Natural Gas Services Group, Inc.

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Incorporated Quarter 2 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 would like to remind you that during the course of this conference call, the company will be making forward-looking statements within the meaning of federal securities laws. Investors are cautioned that forward-looking statements are not guarantees of future performance, and those actual results or developments may differ materially from those projected in the forward-looking statements. Finally, the company can give no assurance that such forward-looking statements will prove to be correct. Natural Gas Services Group disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, you should not place undue reliance on forward-looking statements. These and other risks are described in yesterday's training's press release and in our filings with the SEC including our Form 10-Q for the period ended June 30, 2024, Form 8-Ks, and in our Form 10-K for the year ended December 31, 2023. These documents can be found in the Investors section of our website located at www.ngsgi.com. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially. 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 the most directly comparable measures under GAAP, please see yesterday's earnings release. I will now turn the call over to our Chief Executive Officer, Justin Jacobs. Justin?

Thank you, Anna, and good morning. I'd like to welcome everyone to our second quarter 2024 earnings conference call. Thank you for joining us this morning. We appreciate your interest in Natural Gas Services Group. I'll start by introducing the team. Joining me on the call this morning is Brian Tucker, our president and chief operating officer, and John Bittner, our interim chief financial officer. I'll start today with a quick recap of the quarter, a brief discussion of updated guidance, followed by some high-level remarks regarding the industry. I'll move next to our strategy with our four areas of growth opportunities and value levers and our progress to date. I'll then turn the call over to John Bittner, who will review the quarter in more detail. I'll end with a few closing comments on our increased guidance for 2024 and our longer-term outlook, which remains quite bullish. As for our Q2 results, we are quite pleased with our performance as we reported higher revenue, net cash from operations, and adjusted EBITDA. delivering tangible results against the key growth and value levers I outlined in our last call. We reported a 45% increase in rental revenue year over year and a 4% increase sequentially with the growth driven by more horsepower rented as well as rate increases. Adjusted EBITDA of $16.5 million increased 67% compared to last year's second quarter and looking sequentially is right between our prior two quarters, which were $16.3 and $16.9 million. Based on our results year to date and our favorable outlook moving into the second half of the year, we increased our 2024 adjusted EBITDA outlook from $61 to $67 million to a range of $64 to $68 million. At the midpoint of the range, this equates to roughly 45% growth over 2023, after posting growth of 56% last year. I'm certainly pleased with our Q2 performance, but I am particularly excited to announce our future growth plans. We are taking advantage of supply constraints, strong customer demand for both our equipment and service levels, along with our greater access to capital to grow our rental fleet. We increased our outlook for growth CapEx for 2024, and we expect it will be even higher in 2025. The increase to our CapEx guidance is to support the new long-term contracts we've recently signed with Premier customers including a long-term customer who will become our second largest customer once all these new units are operating in the field. The new contracts are all for large horsepower compression investments above our average rental rate for the fleet and above our target rate of return. Importantly, approximately 40% of the horsepower added as a result of these new contracts will be electric motor driven units. I think it is a testament to the strength of our customer relationships and the technological innovation of our units that we were able to move into the large horsepower electric space in an organic nature. Going forward, we can address market demand in any combination of natural gas engines and electric motor-driven compression. With these new units, we have taken an important step to diversify our customer mix, reduce concentration with larger accounts, and enhance our rental fleet capabilities. I'd like to take a second to thank all of our team members working out in the field, from the mechanics turning wrenches through district management, we could not have done this without your dedication and commitment to exceptional service. As for the market, both near and long-term industry dynamics remain strong for us, and my comments from prior quarters hold true today. Demand for high horsepower compression remains strong, both from existing customers as well as new ones, as evidenced by the new contracts we announced for large horsepower units. While the natural gas industry continues to see some instability in terms of pricing, this has a lesser impact on us, as approximately 75% of our active fleet is in oil and liquids oriented basins where activity is primarily driven by oil. Crude oil prices remain relatively stable and industry forecasts anticipate increased production over the coming years. As we look at the industry opportunity, we see significant growth on the horizon as customers are already looking out as far as 2026. I'd like to shift now to our strategy. using the four growth opportunities and value levers I've discussed as the framework for tracking our progress. To recap, the first is optimizing our utilized fleet. Second, improving our asset utilization. Third, driving new unit growth, particularly in large horsepower. And fourth, executing accretive M&A. In Q2 and since quarter end, I believe we showed demonstrable progress against two of these buckets, leading to our strong quarterly results and increased 2024 guidance. Let me start with asset utilization, which encompasses two parts, converting non-cash assets into cash and increasing the utilization of our existing fleet. With respect to the former, our accounts receivable went from $42 million to $33 million, a $9 million cash improvement in one quarter. This represents approximately 75 cents per share in cash. We believe there is more opportunity to reduce accounts receivable as well as create cash from other assets. notably the income tax receivable and owned real estate. I am confident that as we continue to execute, you will see more of our non-cash assets converted into cash, leading to higher returns for our shareholders. As I noted on our last quarter call, this is an ongoing initiative and will take up to 24 months to fully execute. With respect to increasing utilization of our rental fleet, This is a key priority for us, but more of a medium-term initiative as we look to make modest investments in our fleet to upgrade technology, convert units, and increase unit readiness. We expect to have more information to share in future quarters. The next key opportunity is our fleet expansion, and here we have made consistent progress with significantly more to come. As of June 30th, we had 1,242 natural gas compressors totaling approximately 455,000 horsepower rented. representing a 22% increase in horsepower rented year over year. Horsepower utilization stood at 82.3%, which was up 370 basis points from last year. In our earnings release, we announced new contracts with Blue Chip customers to expand our fleet. As I mentioned, all of the new units are large horsepower and a significant portion are electric-driven compression units. We will be increasing our growth capex this year and next year to support these contracts something we are able to do given our leveraged position and larger credit facility. These are material awards for natural gas services and are all long-term contracts with return on invested capital projected above our target rate of 20%. As a result, I believe we'll see strong growth in revenue, utilization, profitability, and cash flow. A key driver of these new contracts is our technology and commitment to innovation. We are consistently hearing this from our customers. Our technology stands apart as does our service and commitment to exceed customer expectations. Again, with many of our customers looking out towards 2026, this is another good sign for the future. And beyond the new awards, our pipeline is growing, as is interest from large potential customers. I'll come back to this in my closing remarks, and it's now my pleasure to turn the call over to John.