Q4 2023 Natural Gas Services Group Inc Earnings Call
Yeah.
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None: Or vice versa I suppose.
None: Yeah.
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Web site located at Www Dot <unk> Dot com.
Should one or more of these risks materialize or should underlying assumptions prove incorrect.
Results may vary materially.
In addition, our discussion today will reflect certain non-GAAP financial measures, including EBITDA adjusted EBITDA and adjusted gross margin among others.
Or we can filiation of these non-GAAP financial measures the most directly comparable measures under GAAP.
Yesterday's earnings release.
I will now turn the call over to Justin Jacobs, Our Chief Executive Officer Officer Justin.
Thank you Anna and good.
Everyone welcome to our fourth quarter 2023 earnings conference call.
Thank you for joining us. This morning, we appreciate your interest in natural gas services group.
By introducing the team.
Joining me on the call. This morning is Brian Tucker, President and Chief operating Officer.
Jim Haizlip, our Chief Technical Officer, John Bittner, our interim Chief Financial Officer, and Steve Taylor Chairman of our board of directors.
As Steve as Steve was our longtime CEO and interim CEO last year I asked Steve to start us off with some thoughts on the quarter and the year after.
With that John will review the quarter and year end detail and then I will finish our prepared remarks with thoughts on the current state of the business, our updated guidance and our growth strategy going forward.
I'll conclude with a question and answer session.
Before turning it to Steve I wanted to take a second to share with all shareholders. My appreciation for the first rate approach Steve has taken during his transition.
He has been in the valuable resource for me and the team and a welcome presence in the office at one of our largest shareholders. He is well aligned to continue to drive significant value for all shareholders and from my perspective. He is as the saying goes walking the walk thank you Steve.
Yeah.
Thanks, Josh I appreciate the kind words and I want to assure everyone listening in my opinion is mutual we have a great management team in place and it's been my pleasure to work with them.
I won't take long, but it could cause I think the results speak for themselves.
<unk> thousand and 23 was a record year for revenue and EBITDA among other items as we look at this year, particularly this quarter.
With almost every aspect of our performance.
But when we talk about our successful bank funding throughout the year.
Our ability to obtain pre contracted work long duration at excellent rates.
The operational and environmental technology are increasingly incorporating into our equipment. There are many areas can be happy with.
We were especially proud of those items that we have accomplished so we can continue to build on in the future.
All of them are the continued successful execution of our high horsepower strategy that is well established in the 500 horsepower market.
And it moved us into 'twenty 500 horse power realm.
Our ability to secure additional blue chip customers they'll contribute to our growth in the future.
And our safety performance that resulted in zero workplace instance, among our employees in 2023.
I see these as legacy initiatives that we can continue to build on into the future.
Whether you look at the fourth quarter or the full year the company exhibited exceptional growth and results in 2023.
I'm not going to recite road numbers, John will go through those but I will note that anytime you have a year.
That exhibits 40% to 50% year over year growth in rental revenue rental adjusted gross margin in total EBITDA, it's a hell of a year.
I'll distill all of this into the company's ability to identify opportunities and execute on them.
We have many opportunities ahead, and our management team led by Justin <unk> CEO is well positioned and possess the ability to continue the company's growth.
As chairman and as a significant shareholder I have great confidence in our employees and our management team to continue our success.
I'll leave you with one final comment which is the title of the song from 1986, Future's, So bright I gotta wear shades.
Now I'll turn it over to John Bittner to review the quarter and year in detail.
John.
Thank you Steve.
Good morning, everyone to Echo your comments, we had a very successful fourth quarter to finish as strong year. So let me jump first and to review of the fourth quarter first and then I'll get to the full year 2023 results.
Total revenue for the three months ended December 31, 2023 increased to $36 2 million, which was up $13 7 million or 61% from $22 5 million in Q4 2022.
Our revenue was up 15, 5% from $31 4 million for three months ended September 32023.
Rental revenue for Q4 2023 was up was $31 6 million up from $26 million in Q4, 2022 for 54% increase year over year and up $3 9 million from $27 7 million in Q3, 2023% to 14% increase.
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Our sales revenue for Q4, 2023 was $2 $9 million.
Up $1 6 million or 125% from $1 3 million in Q4 2022.
One 5 million from Q3 2023 from 107% increase.
Aftermarket services, our Ams revenue.
It was $1 7 million for Q4, 2023, which was $1 million or 153% for the same quarter in 2022 and down by approximately $600 sequentially.
