NATURAL GAS SERVICES GROUP INC Q4 FY2024 earnings call

• Introductions: Justin Jacobs introduced Ian Eckert (new CFO) and Brian Tucker (President and COO).
• Fleet growth: Ended 2024 with almost 492,000 rented horsepower, a 17% increase compared to 2023 and a 55% increase compared to 2022. Horsepower utilization was 82.1% in the fourth quarter of 2024, up from 80.8% in the prior year.
• Financials: Q4 2024 revenue was $40.7 million, up 12% year-on-year. Full-year 2024 adjusted EBITDA was $69.5 million, a 52% increase compared to 2023.
• Strategy:
  • Fleet optimization: Monthly rental revenue per average horsepower was $26.28 in 2024, a 10% increase over 2023 and a 30% increase over 2022, driven by fleet mix and increased prices.
  • Asset utilization: Accounts receivable were reduced by $23.6 million in 2024, with days sales outstanding (DSO) going from nearly 100 days at year-end 2023 to 35 days at year-end 2024. There are opportunities to further improve asset utilization, including monetizing income tax receivable and real estate.
  • Fleet expansion: Expect significant increases in large horsepower rental fleet in 2025 and into early 2026, with a key customer set to grow and become the second-largest customer in 2025.
  • M&A: Evaluating market opportunities to improve competitive position and returns, remaining opportunistic and disciplined.

The key product segment is rental. In the fourth quarter of 2024, rental revenue was $38.2 million, up 21% year-on-year and 2% sequentially, reflecting the continued addition of large horsepower compression packages. For the full year 2024, rental revenue was $144.2 million, which was a 36% increase compared to 2023 and a 94% increase compared to 2022. Rental adjusted gross margin in 2024 was 60.5%, approximately 650 basis points higher than 2023 and more than 1,000 basis points higher than 2022. The total adjusted gross margin for the fourth quarter of 2024 was $23 million, which increased year-on-year and sequentially by $2.7 million and $0.1 million respectively. However, there was a year-on-year and sequential decline in sales adjusted gross margin of $1.1 million and $0.3 million respectively, driven by the company's shift away from fabrication of new compressor packages as reflected in the termination of fabrication and assembly activities at the Midland, Texas facility.

• 2025 adjusted EBITDA guidance: In the range of $74 million to $78 million, with the midpoint representing just under a 10% increase over 2024.
• 2025 growth CapEx: Between $95 million to $120 million, with almost all capital going to new large horsepower units, already under contract. The midpoint of the growth CapEx range is $107.5 million, a approximately 75% increase over 2024.
• 2026 outlook: Demand appears strong, with unit deployments weighted to the second half of 2025 and early 2026, and confident in increased earnings power once all units are deployed.

• Market volatility: Volatility in oil prices and economic conditions impacting demand for the company's services.
• Regulatory uncertainty: Uncertainty around income tax receivable due to changes in government regulatory agencies and taxing authorities.
• Real estate monetization: Uncertainty in the timing and potential challenges in monetizing real estate.

Q: Clarification on guidance and capital impact A: Justin Jacobs discusses the 2025 adjusted EBITDA and growth CapEx guidance, explaining the midpoint increase and how capital is allocated to new large horsepower units Q: Demand for 2027 orders A: Justin Jacobs talks about contract negotiations for 2026 orders starting in the fourth quarter of 2024 and first quarter of 2025, with customers looking 12-18 months in advance of deployment needs Q: Dollar-per-horsepower revenue flattening A: Justin Jacobs states that price increases have flattened from double-digit rates, but there is still an upward bias to prices though not at the previous rate Q: M&A geography A: Justin Jacobs says M&A is not specific to a particular geography, with most players having exposure to Permian due to production there, but not limited to that geography Q: Margin impact of electric drive A: Justin Jacobs says electric drive is agnostic to margin in the short term, as it's more about having large horsepower units whether natural gas-driven or electric motor Q: Cash unlocking in 2025 A: Justin Jacobs is cautiously optimistic about getting the income tax receivable in 2025, but notes uncertainty due to regulatory changes; real estate monetization is actively underway but timing is difficult to predict Q: Tulsa facility expansion A: Justin Jacobs says there are no plans to expand the Tulsa facility for larger large horsepower units, with incremental fabrication going to third parties Q: Outsourced manufacturing margin impact A: Justin Jacobs states that outsourced manufacturing does not have a material margin impact, as margins are driven by rental rates and internal operating costs, and third-party fabrication is for capital cost