Natural Gas Services Group Inc (NGS) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Natural Gas Services Group First Quarter Earnings Announcement Conference. At this time all participants are in a listen-only mode. After the presentation we will conduct a question-and-answer session. Your call leaders for today's call are, James Drewitz, Creative Options Communications, Wallace Sparkman, President and CEO, Earl Wait, Chief Financial Officer, Randy Larkin, Director of Sales and Marketing. I would now like to turn the call over to Mr. Jim Drewitz.

Thank you very much. Good afternoon, ladies and gentlemen.

It's my pleasure to read the forward-looking statement before we turn the call over to Wallace, so please indulge me. Except for historical information contained herein the statements in this conference call are forward-looking and pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties which may cause NGS's actual results in future periods to differ materially from forecasted results. Those risks include among other things the loss of market share through competition or otherwise, the introduction of competing technologies by other company, prolonged reduction in oil and gas prices which could cause decline in demand for NGS's product and service. A new, governmental safety health, environmental regulation which could require NGS to make significant capital expenditures. The forward-looking statements included in this call are only made as of the date of the call and NGS undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. A discussion of these factors is included in the company's annual report on Form 10-KSB, filed with the Securities and Exchange Commission. With that, ladies and gentlemen, Mr. Wallace Sparkman.

Good afternoon and thank you for joining us for today's conference call. In Texas, I often hear a saying that how about them cowboys. Today we're saying how about that stock price. We also have available on this call Craig Rogers, Craig is Vice President of Operations for our Southern Division, and we have Scott Sparkman, Corporate Secretary and Manager of Contract Administration. If there are any shareholders or other interested parties that want a one-on-one visit because of unanswered questions after this call, you may call us at 800-580-1828. Any one of us will be glad to take your call.

I'm sure most of you know that Wayne Vinson, our President and CEO, passed away in March of this year. Wayne suffered with cancer for about a year before that dreadful disease claimed his life. The entire staff carried on the business as Wayne's health worsened. We have a good management team in place, and our business is continuing our expected growth. We still miss Wayne but everyone has stepped up a little to cover what he was doing. I think our earnings release shows that operations are continuing to expand. Also, we have now received proceeds of key man insurance in the amount of a $1.5 million which was payable on Wayne's death. That number is reflected as a receivable on our first quarter balance sheet.

Now let's talk about the first quarter a little bit. First we'll talk about revenues, for the first quarter ending March 31, 2004, revenues increased approximately 52% to $3.568 million, as compared to $3,244,000 for the same period in 2003. The increase in revenue is reflected prescription plea from the rental of natural gas compressors.

Leasing income for the first quarter increased about 61% to $2,255,000, as compared to $1,401,000 last year. As you can see, the leasing of compressors which is the core of our business, really, is stepping up and is going good.

Gross margins for the first quarter ended March 31 increased 66% to approximately $2,017,000 as compared to a $1,214,000 for the same period in 2003. The gross margin percentage increased from 52 to 57%. So that is showing that as we build more revenues, that the cost of operating the company and associated expenses are not increasing as much.

Net income for the period ended March 31, the quarter, increased substantially, actually because of the insurance proceeds, it had increased 1,506% to approximately $1,894,000 or 36 cents for fully diluted share, as compared to net income of $118,000 or 2 cents per diluted share in the same period in 2003.

The rental units that we have in our rental fleet continue to grow, at the end of December, or at the end of 2003, we had 399 rental compressor units in our fleet. At the end of the first quarter, we had 444 for an increase of approximately 45 units. So that is well in line with what our business plan calls for this year, and the cash flow provided from our operations during the first quarter increased to approximately $1,206,000 compared to $134,000 that was used, or negative number, in the prior year.

EBITDA, which is not an accepted GAAP number, but is often used to evaluate the numbers, increased approximately 298% to $2,853,000, versus $718,000 for the same period last year. So we are very healthy growth company.

At this time I'm going to call on Earl Wait, our Chief Financial Officer, to discuss the balance sheet a little bit. Earl?

Good afternoon, ladies and gentlemen. I would just like to hit a few major items on the balance sheet, make a few comments on that.

One of the things that I'd like to make note of is our cash balance. We don't show a whole lot of cash on our balance sheet, and that's all by design, because most of our cash and current assets that are available are turned into -- and used to build rental equipment. So that's not really a concern to us because we do have a credit, $10 million credit facility available that we can borrow on at any time, and we're mainly using that to build our rental fleet this year.

I would also like to note, like Wallace pointed out, we do have on the balance sheet accounts receivable other of a million and a half dollars which represents the proceeds from the insurance.

We do have currently have a working capital of about $.3 million. We have about $10 million in debt, of which $2.5 million is basically current.

Another item that might be of interest is on the equity statement. We -- right now our shareholders equity is about $16 million. We have converted, if you'll notice on our balance sheet, if you look in past periods, you will notice that we have preferred stock in equity statement. During the quarter, that preferred stock that we had all converted to common, and so, therefore, that is currently absent on the equities statement. That will help us in the future, because we were pay ago 10% dividend on that preferred stock, which we will not to have pay for the rest of the year.

