Natural Gas Services Group Inc (NGS) 2014 Q2 法說會逐字稿

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

(Operator Instructions).

Your call leaders for today's call our Alicia Dada, IR Coordinator and Steve Taylor, Chairman, President and CEO. I would now like to turn the call over to Ms. Dada. You may begin.

Thank you, Ross, and 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 are made pursuant to the Safe Harbor provision 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 actual results and 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 and 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 made as of the date of this call and 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 of that stated I will turn the call over to Steve Taylor, who is President, Chairman and CEO of Natural Gas Services Group. Steve?

Okay, thank you Alicia and Ross. And good morning and welcome to Natural Gas Services Group's second-quarter 2014 earnings review.

Our 16% year-over-year rental revenue growth continued at a strong pace with gross margins in the segment and the Company as a whole strengthening again this quarter. Shipments of gas compressors and liquids in oil shale oriented basins continued at a good rate and our planned fabrication expansion is on track to open up in the fourth quarter this year.

Compressor sales volumes were off a bit this quarter due to some delayed orders but our backlog is intact and we anticipate that this equipment will ship through the balance of the year. We are pleased with our performance this quarter and anticipate continued progress.

I will detail these comments as we go through the narrative so let's move on to the numbers. In the year-over-year quarters our second-quarter 2014 total revenues increased 8%, or $1.7 million to $22 million from $20.3 million in the second quarter of 2013. Rental revenues led that increase with a 16% annual growth rate.

Through sequential quarters of the first-quarter 2014 compared to the second quarter of this year total revenues were off slightly $400,000 to $22 million, primarily due to typically fluctuating compressor sales volumes. Comparing this current quarter to the second quarter of last year total gross margin was up 6% from $12.3 million to $13 million, or 59% of revenue. Sequentially, total gross margin increased 8% to $13 million and moved up from 54% to 59% of revenue.

Gross margins in all three of our product lines, rentals, sales, and service and maintenance increased this quarter to 60%, 43% and 60% respectively. Those continue to be industry high margins across the board.

SG&A was 12% of revenue this quarter which is the same rate as last year -- last quarter -- but we anticipate this to trend down slightly over the balance of the year. However, we have added engineering resources and plan on broadening our sales efforts so a 10% to 11% average rate will probably be what we see going forward.

Comparative year-over-year quarters for operating income reflect a decrease from $5.8 million in the second quarter of last year to $5.1 million this current quarter. This is driven by the higher SG&A rate and an 18%, or $800,000 higher depreciation expense resulting from our rental fee growth. Sequentially, operating income increased 17% to $5.1 million, primarily driven by higher margins across all our product lines.

In the comparative year-over-year second quarter's net income decreased from $3.8 million last year to $3.4 million this year for the same reasons I just mentioned. They increased 19% to $3.4 million between the sequential quarters of this first quarter of 2014 to the second quarter of this year. Our net-income-to-revenue ratio was 15% this quarter.

EBITDA increased in both year-over-year and sequential quarters. On a year-over-year basis EBITDA increased from $10.2 million in the second quarter of last year to $10.4 million in this current second quarter while sequentially EBITDA climbed 10% and is running at 47% of revenue. On a fully diluted basis earnings per share this quarter was $0.27 per common share.

Breaking down the products lines and looking at sales revenues, in the year-over-year quarters total sales revenues, which includes compressors, flares and aftermarket activities fell from $3.3 million in the second quarter of last year to $2.3 million in the second quarter of this year with the decrease primarily attributable to a lower level of flare sales than last year. For the sequential quarters total sales revenues were down the same amount, about $1 million, but this is probably due to the deferral of some compressor builds in subsequent quarters.

Reviewing compressor sales alone, in the current quarter they were about $500,000 compared to $700,000 in the second quarter of 2013 and $2.2 million last quarter. We anticipate that our sales level this quarter would have matched last quarter's but as I just mentioned some of the booked orders were delayed.

In the first quarter we received a good longer-term contract to build equipment for a large customer. And although the total dollar amount is study, the rate of production has been stretched out to more closely match their field production schedule.

Our compressor sales backlog is, however, inching up and stretching out and was $10 million to $11 million at the end of the second quarter of 2014. We estimate that this will be built out over the next two to three quarters.

Rental revenue had a year-over-year increase of $2.7 million, or 16% from $16.7 million in the second quarter of last year to $19.5 million in the current quarter. Gross margins were 60% of revenue this quarter compared to 62% in last year's comparative quarter. Sequentially, rental revenues grew almost 4% from $18.8 million to $19.5 million and we had a good moving gross margins with an increase from 58% in the first quarter to 60% this quarter.

