Natural Gas Services Group Inc (NGS) 2007 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Natural Gas Services Group third quarter and nine months financial results conference call.

At this time, all participants are in a listen-only mode.

(OPERATOR INSTRUCTIONS) Your 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, Erica.

Good morning, ladies and gentlemen.

I apologize for my voice.

My sinuses are just killing me.

So let me get right on to reading the forward-looking-statement.

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 by 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'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 companies, new governmental safety, health and environmental regulations which could require Natural Gas Services Group's 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 included, but are not limited to factors described in today's press release and under the caption, Risk Factors, in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission.

Again, I apologize for my voice.

I'd now like to turn the call over to Steve Taylor, Chairman, President and CEO of Natural Gas Services Group.

Steve?

Okay.

Thanks, Jim.

Good morning to everyone and thank you for joining me in Natural Gas Services Group's third quarter and nine months 2007 earnings review.

If you saw our earnings release this morning, we again reported excellent earnings this quarter and year-to-date and continue to experience significant growth in strategic areas of our business.

The highlights for the comparative third quarter of 2006 versus 2007, show that diluted earnings per share were up 41%.

Net income was up 41%.

Earnings before interest, taxes, depreciation and amortization was up 33%.

And total revenue was up 9%.

For the year-to-date nine months, diluted earnings per share were up 53%.

Net income was up 65%.

EBITDA was up 45%.

And total revenue was up 15%.

Now looking at our total revenue and comparing the third quarter of this year to the third quarter of last year, total revenues were up 9% from $17.1 million to $18.7 million.

This appears to be a slower pace of year over year revenue growth of what we're used to, but if you recall, we had an extraordinary sale of rental equipment in the third quarter last year to a particular customer that totaled $0.5 million that wasn't repeated in the subsequent quarters.

Not including that onetime revenue gain results in a comparative quarterly revenue growth rate of 20% from $15.6 million to $18.7 million.

Sequentially, total revenues rose 6% from the second quarter of this year to the third quarter of this year, from $17.6 million up to $18.7 million.

And the nine-month year-to-date period, total revenues were up 15% in '07 versus '06.

Looking at total gross margins for the company and comparing the third quarter of 2007 to the third quarter of 2006, gross margin grew to $8.5 million which is 45% of revenue, from $6.4 million which was 37% of revenue, a 33% increase.

Sequentially, gross margins increased from $7.2 million or 41% of revenue, to $8.5 million or 45% of revenue.

And looking at the comparative nine-month periods, gross margins increased from $16.6 million which was 36% of revenue to $22.8 million which was 43% of revenue, a 37% increase.

Looking at our sales, general and administrative expenses, they continued to be well under control.

SG&A expense was $1.2 million or 7% of revenue in the third quarter of last year and increased $100,000 to $1.3 million in the third quarter of this year, but still running at 7% of revenue.

In the comparative year-to-date periods, SG&A was down a bit, but continues to run at 7% of revenue.

Net income for the third quarter of 2006 was $2.4 million or 14% of revenue.

It rose 41% to $3.3 million or 18% of revenue in the third quarter of this year.

Sequentially, looking at the second quarter of 2007 versus the third quarter of 2007, net income rose from $2.6 million to $3.3 million, a 26% increase quarter to quarter.

If you recall, I stated in the last call that our net should increase from the level of performance we saw between the first quarter and the second quarter of this year due to reduced overhaul expenses and high rental revenues.

In addition to those occurrences, we also had an excellent quarter in our compressor sales business.

The nine months of 2006 net income was $5.3 million, which was 11 % of revenue and it rose to $8.7 million or 16% of revenue for the nine months of 2007.

That was a 65% increase.

EBITDA in the third quarter of this year was $7.5 million, which was an increase from $5.6 million in the third quarter of 2006, a 33% gain.

Sequentially, EBITDA grew from $6.3 million the second quarter this year up to $7.5 million in this current quarter.

For the comparative nine-month periods, EBITDA increased by $6.3 million or 45%.

