Natural Gas Services Group Inc (NGS) 2015 Q4 法說會逐字稿

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

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

(Operator Instructions).

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

I will now turn the call over to Miss Dada.

You may begin.

Thank you, Erica, 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 through 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.

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

Steve?

Thank you, Alicia and Erica.

Good morning and welcome everyone to NGSG's fourth-quarter and year-end 2015 earnings review.

The fourth quarter of 2015 saw a strong finish for NGS and a challenging year for the petroleum industry and I'm exceptionally pleased with our performance.

With a backdrop of one of the worst energy markets in decades as well as an unprecedented decline in customer activity in capital spending, our revenue and income demonstrated resilience that far outpaced general activity.

Total revenue in gross margins fell only 1% when compared to 2014, that year being a record for both.

We also experienced extremely strong free cash flows in 2015 with operating cash flows running at 43% of revenue, a level very few companies are able to match.

In 2015, our rental gross margins grew to their highest average in five years and sales revenues and margins continued at their robust levels.

We continued to delivered strong free cash flows and build our balance sheet cash.

With that, let's get into the details.

Starting with total revenue and looking at the year-over-year comparative quarters, our total revenues were lower this quarter by 5% or $1.3 million and declined from $27.1 million in the fourth quarter of 2014 to $25.8 million in the fourth quarter of 2015.

Rental revenues were off 14% or $2 million this quarter compared to the same quarter last year while sales revenues increased 23% or $1.5 million.

For the sequential quarters of the third quarter of 2015 compared to the fourth quarter of 2015, total revenues were up 21.5% or $4.6 million to $25.8 million while rental revenues decreased by $865,000 this quarter, compressor sales increased almost $5.4 million to $7.8 million and drove total revenue growth for the quarter.

On a 12-month full-year basis for 2015, total revenues eased a little over 1% to $96 million with rental revenues off the previous year's high by approximately 3% or $2.6 million.

The revenue level NGS achieved this year is I think exceptional.

The prior year 2014 was a record year for our revenues and to replicate that during a period of tremendous turmoil in the industry to within 1% is quite an accomplishment.

I congratulate and thank all of our employees for their tremendous efforts.

Moving to gross margin and comparing the fourth quarter of 2014 to the current quarter, total gross margin was lower by $1.9 million and moved from $14.9 million to $13 million and decreased as a percent of revenue from 55% to 51%.

This reduced margin and ratio was primarily driven by a mix shift toward sales and this compared to the fourth quarter from 24% sales in last year's fourth quarter to 30% this current quarter along with lower margins in our ancillary flare parts and rebuild businesses.

The highlight though was that both of our largest revenue drivers, compressor rentals and sales, continued to deliver industry-leading margin levels, low 60%s and mid-20% ranges respectively.

Sequentially total gross margin increased nearly $1 million to $13 million which equated to 51% of total revenue.

This compares to last quarter's gross margin of 57% with the decrease being driven by a higher percentage of sales in the fourth quarter of 2015 that traditionally have a lower margin.

This is the same mix shift I just mentioned.

On a full-year basis compared to 2015 to 2014 gross margin was off only $560,000 to $53.3 million.

We maintained the same 56% of revenue level that we saw in 2014 and again, this is only 1% less gross margin dollars than we achieved in 2014 which was our highest gross margin level in the Company's history.

Sales, general and administrative expenses fluctuate quarterly as a percentage of revenue but we have maintained those costs at an average of the 11% of total revenues for the past two years.

Operating income decreased from $6.7 million to $4.6 million in the comparative year-over-year quarters primarily due to lower quarterly revenues and the aforementioned mix shift.

However, operating income was up from the third quarter of 2015 by nearly $900,000 in sequential quarters and is running at 18% of revenue for both quarters.

On a full-year comparative 12-month basis, operating income declined 11% to $19.7 million but still ran at 21% of revenue this year.

The decline was primarily due to higher depreciation expenses of $1.3 million from rental fleet additions.

