Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group First Quarter Earnings Call. [Operator Instructions] Your call leaders for today's call are Alicia Dada, IR Coordinator; Steve Taylor, Chairman, President and CEO. I'll now turn the call over to Ms. Dada. You may begin.

Thank you, Erica, 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; 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 Stephen Taylor, who is President, Chairman and CEO of Natural Gas Services Group. Steve?

Thank you, Erica and Alicia, and good morning, and welcome to Natural Gas Services Group's first quarter 2019 earnings review. This morning, we reported first quarter 2019 results and we are pleased with our operational performance. Our revenues grew 11% sequentially with all aspects of our business contributing to the increase. Compressor sales were very strong this quarter and our core rental revenues advanced 4%. EBITDA was $6.1 million this quarter, a 5% sequential and 7% year-over-year gain. We continue to construct and commission our large horsepower units, all of which are contracted, and both our medium and large horsepower units showed net gains in quarterly utilization. We entered the quarter with almost $40 million in cash with virtually no debt and remain positioned to further our growth this year. As we review of our financial results, I'll provide more detail on the operations. NGS reported total revenue of $18 million for the first quarter of 2019. As we look at total revenue, a 22% increase compared to same quarter of 2018. The increase is primarily driven by a 38% increase in sales and a 17% increase in rental revenues. Interestingly, our service and maintenance revenues almost doubled year-over-year. Although a smaller subset of our overall rentals, the associated gross margins in this segment run in the 70% range and we are receiving increased requests for third-party servicing of compressors and flares. Total revenue increased by 11% when compared to the fourth quarter of 2018, mainly due to the timing of sales revenue from compressor sales. Rental revenues increased 4% when compared to the fourth quarter 2018. Total adjusted gross margin for the three months ended March 31, 2019, increased to $8.3 million from $7.8 million for the same period ended March 31, 2018. Adjusted gross margin, which does not…

[Operator Instructions] Our first question comes from Kyle May. Please state your question.

Hey, good morning, Steve.

Hi, Kyle.

I want to start off with compressor sales. So in your prepared remarks and in the press release, you talked about compressor sales really strong and then you mentioned some of the timing that was affected in the first quarter. Were there any other factors that led to the strength in 1Q? And then, I guess, looking ahead, how do you see compressor sales trending for the remainder of the year?

It's a repeat. It's just the variability we see in that business. We had a $14 million backlog last quarter. We've got $11 million this quarter. We've essentially burned off $3 million of that. It's just the up and down out there. There's nothing really magical or mysterious about it. It's just the variability we get in either getting orders in, number one, the margins are different based on the equipment being built and the scarcity of it and the market forces. And then as you put it in the queue, there's always changes in that. Some may want something quicker, later, something like that. So nothing mysterious about it. It's just a variability we see in that business. Going forward, I think that $11 million, and hopefully, we add to that as we go through and keep that backlog up, we think that's a 3-quarter backlog, say, probably got around $3 million, $3 million to $4 million a quarter in sales coming from that.

Okay. Got it. That's helpful. And do you have the compressor sales gross margin for the quarter?

I do. It is essentially flat. Well, if I can get the right quarter here. Oh no, no. It was 10%.

Okay. Got it. And then one more for me. So thinking about the focus on building large horsepower units. You've given us a lot of color on plans for the year, but maybe thinking a little bit more long term over the next one to two years, do you think there's an opportunity for NGS to continue expanding the large horsepower fleet?

Yes, we think so. As I've mentioned before, I didn't want to say at this call, our fabrication is booked up through for the next year, up to Q1 of 2020. So you'll get pretty good visibility on that. Now we're making plans to start adding some speculative units to that build. All the stuff we've got now is contracted. So we're going to add some spec units to that. Now, if it's been like the past year or so, every spec unit gets sucked up before it's even built, which is fine. But we are planning to add some spec units in 2020 on that. We don't have any room from here, but yes, I think we're in this business to stay and stay competitively and we're going to start adding some equipment to that. Now grand, we've had a flush of business come the last 1.5 years, which we're very fortunate to have. And I don't know if we'll continue on the pace of 50 units a year, but certainly, it's going to be – it's a major piece of the business now and we'll continue to push it. Let me correct that number I just gave you. The compressor sales – okay, the sales margin, which is everything, flares, compressors and everything, was 10%. Compressors themselves where just flat from, as I mentioned, the high freight expenses we had this quarter.

And that was – was that 20% last quarter?

Yes, it was – yes, I think so.

Okay. Great. That's all for me. I appreciate it.

Okay. Thanks, Kyle.

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

Good morning, Steve.

Hi, Rob.

I think you talked a little bit about the pricing environment being flattish. How does it look and is there a difference between large horsepower and greater or medium horsepower?

