Stabilis Solutions Q3 2024 Earnings Call Transcript

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November 7, 2024

Key Takeaways

  • Q3 revenues grew 15.1% year-over-year to $17.6 million with a record adjusted EBITDA of $2.6 million and a margin uptick to 14.6%, leaving the company in a net cash position with $15.6 million in liquidity.
  • The revenue mix has shifted significantly toward long-term stability, with 68% of Q3 revenues under ratable contractual agreements versus 43% a year ago.
  • Marine and aerospace growth markets delivered a 3× year-over-year revenue increase, now comprising ~40% of total revenues, highlighted by multi-year LNG bunkering contracts including Carnival’s new LNG cruise ship.
  • Stabilis is pursuing the data center power market with a full suite of services—planning, 24/7 “five-nines” LNG supply and emissions monitoring—to address an expected 22 GW incremental demand by 2030 for cleaner, reliable backup power.
  • Full-year capital expenditures are projected at $8 million–$10 million to fund strategic expansions, including marine bunkering infrastructure, which will require securing additional financing.
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Earnings Conference Call
Stabilis Solutions Q3 2024
00:00 / 00:00

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Operator

Please stand by. We're about to begin. Welcome to the Stabilis Solutions Q3 2024 earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. So that others can hear your questions clearly, we ask that you pick up your handset for best sound quality. Lastly, should you require operator assistance, please press star zero. I would now like to turn the call over to Andy Puhala, Chief Financial Officer. Mr. Puhala, please go ahead.

Andy Puhala
Andy Puhala
CFO at Stabilis Solutions

Good morning and welcome to Stabilis Solutions Q3 2024 results conference call. I'm Andy Puhala, Senior Vice President and CFO of Stabilis, and joining me today is our President and CEO, Westy Ballard. We issued a press release after the market closed yesterday detailing our Q3 operational and financial results. This release is publicly available in the Investor Relations section of our corporate website at stabilis-solutions.com. Before we begin, I'd like to remind everyone that today's conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on the company's expectations and beliefs as of today, November 7, 2024. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected.

Andy Puhala
Andy Puhala
CFO at Stabilis Solutions

The company undertakes no obligation to provide updates or revisions to the forward-looking statements made in today's call. Additional information concerning factors that could cause those differences is contained in our filings with the SEC and in the press release announcing our results. Investors are cautioned not to place undue reliance on any forward-looking statements. Further, please note that we may refer to certain non-GAAP financial information on today's call. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures in our earnings press release. Today's call is being recorded and will be available for replay. With that, I'll hand the call over to Westy Ballard for his remarks.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

Thank you, Andy, and good morning to everyone joining us on the call. We've got a lot of great stuff to talk about today, really building off the momentum when I joined as CEO a little over three years ago. In doing so, I really outlined two primary strategic objectives. The first objective was to stabilize and optimize our existing business to ensure we had a liquidity profile equipped to support both our core business as well as the business we would seek to build in the years ahead. Over the last 24 months, we have demonstrated our commitment to a disciplined, returns-focused approach towards capital allocation while positioning the business to scale within both established and emerging growth industries in search of cleaner fuel alternatives. During the Q3, we delivered more than 15% revenue growth while continuing to shift our revenue mix from spot sales toward longer-term contractual agreements.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

To that end, 68% of our Q3 revenue was under ratable contractual agreements, up from 43% in the previous year. This pronounced shift in the quality and consistency of our revenue mix and the enhanced gas processing capabilities we deployed last year to address feed gas consistency issues resulted in exceptional utilization of our two-owned LNG production facilities and has contributed to a significant improvement in our margin realization, consistent with our strategic focus on driving improved operating leverage. Given our improved margins and operating leverage, we ended the Q3 with $15.6 million of available cash and liquidity and a net cash position on our balance sheet versus $8.6 million of total liquidity in the year-ago period. Our improved financial foundation and strong liquidity profile have enabled continued investment of operating cash flows to grow the business.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

Along our strategic focus of strengthening the durability of our business and liquidity profile, we established a second objective, which was to identify, prioritize, and pursue key growth initiatives that can drive long-term shareholder value. Fueling large marine vessels, providing power for data centers and for emergency response situations, and fueling high-performance rocket boosters in the aerospace arena are incredibly exciting end markets for expansion as they gravitate toward cleaner fuel sources that are reliable and cost-effective. In evaluating growth opportunities, a key criterion was our ability to leverage our capabilities to expand into new markets that are at the forefront of considerable growth.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

