Natural Gas Services Group Inc (NGS) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Natural Gas Services Group 2016 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 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 risk 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 marketshare 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 that 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 and good morning and welcome to Natural Gas Services Group's third-quarter 2016 earnings review. Although our markets continue to be very competitive, I think NGS had a notable quarter. The rate of decline in our rental utilization slowed for the second quarter in a row. Our gross margin and operating income dollars were essentially flat between quarters. Our rental gross margins hit a 10-year high of 66%. Our compressor sales backlog grew. We were able to deliver higher earnings per share this quarter than last and we generated free cash flow at a rate of 55% of this quarter's revenue.

There are some indications of a tightening market with the higher commodity prices, but it is not fully settled into our business yet. If present trends continue, we may be in the bottoming of the cycle. Since our production-oriented activities tend to lag the beginning of market upturns, I think, all things being equal and as I have said before, we are still looking into 2017 before any definitive recovery will be seen. That being said, 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 revenues decreased $5 million from $21.2 million in the third quarter 2015 to $16.2 million in the third quarter this year. Quarterly sales were constant at $2.5 million while rental revenues dropped to $13.2 million this quarter. The sequential quarters of Q2 2016 compared to the third quarter of 2016, total revenues were off $1 million from $17.2 million to $16.2 million. The decrease was due to rental revenues falling $1.5 million, but this was offset by our increases in our sales and service and maintenance revenues.

Reviewing the comparative nine-month year-to-date periods, total revenues were down 22% with rental revenues decreasing 25% to $44.2 million. However, our compressor sales revenues are 10% higher than the nine-month year-to-date period of 2016 compared to last year.

Moving to gross margin and comparing the third quarter of 2015 to this current quarter, total gross margin declined from $12 million to $9.4 million, but improved as a percent of revenues from 57% to 58% in the third quarter of 2016. Sequentially and significantly, total gross margin softened only 1% from the previous quarter from $9.5 million to $9.4 million and improved from 55% to 58% of revenue in the third quarter of this year. In the nine-month year-to-date comparisons, gross margin dollars were down from $40.2 million to $30.7 million.

As a percentage of revenue, year-to-date 2016 total gross margin is averaging 56% compared to 57% for the prior year-to-date period. Speaking of high margins and further demonstrating our excellent cost control, we had rental gross margins of 66% in this quarter. This is the highest rental gross margin we have experienced in over 10 years and I want to commend our employees for the extraordinary job they are doing. Margins like this in this environment we are in are truly remarkable.

Our sales, general and administrative expenses decreased $566,000 or 21% in the year-over-year quarters, dropped 2% or $50,000 in the sequential quarters of Q2 2016 to Q3 2016 and is down $1.3 million or 16% in the nine-month year-to-date comparisons over prior year. As a percentage of revenue, our SG&A expense has averaged 12% over the past 18 months.

Now 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. Noting that, in the following commentary, I will only reference our reported 2015 results, which included that adjustment.

Looking at operating income in the comparative year-over-year quarters, operating income decreased from $3.8 million to $1.8 million in the third quarter of 2016. Sequentially, we saw operating income drop less than $100,000 from $1.9 million to $1.8 million with both coming in at 11% of revenue. When comparing year-to-date 2016 to 2015, operating income fell from $10.5 million to $7.5 million.

In the comparative year-over-year third quarters, net income dropped from $2.6 million to $1.5 million this year. Sequentially, however, we saw net income increase 20% in this third quarter from $1.3 million to $1.5 million. This is held by a favorable tax rate resulting from some R&D tax credits we claimed this quarter. However, even eliminating the lower tax impact and assuming the same income tax rate as the prior quarter, our net income would have been essentially flat between quarters. Still an accomplishment in this environment.

In the nine-month year-to-date periods, net income decreased from $6.9 million to $5.3 million. On a year-over-year basis, EBITDA decreased 23% from $9.4 million in the third quarter of 2015 to $7.3 million in this third quarter, but clocked in at 45% of revenue compared to 44% in last year's comparative quarter. Sequentially, EBITDA remained steady at $7.3 million and rose from 42% of revenue to 45% in this current quarter. Now on a nine-month year-to-date comparison, EBITDA was down 14%.

