Q2 2019 Earnings Call

Good morning, ladies and gentlemen.

Welcome to the natural gas services group second quarter earnings call.

At this time, all participants will be in a listen only mode. Operator assistance is available at any time during the conference by pressing Star zero.

Your call leaders for todays call or at least your data IR coordinator and Steve Taylor, Chairman, President and CEO I would now like to turn turn the call over to Mr. Li said that Ah you may begin.

Thank you Rob and good morning listeners. Please allow me a moment to meet the following forward looking statement.

Commencing our earnings call.

Except for the historical information contained herein. The statements in this mornings 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 groups 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.

Our made as of the date of this call and natural gas services group 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 expectation for such an important looking statements include but are not limited to factors described in our recent press release and also under the caption risk factors in the Companys Andrew report on Form 10-K filed with the Securities and Exchange Commission, having all that stated I will now turn the call over to Mr., Stephen Taylor, who is president chairman and CEO of natural gas services group Steve.

Thank you Alicia and Ross.

Good morning, and welcome to Ngs cheese second quarter 2019 earnings review.

This morning, we reported second quarter 2019 results, we're pleased with our operational and financial performance.

Rental revenues.

Grew 19% when compared to the same period last year led by the strong performance in our large horsepower segment.

Our compressor sales have continued on a good pace with a gross margin percentage this quarter being the highest since the first quarter of 2018.

Gross margin net income and EBITDA dollars have all improved and all comparative periods.

Cash flow from operations for the quarter was $10.3 million or 52% of revenue.

Balance sheet cash remained strong at $30 million.

As we continue the call I will further discuss in detail these financial parameters as well as make additional operating and market comments.

Yes reported total revenue of $19.9 million for the second quarter of 2019, and 9% increase compared to the same quarter of 2018.

The increase was primarily driven by 19% increase in rental revenues offset by a drop in total sales revenues compared to year over year results.

From a rental perspective, we added 127 more units running in the second quarter of 2019.

When compared to the same period of 2018.

Sequentially total revenue increased by 11% when compared to the first quarter of 2019.

Mainly due to an increase in compressor sales.

Rental revenues increased 1% over the first quarter of 2019.

Comparing the six month year to date 2019 period to the same period in 2018.

Our revenues increased approximately $5 million or 15%.

Total adjusted gross margin for the three months ended June 32019.

Increased to $9 million from $8 billion or 12% for the same period ended June 32018.

Adjusted gross margin, which does not include depreciation.

As a percentage of revenue for the three months ended June 32019 was 45%.

An increase from 44% for the comparable period in 2018.

Sequentially adjusted gross margin for the second quarter of 2019 increased from $8.3 million almost $9 million right percent from the prior quarter.

Adjusted gross margin as a percentage of revenue was 45% this quarter compared to 46% in the prior quarter.

Year to date, adjusted gross margin increased 9% $17.2 million for the six months ended June 32019.

Compared to $15.7 million for the same period in 2018.

Selling general and administrative expenses were $2.7 million for the quarter.

Up $370000 compared to year over year, and up $190000 compared to the previous quarter.

Yes, you know it continues to run at 13% to 14% of total revenue for all periods.

Compared to operating income of $226000 in the second quarter 2018.

And $209000 in the first quarter of 2019.

Operating income more than doubled to $593000 this quarter.

For the six months ended June 32019, operating income was $802000 up $226000 or 39% when compared to the same six month period in 2018.

Net income has increased in all comparable periods for the three months ended June 32019, we reported net income of $573000 up from $247000 for the same period ended June 32018.

Sequentially net income increased $216000.

Income taxes were up dramatically in the comparative year over year period, which negatively affected our earnings per share by one cents this quarter.

This increase was primarily caused by lack of R&D tax credits this quarter.

For the six months ended June 32019, we reported net income of $933000 almost twice the $472000. We reported for the first six months of 2018.

For the second quarter 2019, the company posted earnings per diluted share of four cents compared to two cents in 2018.

Sequentially diluted earnings per share increased one cents.

For the six months ended June Thirtyth 2019, we reported earnings per diluted share of seven cents.

Compared to four cents for the same period.

For the same six month period in 2018.

Earnings before interest taxes, depreciation and amortization or EBITDA.

