Q4 2021 Natural Gas Services Group Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the natural gas service group fourth quarter 2021 earnings call.
At this time, all participants will be in a listen only mode.
Operator assistance is available at any time during this conference by pressing Star zero.
Your call leaders for today's call are Alicia Dada IR coordinator.
Nadir.
And Steve Taylor, Chairman, President and CEO .
I would now like to turn the call over to Mr. Sato.
Begin.
Thanks, Paul and good morning, everyone. 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 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 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, yes introduction 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 port 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.
I'll now turn the call over to Mr. Stephen Taylor, who is chairman president and CEO of natural gas services group.
Thank you Alicia and Paul and good morning, everyone and welcome to natural.
Natural gas services group's fourth quarter 2021 earnings review.
Thank you for tuning into the call.
As noted in our earnings release, our overall business is growing both sequentially and on a year over year basis.
Year over year total revenue grew 6% with our flagship rental business growing 12%.
Sequentially total revenue slipped, 1%, primarily due to quarterly fluctuations in sales and our service and maintenance businesses.
Full year comparative basis every one of our business lines grew with overall revenues up 6% and a rental rental revenues increasing 5%.
Our core compression business continued to recover from the pandemic induced decline and again grew in the fourth quarter, our fourth consecutive quarter of rental revenue growth.
Oppression rental revenue grew nearly 2% sequentially and approximately 12% on a year over year basis, primarily driven by an increase in active rental horsepower.
Well I am pleased we continue to show gains in revenues across the board the expenses related to our rental compression businesses business were also significant.
The expenses are largely concentrated in the second half of the year, primarily a result of new large horsepower compression installations.
I'll expand on these later in the call, but they were primarily due to mobilization commissioning and startup costs related to large horsepower units increase.
Increased labor and hiring costs and catch up on deferred maintenance from last year.
While these expenses had a material impact on our bottom line meteor onetime transient startup costs that will result in better margins or potential for improved income overtime and have further solidified our relationship with key long term customers.
It is also worth noting that general maintenance increase was higher than our traditional run rate as a result of increased maintenance costs as well as the level of maintenance catch up.
It was necessary as our business and the business of our customers recover from the pandemic.
Now, let's look at the financial details.
And yes reported total revenue of $18 million for the fourth quarter 2021.
This is a $1 million or six 1% increase from the same quarter in 2020, and as a result of an $1 $7 million increase in rental revenues with an offset from sales and third party sales and maintenance revenue.
When comparing consecutive quarters, we had a slight decrease in total revenues of 1%.
This was driven by an almost $500000 decrease in sales and third party revenues, partially offset by rental revenue increase of $280000.
While our sales revenues fluctuate quarter to quarter, our rental revenues have grown consistently one, 7% and 11, 8%, respectively, and both sequential and year over year quarters, and 5% when comparing full year results significantly Ngls as increased rental revenue in every quarter of 2021.
Total adjusted gross margin, which does not include depreciation for the three months ended December 31, 2021 decreased to $4 3 million from $7 $8 million for the same period ended December 31 2020.
Adjusted gross margin for the three months ended December 31 was 24% of total revenue.
As noted earlier margins were impacted by higher repair and maintenance costs increased labor costs of setting commissioning and startup expenses related to the growth in real compression deployment.
Not to mention of inflationary costs, driven by lubricants of emissions and repair parts.
Sequentially adjusted gross margin for the fourth quarter of 2021 decreased to $4 3 million from $7 $5 million in the prior quarter.
As a percentage of revenue adjusted gross margin also decreased to 24% this quarter compared to 41% in the prior quarter.
The majority of the decline in gross margins resulted from increased rental cost.
A significant portion of which impacted the fourth quarter.
As noted earlier the expenses included higher mobilization commissioning and startup costs.
And to a lesser extent, an increased level of unabsorbed cost manufacturing shops.
Our rental revenue still grew in the fourth quarter, our expense profile was harder than anticipated or many of these expenses.
Are the result of new equipment mobilization, we are not immune from inflationary pressures seen in raw materials and supplies and supply chain challenges.
We're working diligently to mitigate inflationary pressures vigilant in our material and supply sourcing to improve efficiencies.
We also believe the positive industry momentum will provide opportunities to selectively improve pricing and expense recovery.
Sales general and administrative expenses decreased over 13% and increased almost 4% respectively in year over year and sequential periods.
Year over year, we realized lower executive comp expenses and professional fees, partially offset by increased health insurance costs.
