Natural Gas Services Group Inc (NGS) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Natural Gas Services Group first quarter 2011 conference call.

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

(Operator Instructions) Your call leaders for today's conference call are G.

Larry Lawrence, Principal Accounting Officer; Steve Taylor, Chairman.

President, and CEO.

I would now like to turn the call over to Mr.

Lawrence.

Mr.

Lawrence, you may begin.

Thank you, Erika.

Good morning, listeners.

Please allow me to take a moment to read the following forward-looking statement prior to commencing our earnings call.

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

Forward-looking statements, as you know, involve known and unknown risks and uncertainties which may cause the 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 to make significant capital expenditures.

The forward-looking statements included in this conference call are made as of the day of this call.

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

Steve?

Okay.

Thanks, Larry.

Thanks, Erika.

Welcome to Natural Gas Services Group first quarter 2011 earnings review.

If you've had a chance to review our earnings release this morning, we were pleased to report increased earnings for both relevant periods, year-over-year and sequentially.

I will expound in greater detail through the call, but we are seeing signs of more activity and I think our results have tested NGS' ability to take advantage of positive moods in our markets.

Total revenues for the first three months of 2011 were up 30% when compared to 2010, increasing from $11.5 million to $15.1 million.

However, for the sequential quarters of the fourth quarter of 2010 compared to the first quarter of this year, total revenue decreased 7% to $15.1 million.

This is solely the result of the often-mentioned quarterly variability in our sales business.

Looking at gross margins and comparing the first quarter of this year to the first quarter of 2010, total gross margin increased 21% from $6.6 million to $8 million.

In sequential quarters, gross margin was essentially flat at $8 million, an increase from 49% to 53% of revenue.

SG&A in the first quarter, looking at the first quarter year-over-year periods, SG&A declined 7% to $1.4 million in the first quarter of this year.

As a percentage of revenue, SG&A fell from 13% to 9%.

Operating income for the first three months of 2011 increased 49% to $3.3 million from the $2.2 million level of the comparable 2010 period.

Operating income was level between consecutive quarters at $3.3 million to $3.4 million.

We don't often see any real impact from miscellaneous income or expense, but we did have an approximate $640,000 gain from the sale of our old fabrication facility in the first quarter of this year as reflected on the income statement.

Net income after tax increased 83% from $1.4 million to $2.5 million for the three months ending March 31, 2011 compared to the year ago quarter increase from 12% to 17% of revenue.

The sequential quarters of the fourth quarter 2010 to the first quarter this year, net income was up 27% from $2 million to $2.5 million.

If you recall, due to federal tax changes, we had a tax adjustment that resulted in a 42% tax rate in the fourth quarter of 2010.

This quarter our rate is at 38%, which we anticipate at this time to be constant throughout the year.

I say at this time, because there is only one factor in our business with less visibility than our sales revenues, and that's the direction of this government.

EBITDA for the first quarter of 2011 was $7.3 million, a 44% increase from the first quarter of 2010 when it was $5.1 million.

As a percentage of revenue, EBITDA grew from 44% to 49%.

Sequentially, EBITDA increased 12% from $6.6 million in the fourth quarter last year to $7.3 million in the first quarter this year, a respective 41% and 49% portion of revenue.

Fully diluted earnings per share for the first quarter this year was $0.20 per common share compared to $0.11 in last year's comparative quarter and $0.16 last quarter.

Now looking at our different revenue segments, starting with sales revenue, I will remind everyone that sales revenues, as opposed to rentals, consist of compressor, flare, parts, and rebuild sales revenues.

So total sales revenues more than doubled from the first quarter of '10, when they were $1.5 million, to $3.9 million in the first quarter of this year, with gross margins improving from 32% to 34%.

Sequentially, sales revenues declined from $5.4 million to $3.9 million, primarily due to a quarterly decline in compressor sales, but margins showed a slight improvement from 32% to 34%.

Compressor sales in the current quarter were $800,000 compared to last quarter when they were $2.9 million.

The quarterly variability and limited visibility in this business continues.

Gross margins were in the 12% to 13% range for both quarters.

Looking forward for our compression sales, the variability continues but with a brighter hue.

Our compressor sales backlog at the end of the first quarter this year was approximately $7 million, which is an appreciable increase from the $1.3 million backlog we reported last quarter.

Approximately 10% of this is international business, and we think we may see some increases in that going forward.