Correspondingly, recall that we did retire $4.4 million of underutilized rental fleet equipment in the second quarter of 2015 that resulted in a lower operating -- a lower reported operating income level of $15.1 million for full-year 2015.

The comparative year-over-year fourth quarter's net income decreased from $4 million or 15% of revenue to $3.3 million this year or 13% of revenue but increased from $2.6 million to $3.3 million, nearly 28% in the sequential quarters of Q3 2015 compared to Q4 2015.

Net income was $14.1 million in 2014 compared to $10.1 million in 2015 including a fleet optimization charge or $13.2 million without the one-time assessment.

Again, this decrease was primarily attributable to the $1.3 million increase in depreciation in 2015.

Without consideration of our fleet optimization charge, net income held in the 14% to 15% range for both full years of 2014 and 2015.

Our income tax rate in the fourth quarter of this year was 30.4% with the full-year 2015 rate running at 33.5%.

EBITDA decreased from $12.4 million or 46% of revenue in the fourth quarter of 2014 to $10.2 million or 40% of revenue in this current fourth quarter but increased from $9.4 million to $10.2 million in sequential quarters.

Comparing the full years of 2014 and 2015 and not considering the non-cash charge, EBITDA decreased only $1.3 million or 3% and averaged 45% and 44% of revenue for the respective years.

Including the fleet optimization charge for the same comparative years, EBITDA declined from $43.7 million to $38 million in 2015 but still held at 40% of revenue even including the equipment charge.

On a fully diluted basis, earnings per share this quarter was $0.26 per common share compared to $0.32 in the year ago quarter and $0.20 the previous quarter of Q3 2015.

Our full-year diluted EPS was $1.03 per share without the equipment write-down or $0.79 per share when considering the equipment charge compared to $1.11 per share on a fully diluted basis for 2014.

Total sales revenues which include compressors, flares and aftermarket activities grew $1.5 million in the year-over-year quarters from $6.4 million in the fourth quarter of 2014 to $7.8 million in the fourth quarter of 2015 primarily attributable to higher sales of compressors in 2015.

For the sequential quarters, total sales revenues increased nearly $5.4 million from $2.4 million in the third quarter of 2015 to $7.8 million in the fourth quarter of 2015.

This sales increase between the two quarters shifted our mix of sales versus total revenues dramatically from 12% to 30%.

Reviewing compressor sales alone in the current quarter, they were $7 million compared to $5 million in the fourth quarter of 2014 and $1.3 million in the third quarter of 2015.

We ended 2015 with $13.8 million in compressor sales compared to $10.9 million in 2014 with both years within the $10 million to $15 million range I had forecasted in previous calls.

When you consider that during the industry downturns capital expenses and subsequently capital equipment sales declined, this was an exceptional year for sales and we bucked the industry trend.

Not only did we garner more revenue but our gross margins came in at 21% within our historical range and typically higher than the competitive averages.

The point being that we didn't sacrifice margins and still increased revenue.

I expected to see a lower level of sales revenue but it didn't happen.

However as I have said repeatedly in the past, I still expect that it will decline but so far our backlog has kept pace.

Our compressor sales backlog was approximately $4 million on both December 31, 2014 and 2015.

This compares to $3.5 million at the end of the second quarter of 2015 and $6 million at the end of the third quarter of 2015.

Rental revenue had a year-over-year quarterly decrease of $2.9 million or 14% from $20.6 million in the fourth quarter of 2014 to $17.6 million for this current quarter.

Gross margins were however 62% for both quarters.

Sequentially, rental revenues were lower by nearly $900,000 to $17.6 million with gross margins this quarter at 62%, an improvement from 60% in the previous quarter.

Looking at the full-year comparison, rental revenues were off 3% from $79 million to $76.4 million.

Gross margins this year were 62% and have expanded over the past four years averaging 62% this year, 60% in 2014, and 58% in 2013 and 2012.

Diving into this a little more, our gross margin per unit per month has increased 24% and grew by 23% on a gross margin per horsepower per month over the past three years.

