Good morning, ladies and gentlemen. Welcome to the Natural Gas Services Group Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode, [Operator Instructions] Your call leaders for today's call are Alicia Dada, IR Coordinator; Steve Taylor, Chairman, President and CEO. I would now hand the call over to Ms. Dada. You may begin.

Thank you, Erica, and good morning listeners. Please allow me to take a moment to read the following forward-looking statement prior to commencing our earnings call. Except for the historical information contained herein, the statements in this morning's conference call are forward-looking and are made pursuant to the Safe Harbor provisions as outlined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements, as you may know, involve known and unknown risks and uncertainties which may cause Natural Gas Services Group's actual results in future periods to differ materially from forecasted results. Those risks include, among other things, the loss of market share through competition or otherwise; the introduction of competing technologies by other companies; and new governmental safety, health or environmental regulations, which could require Natural Gas Services Group to make significant capital expenditures. The forward-looking statements included in this conference call are made as of the date of this call and Natural Gas Services undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include, but are not limited to, factors described in our recent press release and also under the caption Risk Factors in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. Having all of that stated, I will turn the call over to Steve Taylor, who is President, Chairman and CEO of Natural Gas Services Group. Steve?

Thank you, Alicia, and Erica. Good morning, and welcome everyone to Natural Gas Services Group's fourth quarter and year end 2014 earnings review. The fourth quarter of 2014 capped a strong year for NGS. Total revenue and gross margins were the highest in our history and operating income, net income, gross margin and EBITDA increased in each quarter throughout the year. We continued to grow our rental fleet and achieved a 14% increase in rental revenues, while increasing gross margins to 60%. Although 2015 will be a challenging year, we are well positioned and confident. With our net cash position, we have the strongest balance sheet in our competitive sphere and anticipate generating free cash flow this year. We are confident that our expense control as well as the pursuit of additional sales and product initiatives will strengthen the immediate and long-term performance of the company. I will comment in more detail as we review the financials. Starting with total revenue and looking at the year-over-year comparative quarters, our total revenues increased 17% or $4 million from $23.1 million in the fourth quarter of 2013 to $27.1 million in the fourth quarter of 2014. Rental revenues increased 11% this quarter compared to the same quarter last year and sales revenues were 44% or $1.9 million higher. The sequential quarters of the third quarter of 2014 compared to the fourth quarter 2014, total revenues were up nearly 6% or $1.5 million to $27.1 million. Rental revenues grew the compressor sales were large driver of this quarterly growth with the $1.2 million or 20% improvement. On a full year basis, total revenues increased 9% to $97 million. Our rental revenues grew 14% to $79 million. These revenue levels are above record for the company. Moving to gross margin and comparing the fourth…

Our first question comes from Joe Gibney from Capital One. Please state your question.

Thanks. Good morning, Steve.

Hi, Joe.

Just a question on sales, your backlog pickup to $5 million exiting the year pretty decent order quarter you referenced in some of your prepared remarks and that you are pursuing additional sales. I mean, upside when that typically turns out pretty quickly as we enter downturn or it sounds like you had some tailwinds at least in the fourth quarter. Could you talk a little about what transpired on the order front there in 4Q and in your outlook near-term?

Yes. We came into 2013 - I think about Q2 or so we had a pretty good backlog built up there about $10 million. Then tended to obviously be built off and come off to at the year. In Q4 we got some good orders in Q3 and continued that as I had mentioned on the Q3 call we were even having to shift some floor space towards sales away from rentals which obviously run both ways. We got more sales and then we need to tam down the rentals anyway. Going into '14 in full, we got the $5 million, a little higher than where we were comparatively last year at this time, but as you know and everybody knows sales is the one that takes the harder hit in the market like this typically, so we think that, obviously, we will build that our next couple of quarters. It still is. Kind of if you annualize that, that is still kind of in our realm that we have been telling people $10 million to $15 million kind of our steady rate on that, so I am a little encouraged by that backlog number, now we will have to see what happens going forward, because you know it is almost a new world everyday based on rig counts, what customers are saying and doing and everything else, but it is probably a little stronger than I would have expected coming into market like this. When I say we have added salespeople, we have added people primarily to push rentals and probably I am going to speak a little. We are going after sales or whatever. Obviously, we are going after. We are not going to avoid a sale if somebody wants us to build something, but we have put these people primarily to penetrate the rental markets, but I think we will get some sales out of some of that work too.