As a percent of revenue, EBITDA in the third quarter of 2006 was 33%.

In the third quarter of this year it was 40% and it grew from 30% to 38% of revenue for the comparative nine-month periods.

Fully diluted earning per share for the third quarter of this year was $0.28.

This compares to $0.20 for the third quarter of 2006, a 40% gain.

This compares to $0.22 per share in the prior quarter, the second quarter this year.

Comparing these comparative nine-month periods, diluted earnings per share grew from $0.47 to $0.72, a 53% increase.

It's interesting to note that our net income, our earnings per share and our EBITDA for the first nine months of 2007 already exceed all 12 months of 2006.

Breaking down the segments and looking at sales revenue to start with, our total sales revenue, which includes compressor sales, flare sales, parts sales, compressor rebuilds and CiP compressors, the total sales revenue was $10.9 million in the third quarter of 2006, compared to $10.6 million in the third quarter of 2007.

That's down 3% from the year-ago quarter, but this decline is due to the previously mentioned onetime sale of $0.5 million of rental compressors during the third quarter of last year.

When we back that out as a onetime occurrence, our total sales revenue increased 13% over the comparative third quarter of last year.

Gross margins for total sales improved from 23% in last year's quarter to 35% for this year's period.

Sequentially, total sales revenues increased 4% from $10.2 million to $10.6 million this quarter, with gross margins increasing from 28% to 35%.

Compressor sales alone were flat at $8.9 million in the third quarter of 2006 and the third quarter of 2007.

But again, that is because of the mentioned rental sales last year.

Without those rental compressor sales, compressor sales would have increased 17% year-over-year and gross margin in the same periods increased from 18% to 32%.

The significant increase in margins has been accomplished through a real focus on our costs and the timing inclusion of those into our sales prices, for example, labor and material increases, overhead allocations and items such as that.

Consecutive quarterly compressor sales revenue grew from $8.7 million in the second quarter this year to $8.9 million in the current quarter, with gross margins moving from 26% to 32%.

I want to again point out that these are industry high margins.

The compressor sales backlog at our fabricating facility in Tulsa totaled approximately $26 million at the end of the third quarter of 2007 as it booked into October of 2008.

Now that isn't solid booking, because units are scheduled according to customer request and we still have room in the schedule through that date of October 2008.

But if you equate that to a solid backlog, we're running through midyear of next year.

Looking at compressor rentals, rental revenue continues to grow at a strong rate.

The third quarter of 2006 our rental revenue was $6 million.

It grew 32% to $7.9 million in the third quarter of this year.

Rental revenue increased sequentially from $7.2 million to $7.9 million, a 10% gain in the quarter.

If you recall, we anticipated a backend loaded year for rentals and this quarterly growth is back in line with what we have historically seen.

Comparing the nine-month periods of last year versus this year, rental revenue increased from $16.9 million to $22 million, a 30% increase.

Rental gross margin as a percent of revenue in the third quarter of this year was 60%.

This compares to 59% last quarter and 63% in the year-ago quarter.

As I mentioned in the last call, our rental margins this year have absorbed a fair amount of overhauls that we expensed, but we showed progress this quarter with the margins.

Although we have one of, if not the youngest fleets around, a larger portion of our units are entering the lifecycle need for overhauls.

We will see this expense continue but we still think we can maintain our rental margins in the 60 to 62% range.

We added 69 compressor units to our rental fleet this quarter, that brings total fleet to 1277 units as of the end of the third quarter this year, or almost 150,000-horsepower.

And that's up from 1,111 units we had in the fleet at the end of 2006.

As in the past two years we thought we would add about 250 to 300 rental units to the fleet this year, we still think that with the first half of the year we will be at a lower end of that range.

On August 1, we implemented an 8% price increase on newly built rental units to offset supplier price increases on major equipment.

We're also making plans to expand our rental business into other areas of Texas and Mid-Continent and we'll kick those off early in 2008.

We ended the quarter at a rental fleet utilization rate of 89% from 88% and 87% the two prior quarters.