Average rental rates across the active fleet actually increased approximately 1% for full-year 2015 compared to last year.

Average rental rates for newly set units this year are a little over 4% higher than we saw in 2014.

These are positives.

This is not a real indicator of strength in this environment.

There is more so a higher percentage of more expensive gas lift units being rented this year as compared to smaller, less expensive dry gas oriented units.

Fleet size at the end of 2015 was 2622 compressors and we added 52 new compressor units to our fleet in 2015.

This is down from our 2014 year-end total fleet size of 2879.

If you recall, midyear this year we decided to retire 258 units from our active fleet and record a $4.4 million non-cash charge.

We were also able to sell 42 older used units into the market.

Our active and contracted rental fleet utilization dropped from 73% last quarter to 70% this quarter if you include active and contracted units or 69% on just active units.

In 2015, we spent a total of $12.5 million in capital expenses with $9.6 million in the first half of the year and $2.9 million in the last half.

This represents an approximate 80% full-year decline in capital expenditures compared to 2014.

The second half spend consisted solely of our newly introduced compressor models, those being the larger 500 horsepower frames and the smaller environmentally driven vapor recovery units or VRUs.

We are not building any other rental equipment right now.

If you recall, we started pulling back on our fabrication and CapEx spend in the fourth quarter of 2014 quicker than just about anyone else.

Looking back, this was also when the North American rig count peaked.

This is identical to our experience in 2008 when we decreased our CapEx in the fourth quarter 2008, the same quarter that the rig count peaked in.

I point this out only to show that we do have some early insight into when our business may be headed down which also contrasts with the present situation and reinforce that there are no real clear indicators in the market now one way or the other up or down.

Said another way, if you think projecting 2015 was murky, 2016 is worse.

There is absolutely no visibility as to what customers may require for compression equipment.

I do not anticipate any uplift in the market and the bias over the next couple of quarters is down.

As such, all I can tell you is that we will earmark $5 million for CapEx for the first half of the year but will spend what the market demands whether that is higher or lower.

Going to the balance sheet, our total short-term and long-term debt remains less than $500,000 as of December 31, 2015 and cash in the bank was $35.5 million for net cash position of $30 million.

Our cash flow from operations was $41.6 million in 2015.

This represents a very strong cash generation capability and ran at 43% of revenue in 2015.

From a liquidity perspective, we are in an enviable state.

In addition to our robust cash balance, we will continue to generate strong levels of free cash flow throughout the year and our line of credit was renewed this past year at the same level and rates as before.

We have self-funded over $180 million in capital expenditures since 2009 solely through internal cash flow.

That is extraordinary for a capital intensive business like ours.

Wrapping up, on a revenue basis 2015 was the second best year in NGS's history and it missed first place by only 1%.

Additionally we were able to deliver top-notch results in all respects all the way down the income statement not to mention the balance sheet and cash flow statement.

Not only did we perform financially but our listed common stock had one of the best records in 2015 too, with it down only 3% for the full-year.

Now I normally wouldn't brag about our stock being down but when every one of our peers and the vast majority of oilfield services companies declined anywhere from 20% to 70% on a relative basis, we were an outperformer.

However, I hasten to add that these results belie the fact that we are in a very difficult and competitive market and 2016 promises to be even tougher.

The longer these downturns go the worst they get and although I think there is the possibility that the pressure made lighten some later this year, I think we still have a trough to go through and I don't see any real recovery until 2017.

We will continue to see utilization pressures, very competitive pricing and low commodity prices that drive customers to more and more economically oriented shut-ins.

But NGS is well positioned.

We are the only publicly traded compression company that has retained a C Corp structure and did not convert to an MLP and that now enables us to chart the course necessary to navigate the market.

We are not levered nor do we have owner's distributions both of which rob precious cash.

Our financial profile enables NGS to be aggressive where desired, defensive when required and in all respects continue to deliver industry-leading results.

Now I wanted to make one other comment not related to our results but certainly germane to our business.