Yes, there is a difference. The large horsepower, yes, our utilization's just like the industry's at 90%, 95% on the large stuff, pretty active. And you can press price a little more. Now we've always been probably more of a premium-priced provider from the quality of our equipment and the quality of our service, we can manage just a little more pricing, so – but everybody is busy in that higher horsepower. Our pricing is probably on the high end as we have been historically, last 15 years. So that's nothing new. But we did tend to press a little more and get a little more. The medium horsepower, we're starting to see some increases in that. It's a little more sluggish than the big stuff because there's so much more medium horsepower on the market right now. And then the small horsepower, I think we've talked about it, it's the 125-horsepower's smaller, it just kind of gives a good contribution to the business because it's not a grower and there's – that's really where you get the mom-and-pop businesses that pretty well keep pricing down. So we don't see much price on the small – pricing power on the small stuff. The medium stuff, we're seeing more and more. And the big stuff, of course, it's pretty much who's got the equipment.

Okay. Good. And then how are lead times looking? You're saying you're at capacity. Are you seeing lead time extensions from the equipment vendors? And I guess, how's that picture looking?

No actually – well, it's a mixed bag. We see engines have gotten more readily available. Compressors are staying out there, pretty long leads so compressor becomes the critical lead item. But we've seen some improvement in deliveries with engines and coolers. But it only takes one of them with a long delivery to hold the whole thing back. So all in all, it's staying about the same. But I think we'll see some improved deliveries over the next six, 12, 18 months because I think the manufacturers are at the point of catching up with what that demand was.

Great. Thank you. I'll turn it over.

Thanks, Rob.

Our next question comes from Richard Dearnley.

Good morning. To follow up on the lead time question. Since capacity probably hasn't increased a lot in the last six to 12 months, is the softening – does that imply that the demand has – we've satiated the peak and we're going down or back to normal or something like that?

And you're talking about the manufacturers' capacity, correct?

Yes.

Okay. All right. I don't think it signals much of a slowdown at this point. I mean, if you look at our – certainly, we're full and building as fast as we can. And if you look – if you've listened to any of the calls of other compression companies, two or three, their budgets are up too and primarily big horsepower. So I don't see demand really falling off a whole lot. Now, I will say that probably the last year, 1.5 years, it's been on fire, probably more demand be satisfied. And now it's start – I think you start to see everybody catching up with that demand, maybe hitting some equilibrium. But we think – and again, you tell me the oil price, I'll tell you exactly what you want to know, but we think the next 12, 18 months is a good market.

And the – your service business, which is, the way you break it out, very small, but it seems like your increased requests, revenue doubling, but the number was so small. But was that in large horsepower, medium, small? And why now?

It's all across the board. And it's really probably primarily medium horsepower. We're starting to look at picking up some large horsepower stuff, but we're very cautious about that business and we – that's a business you want to be careful with because it can just get into a bidding for labor and we're not interested in that. And when you do that, margins drop and we haven't concentrated on for a long time. We've actually been asked by a lot of people to do this stuff. And so the last year or 2, we've started to move into it a little more and we're seeing more demand from – it's not across the board all areas, two or three areas, we see the demand more. So – and some of that's just because we're perceived to have a superior repair and maintenance reputation and response in those areas. So I think it's coming up more and more. It's not – yes, I don't think it's anything associated with any sort of capital cycle or maintenance cycle or anything like that. I think we're just getting more market share out of it.

Right. Okay. And the gross margin on sales, if your compressor gross margins were in the 20s, were the flares or something else really low to drag everything down to 10, drag the total down?

No, the – okay, the total...

Or am I missing something there?

Yes, that was the number I just corrected, so make sure everybody's got it. The total sales margin was 10%. So that's everything, compressors, flares, everything, all right? The sales margin was essentially 0 because there was a lot of freight expenses. The flare margins were actually a little higher, mid-30s, a little higher than what they were last quarter and parts margins were up still like that. But that stuff's all small. It's primarily compressors and then flares. Flares contribute some there too. So ending up with a total sales margin of 10%.

Okay, good. Thank you.

Okay. Thanks.

[Operator Instructions] We have a follow-up question comes from Kyle May.

Steve, sorry, one more for me. I think I missed this in the prepared remarks. Can you give us the number of units and the unit base utilization in the first quarter?

Yes. The – hold on here. The number of units – well, number of units in the fleet was 2,567. And unit-based utilization was 53% and horsepower-based utilization was 59%.

Okay, great. Thank you very much.

Okay. Thanks, Kyle.

At this time, we have no further questions.

Okay. Very good. Thanks, and thanks everyone for joining me on this call. I appreciate your time this morning and looking forward to visiting with you again next quarter.

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