Sequentially, our fourth quarter SG&A was impacted by increased health insurance costs.
Operating loss for the fourth quarter, 2021 was $8 $2 million compared to a loss of $2 $2 million in the fourth quarter of 2020.
This increase was due to a decrease in margins across our operating activities as well as a loss on retirement of units from our rental fleet of $3 1 million and an inventory write off of just over $200000.
Sequentially operating loss increased to $8 2 million in the fourth quarter of 2021 from an operating loss of $1 $6 million in the third quarter of 2021.
This increase in comparative quarters is primarily due to the aforementioned lower margins.
Loss on retirement of the units from our fleet and inventory write offs.
Our net loss after tax for this quarter was $5 $6 million. This compares to a net loss of $1 9 million in last year's fourth quarter and net loss of $1 $3 million in the third quarter 2021.
We reported a loss per diluted share of <unk> 44 for the fourth quarter of 2021 compared to a loss of <unk> 14 per diluted share in the fourth quarter of 2020 and.
And 10 cents per diluted share in the third quarter of 2021 .
EBITDA is defined as earnings before interest taxes, depreciation and amortization in our adjusted EBITDA excludes the inventory allowances fleet retirements and stock compensation expense all of which are noncash items.
Adjusted EBITDA for the three months ended December 31, 2021 was $2 $3 million a decrease from $5 4 million for the same period in 2020.
Adjusted EBITDA decreased approximately $3 $1 million sequentially from $5 $4 million last quarter to $2 $3 million in this quarter, primarily due to higher rental expenses, resulting in lower margins.
On a full year comparative basis, adjusted EBITDA decreased $6 $2 million to $18 7 million from $24 $9 million in 2020.
Total sales revenue, which as a reminder includes compressors flares and product sales.
Was the $1 $1 million this quarter.
This is a decrease from $1 $7 million year over year and from $1 $5 million last quarter.
The change in both comparative quarters is due to the volatility in the various sales components on.
On a full year comparative basis, however, sales increased 22% from $5 7 million to $6 $9 million.
So this current quarter, we had a total sales adjusted gross margin loss of $750000.
This compares to a positive gross margin of 48000 in the fourth quarter 2020, and negative gross margins of $91000 in the third quarter of 2021.
Although we have some compressor fabrication projects and progress our compressor sales business continues to be slow with no compressor sales revenues recognized in all comparative quarters.
As noted by our backlog. However, this does not mean the business doesn't generate any revenue.
But with the long lead items associated with our current products. There are quarters that we are fabricating equipment, but not recognized revenue on that equipment yet.
Due to the absence of any recorded compressed yourself revenues this quarter.
And unabsorbed cost compressor only sales margin as opposed to the loss of $1 million for the three months ended December 31 2021.
Compared to a loss of $713000 for the same period, a year ago, and a loss of $557000 last quarter.
Approximately half of the current quarters loss was due to inventory adjustment in obsolescence and unabsorbed costs.
Our sales backlog as of December 31, 2021 was approximately one and a half million dollars compared to approximately $2 million in the third quarter of 2021.
Rail revenue in the fourth quarter of 2021 was $16 $5 million compared to $14 7 million in the fourth quarter 2020.
An increase of 12%.
So the sequential quarters rental revenue grew to $16 $5 million from $16 2 million last quarter. However.
Average rental rates increased approximately 14% per unit in the year over year quarters.
It was certainly positive this is skewed due to the effect of city more and more higher horsepower equipment that contributes to an outsized in an outsized manner to a higher average rental rate.
Rates were essentially flat sequentially.
We all adjusted gross margins this quarter with 30% a $2 $6 million decrease from 51% gross margin year over year.
Two and a half million dollar increase decrease from the 46% gross margin last quarter.
While rental revenues improved throughout the year our expenses.
Related to new compression units released which lead to increased revenue over time were above expectations. In addition to the non repetitive deployment and commissioning expenses, we did experienced maintenance and supply expenses such as the initial all the AD free skills, which can be significant especially in large horsepower units.
While we eventually recover those costs the recognition of the expense and the reimbursement of such well from time to time, resulting cost revenue mismatches like we experienced in the fourth quarter.
These are of course necessary expenditures, but we can and do experience various expenses before revenues generated.
This is a transient problem and the initial expenses are recovered in time, but it does affect current operations and margins.
In addition to the above we are encouraged by oilfield activity it.