For the three months ended June 32019 was $6 million at 12% increase from $5.8 million for the same period of 2018.

EBITDA increased over 6% sequentially.

EBITDA for the six months ended June 32019 was $12.5 million compared to $11.4 million for the same period ended in 2018.

EBITDA margins continue to remain robust and have ranged between 32% to 35% of revenue and all comparative periods.

Total sales revenues, which include compressors flares and aftermarket activities can be somewhat unpredictable and are the most volatile segment of our business.

Sequentially sales revenue increased $1.7 million or 41% largely due to an increase in compressor sales.

On a year over year basis, Ngs sales revenue was down 9%, primarily because of a decline in flares.

Your day sales revenues to increase by $560000 or 6% for the six month periods ended June thirtyth.

Second quarter 2019, total sales gross margin was 24% of revenue compared to 10% in the first quarter of 2019, and 23% a year ago.

This is the highest gross margin percentage for the cell segment since the first quarter of 2018.

For the year to date periods, we reported gross margin of 18% for the six months of 2019.

Compared to 24% for the comparative six months of 2018.

Second quarter 2019, compressor only sales increased from $2.7 million in the first quarter of 2019.

$4.8 million this quarter.

An increase of almost 77%.

Compressor only sales revenues were essentially flat at $4.8 million for the comparative year over year quarters.

Good day compressor only sales were up $930000 or 14% to $7.5 million for the six months ended June 32019.

Compressor only sales margin.

Was 21% for the three months ended June 32019.

Compared to 18% for the same period a year ago.

And increased to a more normalized amount from a breakeven situation last quarter.

Due to higher freight expenses, which we explained during last quarter's call.

Our sales backlog as of June 32019 was approximately $75 million.

Compared to approximately $11 million in the first quarter this year.

I do want to mention our sales backlog includes only gas compressor package packages being built for sale and does not include the tremendous backlog of contracted really years. We're also building.

Moving to rental revenue, we continue to be pleased with our rental results.

With rental revenue of $13.6 million for the second quarter, 2019, and $27 million year to date.

Rental revenues increased in all comparative periods and have increased quarter over quarter for the past four quarters.

Comparing year over year 2019 to 2018 rental revenue increased 19%.

Sequentially, we saw a 1% increase in comparing six months ended June 32019 to 2018 rental revenues increased 18%.

As of June 32019, 23% of our utilized horsepower classified as large.

This represents a significant shift in our fleet makeup over the past couple of years.

And again demonstrates this the strategic direction, we chose Dan was in fact, the correct one.

Compared to the first quarter 2019, our average rental rates on a per unit basis increased 1%.

Or down 2% on average per horsepower basis.

The slight decrease in per horsepower races expected.

Due to the relatively large magnitudes of horsepower being set the reflect the economies of lower cost and associated revenues per horsepower.

Rental rates increased by an average of 7.4% per unit in the year over year quarters.

Many due to our entrance into the larger horsepower class.

We have also been able to capitalize on rate increases on some medium horsepower.

Units.

[noise] rental gross margins this quarter or 53% a decrease from first quarter 2019, real and gross margins of 56%.

And last year's quarter, a 55%.

The fabrication volume of our contracted large horsepower units has grown and the margin impact is primarily attributable to higher labor costs and greater overtime expenses associated with installing and commissioning these units.

Please size at the end of June 2019 totaled 2572 compressors.

In addition of eight units or a little over 7000 horsepower during the second quarter.

Over the past 12 months, we have added 33, new fleet units that total of 33010 horsepower.

With 98% of those classified in large horsepower category.

This represents an eight an increase of 8% and total fleet horsepower.

Our utilization as measured by horsepower climbed from 59% last quarter to 60% this quarter or unit base utilization was 53%.

Activity in the large horsepower portion of our fleet continues to be robust.

In the mid range horsepower segment, our rental activity remains positive.

Somewhat volatile since the beginning of the year.

Were essentially running at breakeven in this segment year to date with respect to utilization, but we have seen a good increase in July .

In spite of this we had 27% more horsepower and 10% more revenue producing units running in the field of year over year.

And 4% more horsepower sequentially.

I noted in last quarter's call that we anticipate our capital expense this year for rental fleet compression be in the range of 37, and a half to $40 million.

We are increasing our estimated capital equipment requirements to between 40 million and $45 million 2019.

