Deep Down's (DPDW) CEO Ron Smith on Q3 2016 Results - Earnings Call Transcript

| About: Deep Down, (DPDW)

Deep Down, Inc. (OTCQX:DPDW) Q3 2016 Results Earnings Conference Call November 17, 2016 4:30 PM ET

Executives

Ron Smith - Chief Executive Officer

Gene Butler - Chief Financial Officer

Analysts

Laura Engel - Stonegate

Walter Schenker - MAZ Partners

JD Abouchar - Two Lakes Capital

Operator

Good day, ladies and gentlemen, and welcome to Deep Down, Inc. Third Quarter 2016 Financial Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference may be recorded.

I would like to introduce your host for today's conference Mr. Ron Smith, Chief Executive Officer. Please go ahead.

Ron Smith

Thank you and welcome to the third quarter investor conference call. The agenda for this call will be the following: I will ask Gene to discuss the third quarter financials. Then, I will discuss some current operational aspects of the business today. Then, we will turn it over to Q&A and finally we will conclude the call.

Gene, would you tell us about the third quarter financials?

Gene Butler

I will, Ron, thank you.

First, a detailed disclaimer related to our forward-looking statement is included in our press release, which has been filed with the SEC. It is also available on our website at deepdowninc.com or upon request. A reconciliation of excluded items and non-GAAP financial measures is also included in our press release and on our website.

Revenues for the third quarter 2016 were $9.2 million, resulting in a net income of $979,000 for a net income of $0.06 per share. This compares to last year's third quarter revenues of $6.1 million, which resulted in a net loss of $639,000 for a net loss of $0.04 per share. The $3 million or 49% increase in revenues was primarily due to the commencement of procurement and manufacturing activities of certain customer orders that were delayed in the previous orders.

Gross profit for the third quarter 2016 was $3.3 million or 36% margin. This compares to our gross profit for the third quarter 2015 of $1.9 million or 31% margin. The $1.4 million and 5% increase in gross profit and gross profit percentage respectively were due primarily to additional costs incurred on prolonged fixed-price projects for a large customer that impacted our gross profit and our gross profit percentage for the same quarter last year which did not occur during the third quarter of this year.

Modified EBITDA for the third quarter this year was $1.5 million compared to the slight loss of 9,000 EBITDA for the third quarter 2015. The $1.4 million improvement was due to an increased level of revenues with higher gross margins. Our balance sheet continues to be very strong. We continue to have a strong cash position and do not have any debt. Our working capital is $14.7 million, our net book value is $23.4 million while our marketing cap is approximately $13 million.

Marketing cap has doubled since last year at this time and it continues to be substantially below net book value. At the end of the third quarter we have purchased a total of 312,000 shares and we're continuing the repurchase program until March 31, 2017. The price of oil continues to be low and the business environment continues to be very uncertain.

This is the perfect time to turn it back to Ron. Thank you.

Ron Smith

Thanks Gene for the explanation of the financials for the third quarter.

I will discuss some of the operational aspects of this third quarter and some of the current work. Using the sales by customer report for the 2016 year-to-date, our recognized revenue for the following categories are as follows: operators had 81% of that revenue, the OEMs had 8%, the installers had 11%. Using the sales by customer report for 2016 Q3, our recognized revenue for the following categories are: operators had 82%, OEMs had 6% and the installers had 12%.

What is exciting is this is again the absolute highest percentage of operator revenue in the history of the company for the year and again the same highest for the quarter. This is the trend we have wanted to get to. This is where we have a majority of the work for the operator, a healthy and consistent amount for the installers with a little bit for the OEMs.

Regarding the profitability for Q3 and the year, we're very pleased to be profitable for this quarter which goes a long way to make up for the year. We had work on the shop floor and finished much of it in this quarter and still have much work on the floor for this last quarter. We had some good service jobs.

We have a planning meeting underway today for the installation campaign to begin the second week in December in Korea. This work is shifted to the right as it was originally scheduled for this month but at least it's still kicking off this year but the good news is the equipment still shipped out last month with much of it already on rent.

