Natural Gas Services Group Inc (NGS) 2019 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Third Quarter Earnings Call.

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

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

You may begin.

Thank you, Ross, and good morning, everyone.

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

Steve?

Thank you, Alicia and Ross, and good morning, everyone, and welcome to NGSG's Third Quarter 2019 Earnings Review.

This morning, we reported our third quarter 2019 results.

If you've had time to review them, you'll see that we had growth in all revenue streams and improvement in all our sales and rental margins.

Rental revenues grew 20% when compared to the same period last year and 6% compared sequentially, both led by robust performance on our large horsepower class.

Our compressor sales continued to be strong with the gross margin percentage this quarter being the highest since the first quarter of 2018.

Cash flow from operations for the quarter was $14.2 million or 68% of revenue, and our balance sheet cash level remains solid, $19.5 million.

As we continue through the call, I will further discuss in detail these financial results as well as include pertinent operating and market comments.

From a nonoperating perspective, we do have various noncash, nonrecurring items in the quarter, which we will review shortly.

And of special note, we announced the retirement of Larry Lawrence, our Vice President and Chief Financial Officer, last night.

I will comment on this at the conclusion of these remarks.

Looking at total revenue, NGS reported total revenue of $20.9 million for the third quarter 2019, a 27% increase compared to the same quarter of 2018.

We experienced an increase in all revenue streams, so the 49% increase in sales revenues, 20% in rentals and 32% in service and maintenance, when compared to the same quarter of 2018.

Sequentially, total revenue increased by 5%.

Rental revenues increased 6% sequentially, while sales revenues increased slightly from an already robust level last quarter.

In the comparative 9-month year-to-date period, our total revenues increased approximately $9.4 million or 19%.

Total adjusted gross margin for the 3 months ended September 30, 2019, increased to $10 million from $7.8 million or 27% for the same period ended September 30, 2018.

Adjusted gross margin, which does not include depreciation or the various noncash, nonrecurring items, as a percentage of revenue for the 3 months ended September 30, 2019, was 48%, consistent with the same period in 2018.

Sequentially, adjusted gross margin for the third quarter of 2019 increased from $9 million to $10 million or 12% from the prior quarter.

Adjusted gross margin as a percentage of revenue increased to 48% in this quarter compared to 45% in the prior quarter.

In the third quarter, we recorded a number of nonrecurring charges that had a noncash impact on the third quarter income statement.

The first and largest of these was an impairment of the goodwill we have carried on our balance sheet since 2005.

A qualitative and quantitative evaluation of our market value compared to book equity value indicated that our goodwill was fully impaired, which resulted in a total charge of approximately $10 million.

We also undertook a comprehensive review of our parts inventory for any excess related to slow-moving items and retired and obsolete parts.

As of September 30, 2019, we have recorded a $3.4 million inventory allowance related to these items.

This is approximately 12% of our total inventory.

Additionally, we decided to retire 327 compression units, representing 39,800 horsepower approximately, from our rental fleet that were close to or at the end of their economic lives.

The majority of this equipment are compressor packages designed for low-pressure, low-volume dry gas fields like the Barnett Shale or San Juan Basin coal beds that have limited applicability in this era of extremely low natural gas prices.

We recorded a $1.5 million loss related to this retirement, which represents less than 1% of the net book value of our total fleet assets.

From a reporting perspective and accounting for these various noncash, nonrecurring charges in the third quarter, we experienced an operating income loss of $13.6 million and a net income loss of $12.2 million.

Loss on an earnings per share basis was $0.93.

Moving forward to the remainder of the financial discussion today, I'll discuss the adjusted operational results, which do not include the aforementioned impact of the various noncash, nonrecurring charges.

The reported results, which do include these effects, are presented in the earnings release and the 10-Q.

Selling, general and administrative expenses were $2.8 million, a year-over-year increase of approximately $440,000 and $110,000 sequentially.

Our adjusted SG&A expenses have continued to run at our typical 13% to 14% of total revenue for all periods.

Adjusted operating income for the third quarter 2019 was $1.3 million, a $1.4 million increase from third quarter of 2018 and an almost $750,000 increase sequentially.

Adjusted net income was $1.3 million for the quarter, which more than doubled second quarter's net income and compares to the year-ago quarter of $236,000.

