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Natural Gas Services Group Inc (NGS) Q4 2018 Earnings Conference Call Transcript

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Natural Gas Services Group Inc  (NYSE: NGS)

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Q4 2018 Earnings Conference Call
March 14, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and 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'll now turn the call over to Ms. Dada. You may begin.

Alicia Dada -- Investor Relations Contact Officer

Thank you, Erica, and good morning, listeners. Please allow me 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 the 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 and 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 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 that stated, I will now turn the call over to Stephen Taylor, who is President, Chairman and CEO of Natural Gas Services Group. Steve?

Stephen C. Taylor -- President and Chief Executive Officer

Thank you, Alicia and Erica, and good morning. Welcome to Natural Gas Services Group's fourth quarter 2018 earnings review. This morning, we reported fourth quarter 2018 results and we are pleased with our operational performance in the fourth quarter of the year, driven by strong sequential rental revenue growth of 7% in the quarter.

While our growth included continued progress in our high-horsepower category, a majority of the rental revenue growth in the quarter was a result of solid performance from our core mid-horsepower fleet. Sales revenue declined by about $1.0 million sequentially, primarily as the result of our decision to reallocate production plant resources to higher margin rental fabrication thereby reducing opportunities for sales revenue. However, our sales backlog at the end of the fourth quarter was at its highest level since the third quarter of 2017. We did have a non-recurring expense this quarter of a little over $0.01 per common share related to potential strategic growth initiatives, but our margins were generally higher in the quarter, which sets the stage for solid performance for the Company in the coming year.

I'll provide more details as we review our financial results. So, looking at total revenue, NGS reported total revenue of $16.2 million for the fourth quarter 2018, a 3% decrease compared to the same quarter of 2017. The decrease was primarily driven by decrease of sales, the magnitude of which was largely offset by an increase in rental revenue.

From a rental perspective, we had 102 more units renting in the fourth quarter 2018 than the same period of 2017. Total revenue decreased slightly by 1% when compared to the third quarter of 2018 due to the timing of sales revenue from compressor sales. However, the decrease was partially offset by 7% sequential increase in rental revenue for the fourth quarter of 2018.

Total adjusted gross margin for the three months ended December 31, 2018, increased to $8.2 million from $7.9 million for the same period ended December 31, 2017. Adjusted gross margin, which does not include depreciation as a percentage of revenue for the three months ended December 31, 2018, was 51% an increase from 47% for a comparable period of 2017.

Sequentially, adjusted gross margin increased from $7.8 million in the previous quarter 2018. Adjusted gross margin as percentage of revenue increased to 51% for the three months ended December 31, 2018, compared to 48% in the previous quarter. The increase in the adjusted gross margin as a percentage revenue can be attributed to higher gross margin in our rental business and a slight mix shift toward higher margin rentals this quarter.

Selling, general and administrative expenses of $2.4 million remained relatively flat for the year-over-year and sequential quarters; goes down 10% in the full year comparative periods. As mentioned, we did have a non-recurring expense in the fourth quarter over $160,000 or over $0.01 per share due to potential growth initiatives.

Operating income was $106,000 in the fourth quarter compared to break-even in the third quarter and an operating income of approximately $220,000 in the fourth quarter of 2017. Our operating income, while positive, is fluctuating more than usual in the comparative periods due to not only lower total revenues caused by lower sales revenues, again due to the rental unit revenue displacement. Higher depreciation expenses due to larger horsepower units being placed into service as they are fabricated and variability in SG&A expenses. We continue to experience some anomaly between our deployment of higher horsepower and lower corresponding revenues and income.

This is almost wholly due to the timing differences between deployment of the equipment and the receipt of full rental revenues and associated income. The variation being caused by scheduling, commissioning and (inaudible) take place after the units were built. To demonstrate this, almost 80% of our growth in high horsepower rental revenue in 2018 was consumed by increased depreciation.

Additionally, due to varied commissioning schedules, only 80% of full rent on the deployed high horsepower fleet is being collected right now. These are timing delays and not permanent delays and a natural phenomenon of moving into a new market that until (ph) such high capital cost and longer start-up cycles. The good news here is that we are beginning to place more high-horsepower equipment every quarter, which should have a positive effect on the aforementioned variability in revenue and income gains.