6% decrease.
Our adjusted gross margin of $23 million in the fourth quarter of 2023 increased approximately 89% when compared to $10 7 million in the same period in 2022.
Sequentially adjusted total gross margin dollars increased 39%.
From $14 6 million last quarter.
Adjusted gross margin as a percent of sales for Q4, 2023 was 55, 9% versus 47, 6% for Q4 2022 and.
46, 4% in Q3 2023.
This material increase in our margin percent was driven primarily by rental adjusted gross margins.
Our rental adjusted gross margin dollars increased year over year to $19 2 million in Q4 2023 from a $1 3 million in Q4, 2022, representing a 70% increase.
Sequentially rental adjusted gross margin dollars increased from $14 2 million or 35% increase.
Our rental adjusted gross margin as a percent of sales for Q4, 2023 was 67% versus 54, 8% for Q4, 2022 and 51, 4% in Q3 2023.
Our rental adjusted gross margin was higher than we expected in Q4, primarily due to lower than expected labor parts and oil expense our expectations that rental adjusted gross margins going forward will be somewhere between what we experienced in Q3 and Q4 as we indicate.
Our expectation for Q4 on the third quarter earnings call.
Adjusted gross margin dollars for our sales revenue increased year over year by $1 6 million to $2 9 million in Q4, an increase of 125% and increased by 107% sequentially.
Adjusted gross margin as a percent of revenue for sales was 21, two in Q4 2023 versus a negative 65% in Q4, 2022, and a negative 7% in Q3 2023.
Our Ams adjusted gross margin for Q4, 'twenty three of 440000 <unk>.
It presented a 152000 increase from the prior year or 53%.
And an increase of 35000 or 9% from Q3 2023.
Ams adjusted gross margin as a percent of revenue was 26, 3% in Q4 of 2023 versus.
It was 45% in Q4, 2022, and 18% in Q3 2023.
As mentioned on last quarter's call, we've seen a significant increase in Ams revenue from historical levels. Beginning in Q2 2023. This increase was primarily due to pass through services that we provide to our range for our customers when installing our large horsepower units.
These revenues will fluctuate with the volume of equipment that in each quarter and they carry low pass through margins against the decline in gross margin percentage from the prior year period.
Volume of new units set saw the highest level of activity in Q2, Q3 of 2023 and decrease somewhat in Q4 23.
Our fourth quarter 2023, adjusted EBITDA was $16 3 million compared to $7 8 million in Q4, 2022, or 110% increase year over year.
And a 38% sequential increase from $11 8 million in Q3.
Our Q4 2023, adjusted EBITDA benefited from our unexpected high rental adjusted gross margin of positive contribution from our sales adjusted gross margin.
Pre tax operating earnings were $4 4 million for Q4, 2023, which improved from an operating loss of approximately $300000 in Q4 2022.
Our Q4 2023 operating income was down approximately 500000 sequentially from Q3.
However, it's important that we did take one time charges.
Approximately $4 million to increase our inventory reserve.
As a result of the cessation of fabrication operations at our Midland facility and.
Additionally, a charge of approximately $500000 part of the retirement of idle units, both of which as disclosed in our 10-K filed yesterday.
Without these charges our pro forma operating income would have been $8 9 million for Q4 on a sequential increase of $4 million from.
From $4 9 million in Q3 2023.
Net income in Q4, 2023 to $1 7 million compared to a net loss of approximately $800000 in Q4 2022.
But down from net income of $2 2 million in Q3 again. The Q4 net income results include the impact of the one time items discussed above.
Earnings per share for Q4, 2023, <unk> thousand 14, Vince 13th.
On a basic and fully diluted basis respective respectively compared to a loss of <unk> <unk> per share for Q4, 2002 and earnings of <unk> 18 per share in Q3 2023.
On a full year basis, the total revenue for the company increased by 43%.
$221 2 million in 2023 from $84 8 million in 2022.
Our rental revenue was also up.
43% to 106, $106 1 million in 2023 from $74 5 million in 2022.
Our sales revenue was up approximately 353000 or 4% to $8 9 million in.
In 2023 from $8 $6 million in 2022.
Our Ams revenue was up 240% $6 1 million in 2023 from $1 8 million in 2022.
Our adjusted gross margin dollars increased by 53% year over year to $58 7 million in 2023 from $38 5 million.
Our adjusted gross margin for rental was $57 3 million, which was up $26 million or 56% from 2022.
