Natural Gas Services Group Inc (NGS) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group first quarter earnings conference call.

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

(Operator Instructions).

Your call leaders for today's call are Kimberly Huckaba, IR Coordinator; Steve Taylor, Chairman, President, and CEO.

I would now like to [turn the] call over to Ms.

Kimberly Huckaba.

Ms.

Huckaba, you may begin.

Thank you, Erica, and good morning, listeners.

If you would again allow me to read the forward-looking statement, then we'll plan to get on into this morning's earnings call.

Except for the historical information contained herein, the statements in this morning's conference call are considered forward-looking, and they are made pursuant to the Safe Harbor provisions, as outlined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements, as you may know, involve known and unknown risks and uncertainties, which may cause Natural Gas Services Group's actual results in future periods to differ materially from the 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, or 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 undertakes no obligation to publicly update such forward-looking statements to reflect any subsequent events or circumstances.

The important factors that could cause actual results to differ materially from the expectations reflected in these forward-looking statements include, but they are not limited to, the factors described in our recent press release and also under the caption Risk Factors in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission.

Having that now stated, I will turn the call over to Steve Taylor, who is President, Chairman, and CEO of Natural Gas Services Group.

Steve?

Thanks, Kim, and thanks, Erica.

Good morning and welcome to Natural Gas Services Group's first quarter 2010 earnings review.

As you know, we continue to operate in a very difficult and competitive market, and have been for about a year now.

Although we see some bright spots that I'll touch upon later, we think 2010 is a transition year from a bad 2009 to a better 2011.

As I review the numbers with you, the year-over-year quarterly comparisons are going to be relatively rough.

This is because the first quarter of 2009 was a quarter when we still had growing revenues and we had not yet been hit with the full brunt of the industry decline.

So, when I compare the current quarter against the high point of the last 12 months, it's not a real representative picture.

What is more important will be the sequential comparisons, which more accurately reflect the present market we are in.

Total revenues in the first quarter of 2010 declined to $11.5 million from $20 million in the first quarter of '09, with the great majority of that decline coming from lower compressor sales.

Sequentially, total revenues were up 19%; again, due to a very low level of compressor sales.

Comparing gross margins in the first quarter of 2010 to the first quarter of 2009, total gross margins fell $6.6 million from $10.6 million, but rose from 53% of revenue to 57%.

This improvement in gross margin is primarily due to our ability to maintain high rental margins and a mix shift to relatively higher rental revenues.

Sequentially, gross margin was down 7% from $7.1 million to $6.6 million, but we increased margins as a percent of revenue from 49% to 57%, respectively.

SG&A expense was down 5% year-over-year and $1.5 million in the first quarter of '10, and up sequentially from $1.4 million.

Comparing year-over-year quarters, net income declined from $3.7 million in the first quarter of '09 to $1.4 million in the first quarter of '10, and it was sequentially off $300,000.

Net income margins fell from 19% last year to 12% in the current quarter but were flat at 12% sequentially.

EBITDA declined from $9 million in the first quarter of '09 to $5.1 million in the current quarter, but held in the 44% to 45% margin range.

Sequentially, EBITDA went from $5.9 million in the fourth quarter of '09 to $5.1 million in the first quarter of '10, but increased from 40% to 44% margin.

Fully diluted earnings per share in the current quarter of 2010 was $0.11 per common share.

Now, looking at segment comparisons, total sales revenues declined to $1.5 million in the first quarter of 2010 as compared to revenues of $6.9 million in the year-ago quarter.

Sequential quarterly total sales revenues declined from $4.8 million to the same $1.5 million.

Margins did, however, move up from 29% to 32%, primarily due to a mix shift.

In the first quarter of 2010, compressor sales alone were less than $400,000 and margins were essentially nonexistent.

This business obviously continues to be severely impacted.

This is what I mentioned in the last call, that we had built through the backlog at the end of the year and we were in a real tight fabrication environment.

We are starting to see a bit of life in it.

The compressor sales backlog at our fabricating facilities at the end of the first quarter 2010 have grown to a bit over $4 million.