Adjusted earnings per diluted share was $0.10 for the third quarter, which compares to $0.04 last quarter and $0.02 a year ago.

Earnings per share for the year-to-date 9 months of 2019 is $0.17.

Adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, for the 3 months ended September 30, 2019, was $7.3 million, a 29% increase from $5.7 million for the same period of 2018.

EBITDA increased over $840,000 or 13% sequentially.

Adjusted EBITDA for the 9 months ended September 30, 2019, was $19.8 million compared to $17.1 million or 16% growth for the same period ended in 2018.

Adjusted EBITDA margins continue to be robust and have ranged between 32% to 35% of revenue in all comparative periods.

Looking at sales revenue.

In total sales, which includes compressors, flares and product sales, on a year-over-year basis, NGS total sales revenue increased 49% primarily due to an increase in compressor sales of $1.8 million or 63%.

Sequential sales revenues increased slightly to $5.8 million, making sales revenue for this quarter the highest since the second quarter of 2018.

Third quarter 2019 total sales gross margin was 25% of revenue compared to 24% in the second quarter of 2019 with gross margin dollars up 7% sequentially.

Gross margins were above the 22% level we saw a year ago with gross margin dollars increasing 72%.

This quarter's gross margin is the highest percentage for the sales segment we've seen since the third quarter of 2018.

Third quarter 2019 compressor-only sales increased from $2.9 million in the third quarter of 2018 to $4.7 million this quarter, an increase of almost 63%.

Compressor-only sales of $4.7 million compares to $4.8 million in the prior quarter.

Year-to-date compressor-only sales were up $2.7 million or 29% to $12.2 million for the 9 months ended September 30, 2019.

Compressor-only sales margin was 22% for the 3 months ended September 30, 2019, compared to 19% for the same period a year ago and increased 1% sequentially.

Gross margin dollars for compressor sales increased 92% and 4% in the year-over-year and sequential periods, respectively.

Our sales backlog as of September 30, 2019, was approximately $5 million compared to approximately $7.4 million in the second quarter of 2019.

We witnessed a very good quarter in our sales business.

Compressor sales and total sales revenues were up substantially in the year-over-year periods, and the gross margin is also expanding.

We continue to (inaudible) our rental business with rental revenue of $14.4 million for the third quarter of 2019 and $41.4 million year-to-date.

Rental revenue increased 20% for the year-over-year period and 18% year-to-date.

Sequentially, rental revenues increased over 6%, showing an acceleration in our rental growth this quarter.

Compared to the second quarter of 2019, our average rental rates on a per unit basis increased 4% and were down 1% on an average per horsepower basis.

The slight decrease in per horsepower rates is not unusual because larger-horsepower equipment cost less per horsepower, which translates into lower per horsepower rental rates.

Rental rates increased by an average of 12% per unit in the year-over-year quarters mainly due to our continued penetration into the large-horsepower markets, which carry higher rental rates.

Rental gross margin this quarter was 56%, an increase from second quarter 2019 rental gross margins of 53% and last year's quarter of 55%.

Our quarterly rental gross margins have been somewhat variable due to the high initial expense we experienced when we set, commissioned and started up large-horsepower units.

With our margin recovery and recovery, we may have hit the necessary critical mass of installed high horsepower that will enable us to better cover these expenses with the rental revenue being generated.

Fleet size at the end of September 2019 totaled 2,277 compressors or almost 406,800 horsepower, an addition of 38 units or a little less than 34,000 horsepower during the third quarter.

As of September 30, 2019, 29% of our utilized horsepower is classified as large.

Over the past 12 months, we have added 60 new fleet units totaling 56,000 horsepower with 95% of those units classified in our large horsepower category.

Factoring for the equipment retirements previously mentioned, our horsepower utilization was 66% and unit-based utilization was 62% as of September 30, 2019.

As we have noted, our large-horsepower class continued to exhibit vigorous growth.

Our medium-horsepower range has made incremental gains throughout the year, but we still experienced a higher churn in this class than usual.

There are, however, market opportunities for the placement of additional equipment before the end of the year that we ought to be successful with.

Overall, and in sum total, we had 24% more horsepower-generating revenue compared to last year's quarter and 9% more revenue-generating horsepower sequentially.

NGS received additional orders in the third quarter for our large-horsepower units and for specialized, high-pressure compressors.