The key will be to be able to complete and recognize as much work as we can by the end of the year and have a steady amount of work in the field for the first quarter of next year, working on everything we can to be profitable in the last quarters to make up for the year.

Like I said, the shop floor is still busy finishing up work to go to Korea for Phase 2 which will bode well for the first quarter but at the same time the seven steel flying leads we had hope to complete by the end of the year will be held up by the [indiscernible] J-plates which still have not arrived yet. It will be now very difficult to complete and recognize these by the end of the year but we’re going to do our best.

Our service teams have just completed some fly and lead installations including 10 with a major installer for a super major along with the successful installation of a new state-of-the-art SAM, subsea accumulator module, which was just successfully connected yesterday.

Our backlog remains strong and EBITDA was not as high as before which have been record highs and it is still in the 20s with many potential projects in the [Harbor] [ph]. Our balance sheet is looking very good so as of today we have just at $7.6 million in the bank, that's 7.6, and that is after buying back as of today 500,000 in company stock. So we're a little more than one half way to go to our goal as of yesterday, and after purchasing and setting up our new [inaudible] water jet cutter which is fully operational, we still haven't tapped into the daily average.

This is also hooking up our new rotational molding to unit system. This should be partially operational by the end of the year making us capable of producing full distributed buoyancy systems for next year’s deliveries.

Regarding our cost reduction program, well this is going to be an ongoing program. Regarding our carousel RFQs or both sales and rental effort, continues. We have several active opportunities in the works, storing a large amount of umbilicals for our client for more than 2 years, this would fit only on the blue 3500. [Loading water to] [ph] flexible flow lines and taking it south is another opportunity.

Sale of the gray 3400 to a client in the south is still in the works and the sale of either or both to a client in the Gulf of Mexico is still current. Temporarily storing umbilicals in between installation campaigns at core industries just popped up the other day. The legal work on the two carousels - other two carousels are still ongoing and remediation planning and execution is underway with all attempts to have both completed by the end of the year.

One of our investors asked the other day if I could explain the comment from the filing. “We are also pursuing multiple opportunities where we seek to leverage our core technologies in nontraditional areas of the energy industry”. Well this refers to it as if we have a pattern of consistent work we have been delivering and concentrating on this consistent work for long time and we're doing the best to do this without risk.

So there are some opportunities for which we have been good at in the past and can leverage these skill sets to do other work using what we already do is slightly different areas but on a grander scale and this is while we're stressing to be on a T&M basis.

So some of this includes the supply of an umbilical and installation via a shortfall in from an island in the Caribbean to an offshore terminal, that's a very real possibility that we're working on and that would replenish the backlog nicely if that came in.

More sealed development and more system distribution equipment including more flow line work and installation in West Africa for past clients. So what we’re doing there is we’re adding on more of the pipeline work to the umbilical systems. Supply of installation equipment for offshore concrete pumping operations, so we will be utilizing our installation equipment but instead of flying leads or small umbilical it will also be for flexible flow lines for concrete to support development of marine infrastructure in Guyana and then support more with our core business.

So as the business moves to Guyana, we have the opportunity to not only to sit out and wait until our core business pops up, but use some of our past fuel sets to help build an infrastructure through the whole port area.

Wind farm, power, umbilical installation services through certain relationships we are finally getting an in-road into people that we may be able to offer our build services to. Advisory capacity for the installation of hydrothermal system components and the operations existence, so people are approaching us to get involved with them to take our installation capabilities on our knowledge and apply it to different areas. We have been working very hard to get that opportunity.

Advisor to Texas A&M University for the field Ocean Discovery XPRIZE. Please look this up, Shell Ocean Discovery XPRIZE and that will tell you a lot about some very neat things for the future. Repair the integrity of flexible flow line and [indiscernible] type operations. There is more of a push for being able to disconnect during storms and safety at PSOs and when that happens on a control and for us, people look in towards us for helping provide a little better remediation services for that.

