Good morning, everyone, and welcome to the Natural Gas Services Group Incorporated Quarter 4 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 security 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 in our filings with the SEC, including our Form 10-K for the period ended December 31st 2024 and our form 8-K. These documents can be found in the investor section of our website located at www.ngsgi.com. Should one or more of the risk 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 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 is Ian Eckert, our new Chief Financial Officer, and Brian Tucker, our President and Chief Operating Officer. I'm very happy to welcome Ian to our team, and I am impressed how quickly he has come up the curve considering he has been with us for less than three months. I'd also like to take a second to thank all the employees at NGS. These results would not be possible without your dedication and perseverance. Thank you. I trust by now you've had the chance to review our fourth quarter and full year '2024 results, which we announced yesterday after market close. We delivered another strong quarter of revenue growth, net cash from operations, adjusted EBITDA and operationally, we improved across the board. We continue to execute on our strategy and against our value drivers. Ian will cover our fourth quarter results, so I will focus more on the year-over-year growth as well as our comparison to two years ago. I've noted on previous calls that NGS is a different business than it was several years ago. I believe these numbers put this in context. I remain quite optimistic regarding our competitive position and our growth trajectory. We closed 2024 with almost 492,000 rented horsepower compared to over 420,000 last year and 318,000 at the end of 2022. This is 17% growth last year and 55% over two years. Horsepower utilization has also improved to 82.1% compared to 80.8% at '23-year end and 74.8% at the end of 2022. Rental revenue in 2024 was $144.2 million up 36% compared to '23 and 94% percent compared to 2022. We've really changed the dynamics of our business, upgrading and upsizing our fleet to focus…

Thank you, Justin, and good morning to those joining us. Let me summarize the financial highlights of our fourth quarter and full-year results. Revenue for the quarter of $40.7 million was up year-on-year when compared to the fourth quarter of 2023 by 12% and effectively flat sequentially when compared to the third quarter of 2024. Rental revenue of $38.2 million was up year-on-year and sequentially by 21% and 2% respectively, reflecting continued addition of large horsepower compression packages. Total adjusted gross margin for the quarter of $23 million increased year-on-year and sequentially by $2.7 million and $0.1 million respectively. These results included a year-on-year and sequential decline in sales adjusted gross margin of $1.1 million and $0.3 million respectively. This was driven by our fabrication and assembly operations as we continue to shift our business away from fabrication of new compressor packages as reflected in the announced termination of fabrication and assembly activities at our Midland, Texas facility. Total adjusted gross margin percentages continued to expand both year-on-year and sequentially to 56.5% as we continue to see rental adjusted gross margin percentage above 60%. Net income for the quarter of $2.9 million increased year-on-year by $1.2 million or 68%, driven by rental-adjusted gross margin, resulting in $0.23 of diluted earnings per share. Sequentially, net income decreased by $2.1 million primarily driven by the inventory allowance and decrease in sales gross profit, both of which relate to the closure of our Midland Fabrication operations along with the intangible asset impairment. Additionally, SG&A expenses for the quarter increased slightly compared to $5.5 million in the third quarter, driven primarily by stock-based compensation expense. Adjusted EBITDA in the quarter of $18 million an increase year-on-year of $1.7 million and roughly flat sequentially. Rented units on December 31, 2024 represented 491,756 horsepower compared to…

