Natural Gas Services Group Inc (NGS) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group 2015 second-quarter earnings call.

(Operator Instructions) Your call leaders for today's call are Alicia Dada, IR coordinator; Steve Taylor, Chairman, President, and CEO.

I would now like to turn the call over to Ms. Dada.

You may now begin.

Thank you, 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 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 forecasted results.

Those risks include, among other things, the loss of market share to competition or otherwise; 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.

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

Steve?

Thank you, Alicia, and thank you, Erica.

Good morning, everyone, and welcome to Natural Gas Services Group's second-quarter 2015 earnings review.

I think we had a little confusion on the phone numbers this morning, so I appreciate everybody that's dialed in twice.

Our second-quarter results demonstrate the optimum position occupied by NGS.

Our production-oriented compressor services somewhat insulate us from the severe swings experienced in the rig-dependent portion of the industry and contributes to our ability to better weather any resulting storm.

NGS's capacity to execute results in the excellent margins, superior cash-generating capability and mitigating revenue impacts achieved this quarter.

This is a strong quarter, and I'll comment in more detail as we review the financials.

Starting with total revenue and looking at the year-over-year comparative quarters, our total revenues increased 10% or $2.2 million from $22 million in the second quarter of 2014 to $24.2 million in the second quarter of 2015.

We had revenue gains across all product lines this quarter compared to the same quarter last year, with rental revenues up 1%, sales revenues almost doubling, and service and maintenance revenues increasing 6%.

For the sequential quarters of the first quarter 2015 compared to this current quarter, total revenues were down a little over 2% from $24.7 million to $24.2 million.

Sales revenues rose almost 10% for the quarter, or nearly $400,000, which partially offset a decrease of 4%, or nearly $900,000 in rental revenue.

Reviewing the comparative six-month year-to-date periods, total revenues were up 11%, with rental revenues increasing 5%, or $2.1 million.

Sales revenues were up $2.6 million, which is about 50% higher than last year's six-month period.

Moving to total gross margin and comparing the second quarter of last year to this current quarter, total gross margin was up 8% from $13 million to $14 million, with both periods holding in the 58% to 59% of revenue range.

Sequentially, total gross margins was off 1% to $14 million.

The new six-month year-to-date comparison's gross margin dollars were up 12% from $25.1 million to $28.2 million.

As a percentage of revenue, gross margin this year to date is averaging 58% compared to 56% to 57% in the respective six- and 12-month periods of 2014.

This is actually even better than it looks considering the sales, which delivered lower gross margins or a larger component of revenue this year than last year.

Our sales, general and administrative expenses continue to be the lowest in the industry and typically run in the 10% to 12% range of revenue.

We were at 12% this current quarter compared to 10% last quarter and 12% in the year-ago quarter.

For the comparative six-month year-to-date periods, SG&A dropped from 12% in 2014 to 11% this year.

If you read our earnings release this morning, you are aware that during the first half of this year NGS initiated a review with the intent being to optimize our rental fleet.

Pursuant to that review, we decided to make adjustments for rental equipment that has been relatively underutilized over time.

This agreement is primarily older gas compression packages with an average age of 11 years old.

They were originally designed for dry natural gas shale operations.

As a result of this review, this quarter, NGS reported a non-cash, pre-tax charge of $4.4 million related to the retirement of rental fleet equipment and an additional $100,000 for a nominal increase in bad debt and inventory allowances.

For perspective, while the 258 units we retired represent about 9% of the rental fleet, they account for only 2.6% of our net book value.

Although the equipment is mechanically functional, the gas market is oversupplied and the economic viability of the equipment going forward is limited.

However, over their rental lives, these retired units generated revenue equal to 2.3 times their cost, which resulted in gross margin dollars totaling 140% of the investment.

In the following comparisons for operating income and net income, I'll note the effect of the fleet retirements on the second-quarter results so that you are aware of the impact.

Operating income increased by 6% in the comparative year-over-year quarters to $5.4 million, a decrease by almost 6% in sequential quarter comparisons.

This decrease was primarily due to lower rental revenues in the second quarter of 2015 compared to the first quarter this year.

Operating income is running at 22% of revenue for the quarter compared to 23% for the second quarter of 2014 and the first quarter of 2015.

Considering the equipment retirements, operating income in this quarter, current quarter, goes from $5.3 million to an adjusted $919,000.

On a six-month year-to-date basis, operating income increased 19%, or over $1.7 million, and is running at 23% of revenue compared to 21% of revenue last year.

In the comparative year-over-year second quarters, net income increased 4% to $3.5 million, up from $3.4 million in the same quarter of 2014.

