Natural Gas Services Group Inc (NGS) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group First Quarter Financial Results Conference Call. At this time all participants are in listen only mode. [OPERATOR INSTRUCTIONS] Your call leaders for today's call are Jim Drewitz, Investor and Press Relations representative, Steve Taylor, Chairman, President, and CEO. I would now like to turn the call over to Mr. Jim Drewitz. Mr. Drewitz, you may begin.

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

It's my pleasure to read the forward-looking statements, so let me get right to that. Except for historical information contained herein, the statements in this conference call are forward-looking and made pursuant to the Safe Harbor provisions as outlined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties which may cause Natural Gas Services Group 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 companies; new governmental safety, health, and environmental regulations which could require Natural Gas Services Group 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 Natural Gas Services Group undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include, but are not limited to, factors described in our May 10, 2007, press release and under the caption Risk Factors in the Company's annual report on Form 10-K filed with the Securities & Exchange Commission.

With that said, I would now like to turn the call over to Steve Taylor, Chairman, President, and CEO of Natural Gas Services Group. Steve, it's all yours.

Okay, thanks, Jim.

Good morning to all and thank you for joining me at Natural Gas Services Group's first quarter 2007 earnings review. If you saw our earnings release this morning, you are aware that we again reported record earnings this quarter that were also accompanied by record revenues.

We experienced double-digit growth in all material financial measures for the comparative quarters. To quickly review the highlights of the comparative first quarter of 2006 versus 2007, total revenue grew 23%. Net income was up 58%. EBITDA, or earnings before interest, taxes, depreciation, and amortization was up 41%. And our diluted earnings per share grew 29%. We're obviously very pleased with these results.

I'll now give you some of the details behind the highlights. From a total revenue perspective in comparing the first quarter of 2007 to the first quarter of 2006, total revenues were up 23% from $13.6 million to $16.7 million. Sequentially, total revenues rose 1% from the fourth quarter of 2006 to the first quarter of 2007, from $16.6 million up to $16.7 million. Although this seems like a modest increase in revenue, it's actually been positive. In the year ago comparative quarters of the fourth quarter 2005 versus the first quarter 2006, revenues actually fell a bit.

Looking at our total gross margins in comparing the first quarter 2007 to the first quarter of 2006, our gross margin grew to $7.1 million from $5.6 million, a 27% gain. Just as significant was that as a percent of revenue, our total gross margins grew from 41% to 43% over the same period. Sequentially, our gross margin dollars increased 5% from $6.8 million to $7.1 million.

Our sales, general, and administrative expense was $1.3 million in the first quarter of 2006. It decreased to $1.2 million in the first quarter 2007, a 5% drop. As a percent of revenue SG&A ran 9% for the full year 2006, compared to 7% starting this year. And as I've mentioned in the past, we are adding staff as we prepare for more growth. So this will rise back to traditional levels through the year.

Net income for the first quarter 2006 versus the first quarter 2007 rose 58%, from $1.7 million, which was 12% of revenue, up to $2.7 million, which was 16% of revenue. For the sequential quarters, our net after tax grew from $2.3 million up to $2.7 million, or 16% increase. Our employees did an excellent job of taking a 1% increase in revenue and translating it into a 16% increase at the bottom line in consecutive quarters.

EBITDA from Q1 2007 versus Q1 2006 was $6.3 million, up from $4.5 million, or a 41% increase. Looking at the increase from the fourth quarter of 2006 to the first quarter of this year, 2007, we grew from $5.7 million up to $6.3 million, a 9% increase in consecutive quarters. EBITDA as a percent of revenue in the first quarter of 2006 was 33%. In the fourth quarter of 2006, it was 35%. And the first quarter of 2007 we had a record 38% EBITDA as a percent of revenue, so we've had a good continuous climb through the year.