Approximately 75% of this increase is attributable to additional rental commitments.

We have received for specialized equipment with the balance being the addition of larger horsepower equipment that were sold out of.

Looking at the balance sheet, our total bank debt is $417000 as of June 32019.

Our cash balance remains strong at $30 million.

This amount is down about $23 million since the end of 2018.

With a vast majority of the cash being invested in our new high horsepower rental compression equipment.

And our new corporate office.

Majority being the high horsepower equipment.

We had positive net cash flow from operating activities in this quarter of $10.3 million.

This represents 52% of our quarterly revenue.

In closing.

We are pleased with the progress in our rental sales and service businesses.

I don't think it's a secret to anyone that theres a lot of volatility in our industry right now.

Commodity prices and activity levels are up and down and there's always a degree of uncertainty.

However, I think our company as one of the best position to move forward and potentially take advantage of any opportunities that may present themselves.

We still have a good contracted backlog ahead of us for the fabrication of rental of large horsepower units.

And our income statement balance sheet and overall liquidity remain on by the best of our peers.

We view the balance of the year positively.

We continue to be presented with and to look at a broad array of options to deploy the cash on our balance sheet.

And potentially expand our product and service menu and complimentary ways.

We have kicked a lot of tires exported a number of possibilities and we'll continue to do so.

However, the continued volatility in commodity prices uncertainty and also activity makes it even more important to remain vigilant in our disciplined in deploying cash and conservative in our assessment of new opportunities.

Great eager to execute an idea as to where our company.

That said, however, we're not eager will not overpay for those opportunities.

Or be lured into opportunities within a reasonable forecast for future growth.

Our conservative approach toward managing cash has served ngs well over time.

And we will continue to protect our balance sheet during these periods of uncertainty.

In conclusion, we are pleased with the continued progress in activity in all of our businesses.

Ross this in my prepared remarks, so please open the phone lines for questions.

At this time, we will conduct a question and answer session.

It feels like the AFR question. Please press star one on your phone now and you will be placed in the queue in order to receive.

You can press columned wind at any time to remove yourself from the queue. Once again to ask a question. Please press star one on your phone now.

Our first question comes from Rob Brown from Lake Street Capital. Please go ahead Rob.

Morning, Steve.

Hi, Rob.

You talked about an uptick in the large horsepower and I guess, that's driving your capex uptick.

Maybe just could you characterize the backlog at the end of the large horsepower business and what you're seeing in terms of market demand attainment.

Well the.

What it is it's it's increased volume going through the you know the shops right now so.

We've seen that volume increase some while we've had some additional rental orders.

Come in large and.

And essentially some medium horsepower high pressure stuff.

So that's that's driven driven that capex requirement up over what we had anticipated even last quarter. So.

It continues along pretty much business as usual on the large horsepower, we still got that backlog that stretches out till.

Q1 of 'em.

Next year 2020, and these are just some additional orders that have come in in the interim.

Okay great.

And then the gross margin on the rental side I think you talked about some additional activity, it's hitting the units and that depress gross margin.

How can that recover or do you see that.

Lower margin in the interim will these get put in place and then it recovers in the future or maybe just some color on that on the growth gross margin improvement potential.

Well I mean, certainly there's improvement potential in <unk> and we're working on that we're trying to.

Yes.

Try different methods do different things on also on the overtime, but the fact remains you got this big equipment and you are small and medium horsepower.

It's pretty easy to set pretty quick.

In a day you can have a.

Equipment under 300 horsepower set and running pretty easy.

To do this equipment is hugely always a 175000 pounds.

It may take three or four trucks to move it and everything else cranes to set it so yeah, you're into a pretty long period of time too.

Yeah give this stuff out there gives us a good commission start troubleshoot et cetera, et cetera, I mean, it's not like a light switch so.

That's stuff just takes more time and you know part of it is you can't say well.

40 hours up we've got to stop you Guy you Gotta continue once you start to to fruition getting they're getting equipment running because obviously the operator.

Customers, all deadline and there wasn't cash flow too. So it's one of those things just <unk> I guess its next or evil right now some of these big horsepower.

Like you say, we are working to mitigate that get that better managed work with the customer to own on how we can do do things differently.

