Natural Gas Services Group Inc (NGS) 2016 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Natural Gas Services Group 2016 second-quarter earnings call.

(Operator Instructions)

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

Thank you, Ross, and good morning listeners. Please allow me a moment to read the following forward-looking statements 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 risk and uncertainties which may cause Natural Gas Services Group's actual results and future periods to differ materially from forecasted results. Those risks include, among other things, a 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 that stated, I will turn the call to Stephen Taylor who is President, Chairman and CEO of Natural Gas Services Group. Steve?

Thank you Alicia and Ross and good morning and welcome to Natural Gas Services Group's second-quarter 2016 earnings review. In the second quarter we continued to see pressure on our business as a consequence of the worst downturn in decades. Notwithstanding recent gains, the rig count has dropped 47% over the last year with oil prices approximately 60% lower.

While most of the drilling-oriented industry saw their businesses retreat starting in 2015 we are just now seeing the primary impact on ours. NGS is typically shielded from declining activity by two to three quarters due to our position on the production side of the business. But with US oil and gas production starting to fall, not to mention last quarter's extremely low oil price, we have experienced a greater contraction in the business recently.

Rental activity in the second quarter continued to decline as a natural consequence of last quarter's utilization drop and the bottoming of the oil price experienced in the first quarter. However, we have seen this decline begin to mitigate itself in the second quarter and the month of July.

Sales activity, which is always volatile on a quarter-to-quarter basis, also declined but our backlog continues to hold steady. Our rental gross margins were again very high due to excellent cost control and 53% of every revenue dollar was converted into free cash flow this quarter.

The first part of the year has been difficult but continued upon the commodity price we believe the worst is behind us. I will comment in more detail when we review the financials.

Starting with total revenue and looking at the year-over-year comparative quarters, our total revenue decreased 29% or $7 million from $24.2 million in the second quarter of 2015 to $17.2 million in the second quarter this year. Sales and rental revenues saw drops of $2 million and $5 million respectively.

For the sequential quarters of the first quarter of 2016 compared to this current quarter, total revenues were off $4.4 million from $21.6 million to $17.2 million. The decrease was primarily in our sales component which saw a drop of $2.6 million. Rental decreased by $1.75 million. Reviewing the comparative six-month year-to-date periods total revenues were down 21% with rental revenues decreasing 23% or $9.25 million.

Moving to gross margin and comparing the second quarter of 2015 to this current quarter, total gross margins declined from $14 million to $9.5 million but continued to hold strong at 55% of total revenue. Sequentially, total gross margin was down nearly $2.4 million from a little over $11.8 million to $9.5 million. Again, total gross margin as a percent of total revenues held steady at 55% this quarter, the same as the first quarter of 2016.

In six-month year-to-date comparisons gross margin dollars were down 24% from $28.2 million to $21.3 million. As a percentage of revenue, year-to-date 2016 gross margin is averaging 55% compared to 58% for the prior year to date. Due to extraordinary cost control we are holding our margin steady.

Speaking of high margins, and although I will address it in more details later, I also want to point out that we had a very attractive rental gross margin of 63% in this quarter. Our sales, general and administrative expenses decreased $725,000 or 25% in the year-over-year quarters, more than $400,000 in the sequential quarters of the first quarter of 2016 compared to this quarter and nearly $750,000, or 14% in the year-to-date comparisons over prior year. As a percentage of revenue, our SG&A expenses were roughly averaging 12% over the past 18 months and we think quarterly cost of $2.5 million or less are sustainable through the rest of the year.

If you recall in the second quarter of 2015 we took a one-time non-cash charge of $4.5 million primarily for fleet optimization. In the following commentary I will include references to 2015 results with and without this adjustment.

Operating income increased almost $1 million in the comparative year-over-year quarters, up from $900,000 to $1.9 million with the adjustment but decreased $3.4 million compared to the second quarter of 2015 operating income without the adjustment. When comparing year-to-date 2016 to 2015, operating income fell $1.1 million when considering the adjustment and $5.4 million without the one-time charge. Sequentially, operating income fell from $3.8 million to $1.9 million.

For the comparative year-over-year second quarter net income dropped from $3.5 million to $1.3 million this year without the adjustment. However, it is up $640,000 from the second quarter of 2015 when considering the adjustment. Sequentially the second-quarter 2016 saw net income decrease from $2.5 million to approximately $1.3 million.

