Natural Gas Services Group, Inc. (NGS) Q3 2015 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen, and welcome to the Natural Gas Services Group 2015 Third Quarter Earnings Call. [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 Ms. Dada. You may begin.

Thank you and good morning, listeners. Please allow me to take a moment to read our 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 the future periods to differ materially from forecasted results. Those risks include, among other things, the 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 over to Steve Taylor, who is President, Chairman and CEO of Natural Gas Services Group. Steve?

Thank you, Alicia and Erika, and good morning, everyone and welcome to Natural Gas Services Group's third quarter 2015 earnings review. NGS posted solid operating results this quarter and continue to be well positioned to continuing our performance. Although our industry is going to through a severe downturn, and every company is affected by it, NGS's gas compression and production oriented services do enable us to avoid some of the immediate and most severe impacts. So with that said, let's go ahead and review the numbers. Starting with total revenue, I'm looking at the year-over-year comparative quarters, our total revenues decreased 17% or $4.4 million from $25.6 million in the third quarter of 2014 to $21.2 million in the third quarter of 2015, well over down 8% for about $1.7 million dollars for the quarter as compared to last year. Our service and maintenance revenues grew 14%. Quarterly total sales declined from $5.2 million to $2.5 million. For the sequential quarters of the second quarter of 2015 compared to the third quarter of 2015, total revenues were down 12.5% from $24.2 million to $21.2 million. Primarily from our sales revenues which were off $1.8 million and rental revenues over down $1.2 million. Reviewing the comparative nine month year-to-date periods, total revenues rose slightly from $69.9 million to $70.2 million with rentals and sales as 1% of the respective revenue levels last year. Moving to total gross margin and comparing the third quarter of last year to this current quarter, total gross margin was down 13% from $14 million to $12 million. Third quarter 2014 gross margins registered at 54% of revenue and improved to 57% in the third quarter of 2015. Sequentially total gross margin was off 14% to $12 million held in the 57% to 58% range relative to revenue. On nine months year-to-date comparison, total gross margin was up 3% from $39 million to $40 million or 56% and 57% in the 2014 and 2015 respective periods. I just want to point out that although we see some quarterly comparative revenue impacts, the majority of the fluctuation is related to typical and historical variations in our compressor sales revenues. However, as I'll detail later, our sales business continues to be robust. Additionally, part of the sales revenue variations, our costs have declined at an equivalent or quicker rate thereby exhibiting our ability to cut costs quickly and in accordance with the revenue environment with which we are presented. Our sales, general and administrate expenses increased $140,000 in the year-over-year quarters but decreased $210,000 in the sequential quarters. For the comparative nine month year-to-date periods, SG&A expenses were up 50% and rose from 11% of revenue in 2014 to 12% this year, still among the lowest in the industry. Although our SG&A dollar amounts vary quarter-to-quarter revenue pressures -- the calculation itself would tend to trend higher as a percentage of revenue. If you recall, and as a reminder, last quarter NGS retired 258 gas compressors with a non-cash pre-tax charge of $4.4 million. The following comparison for operating income and net income, I'll note the effect of the retirements whether the second quarter comparison. So if you're worried the impact is either way. Operating income decreased from $5.8 million to $3.8 million in the comparative year-over-year quarters. When comparing operating income in the effect of the fleet optimization, operating income increased from $919,000 in the second quarter of 2015 to $3.8 million this current quarter. With that -- retirements, operating income was down from top line $5.4 million to $3.8 million in the current quarter -- and I just mentioned in the current quarter. On nine month year-to-date basis, operating income decreased 2% to $15 million this year. Considering the fleet retirements operating income to climb from $15.3 million to $10.5 million for the same comparative periods. I'm not sure there are many companies have been able to hold their operating income level over the past year as well as we have. And the comparative year-over-year third quarters, net income decreased $2.6 million from $3.9 million in the same quarter of 2014. The sequential quarters of the second quarter 2015 and the third quarter 2015 saw net income increase from $615,000 to $2.6 million. Without the fleet retirements, net income for the second quarter 2015 would have been $3.5 million. The nine month year-to-date periods, net income decreased from $10.1 million to $6.9 million with a fleet optimization. With that the equivalent retirement this would have been a 3% decrease from $10.1 million to $9.8 million dollars. On a year-over-year basis, EBITDA decreased 18% from $11.5 million the third quarter of last year, $9.4 million in this current third quarter of 2015. Sequentially, EBITDA was down from $11.1 million in the second quarter of this year to $9.4 million this quarter, not carrying the second quarter retirements. Considering their retirements, EBITDA increased from $6.8 million to $9.4 million. On a nine month year-to-date comparison, and excluding retirements, EBITDA increased 3% to $32.2 million for 2015, and both year-to-date periods posted EBITDA margins in the 45% to 46% range. Considering