And we just recently applied for government brand to build a working prototype of the rental system that have active remediation system available and sealed prior to disasters, so this is again taking our core business in kind of shifting into a little bit elsewhere to be able to do more to even out these out.

The good news is that new and existing clients are looking us to support them in more areas that they are involved, and this is truly a partnering type solution-oriented relationship that we have with them. So I encourage any of you to contact either Gene or myself by email and that we can set up a call to answer any questions or discus any topics, and thank God, our safety record is still great.

So that's all I have for now and I'd like to open it up for Q&A. Are there any questions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Laura Engel with Stonegate. Your line is open. Please go ahead.

Laura Engel

Hi, good afternoon. Thanks for taking my questions and congratulations on the great quarter. Wanted to know as far as the gross margins, I think in the past a few higher metrics have [been brought on] [ph], do you still see the remainder of the year maybe reaching that 38% plus mark or is that a longer term goal, but obviously the 36% for the quarter is that - is an improvement, what are your thoughts on that?

Ron Smith

Is this [inaudible]?

Laura Engel

Yes. Hi, how are you?

Ron Smith

I am fine. Can you ask that question a different - what do you really want?

Laura Engel

With the gross margins, so you had improvement in the quarter and I think at one point you had talked about perhaps returning to some historical numbers in the 38% plus range, is that something you are still looking in subsequent quarters?

Ron Smith

Yes, I mean, that's still - we believe we can do that and that’s still our objective. If you look at this particular quarter we mentioned that, that our people went to work though we bought a lot of assets out here for a particular customer and that we'll go in the job and even though it’s [inaudible] we have the margins on the overall job.

Laura Engel

Okay. Yes, so, okay. And then…

Ron Smith

Well, all I was going to say is on purchases of material for this particular customer, it’s cost plus 15%, so that has an impact on our margins. But our margins are more on the right direction and most of it was affected by the [indiscernible] we did a lot of manufacturing and we don't do that anymore. So very little…

Laura Engel

Okay. And then, some of the carousels I know you talked about the mediation, so that the two that we've historically talked about, no renewals and no sales on those, today you are still trying to work out the resolution on this, is that correct?

Ron Smith

You want.

Gene Butler

No, you answer that.

Ron Smith

You go ahead.

Gene Butler

No, you go ahead, Ron.

Ron Smith

No, go ahead.

Gene Butler

I'm sure I understand the question.

Laura Engel

On the carousels, you said - in the past you discussed potential rentals or sales but on this call I think you just mentioned something about mediation, so the two we talked about historically, if you could just clarify the status on the two?

Ron Smith

Yes, there’s two issues here. One, the mediation that's ongoing and the other one is what’s happening to the carousels.

Gene Butler

These are just two separate subjects because that's actually talking about different carousels. The rental is - and I know our investors are getting tired to hear about the rental but we have got about six active proposals out right now on renting/selling of either or both of the carousel.

So we've got different combinations at play right now and right now we are looking [inaudible] on the solutions for most of them. So, but I am not going to promise anything until it happens.

And secondly, we have litigation going on with two carousels and I was just - I’ve been asked a lot on how that's going and the one carousel, they are both set up for mediation and there’s a lot of preparation work that’s going on and things are progressing along nicely but we haven’t finished it yet. So we hope to get things done by the end of the year. So one of the reasons our investors are so interested in that it has some potential of money to put back into the bank.

Laura Engel

Right. Okay, well, thanks for clarifying that and again, a great quarter and I will hop back in the queue.

Operator

[Operator Instructions] Our next question comes from the line of Walter Schenker with MAZ Partners. Your line is open. Please go ahead.

Walter Schenker

Hi, Ron, Gene. Just to further clarify, because you really were somewhat confusing in talking on the carousels going from the two you own which hopefully will either go into rental or sale and the large carousel you built and the one you rented for which you were now in mediation to try and collect full payment that they are very different and distinct events. On the mediation at what point if mediation fails do you go into - do you then go into arbitration or you have to go into litigation?