Although not a traditionally large source of revenue, but it will generate higher margins, our flare sales have increased almost 300% this quarter when compared to the year-ago period.

Margins are high in this business and acceleration is due to stricter environmental regulations.

Our margins were actually depressed a bit in the overall sales category this quarter due to an appreciably higher level of parts sales at lower than normal margins.

This is due to the disposition of some surplus engines and parts from our inventories.

They were sold at margins ranging from barely breakeven to 15% to relieve some excess inventory.

However, lower margins are better than write-offs and we were happy to move the equipment off our books.

Looking at the rental business, for the first quarter ended March 31, 2011, compared to the same period in 2010, rental revenues increased 10% to $10.9 million with gross margins staying essentially flat at 60% and 61%, respectively.

Sequentially, rental revenues were up from $10.6 million in the fourth quarter of last year to $10.9 million this quarter with gross margin increasing from 58% to 60%.

If you were on last quarter's call, I was a bit worried about margin pressure from the severely cold weather we had.

We were able to reduce costs in other areas and bring our rental gross margin back up to where we like it.

We anticipate continued cost pressures and are taking steps to alleviate those we can, including target price increases to cover higher oil, lube and fuel costs.

We will have some higher overhaul expenses in the next couple of quarters as we prepare idle fleet units that have been contracted for field installation.

This is a necessary maintenance expense and corresponding revenue will follow.

I think it's worthy to note that this is our sixth consecutive quarter of increasing rental revenues.

So we feel pretty confident that, albeit slow, this part of the business is recovering.

From a pricing perspective, the average monthly rental rate of an active unit in our fleet between the first quarter of last year and this year has not varied by more than 1% to 2%.

We think pricing may have stabilized at least for the present time.

Although our rental revenues have increased 10% over last year, fleet utilization has been flat at 68% to 69%.

For a couple reasons, there has been a decoupling of the traditional lock step correlation between utilization of revenue for us in this market.

One reason is that we are placing larger horsepower compression in the field than what we were getting back.

So while our utilization, which is based only on the number of units rented, is flat, revenues are rising.

The other reason that utilization has been retired a bit, is that we are building new, a fair amount of the compression being set.

This is because we are sold out of the higher horsepower models.

The ones we build are all going out on rent at 100% incremental utilization.

The calculation method itself, adding to the numerator and denominator at the same time, slows growth in the resulting utilization.

In any event, we anticipate the traditional relationship will reestablish itself in the future as more idle equipment moves out of the yards.

In fact, we think we will see some of this over the remainder of the year.

We ended the first quarter of 2011 with a rental fleet size of 1,978 units, which is a growth of 69 compressors during those three months.

This compares to a fleet size out of 1,788 units at the end of last year's first quarter, a growth of 190 units or 11% over the year.

NGS was in fact the rental industry's largest fabricator of fleet units in the first quarter of this year.

This is in spite of the two larger competitive fleets, being anywhere from 2 to 6 times our size.

Speaking of competitive fleets, with a continued expansion of our rental fleet, there is a milestone I would like to mention.

That is, as of the end of the fourth quarter 2010, according to the Gas Compressor Association, which is our industry data clearinghouse, NGS now owns the third-largest rental fleet in the US.

This wasn't an objective.

It does demonstrate our ability to grow at a relatively higher rate than our competitors even during depressed markets.

Capital expenditures for the three months of 2011 were $10 million, of which 98% went to rental compression with 100% being self-funded.

Looking at the balance sheet, our total short-term and long-term debt was $2 million as of March 31, 2011, and cash on-hand was $19 million.

Our cash flow from operations for the first three months of this year was $9 million,

As an indication of the cash we continue to generate, in even less than stellar markets, in the 12 months since March 31, 2010, our balance sheet cash has declined by only $2.4 million, while we spent $22.8 million in growth capital and reduced our total debt by $3.9 million.

From an operating and financial perspective, we think we are in an enviable position.

Our relative growth is the highest in the industry and our margins continue to be best in class.

Our pricing has stabilized.

Our debt is negligible.

We see many opportunities ahead.

We have started to capitalize on some of those in the new geographic areas we have mentioned in the past, including Eagle Ford Shale, by moving service and sales people into those plays.

International interest in our fabricated products is increasing.

And while we have started to work for some world-class customers, we have continued to prove to our existing customers the value of our equipment and services.

We think we are the standard to be measured by.

