Natural Gas Services Group, Inc. (NGS) Q4 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. And welcome to the Natural Gas Services Group 2015 Fourth 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, Erika and good morning, listeners. Please allow me to take a moment to read the following forward-looking statement prior to commencing our earnings call. Except for the historical information contained herein, the statements in this morning’s conference call are forward-looking and are made pursuant to the Safe Harbor provisions as outlined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements, as you may know, involve known and unknown risks and uncertainties which may cause Natural Gas Services Group’s actual results in 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. Good morning and welcome everyone to NGSG’s fourth quarter and year-end 2015 earnings review. The fourth quarter of 2015 saw a strong finish for NGS, had challenging year for the industry. And I’m exceptionally pleased with our performance. With the backdrop of one of the worst energy markets in decades as well as an unprecedented decline in customer activity and capital spending, our revenue and income demonstrated a resilience that far outpaced general activity. Total revenue and gross margins fell only 1% when compared to 2014, that year being a record for both. We also experienced extremely strong free cash flows in 2015 with operating cash flows running at 43% of revenue, a level very few companies are able to match. In 2015, our rental gross margins grew to their highest average in five years and sales revenues and margins continued at their robust levels. We continued to deliver strong free cash flows and build our balance sheet cash. So with that, let’s get into the details. Starting with total revenue and looking at the year-over-year comparative quarters, our total revenues were lower this quarter by 5% or $1.3 million, a decline from $27.1 million in the fourth quarter of 2014 to $25.8 million in the fourth quarter of 2015. Rental revenues were off 14% or $2 million dollars this quarter compared to the same quarter last year while service revenues increased 23% or $1.5 million. For the sequential quarters of the third quarter of 2015 compared to the fourth quarter of 2015, total revenues were up 21.5% or $4.6 million to $25.8 million. Our rental revenues decreased by 865,000 this quarter compared to sales increased almost $5.4 million to $7.8 million and drove total revenue growth for the quarter. On a 12-month full year basis for 2015, total revenues eased a little over 1% to $96 million with rental revenues off of previous year’s high by approximately 3% or $2.6 million. The revenue level NGS achieved this year is I think exceptional. The prior year 2014 was a record year for our revenues and to replicate that during the period of tremendous turmoil in the industry to within 1% is quite an accomplishment. I congratulate and thank all of our employees for their tremendous efforts. Moving to gross margin and comparing the fourth quarter of 2014 to the current quarter, total gross margin was lower by $1.9 million and moved from $14.9 million to $13 million and decreased as a percent of revenue from 55% to 51%. This reduced margin and ratio was primarily driven by a mix shift towards sales and this compared to fourth quarter from 24% sales on last year’s fourth quarter to 30% this current quarter. Along with lower margins in our ancillary, flare, parts and rebuild businesses. A highlight though was that both of our largest revenue drivers, compressor rentals and sales continued to deliver industry leading margin levels, low 60s and mid 20% ranges respectively. Sequentially, total gross margin increased $1 million to $13 which equated to 51% of total revenue. This compares to last quarter’s gross margin of 57% with the decrease being driven by higher percentage of sales in the fourth quarter of 2015 that traditionally have a lower margin. This is the same mix shift I just mentioned. On a full year basis comparing 2015 to 2014, gross margin was off only $560,000 to $53.3 million. We maintained a same 56% of revenue level that we saw in 2014. And again, this is only 1% less gross margin dollars than we achieved in 2014, which was our highest gross margin level in the Company’s history. Sales, general and administrative expenses fluctuate quarterly as a percentage of revenue but we have maintained those costs at average of 11% of total revenues for the past two years. Operating income decreased from $6.7 million to $4.6 million in the comparative year-over-year quarters, primarily due to lower quarterly revenues in the aforementioned mix shift. However, operating income was up from the third quarter of 2015 by nearly $900,000 sequential quarters and is running at 18% of revenue for both quarters. On a full year comparative 12-month basis, operating income declined 11% to $19.7 million but still ran at 21% of revenue this year. The decline was primarily due to higher depreciation expenses of $1.3 million from rental fleet additions. Correspondingly, recall that we did retire $4.4 million of underutilized rental fleet equipment in the second quarter of 2015 that resulted in a lower reported operated income level of $15.1 million for full year 2015. The comparative year-over-year fourth quarter’s net income decreased from $4 million or 15% of