Our service and maintenance revenue was $220,000 this quarter, essentially flat in comparative and sequential quarters and runs about 1% of total revenue.

Gross margin this quarter was 48%.

Our balance sheet continues to be very strong.

Comparing September 30, 2006 against the same date in 2007, we have reduced our total debt by 23% from $19.3 million to $14.8 million.

At the end of this current quarter we had cash and cash equivalents of almost $25 million.

Capital expenditures in the third quarter of this year were $6.7 million, up from $5 million last quarter and $4 million in the first quarter of this year.

Our year-to-date cash flow from operations was $14.5 million and has covered just over 90% of our year-to-date capital expenditures of $15.7 million.

Now just summarizing, as I've noted through the call, we've seen a good increase in our activity levels in the third quarter this year and we anticipate that continuing into the fourth quarter.

I have in the past mentioned that we had more compressor units in the San Juan Basin than anywhere else and that the Barnett Shale was growing fast and that it might catch up.

It in fact has caught up and is now our single largest concentration of compressors in the company and is still growing very fast.

However, I will say that we anticipate continued good growth in both areas.

From a natural gas market standpoint, I think we will continue to have a good market going forward.

The Energy Information Administration predicts that heating degree days will be 10% higher in this fourth quarter over the corresponding period last year and that the winter of 2007-2008 will be 4% colder than 2006-2007.

Now obviously prices are estimated to be higher, too.

The US presently consumes about 22 trillion cubic feet of natural gas every year.

Traditionally Texas and the Gulf of Mexico have delivered most of this.

But since 2002, the share of gas from the Gulf of Mexico has dropped from 23% to 14%.

It is still our second largest geographic source of supply.

This precipitous drop is fairly alarming.

The industry has found alternate supply sources, primarily unconditional plays where we concentrate, to replace it.

But it isn't hard to see how declines like this drive the need for continued exploration and will keep us busy into the future.

According to the National Energy Board of Canada, Canadian natural gas output could decline by as much as 15% over the next two years, because energy companies in Canada have cut back on drilling to cope with high costs, midland prices and a strong domestic currency.

Gas delivery from Canada, which is the main source of imported supplies for the United States, could fall by 1.5 to 2.5 billion cubic feet per day by 2009, or up to 5% of total US supply in only two years.

The EIA estimates that LNG imports will increase by 260 Bcf in 2007.

That's for the full-year, that's not per day, and 170 Bcf in 2008.

The total of these imports will offset only half of the Canadian deficiency and that doesn't even consider any increased demand.

Henry Hub spot prices for natural gas are expected to average $7.21 this year and predicted to spike up to $8.65 this winter and should average $7.86 in 2008.

That's a year-over-year 9% higher average in 2008.

The point I'm making and that I continue to make is that the supply/demand characteristics in the US are not getting better.

We will continue to consume more than we produce and most of the future US-based production will come from the unconventional gas plays that NGS focuses on.

We will see prices, storage and activity fluctuate but the long-term looks very good.

NGS is very well positioned in our market of choice and as long as we continue to execute as we have, we will continue to grow very well.

Before I close and as usual, I want to thank all of our employees for the continued work.

It's through their efforts that NGS has been able to grow and prosper as we have and I want to make sure that they know it's appreciated.

They do the work, but I get to brag about it.

Evidence of those efforts was again recognized by Forbes magazine last month when we were named for the third year in a row, one of the 200 best small companies in the US.

This list includes companies with revenues between $5 million and $750 million, a share price that exceeds $5 and that have shown superior return on equity and sales and net income growth over the past 12 months and five-year periods.

It's always great to be recognized by someone like Forbes and our employees deserve the credit.

That's the end of my prepared remarks.

I will now it were the call back over to Erica to open the telephone lines for any of you that might have any questions.

(OPERATOR INSTRUCTIONS) Shawn Boyd from Westcliff Capital Management.

Just want to come back real quick, on the rental fleet you mentioned you were at 1277?

Right.

Okay.

