Brian DiRubbio

Brian Dirubbio from Baird asked about labor availability in the Permian, the economics of acquiring assets directly from operators, and the strategy for the smaller, non-compression businesses acquired from CSI.

Answer

President & CEO Mickey McKee acknowledged the tight Permian labor market, highlighting Kodiak's "Bears Academy" training program as a key mitigation strategy. EVP & CFO John Griggs stated that asset acquisition economics are compelling when they add operational density. Mr. McKee added that the small, non-compression CSI businesses are currently being operated for cash flow with no immediate plans for expansion or divestiture.

Brian DiRubbio from Baird inquired about the current availability and lead times for new compression equipment from packagers. He also asked for a breakdown of the drivers behind the strong contract compression results, separating organic pricing, fleet mix shift, and recontracting.

Answer

CEO Mickey McKee reported that equipment lead times remain extended at 45-50 weeks for engines, with packager shop space also being a year-out bottleneck. He explained the margin improvement was a mix of factors: recontracting churned units at a 15-20% premium, deploying new horsepower at higher spot prices, and achieving 10-15% pricing uplifts on large bulk renewals during the quarter.

Brian Dirubbio of Baird asked about changes in the cost to acquire new horsepower over the last two years and the company's ability to pass those costs on to customers. He also had a follow-up question about where stock compensation was recorded.

Answer

President & CEO Clint Green and VP & COO Christopher Wauson confirmed that new horsepower costs have risen significantly over the past two years but have recently stabilized. They noted that while it's not as easy as it once was, they are still able to achieve the necessary returns on new capital. VP, CFO & Treasurer Christopher Paulsen clarified that stock compensation was fully recorded in the SG&A line.

Brian Dirubbio questioned the change in the cost to acquire new horsepower compared to the last two years and whether the company is still able to achieve adequate pricing to offset these increases. He also asked for clarification on whether a stock compensation benefit was fully recognized in the SG&A line.

Answer

President and CEO Clint Green acknowledged that new horsepower costs have risen significantly over the past two years but have recently stabilized. COO Christopher Wauson added that while they can still achieve necessary returns, it has become more challenging as customers shifted focus to optimization in Q2. CFO Christopher Paulsen confirmed the stock compensation benefit was entirely reflected in the SG&A line.

Brian DiRubbio from Baird asked about the strategy for the ABL facility, the ideal debt structure, and the company's approach to funding distributions with debt. He also inquired about the extent of price increases for new build equipment over the past few years.

Answer

CFO Chris Paulsen stated the plan is to evaluate refinancing the 2027 notes in the latter half of the year, aiming for a leverage ratio around 4x or lower. He emphasized that the near-term focus is on maintaining stable debt metrics through the growth cycle. President and CEO Micah Green added that while new equipment costs have risen significantly in recent years, market contract rates have increased to support the new build economics.

Brian DiRubbio inquired about the company's plans for its ABL facility and ideal debt structure, its capital allocation strategy regarding funding distributions with debt, and recent price trends for new build equipment.

Answer

CFO Chris Paulsen stated the plan is to evaluate refinancing the 2027 notes in the latter half of the year, with a goal of maintaining a leverage ratio around 4.0x while aiming to lower it over time. He emphasized that the near-term focus is ensuring growth capital does not negatively impact debt measures. Both he and CEO Micah Green confirmed that while new build prices rose significantly in past years, they have been stable in recent quarters.

Brian DiRubbio of Robert W. Baird & Co. asked for the current sales mix between aftermarket and OE, the company's long-term goal for this mix, and inquired about U.S. liquidity, including the ability to repatriate cash. He also questioned the impact of production ramps on profitability and operating rates.

Answer

CEO Paul Reitz stated that aftermarket sales now constitute about 45% of the business, up from 25% a decade ago, and expressed interest in setting a future target above 50%. CFO David Martin confirmed that the company has already moved cash to the U.S. in Q1 2025 and has the flexibility to manage liquidity as needed for an inventory build. He also noted that while facility utilization was low, he does not anticipate significant P&L volatility from capitalization variances as production increases.

Brian DiRubbio inquired about the margin impact from lower-than-expected volumes and rising raw material costs. He also asked about the remaining potential for working capital reduction, the location of cash balances used for share repurchases, and whether the Italtractor (ITM) business is still considered a potential divestiture.

Answer

CFO David Martin stated that lower volumes were the primary driver of margin pressure, with a smaller impact from raw material costs. He affirmed a relentless focus on optimizing inventory. Martin also confirmed that while most cash is held offshore, the company has mechanisms to move it without significant tax impact. CEO Paul Reitz described ITM as a core business from a management perspective but noted the Board would likely engage in divestiture talks if approached, consistent with past positions.

Brian DiRubbio of Daniel Energy Partners inquired about shifts in customer ordering patterns due to changing interest rates and sought details on the timeline and operational mechanics of the Coffeyville plant's dual-feedstock (natural gas and pet coke) project.

Answer

CEO Mark Pytosh stated that customer ordering has remained 'ratable' and has not significantly changed, as the interest rate adjustments were not substantial enough to alter inventory strategies. Regarding the Coffeyville project, Pytosh clarified that if approved, construction would occur in 2025 to enable a feedstock decision for 2026. He explained the plant would operate both a pet coke and a natural gas gasifier, allowing for feedstock changes over months, not on a daily or weekly basis.

Brian DiRubbio inquired about the impact of low Mississippi River levels on fertilizer prices, the estimated cost and funding for the Coffeyville natural gas project, and any updates on the 13D filing concerning CVR Partners.

Answer

CEO Mark Pytosh explained that low river levels have not significantly impacted fertilizer prices, as products primarily move by pipeline and rail. He stated the Coffeyville project is estimated to cost around $10 million, funded by existing capital reserves. Pytosh also noted there were no new developments to report regarding the 13D filing.

Brian DiRubbio sought to clarify how to create an apples-to-apples comparison for Q3 results by adjusting for the prior year's $30 million commercial settlement. He also asked about the drivers for the implied Q4 margin expansion, the timing of cash coupon payments, and the company's urgency to refinance its debt.

Answer

EVP and CFO Jonathan Banas confirmed that removing the $30 million retroactive settlement from Q3 2023 sales and EBITDA would provide a normalized comparison. He stated that implied Q4 margin expansion will be driven by manufacturing lean initiatives and the full effect of restructuring, offset by wage inflation. Banas also clarified that cash coupon payments for all notes are due in December. Regarding refinancing, he said the goal is to act 'sooner the better' but is dependent on market conditions, and the company is focused on improving performance to be prepared for an opportunity.

Brian DiRubbio questioned the unusually low capital expenditures, asking how long this level could be sustained. He also asked for the current balances of the first and third lien notes, inquired about risks to the current guidance, particularly from U.S. auto production, and requested an update on the Fortrex compound.

Answer

CEO Jeff Edwards explained that lower CapEx is due to more efficient product design, filling existing plant capacity, and a stricter payback period of less than one year for cost-reduction investments; he sees future CapEx closer to 3% of sales. CFO Jon Banas provided the note balances: first lien at ~$609M and third lien at ~$387M. Regarding guidance, Edwards expressed confidence in controllable factors but noted risks from downward revisions in light vehicle production, which has already impacted the top line. He also confirmed continued positive developments and customer interest in the Fortrex material.