revenue to $3.3 million this year or 13% of revenue, but increased from $2.6 million to $2.3 million and only 28% in the sequential quarters of Q3 ‘15 compared to Q4 ‘15. Net income was $14.1 million in 2014 compared to $10.1 million in 2015 including the fleet optimization charge or $13.2 million without the one-time assessment. Again, this decrease is primarily attributable to the $1.3 million increase in depreciation in 2015. The right consideration of our fleet optimization charge, net income held in the 14% to 15% from both full years of 2014 and 2015. Our income tax rate in the fourth quarter of this year was 30.4% with the full year 2015 rate running at 33.5%. EBITDA decreased from $12.4 million or 46% of revenue in the fourth quarter ‘14 to $10.2 million or 40% of revenue in this current fourth quarter but increased from $9.4 million to $10.2 million in sequential quarters. Comparing the full years of 2014 and 2015 and not considering the non-cash charge, EBITDA decreased only $1.3 million or 3% and averaged 45% and 44% of revenue for the respective years. Including the fleet optimization charge for the same comparative years, EBITDA declined from $43.7 million to $38 million in 2015 but still held at 40% of revenue even including the equipment charge. On a fully diluted basis, earnings per share this quarter was $0.26 per common share compared to $0.32 in the year ago quarter and $0.20 the previous quarter of Q3 2015. Our full year diluted EPS was $1.03 per share without the equipment down or $0.79 per share when considering the equipment charge, compared to a $1.11 per share on a fully diluted basis for 2014. Total sales revenues which include compressors, flares and after-market activities grew $1.5 million in the year-over-year quarters from $6.4 million in the fourth quarter of 2014 to $7.8 million in the fourth quarter of 2015, primarily attributable to higher sales of compressors in 2015. For the sequential quarters, total sales revenues increased nearly $5.4 million from $2.4 million from the third quarter of ‘15 to $7.8 million in the fourth quarter of ‘15. The sales increased between the two quarters shifted our mix of sales versus total revenues dramatically from 12% to 30%. Reviewing compressor sales alone, in the current quarter there were $7 million compared to $5 million in the fourth quarter of ‘14 and $1.3 million in the third quarter of ‘15. We ended 2015 with $13.8 million in compressor sales compared to $10.9 million in 2014 with both years within the $10 million to $15 million range I had forecast during previous calls. When you consider that during the industry downturns capital expenses and subsequently capital equipment sales decline, this is an exceptional year for sales and we buck the industry trend. Not only do we garner more revenue but our gross margins came in at 21%, within our historical range and typically higher than the comparative averages. The point being that we didn’t sacrifice the margins and still increased revenue. I expected to see a lower level of sales revenue but it didn’t happen. However, as I have said repeatedly in the past, I still expect that it will decline. But so far, our backlog has kept pace. Our compressor sales backlog was approximately $4 million on both December 31, 2014 and 2015. This compares to $3.5 million at the end of the second quarter of 2015 and $6 million at the end of the third quarter of 2015. Rental revenue had a year-over-year quarterly decrease of $2.9 million or 14% from $20.6 million in the fourth quarter of 2014 to $17.6 million for this current quarter. Gross margins were however 62% for both quarters. Sequentially, rental revenues were lower by nearly $900,000 to $17.6 million and gross margins this quarter is 62%, an improvement from 60% in the previous quarter. Looking at the full year comparison, rental revenues were off 3% from $79 million to $76.4 million. Gross margins this were 62% and have expanded over the past four years, averaging 62% this year, 60% in 2014 and 58% in 2013 and 2012. Diving into this little more, our gross margin per unit per month has increased 24% and grew by 23% on a gross margin per horsepower per month over the past three years. Average rental rates across the active fleet actually increased approximately 1% for full year 2015 compared to last year. And average rental rates for new units this year are little over 4% higher than we saw in 2014. These are positive; there is not a real indicator of strength in this environment, because more so a higher percentage of more expensive gas lift units being rented this year as compared to smaller less expensive dry gas oriented units. Fleet size at the end of 2015 was 2,622 compressors and we added 52 new compressor units to our fleet in 2015. This is down from our 2014 year-end total fleet size of 2,879. As you recall, mid-year this year, we decided to retire 258 units from our active fleet and recorded $4.4 million non-cash charge. We were also able to sell 42 older used units into the market. Our active and contracted rental fleet utilization dropped from 73% last quarter to 70% this quarter, if you include active and contracted units, or 69% on just active units. In 2015, we spent a total $12.5 million in capital expenses with $9.6 million during the first half of the year and $2.9 million in this last half. This represents an approximate 80% full year decline