Not only is our scalable, cost-effective, execution-ready operating model a considerable competitive advantage for us, but also being the incumbent supplier in many markets positions us for further market share growth as neither large-scale LNG production nor alternative fuel sources are feasible or economically viable for most of these customer applications. While we are encouraged by the growth in these markets, they are in early stages of what we anticipate will become a significant increase in demand. The anatomy of these types of projects consists of a wide array of variables across commercial, operational, and financing fronts, so they take time, and we recognize that.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

That notwithstanding, over the past 24 months, we've made tremendous progress along this front, as evidenced by our LNG bunkering operations in Port Canaveral, Florida, and the Port of Long Beach, California, and the award of a multi-year LNG bunkering contract to fuel Carnival Corporation's newest LNG-fueled cruise ship, the Carnival Jubilee, in Galveston, Texas, in the Q4 of 2023. During the Q3, we realized a threefold year-over-year increase in revenues within our marine and aerospace growth markets, which now comprise approximately 40% of total revenues compared to 11% in the Q3 of last year. Within our marine business, Stabilis is the only provider of marine bunkering solutions with experience executing LNG bunkering operations using multiple modes of delivery on all three coasts.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

Since identifying expansion in the marine market as a key growth strategy, we have spent an enormous amount of time and energy further developing our commercial relationships with the world's largest and most dynamic owners and operators of vessels. Throughout these discussions, several consistent themes have arisen as to why we are a highly thought-of leader to develop the modern marine bunkering infrastructure in the United States. These themes include our extensive experience supported by our deep bench of regulatory, engineering, project management, and operational teams ready to execute. We are a low-risk and execution-ready choice given our existing, redundant, and reliable supply chain and ability to deliver LNG volumes at scale. As a Nasdaq-listed company, our customers value the transparency and stability we provide as a financial counterparty. This is evidenced by the award of our LNG bunkering contract with Carnival Corporation.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

Our team has done an excellent job in the execution of the Carnival contract, and we are excited about leveraging our first-mover advantage to further scale our LNG marine bunkering supply chain to the waterfront on the Texas Gulf Coast. We are moving quickly along this front and feel that we are competitively advantaged when compared to concept company competitors, as we have invested in design, engineering, and feasibility assessment, identified a proposed site, purchased the major components of a 100,000-gal-per-day liquefaction plant, and we present a de-risked value proposition to prospective customers not only due to our experience but by virtue of our ability to leverage our existing operational South Texas and Louisiana liquefaction plants as backstop or supplemental supply points to ensure redundancy and continuity of supply.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

Beyond the Texas Gulf Coast, we are actively evaluating opportunities to build upon our experience on the East and West Coast, as well as expanding outside of the U.S. to the Caribbean, Central America, and South America. Our goal is to have a robust and highly optimized portfolio of production and delivery capabilities to service a broad array of exciting growth opportunities for marine bunkering and power generation applications across these markets. In turning to our commercial industrial markets, we see strong structural tailwinds driving incremental power demand. Applications include data centers, the onshoring of manufacturing, and vehicle electrification, all of which are expected to increase U.S. power consumption by at least 55 GW between now and 2030. Of the 55 GW, data centers are anticipated to consume around 40% or 22 GW.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

To put that into context, that's equivalent to roughly 23 billion incremental LNG gallons of demand per year, or said differently, nearly 650 additional Stabilis South Texas liquefaction plants. This incremental power demand poses a litany of challenges for utilities to service this incremental demand, as the addition of new power generation capacity is highly regulated. It will require significant investment that may not be appropriated and will take considerable time to build. Reliability, scalability, cleaner, and more sustainable power supply are critical needs for data centers, and the constraints are causing data center infrastructure providers and off-takers to proactively take control of their own power destinies. This dynamic is creating considerable opportunities for new power generation solutions in the market to support this incremental load growth and put Stabilis in a wonderful position to address these needs.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

It is our intention to empower data centers to do just that: control their own power destinies. We want to bring energy to where they need it. To do so, we intend to deploy a suite of capabilities across several fronts. We will provide front-end power strategy development and project management services consisting of our highly trained engineering, technical, operational, and project management personnel to assist customers with planning, permitting, licensing, site design, natural gas pipeline sourcing, and access. We'll also provide 24/7, 365 production storage and delivery of LNG to support the five nines, which is 99.999% of reliability for behind-the-meter power to natural gas generators or turbines, primarily in new-build data centers where there is a time lag between data center power demand and when base load grid power is available at the data center site.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