their retirements, EBITDA decreased $3.5 million to $27.8 million. On a fully diluted basis, EPS this quarter was $0.20 per common share compared to $0.30 in the second quarter of 2014. On a nine month year-to-date basis, and not including any effect from the retirements, earnings per share last year was $0.80 compared to $0.77 this year. As I review our operating segments next, the financial comparisons do not reflect any impact on the fleet optimization exercise since those adjustment for below the line changes. Total sales revenues which includes compressors, flares and after-market activities decreased in the year-over-year quarter from $5.2 million in the third quarter of 2014 to $2.5 million in the third quarter of this year. This decrease was primarily attributable to lower compressor and flare sales than last year's comparative quarter. For the sequential quarters, total sales revenues contracted from $4.3 million to $2.5 million. I'm a nine months comparative year-to-date period, total sales decreased only 1% to $10.7 million in 2015. Our Compressor unit sales alone actually increased 16% year-to-date. Regarding compressor sales alone, in the current quarter there were $1.3 million compared to $3.1 million in the third quarter of 2014 and $3 million this past quarter. Our sales backlog continue at much level [ph] and was currently about $6 million as of September 30, 2015. This compares with a backlog of approximately $3.5 million last quarter. This portion of our business has proven to be surprisingly resilient this year. Real revenue had a quality contraction of $1.7 million or 8% from $20.2 million in the third quarter of 2014 to $18.5 million for this current quarter. Our gross margins this quarter was 60%, down from last year's comparative quarter, and down from 64% in the second quarter this year. I want to point out that although real margins dropped this quarter, last quarter 64% margin was the highest we have had in the past years. So should not be a comparison. We were able to get a good jump on reducing our expenses last quarter before revenue started to be impacted. Our goal is to maintain real margins in the 60% average range and in fact margins have averaged 62% over the last four quarters. Sequentially real revenues dropped a little over 6% from $19.7 million to $18.5 million. The comparative nine month year-to-date period, rental revenue in 2015 is 1% higher than last year at $58 million. Real fleet size including the results of our optimization exercise at the end of September was 2,664 compressors and our actual unit utilization was 72% for the quarter. And the active and contracted compression utilization is 73%. We added only two net new fleet units this quarter -- those being our new larger 400 horse power design. We did spend some capital on a modified few other existing and only units into our new vapor recovery units. Some of the civilization pressures our continued pricing strength. Average rentals rates across the actively fleet increased 1.3% in the comparative Year-over-year third quarter periods, and posted a minor 1.8% sequential loss this past two quarters. Looking at pricing for a new set of equivalent which gives a more real time pricing pictures compared to the average pricing that we just talked about, rental pricing year-over-year third quarter period was down 2% and down 6% sequentially over the past couple of quarters. Turning to capital expenditures, the first half of this year we spent $9.6 million against a projection of $10 million to $15 million. The last quarter's call, I said that we wouldn't spend more than $5 million dollars in the second half of this year and we spent $1.6 million this quarter, this current quarter. We are starting to get some traction with our new higher horsepower models and a smaller vapor recovery units of your use -- and excel our capital expenditures slated for. Our income statement demonstrates the industry leading profitability we continue to deliver. I also want to emphasize that broad base and improving strength of our balance sheet. Our accounts receivable averaged quarterly balances have decreased 24% when comparing this third quarter average to the last quarter 2014. Our compression optimization exercise last quarter has improved the integrity of asset values carried on the balance sheet. Our net cash position continues to grow. As of September 30, 2015, our total short-term and long-term bank debt is approximately $400,000 in cash and the bank was approximately $13 million. Our cash flow from operations was $9.5 million for the quarter and $34.8 million to the third quarter of this year. Our free cash flow this quarter is $7.9 million and total $23.7 million for the year-to-date. Summarizing, I'm happy with our performance this quarter, especially our cost discipline. But we have managed our operating expenses well, it's obviously imperative in this environment because of the pricing utilization pressure. Our team has always been good to getting our cost under control and in fact, if you look back, we started shutting down our realm fabrication activities in August of 2014, almost 15 months ago. As in the last downturn, we moved quickly when we think we're entering negative environments. As you may know, we tend to emphasize margins over margins share in downturns like this. We call the same strategy in lass downturn has served us well. And although we lost some nominal share, we were able to regain it within 12 to 18 months of recovery, and we did it with our pricing relatively intact. This doesn't mean that we don't just price into the market. We don't say share with it. I don't know how long this downturn last but we are positioned well in our ability to maneuver through periods or lower activity in a profitable manner as an improvement. That's my prepared remarks and I'll turn it back to Erica for questions anyone might have.