in capital expenditures compared to 2014. The second half spend consisted solely of our newly introduced compressors models, those being the larger 500 horsepower frames and the smaller environmentally driven vapor recovery units or VRUs. We are not building any other rental equipment right now. If you recall, we started pulling back our fabrication and CapEx spend in the fourth quarter 2014, quicker than just about anyone else. Looking back, this is also when the North American rig count peaked. This is identical to our experience in 2008 when we decreased our CapEx in the fourth quarter of 2008, the same quarter the rig count peaked in. A point that I wanted to show that we do have some early insight when our business maybe headed down but to also to contract that the previous [ph] situation reinforced that there are no clear indicators in the market now one way or the other, up or down. Said another way, if you think projecting 2015 was marquee , 2016 is worse. There is absolutely no visibility as to what customers may require for compression equipment. I do not anticipate any uplift in the market and the bias over the next couple of quarters is down. As such, all I can tell you is that we will earmark $5 million of the CapEx for the first half of the year that we will spend what the market demands whether that is higher or lower. Going to the balance sheet, our total short-term and long-term debt remains less than $500,000 as of December 31, 2015 and cash in the bank was $35.5 million for net cash position of $30 million. Our cash flow from operations was $41.6 million in 2015. This represents a very strong cash generation capability and ran 43% of revenue in 2015. From a liquidity perspective, we are in an enviable state. In addition to our robust cash balance, we will continue to generate strong level of the free cash flow throughout the year. And our line of credit was renewed this past year at the same level and rates as before. We have self funded over $180 million in capital expenditures since 2009, solely through internal cash flow. That’s extra ordinary for capital intensive business like ours. Wrapping up, on a revenue basis, 2015 was the second best year in NGS’s history and it missed first place by only 1%. Additionally, we were able to deliver topnotch results in all respects all the way down to income statement, not to mention the balance sheet and cash flow statement. Not only do we perform financially but our listed common stock have one of the best records in 2015 too with it down only 3% for the full year. Now, I wouldn’t brag about our stock being down but when every one of our peers and the vast majority of oilfield to services companies declining over from 20% to 70%, on a relative basis we were an outperformer. However, hasten to additional, these results blow [ph] the fact that we are in very difficult and competitive market, and 2016 promises to be even tougher. The longer these downturns go, the worse they get. And although I think there is a possibility that the pressure may lighten some, later this year, I think we still have a trough to go through and I don’t see any real recovery until 2017. We’ll continue to see utilization pressures, very competitive pricing and low commodity prices that drive customers to more and more economically oriented shut-ins. But, NGS is well-positioned. We are the only publicly traded compression company that has retailed a C Corp structure and did not convert to an MLP. And that now enables us to chart the course necessary to navigate the market. We’re not levered, nor do we have onerous distributions, both of which were our precious cash. Our financial profile enables NGS to be aggressive where desired, defensive when required, in all respects continue to deliver industry leading results. Now, I want to make one other comment, not related to our results but certainly germane to our business. Our lesson was a combination of [indiscernible] discuss, to the Democratic presenters, or contenders when they try to outdo each other when it comes to their province to ban fracking. Bernie Sanders started down this path a few years ago in Vermont, his home state ban fracking. This was of course a hollow gesture because there’s never been any hydrocarbon production or reserves identified in Vermont. Their ban and was meant with the mixture of humor and ridicule and hell as most seriousness and importance as Obama’s red lines in the sand. Now, we get the candidate, Hillary Clinton, promising to enact new rules to make fracking too difficult to perform. This is of course pandering unwatched masses with the position that has no basis in fact or reality. Fracking has been around since the 1940s and has been performed millions of times. The EPA, no friend of the energy industry, has stated over and over, as recently as last year, and has found link to ground water contamination. And in fact, the natural gas and oil release through this technology has brought the U.S. closer to energy security that hasn’t been in decades. It has also dramatically reduced use of coal for power generation and has contributed to a cleaner atmosphere than we had only 10 years ago. While [indiscernible] concerns me who have a major political party in Canada with these extreme views. With that comment, I’ll wrap up my prepared statement and turn the call back to Erika for questions anyone might have.

