American Electric Technologies, Inc. (NASDAQ:AETI)
Q1 2016 Earnings Conference Call
May 16, 2016 10:00 AM ET
Charles Dauber - President and Chief Executive Officer
William Brod - Senior Vice President and Chief Financial Officer
William Dezellem - Tieton Capital Management
Good day and welcome to the AETI to report First Quarter 2016 Conference Call. Today's conference is being recorded. This press release contains forward-looking 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 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 the Form 10-K filed with the Securities and Exchange Commission on March 30, . The Company assumes no obligation 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 would like to turn the conference over to Charles Dauber, President and Chief Executive Officer of AETI. Please go ahead, sir.
Thank you. Good morning, everyone. I would like to welcome you all to the American Electric Technologies' first quarter 2016 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 then walk you through some additional financial details and then I'll come back and share my thoughts on our markets and where we are so far in the year. We’ll then move to a Q&A session coordinated by the moderator.
As you saw from our announcement this morning, the Company’s consolidated revenues for Q1 were $8.3 million, which was up 8% versus last quarter that was down from $15.3 million in Q1 last year. If you remember from last year, we had a significantly reduced backlog level heading into Q4 of only $8.8 million.
In Q4 we picked an awful lot of orders, which increased our backlog at the end of the year $19 million. Although most of those customer projects have 6 month to 9 month delivery cycle, which meant that the majority of the revenue from those orders will be realized in the second and third quarters of this year. And those new orders wouldn’t be able to have significantly impacted Q1 revenue levels, our revenues in Q1 were only slightly higher than what we have - they were in Q4.
The company continues to execute successfully in our projects and backlog and based on the slight revenue increase and an increase in services revenue, the company’s gross margins increased from a negative 4% to a positive 1% in Q1. As part of our efforts to continue to align our resources with the market environment, in the quarter we also incurred a non-recurring charge related to a reduction in force of approximately $400,000.
The management actions associated with this reduction in force are estimated to reduce our fixed expenses by approximately $3 million per year and would begin to be realized immediately in Q2. As a result for the lower revenue in gross margins and incremental non-recurring adjustments to income, the Company announced a loss in Q1 of $3 million. We were encouraged in the quarter by the slight increase in backlog, which was up 3% to $19.6 million. I’ll come back to discuss more about the composition of the backlog later in the call.
With that, I will turn the call over to Bill Brod for some more financial details.
Thanks Charles. As Charles mentioned, the Company recorded several one-item charges for the quarter related to staff reductions in Houston and Beaumont and our joint venture in Singapore. These reductions lower our fixed costs spin by approximately $3 million annually.
AETI reported fully diluted earnings per share for Q1 was a loss of $0.36 compared to a loss of $0.45 in Q4 and a $0.02 per share profit in Q1 of 2015. Our EBITDA, a non-GAAP measure for the quarter was negative $2.7 million, which was up from negative $2.8 million in Q4 and down from $0.5 million generated in the first quarter of last year.
Moving to the balance sheet and cash flow, we ended the quarter with a cash position of $7.1 million in comparison to $6.5 million of total debt. Working capital at the end of Q1 was $8.1 million. The Company reported net cash used from operating activities during the first quarter of approximately $1.6 million in comparison to a use of $0.5 million for the same quarter last year and $2.4 million of net cash from operations provided in Q4 of 2015. Based on our backlog and net cash going into Q2, we believe that our working capital position provides a sufficient liquidity for the year.
With that, I will turn it back over to Charles for some additional commentary and outlook on the business.
Thanks Bill. I’d like to now share with you all more about what’s happening in our market so far in 2016. I’m going to start with our power generation and distribution sector. I have talked about the lumpiness of this sector for a while but this is really on display in our Q1 results for this sector, but we have over $10 million in backlog but in the quarter only saw $224,000 of revenue. As you’ve heard me discussed for several calls we believe the power generation and distribution sector holds great promise for the Company.
There are significant market drivers underpinning this potential including the need for further power generation capacity in the United States and desire to move away from coal for base load power for environmental purposes and the need for the U.S. to upgrade its ageing power distribution infrastructure. We remain positive about the power gen market potential and continue to align our resources to further penetrate this market in 2016 and beyond.
Moving into the oil and gas market sector, revenues in the oil and gas sector increased to $6.8 million, which was up approximately 9% versus Q4, but of course we are still down significantly versus last year. Our oil and gas related backlog for the quarter was also up 9% versus the end of Q4 with $7.2 million.
As I’ve highlighted in previous calls the company operates in three distinct parts of the oil and gas market. I will start with the upstream market, which is the finding and getting the oil and gas out of the ground, which includes land and offshore drilling and offshore production.
Upon 2016 the market for upstream oil and gas still remains down. The Offshore Technology Conference was held in Houston earlier this month and I would say the mood was somber. Most of the folks we met are like us, which is that we’ve been through numerous industry cycles and recognize things will eventually pick back up in the upstream part of the market.
