Natural Gas Services Group Inc (NGS) 2004 Q2 法說會逐字稿

Good morning, ladies and gentleman, and welcome to the Natural Gas Services Group Second Quarter Earnings and Six Months Financial Result Conference Call. This teleconference -- 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 are Jim Drewitz, Wallace Sparkman, Earl Wait, Randy Larkin, Craig Rogers, Scott Sparkman.

I would now like to turn the call over to Mr. Jim Drewitz. Mr. Drewitz, you may begin.

Thank you Mandy. Again, this is Jim Drewitz, with Creative Options, IRPR firm for natural gas services. And it is my pleasure to read the forward-looking statements. So, except for historical information contained herein, the statements in this conference call are forward-looking and are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risk 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 for other companies; a prolonged, substantial reduction in oil and gas prices which could cause a decline in the demand for natural gas products and services; a new government safety, health and environmental regulations which could require NGS to make significant capital expenditures. The forward-looking statements included in this conference call are only made as of the date of this 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, I would like to turn the call over to Wallace Sparkman, President and CEO, of Natural Gas Services Group. Wallace?

Thank you Jim. Good morning, ladies and gentleman, and thank you for joining us for today's conference call. In the introduction you were given some names, let me run through those real quick and let you know what they do for the company. We have Craig Rogers, who is Operations Vice President. We have Randy Larkin, who is Sales and Marketing Vice President; Earl Wait, who is Treasurer and Chief Financial Officer; and Scott Sparkman, who is Corporate Secretary and Manager of Contract Administration. Hopefully, you all have had the opportunity to review this morning's news release on our second quarter and six month financial results. So I'm not going to review all those numbers but the touch on the highlights, so we can leave time for questions and answers and also to hear brief excitements from the other people on this call.

Your questions might be directed to anyone of our management team that is present. You will also hear briefly from them with comments about operation of the company prior to opening either to questions.

From a financial side from the news release our total revenue for the second quarter increased 17% to $3.782 million as compared to 3.22 million for the same period last year. Total revenue for the six months increased 32% to $7,350,000 as compared to 5,564,000 for the same period last year.

Our gross margin for the six months ended June 30, 2004 remain constant at 55.5%, which was the same as the period in 2003. This margin remains fairly constant, largely the result of strong growth within our high margin leasing business. I must say the leasing business has 70-72% gross margin, so that adds to our overall margin results. Our core leasing business continued to grow and expand during the quarter and year-to-date and represented 63% of our total revenue during the first half. Leasing revenue increased 37% for the second quarter and 47.7 % for the 6 months ended June 30, 2004 as compared to the same period last year. This increase is the results of the units added to our rental fleet.

From January 1, this year, to July 30 this year just ended, the company added a 103 gas compressor units to our rental fleet with all of these units being built in Midland, Texas and Michigan shops. This brings our total rental fleet to 502 units as of today. Our utilization rate continues to be in the 90% range both with new units that are completed and committed to customers, that rate would be approximately 95%.

The primary element of our overall growth strategy is to aggressively expand our leasing business. As leasing income represents a larger and larger position or portion of our overall revenue stream, we believe fluctuation in sales reserves will have a less significant impact on our overall revenue trends. It's worth noting that the impact of weak spending by customers on capital equipment can actually benefit our leasing business because customers often turn to less expensive options to meet their compression rates and leasing offers in that opportunities.

While leasing is the primary focus of our long-term expansion strategy, equipment sales are also important. We continued to pursue this revenue stream. We will also continue to actively such out and seek acquisition prospects that will compliment our goal to be a leading provider of compression services to the national gas industry and could also expand our production capabilities. This also could expand our geographic market area. To attain this growth we believe in goals. I remember when our goal was to reach 500,000 per month in lease revenue, we have passed that, we are now our 850,000 per month. And now our goal is 1 million per month, we should pass that goal early next year. We also had a goal to exceed $1 million per month in total revenue on a consistent basis, we are doing that. We also had a goal to have a rental fleet with 500 units, we are there and moving on to 1000 units. So the company is continuing to progress and meet our goals on a timely fashion.