[Operator Instructions] Rob Brown from Lake Street Capital.

Just wanted to get a sense of how the utilization trends are sort of proceeding into the year and your view in how they go into next year and maybe when they bottom, seems like things are holding in pretty well but just wanted to get your view in the next sort of six months or so?

You've asked me the price of oil and gas, right, [ph] which is -- I looking the correlation you might think. We're trending -- it looks like I was trending about two to three points per quarter down. So you just type that easy math, your mid-line next year, you're in the mid-60s or something like that and I thank you it wouldn't continue if that right as you start getting towards maybe the bottom of the cycle or the lower activity levels, almost start to mitigate some plots and flat for a bit and start backup. So it's hard to get us just historically, what we've seen this time, two to three points a quarter, it looks like what it's doing and that I mean if the just does one or two point to some recovery, it doesn't mean if it does three or four, it's getting worse, it's just the on average that's what -- that's kind of what I'm expecting right now.

Okay. And along those lines do you feel like your fleet now is sort of optimized or do you have any -- I guess what's that risk for the retirements, if anything?

We don't anticipate any further retirements, we did that one in the second quarter and that's the first time we've ever done that in the company's history. So company is 16-year old, that's the first time we've done that. And that was primarily as I mentioned last time; just driven by the consistently low priced gas markets, a lot of the majority I think 85% to 90% of that equivalent was just dry gas or any type of equipment. Now as I mentioned we are -- well and again, that stuff is about -- I think if I remember it right, it was 11 years old average age, we do a 15-year depreciation. So more than two-thirds of its live or perform, more than two-thirds of its live and we reduced the fleet of that 9% although it's all about, I think about the 2% that's been very impacts. So it's obviously -- I think the right move at the right time, now I anticipate doing anything, we're -- now we are looking to -- fill some of the gas for the equipment we've got, we're still running in the gas supplies in the 60% top 65% utilization on some of the equivalent but we are looking in the mid-summer converted some because VRU, the vapor recovery units, some of those smaller ones. And when we're more open to sell some of the equipment if a customer long or wants something like that, we're in the past year we would tend not to sell-off real equipment because we want to actually deliver gets the better, it gets from a return standpoint. But that stuff being pretty hard to move in these low gas priced markets, we're not averse to sell so much stuff but I wouldn't expect simply selling the whole lot or anything else and we don't have any plans right now to retiring further.

Okay, good. Thank you. Just quickly one more, I just wanted to get your sense on sales revenue line was quite strong, your backlog was good, what's the dynamic going on there, and you said it was pricing but what's happening in that segment?

Well surprising because typically in these markets -- this is capital equipment, people are buying and that's the first thing that gets cut the capital budgets. So this is surprising part of it. Now, what's happening is pretty much what we've seen over the last year, we've got two or three good legacy customers and like our equipment, like how we do it etcetera and they are still placing orders. So our sales revenue level this year will of course, the year-to-date number is the same as it was last year and sort of a full-year based on the backlog is going to be the same as it was last year too. So that has had zero impact the past year. And it's just -- we've got a couple of pretty good customers that are large customers, good balance sheets, they are not sitting here trying to pull back, I think they are actually trying to take advantage of some of the market, not that it impacts us a whole lot because you know we've priced according to our cost starting from margin standpoint. So as our cost of goods go down, we're going to -- we can pass those along still maintain some pretty decent margins on the equipment. So it's just kind of fine dynamic, I wouldn't have predicted it a year ago but we're certainly happy to have it.

Okay, thanks.

Thanks, Rob.

[Operator Instructions] Joe Gibney from Capital One.

Just a quick question on 400 plus co-star units in your fleet, just curious how many hints do you have in the field and maybe how many are in the queue to get rolled out in the first part of 2016, just trying to get a sense of the component of your mix at this point?

Yes, I mean it's going to be slow, we've got eight or nine out in the field now installed, and I think maybe about half of them runs as -- we got about have them started. So it all looks good, no operating problems or anything else. We've got five more on the shop and these units are about twice the cost of what we traditionally have built in the past, if you recall our standard gas lift units, the 200 horse units have been $160,000 to $180,000 range; these are running and creating $400,000 range. So we've got five of those in the shop, we're getting some pretty good interest off of it, and we're building advanced course you want to hold that equipment and advance in this kind of market but since don't have this -- because of this market and because there is a fair amount of other equipment out there from our competition, we've got to have a stuff in ready. So I think as these start rolling through, we will build these five, get them placed, just keep replacing that, so we see the ramp up as far as acceptance goes, we'll manage that going up and just try to have some equipment available in the fleet. So right now it's a pretty small population obviously and as I've said in the past, I don't think we'll see really any contribution from that over this downturn, that's number one. It's a project deduction for us, the market is going to be prepped forward and I'll just run a downturn anyways. So there is some headwinds to it but I'm encouraged by the recession we've had so far.