Our fully diluted earnings per share for the first quarter of 2007 were $0.22, compared to $0.17 for the first quarter of 2006, which is a 29% increase. This despite a 23% in outstanding shares in the same period. The share count is essentially flat between the fourth quarter of 2006 and the first quarter 2007. And earnings per share increased $0.03, or 15%, from $0.19 up to $0.22, per common diluted share.

Our balance sheet continues to be very strong. Comparing March 31, 2006, against the same date in 2007, we reduced our total debt by 25%, from $22.1 million down to $16.5 million.

Capital expenditures in the first quarter of this year were $4 million, compared to $4.6 million in the first quarter of 2006, and $6.1 million in the fourth quarter of 2006. Historically and currently, approximately 95% of our capital expense goes to new compressor fleet additions and associated service trucks and tools. All of our capitalized expenditures are growth capital. We do not capitalize any of our compressor repairs, maintenance, or overhauls. They're all expensed and fully absorbed and reflected in our gross margins.

In addition to our top and bottom line records in this quarter, we had another milestone. For the first time since the company's been public, which is almost five years, both our cash flow from operations and EBITDA exceeded our capital expenditures for the quarter. Our cash flow from operations in the first quarter was $7.9 million and EBITDA, as I mentioned before, was $6.3 million, compared to the just mentioned $4 million in capital expense.

Now I'll break down a little segment comparisons between sales, rentals, and service and maintenance business lines. Our total sales revenues, which includes compressor sales, flare sales, parts sales, rebuilds, and CiP compressor sales, grew from $8 million in the first quarter of '06 to $9.5 million in the first quarter of '07, a 19% increase. Sequentially, revenues were down $200,000, from $9.7 million last quarter compared to $9.5 million in the current quarter. However, consecutive quarterly revenues for compressor sales alone grew from $7.1 million to $7.5 million, with gross margins improving from 21% to 26%.

Compressor sales alone increased from $6.5 million in the first quarter of 2006 up to $7.5 million in the first quarter of 2007, a 15% increase year over year, with gross margins in the same periods increasing from 25% to 26% of revenue. I think we've done a very good job maintaining and increasing our fabrication margins over the past year. We have a better handle on our costs, and have made sure that our pricing reflects the market.

The current compressor sales backlog at our SCS subsidiary, in Tulsa, Oklahoma, totaled approximately $25 million at the end of the first quarter of 2007, and is presently booked into November of 2007. Compressor rental revenue continues to grow at a strong rate. The first quarter of 2006, rental revenue was $5.3 million. It grew to $6.9 million in the first quarter of 2007, a 31% increase. Our sequential growth in rental revenue went from $6.6 million to $6.9 million, a 5% gain, in line with what we anticipated, and I mentioned in the last quarter's call.

Rental gross margin as a percent of revenue in the first quarter of this year was 61%, the same as the year-ago quarter, but seasonally down from the fourth quarter of 2006, when it was 63%. We typically see some higher rental maintenance expenses in the winter, which reduces the margin a bit.

We added 46 compressor units to our rental fleet this quarter. That brings the total to 1,157 units in our fleet. That's up from 1,111 units at year end. Recalling our view that the year would be back-end loaded, that is on the pace anticipated. We expect that to accelerate towards the last half of the year and in fact are starting to see signs of it. Interestingly when you look at the units added in the last quarter and this quarter and what we're looking at adding in the next quarter, 60 to 70% of those units are our CiP or CiP k compressor line, as opposed to our traditional rotary screw units. We're expanding our reach into the higher pressure segment of the small to medium horsepower wellhead market. We ended the quarter at utilization rate of 87%. I expect this rate to increase in accordance with the anticipated increase in activity throughout the year.

Our service and maintenance business revenue was essentially flat in comparative year over year quarters. It was $277,000 in the first quarter of 2006, and $266,000 in the first quarter of '07. Gross margins in this business sector run in the high 20s and low 30% ranges.

