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00:06 Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Fourth Quarter 2021 Earnings Call. At this time, all participants will be in a listen-only mode. Your call leader for today's call are Alicia Dada, IR Coordinator and Steve Taylor, Chairman, President and CEO. 00:35 I would now like to turn the call over to Ms. Dada.

You may begin..

00:40 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, the statements in this morning's conference call are forward-looking and are made pursuant to the Safe Harbor Provision as outlined in the Private Securities Litigation Reform Act of 1995.

01:02 Forward-looking statements as you may know, involve known and unknown risks and uncertainties, which may cause Natural Gas Services Group's actual results in future periods to differ materially from forecasted results.

Those risks include, among other things, the loss of market share through competition or otherwise; the introduction of competing technologies by other companies; and new governmental safety, health or environmental regulations, which could require Natural Gas Services Group to make significant capital expenditures.

01:29 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 expectation reflected in the forward-looking statements include, but are not limited to, factors described in our recent press release, and also under the caption Risk Factors in the company's Annual Reports on Form 10-K filed with the Securities and Exchange Commission.

02:03 I will now turn the call over to Mr. Steve Taylor, who is Chairman, President, and CEO of Natural Gas Services Group..

02:10 Thank you, Alicia and Paul, and good morning, everyone, and welcome to Natural Gas Services Group fourth quarter 2021 earnings review. Thank you for tuning into the call. As noted in our earnings release, our overall business growing both sequentially in on a year-over-year basis.

02:27 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.

On a full-year comparative basis, every one of our business lines grew with overall revenues up 6% and rental revenues increasing 5%. 02:50 Our core compression business continue to recover from the pandemic induced decline and again, grew in the fourth quarter, our fourth consecutive quarter of rental revenue growth.

Compression rental revenue grew nearly 2% sequentially and approximately 12% on a year-over-year basis, primarily driven by an increase in active rental horsepower. While I'm pleased, we continue to show gains in revenues across the board, expenses related to our rental compression businesses -- business were also significant.

The expenses are largely concentrated in the second half of the year and are primarily a result of new large horsepower compression installations.

I'll expand on these later in the call that there were primarily due to mobilization commissioning and startup cost related to large horsepower units, increased labor and hiring cost, and catch up on deferred maintenance from last year.

03:40 In short, while these expenses had a material impact on our bottom line, I mean, you're (ph) one time transient start-up costs that will result in better margins of potential for improved income over time, 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, a result of increased maintenance costs as well as the level of maintenance catch up, those necessary as our business in the business of our customers recovered from the pandemic. 04:10 Now let's look at the financial details.

NGS reported total revenue of $18 million for the fourth quarter 2021. This is a $1 million or 6.1% increase in the same quarter in 2020 and as a result of $1.7 million increase in rental revenues with an offset from sales in 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 $500,000 decrease in sales and third-party revenues, partially offset by rental revenue increase of $280,000.

04:49 For our sales revenues fluctuate quarter-to-quarter, our rental revenues have grown consistently 1.7% and 11.8% respectively in both sequential and year-over-year quarters, and 5% when comparing full-year results. Significantly, NGS has increased rental revenue in every quarter of 2021.

05:08 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 in 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 and setting, commissioning and start-up expenses related to the growth in rental compression deployment. Not to mention inflationary cost driven by lubricants and emissions and repair parts.

05:43 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 include higher mobilization, commissioning, and start-up costs and to a lesser extent an increased level of unabsorbed cost in our manufacturing shops.

06:21 Our rental revenue still grew in the fourth quarter. Our expense profile was higher than anticipated. While 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 are working diligently to mitigate inflationary pressures will be 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.

06:53 Sales, general and administrative expenses decreased over 13% and increased almost 4% respectively in the 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. 07:21 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 is 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 $200,000.

Sequentially, operating loss increased to $8.2 million in the fourth quarter 2021 from an operating loss of $1.6 million in the third quarter 2021. This increase in comparative quarters, primarily due to the aforementioned lower margins, loss on retirement of the units from our fleet in inventory write-offs.

08:03 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 $0.44 for the fourth quarter 2021 compared to a loss of $0.14 per diluted share in the fourth quarter of 2020, and $0.10 per diluted share in the third quarter of 2021.