Thank you, Ian. Simply put, 2024 was a record-breaking year for natural gas services, and I believe the future will be even better. Over the past few years, we've made tremendous strides to solidify our already strong competitive position. Today, I believe our technology and service can compete against anyone. We will continue to invest in innovation, building the appropriate infrastructure and driving outsized returns for shareholders. As we look ahead to 2025, we are guiding to adjusted EBITDA in the range of $74 million to $78 million, which at the midpoint represents just under a 10% increase over 2024. Our expected range for 2025 growth CapEx is between $95 million to $120 million. Almost all this capital will go to new large horsepower units, essentially all of which are already under contract. At the midpoint of the growth CapEx range, dollars $107.5 million our growth capital increased by approximately 75% over 2024 and will be the second-highest total in the company's history. We had previously guided to growth CapEx of $90 million to $110 million for 2025. The increase is based on contracted new orders for 2026 deployments where some capital will be spent in 2025 along with some slippage of planned 2024 growth capital that will fall into 2025, which is purely due to timing at year-end. The new orders for 2026 are substantial in quantity. They are all large horsepower and pre-contracted with large existing customers. I would further note that a substantial majority of the units are electric drive as we continue to build on our success in this area. It is my view that 2026 will be another year of significant growth in new unit horsepower. As we noted in the earnings release, the timing of new unit deployments will be very heavily weighted to…

Ladies and gentlemen, at this time, we will conduct a question-and-answer session. [Operator Instructions]. We are now ready to begin. We currently have four people with questions starting with Hale Hoak, Hoak & Co. Go ahead, please.

Hi, Justin. Congratulations on a good quarter and more importantly on the transformation of the company over the last couple years.

Thanks, Tom. Appreciate the call.

Just to clarify, I know you came at the guidance and you don't want to put too fine a point on it given the difficulty in predicting when units actually get set, which I totally appreciate. But you gave guidance that I'm coming at a little differently. I show Q4 run rate EBITDA of about $72 million and assuming you put $100 million of capital to work with a 20% return, that gets us kind of in the low to mid-90s of EBITDA. I understand that probably won't occur until maybe first or second quarter of 2026, but just wanted to make sure I'm thinking about that correctly.

I think that's without putting kind of specific numbers and I think that's generally a reasonable way to think about it.

Okay, great. Well, congratulations to you and the team. Thank you.

Thanks, Ken.

Thank you very much. Our next question comes from Mr. John Daniel, Daniels Energy Partners. Go ahead, please.

Hey guys, good morning. Thanks for including me on the call.

Good morning John. Thanks for calling in.

You bet. You noted the strong demand in 2026. I'm just curious at what point would it make sense and also long lead times for equipment, when does it make sense to start placing orders for second half '26, maybe '27 deliveries?

So, the orders for '26 that we've received, are throughout the year. In terms of, the timing of ordered, orders with our partners, I mean, we're really in process of placing all those as we're getting the contracts. And so, it really depends on the deployment schedule that the customer is asking for us. We haven't hit into anything in '27 at this point. It's really focused on, '26, but it is throughout the course of the year '26.

Okay. And just a sort of a dumb question for me, but trying to understand the contract negotiating cycle, when would you expect those customers to start making the inquiries about stuff for '27?

So, we saw for 2026 orders, we were starting to have conversations with some of the larger customers who were planning pretty far out, really in the fourth quarter. And, started to see, coming to contract terms really in the first quarter of '25. And so, it's not universal in terms of customers looking that far out, but we're looking at 12 months to 18 months in advance of needs of deployment. It's just kind of a rough sense.

Our next question comes from Selman Akyol with Stifel. Go ahead.

Good morning. This is Tyler on for Selman. On a dollar-per-horsepower basis, are you guys starting to see things flatten as most contracts have sort of already gone through that inflationary cycle when people are re-upping and we're now sort of coming to the end of that role?

I assume you're speaking about revenue, correct?

Yes. Yes.

Yes. I think I've mentioned this on one of the previous calls, clearly, there was a significant increase in prices over the last several years. That curve is certainly flattening relative to increases that were well in the double digits. I'd say there's still -- as I think I mentioned in the previous call, an upward bias to prices, but nowhere near at the rate, which we saw over the last couple of years, which clearly you wouldn't see that -- those types of percentage increases continue.

Understood. And you had mentioned M&A earlier and possible deal flow in the next year or two. Is that across all geographies? Is that Permian-specific sort of where are people looking to sell?