It's not real big dollars; the majority of it will be booked in the third quarter.

It's certainly a large increase from where we have been the last couple of quarters and a positive development.

If you recall, I mentioned the dilemma we had last quarter with some unabsorbed costs in our fabrication facilities, due to our decision to maintain personnel and in anticipation of some pending fabrication awards.

This backlog reflects one of those jobs coming through.

Looking at compressor rentals, rental revenue declined $2.9 million in the year-over-year quarters from $12.8 million in the first quarter of 2009 to $9.9 million in the first quarter of 2010; but our rental margins held up well at 63% and 61%, respectively.

Sequentially, rental revenues were up 3% and gross margins improved from 59% in the fourth quarter of '09 to 61% in this current quarter.

Average rental price in [inactive] units was essentially flat between the fourth quarter of '09 and the first quarter of '10.

The year-over-year quarterly average monthly rental pricing of active units was down only 7% between the first quarter of '09 and the first quarter of 2010.

We ended the first quarter with a rental fleet utilization rate of 67%.

April utilization continued at 67%, up from 65% in January, and reflected a slight rise in utilization year-to-date -- especially considering a corresponding 1% growth in the fleet.

The rental fleet size stands at 1,788 compressors at the end of the quarter.

Counterintuitively, we have seen an increase in activity on the western slope of the Rockies over the past year and have opened a new field service facility there this past quarter.

From a balance sheet standpoint, our liquidity continues strong and our capital structure is bulletproof.

Our total short-term and long-term debt was $5.9 million as of March 31, 2010, and cash in the bank as $21.6 million.

This is a $1.4 million decrease due to a $6.5 million payment we made to reduce the balance outstanding on a line of credit.

Our cash flow from operations was $8.3 million this quarter compared to $5.8 million in the year-ago quarter.

Our current ratio is almost [6-to-1] and total debt to total cap is approximately 4%.

Now, just summarizing, we continue to operate in a very restrained and constrained market.

Operators are watching the price of storage levels of natural gas very closely and waiting for a clear sign of higher demand or lower supply.

We're in the spring shoulder season, meaning that the summer season will have to drive more usage for any near-term relief.

That remains to be seen, and as I mentioned when we started the call, I think the second and third quarters could be moderated, with all of 2010 seen as a transition year.

We are seeing some bright spots.

Rental revenues are holding steady, as is utilization.

Compressor sales continue to be poor but we do now have some backlog to work through.

Overall margins are holding up and even improving in some respects.

We're not out of the woods and I'm not calling a bottom in our business, because one never knows a bottom until months after it happens.

But I will say that we seem to be at a plateau.

However, it can still be variable over the next few months.

My gut feeling is the worst is behind us, and that we'll make continued, if not smooth, progress over the next few quarters.

There will be fits and spurts, but we think the domestic natural gas business is full of opportunity long-term, and that the downturn experienced for the past couple of years is transient, in some respects natural.

Beyond these comments, I only want to make a couple of remarks about the tragedy in the Gulf of Mexico on the BP Macondo Transocean Deepwater Horizon incident.

First, our thoughts and prayers are with the families of the crews lost.

Second, any drilling, especially offshore drilling, is a dangerous and risky business, but it is carried out because of the great potential it holds for our country to discover and produce more domestic oil.

The environmental aspect is certainly a concern and everything that can be done should be and is being done.

Third, the Companies involved, BP and Transocean, are world-size and, in my opinion, world-class companies.

NGS has worked with and for BP, and they are very strict in their safety and equipment integrity processes.

In fact, we see it as a mark of engineering accomplishment to be able to provide equipment to them.

Unfortunately, incidents like these do happen.

They should be thoroughly investigated and any negligence should be dealt with; but my concern is the frenzy already starting to develop -- not because it's a disaster and there are validations at hand, but because of various other agendas, whether they are industrial, environmental, or political.

I would hope we can keep a broader view in mind and avoid any attempt to cripple a critical industry with an exemplary safety record for this incident.