Yes. It has created significant additional personnel expense not only has our head count increased to meet new equipment demand wages are rising and overtime as prevalent as finding qualified employees, especially in the Permian is challenging.
How are you rotating employees from outside the pardon me and also results in higher training living we have to provide room board and travel costs as well as new equipment and transportation expenses.
In addition to meet this concentrated demand we've had two contracts third party field labor, which in itself was a $1 7 million dollar expense in 2021.
We also experienced over $2 million in the fourth quarter, while we anticipated one time maintenance expenses due to pandemic related catch up and increased year in operating cost imposed by customers.
In spite of all the fully absorb higher costs, we experienced.
Core rental expense of maintaining our equipment as measured by our direct cost of maintenance parts lubricants and fluids for the fleet for the full fleet rose competitive 14, 9% on a year over year per horsepower basis.
In addition to the gross margin impacts our net income. We also retired a number of older compressor units from our rental fleet.
A total of 263 compressor packages, representing 38200 horsepower work.
Were removed from the fleet and a noncash charge of $3 $1 million with that rental fleet size at the end of December 2020 , one totaled 2023 compressors.
Or over 418000 horsepower.
Which also reflects an addition of 12 units or approximately 4100 horsepower during the fourth quarter.
Over the past 12 months, we have added 65, new fleet units totaling just over 18000 horsepower with the majority of that horsepower being classified in our large horsepower category.
As of December 31, 2021 about 45% over utilized horsepower is made up of compressor units that are in excess of 400 horsepower per unit.
Our horsepower utilization is approximately 71% and unit based utilization was approximately 62% at the end of this quarter.
Our capital expense for completed gas compressor rental fleet units in the fourth quarter, which does not include work in progress was approximately $4 $9 million.
For the year, we expended $28 million uncompleted rental fleet additions with an additional $1 5 million in capital on vehicles and other PP&E.
We anticipate continuation of activity activity in the Permian basin expected in 2022.
We anticipate we will spend approximately $20 million to $25 million on growth compression capex in the coming year.
From a balance sheet perspective, we continue to have no debt outstanding at the end of the fourth quarter with a cash balance at the end of the fourth quarter at $22 $9 million. This.
This compares to cash a year ago, a $28 $9 million and last quarter of $24 4 million.
While we fully funded our capital expenditures with cash flow from operations.
We utilized $7 $9 million of cash on the balance sheet to repurchase over 737000 shares of our common stock on the open market.
In spite of our strong capital spending on committed rental equipment.
Stock buyback program, our cash balance in all comparative quarters has continued relatively steady dirt our ability to deliver strong operating cash flows.
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 $8 6 million.
48% of our quarterly revenue.
This is a strong cash flow conversion.
We also reinvested $3 $4 million back into the company through common stock buybacks this quarter.
Our total stock buyback program for 2021 totaled $7 $9 million or five 6% of our outstanding stock.
As of December 31, 2021.
Our average purchase over the course of 2021 is $2 65 per share.
In short 2021 was a year of growth and transition for Ngls, We continued to build our large horsepower rental fleet setting more horsepower in the last half of the year than in any other comparable six month period.
And we also began the process of returning to a normal workflow veterinary two years, a pandemic induced pandemonium.
So those transitions should lead to transformational growth range, yes in the future the cost of investments required in the process had a higher than anticipated impact on margins and profits, especially in the second half of 2021.
As we have started the new year, we are focusing on improving efficiency and pricing as ways to boost margins and profits.
But we won't shy away from continuing our large horsepower growth, which may result in a higher expense run rate.
We'll continue to focus on improving sourcing procurement and execution to reduce our overall cost profile.
Inflation in the oil patch presents a number of challenges the challenges, we'll address given our strong financial position and.
And long time vendor and supplier relationships.
We will also look for ways to use our fabrication expertise in facilities as an advantage to create efficiencies and continue to provide best in class equipment to our customers.
We anticipate steady growth in the coming year. This will be primarily driven by activity in the Permian basin, but we're also seeing signs of increased activity in other areas. We have already had commitments for additional higher horsepower units in a couple of different operating areas and we are currently ordering equipment. We have continued with our practice of ordering committed equipment.
The majority of our needs to ensure that we maximize utilization and returns.
Natural gas services group remains one of the few oilfield companies with a strong recurring rental stream no debt.
Our significant cash position and the ability to consistently generate meaningful operating cash flow.