We will also provide backup and peaking power generation at data center locations as well. To support this, we provide ancillary and critical back-end services consisting of continuous methane emissions monitoring, renewable natural gas, or RNG, and other alternative energy solutions sourcing supported by our highly trained operational and field service technicians to assist customers with mobilizing, commissioning, monitoring, and reliably operating on location. We're extremely excited about the potential in this market, which is a natural extension of our considerable power generation resume, where we have delivered over 12 million kWh of dependable natural gas-fired power for critical mission applications since our company's inception. In closing, I want to leave you with this message.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

With Stabilis, we've provided shareholders with a business that can capitalize on significant upside, evident across our growing, underserved, clean fuel markets, while de-risking the model through an increased mix of high-quality contractual revenue and a disciplined approach to capital allocation. Simply put, we've effectively combined the remarkable growth potential of a successful startup without the risk profile of a startup. It's an incredibly exciting time for our business, and we're just getting started. With that, I'll turn it over to Andy.

Andy Puhala
Andy Puhala
CFO at Stabilis Solutions

Thank you, Westy. Let's move to a discussion of our Q3 performance together with an update on our balance sheet and liquidity exiting the Q3. Q3 net income was $1 million or $0.05 per diluted share on revenues of $17.6 million. Our revenues grew 15.1% compared to the prior year period, driven by strong LNG demand and improved utilization of our own liquefaction facilities. The improved year-over-year utilization was a result of incremental demand from long-term customer agreements and the resolution of the feed gas composition issues, which hindered our production at our South Texas LNG plant in the Q3 of last year. Adjusted EBITDA of $2.6 million was a record for the Q3, increasing by $2.1 million compared to the prior year period. Adjusted EBITDA margin increased to 14.6%, up from 3.5% in the Q3 of last year.

Andy Puhala
Andy Puhala
CFO at Stabilis Solutions

We generated $2.6 million of cash from operations in the Q3, and this strong cash generation continued to build on our solid cash and liquidity position, which we intend to leverage as we invest in growth going forward. As of September 30, 2024, Stabilis had total cash and equivalents of $12.4 million, together with $3.2 million of availability under our credit facilities. Total debt outstanding as of September 30, 2024, was $9.8 million, resulting in a ratio of net debt to trailing 12 month Adjusted EBITDA of -0.2 times. Through the first three quarters, we've invested $3.6 million in capital expenditures on a cash basis, with $1.3 million incurred in the current quarter. This amount is expected to rise in the Q4 as we complete several payments, including those for the expansion of storage capacity at our George West LNG production facility, which we highlighted last quarter.

Andy Puhala
Andy Puhala
CFO at Stabilis Solutions

For the full year 2024, we anticipate CapEx to total between $8 million and $10 million, subject to the timing of specific projects. I'd like to emphasize that ongoing maintenance CapEx for the company remains relatively minimal. On the growth side, an increase in CapEx will reflect positive progress on several of the key initiatives we've outlined in call and will require additional financing. To address this, we're routinely evaluating a variety of prospective sources of capital, with heavy emphasis on those partners that know our industry, our company, and recognize the significant upside potential in our operating model. That concludes our prepared remarks. Operator, please open the line for the Q&A session.

Operator

Thank you. Ladies and gentlemen, the floor is now open for your questions. If you have a question or comment, please press star one on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star two. Again, we ask that you pick up your handset when posing your questions to provide optimal sound quality. In the interest of time, we also ask that you limit yourself to one question and one follow-up question. We will pause for just a moment to assemble the question queue. Our first question comes from Martin Malloy with Johnson Rice. Please go ahead.

Martin Malloy
Martin Malloy
Director of Equity Research and Partner at Johnson Rice

Good morning. Congratulations on the strong quarter and the progress you're making on a number of fronts here. First question I wanted to ask about was on the marine and the Gulf Coast marine bunkering operation project that you discussed in the press release. Could you maybe talk about milestones we might be looking for here to reach FID for this project and any permitting milestones we should be looking for? And then maybe you've purchased a lot of the key items and long lead time items. Maybe time from FID to when it might be operational?