On the broader market horizon, the environment for natural gas is getting better too.

Again, slowly.

Total and horizontal gas recounts were down year over year.

And for the first time in decades, there are about as many rigs drilling for oil as there are for gas.

Throughout the 2000s, the ratio had typically been that 80% to 90% of rigs were after gas.

There has been a sea change in that.

That of course relates primarily to the disconnect in the relative value of gas and oil, but it's a positive leading indicator for gas.

This moving away from gas drilling helps reduce supply without noticeably our future markets.

Spot commodity pricing is stronger now than last year too, after gas prices were up 10% higher in all markets we are operate in over a year ago.

This is a bit contradictory with EIA's projections that average Henry Hub pricing will be down over 6% this year compared to 2010.

Although not really an apple to apple comparison between spot and annual Henry Hub averages, and not much can be gleaned from either, I have been pleasantly surprised as to the strength of price in this year.

However, commodity prices are fleeting; and we still have two shoulder seasons coming that could provide some down sweep; hence my continual caution of quarterly variability.

Storage, when is the last time someone mentioned storage?

Almost a minor indicator now, but it is in line with last year which is in line with the prior year, et cetera.

Longer term, the picture is even more encouraging.

EIA predicts the use of natural gas will grow by 40% over the next 15 years.

At a recent BP presentation, based on their energy 2030 review, forecasters say in magnitude of growth, it shows that natural gas is the only fuel that will grow over the next 20 years, including coal and oil, except for renewables.

And renewables will only be about 10% of the total energy mix in 2030.

By the way, even 20 years down the road, solar in any form barely shows up on the radar, beating, in its insignificance, only by the use of electricity as a transportation fuel.

I'm not so sure wood won't still hold a higher share than solar.

And we won't have to spend billions on it in the interim.

It's funny to me that this is the EIA, a United States government agency, predicting that solar, wind and cow dung will not have an appreciable share of the market even 20 years from now.

Man, this administration is going to be livid when they find out the information their guys are circulating.

So with all this, we have the present administration launching an investigation into why gasoline prices are so high.

And I always felt it was because of the price of oil set by OPEC and influenced by supply and demand forces, dictated it.

But my thinking must be off, because this administration is going to solve the problem by again trying to raise oil company taxes.

I guess they think the third time is a charm.

Remember, this isn't an exclusive Exxon, Mobil, BP, or Shell Oil problem.

It will affect every company of every size searching for oil and gas.

According to a Wood Mackenzie study, if taxes are increased by $5 billion per year on oil companies, which is roughly the amount proposed, we would see a $128 billion reduction in government revenue from loss to rents and royalties, not to mention job loss.

And domestic production would fall by between 400,000 and 1.2 million barrels of oil per day at 2025.

Wait a minute.

A tax increase on oil companies would reduce revenues of production?

Well, then how are we going to punish these guys and get the money to subsidize our favorite orphan energy schemes?

This free market stuff just never works the way I want it to.

All the while, companies still can't get back to work in the Gulf, and huge tracts of land, already opened by the states, are held off the market by the feds.

To further complicate the equation, our President visited Brazil in March of this year and promised the Brazilians that the US would help them develop their offshore oil and gas resources.

So we want to tax our oil and gas industry more so we can send that money to a foreign country for them to find oil and gas so we can import.

I am getting a headache.

The solution, you're in no part of it as natural gas.

I will work more on that later.

I'm pretty consumed now just trying to figure out our energy policy.

But I know one thing, nothing in this administration's present bag of tricks is going to do anything to reduce our dependence on foreign sources of energy or reduce our costs forward.

As a final comment, there is still a ways to go until the natural gas business gets fully back on a reasonable growth trajectory.

I think we are in the early process of that happening.

Simultaneously, we are seeing NGS continue to grow as a leader in this industry, and our growth is value driven as we have proven that margins and debt can be maintained at optimal levels, no matter the market, if you have the discipline and the right strategy.

As I close my call, as usual, I want to thank our employees for their continued efforts.

Our team gets nothing but stronger, and I am proud of every one of them.

Erica, that's the end of my prepared remarks.

I will turn the call back over to you for any questions listeners may have.

(Operator Instructions).

Our first question comes from Joe Gibney from Capital One Southcoast.

Just a question on your backlog on the sales side.

I fully understand the lack of visibility, but your boost here to $7 million, what are your expectations for burn rate out of that backlog this year?