Our adjusted rental gross margin as a percent of sales for 2023 was 54% compared to 49, 3% in 2022.
Adjusted gross margin dollars per sales.
Zero in 2023 compared to a positive 918000 in 2022, which was approximately 10, 7% of sales.
Adjusted gross margin for our Ams business was $1 4 million for 2023 compared to 835000 in 2022.
Adjusted gross adjusted gross margin as a percent of revenue for Ams was 23, 5% for the full year 2023, compared to 46, 6% of revenue in 2020.
And the decline in gross margin percentage was driven primarily by the increase in loan pass through billings low margin pass through billings associated with the new unit set.
Okay great.
Our adjusted EBITDA for 2023 of $45 8 million as compared to $29 2 million in 2022 or 57% increase in 2023.
Our operating income for 2023 was $10 5 million as compared to approximately 400000 for 2022.
Our SG&A expense was $2 8 million higher in 2023, as compared to 2022 and $16 5 million in 2003 versus $13 6 million in 2022.
However, our second half 'twenty three run rate was less than our first half 'twenty three due to some nonrecurring items experienced in the first half of the year.
Also deducting from our operating income in 2023, we did have a noncash nonrecurring charge of 779 burnout an impairment in the second quarter and the one time charges of $4 million for the inventory reserve and 500000 or retirement of idle units discussed above.
Both of which were taken in Q4.
Our net income for $2023 $4 7 million compared to a net loss of approximately $600000 for the full year 2022.
Our basic EPS for 2023 was 39.
And 38 on a fully diluted basis compared to a net loss of <unk> <unk> per share in 2022 for both measures.
As of December 31, we had 1247 utilized rental units.
Representing just over 420000 horsepower.
Compared to 1221 units represent just over 318000 horsepower.
As of December 31, 2022.
We have added approximately 95000 net horsepower to our fleet over the course of the last year.
Representing approximately a 22% increase in total fleet horsepower.
Our total fleet size just over 500000 horsepower in September and we ended the year at a total of 523 365.
This is up from approximately 425000 horsepower fleet size at the end of last year.
During the same period, a rented horsepower grew by over 102000 horsepower we.
We ended the fourth quarter with 66, 5% on a per unit utilization on a per unit basis, and 88% utilization on a horsepower basis.
Our revenue per horsepower increased 17% over the year demonstrating.
Demonstrating the impact of the growth in high horsepower units and also the price increases we've been able to implement over the past year.
Our total fleet as of December 31, 2023 consisted of 876 units and roughly 520000 horsepower for 277 horsepower per unit.
Our average horsepower per unit has grown by 22% over the past year.
None: And notably approximately 98% of our high horsepower fleet is utilized in drawing rate currently.
None: Turning to the balance sheet, we ended the year with $2 7 million in cash and $164 million outstanding on our amended restated revolving credit facility.
None: And looking at our key financial covenants contained in our credit agreement.
None: Our leverage ratio at the end of Q4 was 253 times, which was down from $2 seven one times at the end of Q3.
None: Our fixed charge coverage ratio of <unk> four was three eight times up from $2 78 times in Q3.
None: So we were comfortably in compliance with both of our financial covenants.
December 31 2023.
None: Our accounts receivable balance as of December 31, 2023 was in excess of $39 million.
None: Which is elevated from normal and expected levels.
None: Primarily to a significant increase in rental activity in certain process related billing delays, which we expect to address during 2024.
None: Net book value of our rental fleet at year end was approximately $374 million.
None: We generated cash flow from operations of $18 million compared to $27 8 million for 2022.
None: The decrease is primarily related to the slower collections in our accounts receivable as discussed in the paragraph above.
None: We had capital expenditures of approximately $154 million during 2023, and we increased the balance on our amended and restated credit facility by $139 million during 2023.
None: With that I will turn it back over to Justin for a discussion of the current operating environment.
Justin: Thank you John.
Justin: Overall, we can even see solid demand for both our rental services and new equipment with generally attract pricing, we see a favorable environment for potential growth over the near to medium term and believe we are well positioned to expand our market share while continuing to perform at high levels for our customers.
Justin: Approximately 75% of our active fleet is located in oil and liquids oriented basins, where activity is primarily driven by crude oil prices.
Justin: As such I'll turn first oil on a macro level oil prices appear to be relatively steady, which should continue to drive activity, we have reasonable confidence in the oil markets for the near term activity.