If you recall, our rental growth rate between the fourth quarter of 2013 and the first quarter this year was a bit depressed due to a higher-than-normal rate of rental returns. But we were back on our typical growth rate this quarter.

Our churn is still higher than normal but we are keeping up with it. We continue to set newbuild units into the oil and liquid shales with a new contract rate the first six months of this year running about 20% higher than the comparable period last year. Fleet size at the end of June was 2,732 compressors.

We ended the second quarter with rental fleet unit and horsepower utilization in the 78% to 79% range. This is a net addition of 176 compressors year-to-date on a capital spend of $15 million this quarter for rental compression fleet expansion.

Our active rental fleet is now about 45% deployed into oil shales and liquids-oriented plays. Going to the balance sheet, our total short-term and long-term debt was less than $0.5 million as of June 30, 2014, and cash in the bank was about $14.5 million. Our cash flow from operations through the first six months of the year was $18.2 million.

From a macro perspective the price of gas held a little more promise last quarter than this but that has waned and it looks another flat year for that commodity. We've not seen growth there for a long time so it's not a detriment to our forward plans.

Our customers' activity levels appear to be staying strong in the liquids-oriented plays and the price of crude, which is driving most of that activity, looks to stay high through the year. We continue to add equipment to existing areas and think some of our new areas hold good potential. Overall, trends look to be positive and we are confident that no matter the environment NGS will continue to execute as required.

That's the end of my prepared remarks. I will turn the call back to Ross for questions anybody may have.

Thank you, Steve. (Operator Instructions). Jason Wangler, Wunderlich Securities.

Good morning, Steve. You kind of mentioned it there, I want to maybe dive in a little bit more on the churn and just what you are seeing from the gas. I guess you are just kind of saying it is more normalized?

Obviously the last couple of months we have kind of just seen the commodity trend down. Do you think we are maybe for lack of a better way of saying back to your baseline of gaswork and at this point you are just working on the oil liquids side, and whatever happens there will see if it improves but otherwise you are kind of back to the steady state that you have been at for a while now?

Yes, I think so. As I mentioned it is running a little higher than what it had historically been but I think we are getting a lot of movement on the gas side. And we continue, just like first quarter, we continue to see the gas areas being the weak part of the business, obviously.

As I mentioned the oil and liquids plays are still very active. We are running ahead of even last year on that and about the same pace as 2012. So that is still busy.

We've just got to watch it a bit. I think -- we're, what, this is August now -- yes, you would typically think any of the big weakness on gas would've already been happening and now we start going into a little of the colder weather in the fall and the winter and things like that that we may get, if not a strengthening, at least some stability in that piece of it. But we are back on the same quarterly growth rate we have been used to, so we think generally it is a positive trend.

Sure. That's great. And then just do have any -- I know the last time we chatted at least the Quad O stuff you maybe kind of see once in a while something kind of trickle out. Are you seeing much more there or maybe just your thoughts on the regulation and where that is going?

Well, we see a little movement on that thing. And of course as we have said on the last couple of calls, people are aware it's an environmental regulation that's come in to control methane emissions off locations.

Not the step change we thought it might be in the market but we are seeing some movement there. Typically much smaller equipment, the 20, 30 horsepower stuff, stuff we really don't deal in. It's more of a mom-and-pop sort of thing.

But we are seeing some of our stuff move out a little bit. It's just not as much as we thought, as quick as we thought. But it still going to be a good incremental market.

If you remember part of the rule went into effect this April. The next part goes into effect next April.

There's probably nothing but growth going to be in that thing. I think it still remains to be seen just how fast and at what rate it grows.

Great, and then, sorry, just last one if I could as far as the expansion. You said it is kind of on track. Do you pretty much think that as you get into 2015 is when we will really see the effect of being able to put up a lot more compressors with the expansion?

Yes. We are running pretty good right now. The expansion is going to do two things.

It's going to increase our total throughput at the middle facility and that's where the expansion is going. What we have done in the past is have shifted between Midland and Tulsa. Midland has always been primarily rental, Tulsa has been primarily sales in the past.

We have moved more rentals up to Tulsa in the past couple of years to help drive that rental piece but we never wanted to get to the point that where Tulsa was all rental. We still wanted to maintain some of that sales stuff.

So what we will see in the third and fourth quarters of this year, as the facility comes on in Midland, Tulsa has got -- again this backlog is primarily a third- and fourth-quarter driven event. So we are going to see Tulsa really come down in rental throughput, Midland start to pick up, so we may not see a whole lot at the end of this year as far as difference in capacity.

Next year will be on full speed. It will kind of depend on just how our sales backlogs and volume keep going next year as to the ultimate capacity we can see out of it.

But we are still looking in that -- we did 277 units last year. We are still looking in that 300, 325 this year and then 325, 350 next year.