08:32 EBITDA is defined as earnings before interest, taxes, depreciation and amortization and our adjusted EBITDA excludes inventory allowances fleet retirements, and stock compensation expense, all of which are non-cash items.

Adjusted EBITDA for the three months ended December 31, 2021 was $2.3 million, a decrease from $5.4 million in 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.

09:08 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 $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 very sales components. 09:40 On a full-year comparative basis, however, sales increased 22% from $5.7 million to $6.9 million. This current quarter, we had a total sales adjusted gross margin loss of $750,000.

This compares to a positive gross margin of 48,000 in the fourth quarter 2020 and negative gross margins of $91,000 in the third quarter of 2021. Although, we had some compressor fabrication projects in progress, our compressor sales business continues to be slow with no compressor sales revenues recognized in all comparative quarters.

10:14 As noted by our backlog, however, this does not mean the business doesn't generating 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 compressor sales revenues this quarter and unabsorbed cost, compressor only sales margin posted a loss of $1 million for the three months ended December 31, 2021 compared to a loss of $713,000 for the same period a year ago and a loss of $557,000 last quarter, approximately half of the current quarter's loss was due to inventory adjustment and obsolescence and unabsorbed costs.

10:58 Our sales backlog as of December 31, 2021 was approximately $1.5 million compared to approximately $2 million in the third quarter of 2021. Rental revenue in the fourth quarter 2021 was $16.5 million compared to $14.7 million in the fourth quarter 2020, an increase of 12%.

For the sequential quarters, rental revenue grew to $16.5 million from $16.2 million last quarter. Average rental rates increased approximately 14% per unit in the year-over-year quarters.

While, certainly, positive this is skewed due to the effect of selling 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.

11:48 Rental adjusted gross margins this quarter were 30%, a $2.6 million decrease from 51% gross margin year-over-year, and a $2.5 million increase -- decrease from the 46% gross margin last quarter.

Rental revenues improved throughout the year, our expenses largely related to new compression units, which lead to increased revenue over-time were above expectations.

In addition to the non-repetitive deployment and commissioning expenses, we did experience maintenance supply expenses such as initial all and free skills, which can be significant, especially in large horsepower units.

12:27 While, we eventually recover those costs, the recognition of the expense in the reimbursement of such will from time-to-time resulting cost revenue mismatches like we experienced in the fourth quarter. These are of course, necessary expenditures, but we can do experience very expensive before revenue is generated.

This is a transient problem in the initial expenses are recovered in time, but it does affect current operations and margins.

12:54 In addition to the above, while we are encouraged by oilfield activity, it has created significant additional personnel expense, not only has our head count increased to meet new equipment demand, wages are rising in overtime as prevalent as finding qualified employees, especially in the Permian is challenging.

Hiring rotating employees from outside the Permian also results in higher training, living, we had to provide room board and travel cost as well as new equipment and transportation expenses. In addition to meet this concentrated demand, we have had to contract third-party field labor, which in itself was a $1.7 million expense in 2021.

13:33 We also experienced over $2 million in the furth quarter, and what we anticipate is 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 cost we experienced, the core rental experience of maintaining our equipment as measured by our direct cost of maintenance parts, lubricants and fluids for the fleet -- for the full fleet rose a competitive 14.9% on a year-over-year per horsepower basis.

14:04 In addition to the gross margin impacts on net income, we also retired a number of older compressor units from our rental fleets. A total of 263 compressor packages, representing 38,200 horsepower were removed from the fleet at a non-cash charge of $3.1 million.

With that rental fleet size at the end of December 2021 totaled 2,023 compressors or over 418,000 horsepower, which also reflects an addition of 12 units or approximately 4,100 horsepower during the fourth quarter.

Over the past 12 months, we have added 65 new fleet units totaling just over 18,000 horsepower, with the majority of that horsepower being classified in our large horsepower category. 14:47 As of December 31, 2021 about 45% of our 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 base utilization was approximately 62% at the end of this quarter. 15:10 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 $22.8 million on completed rental fleet additions with an additional $1.5 million in capital, on vehicles and other PP&E. With the anticipate continuation of activity in the Permian Basin expected in ‘22, we anticipate we will spend approximately $20 million to $25 million on growth compression CapEx in the coming year.