Justin: Activity in forecast generally showed stable to increasing production levels for the near to medium term.
Justin: Natural gas markets are a different story pricing is weak and gas oriented rigs are at a relatively low level.
Justin: Current moratorium on future LNG facilities is likely negatively impacted sentiment about gas production at least temporarily.
Justin: Overall I would describe it as natural gas production market is unsteady.
Justin: From the company perspective, we do not currently see natural gas production is a growth story, but our people are doing a good job maintaining our presence in the gas oriented areas and we continue to profitably ranked equipment in these spaces.
Justin: While the overall environment can be described as favorable we will remain in a constant state of awareness that commodity markets can change the negative carry.
Justin: Such we will consistently plan our growth with a with an appropriate margin of safety to withstand any potential downturn.
Justin: I'll turn to our 2024 outlook with an update the guidance provided on our third quarter earnings call.
Justin: We're a written summary of our outlook I would point you to our earnings release filed after the market closed yesterday and I would also remind you of the disclaimer provided at the beginning of this call which addresses forward looking guidance.
Justin: Our current outlook for 2024, adjusted EBITDA is $58 million to $65 million. This is a material increase from the guidance provided on our third quarter call.
Justin: As noted in the earnings release, we believe the low end of the range represents our current view of the annualized amount of fourth quarter of 2023, adjusted EBITDA that is run rate or recurring.
Justin: As it relates to the fourth quarter of 2023, there are two items to which I would draw your attention.
Justin: First we had sales adjusted gross margin of <unk> $6 million in the fourth quarter, but for the first three quarters of the year, we had negative zero point $6 million. We believe the first three quarters of the year are much much better forward indicators in the fourth quarter.
Justin: Second as John noted earlier in the call the fourth quarter 2023 rental adjusted gross margin of 61% exceeded our expectations I would describe margins at that level.
Justin: Everything looked great.
Justin: Taking both of these points into account leads us to believe the low end of the range is a good approximation of the run rate adjusted EBITDA of the fourth quarter of 2023.
Justin: I would further note that we believe there are some areas of investment required in 2024, while we have not yet quantified. These investments they are focused on improving the scalability and efficiency of our operations both in the field and corporate offices to drive material future growth.
Justin: Along those lines I am pleased to announce that our new website went live yesterday.
Justin: Although a relatively small investments it is indicative of our intent to make sure all aspects of our business are in line with a technologically innovative equipment, we provide to our customers I would like to thank our team who made this happen.
Justin: I'll move next to new unit capital expenditures for 2024, our new unit capital expenditures expected range is $40 million to $50 million of that.
That approximately $15 million as capital to build new units from the 2023 plan that will be completed and installed in 2020 for.
Justin: The balance is 2024 capital planned expenditures that are currently expected to be completed and installed in late 2020 for <unk> early 2025.
Justin: In terms of return on invested capital we are targeting at least 20%.
Justin: <unk> to any growth capital expenditures, which I would define as new units unit upgrades and unit conversions. This target is an average rate across our growth capital expenditures.
Justin: I would also like to discuss our forward growth strategy.
Justin: While each of these items will help us meet or hopefully exceed our 2024 outlook. They also reflect our long term intention to grow our revenue and cash flow.
Justin: There are four parts to our growth strategy.
Justin: Number one optimize the existing utilized fleet.
Justin: Number two improve our asset utilization number three expand our rental fleet and number four execute accretive mergers and acquisitions.
None: Describe each of these points in a little detail.
None: First optimize the existing utilized fleet.
None: We believe there are opportunities to modestly improve the profit profitability of our existing utilized rental fleet through targeted price increases, particularly in geographic areas that are experienced high rates of cost inflation, along with operational efficiencies by using improved data collection and analysis to optimize our costs and labor parts and maintenance.
None: Improve our asset utilization.
None: We believe we can improve the overall cash flow of the business by increasing utilization of the fleet as well as creating investable cash for noncash asset.
We have a significant number of currently unutilized units any unutilized fleet. The books as of year end 2023 is more than 600, unutilized units, consisting mostly of medium and small horsepower units.
None: We will review these unutilized units to determine where investment can improve the marketability and cash flow potential of the units.
None: We also have a significant amount of capital tied up in noncash assets. Notable examples of this include the income tax receivable and the higher accounts receivable, which John discussed earlier, we believe these noncash assets can be monetized and invested back in the fleet at or above our target levels of return on invested capital.
