year-over-year increase. Adjusted EBITDA improved from a loss in 2023 to $3.5 million in 2024, setting a historic record in profitability for the company. Throughout the year, we generated approximately $1.4 million in free cash flow. Thanks to our valued customers' timely payments, our cash balance at year-end reached $3.4 million. Let's take a closer look at Q4. Overall revenue for the quarter increased by 14% sequentially, mainly due to improved supply chain performance. While we have reduced the risk of supplier delays, fluctuation in revenue may still occur in upcoming quarters as we are subject to changes by our clients. The gross margin remained steady at 40%, consistent with the previous two quarters. Selling, general, and administrative expenses increased slightly to $1.7 million during the quarter, reflecting increased staffing in line with our growth strategy. Turning to net income, we reported approximately $537 thousand for the fourth quarter, marking a substantial improvement from the net loss of $890 thousand recorded in Q4 2023. This positive shift in earnings was primarily driven by revenue growth and increased gross profit from higher fixed-price project activity. Our team delivered an outstanding performance in that quarter. The full year's financials reflect a 48% increase in revenue, driven by a doubling of fixed-price projects. This revenue growth translated into an EBITDA increase of $4.4 million. This exceptional result was achieved through our assertive growth strategy. The main contribution came from existing customers, where we increased our wallet share of our key accounts. This was complemented by high throughput in production. The gross margin for the full year was 38%, up from 32% in 2023. Selling, general, and administrative expenses were $6.2 million, compared to $6.5 million the previous year. Increasing revenue and reducing costs, resulting in a net income of $2.6 million, a substantial improvement from the net loss of $1.6 million in 2023. This turnaround in earnings led to an improvement in diluted earnings per share, rising to 21 cents compared to a loss of 13 cents per share the previous year. Turning to our balance sheet, we had $5.7 million in working capital as of December 31, 2024, including $3.4 million in cash. This compares favorably to $2.6 million in working capital as of December 31, 2023, which included $2 million in cash. Our working capital improvements throughout the year have effectively converted to cash, resulting in a stronger year-end cash balance. Additionally, we generated approximately $1.4 million in free cash flow, further reinforcing our liquidity position. My sincere congratulations and gratitude to the men and women of Koil Energy. This is nothing short of a remarkable turnaround. Let me share with you how the culture at Koil made this possible. As part of developing our strategy, we also discussed who we are and what makes this team successful. Together with our clients and our employees, we determine our business DNA to be exceptional responsiveness and safe workmanship. This is who we are. This is our DNA. Speed and collaboration are therefore cornerstones of our work culture. Come visit our campus and you will see project managers, engineers, and technicians solving problems together on the shop floor. This is an incredibly effective business model, and we have demonstrated its scalability. Our clients continue to entrust us with critical project awards. For instance, during the fourth quarter, we secured a significant contract to deliver subsea distribution equipment for a project in West Africa. This encompasses multiple electrical hydraulic distribution manifolds. Looking at a full year 2024, we were also awarded a significant contract for advanced maintenance services, re-terminating an umbilical cable onboard an offshore platform. Furthermore, we won a significant contract to provide bend stiffener latchers to an operator in a new region, and then earlier in the year, we won the biggest deal for the year, which included a major scope of work for a subsea safety control system. Although we secured numerous smaller contracts on a weekly basis, it is the significant and major awards that drive our growth. While we celebrate the results from 2024, we are very excited for our future. In 2025, our team will remain focused on growing the company and delivering on our growth strategy. The current consensus among our customers is that energy demand is increasing. Our clients indicate that meeting the world's energy needs will require growth in both oil and gas supply, as well as renewables. As the supply from existing oil and gas wells naturally declines over time, sustained investments will be crucial in the coming years. Consequently, several key subsea basins, particularly the Gulf of Mexico, the North Sea, and the coast of Brazil, are being prepared to significantly contribute to production output. Our strengthened positioning in these markets is essential for achieving sustained growth. A leading indicator for our main products is the number of subsea trees purchased by the operators. Our product lines include vital support systems for subsea trees. According