The new year, well underway, we are steadily beginning to feel we're pushing on more normal operating environment or.
Well, maybe pandemic related health and safety protocols will remain with us indefinitely.
Are beginning to return to more regular work patterns and more personal customer interactions are leading to new opportunities.
We're fortunate that the NGL team remain largely healthy and continue to strive to meet the needs of our customers regardless of the challenges.
I'm grateful for the efforts during the past two years and for their continued efforts as we work to make 2020 to another successful year for natural gas services group.
Paul that's the end of my prepared remarks. So if you would please open the phone lines for 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 in the queue in the order received.
You compress pound one at any time to remove yourself from the queue.
Once again to ask a question. Please press star one on your Touchtone keypad now.
Yeah.
And we have a question from Rob Brown from Lake Street capital markets.
Your line is open Hey, Robyn.
Hi, Steve Good morning.
First question is on kind of margin trends.
This was onetime in the quarter, how do you sort of see the margin recovering.
Will it normalize or will it take time to normalize.
<unk>.
All the time to get pricing.
Well it'll be.
It will definitely improve because.
As I said in the.
From the script and you just mentioned.
Yeah, a lot of these costs are one time in transit.
Now.
The costs associated with installing and commissioning and starting up equipment. That's.
You know that's a necessary evil right.
Comes up first in and the revenues always fall that you want that because that's that's your future growth.
But even outside of that there is.
Like I mentioned, we had some catch up expenses.
From our customers and then pass it to put off some stuff catch up maintenance expenses that we actually had some.
Customer.
Induced or requested.
Ben says that we Didnt anticipate in the fourth quarter for.
Some additional operating.
Catch up from the point of.
With the oil and gas price being hi, everybody wants to maximize flows through units maximize operations and things like that so there's a lot of.
Maintenance associated with bringing units backup to tip top shape from the point of that is if they're not in shape, but from the point of if you're running three quarter capacity, that's a different sort of maintenance profile that if you're running 100 or a 110% capacity. So there's a lot of that going around.
That our guys in the field had to pay attention to and go out and either to do some maintenance on the units and stuff like that to bring them up to the maximized.
Capacity that the customer wanted to do the to maximize or their volumes and their prices. So that was a.
That was an unanticipated expense that we had that should not repeat I don't think because you know we had quite a bit of that in Q4, there's probably a little some left out there but.
You know that that's what I kind of see as a transient expense, we won't experience much of that less so.
And obviously other state airbase sees inflation and supply chain issues and stuff like that <unk> had to pay up for parts you've had to go to different sources for parts you've had to compete for parts on a price basis, and so all that stuff kind of compounds. There are a lot of moving.
Quote unquote parts in this quarter.
And you know a lot of them generated more expense than anticipated so.
All that said.
If you strip out.
What we see as either one time or transient costs.
We'll get the margins back into that we were aiming for the yes.
We're mid Forty's before aim for the 50, then up to the 60 will be back on that trend I think first half of the year.
Now and you can see that from the point that our core maintenance expenses, which were parts.
Fluids.
The direct cost for many of US on this equipment went up 14, 9% now.
Your year over year so.
That's not significant in this environment, where we've got you know all.
All the.
Price increases from suppliers supply chain issues, you know inflation stuff like that so when you when you die when you kind of get rid of all this noise is tens of one time in transit noise, we saw in the fourth quarter and dive into the core cost to maintain the fleet.
It is very competitive so yes.
That's why I anticipate well, we'll get back on on track pretty quick on this stuff.
You know first half of the year that I think.
We will have.
You know a lot better we will have tail winds.
After that.
And as I mentioned, you know we've already gotten orders.
Orders for some big horsepower that stuffs in the mill as far as ordering and everything so they have the activities continuing from a revenue standpoint.
And with a lot of these cost stripped out of it you know the the.
The margins will improve.
Yes, okay.
And.
My second question is really around the activity are you seeing really how many units based high horsepower units.
Sort of I think somewhere on standby I assume those are in the field now Boyd, but how does that look.
The environment with oil prices.
Is there.
You broke up on the last but.
As far as the.
Standby units, we don't have any any more.
Big horsepower standby units in.
In the field, so they're all fully utilized as far as.
Big horsepower going forward.
We've got.
So committed orders.
As I mentioned we.
We primarily order based on commitments, we don't step out too far on speculation now we do buy some speculative units because of the long lead times on some of this stuff it's a.