And for the year kind of at the low end of that old 250 to 300 range?

Yes.

All right.

Going forward, if we could get just a little view on that into 2008?

Well, we're pretty optimistic about '08.

I think we'll be able to do the same number, maybe a little more.

We're still putting together all those plans right now, so I don't want to get too far down the road on that.

But we think in addition to the areas we're in, of course, Barnett's growing very well, San Juan is still going well and then moving into some new areas like I mentioned, I think we're going to see the same to better growth even next year.

Okay, great.

And coming back on the gross margins on the rental fleet, did you say 60-62%?

That's what we aim for, 60 to 62%, right.

Okay.

So that's -- my previous estimates we were thinking kind of 60, so it seems like maybe I just have bad notes or are we kicking that up just a notch?

Well, I've probably said lower 60s or 60 to 62, something like that, but we're running 60% right now.

I think for year-to-date about 60%.

That's the good solid number.

We try not to fall into that.

Of course, we were 59 last quarter and we'll get some fluctuations in that, as I mentioned, if we have a number of overhauls hit in a certain quarter that drags it down a bit, because as you know, we expense all that stuff.

But then, you typically catch up in the next quarter or two, because that stuff goes out on rent.

So, we're aiming for that 60-62 and if we can hit anywhere in that range we'll be pretty happy.

Okay, very good.

I wanted to come back to your comment on the San Juan Basin being the leader but then the Barnett -- so basically the number of compressors in the rental fleet now in the Barnett is equivalent to the San Juan Basin?

It's about 5 or 10 more.

It just pulled ahead recently.

So just maybe as a percentage of the total fleet can you give us what the numbers are now for San Juan and Barnett?

Well, each one of those areas has got just about 30% of the units, so the two average together about 60%.

And we're trying to stoke that competition between those two local managers.

There you go.

Put the year-end bonus on it, right?

Yes, exactly.

Very good.

And in the past you've always been great in giving us kind of a region by region thought on current state of the universe in terms of where we are on the market and where some of these environments like San Juan I think a year ago it has slowed down a little bit.

Can we talk about that briefly, San Juan versus Barnett versus a couple of the other areas?

Sure.

We think the Barnett's still holds good growth for us going forward, so we don't really anticipate any slowdowns.

Farmington is actually -- we'd had some slowdown last year there a bit and some retirement, and again, you always get that in the Rockies with the gas price difference due to pipeline takeaway.

But we've got some real optimistic things we're seeing out there too.

So we think that's going to still give us some good growth going into '08.

The areas where the Rockies and Appalachia we moved into last year, we think what we're calling the Northern Rockies for us, which is actually Western Slope Grand Junction for Utah, we're seeing more and more going there and as I mentioned before, of course that's the play for the next few years.

That's where oil and gas will be coming from ultimately, so that's a place we're getting well positioned in right now and we'll be moving into it more and more as we go.

I think Appalachia still holds a lot of promise.

And then we're moving into a couple of other areas Mid-Continent and Texas and I won't detail that yet, until we get moved in, just from a competitive standpoint, but from our initial look and projections we're making, we think there's going to be some good growth there.

So, we're not seeing, based on just what we're hearing and seeing now from customers and our sales guys, we're pretty optimistic for '08 in actually just about all the areas.

Probably the only thing we've recently seen is maybe a little of the Northeastern Michigan, maybe a little slowdown there just due to some regulatory changes going on in those areas, but nothing lasting and we think things will resume in those areas for good shape too.

Great.

Last question then I'll jump back in the queue.

Gross margin on the sales business, am I looking at this right, 35% on the quarter?

This being the business that I believe was supposed to be a low 20s gross margin business.

Well, I know I'm going to get pressed.

Come on, Steve, get up off that low 20s, but I am hesitant to do that, because as I will also constantly say, it's a variable business and fairly lumpy.

But what we've done is really -- if you remember last year when we had -- I'm not going to say an off quarter, but when we had a quarter where a lot of low-margin equipment hit and kind of compounded the margin or compressed the margin picture back then, we decided back there and I've mentioned this in a couple of calls, that we really take a good close look at this and try to buck the conventional wisdom that different size compressors bring different size margins.

