Natural Gas Services Group, Inc.

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Inc. Quarter 2, 2023 earnings call. At this time, all participants are in listen-only mode. Operator assistance is available at any time during this conference by pressing zero pound. I would now like to turn the call over to Ms. Ana Delgado. Please begin.

Thank you, Luke, and good morning, everyone. Before we begin, I remind you that during this call, we will make forward-looking statements within the meaning of Section 21E of the Security and Exchange Act of 1934 based on our current beliefs and expectations as well as assumptions made by an information currently available to Natural Gas Services Group's leadership team. Although we believe that the expectations reflected in such forward-looking statements are reasonable, We can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the United States Security and Exchange Commission for the factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. In addition, our discussion today will reference certain non-GAAP financial measures, including EBITDA, adjusted EBITDA, and adjusted growth margin, among others. For reconciliations of the non-GAAP financial measures to our GAAP financial results, please see yesterday's press release in our forms 8K, 10K, 10Q, furnished to the SEC. I will now turn the call over to Steve Taylor, our Chairman and Interim President and CEO.

Thank you, Anna and Luke, and good morning, everyone. Welcome to our second quarter 2023 earnings conference call. Thank you for joining us this morning. Before taking your questions, I'll highlight our financial and operational results for the second quarter, discuss the current business environment, and provide comments on other aspects of our business. Reflecting on the quarter, total revenue and rental revenue grew when compared to both sequential and year-over-year quarters. Sequentially, our sales revenues declined, but our strategically important rental revenues continued to grow at a brisk pace, reflecting our 10th consecutive quarter of rental revenue growth. Our overall gross margins improved, led by higher rental margins and lower operating expenses, and operating income and net income both increased over the comparative quarters. We're starting to see the results of our 2023 capital program in our revenues, margins, and bottom lines. The overall environment in our industry continues to be positive, and we anticipate further improvements. Total revenue for the three months into June 30, 2023 increased to $27 million from $26.6 million for the three months ended March 31, 2023, or a 1.3% increase in sequential quarters. Total revenues increased year-over-year from $19.9 million for the three months ended June 30, 2022, for a 35% increase. The small increase in sequential total revenue was due to a $1.4 million drop in sales revenues in the first quarter, although that was offset by an increase in rental revenues in our service and maintenance business. By the way, now and going forward, we will be referring to our service and maintenance business as aftermarket services. There is no change in the revenue components to make up this segment, but aftermarket services, or AMS, conforms closer to how our industry generally refers to it. Rental revenue increased 6% from $22.7 million in the three months ending March 31, 2023, compared to $24.1 million in the three months ending June 30, 2023. Rental revenue increased to $24.1 million in the second quarter of 2023 from $18.1 million in the second quarter of 2022 for a 33% gain over the past year. Both comparative period increases were primarily the result of the increased deployment of high horsepower rental units, higher overall horsepower utilization across the fleet, and rental price increases throughout the year. Rental revenues now compose approximately 85 to 90 percent of our total revenues in all comparative periods. Adjusted gross rental margin increased sequentially from $11.1 million or 49% of revenue in Q1 2023 to $12.8 million or 53% of revenue in the second quarter of 2023. This is a 15% increase in gross rental margin dollars since last quarter. On a year-over-year basis, our adjusted rental gross margin of $12.8 million in the second quarter of 2023 increased approximately 42% when compared to $9 million in the same period in 2022. In the comparative year-to-date six-month periods, our rental revenues have increased 33% while adjusted gross margins grew by 42%. As of June 30, 2023, we had 1,249 utilized rental units representing over 372,000 horsepower compared to 1,281 rented units representing just over 311,000 horsepower as of June 30, 2022. The net decrease in fleet units was due to the combination of a sale of rental units to a customer and the retirement of idle units, both of which happened in 2022. In spite of that, we had an approximate 20% increase in horsepower over the past 12 months. We ended the second quarter with 65.4% utilization on a per-unit basis and 78.6% utilization on a horsepower basis. While unit utilization remained relatively flat, horsepower utilization increased from 77.4% in the first quarter this year. utilized horsepower increased 5.7% in the second quarter when compared