Looking at net income, due to a non-cash adjustment for income tax expense related to executive compensation, we reported a net loss of $282,000 for three months ended December 31, 2018, compared to net income of $18.7 million for same period in 2017. Excluding the tax adjustment expense, net income for the period was $351,000. Excluding the $18.4 million tax benefit from the 2017 Tax Act in the fourth quarter last year, our adjusted net income for the three months ended December 31, 2017, was flat at $352,000. Sequentially, we had adjusted net income of $351,000 in the fourth quarter 2018 compared to net income of $236,000 in the third quarter of 2018.

For the fourth quarter 2018, the Company posted a loss per diluted share of $0.02 compared to a $1.42 in 2017. Excluding the non-cash income tax adjustment in the fourth quarter, earnings would have been $0.03 cents per diluted share. Excluding the fourth quarter 2017 tax benefit, year-over-year quarterly earnings were flat. Sequentially, diluted earnings per share decreased $0.04; however, excluding the income tax adjustment expense, earnings per diluted share increased $0.01.

Earnings before interest, taxes, depreciation and amortization or EBITDA for the three months ended December 31, 2018, was $5.8 million, a slight increase from $5.6 million for the same period 2017 and $5.7 million for the third quarter 2018. EBITDA margins have roughly averaged about 35% of revenue in all comparative periods.

Total sales revenue, which includes compressors, flares and aftermarket activities, can be somewhat unpredictable and can cause considerable swings period to period. The uncertainty of the somewhat unpredictable nature of sales revenues can depend on the market and customer preference, which often times changes period to period.

On a year-over-year basis, NGS sales revenue decreased by $2 million to $2.9 million for the fourth quarter 2018. The revenue drop is primarily due to a decrease in part sales when compared to a large parts order in the fourth quarter 2017, but we also saw compressor and flare sales off (ph) in that quarter too.

When comparing to the previous quarter, total sales revenue fell by $1 million, primarily due to a shift in compressor sales revenues, due to the allocation of a large part of our fabrication floor base to contracted rental fabrication.

Compressor sales revenues of $1.5 million for the fourth quarter 2018 were down slightly year-over-year from $2.1 million. The sequential quarter's sales decreased from $2.9 million in the third quarter of this year to $1.5 million this current quarter, with about $1 million of that sales decline due to the aforementioned fabrication space reallocation.

Fourth quarter 2018 total sales gross margin, as a percent of revenue, was 20% compared to 22% in the third quarter 2018 and 21% a year ago. There can be quite a bit of margin variation period to period in our sales business due to scheduling and bidding, but significantly gross margins for the year average 23% compared to 19% for the same time period in 2017.

Our sales backlog as of December 31, 2018, was approximately $14 million. This compares to sales backlogs of approximately $8 million in Q1, $4 million in Q2, and $13 million in Q3 of 2018. This is the highest backlog we've had since the third quarter of 2017.

We continued to be pleased with our rental results, with rental revenue of $12.8 million for the fourth quarter of 2018, an increase sequentially year-over-year and for the full year 2018 compared to 2017. Additionally, rental revenue in the fourth quarter 2018 was the highest since the fourth quarter 2016. The full year 2018 versus 2017 rental revenue increased 4%, year-over-year quarterly rentals increased 12% and with sequential quarterly rental revenues increased 7%, we have seen an acceleration in recent rental revenue growth.

We continue to expand our large horsepower presence and received an additional order in January that represents approximately $17 million in CapEx. This order, in addition to the large order I mentioned on the last call, will keep our fabrication shops full through the first quarter 2020.

Last call, I mentioned that we are going to build 12 large horsepower speculative units in 2019. All of those have not been contracted in advance of their build. We do, however, plan to build more spec units toward the end of this year and into 2020.

As of December 30, 2018, a full 18% of our utilized horsepower is classified as large horsepower. This is a significant shift in our fleet makeup and demonstrates, I think, the strategic direction we chose a couple of years ago was the correct one.

To keep up with what we think will be continued growth in large horsepower market, we have secured additional fabrication space. Compared to the third quarter 2018, our average rental rates on a per unit basis increased 3% or essentially flat on average per horsepower basis. Rental gross margins this quarter were 57%, an increase from third quarter rental gross margin of 55%, but marginally down from last year's quarter of 58%. Fleet size at the end December totaled 2,572 compressors, an addition of six units or almost 5000 horsepower in the fourth quarter. Over the past 12 months, we have added 31 new fleet units that totaled 29,500 horsepower, with 99% of that being in our large horsepower category.

