Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group, Inc. Quarter 2 Earnings Call. At this time, all participants are in listen-only mode. [Operator Instructions]. I would now like to turn the call over to Ms. Anna 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 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, while 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 million 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 million to 67 million to a range of 64 million to 68 million. At the midpoint of the range, this equates to roughly 45% growth over 2023…

Thank you, Justin, and good morning, everyone. Let me jump into the review of our second quarter results. Total revenue for the 3 months ended June 30, 2024, increased to 38.5 million, which was up $11.5 million or 43% from $27 million in Q2 2023. Our revenue was up from 36.9 million for the 3 months ended March 31, 2024. Rental revenue for Q2 2024 was 34.9 million, up from 24.1 million in Q2 2023 for a 45% increase year-over-year and up 1.2 million from 33.7 million in Q1, a 4% sequential increase. Our total adjusted gross margin of $21 million in the second quarter increased approximately 65% when compared to 12.8 million in the same period in 2023. Sequential adjusted gross margin dollars decreased 1% from 21.1 million last quarter. Adjusted gross margin as a percent of sales for Q2 2024 was 54.6% versus 47.4% for Q2 2023 and 57.2% in Q1 2024. This material increase year-over-year in margin percent was driven primarily by increased rental adjusted gross margins driven by a combination of increased rented horsepower along with an increase in pricing from the previous year. The decrease from Q1 was driven by lower gross margins across the board in but primarily from lower rental adjusted gross margins in Q2 2024 as compared to Q1. Our rental adjusted gross margin dollars increased year-over-year to 20.7 million for Q2 2024 from 12.8 million in Q2 2023, representing a 62% increase. Sequentially, rental adjusted gross margin dollars were essentially flat increasing by $78,000 from 20.6 million in Q1 2024. Our rental adjusted gross margin as a percent of sales for Q2 2024 was 59.3% versus 52.9% for Q2 2023 and 61.1% in Q1 2024. As we mentioned on our last earnings call, our rental adjusted gross margins have been somewhat…

Thanks, John. With respect to our 2024 guidance, our current outlook for 2024 adjusted EBITDA is $64 million to $68 million which marks an increase from the prior guidance provided on our Q1 results call of 61 million to 67 million. We have moved our range up based on our results through the first half of the year and our confidence in the margin generating potential of our rented compressor units. We are mindful of costs looking to improve efficiencies, lowering non-core expenses where we can and reallocating cash to growth and cash flow generating initiatives. With that said, there are some incremental investments that are necessary as it relates to improving scalability and efficiency of our operations in addition to making sure we have the best people in the industry. With respect to growth capital expenditures, we expect to spend between $60 million to $80 million in 2024, reflecting investments in new large horsepower compression units. As noted in our release, the wider range is primarily due to the fact that the contracts were just awarded, and we are still working on the exact timing in terms of what will hit in Q4 '24 versus early next year. At the midpoint of our range assuming $70 million, we would currently expect 2025 growth CapEx to increase by roughly one-third over 2024. To the extent that 2024 is at the lower or higher end of the range, we would expect 2025 growth CapEx to adjust accordingly. This is a similar issue we faced in 2023 and 2024. While we are not providing 2025 guidance, we wanted the investment community to have a rough sense of the growth opportunities we currently have signed. As we move further into the year, we will update 2024 CapEx projections accordingly. It is our expectation…

Ladies and gentlemen, at this time we will conduct the question-and-answer session. [Operator Instructions]. Our first question comes from Mr. Rob Brown with Lake Street Capital. Go ahead please.

Good morning and congratulations on all the progress. Just want to get a little bit into the new contracts and the demand environment. I think you talked about a pretty good pipeline into '25, and I guess the CapEx discussion implies that. But how is the demand environment and maybe just characterize kind of what you're seeing and when you start to see the next cadence of new contracts?

Well, we just announced a bunch of them. So we're certainly focused on those right now and we're going to have significant activity in the second half in 2024 and throughout 2025. So I think I could characterize overall that it is a robust environment in terms of demand for compression. And so we are going to have a very busy time in terms of getting all of these new units set. Obviously, we had a bunch that are still coming on in the second half of '24 and into now 2025 is going to be a very active period in terms of getting new units out into the field. In terms of beyond that, we're already having and have been having conversations with customers for 2025 and 2026. And so that is kind of next on the docket, but overall, it's an active environment.

Okay. Great. And I wasn't minimizing the new contracts you signed, so congratulations on those.

It’s okay, Rob. I appreciate it.

I did want to ask about those. I think you said 40% or electric drive. How is that market developing? And I guess, what's the -- what's sort of the comparison in that market of the rental rates and I guess the margins of that product line?