From an operating perspective, we continue to deliver appreciable cash earnings and have maintained EBITDA at an average of 43% of revenue in 2016 compared to 40% in the nine-month period last year. On a fully diluted basis, earnings per share this quarter was $0.12 per common share compared to $0.10 last quarter and $0.20 a year ago. For the nine-month comparative year-to-date periods of 2015 and 2016, EPS was $0.54 and $0.42 per share, respectively.

Looking at sales revenues, we maintained total sales revenues, which include compressors, flares and aftermarket activities, flat at $2.5 million when comparing the year-over-year quarters. For the sequential quarters, total sales revenues increased from $2.3 million to $2.5 million. On a nine-month year-to-date comparison, total sales are down from $10.7 million to $9.7 million, a 9% decline. A large part of our total sales decline has been in our flare business, which is down $1.2 million in the comparative nine-month periods. This business tends to track drilling probably closer than the rest of our activities and it has declined as a natural extension of the rig count drop.

Reviewing compressor sales alone, in the current quarter, there are $1.7 million, up from Q3 2015's $1.3 million and flat with last quarter. When comparing the nine-month comparative periods, year-to-date compressor sales were up 10% from $6.8 million to $7.4 million, a commendable performance in this environment.

Gross margins for the compressor jobs we fabricated in the quarter averaged 16%, but this does not include full absorption of all fabrication overhead. When that is applied, our compressor fabrication gross margin fell to 4%. But if you recall, this is an improvement from last quarter when overhead absorption issues caused a 10% gross margin deficit. This improvement enabled us to increase our total sales gross margin to 14% this quarter, up from 3% last quarter.

Our sales backlog as of September 30, 2016 was approximately $6 million compared to approximately $4 million in last quarter and $6 million a year ago. We were fortunate enough to pick up a nice international job this quarter, which will help maintain our compressor sales for another quarter or two.

Rental revenue had a year-over-year quarterly decrease of a little over $5.3 million from $18.5 million in the third quarter of 2015 to $13.2 million for this current quarter. Sequentially, rental revenues were down $1.5 million from $14.7 million in the second quarter of 2016. The year-to-date review shows rental revenues were down $14.6 million from $58.8 million to $44.2 million for the nine months ending in September.

Our gross margins continue to be extremely strong. We posted a 66% gross margin this quarter, as I mentioned, a 10-year high against 63% last quarter and 60% in the third quarter of 2015. Year-to-date, we are averaging 65% compared to 62% last year. Average rental rates across the active fleet decreased a little over 1% from the third quarter of 2015 and about 5% from the second quarter. When comparing the nine-month year-over-year periods, our average rental rates for newly set units, which more closely reflect the current market, are off approximately 15%. Obviously, pricing is much more competitive this year.

Fleet size at the end of September was 2626 compressors, which reflects no new net additions to the fleet, although we have continued to repurpose some of our older depreciated equipment into new VRUs, vapor recovery units. Our fleet utilization this quarter was 53%. This is a drop of 3 percentage points since last quarter, but it also reflects the second quarter in a row that we have seen a slowing of the utilization drop. Pressures on utilization and price are likely to continue, but it appears that the extreme deterioration has passed us.

In any market, there are always some bright spots and for us, these came in the form of the new compressor products we introduced last year, our vapor recovery line and the larger 400 horsepower units. If you recall, we brought these to market during this downturn with the intention of introducing our customers to this new equipment now available from NGS. We wanted to make sure customers knew we had these new lines of equipment so if when the recovery began we didn't spend that time educating them. We wanted to be ready to offer this equipment when the market called for it.

Fortunately, we have rented all 10 of the 400 horsepower units we built and as of September 30, we have approximately 25 VRUs installed with a contracted rental backlog of another 25. So this market is getting traction and looks to pick up as we go forward. These are not large numbers in the realm of things, but it does prove that we correctly identified and have executed on these new markets and I have authorized additional rental units to be built.

Additionally, and to build on this success, we are currently introducing our new 600 horsepower gas compressor model, which will be our largest unit. We have already sold a few of them and we will be building some rental fleet models too.

In past calls, I have noted that NGS probably wouldn't spend over $5 million in capital the first nine months of this year and in fact we spent only $3.4 million. Our CapEx spending in this fourth quarter will remain subdued and will average roughly the same as the past three quarters, about $1 million to $1.5 million. However, the rental VRUs and larger units I just mentioned will be built in the first and second quarter of 2017 and that capital alone will equal what we have spent this year to date.