15:44 From a balance sheet perspective, we continue to have no debt outstanding at the end of the fourth quarter, with our cash balance at the end of the fourth quarter at $22.9 million. 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 flows from operations, we utilized $7.9 million of cash on the balance sheet to repurchase over 737,000 shares of our common stock on the open market.

16:18 In spite of our strong capital spending on committed rental equipment and our stock buyback program, our cash balance in all comparative quarters has continued relatively steady due to our ability to deliver strong operating cash flows.

The combination of our cash balance and untapped credit line continues to provide ample liquidity in nearly any conceivable scenario. We generated positive net cash flow from operating activities in this quarter of $8.6 million or 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. 16:57 Our total stock buyback program for 2021, totaled $7.9 million or 5.6% of our outstanding stock as of December 31, 2021. Our average purchase over the course of 2021 is $10.65 per share. In short, ‘21 was a year of growth in transition for NGS.

We continue to build our large horsepower rental fleet, selling 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 two years of pandemic induced pandemonium.

But those transition should lead to transformational growth for NGS in the future, the cost and investments required in the process had a higher than anticipated impact on margins and profits, especially in the second half of 2021.

17:45 As we have started the new year, we are focusing on improving efficiency and pricing as ways to boost margins and profits. We won't shy away from continuing our large horsepower growth, which may result in a higher expense run rate, we will 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, but challenges will address given our strong financial position and long-time vendor and supplier relationships.

18:17 We will also look for ways to use our fabrication expertise and 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 high 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 to the majority of our needs to ensure that we maximize utilization and returns.

18:52 Natural Gas Services Group remains one of the few oilfield companies with a strong recurring rental stream, no debt, a significant cash position and the ability to consistently generate meaningful operating cash flow.

With the new year well underway, we are steadily beginning to feel, we are pushing on more normal operating environment or many pandemic related to health and safety protocols will remain with us indefinitely. Our people are beginning to return to more regular work patterns and more personal customer interactions are leading to new opportunities.

19:24 We're fortunate that the NGS team remained 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 2022 another successful year for Natural Gas Services Group.

19:43 Paul, that's the end of my prepared remarks. So if you would please open the phone lines for questions..

19:50 Ladies and gentlemen, at this time, we will conduct a question-and-answer session. And we have a question from Rob Brown from Lake Street Capital Markets. Your line is open..

20:27 Hey, Rob..

20:29 Hi, Steve. Good morning. First question is on, kind of, margin trends.

Some of this was one-time in the quarter, how do you sort of see the margin recovering and will it normalize or will it take time the pricing?.

20:47 Well, it will definitely improve, because as I said, for the script you just mentioned a lot of these costs are one-time and transient.

Now, the costs associated with installing and commissioning and starting up equipment that's, that's a necessary evil right? That comes up first, and the revenue is always follow that, you want that, because that's, that's your future growth.

But even outside of that, there is like, measure we have some catch-up expenses from customers and stuff catch-up maintenance expenses, maybe actually had some customer-induced or requested expenses that we didn't anticipate in the fourth quarter for some additional operating catch-up from the point of -- with the oil and gas prices being higher, they wants to maximize flows through units, maximize operations and things like that.

21:51 So there, a lot of maintenance associated with bringing units back up to tip-top shape from the point of that they're not in the shape, but from the point of, if you're running three quarter capacity that's a different sort of managed profile that if you're running 100% or 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 tune, do some maintenance of the units and stuff like that to bring them up to the maximized capacity if the customer wanted -- due to the, to maximize their volumes and their prices.

So that was a, that was an unanticipated experience that we had, that should not repeat, I don't think because we had quite a bit of that in Q4, there is probably a little some left out there, but that's what I kind of see as a transient expense. We won't experience much of that less.

22:57 So we've -- and obviously, other bases (ph) inflation and supply chain issues and stuff like that. We've had to pay up for parts. You had to go to different sources for parts. You had to compete for parts on the price basis.

And so all this stuff kinds of compounds or a lot of moving quote unquote parts in this quarter and a lot of generated more expense than anticipated. So all that said, if you strip out, what we see as either one-time or transient cost, we'll get the margins back into that.