We're also building 3 additional high-horsepower units in anticipation of future demand.

Additionally, we accelerated the fabrication of some anticipated 2020 capital expenditures to the large-horsepower rental units into 2019 due to customer timing demands.

As has been the case for the past 2 years, more than 9% of these orders are committed and under contract at premium rental rates, with many of them having longer rental terms than what is generally captured in the market.

With these additional orders and fabrication and accelerated deliveries, all of which will result in future cash flows, we have increased our 2019 capital expenditure budget for the rental fleet additions to $60 million to $65 million from the previously discussed range of $40 million to $45 million.

Through the first 9 months of this year, we have spent $47.5 million on rental fleet equipment.

As far as a 2020 projection of capital spending, our customers are still evaluating their needs, so we don't have a definitive outlook, except that we do expect our 2020 CapEx spending to be lower than the past 2 years, potentially up to 50% lower.

If that's correct, NGS will begin generating positive free cash flow in the second half of 2020.

We understand concerns over expanding our capital expenditure budget.

With that said, it's important to emphasize that the vast majority of the cash that NGS is dedicating to capital expenditures is for firm orders, which result in premium-priced, long-term rental contracts with premier customers.

Those contracts provide good line of sight for future earnings and cash flow.

Moreover, as we have discussed in the past, our financial discipline has provided us with the flexibility to act on these opportunities where many of our oilfield brethren are not as fortunate.

Our operating model over the years has been to build cash during times of lower activity in anticipation of opportunities when the industry gets busy.

Although we cannot presently count our free cash flow generation because we're investing cash into high-return assets, if you look at our cash flow from operations yield calculated over the last 12 months, it's almost 14%.

This is a good proxy as to our ability to generate cash, whether it's spent on cash flow-generating equipment or used to rebuild our cash balance.

On August 12, 2019, NGS announced that our Board had approved an authorization to invest up to $10 million directly into the company through a stock buyback.

The authorization expires on September 30, 2020.

This authorization allowed us to allocate capital in what we think is a desirable investment, NGS itself.

But it's also an indication to the market that we think the company is significantly undervalued.

As of September 30, 2019, the company had repurchased almost 30,000 shares at a cost of almost $490,000.

Moving to the balance sheet.

Our total bank debt remains minimal at $417,000 as of September 30, 2019, and our cash balance remained strong at $19.5 million.

We generated positive net cash flow from operating activities in this quarter of $14.2 million, which represents 68% of our quarterly revenue.

Last night, we announced the retirement of one of our officers, our VP and Chief Financial Officer, Larry Lawrence, effective November 15.

Larry's been with NGS for nearly a decade and has overseen significant growth in the business.

Not only has he been of unique service to the company over this period but also to me personally as we successfully navigated the ins and out of the industry these past years, successfully, I might add.

Larry has been an integral part of our team.

And while we wish him well in his retirement, he will be missed.

He's become a trusted member of the NGS leadership team as well as a friend.

Due to Larry's retirement and in recognition of his significant contributions to the success of NGS, the Board of Directors has unanimously authorized acceleration of Mr. Lawrence's vested shares in the company.

This will result in a onetime noncash expense of approximately $270,000, which will be recorded in the fourth quarter of this year.

Coincident with Larry's retirement, we also announced the appointment of Jim Lawrence to the position of Vice President and Chief Financial Officer as well as our Principal Accounting Officer for reporting purposes.

Jim has over 20 years of financial and accounting experience with public and private energy companies and has worked in and around Midland for close to a decade.

We are pleased to welcome Jim to NGS in this important role, and we look forward to his contributions and leadership.

Complete details on Jim and his appointment can be found in our press release and 8-K filing last evening.

In closing, this quarter clearly demonstrates that NGS is well positioned as we proceed into 2020.

Capital discipline, which seems to be the last -- latest mantra in the oilfield, has been our tune for years.

We have never had an annual earnings per share loss in over 15 years no matter the state of the industry, and our apparently contrarian position of carrying very little debt has served us well not only from a financial and risk perspective, but just as importantly, we are prepared to take advantage of those opportunities and return positive earnings to our shareholders.

Our ability to allocate capital cautiously and judiciously pays extra dividends in markets that are unpredictable.