That's great. I appreciate it, Steve.

Joe Gibney, Capital One.

Thanks. Good morning, Steve. Just a quick question.

Apologize if I missed this in your remarks, but the gross margin percentage on your compressor sales in the quarter, maybe what the dial in going forward. Obviously it's a very high sales gross margin in the quarter, just with the abhorrent mix and the low throughput but was just curious what it was in the quarter?

Yes, total sales was 43% and yes that includes flares and everything else. But actually our compressor sales were running in the 25% to 30% range so we are getting some really good margins on the compressor side.

Obviously the volume was down a little this time so it wasn't across a whole lot of business but our sales margins were running pretty good Q1 also. Compressor sales margins, I want to be sure and differentiate that.

So we are doing pretty good on that piece of business. Now part of that is about half our business now is international and you typically get higher margins on that business but we are hoping we can maintain that at least mid to high 20%s going forward.

Okay. And just general outlook on the flare side? It continues to sort of trend down a little bit here but just sort of flatlining at current levels or do you expect it to sort of step down a little bit as we get into 2015?

Yes, we have always said that the flare business is one of those open and closing windows. It has been opening for about three years and now it is starting to close.

So I think we saw the peak last year. Still a good decent business. Delivers higher margins for us. Not a whole of revenue but we see it coming off.

Of course if anybody pays any attention to the Bakken you see there's a lot of pressure up there. You've got flares down. We've got flares out here in the Permian.

Nobody likes flares, essentially. We don't mind them that much since we sell them. But there is a lot of pressure from local regulators and things like that to get them down.

So we think that will continue to trend down. I think we will hit a level -- that's to be determined what it is in 2015.

And there's always going to be the ongoing requirement for flares. And I think it may even be -- if you go back to say 2009 or 2010 before it really start ramping up there was a given level there.

I think we will probably settle out at above that level going forward just because with all the Quad O and regulations and things like that it is not quite as easy to be able to vent gas as you could before so yes there will be a lot of standby flares out going forward.

So long answer to a short question, but it is coming off but we don't think it will -- we think it will settle at a higher rate than what it was historically before.

Okay, helpful. And just last one for me on the G&A boost in terms of the incremental personnel you are adding, I think you referenced a little bit more engineering resources and sales, is that accurate? Just give a little bit more color on some of the boosted personnel as you guys ramp up to near capacity and looking forward?

Yes, we have brought up engineering more to a full speed sort of thing. Because certainly from the sales backlog has grown so we want a little bit more umph there from that standpoint. And certainly with some of the additional production going on there is some other things we're kind of looking at in the market.

We do want to increase our sales presence. That is probably going to be the bigger thing we look at towards the end of this year and into the first of the year.

We've got good growing areas. They are actually getting bigger to where they can support some more sales staff to keep them growing.

Then there's a couple of three new areas we really want to start pushing a little harder. So it's going to be in conjunction with our capacity expansion, keep the markets we are in growing and then try to move into a couple more.

Okay, fair enough. I appreciate it, Steve. I'll turn it back.

Rob Brown, Lake Street Capital.

Good morning. On your equipment revenue I think you give some pretty good thoughts there about how that ramps up toward the back of the year. But do you still think that the year can come in and that sort of $15 million range, or should we think about that as a little lower for the sales revenue?

We have said it will be in the $10 million to $15 million. And I am probably going to stick with that a little just because we constantly see this stuff moving around.

This quarter it moved around again and last quarter it moved around. So probably the midpoint would be a good number if you want to just put a pin in it.

We think it will -- a lot of the backlog will be built third and fourth quarter. Some may slip over into the first quarter next year.

One of the things we are getting into now is any orders we start getting -- of course those are booked orders, but any new orders also are tending to slip into next year anyway. But just because of raw goods deliveries, engines, compressors, coolers things like that.

So I'm hesitant to lean you towards the high side or the low side. I would say probably the middle somewhere is probably where we will end up on a full-year basis.

Good. Thank you. And on your capacity expansion, does that give you more rental growth, or just remind us again on the units that will open up and how you are shifting toward versus rental versus sales?

Yes, that is strictly a -- well not strictly -- but the expense is intended to increase our rental throughput now. We can build some sold equipment there, too, but typically we do that stuff up in Tulsa. We will do some smaller stuff some time.

Kind of depends on the floor space commitment whether it's in Tulsa or Midland as to what we can do. But yes, it is intended for rental expansion.

So again this year we think that will be in that 300 unit range, which is about 10%, 15% higher than last year and then once we get -- so that's just a fourth quarter really coming on fourth quarter. Then as we get into next year will be up more in that 325, 350 range.