I don't usually mention our search and maintenance activities because they are a small part of our Company, usually about 1% of total revenue. But I will note that our revenue just about doubled this quarter to $490,000 from what is normally a $200,000 to $250,000 quarterly revenue business. This was driven by a surge of work we had performed for one of our larger compressor sales customers and while we continue to perform maintenance work for this operator, some of this initial work would not repeat. We are entertaining more of this type work and although we expect the go-forward revenue stream will be a little higher, it will be closer to the $250,000 to $300,000 per quarter mark.

Going to the balance sheet, our total bank debt is $417,000 as of September 30 of this year and cash in the bank was a little over $61 million. Our cash flow from operations was $9.7 million for the quarter. Free cash flow continues to be strong with $9 million in the third quarter this year, which is consistent with the previous quarter. As a percentage of revenue, free cash flow was 55% this quarter and we averaged 48% so far this year. So for every revenue dollar we generate, we realize almost half of it as real spendable cash.

I read the other day that oil price is only two states of volatility, high or higher and we are certainly experiencing this. On any given day, you can pick the oil price you prefer, whether it is $30 or $70 and find an article supporting your view and of course, with OPEC and their constant state of confusion, it doesn't get any easier for us or our customers in trying to figure out what is going on.

I do get encouragement from a couple of items though. OPEC has at least announced that they intend to try to get prices up. That is the first positive signal from them since the fourth quarter of 2014. We know all the member countries need higher prices. We also know from history that it is a messy process they go through to achieve that goal. It is comical to me when I read dire predictions that OPEC members, if they can reach volume agreements, will cheat on them. Of course, they will; that is how OPEC works, but I'm hoping that is the trend and the intent that matter.

A second area of encouragement is that various operators and customers are signaling larger budgets next year than they have had the past couple years and most of these operators are announcing much better economic and production results than we have seen in a while. If our customers are healthy and active, ultimately, we will be too. Obviously these results and activities take a bit to work through the system and as I have mentioned, our production-oriented services tend to lag the start of recovery by two, three quarters. I think in 2017 we should start to see some recovery in our rental revenues.

As I have noted in the past, NGS is positioned to sell well for this downturn and in spite of the times, our operating results are enviable. Our margins continue to be the highest in the business; our sales backlog has remained steady to up. We are seeing some traction with our new products; our debt is negligible; our ability to generate operating and free cash is exceptional.

Erica, that is the end of my prepared remarks and I will turn it back to you for any questions anyone might have.

(Operator Instructions). Tate Sullivan, Sidoti & Company.

Can you review your comments on CapEx in the nine months? And I think you said it will be subdued in 4Q, but was that total CapEx in the first half of 2017 will exceed what you spent in all of 2016, is that right? Or is that just one part of the business?

Yes, the CapEx we have spent on the new rental units we are going to build in the first two quarters will exceed what we spent year-to-date, the nine months, so the $0.4 million. We will probably spend about $3.5 million around that on the new rental units in Q1 and Q2 of next year.

Okay, thank you for that. And then can you talk about your asset mix of your rental fleet a little bit? I mean how old -- if you can give us information, how old is your average compressor? How long can a compressor last? How will you manage that if the downturn lasts longer than you think? If you could just go into some detail there if you can.

Yes, our average age of the fleet is probably in the five-year range. It stays pretty young on an average just because, in high times, we tend to add a lot of equipment each year. So we have one of the youngest, if not the youngest fleets in the market. Now we book depreciate everything on 15 years and we don't hardly have any book depreciated equipment at this point. The Company is only 16 years old, 16, 17 years old, so we are just starting to get into some zero book equipment. But, as I mentioned, we are converting some of that into our new VRUs so there is a little bit of recapitalization going on on some of that equipment.

Overall, our overall fleet, active fleet, is running about 55% gas lift, which is wet gas and about 45% dry gas, which is typically the traditional San Juan basin, Barnett Shale type gas.

Okay, thank you.

Rob Brown, Lake Street Capital.

On the 600 horsepower market, what is sort of the market opportunity there that you are going after? And I guess does that overlap with your current customer base?

In the higher horsepower market?

Yes.