This represents an increase of 8% in total fleet horsepower, while rented horsepower has increased 25%. Our utilization, as measured by horsepower, climbed from 55% last quarter to 58% this quarter, while unit base utilization grew from 52% to 53% this quarter. We saw an increase in rental units utilized at quarter end of 8% year-over-year and 3% sequentially, while our horsepower running in the field increased 25% year-over-year and 6% sequentially.

We started 2018 with a rental compression CapEx estimate of $20 million to $25 million, and last quarter I raised that to $30 million and (inaudible) year end. Of that $30 million, approximately 95% has been contracted. Based on additional higher horsepower business that we have a direct line of sight of, we estimate our 2019 rental compression CapEx to be in the range of $37.5 million to $40 million. Of this, almost 99% is already contracted.

Moving to the balance sheet, our total bank debt is $417,000 as of December 31, 2018, and our cash balance remained strong at just over $53 million. This amount is down about $16 million since beginning 2018, with a vast majority of cash being invested on new high-horsepower rental compression, equipment and our new corporate office.

Positive net cash flow from operating activities was $23.4 million for 2018 compared to $17.5 million for 2017, a 34% increase in cash flow. Overall, we are pleased with our fourth quarter and 2018 results, especially given the volatile market environment in which we operate. We continue to have one of the strongest balance sheets in the industry, which provides a significant competitive advantage as we evaluate both intrinsic and extrinsic growth opportunities.

As we have said before, we'll be patient and disciplined in evaluating opportunities, but will not be afraid to make meaningful commitments for the right opportunities. We continue to believe we have the right tools and flexibility in place to take advantage of compelling opportunities. We continue our conservative focus on managing capital, which has also served us well. Since 2010, we have self-funded over $230 million in capital equipment, nearly 95% of which is additions to our rental compression fleet. Moreover, approximately 95% of the capital we are currently spending is for equipment backed by long-term contracts at above-market rates with solid counter-parties.

While we are certain that volatility in commodity markets will continue, we're also confident that 2019 is looking to be a solid year of Natural Gas Services Group. Forecast suggests that completions will continue to grow in key resource plays, which will require additional compression of horsepower. Our existing contracts for new compression, including continued growth in our high-horsepower offerings support our optimistic growth outlook for the coming year.

All in all, we are pleased with our performance in 2018 and enthusiastic about our prospects in the coming months, especially given our strong start to the year. Erica, that's the end of my prepared remarks, so please up the lines for any questions.

Questions and Answers:

Operator

Ladies and gentlemen, at this time, we will conduct a question-and-answer session. (Operator Instructions) Our first question comes from Rob Brown from Lake Street Capital. Please state your question.

Rob Brown -- Lake Street Capital -- Analyst

Good morning, Steve.

Stephen C. Taylor -- President and Chief Executive Officer

Hi, Rob.

Rob Brown -- Lake Street Capital -- Analyst

Just wanted to get a little more color on the high-horsepower demand environment. Are you seeing that accelerate from kind of earlier in the year or is it a matter of you now taking on more kind of yourself and in the markets about the same and still strong?

Stephen C. Taylor -- President and Chief Executive Officer

I guess it's accelerating a little. Certainly, the market is strong and I think we're making pretty good market penetration into -- just a couple years ago, we didn't have any of this horsepower and now we're up to -- about 8% of the fleet and 18% of utilized horsepower, is big. So, I don't think it's accelerating as much as we're capturing more of that market as we go, and as I mentioned, we're booked for the next four, five quarters in our shops and we've even secured additional space to try to add more speculative units and you will more anticipate contract in the units too. So, accelerating maybe, but I think it's certainly staying solid. We've grabbed some good contracts the last couple of quarters that we've announced. And, those are -- our order is keeping us busy, certainly from the high horsepower next year.

Rob Brown -- Lake Street Capital -- Analyst

Okay. And I may have missed it. How many on this new contract -- how many units did you win it? I think you said $17 million in CapEx, but how many units is that?

Stephen C. Taylor -- President and Chief Executive Officer

Yes, you didn't miss because I didn't say it.

