Q2 2021 Natural Gas Services Group Inc Earnings Call

August 12, 2021

[music].

Good morning, ladies and gentlemen, and welcome to the natural gas services group second quarter 2021 earnings call.

At this time all participants are in a listen only mode operating assistance is available anytime during this conference by pressing Star Zero you call leaders for today's call are Alicia data IR coordinator, Steve Taylor, Chairman, President and CEO I'll now turn the call over to MS data you may begin.

Thank you Erica and good morning listeners.

Allow me a moment to read the following forward looking statement prior to commencing our earnings call.

Separate the historical information contained herein the statements in this morning's conference call report looking and are made pursuant to the safe Harbor provisions 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 groups actual results in future periods to differ materially from forecasted results.

Those risks include among other things the loss of market share through competition or otherwise.

Section of competing technologies by other companies and new governmental safety health or 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 the expectations reflected in the forward. Looking statements include but are not limited to Baxter 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.

Thank you Alicia and Erika and good morning, everyone and welcome to the natural gas services group's second quarter 2021 earnings review thank.

Thank you for tuning into our call.

As noted in our quarterly earnings press release, the second quarter represented an important inflection point for our company.

80 compression packages in this quarter.

A record 28, new high horsepower units.

With a majority of the high horsepower units being deployed off of standby status.

Not only do all of these units represent additional future revenue and profit for Ngls.

With the deployment of these high horsepower units continued to reinforce the success of our strategy to evolve toward a higher horsepower fleet.

Clearly higher energy commodity prices have returned to new production activity, especially in West Texas.

And overall oilfield activity provide a positive environment for our business.

While we are carefully watching new variance of the Corona virus and any impact it may have on the overall economy. We are cautiously optimistic that the macro environment will provide continued opportunities in the second half of the year.

We are pleased with the progress on our rental fleet during the quarter.

Eddie compressor package, just said over 50 of those were in the Permian basin and of that more than half for large horsepower units.

Certainly progress the progress does not come without costs.

Of which occur ahead of realizing the full quarterly rental revenues on a new set of equipment.

Setting a record number of higher horsepower units had such an impact.

The setting commissioning is starting of this many units increased our parts and labor costs as well as the cost of everyday consumables, such as oil and antifreeze.

This resulted in some mismatch between revenues and expenses, which are timing issues that will naturally resolve themselves over the next couple of quarters.

The third quarter, which we anticipate to be active but not at the level. We saw this quarter will gives us an opportunity to deliberately manage those operational expenses.

In addition, some repair and maintenance costs were higher than normal in the quarter.

<unk> of catching up on noncritical maintenance that was deferred at customers request during the pandemic we.

We have also seen inflationary pressures, which we plan to mitigate by adjusting our rental rates in the last half of this year.

As we noted in previous discussions we worked tirelessly with customers during the past year to ensure we met their safety protocols as well as protecting our own team members, which resulted in some cases and lighter preventative maintenance schedules, which we are presently addressing.

Significant progress was made in the first half of the year with a more modest level of lingering into the third quarter.

While our total revenue decreased 4% sequentially driven by a decrease in sales revenue, both our rental and service and maintenance revenue has improved this quarter.

Rental revenues increased 2% sequentially due to the higher deployment of really units and service and maintenance revenue grew over 60%. Additionally, we generated adjusted EBITDA of four and a half million dollars.

$5.4 million of operating cash flow during the quarter.

Now, let's look at the financial details of the quarter in greater.

Detail.

Looking further revenues <unk> reported total revenue of $17.7 million for the second quarter 'twenty 'twenty one.

This is a 2% increase from the same quarter in 2020 or about $345000.

And as a result of a 3% increase in revenue rental revenues balanced against a 22% decrease in sales revenues.

As you know the largest component of ourselves revenues as compressor sales.

And it is historically volatile yes.

This decrease in sales revenue was primarily due to the absence of realized compressor sales during the period.

When comparing consecutive quarters, we had a decrease in total revenues of 4% or about $648000.

This was driven by $1.1 million decrease in sales revenue, which was only partially offset by rental and service and maintenance growth of nearly $500000.

Well, our sales revenues fluctuate with our customers' capital needs, a rental revenues have grown, 2% and 3%, respectively, and both sequential and year over year quarters.

Significantly in contrary to industry trends and GSS had increases in rental revenue in both quarters of this year.

Total adjusted gross margin for the three months ended June 32021 decreased to $6.6 million from $8.8 million for the same period ended June 32020.

Adjusted gross margin, which does not include depreciation for the three months ended June 30 was 37% of total revenue.

As noted earlier margins were impacted by higher repair and maintenance costs.

Kris labor cost and setting commissioning and startup expenses related to the growth in rental compression deployment.

Sequentially adjusted gross margin for the second quarter of 2021 decreased to $6.6 million from $8.6 million in the prior quarter.

As a percentage of revenue adjusted gross margin decreased to 37% this quarter compared to 47% in the prior quarter.

SG&A or sales general and administrative expenses were down 2% in both year over year and sequential periods.

Operating loss for the second quarter of 2021 was $2.3 million compared to a loss of $148000 in the second quarter 2020.