Okay. And then just the other question I was trying to figure -- the topics of left alone for the last couple of quarters given where the market has been and your referenced in your comments there some level of traction on the smaller sides. I know previously this was under 5% of your total revenue associated with VRUs. Where do we stand on that now, if you're getting little bit more traction or it's still sort of in that very diminished ballpark?

Yes, it's still, I'm not going to show it very much and move little much and for the same reasons as bigger horsepower, it's -- we've got it down market. It's a new product for us going around things like that, so same headwinds. And on both those, the bigger horsepower, the smaller stuff, we knew this, we knew we're introducing the stuff in the down market and the market is very cost conscious and everything else we want to go ahead and get it out. You just down market, to educate the market, the customers, prep the market and everything else. So it's still a good traction but I think we've got we've got five or ten of those slated to go through the shops and again most of those like commissioned in the comments are conversions from existing equipment. So we're getting a little better price point out those going forward. So on either one I think it's -- we're just using this next year to just soften market out for the future bombardment hopefully.

Okay, good deal, I appreciate it.

Thanks, Joe.

[Operator Instructions] Jason Wangler from Wunderlich.

We're just curious to appreciate the utilization commentary and just maybe not pressing too hard on what we're seeing in real time, so to speak but just as you saw the quarter play out and prices kind of got weaker throughout it, was the utilization as you've commented in the past, was it kind of a person most of type situation was there, some big fluctuations throughout it?

Now I mean it's -- I mean you can get some monthly variations, obviously if you get a bunch back to warrants and then maybe a nice month in this bad, so you get those variations but the trend seems to be about the same. In fact I looked at -- yes, showing me trying to terminate a trend on it here, yes they just figured some of the numbers and you assisted and go month-by-month and you're looking back, course looking back it's all -- but when you look at the numbers you're kind of like, I was getting my thought, this is them. But they all kind of feel down right because the trend is down. You get variations but again, I think that the average seems to be that 2% to 2.5% to 3% a quarter. So you divide that by three, that's 1% a month but that just even…

Okay. And obviously this is a little more real time but what's going on in Natural Gas, the units that's have been out there are obviously and really resilient to last few years but just curious, are you hearing anything from that side just because now all the sudden that's cropping up in the last month or so with the weak gas prices.

Yes, it's not as apparent obviously as the oil thing and still a majority of equipment we're seeing come back is all shale oriented and gas. But there has been more gas oriented terminations come back as I saw a year ago but it's hard to say if that's just -- that is because of the low price or just a general cost cutting environment in the business because when you get into this, operators don't look at -- cut some calls some because he sees still some old stuff that has come out, obviously, that comes off even some of the gas stuff but it's not been as -- it's not obviously been as much as old stuff and I don't -- it hadn't been, I guess the best way to characterize it is, it hadn't been an alarm going off at this point.

Sure. And if I could speak one more, again not holding your feet to the fire too much but it seems like so many operators have been pretty opaque about what 2016 looks like. Obviously the seasonality is expected to kind of come this year but that should really not affect you as much given the equipment has to be out there but have you really gotten much indication of what 2016 looks from anybody or is it more just still real time, we're going to worry about this week and we'll get to next week when we get there?

Yes, I mean it's -- everybody is pretty -- they are tightlipped or just don't know. And I think it's just as much to the latter as the former. I think we'll start to see, we'll see how the budget start coming out, will see some of them towards the end of this year, first to next because these sound like last year by what -- some of what till March to tell you what they're going do that year because things are so uneven. So I think we'll see that but we're prepared for the continuation of a down market in the 2016 and I think that's – if it perks up a little quicker, great, we're in excellent shape but we're not presuming anything for 2016, I think you need to be prepared for continuation of a tough market. I'm not asking it to get any tougher, I think it's just going to continue tough and we've proven our ability to get through that this time and the times before. So we'll just continue to watch our cost, try to compete as respectfully as we can and try to get some of these new products out.

Well, if you find that bottom you don't need a phone call. And I appreciate it.

I'd like to know. Thanks.

[Operator Instructions] At this time we have no further questions.

Okay, thanks Erica. And I think everybody for joining me on the call. I appreciate your time this morning and we look forward to speaking with you on the next quarter's call. Thanks.