Rob Brown -- Lake Street Capital -- Analyst

Fair enough.

Stephen C. Taylor -- President and Chief Executive Officer

That's 13 or 14 units. It's all the bigger units or 1,400 horsepower units.

Rob Brown -- Lake Street Capital -- Analyst

Okay, good. And then I think you talked about adding -- are you adding capacity or did you find third-party capacity to build those units?

Stephen C. Taylor -- President and Chief Executive Officer

We're actually outsourcing some of it. We went out and look at the market and we've been working on things -- that's for about six months and we've secured what we think as a premier fabricator to work with us and we're going to do at our capacity and let them do some of the peak shaving part of it.

Rob Brown -- Lake Street Capital -- Analyst

Okay. And then last question on the kind of a non-high-horsepower market. It sounds like that's recovering a little bit as well. How are the trends there and what kind of utilization improvements you kind of see? How is that rate, is that sort of 1 or 2 points a quarter kind of improvement?

Stephen C. Taylor -- President and Chief Executive Officer

Well, you know, the high -- the horsepower utilization went up 3 points and the unit utilization went up 1 point. That's normal with this horsepower. The horsepower use (ph) climbed faster than the (inaudible) that kind of stay in the same. Maybe you see 1 or 2 points in the unit utilization and then 2 or 3 units in the horsepower utilization. And it's hard to say -- I mean, these quarters fluctuating very so much, but we still got a pretty good rental backlog, (inaudible) still building that medium horsepower range, which is essentially gas -- well ahead gas lift compression -- starting to pick up. It's been decent for about a year, but there's been so many properties change in the market, and typically larger companies selling off what they considered more mature properties. So, you always get some shifting of equipment in deals like that and typically there's more optimization (ph) going on when those properties are sold to smaller guys, et cetera, et cetera.

So, although we sell a lot of equipment, by the first half a year, we got a fair amount back, although we've had about three or four quarters of growing net growth in that segment. So, I think it's going to stay good. We've been kind of waiting for it and we've frankly probably lagged the market a little on that just like our utilization has, but that's primarily due to us maintaining our pricing more than what we think the competitive landscape has or the competitors have. We didn't go down as low on pricing. You tend to give up some share on that in a downturn, which we knew and we were OK with because it -- we kept generating EPS, and the operating results were good. So, I think we are not into the point that we've seen the pricing -- general pricing come up in the market that makes our pricing a little more attractive on a relative basis and certainly we've good service reputation out there. So, all that I think is combined to now start perking up that mid horsepower and I've missed this in the last two to three quarters, if -- we obviously the big horsepower is growing, growing quite well and that's for all of our CapEx is going, but once we can get this mid horsepower starting to move, that's a no CapEx growth story, which is great. So, we've returned to start to really pile up on that and incrementally pretty good. So, we think that mid horsepower is starting to come into its own from our perspective and anticipate it continuing that way.

Rob Brown -- Lake Street Capital -- Analyst

Excellent. Thank you. Thank you very much. I'll turn it over.

Stephen C. Taylor -- President and Chief Executive Officer

Okay. Thanks, Rob.

Operator

Our next question comes from Tate Sullivan. Please state your question.

Tate Sullivan -- -- Analyst

Hi. Thank you. Thank you for all the details, Steve. Morning.

Stephen C. Taylor -- President and Chief Executive Officer

Hi, Tate.

Tate Sullivan -- -- Analyst

You mentioned 80% of your full higher horsepower rentals -- rental revenue is being collected. I know it depends on the location for those higher HB units, but what is the average time line from deploying that to start collecting the full rental revenue, if you can...

Stephen C. Taylor -- President and Chief Executive Officer

It goes from -- yes, it goes from three to six months typically. So, once you build this stuff -- and people aren't familiar with this -- this is big stuff. I mean, the skid itself weighs -- the engine compression 175,000 pounds. It's very expensive to move them, very expensive to install them, takes a lot of time, there's more construction, and not just on site from the operator, but there's more fitting up on our end between all the piping there and rental units.

So, it's a pretty big production, and we all knew that going in that's what you get in this market, but you do have more money involved, longer cycles to get that coming in. So, that's what we're seeing. The equipment we have out now, only about 80% of the full rent is being gathered right now and the other 20% is certainly in some form of scheduling, commissioning, start up and stuff like that.