We were aiming for, we're in mid '40s before aim for the 50s, and up to the 60 we will be back on that trend I think first half of the year. 23:47 Now -- and you can see that from the point that our core maintenance expenses, which were parts, fluids, the direct cost for maintenance on this equipment went up 14.9% -- now, year-over-year.

So that's not significant in this environment, where we've got all the price increases from suppliers, supply chain issues, inflation stuff like that. So when you dive, when you kind of get rid of all this noise from this one-time and transit noise we saw in the fourth quarter and dive into the core cost maintain the fleet, that's very competitive.

So that's why I anticipate, we'll get back on, on track pretty quick on this stuff, first half of the year that I think we'll have a lot better, will have tailwinds after that.

And as I mentioned, we've already gotten orders for some big horsepower that stuff in the mill as far as ordering and things of the, if the activity is continuing from a revenue standpoint and with a lot of these cost stripped out of it, the margins will improve..

25:17 Okay. Good. And my second question is really around the activity.

Are you seeing or really, how many units are those high horsepower units sort of somewhere on standby, I assume those were in the field but how does that look ?.

25:37 You broke up on the last, but as far as the standby units, we don't have any -- anymore big horsepower standby units in the field. So they are all fully utilized as far as big horsepower going forward. We've got so committed orders. And as I mentioned, 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 the stuff it's -- it can be six months to nine months to complete in order and deliver up finished piece of equipment.

So you've got to have some inventory anticipated for some of that activity, but the vast majority, probably 75%, 80% of the equipment we build is committed with POs. So it's a hard fast business. 26:44 And then the balance perspective is obviously based on 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 speculative units to, you'll be able to address that stuff because you do lose some business on the leverage, if you don't have something available. So I think that answer the first part of your question, but I couldn't really hear the second part, you broke up some..

27:16 Yeah.

So my 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 sort of the impact of what you're seeing with oil prices where they are?.

27:32 Yeah. Well, oil and gas prices, we've -- the oil prices have been good for a while and that's driven that business. What kind of pleasant in the past was your gas prices were pretty good too, but didn’t see a whole lot of activity and just the gas prone basins.

Here the oil prone basis were fine like the Permian, things like that, but on a gas basins, just haven'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 oil driven areas, but it is picking up a little bit finally. Some of that's just been a reluctance of operators to hit.

We've had $2 gas for 10 years. Now I believe $5. It was going to last very long, if I was more of a peak and cut much comes-off and everything else in the meantime operators will take the money, but they're not -- go drill anything new.

So we're starting to see a little change in that attitude from some of the small and medium horsepower going to add a little more, but again the big horsepower is the story started 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 small to medium horsepower provider to now be at medium to large horsepower provider..

29:05 Great. Thank you. I'll turn it over..

29:09 Thanks, Rob..

29:14 Thank you. Our next question comes from Eric Cinnamond from Palm Valley Capital. Your line is open..

29:24 Hi, Steve..

29:25 Hi, Eric..

29:26 Hey.

Any update on the tax refund?.

29:31 About to ask you the second question?.

29:34 You might have -- you might have put that in the -- you might have to put that in the long-term asset then..

29:41 No, no update. We check all the time. In fact, Tom ask the other day and it's still out there, they’re still lower that we're not say anything, so, yeah, I could -- I can make a political statement around there, but that, but I won't. But no, it's still they say they run a year behind that has been about a year.

So I can't predict anything, but we hope every quarter we see that check, but it's real, real deal..

30:16 And that would be $11 million?.

30:20 Yes. Yeah. I think 11.1 maybe some like that’s right around 11..

30:23 Okay. Great.

And assuming you receive that, what are your thoughts on more buybacks or you just going to fund the elevated levels of CapEx in 2022?.

30:35 I don't know. Yeah. We'll -- and we've talked about it, but the CapEx authorization, we've got, we did the initial one a couple of years ago, I think 2019 for the pandemic hit and that was $10 million. We suspended do anything in 2020 just missed out caution to see what market is going to do. We resumed in 21.

We've 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 spent of course, about 8 million this year. And we've got about 5 million left from that authorization.

So, we'll continue with that and then, once, we get it either the Board will, we'll look at it from the point of, do we do additional buybacks or do you use for capital or what's the best use of it?.