It can be six to nine months to complete an order and deliver a finished piece of equipment. So you got to have some inventory anticipated for some of that activity, but the.
So the vast majority probably 75% to 80% of the.
Equipment rebuild as is.
Committed with P. O's, so it's a it's a hard fast.
Business.
And then the balance perspective is obviously based on what's what's been popular we're sold out essentially of.
Just about all of our big horsepower.
So we're ordering for the committed units and we are ordering for since us.
Speculative units two to you'll be able to address some of that stuff because you do lose some business on deliveries. If you don't have something available.
So I think that answered the first part of your question, but I couldn't really hear the second part you broke up some.
Yes, so it's Mike.
Second part of the question is just really what's the demand environment overall with oil prices, where they are are you seeing.
Lower returns or what's sort of the impact of what youre seeing with oil prices where they are.
Yeah, well, you know oil and gas prices with the oil prices have been good for a while and.
That's that's driven that business.
What kind of puzzled in the past with gas prices were pretty good too, but you didn't see a whole lot of activity and just the gas prone basins.
Oil prone basins, we're fine like the Permian things like that but.
Predominant gas basins, just hadn't moved very much now we're starting to see.
A little more activity in some of that it's not to the magnitude of the all driven areas.
But it is picking up a little bit finally.
You know some of that's just been a reluctance of operators to.
Hey.
We've had $2 gas for 10 years, Nobody believed $5 was going to last very long you know if I was more of a.
Peak and you know cut much comes off and everything else in the meantime operators will take the money, but they're not going to go drill anything new so we're starting to see a little change in that attitude from some of them some of the small and medium horsepower going out a little more.
But again the big horsepower is the is the story.
Starting with us and in the market.
And as mentioned.
Now 45% of our utilized horsepower is large which is.
A pretty big shift.
That's happened over the last.
Three four years from predominantly a.
A small to medium horsepower provider to now being a medium to large horsepower provider.
Okay, great. Thank you I'll turn it over.
Thanks, Rob.
Uh huh.
Thank you our next question comes from.
Eric Cinemark from Palm Valley capital.
Your line is open.
Thanks Derek.
Hey, any update on the tax refund.
[laughter] that's about to ask you the same question.
You might have you might know that in the.
You might have to put that in the long term asset.
[laughter] no no update we check all the time in fact.
I met the other day and.
It's still out there they say they still owe it to us, but we're not saying anything.
So yeah I get them.
I can make a political statement around there, but that but I won't.
But no it's still.
It's supposed to be covenants.
They say, they're running a year behind there's been about a year or so.
You know I can't predict anything, but yeah, we we hope every quarter, we see that check, but it's still a real real deal.
And that would be $11 million.
Yes, Yeah, I think at 11.1, maybe something like that is right around 11.
Okay, great and assuming you receive that what are your thoughts on where buybacks, where you're just going to fund.
The elevated levels of Capex in 2022.
I don't know, yeah, well will and we've talked about it but you know the.
The Capex authorization, we've got we you know we.
The initial one a couple of years ago, I think 2000 <unk>.
<unk> 19, right before the pandemic hit and that was $10 million, we suspended do anything in 2020, just you know.
Just out of caution to see what market is going to do.
We resumed in 2021.
We bought almost 6% back now and we've just about run.
Yeah, we did a second authorization about halfway through the first for another $10 million. So we've we're a little over 10 million total spend of course about 8 million this year.
And.
We've got about 5 million left on that.
Arthur as Asian, So yeah, we'll continue with that and then you know once we get it either you know the board will look at it from the point of do we do additional buybacks or would you use for capital or you know, what's the what's the best use of it.
And you've been spending a lot on on the Capex on the high horsepower.
High horsepower compressors, just curious do you think maybe those compressors. We're underpriced you know looking back at all of these elevated expenses and if so what is your plan going forward to make sure you get an adequate return on capital on all of that past Capex.
Yeah, no. They werent there not underpriced in fact order.
You know some people might say were overpriced I don't think we're over approximately for comparatively where we are priced for a good return on it.
You know, what's Oh, no impact it is obviously it especially in 2021.
The.
The rapid pace at which we installed a bunch of this equipment and the costs associated with it and Yo I enumerated a bunch of those costs, but you know in there also are some operating efficiencies.
We were we were putting a ton of horsepower, we're trying to hire a bunch of people and everything is all the same time and you know and it's.
You get some inefficiencies going in there to besides just the wrote a dollar's spent so.