But, you'll typically see a three- to six-month delay on any given unit once -- until you get full rent. And the good thing about it is, I mean, we'd rather have it day one right obviously than three to six months later, but our minimum terms don't start until the full rent starts. So, even though we may have some interim standby rents, we get full rent for the full term once the equipment start. So we're not giving up anything from the term standpoint when we're looking at these marginally lower rates for a little bit.

Tate Sullivan -- -- Analyst

Okay. In terms of the schedule, the point previous orders into the field, I mean, is that every -- I mean, how consistent is the cadence that it's going out your doors if you can share? Or what is the potential delivery schedule look like for '19, if you can get the negative (ph) effect?

Stephen C. Taylor -- President and Chief Executive Officer

Yes, I'd share it, if I could pinpoint it. It gets highly variable and it's sort of we have a fabrication schedule on when this stuff is planned and what's had and everything else in that schedule, some change in time by the operator. And not from the point of -- I mean, they may want to slide something this way, we might want to slide something that way and everything else. So, it's always in flux. But, we've got -- I don't remember the exact number, probably -- roughly 40 units going through the schedule over the next four quarters, so if you just want to do a quick number, you can say, well, that's 10 a quarter and you got three to six months to get revenue off, I know that's a pretty wide if you calculate that that number is pretty wide variance, but that's priced best I can get.

Tate Sullivan -- -- Analyst

Okay. Thank you. And one more for me and then I'll jump back in. The press release mentioned strategic growth initiatives. Was that based on securing the additional fabrication space or is it something else?

Stephen C. Taylor -- President and Chief Executive Officer

No. It was actually, it says about $160,000 is equivalent a little over $0.01 a share, which I'll want to credit from (inaudible). But it's -- it's just us we need to hire some advisors to look at some external opportunities and we did that and we incur that expense.

Tate Sullivan -- -- Analyst

Okay. Okay, understood. Okay. Thank you very much, Steve, for the detail.

Stephen C. Taylor -- President and Chief Executive Officer

Okay. Thanks, Tate.

Operator

Our next question comes from Kyle May (ph). Please take your question.

Kyle May -- -- Analyst

Hi, good morning, Steve.

Stephen C. Taylor -- President and Chief Executive Officer

Hi, Kyle, how are you?

Kyle May -- -- Analyst

Good. Good. One quick one just to get things going. Can you say again what was the size of the rental compressor fleet at the end of the year?

Stephen C. Taylor -- President and Chief Executive Officer

Yes, let me see, 2,572.

Kyle May -- -- Analyst

Got it, thanks. And one other thing I was curious about with the tax adjustment in the fourth quarter, can you give us any more color on what's going on there and if that should be anything we need to be mindful of going forward?

Stephen C. Taylor -- President and Chief Executive Officer

No. It is a one-time adjustment, so it's not a recurring expense will have, it's an expense the auditors require from a tax standpoint and the problem is some of these -- you've got a booking in the quarter, right? So, it may be over a longer period than a quarter, but booked in that quarter. So, it's just a one-time adjustment that the auditors required us to book and so that's what we did.

Kyle May -- -- Analyst

Okay. Got it. And then maybe the last one for me. As you're looking at -- over the last couple of quarters, you've talked about building some spec units and it sounds like you're already making a lot of headway on getting those contracted. Can you maybe talk about the environment that you're seeing with how long it takes to get those under contract and then maybe a little bit more on your thoughts for spec units in 2019?

Stephen C. Taylor -- President and Chief Executive Officer

No, it's not -- well, we had -- we had actually about one unit per month schedule I think I missed in the last call. So, about 12 spec units scheduled for 2019 in addition to the other committed contracts we had. We have zero spec now because those 12 were taken, which is good, but, yes, now we got to try to build more spec ones. Right now, we're probably looking at another -- it's become independent on shop space. That's when we look at this going outside a little. Right now, just roughly we're probably looking at maybe four or five more at the end of the year and then into 2020, we haven't looked too much into that 2020 yet, but I would go ahead and eventually guess, but, if we just replicate what we were thinking 2019, and do one more a month in 2020, that's 12 units, $13 million, $14 million, in addition to any other contracts, we think might secure and the balance in 2019.