And I think those guys have done a heck of a job of doing that and getting their cost in line and watching those costs and things like that.

So, I'm not going to come off of my low-20s on it and just consider everything gravy beyond that.

All right.

So the bottom line is, ever since that -- that hit was I think second quarter of '06, so several quarters ago, ever since then you're putting maybe a little finer pencil on it and making sure you're selling these at a good margin?

Right, exactly.

And we've gotten a little more rigorous and timely input of cost and through some processes into those sales prices, so we're actually, I think, capturing better what our costs were on some of those things than what we did before.

It's a combination of just--.

But is there anything -- these last three quarters in particular being so strong, is there anything like lower raw materials cost or anything that's temporary in nature that is working through there?

No.

We're constantly getting increased cost from suppliers.

Of course, much to our dismay anymore, but the sales business you're able to -- you know those costs right then, so you try to get the margin into that anyway.

A little different than the rental business where you have to absorb some of that stuff over time or you can't recover it as quickly in the rental side as you can on the sales side.

So we're able to, again, in a more timely and rigorous fashion, just get those costs identified in those jobs, so we can make sure that we're okay with them.

Got it.

Hey, that's helpful.

Another great quarter.

Steve Ferazani from Sidoti & Company.

I just wanted to ask a little bit about the follow-up on the gross margin issue.

How much of it can you say was a product mix issue?

Were you selling more higher horsepower compressors this quarter?

No, the mix wasn't any different than say a "normal" quarter.

It's like I mentioned, we I guess bucked the conventional wisdom that small has lower margins and big has bigger margins or vice versa, depending on who you talking to, and just tried to really get in there and just kind of keep our margins constant across the board and watch our costs real close.

So it would be fair to assume the product mix would be steady into the next quarter as well, that won't impact margins as we model it out moving forward?

I don't think the mix will.

Now again, I'll throw in my usual disclaimer every quarter, that this is a variable lumpy type business that as these units go through, we can get -- we don't think the margin is going to change and some of those things, but you can get some of these units that stay on the floor a little longer, take a little longer and just a 5 to 10% cost variance from just a labor component can affect your margins to some degree.

So, I'm sure you all notice the reticence and hesitation in my voice every time we talk about this stuff, but it's a real thing and it's just very hard to predict with real close accuracy.

In terms of capacity constraints, can you talk a little bit about that?

Are you still pretty much running at full capacity and could you expand the rental fleet faster if the opportunities were there?

Well, we are running at full capacity here in Midland where we build the rental units and up in Tulsa where we build the sales units.

We are always kicking around looking at what we need to do from an outsourcing standpoint, from an additional building standpoint or anything like that.

We haven't made any final decisions on either one.

We are outsourcing some units now and as we go forward in the fourth quarter, so at this point, that seems to be something we can get along with presently.

But we're always looking at what we need to do to keep going forward and grow in the future.

We're hearing a lot of talk about expansion of horizontal drilling programs out in Appalachia, then there's also of course, with the pipeline coming on, lots of talk that the Rockies could improve by middle of next year.

How forward do you have to be in terms of your plans geographically, okay, you know, you can see this segment is going to improve six months from now, how early on do you have to plan for that?

We can move fairly quickly, number one, probably just because of our size and number two, it's not -- we're pretty conservative.

We'll go into an area, we'll put a guy in there, we'll get a small place to start with and as that thing grows we'll staff up and move up.

So if we identify an area, just like these ones I mentioned we're going to move into the first part of '08, within three to six months we can be in there.

Of course, the lead time is getting your sales guys in there and getting the business generated and then we can move in there with the service guys and set up like that.

We certainly coordinate that from the sales and service side.

But three months at the shortest, six months at the longest if it's an area we want to get into pretty quick.

Okay.

Last question I had.

Any change in the outlook in terms of acquisitions, prices still high out there?

No change.

