Natural Gas Services Group, Inc.

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Incorporated Quarter Tree 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 earnings press release and in our filings with the SEC, including our Form 10-Q, for the period ended September 30th, 2024, form 8Ks and in our form 10K for the year end December 31st, 2023. These documents can be found in the investor 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 growth 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 Justin Jacobs, our Chief Executive Officer. Justin?

Thank you, Anna, and good morning. I will start by introducing the team. Joining me today on the call this morning is John Bittner, our interim chief financial officer. Brian Tucker, our president and chief operating officer, is unable to join us this morning, but will be back on our fourth quarter earnings call. I trust by now you've had a chance to review our third quarter results, which we announced yesterday after market close. We are pleased with our performance as we had another quarter of significant top line and bottom line growth. We reported higher revenue, net cash from operations, and adjusted EBITDA, while delivering tangible results against the key growth and value drivers I outlined in our last call. I will focus a significant portion of my remarks today on these growth and value drivers, optimizing our fleet, improving asset utilization, driving new unit growth, particularly large horsepower, and then eventually M&A. Market dynamics remain strong, and we continue to leverage our innovative compression technology strong customer relationships, and our relatively low leverage to drive growth. With our recently announced awards for large horsepower compression and strong customer demand, we see significant opportunities for expansion in the coming years. I'll start today with a quick recap of the quarter, followed by some high-level remarks around the industry and what we're seeing. I'll then give an update on progress against our growth and value drivers, as well as discussing some new additions to the team. I'll then turn the call over to John Bittner, 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. For the third quarter, we reported a 35% increase in rental revenue year-over-year and a 7% increase sequentially, with the growth driven by higher rented horsepower as well as selected rate increases. Adjusted rental gross margin percentage was 61.3% compared to 59.3% last quarter and 51.4% in Q3 of last year. Adjusted EBITDA of 18.2 million increased 54% compared to last year's third quarter and was up approximately 11% from Q2. Based on our results year to date and our favorable outlook moving into the final quarter of the year, we increased our 2024 adjusted EBITDA outlook from 64 to 68 million to a range of 67 to 69 million. At the midpoint of the updated range, this implies 48% growth over fiscal 2023 after posting growth of 56% last year. As I noted on our last call, Natural Gas Services is a different company than it was just a few years back. We are taking advantage of supply constraints and strong customer demand to increase our growth capex in 2025. Our guidance for 2024 growth capex, along with our newly provided 2025 growth capex guidance, is to support new contracts we signed, and I will add, is entirely for large horsepower compression investments. Approximately 40% of the new horsepower will be electric motor driven. With these new units, we will diversify our customer mix and reduce concentration with larger accounts. More importantly, these contracts will help drive horsepower growth, rental revenue, and cash flow, while significantly increasing the earnings of our business. As for market conditions, I'll first look to oil. WTI has been in the high 60s, the low 70s for the last several months. This is a level at which we are seeing strong production and is still driving significant incremental needs for compression. While we are mindful of macro factors that could bring WTI down, generally, we see a strong market for oil. I've received numerous questions regarding the coming administration change and impact on oil prices. While I believe the new administration will materially ease the regulatory burden, My personal view is that macro factors and the growth capital from oil companies are the significantly larger driver of oil prices, regardless of whether it was a Democratic or Republican administration. The natural gas market is a different story. Natural gas prices remain weak, activity is muted, and this impacts demand for our small compression fleet. I do believe the Trump administration will be materially more favorable for natural gas, particularly to ease LNG permitting and ultimately drive production volumes up. This should have a positive impact on compression demand. Now, will this drive prices up? I don't know. We are not including that in our plans, so if it happens, it will have a positive impact relative to our current expectations. I'd like to shift now to our strategy by reviewing our four growth and value drivers. I believe we showed demonstrable progress against several of these drivers, leading to our strong quarterly results, increased 2024 guidance, as well as our bullish outlook for 2025 and the years ahead. I'll start with the first driver, fleet optimization. Our monthly rental revenue per average horsepower, which I calculate as rental revenue in the quarter divided by the average utilized horsepower divided by three to look at the metric on a monthly basis, which is industry standard. That calculation yields a metric of $26.78 per horsepower in Q3 of this year. This is a 12% increase over the same quarter from a year ago. The same metric increased meaningfully in Q3 and Q4 of 2023, with more modest increases since then. The increase in revenue per average horsepower is a function of mix shift to higher horsepower units and price increases for installed units. The second driver is 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, accounts receivable continue to decline. It was $42 million at the end of Q1, went to $33 million at the end of Q2, and is now less than $25 million at the end of Q3. This created $17.5 million in cash over two quarters, or approximately $1.40 per share. We believe there are additional areas to take cash off the balance sheet, including inventory and real estate, which in turn will be used to invest in new unit growth with higher anticipated levels of return on invested capital. We are delivering against exactly what I told you we were going to do over the coming quarters, and I'm confident that as we execute, you'll see more of our non-cash assets converted into cash, leading to higher returns for shareholders. As I noted on our last call, this is an ongoing initiative and will likely span through 2025 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 perform technology upgrades and conversions of our utilized fleet. The third driver is fleet expansion. We have made consistent progress on this driver with significantly more to come. As of the end of Q3 2024, we had units rented totaling approximately 476,000 horsepower. This is a 19% increase in horsepower rented year over year. Just looking at the large horsepower units, as of Q3 2024, we had approximately 333,000 horsepower compared to approximately 253,000 horsepower at Q3 2023. This represents a 32% increase in our large horsepower. As of Q3 2024, 70% of our rented horsepower is in large units. Over the coming five quarters, we currently expect to increase our large horsepower rental fleet by nearly 100,000 horsepower. I will reiterate that these additional units are all contracted with Blue Chip customers, typically on four to five year terms, with pricing that we expect to yield returns above our 20% return invested capital target. We are now almost entirely focused on units that will be set beginning in 2026, once again with an exclusive focus on large horsepower units with a mix of electric motor drives and natural gas engines. Our fourth driver is a creative M&A. While we remain active in looking at potential deals, I want to reiterate that we will remain disciplined on the M&A front. Any potential transaction needs to result in our company and our shareholders being in a better position than the already great position I believe we are in. I would summarize that I don't feel we need to do an acquisition. We will only do a deal if it advances the strategic priorities of the business at a price that makes sense for our shareholders. I would like to highlight two recent additions to the NGS team. Ian Eckert will join NGS as Chief Financial Officer no later than January 6, 2025. Ian has a broad range of financial experience, including public company accounting, financial analysis, and operational improvement. We are very excited to have him join our team. John Bittner, who has served as our interim chief financial officer since October 2023, will continue in that role until Ian's start date and then will provide transition services thereafter. I would like to take this opportunity to thank John and all of his colleagues at the Accordion team who have worked with us over the past year and have been instrumental in our success. Jean Holly was added as a director of NGS effective November 1st of this year. Jean's experience with other rental equipment companies outside of the energy space is additive to our board, as well as her substantial technical experience as a former chief information officer. I believe we have a substantial opportunity using data to improve all facets of our business. I look forward to working with Jean and implementing additional strategies towards that goal. In looking at the talent that has joined NGS over the last 18 months at the management level, on board, and in the field, I think it is a great indication of the power of our story and the opportunity that lies ahead. I also want to take a second to thank all of our employees who delivered these results for our shareholders, as well as to thank our customers for trusting us with their business. To paraphrase our chairman, Steve Taylor, we should all put our sunglasses on as we look ahead to the future of NGS. With that, it is now my pleasure to turn the call over to John.