Now, the issue everybody's got to remember and is about June or July anything we get contracted typically falls into the next year because you've now got essentially six month deliveries on components, engines and compressors and things. So, even if you get a contract in June, July, it's not going to happen -- that revenue piece is not going to happen until 2020. So -- and what is this March? So, we're getting -- we've got about three or four months to secure some more contracts for this year, which we don't have a whole lot of room for and then the last half of the year securing for 2020. So, cut the answer short, roughly maybe one a month and the last quarter of this year and into 2020 in addition to anything else we secure.

Kyle May -- -- Analyst

Okay, got it. Real helpful. Thanks a lot, Steve.

Stephen C. Taylor -- President and Chief Executive Officer

Thanks, Kyle.

Operator

Our next question comes from Richard Dearnley. Please take your question.

Richard Dearnley -- -- Analyst

Good morning. How many units did you rehab in the make-ready bucket in the fourth quarter?

Stephen C. Taylor -- President and Chief Executive Officer

Oh, gosh!

Richard Dearnley -- -- Analyst

Was it about the 80 give or take that you've been running.

Stephen C. Taylor -- President and Chief Executive Officer

No. Hold on. I've got I might have to give you that afterwards, but I thought I had all the answers that needed here. Let's see -- we did about -- I don't have the exact number what we did about -- the expense ran about twice as much in the fourth quarter as it did in the third quarter, but I don't have the number of units.

Richard Dearnley -- -- Analyst

Well, if it were -- so if the expense was more and you did twice and you did 82 in the third quarter, would that tell me you did 160 odd in the fourth quarter?

Stephen C. Taylor -- President and Chief Executive Officer

Yes, roughly that sounds like a high number. I tell you what, I'll need -- I just probably need to dig into that a little more. But, yes, we -- that rental backlog continues to be strong. I mean, I'll say that right now.

Richard Dearnley -- -- Analyst

And the make-readies are largely in the mid horsepower range, aren't they?

Stephen C. Taylor -- President and Chief Executive Officer

Yes, sir. Yes, all the big horsepower's brand names.

Richard Dearnley -- -- Analyst

Would with my calculation, which is a bit of a guess be about right that you only have about one more year of make-ready units that you can make ready and then that inventories used.

Stephen C. Taylor -- President and Chief Executive Officer

We've got -- for 53% utilized, we've still got 11,000 units. You're probably right if you're just talking about the mid horsepower range, not including the small horsepower, it's that market is a missed before just kind of flap. So with the growth in the mid horsepower market and that all being present fleet equipment that needs to be refurbished before it goes out, you might be right. It might be a year and a half or something like that, it's hard to say exactly, but, you know, it -- hopefully that mid horsepower utilization keeps climbing of course. One thing got to remember is, when we say 53% fleet utilization, that's across the whole fleet, right, small, medium and large horsepower. The large horsepower is 95% plus utilized and the medium horsepower is getting into that 60% range and then smaller horsepower just kind of lies 40%, 45%. So, frankly, it's a small horsepower, it kind of drives that overall utilization down.

Richard Dearnley -- -- Analyst

Right. I understand. And then the the third-party capacity, it sounds like that's flexible, but how -- what kind of capacity does that feel like it adds?

Stephen C. Taylor -- President and Chief Executive Officer

Well, we think it can be significant if we need it. The issue always just like I mentioned is long lead times on the equipment, engines and compressors primarily. So, it's flexible to a degree, but you can't sit here in March and say, I want something in June because you don't have the parts and pieces. And, we've still got order that stuff because they just fabricate, right. So, we ordered and shipped to them and they do their thing in accordance with our specs. So it's flexible -- it's like six or seven months out.

Richard Dearnley -- -- Analyst

Okay. Thank you.

Stephen C. Taylor -- President and Chief Executive Officer

Okay, Thanks, Dick.

Operator

Our next question comes from Jason Wangler. Please state your question.

Jason Wangler -- -- Analyst

Hi, good morning, Steve.

Stephen C. Taylor -- President and Chief Executive Officer

Hi, Jason.

Jason Wangler -- -- Analyst

Just wanted to ask on the pricing side, You kind of mentioned it in the previous question, but with the utilization kind of taking higher, it sounds like you said maybe competitors pricing started to kind of firm up a bit. Just where you see the kind of market going on, is it starting to get better on the utilization side?