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

Yeah. Good morning, Martin. Thanks so much for the question. As I've mentioned, we are really excited about the Gulf Coast. We think that the macro thesis is incredibly interesting. And I think some of the milestones we've already, I think, demonstrated to the market by virtue of buying that first 100,000 gal train. We've done quite a bit of preliminary FEED study analysis around our site location. We've settled on a location that we think is highly actionable. And frankly, we are poised and ready to go and think about capitalizing this. But in doing so, there are a couple of variables that fall into play, one of which obviously is the commercial side of the equation, and the other is the financing side. And so there's quite a bit of industrial logic to doing something like this on spec.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

But as you can imagine, a company our size, that's quite a bite to take. So we want to continue to firm that up. And so milestones would be a little bit more meat on the bone in and around commercial activity. But it doesn't mean that we've got to have a fully booked backlog. I think that if we can continue to see green shoots, we'll be in the market raising capital with some speculative because of the backdrops there. So I think those milestones are going to be CapEx, the triggering of larger quantums of CapEx, and/or announcement of commercial activity or broader commercial activity than the success we've already had with that Carnival contract. I think when you think about time, sorry, it depends.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

But as you know, we've got a really good relationship with the majority of our vendors. And so we think that we've got maybe not favored nation, but highly thought of nation status with many of them. And so I think when we think of timeline, that could be an 18-24 months from the time we say go to the time it gets rolled out. So it's a pretty quick and expeditious rollout. And that's one of the beauties of small-scale LNG, the modular aspects and the expedited ability, plus the ability for us to have a balance sheet that affords us the opportunity to buy that first train. So that confluence of activity, I think, expedites this. But 18-24 months is probably a good rule of thumb.

Martin Malloy
Martin Malloy
Director of Equity Research and Partner at Johnson Rice

Okay. And then for my second question, I wanted to ask about the data center opportunity. We've heard from other sources as well that they are serious about looking at LNG as a fuel supply for power generation, and they're focused on timeline. Could you maybe give us a sense of the pace of discussions that you're having? And is it possible that you could get an off-take agreement, or an off-take agreement, I guess, from a creditworthy kind of party for a number of years that would give you the justification to maybe expand liquefaction capacity even further? Or would you be sourcing from third-party sources?

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

Yeah. No. So thanks. The paradigm is changing, as you alluded to. It's changed quickly. Really, over the last 18 to 20 months, you've seen a massive shift and notoriety of this AI and data center and cloud computing infrastructure or the need for such infrastructure. And we think that, yes, there are opportunities for us really in several phases, the first of which is for us to have term contracts to bridge that gap between when the data center has been constructed and when the primary base load grid can show up to their location. That can be six, nine, 12, 18, two, three years. It's hard to speculate, but there'll be some term and reliability of that.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

And then that morphs into providing backup through what historically has been diesel generators, but really, we think moving forward, it's going to be natural gas and generation and turbine capability. And so our volume of discussions, even over the last 90 days, has grown considerably. We are in the process of trying to enter non-disclosure agreements with many prospective customers to better understand their footprint and what their goals are and locations so we can better and more thoughtfully think about where we need to build our infrastructure service at. And so to answer your question, we might have a first wave where we source from third parties or we source from our George West plant, or we double or triple or expand our George West plant.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

But I think it is very likely or possible that we'll build additional infrastructure in and around the U.S. to adequately support a bit of a hub-and-spoke model where we'll have liquefaction capacity, storage capacity, and then also distribute some of that smaller storage capacity at a cluster of data centers. And so it's an unbelievably exciting opportunity for natural gas and the natural gas paradigm to be a participant in the whole technological revolution that's before us. They are also very, very sensitive to emissions. And so diesel is clearly not something that they are highly confident in using moving forward. And they certainly, they, meaning the colo and off-takers, co-location, excuse me, and off-takers are certainly aware of the challenges and costs around some of the more alternative solutions. And so natural gas falls right in the sweet spot at scale.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

As I mentioned, if you've got 22 gigs just by the end of the decade that's coming online, and if we get even just a small fraction of that market share, it's an unbelievably exciting opportunity for Stabilis.

Martin Malloy
Martin Malloy
Director of Equity Research and Partner at Johnson Rice

Great. Thank you. I'll turn it back.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

Great. Thanks, Marty.

Operator

We'll go now to Barry Haimes with Sage Asset Management. Please go ahead. Your line is open.

Barry Haimes
Managing Partner at Sage Asset Management

Thanks so much. One quick housekeeping question. How many gallons did you produce in the quarter? And could you remind us what the annual capacity is? That's the first question.

Andy Puhala
Andy Puhala
CFO at Stabilis Solutions

Yeah. So Barry, good morning. Thanks for the question. We don't disclose publicly gallons sold. And that's really for competitive reasons because most of our competitors are private. Our utilization, I can tell you, in the quarter was pretty good. It was close to 90% at George West and in the high 70s at Port Allen. And the capacity there is 100,000 gal a day for our George West plant and about 25,000 gal a day for our Port Allen plant.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

So call it 45 million gal a year from our own production. But that doesn't count third-party molecules that we also source through our commercial activities and our logistics department, which is about 30 supply points around the U.S.