Wallace, I'll turn it back to you.

Okay.

I might say that just that preferred stock converting saves the company about $100,000 a year, that it was paying out in dividends, so that will go toward building additional rental units. Also, we're in full compliance with all of our covenants with the bank on the financing. All of our debt is amortizing debt. We've amortized new debt, old debt over a 60-month period. So even though we may be borrowing money this year, we'll, through normal payments, retire about $2.3 million of existing debt.

We continue to see customer demand increase as new wells are drilled and gas prices remain high. We added 45 new rental units to our fleet during the first quarter. As demand in existing market areas continues to grow, and we start to market in new areas, we expect this rate of expansion to continue. Also, sales of flares and flare emission systems has been quite strong. You can see what this growth does to our cash flow and profit.

We continue to be the leader in the low to medium horsepower compressor market. To the best of our knowledge there is no other public company in our niche market, and we are certainly in a niche market, that being 50-horsepower up to 500 horsepower.

We still feel that we can accelerate our growth by acquiring and consolidating some smaller operations into our company. This can also open new market areas for us. One of the challenges facing us, an additional -- or is additional shop space to allow us to produce more flare systems and compressor units. We recently leased some land next to our Midland facility to be used for storage of equipment and inventory.

We continue to explore ways to economically expand production of sales and rental units. We're on target with our business plan for this year. Actually, we're exceeding it a little bit, and we expect to continue throughout the year of performing it is a we have in the past. With that, we'll now open up the lines for questions. Erica. Hello.

Ladies and gentlemen, at this time, we will conduct a question-and-answer session. If you would like to state a question, please press 1 on your phone now, and you'll be placed in queue in the order received. You can press pound at any time to remove yourself from queue or star 0 to reach an operator. We are now ready to begin. Our first question comes from David Rogers with Standard Investments. David, please state your question.

Yeah, a couple. Congratulations, fellows, on the outstanding quarter.

Thanks, David.

Without the life insurance, I'm not -- obviously, I guess it comes down to 37 cents EPS and 36 cents per fully diluted with the life insurance. Without it, I'm calculating about 7 cents and 6 cents. Is that about right?

Yes, sir.

I'm sorry?

Yes.

Okay. The -- what's the impact of life insurance, like on book value?

Well, it all goes down to the bottom line. The equity line, so we have roughly 5 million shares out and a million and a half, that would be about 30 cents a share.

Okay.

I think it actually is 29 cents.

That's kind of what I had calculated but I wanted to make sure I wasn't missing something. Is any of that taxable?

No.

With regard to the new market areas, did you open any new market areas this sales and service centers this quarter or --.

We have hired a sales -- typically, David, let me back up and say the way we go into a new area, we did this in the San Juan Basin, we did it in the Fort Worth basin, is we start leasing compressors and contract out the service until we get about 15 units there, and then we'll put -- do our own service at that point and put a salesman assigned to that area. We did that at Farmington, we call it, in the San Juan Basin, and today we have, Randy, how many units in the San Juan Basin area.

Roughly 170.

About 170 units there. We did the same thing at the Fort Worth basin, and we now have --.

130.

-- 130 units there. So that's the way we do. We just start out small and grow it. Randy hired a salesman for the South Texas area, and he is now on board and is beginning to generate interest. We currently have about four units down there, and so we expect that it can grow into a market as big as San Juan or Fort Worth basin.

Okay. That's it for now. I may come back.

Okay. Erica, next call, please.

Our next question comes from Zane Gurley with Nightenger, Tucker and Bruner.

This call -- this question is for Craig and for Randy. I got two questions. The parts, are you having any problem at all getting parts? Is the lag time on order to delivery increased? Is it going to affect your -- will that possibly affect any of your budget considerations? That's my first question. And the second question is, I've been waiting for like ten hats from you guys. I'm wondering if the supply of hats, if you're going to be able to meet the demand for hats also. [ LAUGHTER ]

I'll take the first part, Craig. I'll answer the parts part of it, and the hats you're going to have to deal with our marketing guy. As far as the parts, some of our vendors are having some issues because demand has been up to them also, but we have done up some adjustments to our purchasing, and we're stepping our purchasing up to allow for those extra long lead times, so that it will not affect our production schedule as we had planned.

What about price? Are you seeing the prices of your product -- of the parts going up?

Well, yes, we've seen some of the increase on particularly steel products, and doing so, what we've done is, again, we've forecasted our purchasing to lock in some of the prices that we have currently to control some of that through the rest of this year.

Okay.

How about the hats, Randy?

I'll get your hats.

Oh, you have some hats coming?

Brook has been on me pretty hard.

We might even throw in a T-shirt for you.

One other quick question. Demand for leasing. Last time I was down, every time I come down to your facility there's more trucks outside, and I have a harder time walking around in your facility. I mean, is -- I guess you're getting product out of Michigan, et cetera, but are you able to basically meet your demand at this time, or are you seeing any orders go elsewhere because we can't meet them, or just what's the reality?