Stephen C. Taylor -- President and Chief Executive Officer

Yes, we've seen that. Overall, the market is getting tighter. Obviously, big horsepower is very tight, but in the medium stuff, we're starting to see tighten up a little too, it depends on the model. But what we're seeing in this year -- kind have to macro view of this little bit, as I mentioned, we didn't drop pricing as much in the downturn. We never do; our utilization suffers a little more than the general industry because of that. That's a typical phenomena. We know it's going to happen and we're OK with it. So, we didn't go down as much in pricing. So, (inaudible) went further. So they've got to catch up some and so what we're seeing is that catch up is obviously raising the general price of the industry, even though we're kind of staying where we are right now. We are going to let bails catch up to us, at least close the gap on our normal 5% to 10% premium and what we're seeing is as the market pricing comes up, we're getting more business, because that gap is closing on that. So -- thing is great when a plan comes together, right? So, that's what we're seeing, just a general increase in industry pricing. We're able to kind of stay in where we're in. We're making profit at that point.

Now, obviously, we're increasing some pricing on some models and just like we've done for years, we use utilization to gauge which models we can go up on and which ones we need to hold on. So we've got -- our pricing is is more pinpoint where (inaudible) is a shotgun. We still -- 10% across the board or whatever, but remember most of our competition is lost money consistently throughout these downturns and we haven't. So that's the difference. So we're able to hold in a little better right now. And I think that's why we're seeing some firming of mid horsepower. The pricing is coming close to our and with our service, we're able to win more jobs.

Jason Wangler -- -- Analyst

Okay, that's helpful. And then on the sales backlog, just -- what's the timing on that I guess to the finish? Are we talking rest of this year, is it 12 months or just kind of where we should be kind of thinking as you squeeze that into the fabrication side?

Stephen C. Taylor -- President and Chief Executive Officer

Yes, that's $14 million -- it'll be probably a three to four month -- I mean, three to four quarter backlog. A lot of times is quicker than that but as our mission throughout, we've allocated more space to rental fabrication. So, we're being very, very particular where we slopped these sales units and because we obviously want these big horsepower rental units going out. So I think it will be a three to four -- throughout the rest of this year, essentially, and hopefully we add to it as we go to.

Jason Wangler -- -- Analyst

Okay. Well, if you can find the space, I appreciate. Thanks, Steve.

Stephen C. Taylor -- President and Chief Executive Officer

Thanks, Jason.

Operator

Our next question comes from Tate Sullivan. Please state your question.

Tate Sullivan -- -- Analyst

Hi. Thanks. A couple quick follow ups. You mentioned medium horsepower going out the door is mostly gas lift. Is that the same with the larger horsepower out the door? If you can come.

Stephen C. Taylor -- President and Chief Executive Officer

Yes. The bigger units -- the difference is, the medium horsepower is wellhead gas lift, so your gas lifting maybe one or two wells and the big horsepower is more centralized gas lift where you might be gas lifting 10 or 15 wells. But it's essentially all gas lift is what we're building or deploying from our existing fleet.

Tate Sullivan -- -- Analyst

Okay. Thanks. A little preview of the 10-K customer mix or any meaningful changes that you can highlight pretty consistent.

Stephen C. Taylor -- President and Chief Executive Officer

No, I think -- I mean, we've increased our customer count. I was looking at that yesterday from around think about a year ago, 75 to 80 were up around 90, 95. So,the customer base is broadening back out, of course, in a downturn, it shrinks a little too. So, we're not set any records on the number of customers, but it is growing. But I don't think there's any major shifts in customer concentration right now.

Tate Sullivan -- -- Analyst

Okay, thank you very much, Steve. Have a good rest of the day.

Stephen C. Taylor -- President and Chief Executive Officer

Thanks, Tate. You, too. Appreciate it.

Tate Sullivan -- -- Analyst

Thanks.

Operator

Our next question comes from Mike Urban. Please state your question.

Michael Urban -- Seaport Global -- Analyst

Thanks. Good morning.

Stephen C. Taylor -- President and Chief Executive Officer

Hi, Mike,

Michael Urban -- Seaport Global -- Analyst

So with the outsourced fabrication capacity that you're layering in here, is that going to be primarily the rental stuff, the equipment sales, or is that more a function of production schedules and how that shakes out it could be a little above?