I listened with a combination of chagrin and discuss to the Democratic presidential contenders when they try to outdo each other when it comes to their promise to ban fracking.

Bernie Sanders started down this path a few years ago when Vermont, his home state, banned fracking.

This was of course a hollow gesture because there's never been any hydrocarbon production or reserves identified in Vermont.

Their ban was met with a mixture of humor and ridicule and held as much seriousness and importance as Obama's red lines in the sand.

Now we get the other candidate, Hillary Clinton, promising to enact enough rules to make fracking too difficult to perform.

This is of course pandering to the unwashed masses with a position that has no basis in fact or reality.

Fracking has been around since the 1940s and has been performed millions of times.

The EPA, no friend of the energy industry, has studied it over and over as recently as last year and has found no link to groundwater contamination and in fact natural gas and ore released through this technology has brought the US closer to energy security than it has been in decades.

It has also dramatically reduced use of coal for power generation and has contributed to a cleaner atmosphere than we had only 10 years ago.

What used to amuse me now concerns me that we have a major political party fronting candidates with these extreme views.

With that comment, I will wrap up my prepared statement and turn the call back to Erica for questions anyone might have.

(Operator Instructions).

Ken Sill.

Good morning.

I normally hate to pander to the audience but you guys have done great, great performance.

My question, gas is in disarray right now, storage is full.

It looks pretty grim at least until the fall.

Could you kind of give us a roadmap to the business opportunity for you guys in the Permian where it seems like activity directed toward oil is going to be good but I know there is associated gas.

You made a comment about how some of the more expensive units that you are selling now or the units used for this liquids rich environment is actually more expensive and better.

How can we kind of model your guy's opportunity set in the next up cycle assuming it is more directed at oil and less at gas?

If nobody else heard you, you said it best possible and that is the caveat that is tough right now modeling about anything.

It has been kind of interesting.

Obviously oil has gotten all the headlines and has fallen quite dramatically.

Gas has not done much better but has been down so long that most people don't even pay much attention to it unless of course it was part of your business like ours.

There has even been some recent articles pointing to maybe a little higher gas price towards even the end of this year even with storage running pretty high.

But based on some decline people see over time certainly from the associated gas that comes along with oil wells and a lot of those being shut down and very little drilling going on that way, that remains to be seen.

We have been predicting the gas resurgence for years.

But you've got a little of that.

You've got LNG has left recently.

That will do nothing but grow so I think there is certainly some blocks in place that will help the gas market and incremental pricing as such but it is so hard to predict when that might happen and how it might and the longevity of it and how long it will last and everything else.

It is tough.

We see still relative strength in the gas lift units on the oil side.

Now again relative strength meaning not as strong as last year certainly and as I mentioned, I think it is going to be tough this year.

But compared to gas, it is still a stronger commodity.

So I don't know if that answers your question too much.

I think -- I don't see a whole lot of -- I think oil continue to be stronger, I think gas has got a chance to strengthen but that is one of those things I will have to see it before I predict it.

And that kind of leads to the follow-on.

So we actually think gas gets better next year once you get through whatever happens on inventories this year because there is more industrial demand, more LNG exports.

I mean I guess the concern relative to your business is the wells that they are drilling in the Utica and the Marcellus are so productive now you just don't need as many.

And I am wondering what that does to the opportunity for you guys?

It doesn't change it too much.

We see the Marcellus and obviously that is where a lot of the gas is coming from, that is probably if you want to point at one single area that is causing some of the pricing issues it is there.

And it is because it is so prolific and you are getting tremendous wells out there.

But we don't have a whole lot of compression in that basin as of yet because as you say, wells come in, high virgin pressure, high virgin volumes, not a whole lot of compression happen to be set initially and the stuff that does tend to go in tends to be the larger horsepower more midstream mainline sort of stuff.

So we don't have a whole lot of business in the Marcellus right now.

We continue to see that as a future opportunity because all of these wells as you say, every well declines every day so as those wells over time start to come down and we start to see more and more wellhead, we will see increased business out there.