With that, I would like to call on some team members here for comments that they would like to make. And let’s start with Earl Wait on the financial statements.

Thank you, Wallace. Good morning, ladies and gentleman. I want catch up on few areas, one, some items on the balance sheet, few items on the cash flow statement, and then touch upon our stock prices.

First of all, on the balance sheet, I will like to comment on the current ratio. Our current ratio right now is running 1.1 to 2.1 and that may have seen kind of strength for those -- for some people over the top of business that we're in. We think it’s not all out of reason. We tend to use any liquid assets that have to put into our rental fleet and build rental equipment. We also have $10 million credit facility that we use in case it’s needed in that area. Also, then touch upon the -- a little bit of the debt-equity ratio. Our current long-term debt is running $11.8 million and our equity is $16.8 million, that's about 7.7-1 ratio in that area. That does exclude some subordinated notes that we do have of $1.5 million.

Then we move on to our cash flow statements. Talk about a couple of items from there that I think are important to you as investors. We had a substantial growth in our cash flow provided from operations. We had $3.2 million in cash provided from operations as compared to $576,000 for the same period last year, that's a substantial increase. Of course we do have included in that $1.5 million life insurance proceeds .But if you do exclude -- even exclude that our growth is still over 200%. And that is taking into account that we have close to a $1 million increase in out inventory to provide for increased production and service activities also.

Another item -- couple items on the cash flow statement that I think are important. We have continued to build our rental fleet as well -- in fact we have added 44 new compressors units to our rental fleet since the first of the year. To do that we have spend $5.2 million in that area and also -- the part of that that goes along with that is for us to increase our service activity, so we have about a $0.5 million in service vehicles this quarter -- not this quarter but year-to-date.

Also there is a couple of areas that -- also of interest. We have in order to build our rental fleet and service activities; we have borrowed on our line of credit. Our credit facility this is $3.6 million for that activity, and we are currently paying back -- our long term debt is about $200,000 a month that we have paid back and our current long term debt is $1.2 million so far year-to-date this year.

Now that I mentioned the credit facility that we entered into last year in November, we had a credit facility were we were able to borrow $10 million and that terms out at $7 million. Through the end of second quarter we have borrowed $4.4 million on that and $3.2 million of that has been this year as I mentioned, our borrowings before. Currently that credit facility we are at $5.2 million year-to-date.

Also I am going to mention a little to about our stock price. Our stock price at the beginning of the year was $5.55. It's currently standing at $9.35 as yesterday. That’s a 70% growth in our stock price this year which I am sure you use them -- investors are aware of that fact. Our stock price did hit a high of $10.19 and that was in the early part of May. That's all I have for now; I'll turn it back to Wallace.

Okay at this time we will call on Randy Larkin to talk about the sales and marketing, Randy.

Thanks Wallace, hello everyone I'll try to keep this as brief as possible. There is a lot of going on; we are excited about a lot of things that are happening in our company.

Right now Wallace had mentioned our substantial lease free growth. We have grown 48% on lease revenue over the last six months compared to the same period last year. He mentioned we did hit the milestone, that’s one of our goals, we exceeded 500 units recently and we have been able to maintain a high utilization rate, about 90% on our fleet which is above our target and its above to what industry averages right now, so we are pretty happy about that. We have been experiencing strong growth in our primary operating areas. We just recently exceeded 200 units in our San Juan basin operating area and we exceeded 130 units recently in the Fort Worth Basin or as some may note as the Barnett Shale region over their in the Fort Worth region. We are also experiencing strong growth in the Permian Basin in South Texas. Much of that can be attributed to reciprocating compressor model that we have added to our standard fleet of equipment. That particular technology is [domain] of these particular operating areas and has helped us bolster some new lease revenue and contracts and is these areas. We also added a South Texas sales representative and he is making positive progress and we are going to see continued growth from him as well.