Sequentially operating loss decreased by $1.9 million from an operating loss of $369000 in the first quarter of 2021.

Operating losses increased in both comparative quarters, primarily due to the aforementioned higher rental and commission expenses.

Greater loss in our compressor sales product line.

Our net loss after tax for this quarter with $1.9 million. This compares to a net income of $165000 in last year's second quarter and a net loss of $394000 in the first quarter 2021.

We reported a loss per diluted share of <unk> 14 for the second quarter 2021, compared to an income of one cents per diluted share in the second quarter 2020.

Sequentially, we reported a loss of three cents per diluted share in the first quarter. This year.

EBITDA is defined as earnings before interest taxes, depreciation and amortization.

And our adjusted EBITDA excludes the inventory allowances charges incurred.

Due to fleet retirements and stock compensation expense all of which are noncash expenses.

Adjusted EBITDA for the three months ended June 32021 was four and a half million dollars a decrease from $7.1 million for the same period last year.

Adjusted EBITDA decreased approximately $1.8 million sequentially from $6.3 million last quarter to four and a half million dollars in this quarter, primarily due to higher expenses, resulting in lower margins.

Beginning in the first quarter 'twenty 'twenty. One we have also added bag noncash equity compensation to our calculation of adjusted EBITDA.

And have adjusted comparable quarterly data to provide for accurate comparisons.

Total sales revenue, which as a reminder includes compressors flares and product sales was $1.6 million this quarter.

This is a decrease from $2 million year over year is down from $2.7 million last quarter.

The decrease in both comparative quarters was primarily driven by lower compressor sales.

The current court for the current quarter, we had a total sales adjusted gross margin loss of $204000.

This compares to positive gross margin of our margins of $148000 in the second quarter of 2020 and positive gross margins of $95000 in the first quarter of this year.

Although we have some longer lead projects being currently worked on we recorded no compressor sales revenue in the second quarter of 2021.

This compares to compressor sales revenues of $1.4 million in the second quarter 2020.

$1.9 million last quarter.

Due to the absence of any recorded revenues this quarter and Unabsorbed cost compressor only sales margins posted a loss of $641000 for the three months ended June 32021, compared to a loss of $127000 for the same period a year ago.

A loss of $136000 last quarter.

Our sales backlog as of June 32020 was approximately $2 million compared to approximately $400000 in the first quarter. This year.

Interestingly approximately three quarters of this current backlog is for gas compression equipment that will be employed in energy transition projects.

Not surprisingly we are seeing more inquiries for this type of work that we have in the past and currently those inquiries exceed those of our traditional wellhead natural gas type fabrication work.

The development of these markets over time will come with.

With quite a bit of volatility.

But N G. S does possess Ian has taken co expertise to participate in that is becoming known in these markets.

Real revenue in the second quarter, 'twenty, 'twenty, one was $15.6 million compared to $15.1 million.

An increase of 3% since the second quarter last year.

For the sequential quarters rental revenue grew to $15.6 million from $15.3 million last year.

While compression industry revenue trends have generally been negative. This year. This is our second consecutive quarter of rental revenue growth and is a testament to our high horsepower efforts and adaptation from our customers.

If you recall rental revenues in the second quarter 2020 over the last quarter pre pandemic growth in.

And prior to the related revenue impacts recorded in Q2 Q3 of 2020.

Fact that our rental revenues over the last 12 months have exceeded that level was significant.

Test or our success in growing this primary strategic part of our business.

Rental rates increased by an average of four two.

Percent per unit and the year over year quarters, and three 2% sequentially.

Mainly due to our continued penetration into the larger horsepower market.

And this quarter, we set a total of 41000.

A little over 41000 horsepower.

Terminated horsepower was almost 12000 horsepower, which resulted in a net gain of around 30000 horsepower.

You may notice that the amount of horsepower set does not coincide with the change in our quarter to quarter utilization numbers.

That's because we were already carrying the majority of the newly set horsepower is utilized on a standby basis. So there is no additional horsepower added to the fleet or the utilization calculations just units moved from the yard to location and set in commission.

With this much new horsepower being set commissioned and started up our expenses increased 12, only some of the rental revenue was recorded due to incremental rate increases and partial quarters.

We therefore had a timing mismatch between the expenses incurred in partial quarterly rental revenues.

As such our gross margins were lower than anticipated.

Reported rental adjusted gross margins this quarter were 42% a decrease from both comparative quarters of 56% year over year and 53% sequentially.

To explain this to.

To explain the expenditure narrowed this quarter a little more detail the majority of which was experienced in the Permian basin.

We werent able to record a full quarter of full revenue from unit set later in the quarter Oh did experience a full quarter's worth of expense.

Over 50 units in the Permian basin alone in the second quarter.

As a company. This is the most horsepower we have set in a single quarter and it drove a lot of expense.

Setting commissioning and starting this amount of equipment takes a lot of manpower parts, all and antifreeze, which are not insignificant expenses in volume.

How long with that we've been hiring a number of technicians and adding service vehicles to the fleet.

Some of our costs had been delayed from last year. For example engine emissions testing that had been delayed by our customers in 2020, we're resurrected with a large number of perform this quarter.