Okay. I estimate that market at probably an additional 25 -- the size being about another 25% of the size of what we address right now. So right now, we roughly address this 50 to 60 horsepower up to about 300 horsepower market and I think this 400 to 600 is probably another 25% as large. Now that doesn't sound like a -- that's a decent market; it doesn't sound like overwhelming, but you have to remember this 400 to 600 horsepower stuff equates to about double the rent and double the cost. So a 25% larger market from a revenue standpoint is probably the equivalent of about 50% larger or 50% as large.

Okay, good. Thank you. And then sort of the cash situation, you are using a little bit of it in this new market, but where do you think your kind of baseline cash needs are and maybe your thoughts on how much excess cash you have and what you might do with it.

Yes, our baseline cash requirements right now, of course, are much less than we are generating just because of the free cash flow we are showing now, of course the rising bank balance and certainly we are building some real equipment from the point that we really haven't built in a couple of years, nothing that we have existing, it is all new products, but certainly some going into that.

Hopefully that will accelerate as we go through 2017 and 2018, as things start getting maybe a little more active. That remains to be seen; we will see what happens. But we haven't really -- I don't know exactly what we will spend in capital next year. The next call, the fourth-quarter call, we will give a little indication of that. Of course, that is kind of cheating because that is into 2017, but that gives us a little better feel for exactly what the customers' budgets are, they'll start announcing those in December, January so we can kind of gear around that a little bit to see what we think we might be doing from a capital standpoint.

So, yes, obviously, we have got -- we are generating, it's a good problem to have. We are generating more cash than we require right now, but hopefully we can start chewing up just a little bit more of it as we go forward.

Okay, thank you. I will turn it over.

Mark Brown, Seaport Group.

I just wanted to ask if you can maybe just clarify how are you able to get the higher margins on the rental side even compared to last year given the ongoing pressures in that business?

Well, probably a couple things. Number one, I mean everybody has just done a great job on costs. As our customers have come back to us and asked for some relief or renegotiations, that fun stuff flows downhill, right, so we have done the same thing with our suppliers and certainly they have been cooperative and we have looked at everything we can to continue to cut those costs. So I give all the credit of that to our employees that look for everything and we have probably gone through two or three initiatives over the past couple of years just trying to find more and more and more. And every day we are working on it.

So we get some of that; now some of that is natural. As oil comes down in price, lubricating oils and things like that, stuff we buy a lot of so that tends to come down itself, but other initiatives from where there is rent to uniforms to parts and pieces you buy, everybody has done a great job on that. So you get some of that and then I think you also get a little bit of mix shift. As I mentioned, probably two years ago, our active fleet was about 50% gas lift, now it is about 55% gas lift. So if you recall, the gas lift units are the bigger, more expensive, higher rent sort of equipment. So even in this market.

So you're getting a little bit of a shift towards a little bit higher margin equipment out there, so we are getting some of that also, getting some lift from just a little bit of shift in the mix, but I think the majority of it is still some good cost-cutting everybody is doing.

Good, good. I wanted to just dig in on the VRUs a little bit and how big of a commercial opportunity do you think that could be? Also just in terms of your competitors, you are pretty clear that you are willing to grow that part of your fleet, but are your competitors doing the same or are they constrained by the cash pressures that they are facing and may not have the budget to build up or upgrade to VRUs?

Well, I think it is all of the above sort of thing. I mean we see -- and if you remember, in the past, the VRU market probably started in earnest about five years ago, but it started out very, very small, 10, 20 horsepower stuff that we weren't interested in. Plus you didn't see a whole lot of operators jumping into it because it is just a cost; there really wasn't a whole lot of revenue associated with it. But now you have seen more enforcement, you have seen the operators consolidate locations, go to pad drilling so you are aggregating gas as far as it makes it more economic so you are seeing some lift from that. Like I say, additional enforcement regulations. And also -- so that is driving the size of VRUs up into what we are interested in, more the 50 to 100 horse stuff that we can convert some of our older, low pressure, low volume gas units into. So that is providing kind of a natural uplift.

