Q3 2019 Earnings Call
Good morning.
And welcome to the natural gas services group third quarter earnings call.
At this time, all participants will be in a listen only mode. Operator assistance is available at any time during this call by pressing stars zero.
Your call leaders for today are at least <expletive> data I.R. coordinator and Steve Taylor Chairmen, President and she Oh.
Now like to turn to go over to mislead data you may begin.
Thank you.
Yeah.
To meet the following point looking statement prior to convincing earnings call except for the historical information contained here.
And this morning's conference call, our Fort linking and are made pursuant to the safe Harbor provisions as outlined in the private Securities Litigation Reform Act of 1995.
Right looking statements of you may know involved known in N.N., risking uncertainties, which may cause natural gas San Francisco group action results and feature periods to differ materially from forecast didn't results.
Those risks include among other things to lots of market share do competition or otherwise introduction of competing technology by their companies and new governmental safety help or environmental regulations, which could require natural gas services group to make significant capital expenditures.
The forward looking statements included in this conference call or made as of the data this call and natural gas services undertakes no obligation to publicly updates export looking statements to reflect subsequent events or circumstances important factors that could cause actual results different materially from the expectations, reflecting the forward looking statements include but are not limited to factors.
Describing our recent press release and also under the caption risk factors and accompanied annual report on form 10, K.I. with the Securities and Exchange Commission.
Having all the state it I will now turn the call over this even Taylor with President Chairman and C.O. natural gas services group Steve.
[noise] speculation Ross.
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This morning, we report a 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.
Revenues grew 20% compared to the same period last year, 6% compared to sequentially.
Both led by robust performance on a large horse power.
Class.
Hi, compressor sales continued to be strong with a gross margin percentage this quarter being the highs since the first quarter of 2018.
Cash flow from operations for the quarter was $14.2 million for 68% of revenue.
Balance she cashed level remains saw that 19, and a half million dollars.
As you continue to the call Oh further discussion detail. These financial results as well as include pardoning operating in March comments.
From a non operating perspective, we do have various noncash nonrecurrent items in the corridor, which will review shortly.
And a special note, we Nasser terminals, Larry Lawrence or Vice President and Chief Financial Officer last night.
I mean I'll Miss at the conclusion of these remarks.
The total revenue ingestion poured total revenue $20.9 million for the third quarter 2019, 27% increase compared to the same quarter of 2018.
<unk> an increase in all revenue stream for the 49% increase the sales revenues, 20% of rentals and 32 per cent insertion maintenance when compared to the same quarter of 2018.
Sequentially total revenue increase by 5%.
We don't revenues increased <unk> sequentially, well sales revenues increased slightly from an already robust level last quarter.
And the comparative nine month years day periods are total revenues increased approximately $9.4 million or 19%.
Total adjusted gross margin for the three months into September 30th 2019 increased to $10 million from $7.8 million or 27%.
The same period ended September 32018.
Adjusted gross margin, which does not include depreciation or the various noncash an hour train items.
As a percentage of revenue for three months into September 32019 was 48% consistent with the same period in 2008 tape.
Sequentially adjust gross margin for the third quarter 2019 increased from $9 million to $10 million or 12% for the prior corridor.
Adjusted gross margin is percentage of revenue increase to 40% in this quarter compared to 45% any prior quarter.
During 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 goodwill we've carried on our balance sheet since 2005.
The qualitative and quantitative evaluation of our market value compared to book equity value indicated our goodwill was fully impaired which resulted in total charge of approximately $10 million.
We also intend ticket comprehensive review of our parts inventory for any excess related to slow moving items and retired and obviously parts.
As of September Thirtyth 2019, we have recorded 3.4 million dollar inventory allowance related to these items. This is approximately 12% of our total inventory.
Additionally, we decided to retire 327 compressor units representing 39008.
800 horsepower approximately from our rental fleet, there were close to or at the end of their economic lives.