I don't know that it's specific to any particular geography. And to the extent that Permian has evolved, it's just because that's where the production is. And so most players have, I won't say all, but most players are going to have at least some exposure, if not material exposure to Permian. I don't see it as a particular geography more of a just company that I think are going to be coming to the market over -- in some form in the coming year or a couple of years.

Our next question comes from Mr. Jim Rollyson with Raymond James. Go ahead, sir.

Good morning, guys. Justin, one of the things throughout '24, we got to see with your numbers results, obviously, was margin performance that you guys talked about earlier being up 650 basis points year-over-year. I feel like every quarter, you had a great quarter and then kind of guided more conservatively, not sure it would repeat itself and it generally kind of stayed in that 60-plus percent range for the most part. As you look at your guidance in '25 and as you get all these new units delivered in '26, maybe how you think about the margin profile kind of that business is it on new prices and et cetera, how it looks?

So, I think the rate of increase that I quoted earlier in the call and you just referenced, we're not going to see that level of increase going forward. As you look at the fleet mix, and I quoted this earlier, more than 70% of the rented horsepower as of year-end 2024 isn't that large. And so just the magnitude of the fleet mix shift is going to as high of a rate of change. So, I think that there -- as we add horsepower, there still be some bias up. The flip side is labor is not getting any easier. It's not getting any cheaper. So, have we been conservative? I think we've been appropriately conservative. And our goal is obviously to try and beat but just the magnitude of the change, I don't see that staying anywhere near that rate of increase.

Understood. And curious if you've also mentioned a majority of your new horsepower on order being electric drive, if that has any impact in your mind on the margin or if that's really kind of agnostic.

In the shorter term, I think it's more a function of it, it's all large horsepower. And so, will it have slightly higher margins, it may, but it's really the fact that we're looking at all kind of large horsepower, whether natural gas-driven or electric motor.

Got you. And then last one for me. You also mentioned some of the unlocking of cash this past year was working capital, which you guys did a fantastic job with. As you look into '25, you mentioned the tax receivable, you also mentioned the real estate and capturing a portion of that. Any sense of kind of how much of that you think you could actually get accomplished in '25?

I think on the income tax receivable, I will say that we're cautiously optimistic that we get that in '25. There are obviously a fair number of changes happening in different government regulatory agencies and taxing authorities and can't really speak as to the potential impact there other than it's probably not helpful. But that being said, I mentioned we're approaching the final stage which we're hoping will happen soon. And that final stage, our understanding is typically happens in less than a year. So, we're hopeful we get that in '25. The real estate side, we're actively working and have been working on that pretty significantly in the past couple of quarters. There may require some modest investment there to get monetization, the exact timing. It's a little bit difficult to predict there other than I can say that we're not in the real estate business, we're in the rental compression business, and that's where we want our capital.

Our next question comes from Mr. Jay Spencer with Stifel. Go ahead, please. Your line is open.

Congrats on a good quarter. Can you just elaborate a little bit on the lead times to get components? Are there still long lead times for engines? And what about the electric drive side? Can you talk about the lead times there?

Sure. So, the three parts that our partners that I look at in terms of lead times, the drives where engines really aren't getting any shorter. I mean you're still looking generally somewhere around kind of the 9-month range, plus or minus electric drives are going to be shorter than that, at least for us. The compressor frames. You're talking about kind of 6 months to 9 months. And then the fabrication capability is -- I think, is proving to be kind of the long pole in the tent and that kind of at least 9 months, and that's what we've communicated to customers is ensuring that fabrication capability. You want to make sure you have that locked in to get deployments when you want them. So, we're not seeing that move materially in, if anything, it's at least as long as it's been.

Got you. Okay. And on a related note, so the growth CapEx of $95 million to $120 million in CapEx, how should we think about how that is spent over the course of this year? Is it heavily weighted toward the back end, along with deliveries? Or just what do you expect generally the pacing of that to date?