In the six-month year-to-date periods net income decreased $3.4 million to $3.8 million without the charge or a little over $500,000 worth of charges. On a year-over-year basis, EBITDA increased 8% from $6.8 million in the second quarter of 2015 to $7.3 million in the second quarter of 2016 considering the adjustment or decreased 35% from $11.2 million not considering the adjustment. Sequentially EBITDA was down approximately $2 million to $7.3 million at 42% of revenue.

On a six-month year-to-date comparison, EBITDA was down 10% with the adjustments or down 27% without the special charges included. However, from an operating perspective we continue to deliver appreciable cash earnings and have maintained EBITDA at an average of 44% of revenue over the last 18 months. On a fully diluted basis, earnings per share this quarter was $0.10 per common share.

Now as I review our operating product lines the comparisons will, of course, have no impact from the fleet optimization adjustments or charges from 2015. Total sales revenues, which includes compressors, flares and aftermarket activities, fell almost $2 million in the year-over-year quarters from $4.3 million in the second quarter of 2015 to $2.3 million in the second quarter of 2016. For the sequential quarters, total sales revenues decreased $2.6 million from $4.9 million to $2.3 million.

Reviewing compressor sales alone, in the current quarter they were $1.7 million compared to $3 million in the second quarter of 2015 and $4 million last quarter. However, recalling that compressor sales are historically volatile quarter to quarter, comparing the six-month comparative period shows that year-to-date sales are actually up 5%.

Gross margins for the compressor jobs we completed in the quarter was over 14% which is a good margin in this market but this does not include full absorption of all fabrication overhead. When this is applied our compressor fabrication business fell into the negative. However, our other sales activities, flares, parts and other aftermarket activities, covered that deficit but that also minimized the positive contribution we usually get from those activities.

Along these lines, I want to give just a little more detail on the dynamics of our fabrication business and costs in a downturn because we saw some of that downside this quarter. There are minimum fixed cost to maintaining a fabrication operation and when things are busy the equipment being built, whether for rental or sale, absorbs the fixed cost of the business. However, when things slow down and there's very little fabrication activity those fixed costs cannot be fully absorbed or allocated to specific activities.

Obviously, the variable costs or cost of goods are covered but the fixed costs become stranded. That is, those are real costs that are unabsorbed and have to be charged to the income statement. Our compressor fabrication activity this quarter was at the lowest level we have seen in the last few years and because of this and the base level cost of maintaining the facilities and our core group of people, the impact on the income statement this quarter was estimated to be $0.02 to $0.03 per share.

Due to the inherent variability we've seen in fabrication throughput our compressor sales were down this quarter but our compressor sales backlog continued to maintain the levels we have seen over the past year. Backlog was approximately $4 million on June 30 of 2016 compared to approximately $5 million in the last quarter and $4 million at the end of 2015.

Rental revenue had a year-over-year quarterly decrease of a little over $5 million from $19.7 million in the second quarter of 2015 to nearly $14.7 million for this current quarter. Sequentially rental revenues were down $1.75 million from $16.4 million in the first quarter of 2016. The year-to-date review shows rental revenues down $9.3 million from $40.3 million to $31.1 million for the six months ending in June.

With compressor rentals, the impact from terminations in one quarter will impact revenue into the next quarter. So this current decline in rental revenues was not unexpected based on the utilization drop we've reported last quarter.

With that in mind, the terminations this quarter were at a lower rate, so on a positive note we don't expect near the rental deterioration going forward. In spite of this, our gross margins continue to be very strong. We posted 63% this quarter, again 65% last quarter, and year to date we are averaging 64% compared to 63% last year.

Average rental rates across the active fleet increased almost 2% over the second quarter of 2015 and were down 1.7% from the first quarter. However, average rental rates for newly set units, which more closely reflect the current market, are down this quarter a little over 12% when compared to last year's comparative quarter and 13% lower than last quarter. Obviously price has been much more competitive this quarter.

Some of this price declines and mix shift this quarter contrary to last quarter towards smaller equipment being set but we have also seen what I call predatory pricing this year from competitors and I suspect it is driven by the requirements to service debt and make distributions. When equipment is priced on a cash basis you may choose to not consider items like depreciation, for example, in your pricing calculations.

For NGS depreciation this quarter ran at 37% of our current rental cost. So ignoring it, which we don't do but others may, was starting to drive pricing down but to unsustainable levels. I suspect that some competitors are pricing in this manner.