The sequential quarters of Q1 2015 and Q2 2015 saw net income dip from $3.7 million to $3.5 million.

Considering fleet retirements, net income was reported as $614,000 in the second quarter.

In the six-month year-to-date periods, net income increased 16% from $6.2 million to $7.2 million.

Our net income continues to run at 14% of revenue in all comparative periods.

On a year-over-year basis, EBITDA increased 7.5% from $10.4 million in the second quarter of 2014 to $11.2 million in this current second quarter of 2015.

Sequentially, EBITDA was down 4%, or $460,000, from $11.6 million.

On a six-month year-to-date comparison, EBITDA increased $3 million, or 15%, from $19.8 million to $22.8 million.

NGS's EBITDA-to-revenue ratios continue to run between 45% and 47% in all comparative periods.

Since our fleet optimization adjustments were non-cash items, there is no effect on our EBITDA metrics.

On a fully diluted basis, earnings per share before the effect of any special items was $0.28 per common share, up 4% from $0.27 in the year-ago quarter but down $0.01 per common share from the previous quarter.

Reported earnings per share were $0.05, including the special items adjustment.

As I review our operating segments, the financial comparisons will not reflect any impact from the fleet optimization adjustments we've made.

Total sales revenues, which include compressors, flares, and aftermarket activities, increased significantly in the year-over-year quarter from $2.3 million in the second quarter of 2014 to $4.3 million in the second quarter of 2015.

This increase was primarily attributable to higher compressor sales than last year.

For the sequential quarters, total sales revenues grew nearly 10% from $3.9 million to $4.3 million.

Reviewing compressor sales alone, in the current quarter they continued strong at $3 million compared to $500,000 in the second quarter of 2014 and $2.5 million last quarter.

Year to date for the comparative six-month periods, compressor sales have doubled when compared to the same period last year, and gross margins have averaged 19% this year.

Our sales backlog has held up well in the last couple of quarters, with the current backlog at approximately $3.5 million as of June 30, 2015.

Last quarter's backlog was essentially the same, so we have been able to replace everything that we were building and shipping with new business.

This portion of our business has proven to be surprisingly steady this year.

Rental revenue had year-over-year quarterly growth of nearly $250,000, or 1%, from $19.5 million in the second quarter of 2014 to $19.7 million for this current quarter.

Rental gross margins exhibited a healthy increase from 60% in last year's comparative quarter to 64% this quarter, and up from 62% in the first quarter this year.

This margin expansion, combined with our higher rental revenues, contributed to 8% higher rental gross margin dollars in this current quarter.

Hats off to our field management and personnel.

They continue to do an excellent job controlling their direct expenses while maintaining our service response to our customers.

Sequentially, rental revenues dropped a little over 4% from $20.6 million to $19.7 million.

The gross margins increased to 64% for the current quarter.

Our rental margins have averaged 62% over the last four quarters, with this being the high-water mark over the past couple of years.

While we have managed our operating expenses well, we do anticipate continued pressure on margins.

Rental fleet size, including the results of our optimization exercise, at the end of June was 2,662 compressors, and our actual utilization was 75% for the quarter.

Counting active and contracted compression, our utilization is at 77%.

Counteracting some of this utilization pressures are pricing strength.

Average rental rates across the active fleet increased 6% in the comparative year-over-year second quarter periods and still posted a 1% sequential gain these past two quarters.

Looking at pricing for new leased equipment only, which gives a more real-time pricing picture as compared to the average pricing we just talked about, rental pricing in the year-over-year second quarter period was up 5% to 6%, but sequentially it was flat.

We have had excellent pricing power in the last few years and have constantly increased our average rental prices.

But to no one's surprise, it looks like it's starting to peak.

We continue to experience pricing pressure from customers and competitors and expect this to continue going forward.

The good news is that we have built up a reserve, so to speak, of premium pricing that we can employ to our advantage.

Turning to capital expenditures, I had mentioned in the past that we anticipated we would spend in the $10 million to $15 million range for the first six months of this year.

We came in a little under that, and year-to-date we have spent $9.6 million, of which $8.6 million of that was rental fleet compression, with the balance being service vehicles and shop tools.

Looking at the second half of 2015, unless we see an uptick in business or some special projects we don't anticipate, I doubt we will see capital expenditures exceed $5 million.

That will be primarily allocated to our new 500-horsepower compressor packages and smaller vapor recovery units.

Going to the balance sheet, our total short-term and long-term bank debt is approximately $400,000, and cash in the bank was approximately $21.5 million, both as of June 30, 2015.

Our cash flow from operations was $13.7 million for the quarter and $25.3 million for the year to date.