So, it's going to be more heavily weighted in terms of the CapEx to the back half of the year, although CapEx has been in advance of deployments. And so, it's not as heavily weighted. We also had some slippage from -- as I referenced in the fourth quarter into the first quarter. So, we're looking to see exactly what that number is going to be. So, it is more ratable over the year, although still heavily weighted to the second half.

[Operator Instructions]. Our next question comes from Mr. Rob Brown, Lake Street Capital. Go ahead, please.

Good morning. First question is on just the overall demand environment comment you had about oil sort of stabilizing and you're seeing demand? Are you really seeing demand come back? Or are you seeing it booked for really looking now for '26 and it's sort of set for '25?

So, Rob, thanks for calling in. So, the '25 is more a function of just lead times that as we've communicated to customers, we'll have some one-offs here and there, not saying we can't get new unit fabricated within the course of calendar 2025. But being in March and just seeing the lead times, that's really kind of driving our look forward to 2026. As there's not enough time to get a material amount of units in this year other than what we already have contracted. So, the '26 is really a function of explanations to customers of if you want new units, this is the time frame you need to look out there. I don't know that I would say there's been a material although there's been a material shift in oil prices over the past couple of quarters. I wouldn't say that there's a material difference in demand. We're continuing to see strong demand for compression and significant portion is related to oil.

Okay. Great. And then maybe the electric demand that you're seeing electric drive demand. What's the market dynamics happening there? And I think you said a majority of our units are now electric drive? Just elaborate on what's happening in the environment there?

That is, I think, really driven by availability of power for the customers. Are they going to have the electricity to be able to power those units? And in some cases, the answer is yes. And in many of the cases, the answer is no. And this hasn't happened to us, but I've heard stories in the market where customers thought they were going to have electricity and then found out as they were starting to deploy or in advance of deployment that in fact, they weren't going to have the required amount of power. And so, the -- that's really the kind of big factor as it relates to electrodes availability. And clearly, if you read in the press, the demand for electricity is increasing materially relative to the recent past and the ability to get the power for these types of units, which require particularly in large horsepower, you're talking about significant electricity demand that needs to be there 24/7, 365 to make sure these units are running properly. And just a lot of uncertainty around that. And so, it really goes back to conversations we have with our customers and ask them what they want, and we're letting them drive the decision between natural gas engines and electric motors.

And our last question comes from Brittany Sidia, Maximum Group.

Good morning, and congratulations on your results. My first question has to deal with your Tulsa facility. Do you plan on expanding anymore with more capital expenditures planned for 2025 and after you close your Midland fabrication facility?

Thanks for calling in. In regards to Tulsa, we do not have plans to expand that the incremental fabrication that we're doing for the new units is going to third parties. We are fabricating at the Tulsa facility for some of our rental fleet. It's typically the smaller end of our large horsepower units in terms of size. And that's just constraints that are inherent there at that facility at the size of unit that we can currently do. We won't expand that to do the larger end of the large horsepower units just because of the amount of capital that we've spent with third-party starting going back to kind of 2023, which is a huge capital spend year for us, '24, a significant year and '25, as I mentioned, going to be the second largest in our history. We're actually one of the larger purchasers of rental units from third-party fabricators, which is -- positions us quite nicely with them. And so, to the extent that we're growing at faster rates, we'll go to third parties to build most of that for us.

Okay. Got it. And just since you're doing more outsourced manufacturing, what would be the potential margin impact? Or is there any potential margin impact at all?

It's not so much really on the margins because that's driven by our rental rates and our ongoing operating costs, which are all internal or mostly internal costs. It really has to do with the fabrication of the capital, of which at this point in the north of 1,000 horsepower, we can't fabricate that internally anyway. And so, it's just contracting with third-party fabricators. And so, capital cost, not a margin.

Okay. Got it. That’s helpful, and thank you.

Great. Thank you.

Thank you very much. And we have no other questions.

Thank you, Luke, and thanks for all of your questions and participation on the call. We sincerely appreciate your support. We look forward to updating you on our progress in the next quarter. And thank you again for your time.

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