None: Third expand our rental fleet, we intend to prudently increase the size of our rental fleet, mainly through a pre contracted agreements with our customers. We believe our future growth in this part of our strategy will be primarily driven through our placement of larger horsepower centralized station natural gas can pressure compressors for unconventional oil production.
None: Select increases in medium horsepower units to meet customer demand beyond our existing fleet.
None: Fourth identify execute accretive mergers and acquisitions, we believe there may be opportunities in burgers with or acquisitions of rental compression companies or related businesses, providing similar services. While there is no certainty or probability of any particular deal. We will continue to evaluate potential acquisitions joint ventures and other opportunities that could.
None: Enhanced value for our shareholders.
None: At this point, we will not provide overall growth goals for the medium to long term nor will we provide a breakout for each of the components of the growth strategy in terms of contribution. However, it is the framework for how we intend to drive material growth over the next three years to five years, and we will look to provide further detail in the future I remain.
None: Optimistic as to our growth potential and look forward to delivering against that potential to drive value for our shareholders.
None: This concludes our prepared remarks, so I will ask the operator to queue up for question and answer portion of our call.
None: Thank you so much sir ladies and gentlemen at this time, we will conduct a question and answer session. If you would like to state. A question. Please press seven pound on your phone now and you will be placed in Q any order received comprise seven pound again at any time to remove yourself from the queue.
None: We are now ready to begin.
None: Yeah.
None: Okay.
We do have some questions in the queue.
Mr. Arnell: Mr. Arnell. Please go ahead.
Arnell: Thank you good morning.
Arnell: Maybe you could just talk a little bit about what takes you to the high end of your guidance of the 65.
Arnell: Okay.
Arnell: I think as we look at the.
None: Going through the growth strategy those items really towards the on the first point, which is optimization of the fleet.
None: And seeing what we're able to do in terms of.
None: Targeted price increases.
None: Some potential improvements in operational efficiencies and then as we look to the third point expanding the fleet, it's really the timing of when some of the units which were in the 'twenty three plan.
None: And that was spilled over to 2020 for the timing of when those.
None: Windows are installed.
None: Understood.
None: And in terms of your Capex.
None: In terms of the sort of the new units can you.
None: Talk about how much horsepower you are planning on adding.
None: I guess between the 23 carryover and into 'twenty four.
None: I would give those numbers really just in aggregate, which is if you look at the amount of capital that we see.
None: In 2023.
None: And the horsepower that was added.
None: Ratio as you look at that 2024 will be roughly the same.
None: Got it.
None: Tom.
Tom: And then you talked about gross margin and sort of guided to sort of three <unk> between <unk> and <unk>.
Tom: If I got that correct.
Tom: What went right in Q4 understood, but can you talk about which specific.
Tom: Are you seeing maybe go higher.
Tom: And therefore, reducing your gross margin.
None: It was.
None: It was really as we looked at the performance in the fourth quarter as we said it surpassed our expectations and theirs.
None: Really no particular line items that stood out but it was really across the board with the major line items.
None: Highlighted which are labor parts.
None: Consumable expenses largely oil and so as we looked at those and looked at the performance of machinery and just the timing.
None: We would say that really it's kind of across the board our expectations those come down. So there's no particular line item that we would point to it was really a everything went.
None: <unk> well.
Got it and then just last one for me and then I'll turn it over.
When you're talking about natural gas prices.
None: And you don't really see that as being a growth story can.
Can you just say how much of your.
None: Compression is located in those basins.
None: Sure So as we look at the.
None: The breakout where rough numbers, 75% and in oil basins in the balance so roughly 25% and natural gas.
None: I'll take the rest offline. Thank you so much thank.
None: Thank you.
None: Thank you we'll go ahead and open up again.
None: Mr Hughes Mr. Hayes. Please go ahead.
Mr Hughes: Hello, there yes.
My name is Frank Hughes from our director and the shareholder.
Frank Hughes: First I'd like to say Justin Congratulations on your appointment as CEO.
Frank Hughes: And Steve Congratulations on the next phase of your.
Frank Hughes: Retirement I think this has been this whole transition has been handled expertly.
None: And my question is for you is this more of a personal level could you discuss here for a minute.
None: <unk>.
None: Personal journey going from managing director at Mill Road to board member at Ngls to CEO.
None: Appreciate understanding a little bit about that transition for you.
None: Sure first thank you for the.
None: For the comments ill speak for Steve here for a second but.