This increase was aided by working capital improvements in conjunction with a $4 million tax refund I had mentioned on the last call.

Our free cash flow this quarter was $15.8 million.

Summarizing, I'm pleased with our performance this quarter, especially our cost discipline and superior gross margin results.

The EBITDA, operating income and net income were strong, and cash flow accelerated this quarter.

NGS was well-positioned.

And, as I mentioned on the last call, we continue to roll out our new products and expand our sales force as opportunities dictate.

Looking forward, I think the market will be increasingly tougher.

Oil pricing does not appear to me to gain consistent strength until well into 2016, and I expect utilization and pricing pressure to continue.

Our capital spending is expected to continue at a low level, and we will generate exceptional yields from our free cash flow.

Our balance sheet has no peers in our industry, and we remain confident in our ability to maneuver this volatile market.

Erika, that's the end of my prepared remarks, and I'll turn the call back to you for any questions.

(Operator Instructions) Rob Brown, Lake Street Capital Markets.

Congratulations on a nice quarter.

On your fleet optimization, do you feel like you've fully taken out that business now and you are set for a while?

Or is there some risk in that gas side as well going forward?

That you have to do another optimization?

No, no.

I don't think so.

We've looked at it for a few months here and just trying to figure it out.

And as I mentioned, it's primarily a lot of the older gas shale driven, kind of like the Barnett Shale era, sort of equipment.

Nothing wrong with the equipment, but obviously the gas market hasn't done much the past few years.

So it just looked like it was time to make a decision on decent equipment.

We've still got it.

We're not going to cut it up.

If we can use it, we can use it.

But the economic viability of it in this low gas price market that continues just seem to be limited.

Okay, that's good.

And then you mentioned pricing trends getting a little tougher.

How do you sort of see that playing out?

Is it down 5% to 10%?

What is sort of the range you are thinking of there?

It's hard to quantify that.

There's two sources of pressure.

Obviously you have pressure from customers needing some pricing relief, and then you have the pressures from competitors.

You know, the customers we always seem to have better luck with because obviously we've got a relationship there we can negotiate.

They are aware of our equipment and our service capabilities and things like that.

And we tend to come out pretty good shape on those.

And I'm happy with where we are from those negotiations we've had.

And I think we've probably got the majority of our larger customers behind us on that stuff.

And we haven't -- our range has been -- on discounts has been in the probably the 5% average plus or minus a couple of points around that.

So, I'm happy with where that is.

The wild card and the one that's obviously hard to predict is what competitors are doing.

And that varies by competitor and the region and the geography because you have different players in each area.

They've got different utilizations, they've got different cost basis, they've got different strategies and, you know, marks the one making everything else.

So that's the one that's a little tougher.

From a -- all I have to go on is if you look back in 2009 and 2010 at the price of deterioration we saw back then, over the full span of the downturn being a couple of years, we saw about an overall 10% price deterioration on average pricing.

And that, again, took a couple of years to fully get baked in.

It wasn't overnight; it was over a period of time.

So I don't know if that's right or wrong.

That's really about the only mark we've got to look at.

Okay, great.

Thank you.

I'll turn it over.

Joe Gibney, Capital One.

Where are these compressor sales orders coming from?

A bit surprised by the resiliency of it.

You certainly referenced that in your remarks.

Just curious if you're getting some international mix or just -- it's been surprisingly resilient there on the inbound order side.

So I was curious if you could comment on that.

Yes, you are right.

And as I comment -- because normally going into these, sales takes a hit.

And obviously sales is a big piece of our business compared to other competitors.

Competitors tend to have a bigger sales component.

We've intentionally reduced ours over time to concentrate more on rentals.

So it has been a little surprising that it's held up.

It's a mix.

The international stuff certainly doesn't get hit as hard.

In a downturn like this, the capital tends to hold up better.

But we've been able to capitalize on some new customers coming in.

And you know, we've got two or three legacy customers that just continue to put in orders, and these tend to be bigger guys that will march through these storms.

And obviously they have cutbacks too, but they have core areas that they are looking at developing and keeping going.

So a combination of some international stuff and then just some good core legacy customers just staying busy.

Okay.

I was also curious if you could talk a little bit about your horsepower mix and some of the initiatives to kind of move a little bit higher on the horsepower side.

I think the last call you talked about a couple 400-horse units getting delivered in the field.

And now with the fleet retirement over 200 units here, I'm just trying to get a sense of how you characterize average horsepower within your rental fleet now and maybe broader strategic initiative to get a little bit higher there.

Yes, the -- this 258-unit rationalization, as you can assume, is typically much lower horsepower stuff.