This expense was exacerbated by large parts cost increases.

Due to the precious metals contained in these catalysts.

It's also points out the inflationary pressures, we are facing from parts to fluids labor.

All alone is 30% higher than a couple of quarters ago antifreeze as shown a similar magnitude of increase.

For perspective, although the bear expenses show a large expense over quarters.

The dollar cost per horsepower increased approximately 30%, it's still substantial but a little more perspective.

This expense anomalies should correct itself in the next couple of quarters. When we will have four full quarters of revenue and they sat and commission expenses are largely behind us.

That said, we have a backlog of rental units just had in the third quarter and we will experience the same timing phenomena, but the volume of equipment being commissioned isn't it isn't as high and we anticipate margins coming back to our traditional levels over the next couple of quarters.

Setting larger horsepower of which most of this is <unk>.

Intel's higher initial expenses, but this is a good news scenario revenues rep contracts are long and these expenses are mostly behind us.

Yeah.

We decided at the end of June 'twenty 'twenty, one totaled 257 compressors.

Or 446803 horsepower, which includes a net addition of 19 units.

Our 4800.90 horsepower during the second quarter.

As of June 32021, 37% over utilized horsepower is classified as large.

Over the past 12 months, we've added 42, new fleet units totaling just under 13000 horsepower with 61% of that horsepower being classified in our large horsepower category.

Our horsepower utilization is approximately 64% and unit based utilization was a bit over 55% as of June 32021.

Our capital expense for completed rental fleet units, which does not include work in progress in the second quarter was approximately $5.9 million for rental equipment.

We previously projected capital expense budget of $15 million to $20 million this year and with the $5 million capitalized in the first quarter were pretty well on track with our projections for the first half of this year.

Moving to the balance sheet as mentioned last quarter, we established a new credit facility with a $20 million borrowing base, but with no borrowings outstanding our cash balance at the end of the second quarter was $26.2 million. This compares to cash a year ago of $15.5 million and last quarter at $30.7 million.

The combination of our cash balance and untapped credit line continues to provide ample liquidity and nearly any conceivable scenario.

We generated positive net cash flow from operating activities in this quarter of $5.4 million or 30% of our quarterly revenue.

We also reinvested $1.9 million back into the company through common stock buybacks this quarter.

We will continue to repurchase shares as we believe the fair value of the enterprise is well above that currently reflected in the public markets.

In conclusion, and just remains one of the few companies in the oilfield with a strong recurring revenue stream no debt, a significant cash position and the ability to consistently generate positive operating cash flow.

As we emerge from the trough this cycle, our new business should provide opportunities for new revenue and profit growth.

Well, we're constantly optimistic about the second half of the year as underlying energy demand has helped stabilize the energy markets.

We remain vigilant in our watch of macro trends that can impact our industry and business.

We will continue to focus on balance sheet strength and opportunities that will create long term value.

As I've said before our success is a result of the commitment of all members of the NGL team to.

It makes certain of our customers are satisfied and appreciated our ability to meet challenges of the past year have proven our team is among the best in the business.

They deserve our thanks and appreciation for a job well done we look forward to continuing our pending a responsible growth balance sheet stewardship and responsiveness to our stakeholders as we look forward to the second half of 2021.

Erika that's the end of my prepared remarks. So if you would please open the phone lines for any questions.

Ladies and gentlemen at this time, we will conduct a question and answer session. If you would like to state. A question. Please press star one on your phone now and you'll be placed into the queue in order to receive once again to ask a question. Please press star one now our first question comes from Rob Brown from Lake Street Capital. Please state your question.

Morning, Steve.

Hey, Rob.

Just wanted to get a little bit into the the pricing environment you talked about some of the costs going up are you able to pass that into the pricing or it seems like your pricing was.

And then moving up but maybe how is the pricing environment at this point.

Well.

We're going to.

You'll have some price increases.

The balance of the year we.

We have been.

Moving some up slightly but.

The.

The environment the inflationary environment is really starting to take effect pretty quick.

So you know we're planning on and I don't know the magnitude right now, but we are playing on a run.

Rental increases pretty well across the board the balance of the year.

Well you know, we're seeing everything I mean steel is going up and still doesn't matter too much except on all new builds but like I've mentioned, all going up obviously, its a as expected one antifreeze exotic metals. These catalysts.

That stuff is as has been especially impacted by supply chains.

And hopefully some of this stuff mitigates itself, but.

Yeah, I'm not so sure so yeah from a inflationary standpoint, we'll have to take a.

Wait and see attitude from from that standpoint, but we're not taking a wait and see on.

Awesome prices, we've got to increase which is which is what we're going to do.

Okay great.

And then you talked about some new unit placements coming in Q3, maybe it at a lower rate than Q2, but how is the how is kind of the new unit placement Marc demand market happening now and what are you sort of see after Q3 in terms of.

It's entering the fleet.

Q3 is going to be a lower level in Q2, which actually is is.

Not bad you know because Q2 is was.

You know such a high volume of equipment going out that.

Airbus.

They're busy.