Unfortunately, the agendas appear to have already started.

In a quote that is ironic, if nothing else, Senator John D.

Rockefeller IV, a Democrat from West Virginia, said last week -- I'm no fan of the oil companies.

So, if future action works out badly for them, I'm probably for it.

So, before any conclusions have been reached as to the cause or fault, and while everyone is still responding to the tragedy, we have a Senator from a state representing coal mining interest, an industry with a much worse safety record than the offshore drilling industry, already indicting a whole industry.

This is exactly the shortsighted, uninformed, biased, knee-jerk reaction we have unfortunately come to expect from our Congress.

Let's hope smarter people carry the debate on this issue.

That's the end of my prepared remarks.

I'll turn the call back to Erica for questions anyone might have.

(Operator Instructions).

Joe Gibney, Capital One Southcoast.

Just want to clarify your comment there on the bookings on the sales side.

You indicated most will be booked into the third quarter.

Do you mean revenue burn rate will begin more aggressively in the third quarter and that we'll see this show up in backlog in 2Q?

Just trying to understand that booking comment.

Yes.

The job -- we've got the jobs in, but they're -- you always have some delay by the time you order the equipment, get it in and fabricate it, and can recognize the revenue.

So, that's [what will] happen.

We'll see some of the revenue in Q2, but really, the vast majority is going to be Q3 as we build through and get them delivered.

Okay.

I'm just curious to get your thoughts on the processing demand side.

Certainly, since some of your larger horsepower compression peers have made some inroads and been certainly talking about it a little more in the Marcellus from a processing demand standpoint, and the all the liquids emphasis that's out there now.

Just curious, as you guys think about other opportunities beyond wellhead compression, if that's an area you might be potentially interested in, given the increasing demand footprint seems to be growing?

Yes, I think it makes sense, I mean from a point -- certainly, the current preference is to be maybe just a little more oily or liquids-oriented.

Of course that's a -- that will be transient; we'll be back to -- you know, gas and oil always swap places every once in awhile as to what's the favorite or the most current.

But certainly, I'd give you some exposure that way.

But also, it's -- I mean, processing, treating, and things like that make sense from the point that they're all compression synergistic, the compression [tip we're in] and things like that.

They're fill-oriented businesses or they can be sales type businesses and/or lease or rental type businesses too.

So, it's really not too far afield from the compression rental business, capital equipment-oriented and things like that.

So, I think the strategy is fine whether it's a competitor or whether us.

I mean, we're not in that at this point.

We've kind of kicked around some ideas around that but it kind of remains to be seen if we get into that in the future.

Okay.

Last one from me and I'll turn it back.

Just any revised thoughts on rental total count here [about] the end of the year?

How should we sort of progress as we work our way through the year in terms of rental fleet additions?

I think -- probably beginning -- last year, we added, I think, 40 units or so.

Of course that was down from -- it was about 10% of the year prior, of course.

I don't -- we've only -- we've added about 20 -- I think 19, actually, so far this year.

So, we may -- it's a real hard number -- we may add 40 or 50 total this year if we've already done 19 -- I think it was 19.

Let me doublecheck that.

Yes, 19 so far.

So, it could be a little better year than '09, which is no big surprise.

So, if we're 20 already, I wouldn't say multiply it by four and said 80; I would -- I'd give maybe a rounding of around -- if we did 40 last year, maybe we're under 50 or 60 this year from a unit count standpoint.

Okay, that's helpful.

I appreciate it.

Nice quarter.

I'll hold on the line on calls.

(Operator Instructions).

At this time, we have no further questions.

Okay, great.

Thanks, Erica.

For our close, I, again, want to thank all the employees for their continued hard work.

Certainly, it's through their efforts that Natural Gas will be able to grow and prosper, and get through a very, very tough time, as we have.

And I want to make sure they know that they're appreciated.

Thanks to all for joining me on this call.

I appreciate your time this morning and look forward to visiting with you again in about three months.

Thank you.

This concludes today's conference call.

Thank you for attending.