to the year-ago period, while revenue per horsepower increased 15.5% when comparing the same periods, demonstrating the impact of the growth in higher horsepower units and the price increases we have been able to implement over the last year. Our total fleet as of June 30, 2023 consisted of 1,911 units and 473,884 horsepower, or 250 horsepower per unit. Our average horsepower per unit has grown by 19% per unit over the last year. Notably, approximately 97% of our high horsepower fleet equipment is utilized in drawing rent. Of our $150 million capital budget this year, approximately 90% of it is presently committed to long-term agreements, with a balance anticipated to be contracted in the third quarter this year. As of June 30, 2023, we have shipped and set approximately 50% of the units and horsepower anticipated in the 2023 capital expense budget. Presently, our large horsepower assets comprise approximately 17% of our current utilized fleet by unit count and over half of our utilized horsepower and current rental revenue stream. Approximately five years ago, NGS decided to enter the large horsepower market. At this time, with more than half our utilized horsepower and revenues emanating from larger units, I think we can say that we're an established player in this market segment. Sales revenues for the sequential quarters decreased from $3 million in the first quarter this year to $1.6 million in the second quarter. Two-thirds of the second quarter decrease was from a non-recurring idle equipment sale that occurred in the first quarter. The balance was the typical quarterly fluctuation we experience in parts sales. On a year-over-year quarterly basis, sales revenue increased slightly from $1.3 million to $1.6 million. Our SG&A expenses increased approximately $300,000 in sequential quarters and totaled 18% of revenue. Sequentially, we reported increased operating income of $712,000 in the second quarter of 2023 compared to $402,000 in the first quarter this year, a 77% increase. This improvement was primarily due to higher rental revenues and gross margins. Negatively impacting our operating income this quarter was a software obsolescence charge we took. Without that, operating income would have been roughly twice what we reported. In either event, with or without the software charge, operating income this year improved over the operating income of $658,000 for three months into June 30, 2022. Our net income in the second quarter of 2023 was $504,000, or 4 cents per basic and diluted share. This compares to a net income of $370,000 in the first quarter of the year, or 3 cents per basic and diluted share. In the year-ago quarter, our net loss was $70,000, or one cent. Adjusted EBITDA increased 27% to $9.9 million from the first quarter number of $7.8 million and increased 48% from $6.7 million for the same period in 2022. Our cash balance as of June 30, 2023, was approximately $4.3 million. In the second quarter this year, we realized cash flow from operations of $22.6 million compared to $13.2 million in the same quarter last year. At the end of this quarter, we've utilized $93.5 million for capital expenditures, $92.3 million of which was expended on our rental fleet. Outstanding data on our revolving credit facility as of June 30, 2023, was $100 million. The leverage ratio was 2.53, and our fixed charge coverage ratio was 4.17. These are both well within bounds of the covenants, and the company is in compliance with all terms, conditions, and covenants of the credit agreement. Last quarter, I remarked that we thought the activity we were experiencing would continue the balance of this year and likely into 2024. Based on what we're seeing and hearing internally and from customers, we think this positive forecast continues to be correct. We are in an undersupplied market, and we see little relief to it soon. Industry utilization is high. There is no appreciable capacity being added to the industry. Lead times for major components are long. Customer inquiries from established and new customers continue to flow in, and we have the ability to increase prices to ensure our shareholders get a fair return. Commodity prices and future production and consumption data also seem to support present activity. It's been a long time since we've had this kind of positive dynamic in activity and pricing, and there appears to be a greater capital discipline from customers and competitors that may help sustain this environment. In the past, there's a mantra used when the industry was going through repeated boom-bust cycles. It was, and excuse my colloquial messaging, please, Lord, give us one more boom. We promise not to screw it up this time. It's taken a few decades for this to sink in, but maybe we have it right. However, there is always caution required in a volatile commodity-based industry like ours. There will be another downturn at some point, but I think NGS has somewhat mitigated that impact with long-term contracts, good pricing, exceptionally strong customers and contracts, and long-lived equipment. We are bullish on our industry over the next couple of years and hope to take advantage of the strong environment. Thanks for your time, and I look forward to your questions.