The majority this equipment, our compressor packages design for low pressure low volume dry gas fields like the Barnett shale or San Juan Basin coal beds.
That have limited applicability in this area of extremely low natural gas prices.
We recorded a 1.5 million dollar 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 in operating income loss of $13.6 million and a net income loss of $12.2 million.
Loss on earnings per share basis, with 93 cents.
Moving forward through the remainder of the financial discussion today.
I'll discuss the adjusted to 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.
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Selling general and administrative expenses were $2.8 million a year over year increase of approximately $440000 and $110000 sequentially.
Our adjusted SGN 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.
$1.4 million increase from third quarter of 2018, and almost $750000 increased sequentially.
Adjusted net income.
It was $1.3 million for the quarter.
It was more than doubled second quarters net income and compares to the year ago quarter of $236000.
Adjusted earnings per diluted share was 10 cents for the third quarter, which compares to four since last quarter and two since a year ago.
Earnings per share for the year to date nine months of 2019 Usseventeen cents.
Adjusted earnings before interest taxes, depreciation and amortization or adjusted EBITDA for three months ended September 32019 was $7.3 million may 29% increase from $5.7 billion to the same period of 2018.
EBITDA increased over $840000 or 13% sequentially.
Adjusted EBITDA for the nine months ended September 32019 was $19.8 million.
Compared to $17.1 million or 16% growth. The same period ended in 2018.
Adjusted EBITDA margins continue to be robust and have ranged between 30% to 35% of revenue and all comparative periods.
Looking to 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 increasing compressor sales of $1.8 million or 63%.
Sequential sales revenues include increased slightly to $5.8 million.
Making sales revenue for this quarter to the highest since the second quarter 2018.
Third quarter 2019, total sales gross margin was 25% of revenue compared to 24% in the second quarter 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 sale segment, we've seen since the first quarter of 2018.
Third quarter 2019, compressor only sales increase from $2.9 million in the third quarter 2000 $18 million 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 cells.
Were up $2.7 million or 29% to $12.2 million for the nine months ended September Thirtyth 2019.
Compressor only sales margin was 22% for the three months ended September 32019, 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 end sequential periods respectively.
Our sales backlog as of September 32019 was approximately $5 million compared to approximately $7.4 million in a second quarter 2019.
We witness a very good quarter in our sales business.
Compressor sales and telesales revenues were up substantially in the year over year period gross margins also expanding.
We continue to see growth on a rental business with rental revenue of 14.4 million dollar for the third quarter 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%.
Shown acceleration a rental growth this quarter.
Compared to the second quarter 2019, our average rental rates on a per unit basis increased 4%.
And were down 1% on average per horsepower basis dislike 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.
Well the gross margin this quarter.
It 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 experience we experienced when we set commission and start up large horsepower units.
With that margin recovery a recovery, we may have hit the necessary critical mass and installed high horsepower that will enable us to better cover these expenses with the rental revenue being generated.
[noise] fleet size at the end of September 2019 totaled 20 277 compressors.
Or almost 406800 horsepower.
In addition of 38 units or a little less than 34000 horsepower during the third quarter.
As of September 32019, 29% of our utilize horsepower is classified as large.
Over the past 12 months, we've added 60, new fleet units totaling 56000 horsepower.
With 95% of those units classified in our large horsepower category.
Factory and for the equipment retirements previously mentioned.
Our horsepower utilization was 66% and Unibased utilization was 62% as of September 32019.
As we have noted our large horsepower class continued to exhibit vigorous growth our medium horsepower ranges made incremental gains throughout the year, but we still experience or higher churn in this class than usual.
There are however market opportunities for the placement of additional equipment before the end of the year do we have to be successful with.
Overall and in some total we had 24% more horsepower generating revenue.
Compared to last year's quarter, and 9% more revenue during horsepower sequentially.
Ngs received additional orders in third quarter for our large horsepower units in for specialized high pressure compressors.