Ron Smith

The carousel in Mobile, Alabama is part of the several year lawsuit and the judge ruled to have mediation and we're in the preparation for getting through that process, and the other carousel is the one that we manufactured and it is by contract arbitration. So there is no litigation but arbitration and the arbitrator suggested mediation prior to the arbitration and we have just finished several reports to put under discovery pile that is setting things up to get ready to go for that mediation.

Walter Schenker

Okay. So both pieces which were separate, there was a two different carousels, will or should complete mediation before year end?

Ron Smith

That's correct.

Walter Schenker

Which may or may not be successful and then we’ll see what the next step is.

Gene Butler

Yes, but we’ll make it clear there's no impact on our financials if it doesn’t happen.

Walter Schenker

Right, you just trying to collect money in one case, the rental in the other case, the overages and change orders which you aren’t fully compensated for in your opinion?

Gene Butler

Correct. That’s right.

Walter Schenker

Okay. And…

Ron Smith

We cancelled the mediation activity this week but there are some things pending right now that I can’t really talk about it. So I’m just saying we are in the process.

Walter Schenker

Okay. And changing the subject to the two carousels you actually own and are on the balance sheet which - is there for years now, actually it is years, there have been various people interested in one or the other or conceivably both of those while they largely sit idle. It's hard to understand for me outside maybe so I didn’t understand from your side as well, if when there are three, four, five, six people who are interested in a carousel and may have a specific job, the fact that they don’t understand there are only two carousels and if you were the third guy, we should be so lucky in the queue who wants it, it's going to be gone.

So I am still trying to understand if there are - and there may not be good answer if there are people who clearly feel the need somewhere in the not far distant future, either to store some things south of the border or to use them in some project, why the people don't either pay you for an option or step up early knowing that you know, someone else may get in ahead of them. So it sounds good to me but they don’t want to pay the money?

Ron Smith

That's exactly right, Walter. And we have this discussion on a daily basis and I cannot believe when we are like one of the only options for a particular company that they would take the risk even though we’ve made it very clear this is on a right to first refusal that this very well good leaves your opportunity tomorrow and you won’t have the solution, and they go, okay, thank you.

Gene Butler

[One of the problems] [ph] is that these guys have put in quotes to the oil companies and till they get approved on their quote they don't really want to make a commitment to anybody buying equipment for “that may not get a roof”

Ron Smith

And that is, we've actually got to shut those off to the site, we got probably about three in those potentially opportunities but that's absolutely right but there are some right now that are part of the solution that I think sometimes we come up with two kind of solution we have to try to figure out how to find something smarter. It's frustrating for me too, Walter.

Walter Schenker

Okay. And lastly, on some past calls you've indicated that there is tens of millions or large amounts of business out there which you may or may not get but where you’ve been asked to provide either preliminary quote or something else. There is still a significant amount of new business, which again, hasn’t been awarded yet but where people have come to you and asked to see if you’re interested and where you provided some level of quoting?

Ron Smith

That's correct. Walter, there are lot of projects and there’s several over here in the Gulf of Mexico that are scheduled to take affect but the oil companies haven’t committed to do it yet and people who had quoted on are sitting on the sideline waiting. So there’s a lot of project available. Maybe the elect - the elections will happen. I don't obviously know.

Gene Butler

Well, Steve Pahls our Sales Manager told me this morning in preparation of my call, he’s got $280 million in quotes now and some of the things that I’m talking to you about have just come up in the last couple weeks.

I'm sort of letting you know that there are sort of four phases those prior time nothing going on and there is people who started talk to me directly on can we and would we interested in solving this problem then the next days is quoting which is $280 million and then there's the PO's.

So what I am trying to get across is that there are opportunities right now that are seen to be increasing and in areas that are and other parts of the way that the industries not necessarily just oil and gas. So I am very encouraged by that.

Walter Schenker

Good. Okay, and just the last comment and I’ll hang up, which is just a comment, again I know you’ve bought about half of the buyback. We both appreciate I mean, you as shareholders and me as a shareholder that when you’re buying in stock at a substantial discount to a very hard asset value with a lot of cash which is earning nothing that that's a accretive thing to value so I command you to keep active in that because it is creating more value for everybody. Thank you.