Okay. Then on sort of bill cadence on your rental fleet, the guidance you have given on CapEx at least for the first half of the year $10 million $15 million is it reasonable to be in this kind of 30 unit per quarter to 50 unit per quarter kind of run rate? Is it not dissimilar to what you saw in the fourth quarter as being reasonable and at least the first half and we will kind of market develops, is that a fair statement?

Yes. Since I cannot remember the number, I think that is going to be in a in a reasonable range. Again, like I mentioned, we adjust our capital pretty quick. Just as we did going into '09, the last downturn and as we have done here, we pull by pretty fast and kind of get to a comfort level going to an uneven market like this and we could ramp up or down pretty quick. Our guys are pretty good at doing that. It keeps them up at nights so they can do it. Yes. We are going to kind of run at that rate, annual at $10 million to $15 million. Again, just giving you a six-month look as I am not sure anybody knows what is going to happen in August or the last half of the year, so we are going to kind of run like that. We have got that schedule pretty well set out. We have got some slots we can put if we need to, so that is a very fluid number. It may go up. I don't think it will. I think that $10 million to $50 million range, I do not think it will fall down out of that range. If we see some opportunities, maybe we could get a little stronger.

Okay. Great. I appreciate Steve. I will turn it back.

Okay. Thanks, Joe.

Our next question comes from bill from Ken Sill Global Hunter Securities. Please state your question.

Yes, guys. It is nice - quarter like yours.

Thanks.

…given all the things during the last couple of months, Could you repeat the size of the fleet at the end of the quarter again? I am not sure I got the right number on that one.

Yes. I think it was 20.79 [ph].

27, okay. That is right. What are the kind of terms, how long do these rental contracts kind of run on average?

We will quote 6 months to 12 months, which is pretty much the industry standard, but typically equipment will stay on location two to three years, just because you run out the minimum term that is just a contracted obligation for the customer to keep it, so we can have a chance of getting some money out of it, They will typically keep as long as they are needed that average usually runs two to three years.

Yes. I do not expect them to be returning compressors back, but they are asking everybody for price concessions. Have you guys had any pushback on that yet?

Yes. I mean, that is something we were anticipating. It happens during these downturns. It is not a hand ring exercise; something is going to come about, so we see some of that. It has been very manageable and reasonable. I think as I kind of alluded to in some of my remarks, our service guys in the field have great reputation and experience out there with the operators, so we typically are able to hold any concessions that we may need to give to pretty reasonable amount, and certainly much less than what the market may be tend to do so. I am pretty satisfied with where we are in that realm right now from what we are having to do and then the frequency we are seeing at. Now, I will just comment a little on compressors being said and [ph], we are going to continue to see that roll over survey of compression going out, coming back and everything else. The challenge is going to be trying to keep that utilization reasonable, not reasonable, but flat or within the flat realm. I think we anticipate utilization coming off somewhat during the downturn like this. I do not think there is any way to avoid it. Even when you have a situation where we are kind of our production hunch [ph] on these wells, especially were gas lift 12s were help in lifting this oil out, you are still going to have some operators making some economic limits on some of those stuff at 50 bucks, no matter what you are doing with the gas lift unit. You got a lot and a lot of cost-cutting going on and sometimes you will just cut cost to cut cost. We anticipate having some pressure on the utilization rates, so I think we will see some of that, but I do not think it is going to be certainly that can be manageable relative to everything else we do.

I guess with the low CapEx in the first half, are you kind of keeping the compressor rental fleet where it is or will that nudge up a little bit?