We are seeing a lot of high demand as most people expect seeing the high gas prices, continued drilling and just the general overall shortage that small mid range sports car equipment in the industry which is obviously what I meant to [easy]. We also continue -- we have been very fortunate in meeting customer demands through asset management, being able to add a good mix of standard model to our equipment, our fleet and we've been able to some good projecting on what are customer may need as we move forward in the future. We're also adding new models to our fleet Craig may talk a bit more about this in his statement but one particular model high pressure smaller horsepower rotary screw that is going meet certain [inaudible] in Fort Worth basin as well as some other operating areas that we are targeting. The key behind that is the lower cost to operate the lower cost to package and the easier mobility compared to current technology that exist today.

Another issue that we've had success in doing is being able to displace a lot of top competitor's equipment. A lot of that is attributed to the technological features on our packages and our fleet units as well as the newer modern equipment that we have been able to put out as well as improved service from our service team. As well as an [indicator] we’re still maintaining a higher lease margin even though we've had to expand our service infrastructure to maintain our growth and equipment out there in lease areas but that margin as still maintaining a good level, about 70%. We’ve been able to moderately increase our leased rate and we’ve been able reduce our packaged cost again Craig may talk a little bit about that when he talks about how and the improvement we've made in our [shop].

We're excited about future growth opportunities. We are actively pursuing growth in several key strategic areas. Wyoming Powder River comes to mind and other Rockies producing areas, the Raton Basin, Mid Continent region, [inaudible] and Kansas area, [inaudible], some growth opportunities in the northern areas of West Virginia among others. We are also looking very aggressively at adding sales support in key metro hubs cities including Houston, Denver and Dallas. I anticipate that we will have presence in one, both or all of those major hubs in the near future.

Another thing, one of our goal this year was to expand and broaden -- diversify our cap base. This time last year our top 5 customers represented roughly 70% of our lease revenue. This time last month -- this time -- this year, excuse me, we are at roughly 60% with those same top 5 customers. I want to emphasize that this is not to indicate that our top 5 customer is flat and in fact the revenues that we received from our top 5 customers have produced a 33% increase in rental lease revenues and we are also maintaining close to 100% total ratio and [inaudible] those customers with our fleet equipment that we are adding.

Our flare sales have been strong. We have seen a 50% growth in prior sales this year compared to same period last year. Generally that’s just from overall industry trend activity and continued environmental restrictions that are associated with the flare market. Strong margins -- we continue to maintain strong margin on flare sales of about 60% and we have also recently promoted from demand to add additional sales coverage for our flare sales.

And last but not least, I will talk just little about compressor sales, the compressor sales that we've achieved year-to-date have already exceeded where we were at this time our all of '04 business in compressor sales. We are looking at some pretty large key projects right now, we are hopeful that we will be able to land one on all of these particular projects, rewards are eminent. And our active quotation loss to sold equipment is very substantial, so we are looking very positive in that direction as well. Wallace?

Okay. We will hear now from Craig Rogers, Craig is Vice President over Operations, so which means service and production unit. So, Craig?

Thank you Wallace. Good morning. As is pointed out, it’s been a major challenge as we have grown our own rental fleet, this brings back some opportunities to control our expenses from manufacturing and then as it that equipment then goes into the sales, it brings up the same challenge in maintaining service and maintenance on the equipment as needed. We are doing this, we have attempted to streamline some purchasing and strengthen many relationships. And again as we grow this rental fleet it brings our purchasing math to larger dollars which intrigue the vendors to work with the same [inaudible] daily. We have fortunate enough to maintain a good margin of sale, in doing this we have to continually add personnel and vehicles as early as brought up, while letting this personnel income along the training which again in electronics that we are very proud of our practice, having a large amount of electronics within it in terms of training people in electronics, general maintenance and operations that our labor force continuous to have -- be added to in order to facilitate growth.