[Operator Instructions] Our first question comes from Ken Phil [ph]. Please state your question.

My question, gas is in disarray right now; storage is full; it looks pretty grim, at least until the fall. Could you kind of give us a roadmap to the business opportunity for you guys in the Permian where it seems like activity direction towards oil is going to be good, but I know there is associated gas. And you made a comment about how some of the more expensive units that you are selling now or units used for this, liquids rich environment is actually more expensive and better. How can we kind of model your guys’ opportunity set and the next up-cycle, assuming it’s more direct at oil and less at gas?

Well, nobody else heard, you said it best possible and that’s the caveat which to right now modeling about anything. It’s been kind of interesting, obviously always got all the headlines and it’s gone quite dramatically. Gas is not done any -- not done much better, it’s been down so long that most people don’t even pay attention to it, unless of course it’s part of your business like ours. There has even been some recent articles point maybe little higher gas price towards, even end of this year, even with storage running pretty high. But based on some decline people see over time, certainly from the associated gas, can they come with wells and a lot of those being shut down and very little drilling going on in that way. That remains to be seen. We’ve been predicting the gas resurgence for years. But you’ve got a little of that; you’ve got [indiscernible] LNG has left reasonably, that’ll be nothing but gross. So, I think there’s certainly some blocks in place that will help the gas market and incremental pricing as such. But it is so hard to predict when that might happen and how it might and the longevity of it and how long it’ll last and everything else. It’s tough. I mean we see still relative strength in the gas lift units on the oil side. Now again, relative strength mean, not as strong as last year, certainly, and as I mentioned I think it’s going to be tough this year. But compared to gas, it’s still a stronger commodity. So, I don’t know if that answers your question too much. I think we -- I don’t see a whole lot of -- I think oil will continue to be stronger, I think gas has got a chance to strengthen but that’s one of those things I’ll have to see before I predict it.

And that kind of leads to the follow-on. So, we actually think gas gets better next year, once you get through whatever happens on inventories this year because there is more industrial demand, more LNG exports. So, I guess the concern relative to your business is the wells with their drilling in the Utica, the Marcellus are so productive, you just don’t need as many. And I’m wondering what that does to the opportunity for you guys?

Well, it doesn’t change it too much. We see the Marcellus, and obviously that’s for a lot of the gas that’s coming from, and that’s probably, if you want to point one single area, that’s causing some of the pricing issues, it’s there and it is because it’s so prolific and you’re getting tremendous wells out there. But, we don’t have a whole lot of compression in that basin as of yet because as you say, wells come in, high version pressure, high version volumes, not a whole lot of compression happen to be set initially and the stuff that does tend to go in tends to be the larger horsepower, more midstream, mainline sort of stuff. So, we don’t have a whole lot of business in the Marcellus right now. We continue to see it as a future opportunity because all of these wells, as you say, every well declines every day. So, as those wells over time, start to come down, we start to see more and more wellhead. We’ll see increased business out there. So, generally, the more gas move to the system, the more compression you need in some respect. So, that’s overall good but it varies basin by basin. And as I say, nothing -- not much in the Marcellus now but we do think over time we’ll see more.