Well, it will grow a little. Certainly not going to grow like it has the last three to four years, if you just take the $10 million to $15 million and annualize we are not projecting that, but just a simple calculation. They get you to know maybe about a half of the capital spin rate we were running last year. If you do that, we built little over 320 compressors, so it puts you in 150 compressor range. Now, again, we are not saying that. We are just saying, right now our visibility is only good up to about June, so $10 million $15 million. Obviously, we are going to expect some decline in our capital spend well within our operating cash flows, so we will be adding cash to the balance sheet. Again, every month, we sit down and look at what is going to the shops, what is running, what the utilization is and we base 80% of decision on utilization. If we see utilization take them up a little, we may build a little more if should take them down, we are going to conserve a little more.

Okay. Last question and I will let somebody else get on out there. You know, 60% margins are great, but it tends to attract competition and I just noticed that I do not co-in, but I noticed that Exterran is going to unwind their big experiment and break into a domestic and international company. Do you think that changes the competitive landscape for you guys or is that really not going to have a big impact?

No. I do not think it does. I mean, no matter what they do structurally, we are still competing against them head-to-head everyday out in the field. That is not going to change, so I do not see anything happening there from competitive standpoint. Like I mentioned, we have got very good reputation, very good guys in the field and we will just continue that. I mean, as we did again in '09 and we have reiterated this time to our guys, we are going to cut a lot of expenses and we are going to tighten up just like everybody else, but we are not going to cut our service response, so we are going to respond quickly, we are going to get the stuff back on line, so run time stay up, and that is what enables us to keep the margins and charge a better prices.

Make sense. All right, thank you.

Okay. Appreciate it.

Our next question comes from Peter Van Roden from Spitfire Capital. Please state your question.

Hey, Steve.

Hi, Peter.

On the rental build rate, as you said you are looking to add, I guess maybe 75 units in the first half of 2015? How many of those are spoken for versus kind of building on spec?

At any given time as the stuff goes through far out when you order the components, the engines and compressors, very little or because you got such a long delivery cycle now with engines and compressors. Compressors is not bad being our own compressor, but engine still being out in that four to five-month. Now it is going to be interesting to see how all that stuff loosens up as we go forward, but you got such a long legal on buying stuff that an operator typically won't commit to rental that far out. Usually when you get to the end of that cycle within, say, four to six weeks or something before you start getting commitments on it. Now, the stuff we are building now, the particular models we are building now still have over 90% utilization rate. Otherwise, we would not be building them. By the time it rolls off, 9 out 10 them are going to a job somewhere. That is the big thing we just to measure how to go. Right now [ph] is pricing or build is utilization and we are not going to be building anything that is probably utilized 90% or less than 90% or more and based on what sales guys see and if we anticipate some demand, that's our build. We are going to use that to gauge how we price stuff and what our capital spend will be.

Then as you think about kind of controlling margins this year in terms of price concessions in the utilization, how does that play out in the rental gross margin and how do you guys control that versus what the market is going to dictate to you?

Well, I mean, it impacts if you are not taking other actions and you are just sitting there utilizations taking a little hit and price would take a hit, it will impact it, but that is where we the other cost cutting maneuvers come in whether it is rerouting guys on what they are doing, the over time, et cetera, et cetera: There is lot of levers we pull and we have already started pulling those months ago. The other thing as I mentioned we are trying to do too is, penetrate some of these markets too with getting some additional rental sales guys out there, really try to take advantage of the downturn and a situation where some competitors can. They are going to have to cut back and everything, because of either debt or distributions or whatever it is. We think gives an opportunity to maybe going there and do some of that stuff, so it is not an easy task, but we will tend to try to maintain our margins versus trying to maintain any market share we have got. That is what we did back in '09. That is kind of our basic strategy. The problem is, when you start given up a lot of price, it takes a long time to get it back and customers are reluctant to give it back, because that kind of in the same situation, so we think we can get markets back pretty quick and we are willing to give up a little bit of share as we go through these period to maintain those margins.

Got it. Then final question from me, can you just walk me through the difference between your current utilization and utilization plus contract and then how that plays out from the end of the quarter until the next quarter?