I would call them just generally comparable. There are some differences in a number of different areas. But overall, I would think of them as generally similar. In terms of the market, I think there has been a significant increase in demand for electric over the last several years. And then there is also a constraint -- a practical constraint is there -- is the power at the particular site to power these large machines. And the answer is, in some cases, yes, and in some cases, no. And our perspective is one of flexibility in being able to offer our customers whatever they need. They need natural gas, and in fact, what they want at their particular site or do they want electric. And so in that way, we really want to let the market decide that as the grid increases in terms of power that's provided, and that's a reasonably uncertain exercise to understand at this point, we'll let our customers tell us what they want, and we have the flexibility to be able to provide it for them.

Okay, great. Thank you. I’ll turn it over.

Thanks, Rob.

Thank you very much. Our next question comes from Mr. Jim Rollyson with Raymond James. Go ahead please.

Hey good morning guys.

Good morning Jim.

Justin, maybe you started talking with the new contracts and just reference the fact that rates on those are higher than where your fleet average is today. Maybe just a little sense of magnitude so we can kind of think about where the shift is headed here over the next several quarters as those new contracts roll in? Just trying to understand that kind of delta there, if you don't mind?

Sure. I mean, I'm not going to get into specifics on pricing. I wanted to indicate that it is above the average for the fleet to show that it is overall a good pricing environment, particularly for new equipment, if you have it available. And that it is, I think, supportive of the fact that -- these new units are going to be above our target return on invested capital. And so they're above -- I'm not at a point where I want to quantify that amount, but they are above.

Got it. And when I look at the range now of growth CapEx this year and you kind of alluded to where 25 million is headed from there. Just maybe a little bit of color on how much incremental horsepower that would equate to?

We haven't disclosed the horsepower amount. I would say that the cost of building this horsepower is generally in line with what's out there in the market. A significant percentage of this is fabricated externally just because of the size we're doing that with partners at this point. And it's not a number that we've disclosed in terms of forward-looking, although if you look at the horsepower we've added over the last one to two years, it's generally going to be in line with those price levels.

Got it. Appreciate that. And maybe just one last one on kind of your cash initiatives between DSOs, which you made really nice progress on this quarter and some of the other things you're doing. You mentioned the time line could be out to 24 months, but curious if you have any visibility on some of these items just here over the next handful of quarters?

Sure. There are a couple of buckets and timeframes. Certainly, we've shown good progress on the accounts receivable front, and that is something that's a little bit more in our control, and I'm happy the way we've executed against that and continue to believe we will execute further on that. As John mentioned, it's something to get within kind of historical levels is by year-end. And certainly, in the recent past, we've been well above historical levels, but we want to return back to that. The income tax receivable, we are making progress against, but we're dealing with a government agency there. And so at the end of the day, we are somewhat at their -- if not significantly at their mercy, but we believe it is -- we will receive that. And it's just a question of timing, and we're doing everything on our side that we can to accelerate that. When it comes to the owned real estate, practically, that's just a little bit longer term. And I think that is probably more towards the range I gave up to 24 months. Certainly, we hope to make progress more quickly, but it just does take some time with some real estate, and there's some significant value there. And so it's something we're focused on. I think just the timing is a little longer.

Absolutely. Appreciate the color.

Thank you, Jim. Appreciate it.

Thank you very much. Our next question comes from Mr. Tate Sullivan with the Maxim Group. Go ahead please.

Hi. Thank you. Can you talk about the procurement of the engines themselves? Is it a longer process than a couple of months ago? And is that part of your competitive advantage access to different kinds of engines than the competitors.

I think that the procurement time frame it certainly isn't longer than it was over the past year or so and generally trending probably a little bit better but it's still a long lead time item and it's not the only long lead time item. They're really kind of 3 longer lead time general items, which are the engine, the compressor frame and then getting space with a fabricator to have it done. And those are all still slightly less than they were 2 years ago but it's still a long lead item. And so that leads to some of the just uncertainty on exact timing of CapEx spend between '24 and '25 of we're roughly 6 months to the end of the year as we were looking at these contracts and saying how much is going to fall in Q4 and Q1 but an expectation that they will all be set by the end of 2025. And so I think it is still a reasonably long lead time but probably a little better than it was before.

And related to your comments about industry-leading technology. Is that related to more of the natural gas engines or what -- can you talk about what you're referring to?

