Natural Gas Services Group, Inc.

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Incorporated Quarter 3, 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 0-PAL. 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 the information currently available to Natural Gas Services Group leadership teams. Although we believe that the expectations reflected in such forward-looking statements are reasonable, We can give no insurance 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 gross margin, among others. For reconciliations of these non-GAAP financial measures to our GAAP financial results, please see yesterday's press release in our forms 8K, 10K, and 10Q furnished to the SEC. I will now turn the call over to Steve Taylor, our Chairman and Interim CEO.

Thanks, Anna, and thank you, Luke, and good morning, everyone. Welcome to our third quarter 2023 earnings conference call, and thank you for joining us this morning. Before taking your questions, I will highlight our financial and operational results for the third quarter, discuss the current business environment, and provide comments on other aspects of our business. We had a very successful third quarter. Sequentially, our total revenue increased over 16%, with a year-over-year increase of 42%. These increases were led by rental revenues that grew by $3.6 million, or 15%, sequentially, and $9.1 million, or 49%, when compared to last year's third quarter. Sales and AMS revenue, combined being about 12% of total revenue, grew by approximately $800,000, or 28%. Sequentially, total gross margins grew by 14%. SG&A declined by over $2 million, or 41%. and adjusted operating income was up almost seven times to $4.9 million. Sequential net income increased by over four times, and EBITDA grew 19% to $11.8 million. In the comparative year-over-year periods, we saw similar growth dynamics and cost savings, and I will detail those later on the call. Our 2023 capital program is proceeding as planned, and as we have also experienced in the last quarter, It continues to show exceptional and positive financial impact. Additionally, we saw the following of our AK this morning. We have expanded our existing credit facility from $175 million to $225 million and have added a new member bank to the group. These funds will continue, will be primarily dedicated to our 2024 growth capital plans and represent continuing confidence from our banks of the results we're achieving and our plan going forward. On this call, I have Jim Hazlett joining me. Jim is our vice president of technical services and has been with NGS almost 20 years. Brian Tucker is also here and joined NGS about a month ago as president and COO. At the same time, John Bittner took over our chief financial officer duties on an interim basis. Brian and John both have extensive experience in their respective fields, and if you'd like a refresher on their backgrounds, I'll refer you to the press release we published at the time. We're glad to have all of them on our team. Now, let me jump into the review of the third quarter. Total revenue for the three months ended September 30, 2023 increased to $31.4 million from $27 million for the three months ended June 30, 2023, or a 16.4% increase in sequential quarters. Total revenues increased year-over-year from $22 million for the three months ended September 3, 2022, for a 42.3% increase. Sequentially, adjusted total gross margins increased 14% from $12.8 million last quarter. On a year-over-year basis, our adjusted total gross margin of $14.6 million in the third quarter of 2023 increased approximately 49% when compared to $9.8 million in the same period in 2022. Rental revenue increased 15% from $24.1 million in the three months ended June 30, 2023, compared to $27.7 million in the three months ending September 30, 2023. Rental revenue increased to $27.7 million in the third quarter of 2023 from $18.6 million in the third quarter of 2022 for a 48.7% gain over the past year. Both comparative period increases were primarily the result of the increased deployment of higher horsepower rental units, slightly higher horsepower utilization across the fleet, and rental price increases throughout the year. Rental revenues now compose approximately 85% to 88% of our total revenues in all comparative periods. Adjusted gross rental margin increased sequentially from $12.8 million, or 53% of revenue, in Q2 2023 to $14.2 million or 51% of revenue in the third quarter of 2023. This was a 12% increase in gross rental margin dollars since last quarter. Our gross margin percentages slipped 150 basis points due to higher than usual parts costs. We see that as an irregularity and anticipate that these margins will recover in the fourth quarter. In the comparative year-to-date nine-month periods, our rental revenues have increased 38%, while adjusted gross margins grew by 50%. As of September 30, 2023, we had 1,233 utilized rental