Summarizing, I'm well pleased with the first quarter of the year. We anticipate some deceleration in growth and saw a bit of it in some areas. But we were able to balance that in other areas and continue our growth, and get some margin expansion to boot. We continue to stay busy in all of our areas, but we're especially excited about the Barnett Shale. We have a very good share there, and it continues to grow. Our customers' programs show no signs of slowing, and we have been able to add new customers to the mix also. Michigan is also a bright spot. It's a mature province, but we grew very well there last year and expect the same this year.

I highlight those two areas in particular, but we have excellent growth potential in all of our existing areas that we operate in. We're in good markets. Our strategy is working. And we execute well. So we will have challenges through the year, not the least being the scarcity of qualified people. This is getting to be a tougher problem, but we will continue to work through that.

Looking at Energy Information Administration of the Department of Energy projections, they also paint a very good picture for the rest of the year. Total gas consumption this quarter, the first quarter, was 10% higher than the year-ago quarter and is projected to be 3.4% higher for the full year 2007. Natural gas inventories are presently 15% below last year's levels, and that's because prices at the Henry Hub averaged $7.84 in April, and are expected to average that same price for the year. That's $0.90 higher than the 2006 average. And we project it will further rise to an average of $8.16 in 2008.

The macro environmental scene looks, and I expect that NGS will continue to execute as we have in the past to take advantage of these robust markets. We are optimistic about the year.

Once again, before I close, I want to thank all of our employees for their continued work. It's through their efforts that Natural Gas Services Group has been able to grow and prosper as we have, and I want to make sure that they know it is appreciated.

That's the end of my remarks, and I'll now turn the call back over to Erica to open the lines for any of you that might have any questions. Thank you.

[OPERATOR INSTRUCTIONS] Our first question comes from Mike Dreeker from Morgan Keegan. Please ask your question.

Well, that was close, Steve, it's Mike Drickamer.

Hi, Mike.

Steve, I ask you a question every quarter on your sales margins. Every quarter you give me the same answer. Let me see if you want to change it this quarter. Sales gross margins were 30% in the first quarter. Are you comfortable with that level? Do we have enough data points now to say that the trend is the higher? Or are you still comfortable with something closer to the 20% range?

Well, I guess you don't think I'm giving the right answer, huh, Mike?

Well, let me see. In the past several quarters, you've done quite well on margins.

Yes, and I get it's just the conservative view of it. As we've talked before, it's still a volatile business from a revenue predictability quarter to quarter, and a margin predictability quarter to quarter, too. I might get a little more confident in the margins going forward this year, maybe not being 20%. Maybe being 21, 22, average, we can hit. Again, I still think we have to look at the average, and the rolling average on these quarters from sales business. And we're certainly not ready to go--start jumping out into the mid-20s. I think we hit some quarters on these. But again, this can change pretty quick just based on customer preferences, the way orders are received, and things of that nature. So I'll concede to a point or two rise for the year, but that's about as far as I'm comfortable in right now.

Okay, you talked about the rolling margin issue, and you have had several good quarters here in a row. But if you look at what happened the second quarter of 2006, you had a quarter first quarter, and then you fell to a 12% gross margin in the second quarter. Could we see that same thing? Is there anything seasonal that happened second of '06 that we could see in the second quarter of '07 again?

No, and if you recall back that was--and again, this I think underlines what I've said about really looking at that business on a trend, on a rolling twelve months instead of quarter to quarter, because the--as you mentioned, the Q1 '06 was good. Q2 '06 was down. But the average for the first half was right on the 20% line as we had mentioned. So if you do look at that on a trend, I think we are right where we said we'll be. It's just this quarter to quarter stuff.

But I don't anticipate, don't see that kind of--we had a lot, as you can remember, we had a couple of factors that drove that down in second quarter last year. We had a lot of small, lower margin units come through, and we had some labor costs jump up a little on us. So we've addressed both of those. We challenge the notion in our own minds, and in the industry somewhat, that smaller horsepower has to be skinner margins. So we've priced that a little better and watched our costs a lot closer. So I don't anticipate a drop like we saw before, but again, I just want to encourage everybody to look at it more on a trend than a quarter to quarter basis.