[Operator Instructions] Our next question comes from Jason Wangler. Please state your question.

I appreciate the comments, especially at the end. I was watching some of that Sunday night and shaking my head too. I was just curious on the rental side, you seem to be holding up pretty much exactly like you kind of expected, but the sales side obviously doing a lot better and you mentioned in your comments. But is there something you are seeing specifically there outside of I guess just more demand for units, is that some type of trend with your clients or anything that just kind of get you guys to stay more busy on that side?

It’s not any really -- real change, and we’ve been fortunate and I’ve missed that about every call that this was totally out of character for this kind of market that this capital equipment actually increases year-over-year in a bad, bad market. And what I mentioned in the past still holds. We just got a couple of good legacy customers that are large operators that have good balance sheets that they still primarily Permian oriented, that’s the only place running, right? So, still lot of opportunities to do things. We do a lot of work with them and they like our stuff and we’ve been able to ride that way. Now, I think as I mentioned, 2016 is going to be a tough year; it’s going to be tougher than 2015. And I think -- and the backlog came off a little, came off a couple of million dollars from Q3 to Q4, still looks same as a year ago and little higher than Q2 and there is still some potential work out there but we’ll see if that backlog continues. If it does, great. Maybe 2016 on the sales side holds up decently. If not, I still expect that pipeline to dry up, it’s just -- I’m about 18 months late on the prediction.

It’s been a good thing, no question. I think your comments kind of show how the market is. So, it’s nice to see some upside. Maybe just dovetailing on the previous question, just in that Marcellus area, is there a time frame we should be thinking of when that area is going to really start needing compression or more, I mean as the whole? I mean that’s just a blanket statement but is there something that we should watch for there that would start to give that opportunity to you guys?

It’s hard for you to tell because you don’t really have any -- I don’t think there is any independent debt available from how much compression is going in, how much is well ahead, how much is mainline, bla, bla, bla. So, it’s real hard for -- I mean we can’t even tell unless we’re -- we just kind of know because we’re in there talking to customers et cetera, et cetera. Other than us just saying, hey, we are starting to put more equipment in there, we’re starting to see some change there, which again I think is not eminent, I don’t know how else you might see it unless just go around every quarter ask everybody what they’ve got but that’s impossible to do. So, we keep -- frankly, it’s been little longer than we thought with those wells -- you are stable to see operations in these tremendous wells, and of course that’s what’s enabling them to produce gas, cheap gas at these low prices because they’re on a per volume basis, it’s cheap gas from to get. So, we’re still waiting and we don’t -- I don’t really have a good prediction yet.

Okay. And then maybe just one, with the cash balance doing so well and obviously it looks like free cash flow is going to continue. I know you -- I probably at least ask it quite often but where do you see that going? I know you’ve kind of talked in the past of having 30 million or 40 million is kind of your treasure chest, so to speak to build out when the cycle turns. But any thoughts on what you do with any -- I guess what you consider excess cash going forward?

Just to reiterate what I’ve said a couple of times, if we get to a level that we think there is enough "corporate cash” or cash needed for corporate needs, anything beyond that be in excess. And I don’t it was a $30 million to $40 million range, I might have been a little higher than that. But we had never put out a number, just kind of a feeling from ranges. But we’re going to continue to generate cash. In fact, we’re up around $40 million as of the end of February. So, it’s still happening. And obviously as long as we don’t have a lot of capital requirement, so that’ll build. It’s -- throughout this year, we’ll look at what cash requirements might be needed from our standpoint. Obviously what I just said, not a whole lot of capital stuff. We probably will buffer that cash just a little more, based on what we think is a tougher year coming, not a whole lot. But ultimately, we’ll sit there. And if we think there is “excess cash”, we’re going to try to figure out what’s -- what, when and if this cash should go back to shareholders. And we don’t have anything to say that they’re right now but that’s always a -- it’s always a topic we’re looking at.