We still see some international opportunities in upstream oil and gas that we’re pursuing but overall we don’t actually see recovery for the upstream market sector until next year recognizing and trying to predict oil prices is not an exact science.
Turning to the midstream part of the oil and gas market, which is the oil and gas pipeline, gas processing, and oil and gas storage and terminal applications. But we tell you that in general, the midstream market is certainly softened in the past several quarters. We still see opportunities for pipeline projects and then storage and terminals put in general this part of the oil and gas market is down versus 2016.
The last part of the oil and gas market is actually the one showing the most activity which is the downstream market. This sector includes oil refining, chemical and petrochemical plants and liquefied natural gas or LNG projects. Refining and chemical markets continue to look positive for 2016, utilizing either low-cost oil or low-cost natural gas. These projects are generally larger than the midstream project and we see good opportunities for this sector this year.
Both the power gen and the downstream oil and gas markets are the key sectors for our IntelliSafe Arc-Resistant Switchgear product line. In Q1, we made significant progress with IntelliSafe. We put IntelliSafe into a mobile trailer and took it on the road to demonstrate it to a variety of brand new potential customers in the EPC, Downstream and Power Generation sectors.
This is one of the best ways for customers in our markets to see the technology advantages we have designed in IntelliSafe and also see the quality of our workmanship compared with the traditional solution providers in the market. We are also pleased to announce that IntelliSafe recently won two industry awards. It was named Product of the Year by Electrical Construction & Maintenance magazine and was recently named a finalist for Product of the Year by Consulting-Specifying Engineer magazine.
We view these two awards as a great validation by the industry of the improved functionality and safety of the product and the marketability of IntelliSafe as we sell the customers that read those magazines in our key sectors.
Moving to our international operations, which are primarily oil and gas related. M&I Electric, Brazil is focused on providing electrical services primarily to the Brazilian land and offshore oil and gas market. Although the Brazilian macroeconomic environment remains challenging M&I Electric, Brazil saw revenue increase in Q1 by 2% to $647,000. The team continues to expand their business written under the offshore production market into the quarter with some large strategic customers operating in Brazil.
We remain positive about the Brazil long-term outlook as the team continues to increase penetration in non-drilling customers and continue to progress with projects directly related to Petrobras and the land-based downstream operations.
Turning to our international joint ventures, our BOMAY joint venture in China had another profitable quarter with revenues of $7 million and AETI recognized 40% of their profits as net equity income, which was $79,000. As you are aware, the Chinese economy remains flat at a down level compared with our 2013 and 2014 and we expect to see BOMAY remain flat in 2016 compared to 2015 as well.
Our joint venture MIEFE in Singapore continue to decline in Q1 with revenues of $662,000. In the quarter, we suspended manufacturing and cut the MIEFE staff to bear minimum levels including the severance cost associated with those reduction in force, our share of the MIEFE loss in the quarter was $274,000 and had joint venture results together, the equity income from our two foreign joint ventures net of JV related expenses was a loss of $246,000 in the quarter.
Moving into our non-energy related marine and industrial sector, Q1 revenues were basically flat at $1.2 million versus Q4 of last year and Q1 of last year as well. Backlog for this sector was up $0.8 million to $2.2 million just like the refining and petrochemical markets, we believe 2016 we will continue to see opportunities in the non-oil and gas chemical markets through the year especially as we further penetrate the large EPC customers who focus on these large chemical projects.
When I add the backlog for the various sectors together, total backlog for the Company was $19.6 million, up over 3% from $19 million in the fourth quarter. Although backlog is up we recognized as the significant portion of that backlog will be realized in the second quarter and the second half of 2016.
To summarize where the Company is, first, we are facing the tough market environment, but there are some promising areas of opportunity the Company to execute in. Second, we have a compelling set of product solutions including our new IntelliSafe product that we think really address the key requirements of those areas of market opportunity.
Third, we lowered our breakeven level was significant cost reductions, we’ve essentially exited our money loose in Singapore operation, while maintaining profitability and even growth in China and Brazil and are tightly managing the Company’s cash. To modern all these together, we feel like we have the right plan in place to execute through this period.
We start to continue to book orders and get the profitability for the Company and I will look forward to sharing more about our progress with you on those matters in next quarter's call. Before we proceed with the Q&A session, I would like to conclude the prepared portion of my comments by thanking our employees for their hard work and to thank our customers and our shareholders for their support.
This concludes the prepared portion of my call and I’ll now turn the call over to Taylor for the Q&A Session. Thank you?
Thank you. [Operator Instructions] And we’ll take our first question.
This is Bill Dezellem with Tieton Capital. Couple of questions to start with, first of all the tax benefit was nearly zero in the quarter, why was that and what do you see going forward?