I think that those are the units overall. There are a couple of key items that I would point to in terms of the run times of our units is not the mechanical availability but the actual run time that the customer sees due to our smart technology is quite strong and we've received a lot of favorable feedback from customers that delivers productivity to them and that's important from a service level and ultimately profitability perspective on there. And so that's one component of it. And the second major component, which relates to engines but also some of the technology that we put on to the units is reducing emissions and that is an increasingly important characteristic or need for the producers. And so those are certainly two of the big ones not the only ones but two of the larger drivers of the technology of the units where we're getting very favorable responses from customers.

And last, do you already have electric motor horsepower in the field or not?

We do.

You do. Okay.

Yes, we do.

Okay. And I assume the service related to those, is it much less compared to the natural gas engine components are not necessarily.

It is lower just because you have some lower levels of maintenance in that you got dealing with an electric motor versus an engine fewer moving parts requires some less maintenance but it is an area that we have significant experience going all the way back to fabricating these years ago. So it's an area that we have a good bit of experience from.

Thank you very much.

Thank you, Tate.

Thank you very much. And our next question comes from Selman Akyol with Stifel. Go ahead please.

Thank you. Good morning. A couple of quick ones for me. So you talked, I think about 40% of your delivery is going to be electric drive and you guided a little bit towards 2025. Would you expect that percentage to move meaningfully one way or the other as you look into 2025 and beyond?

Morning, Selman. Just to confirm your question is will the electric percentage differ much in 2025?

Correct.

I would say remainder of '24 and '25 on the new contracts that's looking overall that 40%.

Got it. And then is something changing out there because -- I mean especially for large horsepower, right? It's just not electric but it's large electric. Is there something your customers are seeing that's given them confidence to go that way? Because we have been hearing that that's still kind of a huge stumbling block?

I think it was -- I would say, generally, it's been the last several years that we've seen increasing although somewhat uneven interest in the large horsepower. I think there is an attractiveness from the operator's perspective in certainly, the emission side as it relates to the compressor units and potentially some on the run time just with less maintenance, but that's assuming that there is -- that one power exists at that particular site, and then two, that it is consistent power. And that is, I think, really the -- a material restriction in terms of the potential penetration on compression overall and specifically large horsepower and there's a fair bit of uncertainty around that. The customers are uncertain as to will they have power for instances of -- they thought they would. And then suddenly, they didn't and they'd already planned to put electric horsepower there. And so I think the power supply and consistency is really the big question mark. And that's kind of an unknown, which is one of the reasons that we want to take an approach that is either or it's whatever the customer wants there, we can supply either. And so I think there's significant interest. I think it will continue to increase over some long period of time, but it's going to be uneven.

Got it. And I know you focus on the Permian, we always talk about the Permian, but are you guys seeing demand in any other basins out there?

I would say that the Permian is certainly the most robust. And for us, with it around 75% of our business, the area that we focus most we are seeing, certainly in other basins that are more oil driven. We're continuing to see demand. It's just on a relative basis for size for us, it's just smaller, but it doesn't mean it's not there.

Got it. And then last one for me. Can you just touch on your outlook for acquisitions?

It's an ongoing process. I think it is an opportunity for us but it's not one that we have to do for our shareholders to see, I believe, very good returns. And so I think I look at it that way. It's an ongoing set of discussions with potential acquisitions, whether entire companies or portions of fleets, but it's not one that I feel that we are pressured to do. We are in an advantageous position to I think there is strategic logic to it, but we'll remain disciplined on the composition of the fleets that we're looking at, the customer mix, the base and obviously valuation. And so it will be an ongoing process, of which we'll continue to look at, and we'll pull the trigger if we see something that we think makes sense for shareholders.

In terms of just acquisitions, not thinking so much about another compression company, but just thinking about do you have customers who may be looking to sell units from basins that either are not working out as well as maybe originally thought?

I'm sorry, Selman can you just repeat the question? I'm not sure I heard that right.

Yes. Let me phrase it better. So are there any packages from your customers that you could potentially acquire from them where either their basin is not spooling up as fast as they thought or less of an emphasis. So is there any opportunity to buy compressor packages from your customers?

I see from the customers. I missed that part, sorry. We've seen it, although that's not I wouldn't describe that as a material portion of where we are spending our time in M&A. If that becomes a larger opportunity, it's something that we'll certainly look at, but it's not a big part of it today.

Understood. Thanks so much.

Thank you.

Thank you very much. [Operator Instructions]. I don't see any other questions. Go ahead, please.

Thank you, Luke, and thanks for all of your questions and participation on the call. We sincerely appreciate your support. I want to thank all of our employees who delivered these results for our shareholders. I also want to thank our customers for trusting us with their business. We look forward to updating you on our progress in the next quarter. Thank you, everyone, and we're done with the call.

This concludes today's conference call. Thank you everyone for attending.