You know to take lots of people and parts and manpower et cetera to do that so Q3 being a little lower level is not a bad thing kind of gives us a little chance to take somewhat of a breath and get get concentrated on.

Revenue increases in earnings.

Managed costs.

So you know.

That's we think Q3 is going to have good level.

Beyond that certainly from a sales standpoint.

Sales are still pretty constricted from standard.

Yeah, wellhead natural gas sort of.

Business as I've mentioned, we're actually seeing more energy transition projects.

And anything and that's not a real high level, Yeah, we think that will grow over time.

But the sales perspective is pretty muted right now from traditional aspect now from a rental.

<unk> point.

We think.

You know Q4 is gonna be busiest little hard right now to put a.

You know a finger on it we don't have a whole lot of projects for Q4 and that kind of it sounds funny when we're sitting here in August but.

We think that.

We know of.

Some big equipment going out some little equipment going out.

But certainly you know between now and and.

In Q4, we anticipate more being added more being scheduled and stuff like that so.

The operators are.

Yeah.

Think of it surprised a lot of people with her.

There are constraints on activity and and.

Drilling and things like that where we're picking up activity. We think is certainly from.

Projects that were put on hold last year that are going forward now certainly the commodity level, even though it showed a little softness lately is still a lot better than what a wall.

So we anticipate a good balance of the year, it's just hard to hard to put a finger on Q4 right now until we get a little closer to it.

Okay. Good and then just.

Wanted to loop back that energy transition project comment what what types of projects are you doing in that world. It is that.

Could that be a rental market as well.

I'm not going to tell you exactly what kind of project just from a competitive standpoint.

And it could be a rental.

Market will see.

It's pretty nascent and it's.

You know evolution, so it's hard to tell right now the.

Jobs, we've gotten inquiries, we've received have pretty well been.

Just off relationships and kind of out of the.

The blues some hard I mean, we we know the markets out there and we know where we can participate et cetera, but you know a lot of this is just coming from.

No word of mouth or name getting out there. So that we can do some of these projects and you know these projects tend to be fairly highly engineered when you start working with.

You know some of the exotic gases and things like that it's it's a little different and that's actually why.

Mission, we've done work.

We've done compressor work on jobs. This quarter, we have recognized in the air because of not completed but they they were taking a fairly long time from <unk>.

Engineering and procurement.

To build on some of that stuff. So we see long lead projects.

Rental maybe yellow wood.

Necessarily opposed to it kind of depends on the term and the and the rates, but certainly the sales things here right now and.

At least this quarter is pretty substantial.

It's going to be volatile.

Maybe once we finish these projects don't get anything for another quarter or two or whatever but.

There's certainly focused us on some of those markets and what we can do and I think.

The customers out there are starting to see some of that too so it's.

That's my best Prognostication on the market, that's really just started.

A couple of quarters for us.

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

Okay. Thanks, Rob.

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

Hi, Thank you Hi, Hi, Steve.

Following up on your last day.

Following up your last comment on the energy transition just to clarify most of the 2 million backlog.

Is that what you referred to is energy transition.

Away from the wellhead most of that those kind of projects yeah, yeah three quarters out.

So the backlog about two men, so approximately a million and half dollars of.

It is.

And as you transition projects in.

Yeah, obviously, I'm using an energy transition recoveries and number one is a great buzzword right now and number two I don't have to tell you exactly what the projects are.

Okay, no competitive just to clarify that.

Understood and then.

Is it a more well I don't know if that's the right word is normal operating environment or excluding all the what's happened with the covid timing in the last year.

As parts replacement work that you usually do.

Fixed at the time of the contract or is it a lower margin business, usually compared to the rental business.

Okay.

Now, which part of the business he said parts.

You mentioned replacement some backup work related to replacing parts or service work on the <unk> or.

Or is that the emission standards that you talked about yeah, yeah that was that was more.

Customer requested deferred maintenance yeah.

Obviously, a lot of things slowed down last year, just from the point of.

Primarily covid and there may be a little careful and stuff in and some of this maintenance of one.

Absolutely necessary you know.

Either you go through it.

The equipment requirements or anything else you know some customers you saw.

Oh opted to push it back and.

Now that we're in a little different environment, and you know kind of coming into a stronger year. We rescheduled some of these things and a lot of it was emissions testing.

Okay, Yeah, which which drove a lot of catalyst purchases, which are I say.

Expenses to start with but we've seen quite a an.

And inflationary hit on that just due to the metals in it.

Sorry, It was just primarily cash.

Catching up on some deferred maintenance and parts costs, there and some labor too.

Okay, and then did.

Did I hear correctly that quarter over quarter prices were down but it is that your calculation based on not burning the full full rates on the deployed equipment from that this quarter from the second quarter.

No prices, you're talking about rental prices.

Yeah, Yeah yeah.

The average rental price per unit across your fleet.

Oh no. It went up it was up.

Okay.

I remember at three to 3% to 4% year over year and sequentially. So and again, that's that's primarily driven by.

The large horsepower going out.

Okay, and then with the hiring efforts and maybe it's related to that deferred maintenance.

Are you back to levels, where you were before covid.

Can you comment on that as.

As far as head count.

Head count please or hours worked in the field.