So generally the more gas moves through the system the more compression needed in some respects so that is overall good but it varies by basin by basin and as I say not much in the Marcellus now but we do think over time we will see more.

Okay.

Thank you.

(Operator Instructions).

Jason Wangler.

Good morning, Steve.

Appreciate the comments especially at the end.

I was watching some of that Sunday night and shaking my head too.

Was just curious on the rental side seems to be holding up pretty much exactly like you expected but the sales side obviously doing a lot better and you mentioned it in your comments.

But is there something you are seeing specifically there outside of I guess just more demand for units?

Is there some type of sea change with your clients or anything that is just kind of getting you guys to stay more busy on that side?

You know, it is not really any real change.

We have been fortunate and I mentioned that about every call that this is totally out of character for this kind of market that this capital equipment actually increases year-over-year in a bad, bad market.

What I have mentioned in the past, it still holds.

We just got a couple of good legacy customers that are large operators that have good balance sheets that they still primarily Permian oriented.

That is the only place in the world right now, right?

So still a lot of opportunities to do things.

We do a lot of work with them and they like our stuff and we have been able to ride that wave.

Now I think as I mentioned, 2016 is going to be a tough year.

It is going to be tougher than 2015 and I think -- and the backlog came off a little, came off a couple million dollars from Q3 to Q4.

still the same as a year ago and a little higher than Q2.

And there is still some potential work out there but we will see if that backlog continues.

If it does, great.

Maybe 2016 on the sales side holds up decently.

If not, I still expect that pipeline to dry up.

I am about 18 months late on the prediction.

It has been a good thing though, no question, and I think your comments kind of showed how the market is so it nice to see some upside.

Maybe just dovetailing on the previous questions, just in that Marcellus area, is there a timeframe that we should be thinking of when that area is going to really start needing compression more -- I mean more as a whole, not just to put a blanket statement but is there something that we should watch for there that would start to get that opportunity to you guys?

It is hard for you to tell I think outside because you don't really have any -- I don't there's any independent data available from how much compression is going in, how much is the wellhead, how much is the mainline blah, blah, blah.

So it is real hard for -- I mean we can't even tell unless we just kind of know because we are there talking to customers etc., etc.

Other than us just saying we are starting to put more equipment in there and we are starting to see some change there, which again I think is not imminent, I don't know how else you might see it unless you just go around every quarter and ask everybody what they have got.

But that is impossible to do.

So we keep frankly, it has been a little longer than we thought but those wells operators have these tremendous wells and of course that is what is enabling them to produce gas, cheap gas at these low prices because they are on a per volume basis it is cheap gas from the get.

So we are still waiting and I don't really have a good prediction yet.

Okay.

And maybe just one more with the cash balance doing so well and obviously it looks like free cash flow is going to continue, I know I probably at least ask it quite often of you.

But where do you see that going?

I know you have talked in the past of having $30 million or $40 million is kind of your treasure chest so to speak to build out when the cycle turns but any thoughts on what you would do with any what I guess you would consider excess cash going forward?

Yes, just reiterating what I've said a couple of times, if we get to a level that we think there is enough quote unquote corporate cash or cash needed for corporate needs, anything beyond that would be in excess.

And I wasn't, I don't think it was a $30 million to $40 million range.

It might have been a little higher than that but we had never put out a number just kind of a feel and some ranges but we are going to continue to generate cash.

In fact we are up around $40 million as of the end of February so it is still happening and obviously as long as we don't have a lot of capital requirements, that will build.

You know, throughout this year we will look at what cash requirements might be needed from our standpoint.

Obviously what I said, not a whole lot of capital stuff.

We probably will buffer that cash just a little more based on what we think is a tougher year coming, not a whole lot.

But ultimately we will sit there and if we think there is quote unquote excess cash, we're going to try to figure out what, when and if this cash should go back to shareholders and we don't have anything to say about that right now but that is always a topic we are looking at.

I appreciate it.

I will turn it back.

Ken Sill.

Just had a follow-up since it seems like the queue was a little bit light.