31:39 And you've been spending a lot on the CapEx on the high horsepowers and high horsepower compressors, just curious if you think maybe those compressors were underpriced looking back at all these elevated expenses and if so, what is your plan going forward to make sure you get an adequate return on capital all that past CapEx?.

32:02 Yeah. No, they weren't -- they're not underpriced, in fact, to our -- so people might say we are reprised, I don’t think we are reprised for competitively, we are priced for a good return on it.

What's -- impact is obviously, especially in 2021 where the rapid pace at which we installed a bunch of this equipment and the cost associated with it, and enumerated bunch of those costs, but in there also are some operating efficiencies, where we were -- we're putting a ton of horsepower.

We're trying to hire a bunch of people and everything on the same time and it's, you get some inefficiencies going in there too besides just the wrote-dollars spent. So, I think 2022, I mean 2021 is kind of, I guess a shakeout year somewhat finally putting all this equipment to or get it out, installing it.

33:04 I mean we installed a ton of horsepower in 2021 as I mentioned. The last half, that was our most our busiest time in the history as far as horsepower installed. So it was just a bunch of much activity going on.

So yeah, look at 2021 as kind of a shake out from an expense standpoint and given that stuff in, 2022 as mentioned, some of these one-time expenses some are transient, with that barring a big burst of equipment like there, which I don't anticipate. The margins will climb and the returns will climb too.

So they're priced right, it's just the expense piece of it has risen more than anticipated. But I think this year is just mentioned to Rob, the expenses, I think will be -- the core expenses are good, we’d guide you all these surrounding ones in shape and I think we will..

34:16 In most of these compressors, Steve, they are under contract and what's the average age of those?.

34:23 Yeah. All of them are on the contract. When we -- and they are between three to five-year terms. And I would -- on average, price some have been out there about three years and probably getting close to the Permian I said just we are not the last half of this year.

So it's hard to put an average age on it that means any time, but the vast majority I guess 90%, 95% are still on the contract, obviously different point to the term.

But the -- I think all the horsepower we've ordered so far this year is under long-terms, we approach them five-year deals and that's what we try to do, certainly, that would be big horsepower got those longer terms and we do get good prices on it as just we've got this experience thing has come up a bit this year and, but that will be managed.

So it's all I would say, 90% of the big horsepower contracted still within a minimum term..

35:43 In the pricing on those contracts, is that set throughout the contract term, or is there any way you can adjust assuming inflation continues to excel in the maintenance cost?.

35:54 Yeah. We've got the ability on the majority of them to go back and ask for increases. Now they’re mutually agreeable increases, so there's always negotiations around that, but we've got the ability to do that. And in fact, we're doing that.

We're still, I mentioned, there were some price increases last quarter and we've started that and we're still in the midst of doing that. So, we're in constant contact with customers on this stuff and going forward, increases..

36:30 Well, Steve, we’ve got $4 or $5 gas now and $100 oil, a lot of these energy service companies is taken them a while to catch up with demand and a lot of people are facing the same problems you are, do you have any prediction of when the revenues will catch up to expenses and we'll see a profit?.

36:54 Well, I'm hoping this year like I just mentioned, I think, yeah, the, if you look at the expenses and I mean. I would say, on the other day, 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 it is a double or triple whammy this quarter.

So certainly, in 2022 the rental expenses, we'll get back into the ground that we want them. We were on a decent path to higher margin for the fourth quarter hit. So we'll resume that path and certainly aim for that 50% margin by the end of the year, then after of that into next year, we are a climate of that 60% and that's our target on them..

37:58 All right. Thanks, Steve and good luck..

38:00 Okay. Thanks, Eric..

38:04 And our next question comes from Justin Jacobs from Mill Road Capital. Your line is open..

38:21 Hi, Steve. Thanks for taking the questions.

Just to go back on the gross margin questions for a second and all these you've stated that the, if 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 cost.

And you've talked about different categories, both the release and your comments kind of one-time which are mobilization, commissioning, start-up, in your comments you just mentioned you got some increased labor cost and then increased deferred and maintenance.

Can 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 for each of those different categories you've talked about?.