We appreciate that the shareholder perception is is that is it actually is which has been I think a very constructive partnership. So I. Appreciate the positive comments there is noting that.
None: From a from a personal perspective.
None: Prior to Mill Road I'd worked.
None: Really a combination of operational role in investor.
None: Particularly in turnaround situations and so for me this was a little bit about going back to earlier in my career as I looked at the opportunity with natural gas services haven't been on the board and shareholder through a mill for for.
None: For several years prior to that.
None: What I believe is really some some great potential.
None: Really as you look at the results over the past year.
None: The business has grown significantly and I think there's an opportunity to continue.
None: Growth.
None: In the future for for several years, and so that was a very attractive opportunity.
None: My relationship with.
None: Steve.
None: And having been on board give me confidence that we'll be able to just step in and really hit the ground running with a great transition. So overall, it's just exciting.
None: An exciting opportunity for me.
And speaking with.
None: And Oh by my team are now former team at Mill Road, who were longtime friends and colleagues. They were just incredibly supportive in that opportunity and really joining.
None: One of their larger investments and so all around it was a great opportunity that I was excited being able to take.
None: Well again, thank you very much for those comments.
None: I have been involved with natural gas services for 25 years.
None: It was initially an investor when it was still a private company.
None: Very glad to see.
None: The <unk>.
None: Managed to work out on.
None: Therefore, the company on yourself.
Joseph: Again, thank you Joseph.
Joseph: <unk>.
None: I'm sorry.
None: Next question comes from Rob Brown.
None: Hi, It's Rob Brown with Lake Street capital markets.
And congratulations on all the progress.
Robert Duncan Brown: Thank you.
Robert Duncan Brown: Yes.
Yeah.
None: We lose you there.
None: Yeah.
Turning it around.
None: Yeah, Hi, thank you.
None: And congratulations on all the progress Rob Brown with Lake Street.
First question is on the.
Robert Duncan Brown: The pricing environment, and you've alluded to do some opportunities with your <unk>.
Robert Duncan Brown: Some of your fleet, but how is the overall pricing environment as the prices still continue to increase.
Robert Duncan Brown: Placements.
And I guess how is the.
Robert Duncan Brown: The opportunity for pricing I guess in the market.
None: Yeah, I would hit that first it's just a high level.
None: Our comments earlier were that we're seeing both for existing units and for new unit generally attractive pricing.
The pricing was I think.
None: Really driven over the past several years by significant cost inflation depend.
None: Depending on what metrics you will look at but I think a general feeling that level of inflation has has moderated some although still still there.
None: And as we look at.
None: The areas, where we are largest in terms of our business.
None: We're still seeing that.
None: That.
Labor inflation, particularly at the at the Permian Basin, where it is still very difficult to two.
None: To attract people in the field.
None: So.
None: So as we are going through our existing fleet and looking at new New units were certainly taking a close look at pricing to say are we able to maintain and try and improve our margin overtime.
None: Okay, Great got it.
None: On the Capex spending outlook.
None: You've talked about sort of.
None: I guess, some some potential upside to that I think or I guess, what drives upside to the capex are you.
None: Being kind of customer quotes.
None: Interest that could drive upside to the capex or does that look pretty stable for the 24 period.
None: We're certainly seeing.
None: Seeing incremental customer demand.
We haven't made any decisions around that but that is.
None: Near term or relative near term reveal for us.
None: Looking at the availability and making sure we're maintaining prudent levels of leverage in the future, while so looking to capitalize on the ability to.
None: Pre contract with some some great customers.
None: Four.
None: New unit quite attractive prices. So that's something we've made a decision on yet but.
None: It is certainly something that we're looking at and we will update on the on the next quarter to the extent that our capital plan increases.
None: Okay, great. Thank you I'll turn it over.
None: Okay sure. Thank you. Thank you Mr. Brown.
Our next question comes from Tim O'toole.
None: Mr. Etzel. Please go ahead.
Tim O'toole: Good morning can you hear me alright.
Tim O'toole: We can hear you Tim.
Tim O'toole: Great.
Tim O'toole: And.
Tim O'toole: As I've done in the past.
Tim O'toole: So first of all welcome Justin and congratulations to Steve are finally, retiring after a couple of drivers.
Tim O'toole: And.
Tim O'toole: We'll catch up with you off line.
Tim O'toole: A couple of quick questions one is.
Tim O'toole: On the balance sheet, the debt level coming out of the fourth quarter at $164 million.