Are we still in the same mindset with the compressor sales and revenue in general, and compressor sales are going to be flat year over year, are you still in that target?

Yes, I think so.

Between the remaining quarters, we've probably got 20/40 -- wait a minute.

Maybe 25/50, 25% split of that backlog for the remaining quarters of the year.

So, that will equal about, I think, the same as last year.

Any lift we get will be if we are able to garner anything else this year, especially in the fourth quarter to round that up just a bit.

Okay.

That's helpful.

And, then, on the margin side, an encouraging rental margin.

It's a fuel/lube cost issue as you guys combat that.

You certainly advertise that going forward that that's going to be a challenge, as is labor.

I was just curious, is it operational efficiency?

You referenced some targeted price increases to compensate for some of that, but how else are you fighting that upper trend?

It's tough.

I know certainly input cost creep is at play as well with engine prices up and delivery times there elongating there a little bit too.

Yes, yes.

There's not much that isn't going up, except for our pricing.

It's flat.

At least that is not trending down anymore.

We have actually absorbed two price increases on oil.

I am not even including diesel and gasoline as a vehicle fuel.

And another one came in about two weeks ago.

We just can't stand it much more.

We're going to target that.

Really, our guys in the field have done a great job on just watching your P's and Q's.

You can get a lot out in the field.

You can get parts changes.

You can get professional mechanics.

And, we've got professional mechanics where these guys know when to change a part and they know when to repair a part.

They can get that stuff back up and running and things like this.

It's just the little things.

It's not the one big thing, it's the thousand little things that contributes to that.

And, our guys, none of us were happy with the margin in Q4, although some of it was not our fault from some of those price inputs, and some of the weather issues.

But, they fought through the weather in Q1, of course, we still had some of that stuff, and pulling it out.

The attribute all goes to them.

Again, it's just day-to-day watching the cost of it all.

Understood.

One last quick one for me and I'll turn it back.

Just curious, I missed it.

The end of the quarter fleet count on your rental side.

I think it was 1,978 is what I said.

Yes, hold on.

I can't remember it myself.

Yes, 1,978.

Okay.

And, same 100% to 120% CapEx expectations year over year in '11, that you espoused last quarter?

Well, last year we did $22 million.

120% would be about $25 million, and we've already spent $10 million.

We may run a little higher than that maybe another 10% higher.

We do expect some of that capital to fall off towards the end of the year.

So, I might go 120% to 130% now.

Good deal.

I'll turn it back.

I appreciate it.

Our next question comes from Matt Beeby from Global Hunter Securities.

Please, state your question.

Can you hear me okay now?

Yes, go ahead.

Okay.

Sorry about that.

Can we maybe look at the sales margin a little bit?

It seems like there was maybe some one-time items in the quarter.

Do you think that the trajectory for improvement in that sales margin is still heading up towards the low 20% run rate toward the end of this year?

Well, we are hoping, Matt, it's been lower than what we have been used to in the last couple of quarters just from some competitive situations and jobs we wanted to get.

We are still running higher than industry as a whole, but we are thinking, going forward, we can raise those a little bit.

Of course, it helps with the backlog.

Coming up somewhat, we got those, some higher than the 12% to 13% margins.

So, we think we will see some improvement of that.

I'm not going to say we're being in the 20% range quite yet.

We may still need continued improvement in the business to get back after that.

Remember, we were getting those 20% and 25% when things were pretty hot and heavy.

But, I think we will at least get into the high teens towards the end of the year, and hopefully we can continue to improve that next year.

Are you there, Matt?

Yes, can you hear me okay, Steve?

Yes, now I can.

I apologize.

On the number of rental units added in the quarter, 69, that was a little bit higher than I think most of you expected.

You think that is a good run rate for additions for the rest of the year?

Do you see demand that is fitting for that kind of a run rate?

Well, I hope demand stays the same, but I actually hope we can stop building and move more out of the yards.

We think that will come off toward the end of the year.

Again, as I just mentioned with Joe on the capital stuff, we think it will slide off more towards the end of the year, just because we've got a particular build we are doing for two or three customers.

We think that activity is going to slow at that time, but we think there is going to be a little more, a little pickup of just some standard stuff that we've got in the yards.

What we have been building is the higher horsepower, which is 150, 200 horsepower for us, so we are totally sold out of.