Now as far as competitors getting into the market, most of the competition we see are smaller fleets, it is not the bigger guys. You will see some of that, but generally the bigger fleets in our business tend to lean towards bigger horsepower. So we have got the fourth or fifth largest fleet and we are in the wellhead piece of it, but the bigger guys, the larger fleet tend to be bigger horsepower, so that doesn't even really fit into the VRU market. So we tend to see smaller mom and pop sort of organizations more so than the bigger guys and everybody is cash-constrained nowadays -- well, everybody but us maybe, cash-constrained somewhat. So I imagine if you have got to pick and choose where you are putting your money if you are one of the bigger players, it's probably not going to be in that market, it is going to be where your fairway is, the bigger stuff that you are already trying to move out.

You mentioned flare sales, that they may start to track, typically track the drilling activity. Do you see the flare sales coming back or some of the regulations that were proposed, especially in North Dakota? Is that going to put a lid on in terms of the amount of sales that you can do in that segment?

Yes, I think we have seen the golden age of flares probably three or four years ago and I mentioned that when our revenue was climbing up in that business to $5 million or $6 million a year, that that was an opening and closing window. You had -- number one, you had all of the oil shale wells coming on, you had a lot of flare requirements because the gas is very rich, there was no pipelines for a lot of this oil-associated gas so you had a lot of flares going out just to take care of it. You can't vent it, so you had to burn it off.

So you saw a lot of that and then it started coming off with the downturn and I think it will get back into that. It is low now. I think it will get back into that $1.5 million to $2 million a year. Minimal is good margins. But over time, you still need flares from an emergency situation. Production flares typically are just standard, but the flare business is one of these businesses that nobody wants to buy a flare. You have to have them, but nobody wants to buy them because usually they're not -- if they are on an emergency basis, you never want them to work. You buy something you never want to use.

And then with more and more of the regulations, and it is not as much regulation as just public perception of flares, that has kind of put a cap on some of that stuff too. Actually, the EPA is okay with flaring; it meets all the environmental requirements they care to put out, but generally the public doesn't like to see gas flare and operators don't like it either. It is just in operating circumstances, you have to if they do it.

So to shorten that answer, I think, yes, we are at a low point now, we were in a high point. We will kind of get back into that normalized $1.5 million to $2 million probably the next year or two, but it is not going to be as big as it was.

Okay, understood. Thank you. Appreciate it.

Tate Sullivan.

Thank you and following up on my earlier question on spending, did you say that the 600 horsepower gas compressors, you are building them for sale, but you might build some for your rental fleet, is that correct?

Yes, we introduced the 400 horse last year and then we had the 600 in the back of our mind, but then we had the opportunity to build and sell some and we haven't sold them yet, so they are in that backlog. So we're going to go ahead and start putting some of those in our rental fleet also. So yes, we've sold, I don't know, six or seven and then we are -- we are not starting out big; we will probably build two or three in the fleet just to kind of get them out.

We are going to do the same thing we did in the 400 horse. We built 5 or 10. As we rented them, we built some more. We kind of roll it like that. So we will do the same thing with these 600 horse and start to roll them and I think there is a good market there. It is the same customers essentially that we deal with right now, certainly the same customers that do some of this 400 horsepower stuff, but this all still tends to fall into that wellhead type work that we are essentially specialists at and so we should have good luck with those two sizes as we have had generated with our main fleet over time.

Okay, great. And then just background question, what was the total number of compressors you have and when the compressors reach the end of their depreciated life, do you take them out of your total number of compressors that you may rent?

Well, we had 2626 at the end of the quarter and when they -- if they appreciate out to zero book, no, we don't take them out of the count, we just get to make a whole lot of net income off of them. The only way we take them out of the count is if we essentially just write them off and cannibalize them, much as we did in the second quarter last year when we were around 250 compressors we wrote down to zero. We took those out of the count, but they weren't going to be used anymore. We are essentially stripping them down, converting some of them to VRUs and they will be added back in the count as they are converted and put back into the fleet. And then we used a lot of parts and pieces.

And this is one thing, utilization is all over the map anymore in this kind of market and you see utilizations from 40%, 50% up to 90% and 90% is a little suspect in this kind of market, but other fleets do tend to take equipment out of their count just because it hadn't been refurbished or overhauled or something like that. We don't do that. Unless it goes to zero and we tear it apart, we keep everything in the count that we have. So our utilization probably tracks a little lower than the general market that way.