Tim O'toole: Good.
Tim O'toole: We are now basically closing the books on the first quarter. So I'm wondering if you could talk about kind of current debt levels and then also.
Tim O'toole: Where where would you target that to go in terms of some of the various ratios.
None: Let's just say.
None: If you're at $60 to $65 million of EBITDA This year.
None: Out of the year.
Absent, let's say M&A.
None: Where would you like where would you target that.
None: That ratio to be.
None: Yeah coming out and then kind of also related.
None: I think that you have bid on your debt facility that you have.
Depending on leverage ratios.
None: Varying.
Our grid or a matrix on the spread is over.
Where we're can nacco, we cant really control what the fed does in terms of short term rates and what winds.
None: Winds up being but that spread will relate to the bid.
The coverage ratios. So could you talk about that in the <unk>.
None: The leverage a little bit.
None: Sure.
None: Maybe I'll ask John Bittner to address the second question first just.
John Bittner: Two the pricing the interest rate.
John Bittner: Great.
John Bittner: So the pricing on the interest rate increases by 25 basis points, when our leverage gets north of two points.
None: 275, which we are now currently below.
None: So we are.
None: Kind of the mid tier of the grid on our pricing for more.
<unk>.
None: Q4, 2023, and do you want a 2024.
None: Yeah.
None: Yeah.
None: And on the you know to address your question Todd.
None: Target.
There isn't a specific target level that that would look at I would say that as you look at the Q4 numbers.
None: That is a level that we are very comfortable with as we mentioned in the press release, we have a.
None: A comfortable cushion on all of our financial covenants and just in looking at.
None: The.
None: Availability and modeling different scenarios into the future.
None: Positive or potentially negative just in terms of overall market.
None: Environment.
None: People are very comfortable with the current level.
None: Hum.
None: Not going to I guess go through any projections into the future I think you've given some guidance that you could probably reasonably.
None: Work through and have a sense of where we are going to be on the debt side.
None: And so it's a balance for us.
None: Taking on some.
None: Incremental debt to capture some potentially attractive new unit opportunities with existing customers that we could potentially grow to be larger customers for us.
None: With I think sentiment of some of our shareholders.
None: We like where our leverage levels are maybe that's comfortable a little bit higher.
None: And kind of balancing that for the future.
Okay. So thanks for that and then.
None: You talked also about.
Well I guess, yes.
None: I'm not sure if you said monetize but I'm wondering kind of what the what but the dials we can turn here.
None:
None: The accounts receivable days are obviously high could you maybe talk about targets on that and how many quarters. It takes to kind of normalized towards those targets.
None: Towards that starts.
None: And if there are any other assets and in fact, I'm wondering about the I guess, specifically, but maybe you can broaden the discussion as well.
None: On the on the fab facilities.
None: Have they been monetize or is that a process that you or your own you're pursuing at this point.
None: Yeah sure. So let me take a first go to accounts receivable.
None: As you mentioned our days receivable is much higher than historical.
None: We do.
None: If you looked at our historical you know going back several years.
Without giving a specific number those levels are really where we're looking to get back to and you don't see any.
None: Reason at this point, we can't do that over the course of the year.
None: Give specific kind of quarterly targets, but.
None: We're comfortable saying over the course of the year, we understand what we need to do to bring it back down to more historical levels.
None: On the fabrication facilities.
None: We're currently reviewing the capabilities that we need as a business to really drive the rental side, we've got some some great people and some.
None: Great capabilities that are necessary for us in.
None: In terms of what we'll do on facilities all of that will be driven by.
None: Capabilities that we need and that's a process that is ongoing.
Okay, great. Thank you for that.
Another quick question balance sheet question is.
None: Is the tax receivable has been out there for quite a long time obviously.
None: And yet any quick update on that I mean any visibility in terms of.
If the government moving on that.
So nothing incremental that I would give other than what we put in our disclosure in terms of forward looking.
None: I certainly will say it is at at or near the top of our list.
Something that we would turn from a correct noncash asset into a cash asset.
None: To be able to invest back in the fleet. So it's something that is.
None: Is right at capital one.
None: Right, Yeah, I'm sure I'm sure. It is because we can actually control it.
None: And then.
Final area, maybe you could talk a little bit about.
Capital allocation.
None: All of your peers.
Actually I think all of your peers actually.
Resolved not just on EBITDA, but also on discretionary cash flow, which one can back room.
None: Do but I think everyone kind of many people use it.