Barry Haimes
Managing Partner at Sage Asset Management

Got it, and then second question, if I could do a follow-up on the data center opportunity, could you sort of describe what your sweet spot is versus I would think it would be relatively easier for the data center guys to, if they're going to get power from natural gas, to get it off the pipeline if there's pipeline availability. But there may be places where there isn't. So I'm sort of trying to understand where you guys, where your solution would fit, what your sweet spot would be.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

No, you're right on. Just early indications by that growing list of customers that we have started to have engagement with, in some instances, as much as half of their rollout, which might be several gigs over the next five years, are not on natural gas pipelines. So the quantum is material. And so we are still in fairly early stages of trying to fully quantify that. But also, it's one thing to just rapidly respond to a location. But really, I think our perspective is, rather than try and shoot from the hip, we want to better understand their entire portfolio so we can be thoughtful in ensuring that they've got reliable, cost-effective bridge and redundant power generation for their needs. And so we're in the throes of doing that.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

But as I mentioned, it could be as much as half of these locations that these co-location and off-takers are rolling out don't have natural gas pipeline access at all. And also, I'll say that even if they did, on the backup and peaking side, natural gas pipelines sometimes can be challenged in many states. Look at Texas alone. Oftentimes, especially in the winter months, there's intermittency in those natural gas pipelines. And sometimes they're either providing maintenance or unclogging those pipelines. Sometimes they've got to discontinue use commercially because you've had disruptions in the pipelines. And so having a backup from LNG or a third-party source that's got a lot of storage that we can deploy that's not dependent upon a pipeline or that can weather a pipeline discussion, that's also fair game.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

So I wouldn't say it's entirely just a universe of prospects that aren't on natural gas pipelines. That certainly is a large part of the universe. But there's also a universe of those that are on pipelines that also want to have that redundancy. This 99.999% or the five nines is real. And it's something that they are very sensitive to about maintaining the ongoing flow of power and data generation out of these centers.

Barry Haimes
Managing Partner at Sage Asset Management

Great. Thanks so much. Lots of continued good luck.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

Yep. Thanks.

Andy Puhala
Andy Puhala
CFO at Stabilis Solutions

Thank you.

Operator

We'll turn now to Matt Dhane with Tieton Capital Management. Please go ahead. Your line is open.

Matt Dhane
Portfolio Manager and Principal at Tieton Capital Management

Thank you. I wanted to ask about the aerospace market. I was curious how it has developed relative to your expectations. And then secondarily, also, is the aerospace market an industry where we should expect long-term contracts to play a role over time?

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

So I'll answer that. The first question is, actually, it has. It's playing out really along the lines of how we've expected. And what I mean by that is we expected a little bit of lumpiness and volatility. There's certainly a main participant in that market right now who's got the lion's share of market share. And as you can imagine, there are regulatory inputs and other variables that come into play when it comes to launching and R&D for rockets. And so I'd say it's where we anticipated. We are fortunate to have a little bit of readability and contractual coverage in our aerospace business. That's a new phenomenon that really occurred a few months ago. And so we're excited about that. We think we can build upon that. And we think that over the ensuing years, not all roads will go through one company.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

There'll be others, which there are now, but those others will enhance their capabilities and continue to need LNG to not only support their research and development activities, but also their launch activity. Maybe not the voluminous amount per rocket launch that another provider does, but certainly a cluster of launches that, if you aggregate, can be a very exciting opportunity for us as well. And so, as you know, we're the market leader. We've got a track record of safe and reliable fuel supplying to these high-performance rocket boosters. And we expect to continue to maintain and protect that market position as this market continues to evolve over the ensuing years.

Matt Dhane
Portfolio Manager and Principal at Tieton Capital Management

Great. Thank you, Westy.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

Thank you.

Operator

That will conclude the Q&A portion of today's call. I would now like to turn the floor over to Mr. Ballard for his closing remarks.

Westy Ballard
Westy Ballard
President and CEO at Stabilis Solutions

Thank you, everybody. We're excited about today, but certainly tomorrow, and we look forward to talking to you down the road.

Operator

Thank you. This concludes today's Stabilis Solutions third quarter 2024 earnings conference call. Please disconnect your line at this time and have a wonderful day.

Executives
    • Westy Ballard
      Westy Ballard
      President and CEO
    • Andy Puhala
      Andy Puhala
      CFO
Analysts
    • Barry Haimes
      Managing Partner at Sage Asset Management
    • Matt Dhane
      Portfolio Manager and Principal at Tieton Capital Management
    • Martin Malloy
      Director of Equity Research and Partner at Johnson Rice
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