CSI Compressco LP

Good day, and welcome to the CSI CompressCo's second quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I will now turn the conference over to John Byers, Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning, and thank you for joining CSI Compressco's second quarter 2022 results conference call. I'd like to remind you that this conference call may contain statements that are or may be deemed to be forward-looking. These statements are based on certain assumptions and analyses made by CSI Compresco and are based on a number of factors. These statements are subject to a number of risks and uncertainties, many of which are beyond the control of the partnership. Your caution that such statements are not guarantees of future performance and that actual results may differ materially from those projected in the forward-looking statements. In addition, in the course of the call, we may refer to EBITDA gross margins, adjusted EBITDA for cash flow, distributable cash flow, distribution coverage ratio, leverage ratio utilization, or other non-GAAP financial measures. Please refer to this morning's press release or to our public website for reconciliations of non-GAAP financial measures to the nearest GAAP measures. These reconciliations are not a substitute for financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period. In addition to our press release announcement that went out earlier this morning and is posted on our website, our Form 10-Q will be filed later today. Please note that information provided on this call speaks only to management views as of today, August 9th. It may no longer be accurate at the time of replay. With that, I will now turn the call over to John Jackson. Thanks, John, and good morning.

Appreciate everyone joining the call today. As we discuss the second quarter results and the outlook for the remainder of the year, there are two overarching themes that I want to talk about at the beginning. The first is demand. The demand for our equipment is currently very high. It began last year with large horsepower, continued with demand for electric drive units, both conversions of existing units and new-build electrics, and has continued to pick up in the medium and smaller horsepower units. This has led to more pricing strength as we attempt to maintain and ultimately improve our overall margins. As a result, our shops across the organization are full of make-ready activity related to our existing fleet, as well as AMS work on customer-owned units. We have the visibility to see that this level of activity will be sustained through the rest of the year and into the early part of 2023, as we deploy a large portion of our remaining idle fleet over this time frame. The second theme is cost, the inflation and the supply chain impact. During the second quarter, we saw significant increases quarter over quarter. As we noted in the earnings release, these were primarily associated with fluids, parts, and labor. We're all familiar with the gasoline prices. We saw the dramatic increase in prices this year, especially in the second quarter. And since the end of the second quarter, we've seen gasoline prices recede from their highs like the rest of you probably noticed. The impact on gasoline costs is immediate, and we are seeing lower gasoline costs in our financials as we begin the third quarter. The other and more significant part of fluids is lube oil. Lube oil prices change more slowly, and so while we expect reductions in the coming months, the effect may be more gradual than that of gasoline. In the parts area, we've had price increases from suppliers during Q1 and Q2, and with the more significant of those increases occurring in Q2. We've had some early Q3 price increases from suppliers, but hope to see some stability from here related to those costs on parts. Labor costs also increased in the second quarter as a result of increased hiring, raises, and increased overtime. Our people are fully utilized deploying our idle fleet and expect that will continue through the rest of the year. Overall, we're working very diligently to mitigate the impact of cost increases where we can, but it remains difficult to predict the effect in the short term as costs are changing rapidly. As we look ahead, we have a high degree of excitement and optimism. We still have a significant number of contracted idle units that are to be reactivated over the remainder of 22 and into early 23. We expect to see utilization continue to improve through the rest of this year as these units move from make-ready to revenue-generating assets. In addition, the current active fleet is seeing far fewer returns than the past few quarters. When customers do give notice and intend to return the unit, the unit is often recontracted before it is returned. In many instances, we're seeing that same unit deployed with a new customer at a higher price. This is a continuation of what we began to see late last year in the higher horsepower end of our fleet as availability began to tighten. Our current pricing for most of our fleet is at an all-time high. As we're able to raise prices across the contracted fleet to current market prices, we expect to recover the increase in costs we are currently experiencing. The second half of 2022 will be largely focused on deploying both idle fleet units and electric motor drive converted units, while also completing, installing, commissioning the final new builds we have committed for 2022. In addition, based on lead time and customer demand, we'll be making additional capital commitments for 2023 over the course of the next quarter. As we think about capital allocation over the coming quarters, We'll continue to focus on spending our money to deploy our existing fleet first, that being compressors or coolers, aiming plants, international opportunities for any product line, including the electric motor drive conversions of existing units. As we reach near full utilization levels, the shift in capital will move towards fleet additions. We have several new build opportunities in compression, both gas and electric, that we're currently evaluating and high grading. One of the effects of the inflationary environment, is the cost of new large horsepower units has increased significantly over the last six to nine months. In addition, lead times for delivery of major components continue to extend. Any new built units we commit to now will generally not come online until the second half of 2023. As always, we look to the most effective return on our capital as we commit to new projects. This return analysis is not just pricing, but includes improving the terms and conditions surrounding contracts related to spending this new capital. In summary, we continue to see a strong demand environment for our products and services throughout this year and well into 2023. The cost of the equation will be the variable we are watching closely and working to mitigate on the continuing inflationary pressures. All our product lines and geographic areas are experiencing growth in this environment. We believe in the long-term demand for natural gas worldwide. This drives an ever-increasing need for compression, And we look forward to growing the company, delivering exceptional service, and improving shareholder returns. With that, I'll turn the call over to John Byers. Thanks, John.