I don't want to end this call without recognizing those who deliver exceptional quarters like this: our engineers and fabricators who build equipment of exceptional quality, our field technical force that delivers exceptional service to our customers, our financial accounting groups that keep track of it all and our ancillary departments and services who provide the daily support for our frontline personnel to do their jobs.

None of this is obviously possible without the dedicated work of our employees.

Ross, that's the end of my prepared remarks, so please open the phone lines for questions.

(Operator Instructions) Our first question comes from Rob Brown from Lake Street Capital.

Maybe just go a little bit further into the high-horsepower business.

It's been doing well over the last few months, and you're seeing revenue growth there but also order growth for the rental equipment.

Maybe give us some color on the market environment.

Are you seeing a market environment improvement?

Is it share gains?

And what's really driving the growth?

Well, of course, the primary part of it is a couple of big contracts we got a little over a year ago.

We've been building those out and also installing those.

So that's been a primary source of the revenue growth, and of course, the CapEx growth, too, just pushing that equipment.

So that's it.

But we're also starting to place some equipment with some other customers.

We've been pretty well tied up on those major orders from a fabrication standpoint up to this point.

We're starting to see some light at the end of the tunnel.

So that relates to the speculative units that I mentioned, only 3 of them, so nobody needs to panic.

But we did need to have that stuff in the queue to be able to rent it.

So we've seen a couple of others -- other customers start to come into the fold on that.

So generally, the markets we -- obviously, that's all penetration because we were in this business probably 3 years ago.

So we're making market share gains on that.

We're making penetration.

The industry is expecting somewhat of a slowing in 2020.

There's probably already a little bit of it, some of the -- certainly the upstream or more of the drilling or in guys of sand providers, pumping companies, drillers, things like that.

We -- as you've heard before in the past, we typically don't see slowdowns till after the drilling piece of it with us being on more of the production side.

But we're uniquely positioned, I think very well positioned from the point that we were still building equipment that's been contracted, that's going out at good rates.

So we still see another quarter or 2 of growth than just completing the contracts we've got.

And then we'll have another quarter or 2 after that of increasing revenues from that equipment being installed.

So we're a little anomalous to what the market looks like right now.

But if it does slow to more of a -- or less activity than what we've seen and what we're continuing to build out, as I mentioned, the only bad thing that will happen to us is we'll start generating a bunch of free cash.

So I think we're in good shape.

I do think the overall -- obviously, the overall market is slowing, and I think that will impact production side somewhat.

But the good thing about the production side is when the drilling side slows down, that's the only thing bringing money, is production.

So we tend to be hit less.

And certainly, the big horsepower's on long-term contracts.

So the contracts are essential link that will carry us through any anticipated slowdown that we may even see into next year.

So somewhat irrespective of the market, we're a bit insulated from things right now just based on our contractual obligations we're fulfilling right now.

Okay, great.

And then on the mid-horsepower business, I think you talked about it being mixed.

But there were some opportunities by year-end.

Could you give us a little color there?

Yes.

We've -- the mid-horsepower in 2018, it did real well.

2019 has been a little slower growth on it.

We're seeing incremental pickup a little every quarter.

And we're actually setting -- increasingly setting more and more of the smaller units or the mid-horsepower units each quarter.

But the churn is keeping up.

And so we're getting back a number of those, too.

Now our net between what's set and what we get back is growing, so that's where we're getting the incremental gains.

But it's just not what we typically see in a somewhat of a recovery mode or a decent market.

So I think being the decent piece of that.

And of course, now it kind of moves into the big horsepower being the decent piece.

But we see some competitive openings from the point of others not having good service, maintaining good service and things like that and operators wanting to make some changes there.

So that's what we're seeing.

And they tend to be more than 1 or 2 or 5 or 10.

They tend to be the 20-, 30-, 40-unit sort of packages people are looking at.

So we don't have those.

We're bidding them.

We're in the midst of marketing that stuff and selling on it and hopefully closing on it.

So if we're successful in some of those, we'll see a little more incremental pickup in that medium horsepower range.

(Operator Instructions) And Steve, at this time, there appears to be no further questions.

Okay.

Ross, appreciate it.

Thanks, everybody, for joining me on the call.

I appreciate your time this morning, and we're looking forward to visiting with you again next quarter.

This concludes today's conference call.

Thank you for attending.