Okay, great point. And then I mean longer term is there a chance that the type of compressors you are renting will change meaningfully based on new technology or new equipment going into them in let's say 10 years or do you foresee compressors will be pretty much the same in 10 years as they are today?

Yes, I think the good part about this business is there is very little technical obsolescence. Piston tends to go back and forth in a horizontal motion, that has been about the same for a couple hundred years. So the only technical things we have really seen over the past years have been environmentally-oriented or emissions equipment and that is typically on the engine, that is engine manufacturing issues usually. We can retrofit with bolt-on stuff if need be, but nowadays when you buy an engine, it is already all emissions-compliant so we don't have to really worry about that from our perspective; it is just a maintenance issue to us anymore.

I don't anticipate anything that would technically obsolete any of our equipment. The only thing you see it change over time is the type of equipment you might need. 10 years ago, it was dry gas, low volume, low pressure units; now it is more high pressure, high volume units. We have the gamut of those so you tend to have just shifts in whatever people are drilling, low pressure gas wells or higher pressure oil wells. That is the only change it has. It is just a model shift.

Okay, thank you very much for that.

Jason Wangler, Wunderlich Securities.

Good morning, Steve. Was just wondering how it is going with the pricing conversations. Obviously, you talked a lot about utilization kind of starting to see the slower declines. How has the pricing discussions gone? Is that kind of changing as well as you kind of start to see kind of a bottoming affect?

Well, a little. I think I have stated maybe in the past that there probably wouldn't be any more pricing conversations if our competitors will quit discounting so much. We tend to hold our pricing higher. Certainly that impacts our utilization a little I think, but it also impacts our ability to make money. I think you can see both of those in the numbers, but I think the operator is okay with where prices are. But certainly if somebody comes in and says, hey, I can give you this great a deal, everybody looks at a deal.

So it is less, it has gotten -- certainly the frequency of those conversations is less than say the first half of the year, but it is still out there and we are still going to have some -- as long as we have too much equipment in the market and we do, we are still going to have some of these guys pricing below where they should in my opinion. They have got a different opinion obviously, but as long as we have got that dynamic in a slower than normal market, we are going to have some pricing issues I think going forward.

That is fair. On the product sales, which obviously continue to hold up a lot better I think than any of us would've thought, you got the backlog moved up a bit too. Is kind of a $2 million to $3 million type run rate kind of fair you think as long as we have a backlog in the current range as well as we look at it on a quarterly basis?

Yes, I think so. Total sales, compressor sales are like $6 billion or $7 million, I think. Yes, $7 million or $7.5 million compare the nine-month periods. So if you annualize that, you are in the $9 million to $10 million. I still think the $9 million to $10 million is going to be the range we are going to see certainly this year and probably next year. I don't know, as I have said many times, sales are volatile quarter-to-quarter especially compressor sales and we have been very fortunate the last couple of years that they have kind of stayed up for us. And every night I go to bed and kneel down and pray that they stay the same too, but it could change any quarter, but so far so good. So I would say $9 million to $10 million is what we have seen last year and what we will see this year and hopefully that's what we will see next year.

Okay, that is great. Thank you, Steve.

(Operator Instructions). Craig Hoagland, Anderson Hoagland & Company.

I am curious if part of what is benefiting gross margins is having less equipment overhaul expense or equipment prep per rental expense?

Well, you get some of that. When we have equipment come back in off of a contract, whether it is a busy time or a not busy time like now, we don't overhaul or go through that equipment until we have a new contract on it. So right now with that activity being subdued, certainly more coming in than going out, we don't have as high an expense on that. Now we do have an expense because obviously we are still putting equipment out, it is just at a lower rate than is being terminated right now. It looks like hopefully it is bottoming somewhere.

But we do get a little bit of that, and we will see an impact on gross margin as things pick up because, as more equipment goes out, we start building a little more on that too, but that has always been -- I think that is kind of built into the average bit also. One of the things we don't do, we don't capitalize any maintenance so it is all seen every quarter. You are probably getting a little bit of that, but if you look back, this compares to 62% average last year, 61% average the year before. So we are getting a little bit of that, but still our margins run pretty high.

Okay, thanks.

At this time, we have no further questions.

Okay. Well, thanks, Erica, and thanks, everybody, for joining me on the call. I appreciate your time this morning and look forward to visiting with you again next quarter. Thanks.

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