Their standard rental package is just they are just popular in this market, where you need a little larger horsepower to move a little more gas lines, because of low pricing.

You're making economics.

We think that will trail off a little towards the end of the year.

Again, I wouldn't use 70 as a run rate for the quarter.

Again, if we look at, say, up to 130% of last year's capital -- this is up around $27 million, $28 million, so we spent a third of that this quarter, so we've probably got two-thirds over the next three quarters, as a rough estimate.

Okay.

That's helpful.

And, you briefly mentioned the units in the yard now.

Could you walk through real quickly the process of getting those back to working shape or working condition and maybe a cost per unit that you are looking at right now?

Well, it's the standard operating procedure.

When times are bad, when the stuff gets rented, an item gets rented, we just go back through and double-check.

Sometimes you don't have much expense.

Sometimes you have some overhaul expense on them.

So, it's pretty highly variable.

I'm hesitant to just run a number out there, because it wouldn't be accurate or helpful.

But, we've got a pretty good indication of some of that business we think we're in line for it.

And there's just been a general pickup.

As I've mentioned, we started setting just a little bit of equipment at Eagle Ford, and that's been equipment that we'd be able to place out in the yards.

We have actually moved a little more equipment to a couple of other areas that we haven't really historically been in.

So, there is some other areas that are taking some equipment that's idle, which, of course, is what we all want.

We can slow down the capital and still increase the revenues and the margins that way.

So, it's just kind of a mixed bag as to what we are seeing right now.

The big growth driver has been the stuff we have been building, because it is 100% utilized.

We are out of it.

But, we think there seems to look like there may be a shift towards, we're not going to need as much of that stuff going forward and we will be able to replace some of that with the idle equipment now.

Thanks, Steve.

Our next question comes from Gary Farber from CL King.

Please state your question.

Good morning.

Two questions.

I wasn't sure if I missed this.

Are there any particular areas or geographies you want to call out as far as being areas of strength or opportunity?

And, then can you discuss, if there's any update, even though it hasn't been that while, just your thoughts on the international markets?

Areas of growth, as we mentioned probably in the last couple of quarters, there's a combo on gas play at the Barnett that is pretty active.

So, the Barnett is actually driving some of this activity.

We mentioned the Eagle Ford.

We are starting to see some stuff going there.

So, and, there's a couple areas there that, obviously, I'm going to mention them because right now it's probably more of a competitive, maybe more in stealth mode in some of those until we get a little heavier concentration.

But, a couple areas I hadn't even mentioned that we are starting to see demand for our equipment that we're moving our stuff into.

So, [that's good] we've got some new growth starting up, it looks like, and, of course, in some existing areas.

I have a pretty good expectation for the Marcellus going forward.

I don't think that's anything imminent.

We think, next year, we will probably see a little bit more equipment going into that area from the Marcellus play.

We've got stuff in Appalachia, but just from the Marcellus maybe just starting to come on a little more.

We think if we begin next year, we'll start doing a little more momentum there too.

So, there's a broad array.

We are in all of the good areas now.

We've been targeting and spotting all those areas that we talked about forever, the Marcellus, Eagle Ford, et cetera.

We're starting to get either get some small piece of equipment into those or start getting a little better feel for when that stuff might be starting.

So, that's pretty positive in my mind.

From the international side, as I mentioned, about 10% of this backlog we've got now is international.

I think I mentioned on the last call, we seem to be getting more international calls, and we don't even market internationally.

I don't know if it's our good looks and superior intelligence or somehow people are finding us and like our equipment too.

But, I think there's -- a lot of it is South American.

There is some in the Far East.

There seems to be -- I think our little sift compressor has garnered some attention around some of this stuff.

It's our own proprietary line of compressors.

It fits well in these small horsepower plays, especially with the shale play.

These overseas ones that we are looking at aren't shale plays, but we are able to use some of our equipment in those.

So, I can't really explain it too much.

We have always had a lot -- not a lot, but we've always had some international exposure.

It just seems to be coming from different companies in different countries right now.

I think it'll give us some sort of toehold in some of these areas with some of these customers that I would expect we would grow as activity grows.

Okay.

Thanks.

Thanks, Gary.

At this time, we have no further questions.

Okay.

Erika, I appreciate your help.

And, I want to thank everybody for your time this morning.

I look forward to visiting with you again next quarter.

Thanks.

This concludes today's conference call.

Thank you for attending.