None: The industry as a valuation metric.
None: And then that relates also to.
None: Based on a year's discretionary cash flow, how do you allocate that capital and.
Is there a consideration.
None: Adding at least a modest dividend at some point.
None: Vis vis that capital allocation.
None: Strategy, if you will.
None: Sure.
None: So I think you're in a look back in previous quarters and you've asked the question around is our free cash flow I think it's been entirely reasonable.
None: Topic for us to consider how we.
None: Over time provide better understanding of our shareholders about how we're thinking about capital allocation.
For that particular topic.
None: Some incremental guidance in this quarter relative to what we've done in the past and of course, Steve gave any sort of first time on the on the prior quarter call. So.
None: On general capital allocation. It is a good question for which we're going to consider how we give.
None: Better color to our investors over time, it's something that we'll look to do without giving a specific.
None: Timing of what we're going to when we're going to do it by the end of exactly what we're going to do.
None: The.
Topic of dividend is one that the board certainly is considering as part of overall capital allocation.
None: Specific that I would give there in terms of.
None: Ty you know potential timing or.
None: Any more detail than that other than to say it is clear looking at the large players that a dividend is a material part of what is likely a material part of their valuation and.
None: Im mindful of that and the board is mindful.
Okay, great and thanks, all of the discussion and congratulations to you both and the whole team there.
None: Thanks.
None: For your question.
Thank you Mr <unk>.
None: Question looks like it comes from Tate Sullivan.
Tate H. Sullivan: Please go ahead.
Tate H. Sullivan: Great. Thank you I'll take Sullivan from Maxim Group, and Steve Great working with you and look forward to staying in touch and I heard earlier, you mentioned good progress you've seen moving into that 1500 horsepower market continue to go to 2500, if youre website. Your new website shows how large as units or can you talk about the length of the <unk>.
Tate H. Sullivan: Until contracts on some larger units going out the doors.
Tate H. Sullivan: Are we talking two to three years five years or can you get some context there.
Sullivan: Sure for the for the large horsepower units, we're going to be at the high end of the range and I think in need.
Sullivan: The public disclosure of our 10-K.
Sullivan: Listed those up to 60 months.
Sullivan: Tractor way.
Sullivan: Okay.
And then can you talk about the customer mix and just your dialogue with customers so far.
None: Are you.
None: Oxy has turned into what continues to be a very important customer just demand keeps up continues for them are you looking to diversify a little more and can you talk about your conversations with customer specific.
Sure we are.
None: I won't get into specific customer names, obviously, you can see that oxy has a.
None: Our largest customer and a very important customer.
None: We are continuing to see.
None: Demand from.
None: Really across our customer base, and even with new customers.
We're mindful of.
None: Diversifying.
None: Customer base really in terms of dollars so that.
None: It's not just oxy, that's going to take some time to do it.
And certainly we don't want to we want to continue to increase our business with.
None: Oxy.
None: And so we think we have some opportunities too.
None: Have a couple of.
None: Additional.
None: Large customers.
None: They don't get surprised.
None: <unk>.
None: Certainly over the short to medium term, but we're seeing opportunities there and that's part of us sitting around.
Around.
None: The capital plan.
None: And last for me too.
None: Sales growth adjusted gross profit margin shifts the positive factor a streak.
None: Is there do you have more sales projects or can you comment in your backlog and might this be a new trend going forward in terms of the type of margin for sale.
None: Yeah.
None: Go back to.
None: In our prepared remarks.
None: We certainly were happy with the positive contribution in the fourth quarter, but as we think about.
Our run rate as of the fourth quarter.
To apply to our our 2020 for outlook on the sales the adjusted margin, we'd really look more towards the first three quarters of the year as as the go forward as opposed to.
Yeah.
None: Great. Thank you very much.
None: Thank you MS gentlemen, there are no more questions.
None: Great. Thank you.
None: Thanks for all of your questions and participation on the call.
None: We sincerely appreciate your support and I want to thank all of our employees did a real work to deliver these numbers for shareholders. It is sometimes a thankless job, but this is our opportunity to thank you for a job well done.
None: And believe we are in an enviable position our markets are generally strong and we have customers who value our equipment and services and would like more of them. We look forward to updating you on our progress in the next quarter. Thank you.
None: Okay.
This concludes today's conference call. Thank you so much for attending.
The moderator has ended the conference good morning, Thank you for calling.
None: Yeah.
None: [music].