We're able to expand our [gas] facility in order to bring in this material and equipment to facilitate more packaging as going on. As Randy spoke about we developed a 500 pound, 175 horsepower single stage rotary screw compressor, not to be confused with the two stage rotary screw we started building to develop last year that we have had good success with. As we developed it we expect to put the first ones out in October and look for good return from these packages as well as the lower maintenance and expense. We're currently have about 75 employees in the Midland area who take care of this production and maintenance and doing this -- that our growth we have also increased our production in our Michigan facility to enable us to keep doing these new products in Midland. In the San Juan Basin to the maintenance side of the things we have recently put in a rebuild (phonetic) facility and personnel so that we can continue our rebuild and exchange program of our rotary screw compressors. We'll be doing the same thing in the Fort Worth Basin with our facility out there in this third quarter we will build a press table piece of equipment that enables us to really rebuild in those areas. Again, we have continually get [inaudible] as we add these equipment -- this equipment in the field approximately 30 units per [rentals], what it takes so if you do the math and see that as we're going into our rental fleet every 30 units to go out into that fleet and got matter [inaudible] interrupt in order to give the customers the -- make this expectations -- they continue to expect, but with commitment to our customer to a fair amount will to continue to excess of our company. The service is clearly communicated to our sales, engineering, manufacturing and our service personnel.

With that, I am going to turn it back over to Wallace.

Thanks Craig. One last one to cover on here is Scott Sparkman and Scott let's make it brief because we will open it up for questions.

Good morning. I know everybody is ready to get the questions and answer, so I will keep my comments brief. I just want to add that the Board of Directors described in all times to be in compliance with Sarbanes-Oxley and all of that compliance -- last year the Board established several committees, being audit committee, governance personnel development, nominating committee, and the compensation committee. These committee is comprised up and chaired by independent directors. The committee charters are available on our website as they are adopted and/or you can contact the office, here you can ask for me and get a copy of that charter. Now, I will turn it back the Wallace.

Thank you Scott. Mandy, we will open it up for questions now.

Thank you. Ladies and gentleman, 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 "#" at any time to remove yourself from the queue or "*" "0" to reach an operator.

Our first question comes form David Rogers of Standard Investment Charters. Please state your question.

I have got a couple. Congratulations guys. First of all on the steady growth. Will concern on with rental little leasing growth revenues, which we know as one of the drivers here, you mentioned the growth rate was 37%, which is really the lowest quarterly growth rate at least for the last, I think 5 or 6 quarters. If I am calculating things right, is this indicative of some sort of a slackening market demand or is there a one-time phenomenon or just reflect your inability to meet demand because of manufacturing constraints or what's -- you know why -- I guess Randy might be the best person to answer this. You know, why the lower growth rate in leasing?

Will Randy have a note?

Dave thanks for the question. Good hear from you. I am thinking about that David, the best way that I can explain that David is pretty simple. The more our revenue continues to grow they don't be able to maintain that higher level of growth rate from quarter-to-quarter, that make sense.

Yeah, that makes sense except to this, it seem like some of the other quarters we were actually in the year we were actually accelerating, and so this was kind of a surprise that it actually began to decelerate?

You can accelerate the smaller yard. You are going to accelerate at a larger percentage. Typically, whole units than ever and the market is not slacked though and so just it’s a matter of getting the units produced and getting them producing revenues of because we don't count the revenue until that unit is started up in the sale.

I think that there is a point that the fact the larger the lease fleet gets, the hard is to maintain that percentage growth.

I understand the difficulty in doing in that existed, beginning in quarter -- you know quarter one of 2003 had at least revenue growth rate of 40% and then in the next quarter 66%, next quarter 55%, the fourth quarter 81%, and then you know for the full year last year 61%, it just look like you were accelerating, I don’t have the number for Q1 of this year but I thought it was somewhere north of 55% or so. You may recall what that was that Randy I don’t know. But to suddenly go back to 37% as a growth rate you know. I'm just wondering if there is telling us something about market or about our ability to meet demand with marked manufacture difference which leads me to the next question, this came up in the last conference call and some other conversations, you know what's the status of any plans to extend manufacturing capabilities to meet what I think we’ve thought that was a expanding market demand?