Fleet size of the end of June was 2,626 compressors which is one unit less than last quarter. This loss of one unit was due to the decommissioning of five older fleet units for conversion to vapor recovery units plus the building of four new vapor recovery units.

Our active fleet utilization this quarter was 56%. This is a drop of 5 percentage points since last quarter, but it also reflected the acceleration of the utilization drop we've seen so far this year. Our steepest decline of this downturn was in the first quarter of the year.

So with this firming and other factors I'm expecting Q1 to be the worst quarterly decline we will see. Pressures on utilization and price will likely continue but I think the extreme deterioration is passed us.

Although oil price dropped significantly at the beginning of the year and the competitive pricing contraction in the market has been severe NGS has been able to maintain our relative market share. In a market where pricing utilization is constantly under pressure I think this is an accomplishment, especially when we continue to lead the market in pricing from a premium perspective.

Last call I mentioned that we would earmark $5 million for CapEx for the first six months of the year but that it was predicated on market demands. In the first quarter of 2016 we spent a little under $2 million and this quarter we capitalized only $700,000. So we had the first half of the year spending only a little over $2.6 million of capital funds.

This is in line with the depressed market we are in and I think that $5 million mark for the second half of the year will be more than adequate. As mentioned we have recently approved the building of more VRUs. If you recall, we designed a line of vapor recovery units last year in order to take advantage of new EPA emissions regulations and we are committed or sold out of our initial run, so we have authorized the building of more of them. As I've mentioned in the past this is not a needle mover in the short term but the significance of any growth at the moment is important and we do think this would be a good future market.

Going to the balance sheet are total bank debt is $417,000 as of June 30, 2016 and cash in the bank was a little over $52 million. Our cash flow from operations is $9.8 million for the quarter. Free cash flow continues to be strong with $9 million in the second quarter this year, $1 million higher than last quarter.

As a percentage of revenue, free cash flow was 53% this quarter and has averaged 45% this year. So for every revenue dollar we generate we are able to turn almost half of it into real spendable cash.

From a macro point of view things look to get better. The rig count has showed some minor increases recently and oil supply and demand appears to be roughly balanced at present. However, production continues to decline.

The wildcard in this picture is the large overhang of crude inventory but that's just a timing issue and it will get worked off. Even the secondary effects are starting to show up. For example, rail shipments of oil appeared to have bottomed and are inching up also.

Natural gas is even shining a little brighter. Natural gas consumption exceeded coal share in the US for the first time ever in January this year and consumption this year is trending up. We have even for the first time in recent memory said additional dry gas units in some areas.

I don't think anyone is predicting a boom anytime soon. But the macro combined with what we see in the market gives us cause to peer out from under the covers now.

Summarizing NGS has positioned itself well for this downturn as we have in the past. In spite of the times our operating results continue to be enviable. Our margins continue to be among the highest in the business.

Our sales backlog has remained steady. We are seeing some traction with our new VRU product and our ability to generate operating free cash is exceptional. Although some of the inherent fixed cost of the business are temporary impacts on our bottom line these are transient and will be mitigated as activity picks up.

That's the end of my prepared remarks. And I will turn the call back over to Ross for any questions that you may have.

(Operator Instructions) Jason Wangler, Wunderlich.

Good morning, Steve. I was curious on a couple of things you said at the end of your prepared comments.

Just one, sending out some dry gas units. Could you maybe talk about the geography of those and also if that's coming on to new wells or if that's from shut-in stuff or just maybe the thought process of the client there?

From a well standpoint it's not really new wells it's some existing either existing wells that have been turned back on or some displacements, some other competitors in some of the stuff. But primarily there's been some new stuff going out, so it's been -- and, again, it hadn't been a whole lot, you wouldn't even mention it if you just hadn't seen it in a long time.

It ties in with maybe a couple little bright spots on the natural gas side of it. And I hesitate to say that because tomorrow gas prices will drop. But it's not a big deal yet but it's the first time we've seen it in a little bit.

From a geographical standpoint I hate to say too much about where we're seeing it. I would just say it's in some very mature areas that we haven't seen much activity out of for years actually.

Okay, that's fair. And another bright spot I suppose on the VRU side, could you just talk about the thought process on what that plan would be for the second half of this year?

You mentioned you are sold out, so curious if you could comment on how many you have now? And then just how many you intend to build at least as you look at the second half of this year given it sounds like it's the brunt of the build for the rest of this year?