Yeah, where we're above.

That from a head count standpoint.

So revenues are what about 3% above <unk>.

Last year.

Yeah, our head count well.

The field count is higher.

You know the the fabrication facility count is lower.

You know just causes are there differences in activity so.

Probably I would guess that our overall head count is lower.

Due to the Q2.2020 being pre pandemic and then Q2 now.

But it's been shifted a little you know fabrication I am pulling down some in fill employment up.

Okay, great. Thank you have a great rest of the day, okay. Yeah. Thanks type.

Once again to ask a question. Please press star one on your phone now.

At this time, we have no further questions.

Okay. Thanks, Erica and thanks, everyone for joining me on this call I. Appreciate your time this morning, and look forward to visiting with you again next quarter.

<unk>.

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

[music].

The host has ended this call goodbye.

[music].

Good morning, ladies and gentlemen, and welcome to the natural gas services group's second quarter 'twenty 'twenty one earnings call. At this time all participants are in a listen only mode. Operator assistance is available anytime during this conference by pressing Star Zero Your call leaders for today's call are Alicia Dada IR.

Nader, Steve Taylor, Chairman, President and CEO I'll now turn the call over to MS data you may begin.

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 mornings conference call are forward looking and are made pursuant to the safe Harbor provisions as outlined in the private Securities Litigation Reform Act of 1095.

Looking statements as you may know involve known and unknown risks and uncertainties, which may cause natural gas services groups actual results in future periods to differ materially from forecasted results.

Those risks include among other things the loss of market share through competition or otherwise.

Construction of competing technologies by other companies.

New governmental safety health or environmental regulations, which could require natural gas services group to make significant capital expenditures.

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.

Thank you Alicia and Erika and good morning, everyone.

Welcome to the natural gas services group's second quarter 2021 earnings review.

Thank you for tuning into our call.

As noted in our quarterly earnings press release, the second quarter, representing an important inflection point for our company. We said 80 compression packages in this quarter and putting a record 28, new high horsepower units.

But the majority of the high horsepower units being deployed off of standby status.

Not only do all of these units represent additional future revenue and profit for Ngls.

But the deployment of these high horsepower units continue to reinforce the success of our strategy to evolve toward a higher horsepower fleet.

Clearly higher energy commodity prices have returned to new production activity, especially in West Texas.

And overall oilfield activity provide a positive environment for our business.

We are pleased with the progress on our rental fleet during the quarter there'll be 80 compressor packages set over 50 of those were in the Permian Basin.

That more than half for large horsepower units.

Certainly progress the progress does not come without costs.

Of which occur ahead of realizing the full quarterly rental revenues on new set of equipment.

Setting a record number of higher horsepower units had such an impact.

Resetting commissioning of starting of this many units increased our parts and labor costs as well as the cost of everyday consumables, such as oil and antifreeze.

This resulted in some mismatch between revenues and expense, which are timing issues that will naturally resolve themselves over the next couple of quarters.

The third quarter, which we anticipate to be active but not at the level. We saw this quarter will gives us an opportunity to deliberately manage those operational expenses.

In addition, some repair and maintenance costs were higher than normal in the quarter.

<unk> of catching up on noncritical maintenance that was deferred at customers request during the pandemic.

We have also seen inflationary pressures, which we plan to mitigate by adjusting our rental rates in the last half of this year.

As we noted in previous discussions we worked tirelessly with customers during the past year to ensure we met their safety protocols.

Well as protecting our own team members, which resulted in some cases and lighter preventative maintenance schedules, which we are presently addressing.

Significant progress was made in the first half of the year with a more modest level of lingering into the third quarter.

While our total revenue decreased 4% sequentially driven by a decrease in sales revenue.

Both our rental and service and maintenance revenue has improved this quarter.

Now, let's turn to the financial details of the quarter in greater.

Detail.

Looking further revenues <unk> reported total revenue of $17.7 million for the second quarter 2021.

This is a 2% increase from the same quarter in 2020 or about $345000.

As a result of a 3% increase in revenue rental revenues balanced against a 22% decrease in sales revenues.

As you know the largest component of our sales revenues as compressor sales.

And it is historically volatile yes.

This decrease in sales revenue was primarily due to the absence of realized compressor sales during the period.

When comparing consecutive quarters, we had a decrease in total revenues of 4% or about $648000.

This was driven by $1.1 million decrease in sales revenue, which was only partially offset by rental and service and maintenance growth at nearly $500000.

While our sales revenue fluctuate with our customers' capital needs, a rental revenues have grown, 2% and 3%, respectively, and both sequential and year over year quarters.

Significantly in contrary to industry trends and GSS had increases in rental revenue in both quarters of this year.

Total adjusted gross margin for the three months ended June 32021 decreased to $6.6 million from $8.8 million for the same period ended June 32020.

Adjusted gross margin, which does not include depreciation for the three months ended June 30 was 37% of total revenue.

As noted earlier margins were impacted by higher repair and maintenance costs.

Increased labor cost and setting commissioning and startup expenses related to the growth in rental compression deployment.

Sequentially adjusted gross margin for the second quarter of 2021 decreased to $6.6 million from $8.6 million in the prior quarter.