Our next question comes from Ken Phil [ph]. Please state your question.

Just had a follow-up, since it seems like the queue is little bit light. You made the comment that because you never did an MLP, you think that puts you in a better position than some of your peers. I just wanted to kind of follow up on that. I know the guys that dropped assets down to MLPs, have the distributions, and when they cut some distributions, that’s going to be an issue. But does this put you in a better position than the parent or the general partners of the MLPs which I’m assuming could still compete with you guys in this space. I just wonder how does your not following MLP trail obviously gives you the ability -- you don’t have this cash outflow, but how else does that maybe help you relative to the other guys going forward?

With the general partner or the limited partner, certainly the limited partnership has distributions they’ve got to consider. And with the equity values dropping so much this past year, some of distributions got a little out of hand. And we’ve seen at least one cut from peers already, and I would imagine there maybe some more coming this year. Unpredictable [indiscernible] about those things. From the GP side, of course GP owns about 2% of the limited partners, that’s more -- I don’t really look at it from a point of which ones are we competing against and which one do we have to worry about. They’re all kind of rolled up from the point of when you got to field and equipment level and what’s the pricing and service levels and things like that. So, I think we’re still -- outside of, even if you go back three years ago, four years ago, whenever they wanted to be an MLP and etcetera, etcetera, we still have the competitive advantage. What is much -- debt free at that point and distributions at that point because again $100 oil and cheap mines solved a lot of problems. So, nobody was worried about that three or four years ago. But we still had the competitive edge that we still retain, good equipment; good service; response and run time of two hours and things like that. And that hasn’t waned in this period of -- missed in the past. We emphasize that even as rates are coming down and things are getting tighter, we don’t start cutting at that point. So, whether it’s GP or LP, we tend to look more together. And I think we’ve still got the competitive edge in the field and in the market operationally, if not financially also.

Our next question comes from Rob Brown. Please state your question.

I just want to get a little more color on the CapEx expectations. I think you said $5 million for the first half. Is that more VRUs and more of the high horsepower equipment, what does that consist of?

Yes, that’s all that would be, just as continued from the second half when we set that number. We mentioned $5 million in the second half, we spent $2.9 million. So, the only reason 5 is out there is because it’s marginal number, I’ve said it before and maybe it’s seven, maybe it’s one, who knows. But yes, it’s all going to be strictly the new model. We’re getting some good traction on the little VRUs. We’re putting out more and more the 500 horse units. The VRUs move a little bit quicker because they are cheaper equipment, lower rent, more environmentally driven in this market. So, operators a lot of times just don’t have a choice on want to get that equipment, of course the bigger equipment, sometime like you are you not going to put it out just, may move gas from a well right now. So, the environmentally driven market is essentially somewhat exempt from the downturn. So, long answer to a short question but yes, it’s just going to be those two types of equipment.

Okay, great. Thank you. And then I know you said visibility is very poor but I just wanted to get a direction on pricing I guess in particular, has it gotten incrementally tougher or has it just remained a difficult pricing environment, sort of how it’s been in the last six months?