We're also building three additional high horsepower units in anticipation of future demand.
Additionally, we accelerated the fabrication of some anticipate 2020 capital expenditures.
At the heart to large horsepower really units into 2019 due to customer timing demands.
Yes has been the case of the past two years more than 9% of these orders are committed in 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've 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 nine months to this year, we've spent 47 half million dollars on rental equipment rental fleet equipment.
As far as a 2020 projection of capital spending.
Customers are still evaluating their needs. So we don't have a definitive outlets except that we do expect our 2020 capex spending to be lower than the past two years potentially up to 50% lower.
That's correct Ngs, we'll be getting generating positive free cash flow in the second half of 20 to 20.
We understand concerned over expand our capital expenditure budget.
[laughter].
With that said.
He is important to emphasize it the vast majority of the cash it ngs is dedicated to capital expenditures is for firm orders would result in premium price long term rental contracts with premier customers.
Those contracts provide good line of side 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 off a brother and are not unfortunately.
Our operating model over the years has been to build cash during times lower activity anticipation of opportunities when the industry gets busy.
Although we cannot presently tad our free cash flow generation, because we are investing cash into high return assets.
If you look at our cash flow from operations yield calculated over last 12 months is almost 14%.
This is a good proxy as to our ability to generate cash whether is spin on cash flow generation equipment are used to rebuild our cash balance.
On August 12, 2019, Ngs announced at our board had a prudent authorization to invest $10 million directly into the company through a stock buyback.
The authorization expires on September 32, 2020.
This authorization allowed us to allocate capital in what we think is a desirable investment ngs itself.
But it is also an indication to the market, we think the company's significantly undervalued.
As of September 32019, the company had repurchased.
Almost 30000 shares and the cost of almost $409000.
Moving to the balance sheet.
Total bank debt remains minimal at $417000.
As of September 32019.
Our cash balance remained strong and 19 half million dollars.
We generated positive net cash flow from operating activities in this quarter $14.2 million, which represents 68% of our quarterly revenue.
[noise] last night, we announced the retirement of one of our officers, our VP and Chief Financial Officer, Larry Lawrence effective November 15th.
There's been a things yesterday for a decade.
And as overseeing significant growth in the business.
Not only has he been of unique service to the company over these this period.
But also to me personally as we successfully navigated the engine after the industry. This past years success, they I might add.
Larry has been an integral part of our team and why we wish him well under his retirement he will be missed it become a trusted member of the Ngs leadership team as well as a friend.
Good legs retirement, and a recommendation of his significant contributions to the success of Ngs. The board of directors hedging Nash they authorize acceleration of Mr launches of vested shares in the company.
This will result in a onetime noncash expense of approximately $270000, which will be which will be recorded in the fourth quarter. This year.
Coincident with letters retirement, we also now see a potent 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 has worked in and around Midland for close to a decade.
We're 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 cleared demonstrates the ngs is well positioned as we proceed into 2020.
Capital discipline, which seem to seems to be the last latest mantra in the oil field has been opportune for years.
We've never had an annual earnings per share loss in over 15 years no matter the state of the industry.
And our apparently contrary and position of carrying very little debt has served us well.
Nothing from a financial <unk> risk perspective, but just as importantly, we are prepared to take advantage of those opportunities you never turn positive earnings to our shareholders.
Our ability to allocate capital cautiously and judiciously page extra dividends in markets that are unpredictable.
I don't want to in this call without recognizing those and deliver exceptional quarters like this.
Our engineers and fabricators are bill equipment of exceptional quality.
Our field technical force that delivers exceptional service to our customers our financial accounting groups that keep track of at all and artillery departments or services, we provide the Davis support for our frontline personnel to do their job.
No. This is obviously possible without the dedicated work for our employees.
We're also seemed to my prepared remarks. So please open the phone lines for questions.