As a percentage of revenue adjusted gross margin decreased to 37% this quarter compared to 47% in the prior quarter.

SG&A or sales general and administrative expenses were down 2% in both year over year and sequential periods.

Operating loss for the second quarter of 2021 was $2.3 million compared to a loss of $148000 in the second quarter of 2020.

Sequentially operating loss decreased by $1.9 million from an operating loss of $369000 in the first quarter of 2021.

Operating losses increased in both comparative quarters, primarily due to the aforementioned higher rental and commission expenses.

Greater loss in our compressor sales product line.

Our net loss after tax for this quarter of $1.9 million. This compares to a net income of $165000 in last year's second quarter and a net loss of $394000 in the first quarter 2021.

We reported a loss per diluted share of <unk> 14 for the second quarter 2021, compared to an income of <unk> <unk> per diluted share in the second quarter 2020.

Sequentially, we reported a loss of <unk> <unk> per diluted share in the first quarter. This year.

EBITDA is defined as earnings before interest taxes, depreciation and amortization.

And our adjusted EBITDA excludes inventory allowances charges incurred.

Due to fleet retirements and stock compensation expense all of which are noncash expenses.

Adjusted EBITDA for the three months ended June 32021 was $4.5 million a decrease from $7.1 million for the same period last year.

Beginning in the first quarter 2021, we have also added bag noncash equity compensation to our calculation of adjusted EBITDA and.

And have adjusted comparable quarterly data to provide for accurate comparisons.

Total sales revenue.

As a reminder includes compressors flares and product sales was $1.6 million this quarter.

This is a decrease from $2 million year over year is down from $2.7 million last quarter.

The decrease in both comparative quarters was primarily driven by lower compressor sales.

For the current quarter for the current quarter, we had a total sales adjusted gross margin loss of $204000.

This compares to positive gross margin margins of $148000 in the second quarter of 2020 and positive gross margins of $95000 in the first quarter of this year.

Although we have some longer lead projects being currently worked on we recorded no compressor sales revenue in the second quarter of 2021.

This compares to compressor sales revenues of $1.4 million in the second quarter, 2020, and $1.9 million last quarter.

Due to the absence of any recorded revenues this quarter and Unabsorbed cost compressor only sales margins posted a loss of $641000 for three months ended June 32021, compared to a loss of $127000 for the same period a year ago.

Loss of a $136000 last quarter.

Our sales backlog as of June 32020 was approximately $2 million compared to approximately $400000 in the first quarter of this year.

Interestingly approximately three quarters of this current backlog is for gas compression equipment that will be employed in energy transition projects now.

Not surprisingly we are seeing more inquiries for this type of work that we have in the past and currently those inquiries exceed those of our traditional wellhead natural gas type fabrication work.

The development of these markets over time will come.

With quite a bit of volatility.

<unk> has taken <unk> expertise to participate in that is becoming known in these markets.

Rail revenue in the second quarter, 2021 was $15.6 million compared to $15.1 million, an increase of 3% since the second quarter last year.

For the sequential quarters rail revenue grew to $15.6 million from $15.3 million last year.

If you recall rental revenues in the second quarter 2020 over the last quarter pre pandemic growth.

And prior to the related revenue impacts recorded in Q2 Q3 of 2020.

Fact that our rental revenues over the last 12 months have exceeded that level of significant.

Test or our success in growing this primary strategic part of our business.

Hello rates increased by an average of four 2% per unit and the year over year quarters, and three 2% sequentially.

Mainly due to our continued penetration into the larger horsepower market.

And this quarter, we set a total of 41000.

A little over 41000 horsepower.

Terminated horsepower was almost 12000 horsepower, which resulted in a net gain of around 30000 horsepower.

You may notice that the amount of horsepower set does not coincide with the change in our quarter to quarter utilization numbers.

<unk> moved from the yard to location and set in commission.

With this much new horsepower being set commissioned and started up our expenses increased 12, only some of the rental revenue was recorded due to the incremental rate increases and partial quarters.

We therefore had a timing mismatch between the expenses incurred in partial quarterly rental revenues.

As such our gross margins were lower than anticipated.

<unk> rental adjusted gross margins this quarter were 42% a decrease from both comparative quarters of 56% year over year and 53% sequentially.

To explain this.

To explain the expansion scenario this quarter, a little more detail the majority of which was experienced in Permian basin.

We werent able to record a full quarter full revenue from you know set later in the quarter, while we did experience a full quarter's worth of expense.

Over 50 units in the Permian basin alone in the second quarter.

As a company. This is the most horsepower we have said in a single quarter and it drove a lot of expense.

Setting commissioning and starting this amount of equipment takes a lot of manpower parts, all and antifreeze, which are not insignificant expenses in volume.

Hello, with that we've been hiring a number of technicians and adding service vehicles to the fleet.

Some of our costs had been delayed from last year. For example engine emissions testing that had been delayed by our customers in 2020, we're resurrected with a large number of perform this quarter.

This expense was exacerbated by large parts cost increases.

Due to the precious metals contained in these catalysts.

It's also points out the inflationary pressure, we are facing from parts to fluids labor.