You made the comment that because you never did an MLP you think that puts you in a better position than some of your peers.

I just wanted to kind of follow up on that.

I know the guys that dropped assets down to MLPs have the distributions and when they cut the distributions, that is going to be an issue.

But does this put you in a better position than the parent or the general partners of the MLPs which I am assuming could still compete with you guys in this space?

I just wonder how does your not following the MLP trail obviously gives you the ability you don't have this cash outflow but how else does that maybe help you relative to the other guys going forward?

Well, from whether it is the general partner or the limited partner, certainly the limited partnership has distributions they've got to consider and with the equity value dropping so much this past year, some of those distributions have gotten a little out of hand and we have seen at least one cut from peers already and I would imagine there may be some more coming this year.

Not going to predict it.

We'll let them worry about those things.

From the GP side, of course typically the GP owns about 2% of the limited partners.

That is more -- I don't really look at it from the point of which one are we competing against and which one do we have to worry about.

They are all kind of rolled up from the point of when you are down at the field and equipment level and what is the pricing and service levels and things like that, so I think we are still outside of even if you go back three years ago, four years ago when everybody wanted to be an MLP and etc., etc., we still the competitive advantage.

It wasn't as much debt free at that point and distributions at that point because again $100 oil and cheap money solves a lot of problems.

But nobody was worried about that three or four years ago.

But we still have the competitive edge that we still retain, good equipment, good service, response and run times, the 2Rs and things like that and that hasn't waned during this period.

As I have mentioned in the past, we emphasize that even as rates are coming down and things are getting tighter, we don't start cutting at that point.

So whether it is GP or LP, we tend to lump them all together and think we've still got the competitive edge in the field and in the market operationally if not financially also.

Okay, thank you.

Rob Brown.

Good morning.

Just wanted to get a little more color on the CapEx expectations.

I think you said $5 million for the first half.

Is that more VRUs and more of the higher horsepower equipment or maybe what does that consist of?

Yes, that is all that would be.

Just has continued from the second half when we said that number.

We mentioned $5 million in the second half.

We spent $2.9 million.

So the only reason $5 million is out there is because it is a nice round number I had said it before and maybe it is $7 million, maybe it is $1 million.

Who knows?

But yes, it is all going to be strictly the new models.

We are getting some good traction on the little VRUs.

We are putting out more and more of the 500 horse units.

The VRUs move a little quicker because they are cheaper equipment, lower rent, more environmentally driven in this market.

So operators a lot of times just don't have a choice on I want to get that equipment whereas of course bigger equipment sometimes like anything else you are not going to put it out just to maybe move gas or move oil right now.

So the environmentally driven market is essentially somewhat exempt from the downturn.

So long answer to a short question but yes, it is just going to be those two types of equipment.

Okay, great.

Thank you.

And then I know you said visibility is very poor but I just want to get a sense on direction on pricing.

I guess in particular has it gotten incrementally tougher or has it just remained at difficult pricing environment sort of how it has been in the last six months?

It has gotten tougher.

If you recall on some of the calls in the past, I'd mentioned it was two sources of pricing, one is just the current heads up pricing where you are just outbidding everyday on work and that is the more severe pricing.

And the other pricing is customers coming back on stuff that is already utilized and installed and needing a break there.

The customer negotiations, last year we saw price concessions running anywhere from 2.5% to 7.5% on that.

That has come up and I would characterize that being more of a 5% to 10% sort of environment now so it is not a big number but somewhat of a change.

Now the heads up pricing is really where you start to see the competitive pricing coming in.

It has gotten worse versus last year.

I think again, you get into some of these situations to where some competitors don't have the financial flexibility we do for whatever reason whether it is debt distributions or lower margins or whatever it is.

And they tend to price at contribution levels I think it seems like.

So we are seeing more and more of that as competitors get I guess more and more -- I don't know if it is desperate but more and more concerned about keeping equipment out that that pricing tends to come off.

You see that still same thing in 2009, we are seeing the same thing now.