It’s getting tougher. If you recall in some of the calls in the past, I’ve mentioned, there is two sources the price, right? One is just the current heads up price where you just have bidding [ph] everyday on work. And that’s the most severe pricing. And then the other pricing is, just coming back offset that’s already utilized and installed and moving up right there. The customer negotiations, last year we saw price concessions running from 2.5% to 7.5% on that. That’s come up, and I would characterize that being more 5% to 10% sort of environment now. So, it’s not a big number but somewhat of a change. Now the heads up pricing is really where you start to see the competitive pricing coming in. And it’s gotten worse versus last year. You can -- I think again you get into some of these situations where some competitors don’t have the financial flexibility we do for whatever reason, whether it’s debt distributions or lower margins or whatever it is. And they tend to price at contribution levels I think, seems like. So, we’re seeing more and more that as competitors get I guess more and more, I don’t know desperate but more and more concerned about keeping equipment out that pricing terms come up. And you see same thing and we’re now seeing same thing now. And this is where we made this decision between as this equipment we want to get in the market at that price or is not. And as I’ve said in the past, we tend to try to maintain some margins in this market and maintain some pricing. And it becomes increasingly difficult with competitive environment we’re seeing. But our price, I mentioned, is actually showing a positive trend year-over-year. Now, I don’t want to misleading but like I said in the comments that is not necessarily positive from the standpoint that -- I mean we are not increasing price, I mean make that clear, and nobody is. I think we’re decreasing price less. I tend to think that our competitors are probably discounting at twice the level we are. So, we’re maintaining our price little better and will give us some share on that but we are not doing it just as a wholesale, hard fast rule that no pricing, it’s all margin or anything else, as we go. Yes, the pricing environment is getting tougher.

Then last question, what was your ending fleet size and then along with that what sort of your view on that fleet; is it more cuts to that fleet that you could look at or is it pretty much its way to downturn?

The fleet size at the end of 2015 was 2,622. We don’t -- we got rid of 250 units last year which at that point was about 9% the fleet size and about 2% of the net book value. So, it’s obviously the older stuff and the dry gas stuff. We don’t have any current plans to do anymore like that. Now obviously as a public company, you go through the reviews all the time, we’ll be going through those same reviews, whether they’re bad debts, inventories, asset values whatever it is. It’s just part of what to do. So, I’m not going to predict that we would or wouldn’t do anything. But right now, we think we got the majority of what needed to do last year. And we’re going to hold there. If this market gets appreciably worse, obviously we have to look at all that stuff. But right now there is no plans.

Our next question comes from Peter van Roden. Please state your question.

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

Well, I would expect them to trend down but we are going to try like heck to keep them up. We’ve got them up well this year which is not a great year, I mean from industry standpoint, a lot of pressure is on us. So, I mean our guys have done excellent job on that. And we’ve actually started back into another cost exercise this quarter to look again, make sure nothing slipped in or slipped out or anything else. So, we’re really focused on those margins and trying to maintain those. And of course that comes both ways, the cost side and the revenue side and how we keep pricing. So, we’re going to try to keep them there, in the 60% or higher. Whether we can, really just depends on the depths of the market. And like I mentioned, I think we’ve still got a trough to go through. I think ‘16 is the -- I don’t want to predict anything in this market but my feel is ‘16 is kind of low point. Maybe ‘17, we’ll start to see something out of it. But I think we’ve still got a some hills to climb.

And then on the CapEx side, you talked about -- you’re marking $5 million for the first half; is it fair to say that everything that you build is for a customer order, so that really it’s 100% utilized when it gets built?

Certainly, all of our sales stuff is. Now, on the rental yes, well, the 500 horsepower’s equipment and the little of VRUs we’re filling, there was mix in the past. What we decided to do, you’ve got to equipment yard to run it, you can’t -- we prefer just rental customer say it takes six months to build it and we’ll have it for you. But this market doesn’t allow you to do that. So, you’ve got to build in advance a little. So, we’re putting a nominal amount, 5 to 10 of each of those units in the fleet to be able to pull out and be competitive from the delivery standpoint. So, those, technically don’t have a customer earmark to them. When we get to 5 to 10, if they’re renting, we are not building more. We’ll just hold those and then as they rent, we’ll build more. So, it’s kind of a delayed sort of backlog we’re trying to build and that’s just a little. But right now it’s -- and again that’s just small dollars, we’ve spent less than $3 second half. But, we don’t have any -- we have particular areas and maybe particular customers we’re looking at but we don’t have written contracts necessarily.

At this time, we have no further questions.

Okay. Well, Erika, I appreciate your help and I appreciate everybody joining us. And I look forward to visiting with you again next quarter. Thank you.