All alone is 30% higher than a couple of quarters ago antifreeze as shown a similar magnitude of increase.

For perspective, although the bear expenses show a large experience over quarters.

The dollar cost per horsepower increased approximately 30% still substantial but a little more perspective.

This expense anomalies should correct itself in the next couple of quarters. When we will have four full quarters of revenue and the ceding Commission expenses are largely behind us.

That said, we have a backlog of rental units just had in the third quarter and we will experience the same timing phenomena.

But the volume of equipment being commissioned isn't as high and we anticipate margins coming back to our traditional levels over the next couple of quarters.

Setting larger horsepower of which most of this is <unk>.

Intel is higher initial expenses, but this is a good news scenario revenues are up contracts are long and these expenses are mostly behind us.

Please size at the end of June 2021 totaled 257 compressors.

Or 446803 horsepower, which includes a net addition of 19 units.

A 4800.90 horsepower during the second quarter.

As of June 32021, 37% over utilized horsepower is classified as large.

Over the past 12 months, we've added 42, new fleet units totaling just under 13000 horsepower with 61% of that horsepower being classified in our large horsepower category.

Our horsepower utilization is approximately 64% and unit based utilization was a bit over 55% as of June 32021.

Our capital expense for completed rental fleet units, which does not include work in progress in the second quarter was approximately $5.9 million for rental equipment.

Moving to the balance sheet as mentioned last quarter, we established a new credit facility with a $20 million borrowing base, but with no borrowings outstanding are.

Our cash balance at the end of the second quarter was $26.2 million. This compares to cash a year ago of $15.5 million and last quarter at $30.7 million the.

The combination of our cash balance and untapped credit line continues to provide ample liquidity and nearly any conceivable scenario.

We generated positive net cash flow from operating activities in this quarter of $5.4 million or 30% of our quarterly revenue.

We also reinvested $1.9 million back into the company through common stock buybacks this quarter.

We will continue to repurchase shares as we believe the fair value of the enterprise is well above that currently reflected in the public markets.

As we emerged from the trough this cycle, our new business should provide opportunities for new revenue and profit growth.

While we are cautiously optimistic about the second half of the year as underlying <unk> demand has helped stabilize the energy markets.

We remain vigilant in our watch of macro trends that can impact our industry and business.

We will continue to focus on balance sheet strength and opportunities that will create long term value.

As I've said before our success is a result of the commitment of all members of the <unk> team to make certain of our customers are satisfied and appreciated our.

Our ability to meet challenges of the past year have proven our team is among the best in the business.

Erika that's the end of my prepared remarks. So if you would please open the phone lines for any questions.

Ladies and gentlemen at this time, we will conduct a question and answer session. If you would like to state. A question. Please press star one on your phone now and Youll be placed into the queue in order to receive once again to ask a question. Please press star one now our first question comes from Rob Brown from Lake Street Capital. Please state your question.

Morning, Steve.

Hey, Rod.

Just wanted to get a little bit into the the pricing environment you talked about some of the costs going up are you able to pass that into pricing or it seems like your pricing was kind of moving up but maybe how is the pricing environment at this point.

Okay well.

We're going to.

You have some price increases.

The balance of the year.

We've been.

Moving some up slightly but.

The the environment the inflationary environment is really starting to take effect pretty quick.

So we're planning on and I don't know the magnitude right now, but we are planning on rental increases pretty well across the board the balance of the year.

Well you know, we're seeing everything I mean steel is going up and still doesn't matter too much except on new builds but like I've mentioned, all going up obviously its a.

Expected one antifreeze.

Exotic metals these catalysts.

That stuff is has been especially impacted by supply chains.

And.

Hopefully some of this stuff mitigates itself, but.

Yeah, I'm not so sure.

From an inflationary standpoint, we'll have to take out.

Wait and see attitude from from that standpoint, but we're not taking a wait and see on.

Awesome prices, we've got to increase which is which is what we're going to do.

Okay, Okay great.

And then you talked about some new unit placements coming in Q3, maybe it at a lower rate than Q2, but how is the how is kind of a new unit placement Marc demand market happening now and what.

What are you sort of see after Q3 in terms of.

Entering the fleet.

Q3 is going to be a lower level than Q2, which actually is is.

Not bad because Q2 is was.

Such a high volume of equipment going out that.

Airbus is just extremely busy and.

Yes.

Lots of people and parts and manpower et cetera to do that so Q3 being a little lower level is not a bad thing kind of gives us a little chance to take somewhat of a breath and get concentrated on.

Revenue increases in.

You know manage costs.

So.

That's we think Q3 is going to have good level.

Beyond that certainly from a sales standpoint.

Sales is still pretty constricted from standard.

Wellhead natural gas sort of <unk>.

Business as I've mentioned, we're actually seeing more energy transition projects.

And anything and that's not a real high level, Yeah, we think that will grow over time.

But the sales perspective is pretty muted right now from traditional aspect now from a rental.

Point.

We think.

Q4 is going to be busiest little hard right now to put a.

Our finger on it we don't have a whole lot of projections for Q4 and that kind of it sounds funny when we're sitting here in August but.