This is where we make the decision between is this equipment we want to get in the market at that price or not?

And as I've said in the past, we tend to try to maintain some margins in this market and maintain some pricing.

It becomes increasingly difficult with the competitive environment we are seeing but our pricing, I mentioned is actually showing a positive trend year-over-year.

Now I don't want to mislead anybody like I said in the comments.

That is not necessarily positive from the standpoint that -- I mean, we are not increasing price let me make that clear and nobody years.

I think we are decreasing price less.

I tend to think that our competitors are probably discounting at twice the level we are.

So we are maintaining our price a little better and we will give up some share on that.

But we are not doing it just as a wholesale hard fast rule that no pricing, it is all margin and everything else that we are putting in as we go.

But yes, the pricing environment is getting tougher.

Okay, thanks.

That is great color.

And then last question, what was your ending fleet size and then along with that, what is sort of your view on sort of that fleet?

Is there more cuts to that fleet that you could look at or is it pretty much just wait through the downturn?

The fleet size at the end of 2015 was 2622.

We don't -- we got rid of 258 units last year which at that point was about 9% of the fleet size and about 2% of the net book value.

So it is obviously is the older stuff and the typical the dry gas stuff.

We don't have any current plans to do any more like that.

Now obviously as a public company, you go through reviews all the time.

We will be going through those same reviews whether they are bad debts and inventories, asset values, whatever it is, it is just part of what you do.

So I'm not going to predict that we would or wouldn't do anything but right now we think we've got the majority of what we needed to do last year and we are going to hold there.

Now if this market gets appreciably worse, obviously we have to look at all that stuff but right now there is no plans.

Okay, thanks.

Peter van Roden.

First question on the gross margin side given kind of your outlook or lack of visibility on pricing and utilization, do you think that you can keep gross margins in the kind of 60% level or would you expect them to trend down over the course of the year?

Well, I would expect them to trend down but we are going to try like heck to keep them up.

We have got them up, we have got them up well this year which was not a great year from the industry standpoint and a lot of pressures on us.

So our guys did an excellent job on that and we have actually started back into another cost exercise this quarter to look again.

Let's make sure nothing has slipped in or slipped out or anything else.

So we are really focused on those margins and trying to maintain those and of course that comes both ways, the cost side and the regular side and how we keep pricing.

So we are going to try to keep them there in the 60% or higher.

Whether we can really just depends on the dips in the market and like I mentioned, I think we have still got a trough to go through.

I think 2016 -- I don't want to predict anything in this market, but my feel is 2016 is kind of the low point and maybe 2017 we start seeing something out of it but I think we have still got some hills to climb.

Got it.

And then on the CapEx side, you talked about you are earmarking $5 million for the first half.

Is it fair to say that everything that you have billed is for a customer order so that really it is 100% utilized when it gets built?

Steve Taylor

Well, certainly all of our sales stuff is and on the rental side, yes.

Well, the 500 horsepower equipment and the little VRUs we are building as I mentioned in the past, what we decided to do on that you've got to have equipment in the yard to rent it.

We would prefer just to rent to a customer and say it takes us six months to build it and we will have it for you but this market doesn't allow you to do that.

So you've got to build in advance a little.

So we are putting a nominal amount five, 10 of each of those units in the fleet to be able to pull out and be competitive from a delivery standpoint.

So those technically don't have a customer earmarked to them.

When we get up to the five to 10 if they are not renting, we are not building anymore we will just hold those and then as they rent, we will build more.

So it is kind of a delayed sort of backlog we are trying to build on that stuff a little but right now and again that is just small dollars.

We spent less than $3 million in the second half but we don't have any -- we have particular areas and maybe particular customers we are looking at but we don't have written contracts necessarily.

Got it.

Okay, that is all I had.

Thanks, Steve.

At this time we have no further questions.

Okay.

Erica, I appreciate your help and I appreciate everybody joining us and look forward to visiting with you again next quarter.

Thank you.

This concludes today's conference call.

Thank you for attending.