Stephen C. Taylor -- President and Chief Executive Officer

It's going to be -- right now, it's going to be primarily big horsepower -- the bigger 1,400 horsepower units. Those are the ones that take up so much room, so much time that it really impacts this job when you start putting those through. So that's where we need the most help. We can fit in most of the sales are say medium horsepower, you can slot those in a little better. But the big ones take up those -- I use disruptive in a positive manner. They're disruptive to a shock because they take so much time and space that's what we're looking to outsource primarily, just the bigger stuff.

Michael Urban -- Seaport Global -- Analyst

Okay. So, then the stuff, your equipment sale margin shouldn't really be impacted much. I guess that's where I was going, I mean, obviously you are going to have to pay these third parties something I guess it just means maybe slightly higher CapEx and you would have otherwise buy your equipment share margin shouldn't be affected necessarily.

Stephen C. Taylor -- President and Chief Executive Officer

Right. Exactly. We think the margins will stay in that 20% range. So, the mission I think we're 20% plus or minus 2% or 3% by quarter, of course it varies. But, you know, that's still generally the highest margin in the industry. But, the outsource stuff, we'll have to pay a little more, obviously. But again, remember, those are three to five-year rentals and we absorb a little more cost on that and still look at good returns over the life.

Michael Urban -- Seaport Global -- Analyst

Yes. That makes sense. And then I guess just one kind of housekeeping question, apologies if I missed it. You gave us the unit count at the end of the year, what was the fleet horsepower at the end of the year?

Stephen C. Taylor -- President and Chief Executive Officer

I should have given you that but I didn't. I think it was around 390,000 or 395,000 horsepower. I think that's what I'm looking here in notes. I'm sure -- it is here somewhere, but, OK, 398,765 horsepower, so almost 400,000 horsepower.

Michael Urban -- Seaport Global -- Analyst

Okay, cool. And then last one for me. The utilization number, 58% on a horsepower basis, 53% on a unit basis, was that's the end of year, right.

Stephen C. Taylor -- President and Chief Executive Officer

Yes, sir.

Michael Urban -- Seaport Global -- Analyst

Okay, that's all for me. Thank you very much.

Stephen C. Taylor -- President and Chief Executive Officer

Okay. Thanks, Mike.

Operator

Our next question comes from Richard Dearnley. Please state your question.

Richard Dearnley -- -- Analyst

Just a quickie for relative newbies. You come in about your sales are largely medium horsepower; could you talk about the economics of buying the medium versus renting the large? Does renting the rent on the large since there are higher dollar go hand-in-hand with, we want to be cash flow neutral is the new mantra or what's at work there?

Stephen C. Taylor -- President and Chief Executive Officer

Well, I mean, it's just simply, what the customers ordered and how they want to get it. It's -- we saw big horsepower in the past, and small and medium, and right now the concentration has been primarily medium horsepower from sale perspective, and of course, we're really pursuing rental market on the big. So, there's not really too much of a impact from one to the other, it's really just what the customer wants and how they perceive their requirements. The big horsepower rentals those are getting pretty popular because number one, lots of capital involved in this stuff and an operators just all time. They're better off spend that capital on drilling a well than buying compression. So that's important term, bigger horsepower takes a lot more specialized technicians in the field and things like that. So, rental horsepower -- big rental horsepower has become more popular. And again, the medium stuff, we've got a lot of media stuff rental but sometimes people just want to buy it. So it just depends on how the orders come in and what they want to do.

Richard Dearnley -- -- Analyst

Right. Okay, thank you.

Stephen C. Taylor -- President and Chief Executive Officer

Thanks, Dick.

Operator

(Operator Instructions) At this time, we have no further questions.

Stephen C. Taylor -- President and Chief Executive Officer

Okay. Thanks, Erica and thank everybody for joining this call. We look forward to a growing 2019. I appreciate your time this morning. Look forward to visiting with you again next quarter. Thank you.

Operator

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

Duration: 46 minutes

Call participants:

Alicia Dada -- Investor Relations Contact Officer

Stephen C. Taylor -- President and Chief Executive Officer

Rob Brown -- Lake Street Capital -- Analyst

Tate Sullivan -- -- Analyst

Kyle May -- -- Analyst

Richard Dearnley -- -- Analyst

Jason Wangler -- -- Analyst

Michael Urban -- Seaport Global -- Analyst

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