Yes, our initial run on that stuff, and this is in some of these numbers are not confusing but a little mixed, but if you remember some of that equipment we wrote off last year we were refurbishing and recommissioning into VRUs and some of the stuff is more new. So we've got a combination of what we're doing. As I mentioned we decommissioned five older units and are going to rebuild them as VRUs.

There's four of those. We are building some new ones going forward, too. So our initial run was in the 10 to 15 unit range, those are set or committed.

Now outside of that we've done some minor conversions on some existing equipment to place on VRU applications. Not confusing to say but not strictly the pure VRU line we're building but semi-converted enough for a customer's requirements.

So if you do that you can probably double that if you're throwing it into a VRU column. And while we've approved some new ones in the schedule, so we are adding in five to 10 more by the end of the year in combination with the ones we're recommissioning.

Okay, that's helpful.

Not big numbers but certainly the biggest thing going.

Well, hey, sold out is sold out. So we'll take it at this point.

Right, right. Exactly.

One more if I could on the other side of it. The larger units, I know you put a couple out late last year or early this year. Just how you're seeing that program go and if you have any indications or interest to build some or those as we go through either this year or even looking further out.

Yes, we're about 80% utilized on those. And it's slowed down, the activity on that just like everything else has slowed down the last couple of quarters. But we think some opportunities coming up the last half of the year to hopefully get those towards a sold-out level and then start building some more of that.

Right now it had a good flush at the end of last year, kind of stalled here with these couple of quarters but we see some opportunities out there. So not as quick and not as much traction as the smaller VRUs and, of course, not as much money but we've still got good high hopes for that line. And it will come about, it's just in this period right now just not a whole lot of stuff moves out like that.

That makes sense. I will turn it back. Thanks, Steve.

Rob Brown, Lake Street capital markets.

Good morning, Steve.

Hi Rob.

On the utilization rate you talked about it starting to decline at a lower rate but maybe give us a sense of where you think that bottoms and back to that a couple points a quarter or give a sense of where that bottoms?

Well, this is all -- the bright spots are all relative, right? They are not absolute at this point. So we're talking about deceleration of utilization drops and deceleration of pricing pressures and things like that.

We still see it out there. There's still a very competitive market. As I mentioned the first of the call being on the production side we've had our lag and now we're getting hit more so with the brunt because obviously production has fallen off.

You need compression in a world like that. So that's still an advantage of our business being a little behind the curve on some of that stuff but we're in the middle of the curve now.

So boy, Rob, I hesitate to even tell you because I wouldn't have guessed two quarters ago where we'd be. We're 56%. Whether that goes to two or three quarters -- I mean 2 or 3 points a quarter like it was in 2015 it gets back to that or not I don't know.

I'm real hesitant to even try to say anything publicly along those lines. We were just saying we've seen 13 point drop in the last two quarters which is obviously way more than we would have predicted and that was, I didn't look, but that was probably about the full year of last year. So if we can get back into that 3 to 4 points a quarter until it bottoms I think that's certainly a good indicator but I am real reluctant to tell you what that might be.

Now on the plus side, essentially just as we've shown, even with the deterioration in pricing and deterioration in the utilization we're still top line obviously gets impacted but we're still holding the bottom line pretty well from a margin and free cash flow standpoint. So we obviously look at that real close, but I will let you put your own market utilization, I'm sorry I can't help you there more.

Thanks for the color. I know that a tough one to predict.

On your SG&A cost I think you mentioned sustainability. Could you clarify was it $2.5 million a quarter that you said you could keep it at?

Yes, we actually ran $2.2 million this quarter. That was down. I'm hedging a little, which is the world right now.

But we think the deterioration, or not deterioration, the cost savings we've seen which is in the 15% to 25% a quarter range is sustainable through the end of the year. So that was the main point I wanted to make on that, that we can hold it down. Yes, you get some quarterly fluctuations on that stuff so things can go up and down, but generally we're going to be able to hold that tight from a cash basis on the next couple of quarters.

Okay, good. And then last question, here you had nice progress on your receivables balance coming down. Is there any -- how do you feel about that receivable situation and should it stay at this level?

I'm glad you mentioned that because I probably should've spent a little more time on that. Yes, we're certainly happy with the progress being made there. We've got certainly real good people watching that and making sure we don't get too far out.

It's just been good old staying on people and getting paid. And obviously in a market like this you got a bifurcation of customers. You got the big guys that pay you but they drag you out a little more, then you've got the little guys that may or may not pay you and they certainly drag you out.