Hi, Bill. This is Bill here. Yes. As far as the tax benefit is concerned we are fully reserving for any loss carryforwards at this time. We believe that just a conservative position in light of where the market is so that’s really what’s driving that both the loss carryforwards which would be a benefit where we’ve got a reserve established against that.
Great. Thank you. And then may see now that you have essentially shutdown operations and taken the restructuring charge, does the loss go to zero going forward or what is the correct way to think about that as we move for the remainder of this year and next year?
Yes, Bill that would be a fair expectation going forward that those losses were related primarily to the reduction, the staff reductions in Singapore and were recognized during the first quarter, so going forward which we should be fine.
And then would you describe the cost-cutting measures that you took in light of the backlog being up, the two seem a little bit in contrast, we would really like to understand what it was you did and what you're thinking was there? Please.
Yes, Bill, this is Charles. So our business continues to remain lumpy as we’ve talked about and what we need to make sure that we've got the absolute maximum focus on not only booking the orders, but on reducing our costs and making sure our breakeven is as low as possible. So what I would tell you is this is just further tightening around the areas where we see opportunities and reducing the areas with Company where we don't see opportunity. So we may have pulled more people out of the drilling part of the business for example, more people out of some of the other operations to focus the core of the Company on where we see the opportunities in the Downstream and Power Gen sector in the associated operations that support those.
So these would be people that weren’t in a position to make a transition to these different industries where there is some activity going on?
It’s a mix of things, but overall part of getting through downturn with lumpy quarters is making sure we’ve got the lowest breakeven point possible while still be able to fully sell and enter orders and engineer and manufacturing and ship and all the other good stuff that we are doing. We think we’ve been able to do that.
Was there some degree of streamlining so when business bounce is back, you won’t need to replace those are just the processes are now going to be better going forward?
I think that when things scale back up on sort of a steady state level most of it will end up getting hired back is not necessarily going to be the fixed costs that we’ve reduced a lot of what will scale back up because with the infrastructure in place is a traditional direct labor which charges directly the jobs. Right, so I think we’ve got the Company and the infrastructure to a good spot where we can make it through if the order book goes up and down at the lower levels, but still be in a position to take advantage of the opportunities that we’ve got.
That’s very helpful. I would like to ask one more before I turn it over. The FlexGen relationship that you announced [indiscernible] little over a year ago I believe would you share with us an update with that please?
Yes. So for those of you who are wondering what this was we announced our relationship with FlexGen, FlexGen makes energy storage systems, this partnership was for the - primarily for all of our sectors, but really for the land drilling part of the market. And at this stage, although we do talk to all customers about FlexGen and improving their operations on most of the land drilling customers are on a capital for use right now and they are not even interested in looking at ROI oriented projects. And so we expect if the market picks back up we will see more opportunities for FlexGen going forward. We've still got a great relationship with the team at FlexGen team’s that works together just not a lot of opportunities at this minute.
Great. Thank you.
[Operator Instructions] And we will take our next question.
It’s Bill Dezellem again. I guess if no one else wants to turn I’ll jump in with one more please. And that is G&A was down I believe $400,000 or so from the fourth quarter, would you talk about where you took that out and especially in light of the fact that you had a charge in the quarter for reduction in force and try to fill out the rest of that picture for us please?
Yes. Bill. This is Bill here. In terms of the $400,000 charge for Q1, we recognize that all in the G&A section because it's more of a one-time charge, but there was some indirect cost that I would say were included in that, but it's basically taking out a what I would consider to be more of a middle tier of management to kind of right size the organization, so we've got staffing primarily in the - I would say some accounting, finance, IT, some of the middle management in Beaumont with the facility there. That was taken out. That really drove that charge.
Okay. And then in spite of the $400,000 that was in G&A, the G&A number was down about $400,000 versus Q4. Where did that reduction come from?
Some of the costs that we’ve had in Q4 were some charges to - for example our allowance for bad debt, we increased our reserve in Q4 so we had some - that contain one-time charges in Q4 that we did not see in the first quarter of this year. So I think I don't have that information in front of me, but we do have specifics that we called out on the last earnings call that highlight that.
Great. Okay. Understood. And then BOMAY, the results in the first quarter did we understand correctly that that's roughly what you would expect going forward for the remainder of this year's quarters?
What I would say is BOMAY is - what I expect is the BOMAY is going to be based on the Chinese market. I think BOMAY will end up being flat versus 2015. We don’t give the guidance right, but in general I think BOMAY will be flat overall on a quarter-by-quarter basis I think their business will also go up and down, but we except and maintain profitability through the year and in each quarter and I expect the revolver is also be consistent to 2015.
Great. Thank you both again.
Okay. Bye Bill.
[Operator Instructions] And we have no further questions.
Okay. Thank you everybody.
And this does conclude today’s conference. Thank you for your participation. You may now disconnect.
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