to Westwood Global Energy Group, a market analyst firm, the global annual subsea tree awards included 284 and 279 awards in 2023 and 2024, respectively. This healthy market presents a good opportunity for Koil Energy Solutions going forward, as our offering, such as subsea distribution equipment and services, are typically awarded 1 to 1.5 years after the subsea tree awards. During the first quarter of this year, we have seen a significant increase in bidding activity. We therefore anticipate experiencing the benefits of this positive momentum throughout the remainder of the year. As part of our growth strategy, we have also been focusing on expanding our service offerings to better address the operating expenditures of our energy customers. We also expect this expenditure to increase due to aging infrastructure. Re-termination of an umbilical cable on an existing installation is an example of our success in the maintenance market. We are 1 year into an ambitious 3-year strategy focused on achieving continued profitable revenue growth. You can view a copy of our growth roadmap in the investor presentation on our webpage. During 2024, we have grown revenue by approximately 50% year-over-year. Our growth strategy continues to push Koil's business performance domestically. We have also advanced our international activities and are now well ahead of our original go-to-market growth plan. For example, in order to strengthen our presence in South America, Koil Energy has expanded into Brazil with a new manufacturing and service support facility in Macaé. We have also established a strategic alliance with SubseaDesign AS, a Norway-based company, to accelerate advancement in subsea technology. Driven by the rising demand for innovative solutions in the global subsea industry, the two companies will collaborate within R&D and project execution. Before we conclude, I want to thank our shareholders for their continued interest in our company. I would also like to express my gratitude to our board of directors for their steadfast support in our strategy and operations. Koil Energy is a great investment opportunity. We offer mission-critical deepwater solutions with a high barrier to market entry. Koil Energy is a fast-growing company with a strong foundation and no long-term debt. That concludes our prepared remarks today. I'll turn the call back to the operator to take investor questions. Operator? Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. At this time, we will pause momentarily to assemble our roster. Again, if you would like to ask a question, please press star and then one. Please stand by as we poll for questions. Your first question today will come from Scott Weis with Semco Capital. Please go ahead. Hi, Erik. How are you doing? Doing great, Scott. How are you? Great. Thank you. Nice quarter. Thank you. Can you comment, please, on how your end markets are affected by oil prices? Most of our business is related to what we call greenfield. Those are the large investments subsea that take years to plan, engineer, and execute. The work we're doing now are decisions made by the operator perhaps four or five years ago, and certainly more than three years. What did they think the oil price will be today or next year? I don't know. It does not affect the activity level for most of our activity. Now, it will affect whatever they can affect. If the oil price stays below $70 too long, it will affect their cash flow policies, right? If they can delay something, if they can cut something out, they will. We haven't seen that yet, but that can happen. That's related to the maintenance work sometimes, if they can push it off for another quarter to save money. Also some of the new projects that they're planning to do, they may delay some of that. It has a very small effect short-term for us. Okay, thanks. Two more questions. Can you comment on your order book and your visibility? How far out can you see and forecast effectively? Secondly, you're now through Q1. Can you provide any comment on Q1 or an outlook for Q1? To answer your last part, I cannot comment on Q1. With respect to the backlog, we're not reporting the backlog. It is not meaningful, and it's not very helpful in order to forecast. A lot of the work we do, we get it right before the quarter starts or during the quarter. It's not a very good indicator. On that part of the question, the visibility we have goes a couple of quarters out when it comes to some of the activity, but not all. It's not like we have two quarters of revenue that we're looking at. We may have a backlog that spreads out over the next three quarters, but it doesn't cover all the revenue we expect to have. Again, it's not very meaningful. I hope we'll get there one day, where we have more diversified activities and where it would make sense to share with you a backlog. Okay, thanks. One more question. Do you have any plans to uplist on the NASDAQ at some point in the future? Yes. When that will be, I don't know. Several of you guys have suggested that, and I think it's a good idea. When we become a larger company, that will be a good place to be. Right now, it's probably too early. I need more time and some