We are concentrating on the organic growth, which has done very well, but we also look at opportunities as they come along.

There's nothing on the board right now.

As I mentioned before, the things we've seen either number one, pricing was out of kilter with what we could build stuff for, or number two, the fleets we'd looked at looked to be hard to integrate than what just growing organically would be.

And those things tend to be -- especially the latter part though, where you have fleets that aren't quite as homogenous as ours, it's a more difficult issue, not just buying assets, but then you've got to run these things and have inventories, have the people with the right skill levels.

And you get into some of those tougher areas to integrate.

And so we just haven't found the right fit on any of that stuff right now.

So while we look, we continue to forge ahead organically.

Neal Dingmann from Dahlman Rose.

I'll hesitate not to congratulate you on the quarter like everybody else this time.

My question I guess is one of pricing.

You've talked about it a lot, but I'm just sort of wondering, are you going to see for the rest of this year or I guess more particularly I guess it's tough to look at this point for next year, your one or two price increases that you try to run through.

Are expectations still that you might try to do that early next year?

I'm just wondering, I guess sort of the follow-up to that is, are you seeing some of the softness in your area that obviously frac and some of the land drillers, etc.

are seeing?

Of course I mentioned the increase in August, which was for all the new builds we're putting out.

We're constantly looking.

I would anticipate any future price increase, which would typically be an increase on units that are out in the field right now, will be a lot more selective than what we've done in the past.

We'll look at models that are popular, areas that are busy, costs that have gone up more than others, etc.

In the past we've done blankets to try to just cover everything like that, but we might probably just look at more of a selective thing.

We might go into a certain area and raise it X.

We might go into another area and raise it less.

But just trying to more fine-tune it.

There certainly is sensitivity to cost out there.

We've got sensitivity from our suppliers to cost, but we try to be fair about those and certainly try not to push it too much.

But we do want to keep our cost in line relative to the revenues.

So I'm not ready to predict if or when, but if we do it will be probably more of a selective thing.

Okay.

Then I guess the typical question I ask as far as on acquisitions, looking at your cash position and then looking at how segmented the market still is, obviously ex-you and [ex-terra], I was wondering is it more because -- I know you're pretty peculiar on the type of fleet that you're running.

Is it more that or more it would be tough even if you added some more compressors, would you not have the service side to keep those running or would you entertain and are you more actively looking for acquisitions?

We're always looking.

We've got our eyes and ears open and yes, we'll entertain anything actually.

I mean, we'll look at a lot of stuff and then decide whether it makes sense or not.

But, looking at those fleets we do get into the issues of -- and again, buying the assets is no trick.

I mean that just takes money.

But actually operating those things in the manner we want to operate them in from a service standpoint and runtime standpoint and customer satisfaction perspective, that's really where the trick is and where maybe a little more of the skill comes in.

And that's where you really get into the problem, where if you have a -- and I'm not fooling myself to think, like as I mentioned, we've probably got one of the more homogenous fleets in the industry and that's good.

And I haven't fooled myself to think that if we do buy somebody else that it'll stay as pure as it is.

I don't think that will happen.

But, when you sit down and look at the buy versus build decision, well we can buy these number of compressors and do this and that, so often it comes down to, well you know what, we can grow it just as fast and probably at an incrementally lower cost per unit and then we don't have all the integration issues, which are always the ones that catch us.

So, it's not an overly conservative view.

It's just, I think, an intensely realistic view that it's hard to "rollup" some of this business in that respect and make it accretive, keep the margins, keep the earnings and everything else.

Let me ask, you brought this up, as far as the runtime guarantee, at a certain point will you be running into that issue as you continue to bring out let's say 75 or so, if that continues a quarter, what sort of an average as far as people per compressors needed to keep those running and a quarter this year, next year, is that something that it's possible you might run up against?

Well, when we look at how we're going to expand and what we're going to do for a year or how we're going to go into an area, we look at three things.

Number one, what's the demand?

How many do we think we can rent from a sales standpoint?