I think we are going to have that component in there as long as we're setting the stuff. It we saw a depression here of a couple of points because we've had a higher volume going out. So you know more equipment more a more time.

And you know and that's.

Not a bad problem right, but but we do have some depression in the interim and then once you get you know once we get all this stuff out there. So you got no more orders period. I mean, then those that margin will naturally climb back up because you don't have this.

There's tremendous upfront need for people and labor So I expect it to.

Yeah, and I don't want to say is depressed margins just to it's just a margin.

Yeah for initial <unk> said expenses, and then that'll improve as just couldn't get set.

Although frankly it's.

We don't want to prove to mask, who want to keep you know contracting instead that common equipment.

Okay, Okay, great and then on the medium horsepower I think you said an uptick in that market is happening as well.

Is that.

Is that utilization rate now look to increase kind of each quarter out more of an improving basis or is it still too early to tell.

Well, we we think it's going to be an improving basis. The 2000 they showed real good.

Movement in all classes large and medium in some small.

And then we kind of get into the first couple of quarters of this year and it slowed down Oh.

Fair amount the.

Yes.

Growth in this business comes from obviously number one setting seven more equipment and you're getting back.

And our yard termination rates stayed about the same first couple of quarters, but the the set right.

Declined somewhat and so obviously that margin comes down a little bit in that in that utilization stayed flat.

And I think part of it is couple of things number one.

Obviously, the Q4 volatility air based on 2018 kind of put a you know a little chill along.

Also activity coming into the year and.

And hopefully this July show some you know some movement out of that.

And then there's still a fair amount of properties changing hands that always.

You always net out a little drop in some of that stuff because there is efficiencies going on and you have new your new operators like for comedy show.

We're seeing both those things are things primarily just the activity.

In the field have dropped some hot but now you know July .

They are pretty good so we're hoping that continues now.

I'm not guaranteeing that.

Oh a if.

Overall, certainly the big horsepower, but overall, even with a medium and small we've we've been able to increase.

Revenues number of units at horsepower going out and stuff like that so in spite of some of the the slow down we've seen the first part of the year on getting to that medium horsepower out we're still.

Positive moving forward on it.

Okay, great. Thank you I'll turn it over.

Thanks, Rob.

Our next question comes from Richard Dearnley from Longport Partners. Please go ahead.

Good morning, Hi, Daniel Hi, How's everything.

[laughter] given the what are the folks in the industry, saying about the flaring gas issue and.

Yeah.

The Green movement, and this that and the other as regards your.

So what are your FLIR customers talking about are worried about.

It is [noise].

Is this a problem or.

Coming at Us.

Well I don't.

Yeah.

Especially when I show my bias here towards energy industry [laughter] third up problem Rally now you have a new York City, I, probably changed my tune, but.

Yeah.

It's it's a it's a problem from the point of.

You know unfortunately, it's necessary at times, when you're drilling wells don't have gas outlets and you've got to do some of that gas to produce at all so that's just a natural.

No result, and phenomena going on now.

Yeah. There's obviously, there's been a lot a lot of press lot of talk Valspar and go on here and stuff like that.

Hi Inn.

Forgive me if some of sensationalize, yeah, that's what our threats.

But you know that the operators are well aware of it.

Operating as efficiently as they can they do have to flare. They do it is a you know it's minimal bases as possible and most players typically don't last very long. They you know you typically put flares out on about everything from not flaring.

But certainly the use of the Florida has been the bigger in everybody's mind here lately. So yeah. The operator just.

Yeah, I'm not saying much I mean, it's just like.

Yeah, I guess, just you know down, but I need a flare sort of thing nobody wants to.

Waste any resource but.

Yeah, we're seeing some yeah. The flare sales are down a bit we're seeing is actually some activity picking up and.

And flare maintenance and things like that so.

Yeah I think.

The activity for US I think we'll we'll pick up a bit towards she has to go through the year and on until some of these pipelines.

Some are in some are still coming so you know I think it's just a it's just natural phenomena of pump moral right now.

Right.

Okay. Thank you.

Thanks <expletive> .

Our next question comes from Mike Urban from Seaport Global. Please go ahead Mike.

Thanks, Good morning.

Hi, Mike.