Yes, we think.

We know of.

Some big equipment going out some little equipment going out.

But certainly between now and in Q4, we anticipate more being added more being scheduled and stuff like that so.

Yeah.

The operators are.

Yeah.

Thank you I'm surprised a lot of people with her.

Constraints on activity and and.

Drilling and things like that where we're picking up activity. We think is certainly from.

Projects that were put on hold last year that are going forward now certainly the commodity level, even though it showed a little softness lately is still a lot better in quite a while.

So we anticipate a good balance of the year, it's just hard to hard to put a finger on Q4 right now until we get a little closer to it.

Okay. Good and then just one.

I did look back that energy transition project comment what types of projects are you doing in that world. It is that.

Could that be a rental market as well.

I'm not going to tell you exactly what kind of project just from a competitive standpoint.

And it could be a rental.

Market will see.

It's pretty nascent and it's.

Evolution, so it's hard to tell.

Now the jobs, we've gotten inquiries, we've received pretty well Ben.

Just off relationships and kind of outlook.

The blues some hard I mean, we we know the markets out there and we know where we can participate.

Paid et cetera, but you know a lot of this is just coming from.

Word of mouth or name getting out there. So that we can do some of these projects and these projects tend to be fairly highly engineered when you start working with.

You know somebody exotic gases and things like that it's it's a little different and that's actually why.

As I mentioned, we've done work.

And we've done compressor work on jobs. This quarter, we have recognized in the air because of not completed but they they were taking a fairly long time from.

Engineering and procurement are to build on some of that stuff. So we see long lead projects.

Rental maybe we're.

We're not necessarily opposed to it kind of depends on the term and the and the rates, but certainly the sales thing is here right now and.

You know at least this quarter is pretty substantial.

It's going to be volatile.

Maybe once we finish these projects, who don't get anything for another quarter or two or whatever but.

It is certainly focused us on some of those markets and what we can do and I think.

The customers out there are starting to see some of that too so it's.

That's my best Prognostication on the market, that's really just started.

A couple of quarters for us.

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

Okay. Thanks, Rob.

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

Alright, great. Thank you Hi, Hi, Steve following up Bill.

Just.

Following up your last comment on the energy transition just to clarify most of the 2 million backlog.

Is that what you referred to as the energy transition.

Away from the wellhead most of that those kind of projects yeah, yes, three quarters out.

Yes, so the backlog is about $2 million or approximately $5.

It is.

And as you transition projects in.

Yeah, obviously I'm using the energy transition recoveries and number one is a great buzzword right now and number two I don't have to tell you exactly what the projects are.

Okay.

Competitive just to clarify that.

Understood and then is it a more well I don't know if thats. The right word is normal operating environment or excluding all what's happening with the covid timing in the last year.

As parts replacement work that you usually do.

Fixed at the time of the contract or is it lower margin business, usually compared to the rental business.

Okay.

Now, which part of the business you shipped parts.

You mentioned replacement some backup work related to replacing parts or service work on the <unk> or is that the emission standards that you talked about yeah. Yeah that was that was more customer requested deferred maintenance.

Obviously, a lot of things slowed down last year, just from the point of.

Primarily covid and there may be a little careful and stuff and some of this maintenance of one.

Absolutely necessary.

Either.

<unk>.

Equipment requirements or anything else.

We just saw.

Oh opted to push it back and.

Now that we're in a little different environment and kind of coming into a stronger year. We've rescheduled some of these things and a lot of it was the emissions testing.

Okay, Yeah, which which drove a lot of catalysts purchases, which are I say.

Expenses to start with but we've seen quite a.

And inflationary hit on that just due to the metals in it.

Sorry, It was just primarily.

Catching up on some deferred maintenance from parts costs, there, hence the labor too.

Okay and then.

Did I hear correctly that the quarter over quarter prices were down but is that your calculation based on not burning the full full rates on the deployed equipment from that this quarter from the second quarter.

Now.

Now prices, you're talking about rental prices.

Yeah Yeah.

The average rental price per unit across your fleet.

Oh no. It went up it was up okay.

Okay.

I remember at 3% to 3% to 4% year over year and sequentially. So and again, that's that's primarily driven by the large horsepower going out.

Okay.

And then with the hiring efforts and maybe it's related to that deferred maintenance.

Are you back to levels, where you were before covid.

Can you comment on that.

As far as head count.

Head count please or hours worked in the field.

Yeah, where we're above.

That from a head count standpoint.

So revenues are what about 3% above <unk>.

Last year.

Yeah, our head count well.

The field count is higher.

The fabrication facility count is lower.

Just causes are there differences in activity so.

Probably I would guess that our overall head count is lower.

Due to the Q2.2020 being pre pandemic and then Q2 now.

But it's been shifted a little you know fabrication and pulling down some in fill employment up.

Okay, great. Thank you, Steve I have a great rest of the day, okay. Yeah. Thanks type.

Once again to ask a question. Please press star one on your phone now.

At this time, we have no further questions.

Okay. Thanks, Erica and thanks, everyone for joining me on this call I. Appreciate your time this morning, and look forward to visiting with you again next quarter.

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

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