So it's due to the equipment and the 100-horsepower average.

So this will move the -- just that alone will move the average up a bit.

Not the whole lot, but we may move up 10 horsepower or so just on average.

But yes, the bigger part of that initiative is this 400- to 500-horsepower frame that we are building and coming out with in our own CiPerator compressor line.

The full rollout is really not going to happen until about Q1 of 2016, where we have our frame ready for the patterns being built, frames being cast, machine and things like that.

And to refresh everybody's memory, this is our own compressor line built from the ground up.

We commission castings, machine, everything else.

So there is a lead on some of that stuff.

Now, the equipment we are putting out now is other compressors we are buying in the market, patching it up and putting it out there.

Good compressor line, nothing wrong with them.

But not -- it won't be our go-to line as we go forward.

So we are -- we've got those 7 or 8 units I've mentioned in the last couple of calls out.

I think about half of them are out on location, yet haven't started up yet.

The other half, 3 or 4, will be delivered in the next 30 days.

So those are going out.

We'll get some traction from the sales guys on units going.

We've actually -- we'll start building some more equipment and start building some idle inventory up in that 400- to 500-horsepower range, too.

Then hopefully by the -- by Q1 2016 one we've got -- we're already going into more robust production with our own line that we've got some of this is a little more traction in the market.

People know us a little more for that horsepower and everything else.

Going above that horsepower right now, we don't have any plans from the point of anything on paper.

We are always looking at that market to see what's going on with it.

There is some attractiveness to the bigger horsepower markets.

We think we can make even incrementally better margins on it because typically when you are building higher-horsepower equipment on a dollar-per-horsepower basis, it's cheaper to build.

It's cheaper to operate, things like that.

So we think over time we'll be continue to creep up into that.

Obviously we haven't been moving into it very fast, but this downturn gives us an opportunity to move into that 400- to 500-horse, where we think is a pretty good opportunity for us through existing customers or existing areas, et cetera.

But also, we think we just feel like that's probably not a really -- maybe more of an underserved market that we can really capitalize on.

All right.

Fair enough.

I appreciate it, Steve.

I'll turn it back.

Jason Wangler, Wunderlich.

I was just curious, on the inventory side on the balance sheet, you still have quite a bit there.

Could you just walk us through kind of the thoughts as we wind down the build program just how you see that cadence going?

Is there some cash flow to unlock further on that or what we have there?

Yes, some of that is a byproduct of these slowdowns.

One of the things first address this rationalization we have just talked about, about $1 million of that is coming off the balance sheet and going into inventory because we are using some of that.

Now, that wasn't written down obviously, but we are transferring it from assets to inventory because some of this equipment -- again, the equipment is good and we can reuse some of this equipment in some future builds and things.

So that's going to increase the inventory right there about $1 million.

When you get into these downturns, that you know the last couple of, they happened so fast you're -- whether it's the oil price drop or gas price drop happens over a quarter.

And if you remember, a year ago, engines were about a six-month delivery.

So when you get a difference in timing like that, we and probably everybody else have engines coming in that you don't need and you can't cancel.

So, that builds inventory there, too.

We're not going to build stuff just because we've got engines.

So we preserve the engines, stack them, and the good thing about an engine, it doesn't go bad over time.

So, we'll use it when things turn around.

But you do get some inventory increases that way.

So you get some of this just by virtue of going into a downturn.

Now, obviously we've got enough cash on the balance sheet to stand that hit.

But we are looking at trying to -- we are looking at the initiatives going on and looking at the inventory to see what we need to do, have to do, want to do and things like that.

And we increase that inventory reserve just a little.

Not much, but we are constantly looking at that.

And hopefully there's some other working capital items we can release some more cash out of.

Okay.

So maybe just as I think about it, based on that, you are probably pretty close to getting done with the orders of inventory just given the lag time and sitting in August now.

And so maybe it's a relatively static number, but what it basically does is when you get back to building that's just basically what you can use to kind of kick off that program, I guess.

Does that make sense?

Right, right.

Yes.

These downturns, you'll typically carry a little counterintuitively a higher level of inventory you want just because you've got -- had equipment coming you couldn't -- you thought you were going to need and you couldn't shut off.

But yes, you won't see it climbing.

You know, get quarterly variations in it, but from a perspective of climbing any more, no, you shouldn't expect that.

Okay.

Great.

I'll turn it back.

Thanks, Steve.

(Operator Instructions) At this time, we have no further questions.

Okay, thanks, Erika.

Tank everybody for joining me on this call.

Appreciate your time this morning and look forward to visiting with you again next quarter.

Thank you.

This concludes today's conference call.

Thank you for attending.