Yeah think 2022 .
I mean, 2021 is kind of a.
I guess, a shake out year somewhat.
Finally, putting all of this equipment to work get it out installing it I mean, we installed a ton of horsepower.
Horsepower in.
You know 2021 as I mentioned last half we've that was our most our busiest time in the year.
And in history as far as horsepower installed. So it was just a bunch of bunch of activity going on so yeah. We're.
Looking at 2021 as kind of a shake out from an expense standpoint, and getting that stuff in 'twenty.
2022 as mentioned some of these one time expenses from our transient.
Without.
Barring a big burst of.
Equipment like that which I don't anticipate.
Yeah.
The margins will climb and the returns declined two so they're priced right. It's just the expense piece of it has risen more than anticipated, but I think this year as I, just mentioned and to to Rob.
The expenses.
I think will be the core expenses are good would you got you got to get all of these surrounding ones in shape and I think we will.
And most of these compressors Stephen they are under contract and what what's the average age of those.
Yeah Oh.
All of them are under contract.
When we.
And they're between three to five year terms and I would you know on average.
Probably some have been out there about three years and probably getting close to the the term in some of them you know like I say just went up the last half of this year. So.
It's hard to put an average age on it that means anything but.
Majority of guest 19, 95% are still under contract.
Obviously different points of a term.
But.
The.
The let's see I'm thinking all the horsepower we've we've ordered.
So far this year is under long terms are approaching five year deals and.
And that's why we try to do certainly on the big horsepower GOR.
Gordon goes longer terms and we do get good prices on it is just we've got 60.
<unk> expense thing is has come up a bit this year and but that all being managed so it's it's all.
Essentially I would say 90% of the big horsepower.
Contracted still within a minimum term.
And the pricing on those contracts is that set throughout the contract term or is there any way you can adjust assuming inflation continues to accelerate.
And the maintenance costs, we've got we've got the ability on the majority of them to go back and ask for increases now you know theyre, they're mutually agreeable increases so there's always negotiations around that but we've got the ability to do that and then in fact, where we're doing that.
You know we're still in the midst.
There was some price increases last quarter.
And we've we started that and we're still in the midst of.
Doing that so we're we're in constant.
Constant contact with customers on this stuff and.
You know going for increases.
Well Steve.
Got four and $5 gas now in $100 oil you.
All of these energy service companies, it's taken them, a while to catch up with.
With demand and a lot of people are basically seeing problems you are.
Do you have any prediction of when the.
The revenues.
Catch up to your expenses it will see a profit.
Well I'm, hoping this year like you just mentioned I think.
Yeah. The if you look at the expenses and you know.
I mean I.
Sam there there is like.
Five or six different kinds, we saw in the fourth quarter that were either one time or transient or higher than anticipated. So.
There's a you know a double or triple whammy.
This quarter so.
Certainly in 2022.
The real expenses will get back.
Back into the ground that we want them you know we were on a.
Hey.
You know a decent path to a higher margin for the fourth quarter hits, So we'll resume that path and certainly.
Aim for that 50% margin by the end of the year. Then after that you know the end of next year, we ought to.
Climb into that.
60% is and that's that's our target on that.
Alright, Thanks, Stephen Good luck.
Okay. Thanks, Eric.
As a reminder, if you do have a question. Please press star one on your Touchtone keypad.
And our next question comes from Justin Jacobs from Mill Road capital.
Your line is open.
Good morning, Steve and taking the questions.
Just to go back on the on the gross margin questions for a second and all these you've stated that they have you look at your adjusted gross margin on rental income Q4, this year versus prior year decline from 51% to 30% if I apply that same 51%.
Margin to a year ago implies about $3 $5 million of incremental costs.
And you've you've talked about different categories.
Release in your comments, you know kind of one time with her mobilization commissioning startup.
In your comments you just mentioned you got some increased labor cost and increased deferred maintenance.
You give a sense in dollars of that kind of roughly $3 $5 million or some number around there how much of those incremental expenses are to each of those different categories. You had talked about.
Well the yeah as I mentioned, we had about 2 million of that was the and fourth quarter either some.
Catch up on some deferred maintenance either some.
We had deferred or the customer had asked us to defer and then on the other side you know some.
Not catch up but I guess that you know anticipatory.
<unk> expenses based on.
