Natural Gas Services Group, Inc. (NYSE:NGS) Q3 2023 Earnings Call Transcript November 20, 2023
Operator: Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Inc. Quarter 3, 2023 Earnings Call. [Operator Instructions] I would now like to turn the call over to Ms. Anna Delgado. Please begin.
Anna Delgado: 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 Securities 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 team. Although we believe that the expectations reflected in such forward-looking statements are reachable, we can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the United States Securities 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 and our Form 8-K, 10-K and 10-Q furnished to the SEC. I will now turn the call over to Steve Taylor, our Chairman and Interim CEO.
Steve Taylor: 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 7x to $4.9 million. Sequential net income increased by over 4x, and EBITDA grew 19% to $11.8 million. In the comparative year-over-year periods, we saw similar growth dynamics in 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, is continuing to show exceptional and positive financial impact. Additionally, we saw the filing of our 8-K 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 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 Gas 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 refresh on the background, and I refer you to the press release we posted 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 $20 million for the three months ended September 30, 2022, for a 42.3% increase. Sequentially, adjusted total gross margin 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 rolling units, slightly higher horsepower utilization across the fleet and rental price increases throughout the year.
Rental revenues now composed 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 is 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, where we see that as irregularity and anticipate that these margins will recover in the fourth quarter. In the comparative year-to-date 9-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 rent units, representing just over 305,000 horsepower as of September 30, 2022.
We have added over 85,000 horsepower to the fleet this year and approximately 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 the same period, our rent 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. The horsepower utilization experienced a slight uptick from 78.6% in the second quarter of the year.
Revenue per 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 and drawing rent. Presently, our large horsepower assets comprised approximately 19% of our current utilized fleet by unit count, and over half of our utilized horsepower and current rental revenue stream. Sales revenues for the sequential quarters decreased from $1.6 million in Q2 '23 to $1.4 million in the third quarter this year.
An aerial view of a natural gas compressor station, its engines and piping stretching for miles.
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 to $1.4 million. This is driven by the onetime 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 have declined over the past few years due to higher customer demand for rental services, our increased outsourcing of large horsepower fabrication and our deemphasis 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 frustrate 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 was 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 a 9% of revenue, which is uncharacteristically low. We think this represents a low point. Going forward, we anticipate that SG&A will normalize at the level of 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 7x 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 $0.18 per basic and diluted share. This compares to a net income of $504,000 in the second quarter of the year or $0.04 per basic and diluted share. In the year ago quarter, our net loss was $80,000 or $0.01. Adjusted EBITDA increased 19% to $11.8 million in the second quarter of $9.9 million and increased 53% from $7.7 million for 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?
John Bittner: Thank you, Steve, and good morning, everyone. The outstanding balance on our current revolving credit facility as of the end of Q3 was $128 million. Looking at our key financial covenants, the leverage ratio at the end of Q3 was 2.71%, and our fixed charge coverage ratio for Q3 was 2.78%, both giving us comfortable cushion of these ratios as compared to the required levels in our credit agreement. And the company is in compliance with all terms, conditions and covenants in the credit agreement. As Steve mentioned earlier, and as you may have seen in our announcement this morning, we have secured an increase in the total commitment of our credit line of $50 million from our bank syndicate. We accessed this additional commitment using the accordion feature contained in our existing credit facility.
The total commitment amount was the only change to the credit facility with all terms remaining the same, particularly our borrowing rate, which currently is SOFR plus a spread based upon our net leverage ratio, which at the end of Q3, the interest rate was or plus 3.5%. We continue to have units being delivered through the first half of 2024. So we will look to utilize the additional capital for our capital requirements beginning in the second half of 2024. With that, I'll turn it back over to Steve for some closing comments.
Steve Taylor: Okay. Thanks, John. This past year, essentially since we've incurred our debt balances, I've had request from shareholders to provide a greater level of detail as to our forward plans, otherwise known as your guidance. As you know, guidance is always a risky area, and I equate it to what can happen in a football game with a Ford Pass. There are three possibilities. The past is completed, it's not completed or it's intercepted. Therefore, you have a one in three chance of being successful. Guidance will be high, low or right on the number, again, one in 3. In spite of that, I think it's a fair request. That said, we are issuing our first set of guidance for revenue and EBITDA for 2023 and 2024. These numbers, along with the color provided in my prior comments, should allow everyone to assemble their own models with a higher degree of accuracy.
For 2023, we anticipate the full year revenues will end up between $110 million and $116 million, and EBITDA will range between $37 million and $39 million. In 2024, revenue is projected to be $130 million to $140 million, with EBITDA between $50 million and $60 million. Note that the 2024 guidance does not reflect any impact of a 2024 CapEx program, but we will update that as soon as we announce details on next year's capital program. So we not only dipped our toe into the water, we're now up to our neck, all I ask be kind. From a macro perspective, the factors supporting hydrocarbon production and pricing appear to be intact. There are certainly countervailing wins, notably the recent weakness in crude price. But overall, the hydrocarbon economic environment seems to be favorable.
We will avoid the once predicted 2023 recession. OPEC seams ready to defend any further weakness in construction of appreciable LNG export facilities in the Gulf continues. It's never smooth selling, but we think 2024 and into 2025 will continue to be a good environment for NGS. We are in an undersupplied gas compression market, and it appears that it will continue into next year. Industry utilization continues to be at very high levels. And listening to other earnings calls, there is very little, if any, incremental capital being planned to mitigate the dart of gas compression equipment. Lead times for major components continue to stretch out. As NGS goes forward, we will endeavor to precontract equipment with long term and required returns before we commit to building it.
As we have done in the past, this will ensure our committed capital returns. We intend to pick our customers. This isn't meant to be a loose statement, but NGS has a lot to offer from our service capabilities to superior equipment and run time to technology. Capital is limited, and we want to make sure that customers going forward with us appreciate the value we deliver and are looking for strong partners as we are. We're both on our industry and our opportunities with our capital availability, long-term contracts at exceptional rates and good counterparties, we are in an enviable position to take advantage of the strong environment. Thanks for your time. I look forward to your questions.