Yes. The difference is just merely what we have already got contracted, but it is not out earning revenue yet, so either it has been contracted, it is going through the build cycle or it is in the yard getting ready to go out or it may even actually be go on a location, but have not start up and started on rent yet, so that is the difference. It is about 3% differences. It has been around that way. It looks like about the last year or so, that is only the difference. The basic utilization is just what is out earning revenue now, the basic plus contracted is what will be earning revenue.

Got it. Okay. Thanks. Great quarter.

Thanks.

Our next question comes from Rob Brown from Lake Street Capital. Please state your question?

Good morning.

Hey, Rob.

Wondering if you could kind of put maybe some numbers on your utilization, how far it goes down, what is your sort of sense on where utilization will bottom I know it is a little hard to predict, but sort of how many points utilization reduction should we think about?

Boy, a little hard to predict? It is a tough thing, because again just like I had mentioned, we will typically, we use utilization to make a lot of decisions whether it is pricing, build schedules, whatever, but on the other hand, we do not use it to drive too much of what we are trying to charge at their either. As I just mentioned, we will try to maintain margins and sometimes that is at the expense of utilization, so we had very strong pricing power. I think the best in the industry from what I can tell and we want to maintain that and hold there, so we are pretty reluctant to cut prices severely as others may and we are willing to give up some equipment or some share if it is not what we think we ought to be doing. Have you forgotten your question yet? I do not know it is real hard. Maybe it gets down to the high 60s, low 70s. I think that in one case you could say yes pretty easy and other case you would say well it all kind of depends on how much traction we gave some of the sales initiatives and as well as other. Maybe that is the best guess; maybe we get a 10% drop or something like that.

Okay. Great. Thank you. Then on the sales expansion, what territories are you expanding sales into and sort of what is driving that expansion. Is it that they are at least still active?

Yes. I am not going to disclose where we are going just from a competitive standpoint right now, but yes it is areas that we actually have some equipment in, but we haven't in the past had enough to really fill it out, because all the other areas has been so busy. Now we have got a little more leeway to do something to place equipment, or build equipment we put these guys into. Some areas just have not been big for us yet, but we think there is a lot of opportunity. We have already got people, some equipment there, some service presence and everything, so we think it is going to be a pretty efficient build-out from time and money standpoint. It is not a new. Do not worry it is not that exclusive shale or anything or anything like that. It is a pretty standard stuff that we think we can just get some incremental business off of.

Okay. Great. Thank you.

Okay. Thanks.

Our next question comes from Jason Wrangler from Wunderlich. Please state your question.

Hey. Good morning, Steve.

Hey, Jason.

Maybe kind of also on the last question, could you maybe talk about what you are seeing, maybe even specifically up in the Northeast that it seems like that market has kind of held in better at least from a spending perspective and rig count so far whether it Marcellus and Utica. Where you see your activities up there - might be an area of growth going forward?

Yes. It is. I mean the Utica looks good to us the Permian looks good to us. These are the same areas that I had mentioned before. I had mentioned before trio is Utica, Permian and Niobrara is where we thought might be the relatively stronger areas for us. Utica and the Permian are proven to be that way and Niobrara's price slowed down a little more than we anticipated, but we think there are still opportunities out there with our standard equipment and potentially these VRUs also, so those of the two to three areas that we see being really in those particular areas being growers.

Okay. Maybe could you comment the bigger unit sound like a pretty interesting opportunity. Are there certain places or certain types of wells that those are really kind of focused on? Is that maybe kind of, to your point, about were some of the areas that you are trying to go to? Just trying to understand what the plan is as far as, as you kind of go up the horsepower side?