units, representing over 400,000 horsepower, compared to 1,196 rented units, representing just over 305,000 horsepower as of September 30, 2022. We have added over 85,000 horsepower to the fleet this year, an approximate 20% increase in total fleet horsepower. Our total fleet size just passed 500,000 horsepower in September for a total of 509,000 horsepower at the end of the quarter. During that same period, our rented horsepower grew by almost 95,000 horsepower. That's a 31% growth in utilized horsepower and equates to incremental utilization of 111%. That's a utilization number you won't see often. We ended the third quarter with 63.3% utilization on a per unit basis and 78.7% utilization on a horsepower basis. Unit utilization decreased slightly from 65.4%, primarily due to lower utilization on our small to medium horsepower fleet and the impact from lower natural gas prices. But horsepower utilization experienced a slight uptick from 78.6% in the second quarter of the year. Revenue for horsepower per month increased 13.5% over the last 12 months, 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 September 30, 2023, consisted of 1,947 units and 509,000 horsepower or 262 horsepower per unit. Our average horsepower per unit has grown by 22% over the last year. Notably, approximately 97% of our high horsepower fleet is utilized in drawing rent. Presently, our large horsepower assets comprise approximately 19% of our current utilized fleet by unit count, and over half of our utilized horsepower in current rental revenue streams. sales revenues for the sequential quarters decreased from 1.6 million dollars in q223 to 1.4 million dollars in the third quarter this year this decrease was from quarterly fluctuations we typically experience in compressor and part sales on a year-over-year quarterly basis sales revenues decreased from 3.1 million dollars to 1.4 million dollars This is driven by the one-time large sale of active rental equipment to an existing customer in last year's third quarter. As I've mentioned in the past, our sales activity, primarily representing compressor, flare, parts, and miscellaneous sales, had declined over the past few years due to higher customer demands for rental services, our increased outsourcing of large horsepower fabrication, and our de-emphasis of flare sales and service. This lower level of sales should continue due to the changes mentioned. There will continue to be volatility, albeit reduced. AMS or aftermarket services in our most recent two quarters have seen large increases in revenues. This is primarily due to pass-through services that we provide to or arrange for customers when installing our large horsepower units. These revenues will fluctuate with the volume of equipment set in each quarter, and they carry low pass-through margins. However, when sales and AMS revenues are combined, they represent 12% of our total third quarter revenues, where we experienced 28% growth in sequential revenues and a positive gross margin of 8.5%. Year-over-year, the combined revenues increased $250,000. Gross margins decreased, but still held at 9% of revenue. Our SG&A expenses decreased a bit over $2 million in sequential quarters and totaled 9% of revenue. On a year-over-year basis, SG&A expenses decreased over $1.2 million. This was an anticipated and welcome decline in expenses, and at 9% of revenue, which is uncharacteristically low, we think this represents a low point. Going forward, we anticipate that SG&A will normalize at a level 15% to 20% higher than this quarter, still a reasonable amount. Sequentially, we reported increased operating income of $4.9 million in the third quarter of 2023 compared to $712,000 in the second quarter this year, almost seven times higher. This improvement was primarily due to higher rental revenues along with the decrease in SG&A. On a year-over-year basis, our operating income increased to $4.9 million compared to an almost $300,000 loss in the same third quarter period in 2022. Our net income in the third quarter of this year was $2.2 million, or 18 cents per basic and diluted share. This compares to a net income of $504,000 in the second quarter of the year, or 4 cents per basic and diluted share. In the year-ago quarter, our net loss was $80,000, or 1 cent. Adjusted EBITDA increased 19% to $11.8 million from the second quarter of $9.9 million. and increased 53% from $7.7 million the same period last year. From a balance sheet perspective, our cash balance as of September 30, 2023, was approximately $200,000. In the first nine months of this year, we have generated $25.7 million in operating cash flow, which is 27% higher than the $20.2 million generated in last year's comparative period. At the end of this quarter, we spent $128.6 million for capital expenditures. 98% of this, or $126.4 million, was expended on rental fleet growth. I'll now ask John to comment on the bank facility. John?