Okay, and then we hit--kick this horse a little bit more here. Were there any mix issues in the second--excuse me, in the first quarter that drove that margin even higher? Did you put through a larger number of marginal horsepower compressors, and that's why perhaps we didn't see a bigger sales number but we did see a bigger margin number.

No, again it relates back more so to cost control and fully pricing what we're putting out. I think we're--we still get a good margin in that business. The backlogs are out, so we're really trying to hold the line on margins and inch them up as we can. So over the past year, the past four quarters, we've made progress in that, and a little at a time adds up to a pretty good number. And that's what we saw the first quarter.

Okay. Looking at the rental side of the business, margins were down in the first quarter. You attributed that to seasonality. Does that mean you expect second quarter margins to be back closer to where they were, say, the fourth quarter, or will it take some more time to catch up?

Well, I think the rental business--we're going to run the low--the 60 to 62, 63 percent marginal in that business. We do typically see a drop in Q1 because of winter in some areas. It's tougher to get around. It's more expensive. And you've got a lot more movement and activity in the field, just trying to keep things running. So you generate more expense. But there's a lot of things that feed into that of course. We can get--if you look back at Q2 last year, we didn't jump up to that 63 just in the quarter either. We get some gradual improvement over time, because one of the things that happens when you have a tough time in the winter getting around. Then when spring comes, you're getting around and catching up on the things you didn't get done.

So, again, I encourage everybody not to look for sudden dramatic jumps or drops. Anything, I think in this business is going to be a bit gradual. And I don't think the rental--the rental especially, because we've got certainly a big fleet out there and so momentum tends to carry some of that. I think we'll--we ended the year, I think, in '06 at 60--I think 61 or 62 was the average. And as I mentioned before, that's a very good margin. In the business I think it's one of the best, if not the best, the way we calculate our gross margins. And we're pretty fully priced. So I think we're about at the top end of that margin. We'll get some blips every once in awhile, but on average the low 60s is probably what we're looking for.

Okay, and then on the rental fleet, you talked about the growth being backend loaded. Do you still expect it to be about 25 to 30% year on year growth number?

Well, we're looking at--we ended the year at 1,111 compressors, so we're still looking at the 250 to 300 range. So I think that's probably more like 20 to 25% growth.

Okay, and then what is then the CapEx expectation for full-year '07 with that 250, 300 compressors?

Well, if go on the average and we stay on the path, it will be between $20 million, 20 to $22 million, based on that 250, 300 range.

Okay, how's then the outlook for acquisitions?

Well, we're looking. And nothing on the table. I think as we talked to some past calls. We're looking to see some evaluations that seemed a little high in the past come off. And something that fits us strategically from the point of being in an area where we want to get into, being in an area that we want to beef up in, and things like that. Market and [Bridgeport] were very, very strong. On our own, we can grow share ourselves very well. [Misson Path] would be a good candidate at the end, some new areas, Appalachia and Rockies, even Arkoma, or places like that. So we're scanning the horizon and opening talks with people.

Okay, thanks, Steve. I'll let somebody else have a chance.

Okay, thanks, Mike.

Our next question comes from Neal Dingmann, from Dahlman Rose. Please take your question.

Hi, Steve.

Hi, Neal.

Yesterday, on the [inaudible] call, they mentioned for certain reasons, they said, a little bit of weakness, at least they said, in the lower horsepower. It seems yours--I think yours is a little bit flatter. Is that more of a regional thing, because the business is so standardize, or how would you sort of break down right now. Are you still seeing these sort of pockets of softness?

Well, you're right. It always gets back typically, at least in our business, to--the San Juan Basin always is a weak sister in any blips you see on gas prices, any blips you see in activity and things like that. And so, as I mentioned on the last call, we figured we'd be running 11% revenue growth compounded per quarter for about four years. And I mentioned last time I thought that would be about half, and it actually came in about 5, so I was right on on that number. And it is. It's Farmington--one of the things you've got there is winter, where a lot of areas we operate, we don't get too bad, like in north Texas. So yes, you get some softness in some of those areas. We're seeing that come back on already.