At this time, we'll take questions. If you like to ask the question. Please press star one on your phone now and you will be placed in the Q. When do I received you can press pound wine at anytime movies off from the Q. Once again, if you like to ask a question. Please press star one on your phone now.
My first question comes from Rob Brown from Lake Street Capital. Please go ahead Rob.
Hi, Steve.
Hi, Rob.
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.
To give some color and 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've got.
Well over a year ago, who had been building those out.
You also saw on those so that's that's been a primary.
Source of the the revenue growth and of course, a <unk> the capex growth to just just person that equipment. So that's that said, but we're also starting to.
Place some equipped but with some some other customers we've been pretty well tied up on those a major orders from a fabrication standpoint up to this point, we're starting to see some you know some life tunnel so.
That.
Relates to the spec speculative units that I've mentioned only three of them so nominees to panic, but.
We do need to have that stuff in the queue to be able to rent it.
So we've seen a couple others other customers start to come into the fold on that so generally the markets Weve. Obviously, that's all penetration because we weren't in this business probably three years ago. So we're making market share gains on there were making penetration you know.
The industry is expected in somewhat of a slowing in 2020, there's probably already a little bit of at some of the certainly the upstream.
Oh, the or more that drilling Orient guys are seeing it sand providers pumping companies drillers and things like that we as you know as you've heard before in the past we typically don't.
The.
Slowdowns till after the drilling piece, so with us be on more than production side.
But were.
We are uniquely position I think very well positioned from the point that we were still building equipment, that's being contracted.
Thats going at it at good rates.
So we still see.
Oh another.
Quarter or two of growth Dan just completing the contracts. We've got and then you will have another quarter to add to that of of increasing revenues from that equipment installed. So yeah, we're a little that anomalous to what the market looks like right now.
But if it does slow to a two or more of it or.
Or or less activity than what we've seen in what we're we're continuing to to build out.
As I mentioned you know them.
The only bad things happen to us we will start generate a bunch free cash.
So I think were youre in good shape I do think the mark the overall, obviously, they're all market is slowing I think that will impact production side somewhat but.
Good thing about the production side is.
One of the drilling side slows down that's the only thing bringing money as production. So we tend to be hit less and and certainly the big horsepower is a long term contracts. So the contracture since a link that will carry us through any.
You know anticipated slowdown that we may even see into.
Next year so.
You know somewhat irrespective of the market worse were a bit insulated from things right now just based on our contractual.
No obligations were.
Fulfilling right now.
Great. Thanks, Thanks for that color and then in the mid horse power business I think you talked about it being mix, but there was some opportunities by year end.
Yes, a little color there.
Yeah, Yeah Weve.
That the mid horsepower.
2008, it did real well 2019, it's been a little slower growth on it we're seeing incremental pickup a little every quarter and we're actually setting.
You know 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 you know a number of those take enough now or our net between watch said, what what would get back is growing so that's where we're getting the incremental gains, but it's just not what we typically see.
In the in a somewhat of a recovery mode or go a decent market.
So I team being that you'll be in the decent piece of that of course now kind of moves into the big horsepower been a decent piece, but.
Yeah, we we see some.
Competitive.
Openings from the point of.
There's not having a 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 they tend to be more than the one or two or five or 10 year. They tend to be the 2030 40 units sort of packages people are looking at so we don't have those were bidding them.
We're in the and.
You know midst of.
Marketing that stuff and and selenide and hopefully close and all that so you know for successful in some of those will we'll see a little more incremental pickup in that.
Medium horsepower range.
Okay. Thank you I'll turn it over.
Thanks, Rob.
As a reminder, if you would like that question. Please press star one on your phone now.
Yeah, Steve at this time your appears to be no further questions.
Okay.
Ross appreciate it thanks, everybody for joining me on the call. Appreciate your time this morning, and we'll look for division with you again. Thanks.
This concludes todays conference call. Thank you for attending.
No. It has ended this call good bye.