What did it fall up in a couple of the previous questions specifically around the the increase that you saw in July there that you know again or you know maybe don't want to read too much into it given that's just a month here, but is that I'm guessing that's primarily been in the mid horsepower range given that you're pretty well you know deployed and so without on large horsepower stuff and small hasn't really seen a much improvements or is that primarily down in the mid mid horsepower engine.

Yeah, Yeah. It is.

Okay.

And.

And then just kind of following up on the the margin commentary for rentals.

You know as you continue to roll out the larger horsepower units as he said there is some of that that expense are out there I mean should we think about kind of this this range for kind of a normalized level or can can you improve on it based on some of the things that you talked about in terms of just getting better at it learning curve of working with the customer.

A little bit more more closely.

Yeah, I think will.

Well improve on for all those reasons you said, it's a somewhat I was just going to happen.

You know just a just a process sit in this big equipment get it running.

Well we are.

Working on different ways to.

You'll handle some of the.

Installations commissioning things like that go different ways or you know maybe space in some of this equipment out a little better from the point of.

When you have three come out wants versus.

Yeah, one three times in a row, it's a little different there's a lot of different things and I'm glad you brought back back up because I don't want to imply that you know, we we think it's going be 53% from here on I do think we're going to see some improvement now I'm not going to you I don't want to put a specific number out there of course, but I would say yeah, we'll be we'll be in the mid.

Mid fiftys, while we're setting this magnitude of equipment and that's probably the rest of the year. We've got a lot of equipment being built and coming out then of course you know there's this president president backlog will tail off.

The first half of next year.

So I think we'll see some improvement anyway going forward as we learned a little more about you know efficient ways to do this and how we can work together with a with a customer on it.

And then I think you know Oh.

As we get these out and you have to remember a lot of this cash flow hadn't started come back at US Yeah. We're just suffering expenses now with very little cash coming back on some of the stuff. So you know once we start getting into 2020 of the majority. This equipment starts to be set and full rental starts rolling and you will get a natural uplift just because we've got more cash flow coming in but.

But yes, definitely we're going to see some improvement there's margin going through the rest of this year I would I would you know tagging in that mid 50% range. Then I think into next year, we'll get back up into our normal.

Hi, Fiftys low sixtys.

Okay. So there it sounds like you know nothing's really changed on that front I mean, they had the large power large horsepower units all else equal should generally carry a higher margin percentage. If you kind of look at that that mix.

Yeah, Yeah generally it will now yeah, we won't see it well see it on an individual basis, you won't see it from a company basis for a bit until number one you know all the stuff gets out and running and you know and frankly were yeah, we get more units into the fleet now Weve got about.

What 23% of the horsepower now as you know active horsepower is large horse large so well start to see some up lift in and it overall, we anticipate the first.

First part 2020, but.

Certainly by mid 2020, when all this equipment is out.

Full rentals were started.

Yeah, we wish we should see some contribution from the large horsepower margins.

Okay.

And then the last one from me on the the Capex. The increase there you said is just as some additional orders coming in.

On the rental side it sounded like you were still going to build some some spec units in there for for large horsepower just given the demand there and given that you are effectively sold out is that.

The case or is there any kind of hesitancy there given what your yeah. What we're seeing in the you know the market there for your for your customers.

Yeah some of the.

Like to mention about three quarters of that increase was.

Contracted stuff so youre building, they don't go right out and start making money.

About a quarter of it is.

Is a spec so we do and that spec is larger horsepower and now I'm going to say exactly what size of scale, because we classify larger horsepower 400 and and higher.

Well right now we're sold out of those so yeah, we think.

That's still a good.

Mark on those on the spec units were building you know in the larger horsepower in and that Oh, yeah, we're not overly concerned about committing capital to that.

We will more than likely now obviously, we're going to watch it pretty close here in the next couple of quarters.

Yeah right now we think we will continue to build some spec units into 2020 and the larger horsepower.

Range so.

But we'll we'll take that quarter by quarter and see how the market shapes up and reacts.

Okay sounds good that's all for me. Thank you.

Okay. Thanks, Mike.

As a reminder, if you would like to ask a question. Please press star one on your phone now.

And Steve at this time there are no further questions.

Okay, well I appreciate everybody joining us for the call.

And I look forward to visit with you again next quarter. Thank you.

This concludes today's <unk> Paul.

Thank you for attending.