more advice on how to do that. Sometime in the future, absolutely. Okay, great. Keep up the good work. Thank you. Thank you, Scott. Again, if you would like to ask a question, please press star and then one. Your next question today will come from Peter Michelman, private investor. Please go ahead. Oh, hi, Erik Wiik. Hey there, Peter. My question is about the tariffs that were implemented. What kind of effect will that have on your raw materials, carbon steel and super duplex steel? Yes. Let me answer that question by several steps here. The first thing is that we are a vertically integrated company, so we don't have a whole lot of outsourcing. That means that our exposure is limited due to the fact that most of our work is done in-house. What we do outsource is such as coating and some of the component parts, and as you mentioned, some of the super duplex tubes and high alloy tubes and parts that we buy from the outside. That's the first part. We have a small exposure there. The second part is that, and this is similar to other players in this industry, we kick that problem up the value chain. In our contract with our customers, we have clauses that protect us from changes to government regulations, including tariffs. Our suppliers do the same thing to us. You kick it up in the food chain, so eventually, you will feel it at the gas pump. The risk that remains is, of course, there, because it's very disruptive, the changes back and forth. The risk is that you may have a supplier that doesn't know what to do, and he may not be able to deliver. You may have a client that is not willing to honor the contract and not pay us for the increased cost. There is remaining risk here that we have to manage. We have included more conversations on the project management level and on the bidding level, where we did discuss if there's a particular risk connected to tariffs in each of the deals we make. There's some risk there, but much less than most other companies, I would say. Okay, got it. In the 10-K, you listed 63 employees. I think that was at the year-end of 2023. I'm sorry, of 2024. What is your current headcount, and how many are in Brazil? The current headcount is the same. There's been some changes back and forth. We have two people in Brazil at the moment. Okay. Do you have a timeline for increasing staffing in that facility in Macaé? Yes. We will hire people there when we close a contract. One of the reasons we were getting a facility early was that we got a good deal, first, and the second thing was that the clients there told us very clearly that, "You have to have a facility before we consider you as a serious player." We had to get something early. We got a good deal, and that's now in place. Now we're watching our spending there carefully and preparing for the first opportunity. We're bidding right now, and we're bidding different kind of contracts. In one case, if we win this particular deal, then we need to hire a certain number of people. If we win another contract that we're also bidding, we will have to hire maybe different kind of skill set people, et cetera. We have plans on how to do it, and the trigger point is that we will get an award, or we know that we're getting an award in order to watch our money there. Okay. When that is forthcoming, you're anticipating doing all or most of the engineering in Houston? Absolutely. Yes. In the beginning, certainly all the critical aspect of this will be done in Houston. Most of the hours and the work will be done in Brazil. We will also have inspectors. We will have our project management present in the country. We also anticipate that some of our service technicians will actually go to Brazil and participate in tests and also offshore. We are preparing their visas and certification in order to work offshore in Brazil. Would you anticipate the cost structure of that facility would be a bit less than in Houston once it's fully operational? It will be lower because the activities will be limited to whatever product line we will have there. In the beginning, we anticipate that to be more service-oriented and not the full-fledged manufacturing. It will be smaller and less expensive than what we have here in Houston. What specifically would you be limited in terms of fabrication, in terms of the square footage of the facility? If we get a larger contract, one of the things we're looking at now is to build, for instance, 15 structures that we're bidding on. If we get all that work, we will have to outsource it. We have lined up a partner in Macaé that we've been working and discussing with for over a year that will do some of that fabrication for us. I see. It's similar to Houston in that you use subcontractors when necessary in Houston. In Houston, we do less subcontractors because we are vertically integrated. We think that in Brazil, a part of the time, we will use subcontractors there certainly while we're building up our capability. All right. That seems appropriate. All right. That's the end of my questions. Again, congrats on a nice quarter here. Thank you, Peter. 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 our 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.