The plan is that and that’s an ongoing discussion with us is to expand by building another building on the Midland facility where we have sufficient room do that, that’s one. The other is to step up number of hours of the employees but that you loose some efficiently in doing that. Another thing would be to go to a second shift which again is proven that you lose may be as much 40% efficiency by doing that. So that's something that we’re looking at very closely. Another possibility and we’re actively looking for acquisitions would be somebody that has a facility that could you know offer more units to our rental fleet through that, so we’re looking at everything. At this particular moment although it is crowding us we are able to keep up with our demand but as Randy goes to these new areas that he is talking about then certainly that's something that we have to address.

Okay. Couple of things, in the recent private placement financing, I couldn’t identify in the disclosure documents what the restriction period was on the financing?

The restriction period is on it until it is registered. We did agree to file a registration statement but even then if you look at the size of the transaction in the terms of the deal that would be subject to insider restrictions even though the stock may be registered.

Okay are there any covenants that prohibits the investors from arbitrage activities like shorting the stock into the end the restricted?

No, but I would say as an insider that would be the very bad if that happens.

Okay any other financing plans?

Not at this particular moment with the balance that we can use from the $10 million credit facility and this $5 million investment that will carry us long -- and our cash flow that will carry us a long way David.

Okay. I'll step down and come back.

Okay, thanks

Our next question is from Dane Burlie (phonetic) of Tinygood Tucker (phonetic). Please state your question.

Yeah I have several questions here, should be covered pretty quickly first of all, for the person that was just on the phone call, just to comment, it appears that this restock was restricted under 144, or short into that, I believe that it is an illegal activity, so I don’t understand that question. So any way, my questions are, number one, the private placement that was announced on 7/21, obviously your financials as of the end of June, is that money been accessed, is it in the balance sheet, is it in the bank, can you give us update on that?

Yes it will be in the bank tomorrow. It is not on the -- it goes in the bank, it goes on the balance sheet, it will increase our equity by you know the $5 million.

Okay.

16 million. And so will have at end of August we will have the 16 million plus profit -- July plus profit for all this. So yes it will be reflected in the balance sheet.

Yeah, second question, as we all know Wayne past away earlier this year and CEO spot, any comments on possibly some management -- some management strategy on the CEO spot, CEO just a general comment, I'm not asking obviously specifics but any thought being given to that?

There is lot of talk been given to it by the Board of Directors. At the last Director meeting, they said that they we’re going to make that decision and fill that position, as you know, I am on a interim basis, but they are not going be rushed into doing anything until they, right person is available but I think there actively giving consideration to that and I would expect some action be taken before year end.

Your last question, I'm pretty impressed with your continued growth on the lease business myself, my one question is are you still able provide the service, in other words do you -- does the product that your putting on the fields still have the -- is it robust, is it reliable etc. as I it has been in the past, is that still your situation in natural gas services because it was big in the past?

That is Craig's responsibility and he takes it heart. I can assure you that the equipment is improving as opposed to staying the same and our service is better than when we use contract.

And you still are getting excess to parts Craig?

Yes we have got a very strong infrastructure that's coming together and again we have got parts support personnel in each of our strong areas, the Fort Worth Basin, - the [Forkland Missouri], we have a person in each area committed to report to our purchasing coordinator here in Midland.

Okay. I finish it, good quarter gentlemen.

Alright, thanks.

Thank you.

At this time I show no further questions.

We want to thank you for tuning in to us if you will this morning. We hope you gained some information and if you had questions that they got answered properly and again thanks for your interest in the company and your continuing support.

This concludes today's conference call. Thank you for attending.

Thank you, Mandy.