Release Date: May 16, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Natural Gas Services Group Inc reported a strong quarter with sequential growth in rental revenue, rental-adjusted gross margin, and rental-adjusted gross margin percentage.
- First-quarter adjusted EBITDA of $16.9 million exceeded the previous quarter's $16.3 million, with a rental-adjusted gross margin percentage of 61.1%.
- Total revenue for Q1 2024 increased to $36.9 million, up 39% from Q1 2023, driven by a 48% increase in rental revenue year over year.
- The company has maintained a lower level of leverage at only 2.57 times compared to its competitors, enhancing its financial stability.
- Natural Gas Services Group Inc is actively engaged in discussions for new high-horsepower unit contracts extending as far as 2026, indicating strong future demand.
Negative Points
- There is caution about the sustainability of the high rental adjusted gross margins achieved in the past two quarters, with expectations of some downward pressure in the future.
- SG&A expenses increased in Q1 2024 to $4.7 million, or 12.7% of revenue, compared to $4.2 million or 11.6% of revenue in Q4 2023.
- The accounts receivable balance remains elevated, indicating potential issues in timely payment collections despite improvements in process automation.
- Cash flow from operations decreased to $5.6 million in Q1 2024 from $18.2 million in Q1 2023, primarily due to a usage of cash for accounts payable.
- While the company is making progress, there are still challenges in converting non-cash assets into cash, particularly with accounts receivable and inventory management.
Q & A Highlights
Q: Good morning. First question, you addressed it quite a bit, but the gross margin sustainability, I think you assumed some retrenchment, but what's the sense of how that normalizes? Are you still need to get some data, or do you feel like you'll have a higher level of gross margin with the high horsepower mix increasing?
A: Morning, Rob. So I would say that after we've seen now two quarters of higher levels, we're certainly getting more comfortable that we're going to have a higher level. And we expected with the high horsepower that they would have higher margin, which is in fact, has been the case. I think over the coming quarters, we'll certainly gather more data. And our target kind or general view is I would say that we've been pleasantly surprised that we are seeing numbers with a six on the front of it, we're expecting something more with five on the front of it, and that's still our general view as we go forward. But we hope to be able to keep it in the sixes.
Q: Okay, great. And then the demand environment, you talked about a fair number of discussions. Are you still seeing interest -- big interest in the high horsepower, good pricing? And maybe some color on kind of the demand environment and what it would take to kind of look to, I guess, 2025, '26 capital spending at current levels?
A: So speaking generally of the environment, we're only looking at contracting new units in our high horsepower range. And we are seeing still a strong demand environment in terms of a lack of availability of equipment, in terms of the pricing that we're able to get, in terms of the life of the contract. So really it's quite similar to the last call. We're still seeing quite a favorable environment in terms of demand for high horsepower.
Q: Okay, great. And then you touched a little bit on what kind of electric drive conversion. How much opportunities there? What's a capital per unit on that? And how some of that market looking at this point in terms of demand?
A: In terms of looking at the electric conversion, it's still early days for us. As you look at the unutilized portion of our fleet, this is small and medium horsepower, so the average unutilized unit, we're looking at numbers about 150 horsepower. So this is the small and the medium. So the capital cost for conversion there is on an absolute basis relative small dollar per unit. If we are successful in converting and getting those placed under contract, the return on invested capital is quite attractive. But in terms of opportunity there, it's still too early for us to give any sense of what the magnitude of that could be in terms of converting units and putting them out in the field.
Q: Hey, guys, good morning. Of the -- about $9 million in year-over-year incremental gross profit dollars that you generated, do you just roughly split that out between how much of that came from the new unit that you put on in the last year? And how much of that came from pricing on the existing fleet?
A: So I would say that -- I won't break it out in terms of specific numbers, but just give a sense. The majority of that is going to come from new units, but there is also a substantial contribution. But obviously, less than a majority that's coming from price increases.
Q: Okay. And how much opportunity there for pricing in the pre-existing fleet, and to what extent is the lack of availability of new equipment and how expensive new equipment is informing that pricing on your older stuff?
A: So I would break it into the high horsepower and then than small and medium and high horsepower, you can we look at our public competitors and see that utilization is exceptionally high, so no different there. And so in terms of the lack of availability, that certainly is informing the pricing environment. In terms of more of our small and medium, even there, it really depends on the basin and what the operator is producing, is it gas or is it oil. But we're seeing in certain basins still significant cost inflation. And as a result of that, we, along with others, are -- it's necessary for us to increase our prices to maintain margins.
Q: Okay. And what do you say to maintain margin? Are you just talking about like daily gross profit dollars or percentage? So that if you get the more revenue, there's more gross profit dollars for the company as well. Or units, right?
A: It is a mix, although we're typically the trying to target maintaining the margin percentage.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