Yes. We think there is pretty primary submarkets in that bigger horsepower markets, number one is just what you say. Sometimes you have bigger wells that our equipment really is not big enough to pump, so you either put two or three units out there. Operators do not like doing that, so a lot of times have equipment for that. Number one, get a bigger well that has got more gas and reasonable horsepower. Number two and three are things we see developing and we think we will continue over time. Number one is gas lift, a centralized gas lift, so we have been doing a lot of gas lift for last three to four years on a wellhead basis. I mean, we have made a great mark there with customers in our equipment and everything else and that is going to continue, but you are seeing more and more centralized gas that is going in to, so that is typically bigger horsepower located centrally and then just running gas lines out to wells instead of having an individual wellhead compressor. We think both markets to be good, but the centralized one is a growing one that we think we can tap into. The other is, pad drilling, pad drillings is going to be more and more popular as you go, so when you have four, six, eight wellhead on location versus one, you need bigger horsepower, because you are pumping more gas volumes, so we think that is another market. One market has always been marginal advantage is just bigger wells, but these other ones are growing we think and we think we can jump right in there. The good thing about moving up this horsepower is, we are still in the realm that we claim kind of this kind of 100 to 500 horsepower range, we are just moving up, with much more bigger into this bigger horsepower. A lot of the new revenue streams with very incremental cost, because it really give you the same sales force, same customers, same areas we are already operating in plus the kind of in-filling with some bigger horsepower.

That is great. I will turn it back. Thanks, Steve.

Okay. Thanks, Jason.

[Operator Instructions] Our next question comes from Joe Pratt from Stifel. Please state your question.

Hi. A quick question and this is random item. I think on the USAC call they mentioned that quite a better supply of lubricants were used with your compressors and the declining cost of that could help margins. Is that relevant at all?

Yes. I mean that is some of the stuff that obviously all of us do [ph] get to and then that is one of our initiatives we have got going on just like our customers come back to us and want some help we are looking to tie our suppliers too, so we are trying to spread the good news around. Yes, we are going to see lubricant prices come off, some other things hopefully we will come off too. We are still a little bit early in this cycle to see some big items come off like engines, things like that, but there can be a lot of ancillary and wearable disposable items.

Okay. Thank you very much.

Yes. I appreciate it.

Yup.

Our next question comes from Veny Aleksandrov from FIG Partners. Please state your question.

Good morning, Steve.

Hi, Veny.

The 300 and 500 horsepower, are not giving an exact date what are your plans, when do you think you are going to be able to deploy them?

Well, we have got a prototype frame already built additional back ground for our compressor brands is called CiP, and that just stand for cylinders and plainer kind of an engineering term but that has been our bread-and-butter on this gas lift stuff for four or five years. We had this product line for more than 10 years. It is a great little machine, it has got a lot of unique little features for a wellhead equipment, it helps us build a smaller footprint or lighter weight, et cetera, et cetera, so very popular with customers. What we have done obviously, we get this 125 horsepower and 250 horsepower frames that use the heck out of, but seeing these all the markets developing this 350 horsepower and 500 horsepower, we are going to go, physically it is going to be bigger in size, because you put more cylinders on and have type of bigger engines and stuff like that. We got the first prototype frame built and we are starting to contract some production items. We do not obviously own a foundry do not do the captions ourselves. We contract that stuff, so we are kind of in the mode of, number one, finding a home for the first prototype, put it out on a well using, make sure if things are working the way we think it all work, simultaneously starting to contract some of the parts and pieces to it. Then hopefully by the end of this year, we have this prototype out, worked it on the relived well, we need to do and then we will be raised or deploying into '16.

Thank you so much. Also, if we talk on the margins, the rental fleet, they are very good very impressive this quarter. At the same time you saw that you have some pricing pressure. Are we about to start seeing the pricing pressure because with pricing pressure how did you get the 62%?

That is a magic. I cannot tell you the secrets. We did not have much as much pricing pressure in Q4. We have a little, but not as much, so it was really just a matter of not seeing a whole lot of at point, but we are starting to see and it is really out there. Everything you read is true. Now the amount you read maybe true for some and not true for us as I mentioned we are able to control them. It seems a lot better than most, so we yes we will start seeing more of it kick in as we go through '15. Yes. We won't. I mean, we are now going to keep track and try to quantify what it is just except for the point that we are just seeing single-digit issues right now versus anything more extreme.

Thank you so much.

Okay. Thanks, Veny.

[Operator Instructions] At this time, we have no further questions.

Okay. Well, thanks Erica, and thank everybody for joining on the call. I appreciate your time this morning and we will look forward to visiting with you again next quarter. Thanks.