So it's just good credit management actually. And I don't take the credit, I give the credit to our credit supervisor, staying with them, staying close, understanding what the customer is going through, what the business is. We don't hesitate to shut equipment in, we don't hesitate to file liens, sometimes we don't hesitate to sue to get our money.

So we don't -- we do a good job for everybody and we want to get paid for it. I think everybody understands that. And we've been hit with some bankruptcies, too, now actually the last this downturn and the last downturn.

But, fortunately, and of course bankruptcy is not contrary to popular belief I still don't think it's a good business strategy, but the thing that has changed now versus five or six years ago in the last downturn is you get a lot more prepackaged bankruptcies. It's less of a free-for-all or less of a lawyers' holiday and more of a organized, pre-negotiated sort of business reorganization which tends to put us (technical difficulty) from the point of if we can be a preferred vendor we tend to take much less of a prepetition hit.

Of course, post-petition you are typically paid. But we tend to come out a little better on those. So that's helped also just I guess a maturation of how bankruptcies work over time but generally we have a very good credit person and they are watching this.

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

Peter van Roden, Spitfire Capital.

Hey, Steve. Couple of questions.

So you mentioned that pricing on newly sent units was I guess down over double digits. But as you think about pricing in the overall business, how has that been trending if you can look at blended price for the year?

Well, that's the average and compared to I think sequentially and year over year, I think year over year we're still up 2%. Sequentially we're down about 2%. So if you want you could say it's probably roughly flat with any comparative quarters or periods over the past year on the average.

So what happens, obviously, the new set stuff is more of a current market rate and reflects what's going on currently. Nobody is real surprised there's a lot of price pressure, price competition out there. Now the price pressure tends to it's shifted over time.

Last year, and going into the first quarter, it is primarily driven by customers. Crude prices dropped, venues from concessions, discounts and that was what was driving a lot of the pricing pressure.

It's changed since the first quarter and it shifted more so away from operators more towards competitors. As I mentioned and went into a little detail, some of this pricing is just nutty. And I don't know if we'd choose not to participate in it or we just don't, but that's why you see that 12% -- I think the 12% year-over-year and 13% sequential decrease in current new sets.

Now the bright part to that, this is a dimmed bright point, is there is not so many new sets going out now as there were when times were busy. So it's got a muted impact on the overall average. I think that will continue on.

No, this is the severest contraction we've seen in the pricing on a percentage basis. And hopefully we see some relief from that. But, again, we tend to still be a little more premium priced than most people.

As I mentioned we've maintained market share with that. But price shows a little more severe with us than anybody else as far as what that pricing contraction might be because we're coming off a higher point a little.

Got it. That's really helpful.

And would you say that the pricing has gotten competitive enough where customers are thinking about going through the whole rigmarole of actually taking offsets? Or is that still too much, has pricing not gotten to that point where it's not very attractive from a service and cost perspective?

When you say taking offsets, what do you mean?

I guess replacing an NGL --

Just replacing competitors or us or anything?

Yes, yes.

We don't see a whole lot of that. We replace, I think we replace more competitors than it happens to us. Everybody is always taking potshots at everybody.

I think we're able to generally hold in pretty well with existing customers. Now sometimes you may have to give discounts, obviously, to match pricing to the market. But we generally are able to hold in because when you are installed out there our service continues to be superior.

So you can protect that piece of it fairly well. Where we do see more impact is in new bids, new market bids and things like this where an pricing is what I think is ridiculous. As I mentioned I think it's predatory.

I define predatory as not sustainable and I think you can do that for a little bit but ultimately you can't do that. And as I mentioned we still, I mentioned on the last call I'll say it again, we still make net income. We think net income is important and a lot of people don't and if you want to price that way, that's fine but we choose not to.

We want to keep a price that we think is reasonable and competitive in the market. But as far as defending present installations I think we do a pretty good job there. It's the new stuff coming out that's pretty competitive and sometimes hard to get.

Got it. Okay. And then two more questions.

As you think about your sales gross margins, I guess for this quarter they are suffering from lower compression sales and then also your build rate on your actual units that you're building to put out in the field. I guess what level of both compression sales and the new CapEx do you need to see to start to see that absorption rate get better and hopefully sees sales gross margins get back to a more normal level?

Well, you've got two curve there right, the revenue curve and the cost curve and those are constantly moving. One of the things that hurt us in Q2 was the sales were down. And we had one or two units that moved out a little more than what we had anticipated, so we had some miss of some absorption there.