Number two, how many do we think we can build from a fabrication standpoint?

Number three, how many can we service from an operational standpoint?

And if any one of those -- and the lowest number of those three is the number you go with.

So if we could build X and we could rent X, but we can only service 0.8 X, we can only go with the 0.8 X, because the killer in the rental business is overrunning your service.

So, we don't intend to do that, so we're always watching those three and we're really concentrating on that service aspect of it, so I think that's what gets us -- you know, they say, sales gets you the first job and service gets you all the rest of them.

So we've got to stay on top of that.

So we watch that real close and as we're growing we're still adding people.

They're getting harder to find and they're a little more expensive, but that's the market right now.

So I think we've got our priorities right in how we expand these things and not just building to build and put them out there, but we know we've got to take care of them.

Is it a general rule as far as how many compressors a service individual can keep running or you assign to them?

Yes, there's a rule of thumb and it's probably like about 25 units per man.

But that's a rule of thumb that varies, because it's different in the Rockies versus South Texas versus Michigan.

But just as a gross average that would be about right.

Okay.

Keep up the good work, Steve.

Jeffrey Kerr from Kerr Financial.

Neal kind of hit on a lot of my points and great job with the margins.

I guess my question is that you're guiding to the low end of previous guidance on the rental fleet.

Can you give us more of an explanation?

Has it been just the capacity where I'm maxed out or has it been people or both?

At the end of last year we had projected that the first half of the year would be a little slower than the second half and what happens is with that, we cut back fabrications just a bit, just so we wouldn't have more equipment sitting in the yard than we needed.

And we thought the backend, the second half would be busier.

So, when you get to that second half, we can't ramp up fast enough and to a high enough degree to cover the slower first half.

So it's just a matter of running out of time in the year, essentially, to get to that number.

Okay.

But would the capacity -- and certainly I respect your discipline and your methodical nature of looking at acquisitions and you just gave a great explanation as to why you don't go out and just buy a fleet if it doesn't fit.

But I guess the other side of that is, is it possible -- you spoke of looking at increasing capacity organically, expanding and outsourcing like that, is that something that we should be more focused on, given probably a lack of opportunities on the acquisition side?

And we are.

As I mentioned, one of the things we have done the last year and we're gearing back up again right now is some outsourcing.

So, we don't have to do 100% of our stuff to keep growing 120-130% beyond capacity.

We can keep our core capacity then we can outsource some additional too.

Now, we are looking at and have been for six or nine months, just how to and when to increase just our core capacity.

That's an ongoing exercise and we continue to look at that and we're looking at that as we speak.

But for right now, we're outsourcing and we think that can carry us into even a good '08.

How can I ask this question?

Is that outsourcing going to be a growing percentage say in Q4 of '07 and then into Q1 '08?

Yes, we're going to do a little more outsourcing in Q4 than we have done the earlier part of the year.

Again, just trying to put more out there because it's a busier part of the year.

Now into '08 we will probably continue some of that, but again, we may increase some capacity on our own too.

So, we've got a couple of ways we can play that I think and still keep us ahead of the curve.

And we intend to do that.

We're not not building capacity because there's a lot left out there that we can't do or that sort of situation.

We're looking at growth in '08, so we're looking a little more intently at okay, what can we do internally, what can we outsource, what else do we need to do?

So it's a very active analysis at this point.

Okay.

Again, keep up the good work.

Congratulations.

(OPERATOR INSTRUCTIONS) Follow-up question from Shawn Boyd from Westcliff Capital Management.

Steve, just one follow-up on that last question, that got me thinking.

In terms of the capacity, I know it's under review right now, but maybe something we can all think about.

What would be the step change that we might see here?

In other words, if the company has the ability through its internal manufacturing and the outsourcing to do 250 to 300 units a year in additional units into the fleet, if you did go down the road and bring on the new capacity, would it add 50, would it add 250 units?

What would be the change to think about?

I think to go out and add permanent capacity, I think we'd be having to look at on the order of doubling, just a magnitude of that sort.