39:17 Well, as I mentioned, we had about 2 million of that was the fourth quarter, there is catch-up on some deferred maintenance either some we had deferred or the customer had, asked us to differ.

And then on the other side, some not catch up, but I guess anticipatory expenses based on higher volumes, higher oil prices, stuff like that, stuff I mentioned while ago, where we had to go out and maybe just to run three quarter capacity and customer wants 100% capacity.

Yeah, we got to go out there and adjust things, things up a little more and all things in better. 39:56 So a couple of million dollars was due to that and we really didn't anticipate those expenses.

Say, the other million, million and half, if you probably a -- and it's hard to somewhere in certain categories but assigned to certain categories, but I would say probably half of that remain that, million and half would be the startup, commissioning, mobilization and everything else expenses.

And that includes the initial oilfields, things like, which are not insignificant. 40:55 And then a lot of that is, these labor costs. They really accelerated. They really gotten high and we've had to keep up have some third party. So I would -- falling into that commissioning, mobilization, startup expenses, probably half of that, maybe $0.75 million.

And then the other say $0.75 million is going to be all the other miscellaneous stuff you've got. We've got rotator now. They're very expensive to hire. So you got higher labor cost there, parts, prices and increases, I mentioned the 15% increase just in the core maintenance expense to be in the parts and some of the lubricants.

So you're going to have a smattering of that sort of stuff. Just higher cost on a lot of different categories for that balance..

41:54 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 costs.

Let’s go to that 2 million for a second, so all of that was in the fourth quarter?.

42:13 Yes..

42:15 Okay.

If you expect that cost to continue in Q1 now of this year in ‘22 and maybe even Q2?.

42:25 No, I mean, there might be a little carryover that Justin. But that was like, say, some catch-up and some I guess what I’m calling anticipatory expenses not anticipatory, but optimization expenses I guess from the operator, come out here, right, let's to get this stuff going on.

You've got a lot of oil or gas to move price are good et cetera, et cetera. So there's a lot of, a lot of that going on. So I don't anticipate a whole lot, going forward for that $2 million and I think that was, it was a surprise to us, we thought that most of stuff has been done and that equipment was operating as it should.

But there is still some, some capacity things we had to address, just had to turn them up to a very high degree where they weren't used to that. So I don't think we'll see hardly any of that carry over..

43:29 Okay. That's helpful.

And then back on the $1.7 million of contracted labor that was I believe a total number for 2021?.

43:39 Right..

43:41 And is that, when I think about that contracted labor, is that labor that you just didn't have available and so you had a contract, but it's kind of the labor cost of running the business or is that some kind of incremental cost that was outside? I was not quite sure how to think of that if it's third-party labor coming in?.

44:02 Well, I’d say looking at going forward to be incremental, but when we did it, it was integral cost because we just, we couldn't hire enough people, a quick enough time ourselves equipment, so we had to get a set. We had, customer imposed deadlines and so we had quite hire some help and that's just a simple as that.

Now we've got, we're -- I'm not going to say, we were fully staffed probably 80% staffed. So we've got a lot more people on the payroll to handle that. We don't have to go at the hire the third-party stuff. We had to do it, it is painful to do it.

We've really concentrated on getting more people in, but we just, with the time in position from the customers on how much equipment to set, we just couldn't do it with, but before we hire.

So we had to hire help for a bit and that's one of those transition expenses, I think that, we'll still have some what, 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..

45:12 I see.

And so, you have the people or you will have the people going in 2022, it's just there'll be NGS employees versus third-party contracted labor you're bringing in?.

45:24 Right, exactly. Yeah. We just had to use third-party to plug the gaps..

45:29 Got it. And what's the incremental cost of doing it $5.7 million (ph) if that's kind of the third-party rate.

How much do you save on that when they come in-house?.

45:41 Probably a third..

45:51 Okay..

45:52 A third to a half of those..

45:56 Okay. Got it. That's helpful. Okay. Those are all my questions. Thanks for – thanks for taking the time..

46:01 Okay. Yeah. Thanks, Josh..

46:08 And we have no further questions in queue at this time..

46:12 Okay. Thanks, Paul. And thank you everyone for joining me on the call. Appreciate your time this morning and look forward to visit with you again next quarter. Thank you..

46:27 This concludes today's conference call. Thank you for attending..