This is Randy. At this time, to my knowledge, and I stay in pretty close communication with our sales team, I don't know of any jobs that we've lost because we weren't able to meet demand. We've done a pretty did job here, doing some good projecting on what kind of equipment we need to be putting in our queue, although given the lead time it takes to get certain components in we have to look about a 14, 16-week-in-advance window. We've done a good job keeping a good mix of equipment in our schedule, and that seems to meet the demands on our customers. Now, at the same time, some of our customers, we've developed strong relationships with them, they've been willing to wait and we're thankful for that.

One more quick question. Flare business. Strong? Average? What comment on your flare business.

Flares are really strong this year. We're really happy to see what we've been able to do in this first quarter, first quarter historically has been kind of a slower quarter compared to the rest of the year but this first quarter was really nice quarter for us. In fact, it was -- we closed the first quarter out with flare sales 12% above budget.

Those are primarily sales, right, Randy?

Yes, sir.

What sort of average margins do you see on those?

They're high margins. They can fluctuate anywhere from 40% up to 100%.

100% margin?

Uh-huh.

That's an interesting margin. I'd like some of that.

Typically, on average, I think you could look at 60% on flares.

Thank you.

Okay. Next caller, please, Erica.

Our next question comes from Dick Wallstein, an independent investor. Dick, please state your question.

I'm concerned about the warrants for the company, and I just wonder what the exercise price is and I know it runs out to 2006, and I'm just wondering where I can go to get some information as to the conversion from warrants to stock.

You can get an answer right now.

Good.

The exercise price of the warrant is $6.25. And they, as you said, they expire in October of 2006, but in any such time as the common stock trades at $10.94 for 20 consecutive business days the company can call the warrant. And if called, the holder can either accept the company's price of [$6.25] cents, which was the original sales price, or they can -- they have 30 days in which to exercise.

Okay. If the warrants are exercised, what do we have to come up with by way of further investment to receive the shares?

$6.25 for each warrant and you get the share of common stock.

Okay. Regardless of what the price is at that time.

Yes, sir.

Okay. Fine. That answer my question. Thank you very much.

Thanks for your interest.

Great.

Next caller, please, Erica.

Our next question comes from Jeff [Jaffica] from Kerr Financial Group.

Could you guys talk about the line of credit, how much has been drawn down?

3.5 million.

3.5 million?

Yes, sir.

And what's the horsepower at quarter end?

The interest rate? Is that --.

No, the horsepower for the company, all the -- compressors.

We're --.

Totally speaking.

We're presently, at the end of the quarter, with just over 48,000 horsepower. Is that what he's --.

You're talking about total horsepower in the fleet?

Total horsepower in the fleet.

In the first quarter is 48,486.

And this quarter, it seemed like the margins were much healthier than the fourth quarter of '03. Can you comment on why that might be?

We continually add to our rental fleet, and as to the component of our total sales, more and more of it comes from rental, leasing income, the higher our margins will be. So as that component grows, our margins will grow.

I might add there that our gross profit from the leasing business, that's after the operating maintenance and operating costs of the unit is running in the 72% range. So as we've had more equipment, you can see what that's doing. It does help the margins.

What's the utilization, what's the capacity right now?

We typically like to stay in the -- at 90% because if we get higher than that, that means we don't have enough new equipment in our fleet to take care of customer demand. As of today, that number is, I think, 88%, but if you add in the units that we have that have just been produced, that have homes, we don't count them as active until they're installed and generating revenue. We'd probably be at about 93%, 94%.

How quickly do you think that the property that you're talking about renting and like that nearby, will be productive?

The units that we've just produced?

No, no, the -- you spoke earlier of the --.

-- Acquisition.

We're leasing that, and we needed it for storage.

Okay.

And we store our flare units. We have some rental flares, trailer-mounted, we store those there. Since Craig is having to buy steel pretty much in advance for monthly needs, then we store that steel there, and then as we produce units for the rental fleet they come out of the shop, and they also go to that yard.

And with that currently in use.

Okay. Thank you very much.

All right, sir.

Erica, could we have the next caller, please?

Our next call comes from David Rogers with Standard Investments. David, please state your question.

Is there any kind of a seasonality to your SG&A? I'm calculating that your Q1 SG&A as a percentage of sales is -- what happened to my number? -- 18.65% which is the highest -- it's an uptick of, I don't know, 80 basis points, I guess, from sequentially, but it's the highest since you've had -- since the Q1 of last year and I'm just wondering if there's any seasonality to the.

It's not really seasonality, but there is some fluctuations in it from period to period.

We did have some additional legal fees this quarter that drove it up a little bit, but you won't see that trend extend.

Okay.

22%.

That's it for me.

Okay. Thank you.

Next call, Erika, please.

At this time we have no more questions.

Okay. Well, gentlemen, we appreciate your interest in the company, and again, I'll repeat, if you want to speak with any one of us, or if you think of a question you didn't get answered, you may call us at 800-580-1828. And just ask for any one of us, and we'll be happy to talk with you. Thank you.

This concludes today's conference call.