Because I think just going another 50 or so is not going to be worth the money.

You can outsource that pretty easy.

And I kind of see it from the point of, if you're going to outsource, maybe if you need another 20-25% outsourcing is probably the more economical way to do that.

If you start getting over that, certainly in the 50 to 100%, you probably need to be looking at building or buying.

25 to 50 might be the gray area that you play with a bit.

So, that's just real rough look at how we're kind of looking at this thing.

So I think to buy additional capacity or build additional capacity, we've got to be looking at, from a floor space standpoint, probably doubling in that respect.

Now that doesn't mean you the next year double your output or double your revenues in that respect, but it gives you a ramp-up over maybe a couple or three years to get to that point.

Got it.

That's helpful.

And going back to your other two bottlenecks, you were very clear, you need to be able to place them, you've got to build them and you've got to service them.

If you could build 1,000 right now, what would be the maximum that you could place and service?

Well, if we could build what we wanted to build with no constraints there, of course there's some point you're going to meet lagging demand, but right now probably the biggest issue would be people.

And again, I won't say that's an issue, I'm just saying if you had a really high accelerated growth rate, people would probably be the constraint more so than fabrication or the demand right now.

Okay.

People just to service them?

Right.

Primarily guys in the field, from that respect.

And again, I'll point out, we've grown pretty well and have stayed ahead of it, so we anticipate whatever we decide to grow from all three of those aspects we can handle it from a people standpoint and demand and fab.

They're just constraints.

They're not barriers.

Got it.

And just last point on this.

I know it's in rough stages, but can you just give us a rough range on how much does it cost you?

What kind of CapEx we're talking about here?

Oh, if you expanded?

Yes.

This is a pretty high-cost place.

I don't know.

You'd probably be in the $2 to $3 million category, something like that.

Matt Beebe with Morgan, Keegan.

I know you talked about 2008 and hadn't really firmed up things yet.

I was curious if you thought maybe we would see kind of the slowdown earlier in the year building up as we get into the fourth quarter or are we going to see more of a flatter level of production as far as adding to the rental fleet?

I'm going to say right now, on November 6th, we're anticipating a little smoother year from that standpoint.

Now, again, we are getting some of the final input from customers, sales people, etc.

in, so I reserve the right to revisit that.

But right now we're looking from the point of a little smoother year from a backend loaded sort of situation.

We think pricing looks to be decent from the gas standpoint, activity, etc.

And the other thing we think will help us is these one or two areas we're looking at expanding into I think will help drive some of that in the first half more so than what we had last year.

Okay.

And then as far as CapEx per compressor, what is that rate currently or where do you expect that to go?

Right now it's about $67,000 to $68,000 per unit.

If anything, it will go up from a point of actually less supplier increase.

We've got those increases, but the increase we see in the future is going to be more towards reciprocating compressors or a little larger horsepower compressors.

So we're going to see a higher cost per average unit, but that average unit horsepower will probably go up.

Okay.

And then as far as those cost you had mentioned you're taking a real good look at trying to reduce some of those.

Are there any specific measures that you can talk about that really driving that?

Two big things -- you're talking about the compressor sales business, right?

Correct.

Okay.

You've got two big things there, labor and materials and both of those are really what we've really watched very closely and again, I'll give a pat on the back to those guys at Tulsa for really getting a handle on that stuff.

So we're just watching those real close.

We've done a little better internally from an overhead allocation standpoint, make sure we've got all those costs covered in there.

And it's just once we get those identified and placed in there, it's just paying attention.

Are you increasing the number of suppliers you have or are you entering longer-term contracts to get better deals?

Is there anything that specific or it's just those guys are doing some hardnosed negotiating?

Not anything different on the contractual standpoint or the supply chain per se.

Really just the basics, identifying your costs, make sure you've got them covered and constantly monitoring them.

At this time we have no further questions.

Okay.

I appreciate everybody joining us and we look forward to a good fourth quarter and telling you about it early next year.

Thanks.

This concludes today's conference call.

Thank you for attending.