Operator

Thank you. And our next question comes from the line of JD Abouchar with Two Lakes Capital. Your line is open. Please go ahead.

JD Abouchar

Great. Thanks, guys, and congrats on a good quarter. I guess, first just a follow-up on Walter’s question about sort of pipeline maybe more from 30,000 feet, it really gone quite when oil, bottom fell out of it. It sounds like the industry is starting or has adjusted to the new pricing environment and there's starting to be some activity or maybe I am putting words in your mouth. Can you just kind of tell us where the offshore guys are where the mines out right now?

Ron Smith

So, independent on my discussion because I prefer talking about quite a few things that are in the oil and gas like this laying this umbilical off to control an offshore plan for 236 inch import lines for basically an offshore fuel terminal to some of things at shale and Chevron who got cooking up, there is some client enthusiasm about the potential.

At the same time people are worried about their jobs. I think the oil companies are still going to be laying people off because of the lag time but the other day I just heard that Maddock 2 has just been released and that's huge for VP, we're talking about renewing of their umbilical frame agreements with people, at the same time of the super maintenance we're talking about cost reduction programs which doesn't scare me on how they can do things more clever and at the same time they’d like to have sit and talk with us.

So I think that as they hunker down, deep down maybe a hunker down position to them. So this could be our opportunity for us to increase and so part of being their overall cross savings.

Gene Butler

Well, I can say on rig a lot about, the force on this projects come on the drilling side obviously there's a lot of negotiation out going on pricing of the offshore rigs. So that's a good sign and although, we haven’t see any of signs yet, they are now negotiating to a better price.

JD Abouchar

Okay. And another question maybe more for you Gene is, great revenues this quarter, I sort of - it sort of imply from your commentary that perhaps some of the revenues got pulled forward from Q4 to Q3, so just broadly speaking how would - your best guess on how Q4 is shaping up and so where are our base revenue run rate should look like in this constrained environment?

Gene Butler

I'm only going to say, I don’t think we had any pull out forward in the Q3. I think what happened was the projects we talked about in the second quarter where we were doing engineering about material and lower margins took effect and we had to close that offshore working. So one we had closed and we had a lot of people on it.

So, if we see a little around kind of now that we are pulling four to three but for Q3 we didn’t lose three to four because it seems like every core that we have a call, we had some things move from that quarter to the next quarter and never could recognize it. So here, we see the revenues at 9 million versus the 6 million. You see having their recognized revenue to finish they are working at core, makes all the difference between begin not profitable and profitable. So we’re able to recognize it, and two, we got more profitable.

Ron Smith

I think the fourth quarter is still going to be pretty good but some of the revenues probably is moving in the first quarter but you also had to remember the fourth quarter has Thanksgiving and Christmas, so that always has an impact but right now we’re still looking fine.

JD Abouchar

Great. And then what percentage of revenues this quarter were time and materials and our goals to get as much as possible there kind of where are we and what’s your target?

Ron Smith

I am working over my shoulder because that’s a number that’s always floating around. Gene, where are we right now on the T&M, percentage-wise.

Gene Butler

Its 70%.

Ron Smith

70% is the vote.

JD Abouchar

Okay. And then my last question is you sort of have a love-hate relationship with GE, any impacted all from - you know looked like maybe they weren't going to be as active then they come out nowhere and buy Baker Hughes that - any impact for us at all?

Ron Smith

That could be a good thing lot fairer; maybe they’ll start learning out a good business in the old patch.

JD Abouchar

All right. Thanks guys.

Ron Smith

Okay. I don’t think GE is - they want to get bigger in this industry and they bought one of the leaders in the industry. So principally in the equipment type of business but still that's probably a positive move. Any more questions?

Operator

I am showing no further questions at this time and I would like to turn the conference back over to the CEO, Mr. Ron Smith for closing remarks.

Ron Smith

Well, thank you very much. And I appreciate yours interaction and I look forward to talking to you all in three months about some more positive stuff. So thank you and we'll see you later. Bye, bye.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

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