Okay, good. And last question, could you give us an update on your liquid separation project? Where are you at on that and what's the next milestone there?

Yes, we are still looking at that from the point of -- from a little wellhead sort of separation skid. So we are still in the midst of final design.

We are looking at probably some other -- that process, a couple other adjunct processes and ancillary items there. So we are still on track to be looking at trying by the end of this year or into the next year to see if this is something that may be attractive to an operator, may fit into our bailiwick and things like that. So still very much on track, just kind of grinding out the designs and market data and research and things like that right now.

Okay, great. Thank you I will turn it over.

Craig Hoagland, Anderson Hoagland.

Hi, Stephen. I think you mentioned a statistic I just want to go back to, which is new contract rates were up, if I got it right, 20% in the first half?

Right. Compared to last year.

And does that refer to the rate of bookings for rental equipment, or what exactly does that refer to?

What it is is number of units set. So equipment actually set and earning revenue is running at a higher rate this year than what was in comparative period last year.

Okay. So 20% more units generating revenue?

Well that's been set. Now what you have to do, from the rental side you have the crew at the set then you also have the equipment that is terminated, so you get that churn on that and that's what I was referencing before.

So it's not necessarily -- doesn't necessarily equate to the growth rate. What it really points to is just the activity, primarily the activity in the oil shales is continuing at a high rate.

Yes, and that was a reference to the liquids part of the business?

Right. Because that is primarily -- from a capital standpoint that's 99% of what we are building, so that's the driver right now.

Right. Okay. Thanks, Steve.

Peter van Roden, Spitfire Capital.

Hey, Steve. Just a couple quick ones.

Can you walk us back through the number of units you added? You went through that pretty quick and I just wanted to make sure that I have it right.

Yes, I think it was 176 year-to-date. And it splits about half-and-half by quarter.

Yes. Okay. And then on the SG&A front, you mentioned that you are adding some salespeople and you are looking at some new areas. Are those gas or liquids areas?

Well, where we have salespeople located they actually have both areas though we are adding them from the liquid standpoint. But they will be able to capitalize if we get any movement in gas.

But we have the sales guys located in strategic areas around the country in these basins. So for example, the Dallas-Fort Worth area you've got the oil and gas out there, same way in the Rockies area and stuff like that. So they will be able to call or chase business in either one of them but our primary direction is for the liquids plays.

Okay. And a final one for me is, some of your competitors I guess in the last month have announced some decent sized acquisitions. Do have any thoughts on those?

Well, I know most of those guys, I wish them well. Some of them looked a little expensive. I think the market seems to think so too.

But I don't know, we will watch and see how it all plays out. It's not any new players, it's just combinations. So we are all familiar with what, how they operate and what they do.

I think it has confirmed that we continue to be the most profitable company in the industry at least on an EBITDA-to-revenue ratio. So we are able to see some numbers we haven't been able to see before. So I don't think it changes the competitive dynamics a whole lot but it remains to be seen and see how it all works out.

Do you think it helps you or hurts you from a pricing perspective?

Typically consolidation would help. Now again that remains to be seen too. We still continue to be the highest priced guys around and you would hope that some of this would help from that standpoint.

But we will have to kind of see what happens. Dynamics change and things like this. So it is kind of hard to tell right now.

Okay. That's all I had. Thanks.

Veny Aleksandrov, FIG partners.

Hi, Steve. Good morning. A very short question on the utilization.

You said 78%, 79% in the quarter. Having in mind that the small compressors and the dry gas are not doing so great as the rest of the fleet, how much space for improvement do you have from the 79%?

Yes, most of the overhang is the dry gas stuff and that is what we've had for a while on that. So I think we will see a continued improvement on that.

We get into this situation we are adding so much equipment each year, we are growing the fleet 10% to 12% a year, which is the fastest growth rate in the industry. So you kind of get some quarterly variations on that utilization.

You may have a point or two swing in some of that stuff. Because we are adding it so quickly we are putting that stuff out but yes you may have a little 10 or 20 units sitting around over the quarter makes a difference and a point on the utilization.

So I'm not too concerned about a little variations on the quarter on it. But I think we will continue to see some improvement over time on that. If you look at our utilization chart over time you kind of you will have little sports of growth in it and you kind of flatten out a bit.

I think as things consolidate and equipment going out then you have little spurs and then it flattens a little bit. So I think we are kind of in that pace right now where it is kind of flattened in that 79% range or so. But I anticipate it continuing up next year.

I appreciate it. Thank you.

(Operator Instructions). At this time there appears to be no further questions.

Okay, Ross, appreciate it. Alicia, thank you and thank you everyone for joining me on this call. I appreciate your time this morning and look forward to visiting with you again next quarter. Thanks.

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