As I mentioned, Barnett Shale's just amazing. I mean it continues to be still growing. It looks like it's growing very well this year and on into next year and we're not only growing our existing customers. We're picking up some new ones. We're able to balance that with areas we've got. But San Juan is always typically the one that will lag in some periods.

Okay, and then, are you being approached at all by--the previous question was a little bit about acquisition. Which is--given that there's still so many private folks in your business. I mean, are you now in this type of market, are you all approached from time to time with an offer these days, or is that not necessarily happening?

By them, as far as being a candidate for acquisition?

Yes, sir.

Okay. No, not a whole lot. Actually, it's--any that we talk to or look that, we'll get some months listed. Some we'll just have conversations, and see what maybe makes sense. But I think again when you talk about the little private companies, some Mom and Pops, business is good for a lot of people. And so those guys probably don't turn to thinking about some of that until maybe things might flatten out somewhat. So I think things are running real hard, and they probably don't think about that. It more so seems to fall to us to try to identify and make some of those approaches.

Okay, thanks, Steve.

Thanks, Neal.

Our next question comes from Darrel Norris, a private investor. Please state your question.

Hi, I know my question is a difficult one to answer. But looking at the stock price, you've come around each quarter with all these beautiful results. And we compliment you on that. But stock price doesn't seem to produce the same results. You were back above $20 a share last year. And stock has [been in that range] since then. Do you have any ideas how to get it moving up?

Well, Darrel, I tell you what. If I could predict the market, we all would be having different conversations nowadays probably. The only thing--and you can get all kinds of reasons if stock people--you'd probably get ten reasons as to what's going on. The only thing we can do of course is to continue to post numbers. And we do that. I think we post very good ones. And we have a very positive outlook going forward. I think we're in the right place. We're in the right time. We're doing the right thing. You hear from people talking about the popularity of the oil and gas business right now. Or the surge business, versus twelve months, eighteen months ago. Maybe that's up or down or things like that.

And it's--I don't have any one single answer for you. Frankly, when you're in an investor, you've got a good investment. And the numbers tend to prove out over time. That's what always drives, ultimately stock valuations is what's the value of the company, and it starts with the operating numbers.

Okay, well, I'm rooting for you. Keep what I got.

Well, great.

I'm not selling it, so anyway, keep up the good work.

Okay, I appreciate the call, thanks.

[OPERATOR INSTRUCTIONS] Our next question comes from Jeffrey Kerr, from Kerr Financial Group. Please ask your question.

Hi, Steve, how are you doing?

Hi, Jeffrey, how are you?

I'm doing okay. I tuned in a little bit late and I may have missed this. But did you talk about what your backlog is out to?

Yes. The backlog in Tulsa is about $25 million at the end of the first quarter of this year, and we're booked into about mid-November. It's pretty well stayed the same from the last call. If you remember, it jumped up a bit in the last end of the year, but it's held in there and so we're looking at ten months or so out.

Right. Is there anything operational that you've done different to expand capacity. Can you talk about that?

Well, from the rental side, or the sales side, or both?

That was rental, I guess. We focus more on rental, but both, I guess, as well.

okay, well on the rental side, just some things--we really made the big changes last year and changed some of our fabrication. [C2SC] going from a sequential process to batch processes, and things like that. Some layout changes, process changes, and things like that.

And you did some outsourcing last year, too, as I recall.

Right, we did. Now this year, we think we can--unless we get a surge on something that we don't anticipate, we think we can actually build the 250-range in house. We prefer to do that if we've got the space, the people here to do it. And we sort of control the quality to our liking. So we think we're okay in that realm there. Up in Tulsa, at SCS again, they've done just a fantastic job just squeezing out a little more every year. And this year it looks like revenues on track to do about the same thing. So we haven't added any physical rooflines to any of our places right now. We are looking at that, but we haven't made any decisions as to what or when or how we're going to do it. But right now, we're in good enough shape to handle what we think we're going to have for the rest of the year.