And we've continued to pare back in both the fab facilities we've got from just a pure operating expense standpoint and, unfortunately, from a headcount standpoint. So as that cost curve is continually coming down. Obviously, we're trying to get that revenue curve up a bit and that's a tougher part.

So it's hard to predict exactly. Number one as we always get into, volatility quarter by quarter on what equipment is we can book revenue on and recognize that revenue on. And this quarter we had a couple we didn't get in and they were delayed a little bit and couldn't do that.

If we had those we might not have had the issue. But generally, and this is generally because I will point out something else that happens to you, generally we think we will probably be about breakeven the rest of the year on that. We won't see any positive or any negative out of it.

Obviously we saw a negative as I mentioned $0.02 or $0.03 this quarter. But one thing that impacts this, and we do this is, we've moved some VRUs into the schedule to build from a rental standpoint because we're sold out, we still have some customer demand. We don't want to go out and market that equipment and not have it available and not build it because you lose all that effort and money. But what happens is you move out some of the backlog.

So we could take the position that hey, we're just going to cram all this sales stuff in because it's money today and we've got to have it and everything else. Or we try to balance this stuff and say you know what, some of the sold equipment may fall over into the first quarter of next year. We may not see it this year but we need to build some of the VRUs from a rental standpoint.

So you get into some of these, so we are trying to make these decisions that are based on the good of the business and sometimes the long term gets in the way of the short term and it should in this situation we think but that ends up causing a little more of an absorption problem. So a lot of moving parts to it, but the short answer is we think now we can probably be essentially neutral then for the rest of the year but it's a quarter-by-quarter decision.

Got it. And when you say neutral that also would be inclusive of the D&A because you guys had positive gross margin in this quarter. So I guess I'm just trying to understand do you think that gross margins go down again from here?

On the sales side?

Yes.

No, that's what I'm saying. We showed, on compressors only we showed we had a negative 10% gross margin when you absorb all the costs.

Got it.

Now, over on all sales we had a positive 3%. So obviously the other sales subsidize the compressor sales.

So what I'm saying is we are hoping we have a zero gross margin with all the absorption in there. And we're still making 14%, 15% gross margin on a project basis. So we're not losing money as we build the equipment, it's just this absorption issue.

Got it. That makes sense. So gross margins should all things being equal on the sales side of the business go up from here?

Yes, fully absorb, they should.

Okay. Then final bit is as you think about if this is the bottom, and it sounds like this isn't the bottom for utilization, so other than the VRUs there isn't a ton of need to build new stuff, but let's just say next year activity picks up and there is a chance to start putting new units out. Do you think you can do that out of the existing fleet or would you expect to have to start building new units to match the well profile or the places that those units would be needed?

I think we'll be able to certainly let's say it picks up Q1 2017. We've got enough equipment available that we can just put out. So I don't think we will have appreciable capital expense next year even if the market turns up and even if it turns up appreciably.

We can just use the equipment we've got now. What we will have, we saw it the last downturn, we don't capitalize any maintenance expenses. So unlike a lot of competitors in the business, we expense it all.

So when you do that and you start putting equipment out you have to go through it, check it out. Even if nothing is wrong with it you have some labor to make sure it's runable condition when it gets out there. So there's expense going into that.

Now that's an income statement expense. And as we saw last upturn our gross margins on the rental side may drop somewhat, because we had that expense to put it out, but we have no capital to do that. So I think that's the dynamic you'll see going forward.

I think we can go 12 to 18 months without any appreciable capital expense and ride the wave of a recovery. So that's really part of the good part of this business is when this thing does turn up we will have very high incremental contribution to the business to the income statement.

Now I hope the capital we do spend is additional VRUs and additional of the larger horsepower stuff we're wanting to put out and I anticipate that's what our capital will be allocated to. Now talking about the bottom, I'm going to let you call the bottom because I'm not going to, the improvements we're seeing like I say are relative and not absolute at this point.

So we're seeing a relative deceleration, a relative improvement in things like this. We still see pricing pressure. We still see utilization pressure and I think we will for the rest of the year.

I think we're bumping along bottom on this but we're going to bump. But again we're well-positioned, we're in fine shape. But I don't want to read in the San Francisco paper tomorrow that Steve calls the bottom.

All right, thanks Steve. I appreciate it.

(Operator Instructions) At this time there are no further questions.

Okay. Thanks, Ross, thank you Alicia and thank you everybody that's called in. Good questions.

I 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.