You know higher volumes higher oil prices and stuff like that stuff I mentioned, a while ago, where we had to go out and you know maybe you know was used to running three quarter capacity and customer wants it wouldn't be you know 100% capacity you know, we gotta go out there and adjust things tune things up a little more than dial things in better. So a couple of million dollars was due to the.
And we really didn't anticipate those expenses.
Yeah.
Yeah the.
Say, the other million men and have them.
You know if you.
He probably a.
And it's hard to.
Go pigeonhole somebody in certain categories.
Not pigeonhole, but signs of certain categories, but I would say probably half of that.
Remain that our men and half would be the.
Yeah startup commissioning.
Hum.
<unk> and everything else expenses.
And that includes the you know the initial oil fields.
Things like that which are not insignificant.
And then a lot of that is these yeah labor costs, they they've really accelerated they've really gotten high and we've had to do to keep up Howard from third parties. So I would you know falling into that.
Commissioning mobilization and startup expenses, probably half of that maybe you know three quarters of a million dollar. She yes, and then the other say three quarter million dollars just going to be all the other miscellaneous <unk>.
Stuff you've got we got rotator has now they're very expensive to hire so you've got you know a higher labor costs there parts.
Parts prices and increases yes.
Mentioned, the 15% increase just in the core.
Maintenance expense being the parts in and some of the lubricants so.
You got to have a smattering of that sort of stuff just higher costs on a lot of different categories for that that balance.
Okay. That's helpful and that actually is a good segue into my second question I heard you mentioned two numbers.
A $1 7 million of contracted labor and $2 million of increased customer induced cost go to that that $2 million for a second so all of that was in the fourth quarter.
Yes.
Okay do you expect that cost to continue in Q1 now of this year in 2002, and maybe even Q2.
No I mean, there might be a little carryover that Justin but yeah that was like say some catch up and some.
I guess, what I'm, calling anticipatory expenses, not not an anticipatory but.
Optimization expenses I guess from the operator come out here Hey, let's get this stuff go on you.
We got a lot of oil or gas to move prices are good et cetera et cetera. So there's a lot of you know a lot of that going on so I don't.
I don't anticipate.
A whole lot of that going forward for that 2 million I think that was a.
It was a surprise to us we thought most of that stuff had been.
Done and Yao.
Yeah that equipment was was operating.
It should but there is still some you know some capacity things we had to address you know you just had to tune them up to a to a very high degree where they weren't used to that so.
I don't think we'll see hardly any of that carryover.
Okay. That's helpful and then back on the $1 7 million of contracted labor is that.
I believe that a total number for 2021.
Right.
And is that Oh.
Think about that contracted labor.
Is that.
Labor that you just didn't have available until you had the contract, but it's kind of labor cost of running the business or is that some kind of incremental cost.
<unk> was outside of just not quite sure how to think of that if it's third party labor coming in.
Well I'd say looking at it going forward to be incremental but when we did it it was a integral cost because we just we couldn't hire enough people.
And a quick enough time to sell that equipment. So we had to get it said we had a customer.
Customer imposed deadlines.
So we had to go out and hire some help and that's that it's as simple as that now we've got we're.
Let me say, we were fully staff will probably 85% staffed so yeah. We've got a lot more people on the payroll to handle that we don't have to go out harder the third party stuff.
So we had to do it is painful to do it.
You know really concentrated on getting.
More people and but we just with.
With the time.
Imposition from the customers on how much equipment to set we just couldn't do it with it before we had so we had to hire help for for a bit and that's and that's one of those transient expenses I think that well.
We will still have some bought some third party, but it won't be near the magnitude of that it certainly will be.
Less than half of that or more because we've really concentrated on getting rid of that expense.
I would say and so youll you have the people or you will have the people going into 2022, it's just there'll be <unk>.
<unk> employees versus third party contracted labor you're bringing in.
Exactly yeah, we just had to use third party to plug the plug the gaps.
Got it and what's the what's the incremental cost of doing it that $1 seven if thats kind of a third party rate how much do you save on that when they come in house.
Oh, probably.
Hum.
A third.
Got it.
Third to a half of those pants.
Okay.
Got it that's helpful. Okay. That's all my questions. Thanks for thanks for taking the time, okay. Thanks Jessica.
And we have no further questions in queue at this time.
Okay. Thanks, Paul and thank everyone, who is joining me on the call.
Appreciate your time this morning, and look forward to visit with you again next quarter.
<unk>.
Yeah.
This concludes today's conference call. Thank you for attending.
The house has ended this call.