Do you think that you--what you're establishing is that you've got new customers and you've grown in the Barnett Shale area. Do you think that you risk losing any opportunities? Or missing opportunities by not having a higher capacity?

No, we don't. The way we sit there and try to figure out what we need from a capacity standpoint is, first off, see what our customers are asking from us. We'll roll that. We'll measure that against what we can do capacity-wise. And then the bottleneck that has become more so, once you build it and rent it, how do you service the field. And today, if you must go, is how quickly you get the parts and pieces in. today it's more so with people becoming scarce from the field, it's more so. So in build and rental business you can't outrun that service side, so that's become the critical lead now. And so, we're not missing anything.

Now I will say, if we could hire the good quality--we try to hire at a higher rate, we might be able to do a little more on that. But I think we're going to be--but you can't do that. Everybody's looking for good people like that. So we're just into a situation where there's just so many people right now that--but we can still grow that 250, 300 rate from the hiring side, the capacity side, from the customer demand side. I guess we're always going to miss somewhat, but as long as we target our good customers in there, and again we're really seeing some good expansions and some new good major customers coming in. but we tend to get more than our fair share.

Okay, last question then. In the big picture, at the year-end call you were predicting you'd have a choppy--as I remember the term "choppy" first half of the year. And in your comments, that you kind of still think that this is going to back end loaded in '07.

Right.

But this is a pretty good quarter. I mean, as you said, you did an excellent job on increasing margins, and so if--does this still qualify as choppy, I guess? And we can expect improvement in the second half of the year. Just want to qualify the [calc.]

Yes, that's a good question. It's kind of like that duck on the pond. It looks nice and straight on top, but it's paddling like hell under water. And when I say choppy from the point of again--the sales had good growth. The sales margins were good. Rental grew about half what we're used to. And that's what I was anticipating. That's what I was referencing. So when we get some of that, that's what I look at. And I think we'll see that into the second quarter too, still some of that. But again, the backend load I'm talking about more so is the rental side pickup. We have good visibility right now on the sales side, as we mentioned on the backlog. The rental side is what's really going to pick up pretty well in the second half from a quarterly revenue increase standpoint.

Okay, very good, thank you.

Thanks.

Our next question comes from Brant DeMuth from Mazama Capital. Please state your question.

Hey, Steve, thanks for a good quarter.

Good to hear from you.

In the past you've been a little more explicitly on maybe some of your customer wins and whether they're large entities versus kind of a small checkbook operators. Can you talk about the Barnett maybe, who you've won, and if not who, what size they are.

well, I won't go into particular names. When we catch them we like to keep them. But they are, along with our typical customer profile, large independents. And that's been, throughout the company, that's been our bread and butter customers, the large independents that drive a lot of activity, prefer to drill wells rather than rent compressors, pay their bills on time, have lots of money, and go out there and put it to work. So our customer profile has continued along that line. It's just that we're getting some other people in that we haven't concentrated on and penetrated at this point. But they're starting to rent equipment now.

How about on the compressor sales side, the concentration in the backlogs?

Still sales our largest customers. In that we're getting a little more diversification away from that. We've--the last couple of years we've endeavored to keep our good customers happy, keep them growing while trying to diversify at a little quicker rate so that we get our top ten percentage to be less a piece of the whole, but keep them growing. That's probably stayed a little steadier in the concentration of customers there, but again those are very good customers we've got there. We work quite well for them and know each other very well. We do have other customers coming into that mix, probably not as quick as on the rental side.

Okay, thanks, Steve.

Thanks.

[OPERATOR INSTRUCTIONS] At this time I have no further questions. I'll turn the program back over to Mr. Taylor.

Okay, Erica, thank you. And I certainly appreciate everybody dialing in or listening in on the call. And we look forward to continued upward movement, continued activity. And looking forward to seeing you again next quarter. Thank you.

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