Good morning. Welcome to the Archrock Third Quarter 2021 Conference Call. Your host for today's call is Megan Repine, Vice President of Investor Relations of Archrock. I will now turn the call over to Ms. Repine. You may begin.

Thank you, Charlotte. Hello, everyone, and thanks for joining us on today's call. With me today are Brad Childers, President and Chief Executive Officer of Archrock; and Doug Aron, Chief Financial Officer of Archrock. Yesterday, Archrock released its financial and operating results for the third quarter of 2021. If you have not received a copy, you can find the information on the company's website at www.archrock.com. During this call, we will make forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 based on our current beliefs and expectations, as well as assumptions made by and information currently available to Archrock management team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements during this call. In addition, our discussion today will reference certain non-GAAP financial measures, including adjusted EBITDA, gross margin, gross margin percentage, cash available for dividend and free cash flow after dividend. For reconciliations of these non-GAAP financial measures to our GAAP financial results, please see yesterday's press release and our Form 8-K furnished to the SEC. I'll now turn the call over to Brad to discuss Archrock's third quarter results and to provide an update of our business.

Thank you, Megan, and good morning, everyone. The positive trends in our top line drivers that we saw in the second quarter accelerated in the third, bolstering our confidence that the industry is in the early stages of recovery and setting the stage for a significant increase in activity as we move into 2022. During the quarter, we grew our operating horsepower slightly after adjusting for the noncore asset sales. Horsepower bookings exceeded second quarter levels, we're driving bookings at levels similar to early 2019, providing us greater visibility into new starts through the remainder of 2021 and into next year. And finally, our AMS revenue increased sequentially and on an annual basis as our customers began catching up on major maintenance. Turning to our financial performance. The second half of the year is proving to be the transition period we expected and that we experienced in the past as a late cycle market participants. As we discussed last quarter, our revenue is at cyclical lows, and at the same time, we're beginning to invest to meet the expected growth ahead. And we're starting to face inflationary pressure from a tightening market. Despite the near-term challenges this presents, we're seeing the benefits of our actions to maximize our profitability, cash flows and returns for our shareholders. Our total revenue of $195 million was down just $450,000 sequentially. Our contract operations gross margin percentage of 61% was within guidance expectations and above prior cycle lows even in the face of sharp cost inflation. We generated impressive free cash flow after dividend of $98 million for the quarter and $179 million year-to-date, driven by disciplined capital allocation and proceeds from the sale of noncore assets. I'd also like to highlight that since the end of 2019, we've repaid a significant amount of…

Thanks, Brad, and good morning. Let's look at a summary of our third quarter results and our latest financial outlook for the year. Net income for the third quarter of 2021 was $9 million and included a few onetime items the majority of which were noncash. We recorded a pretax $5 million long-lived asset impairment and $2 million in depreciation expense from the write-off of compression and other assets damaged during Hurricane Ida. We reported adjusted EBITDA of $92 million for the third quarter of 2021. Higher net gains on the sale of compression and other assets as well as improved AMS gross margin dollars contributed to the $5 million increase in adjusted EBITDA compared to the second quarter. Turning to our business segments. Contract operations revenue came in at $159 million in the quarter down only $5 million compared to the second quarter, primarily due to the previously announced strategic divestment of smaller and older horsepower. Our gross margin percentage of 61% was down 200 basis points sequentially as expected due to the higher cost Brad reviewed earlier. In our aftermarket services segment, we reported third quarter 2021 revenue of $36 million compared to $32 million in the second quarter and $30 million in the prior year as our customers began to catch up on long overdue maintenance activities. Better top line performance helped with the segment's cost absorption, driving an increase in AMS gross margin percentage to 15% from 13% last quarter. SG&A totaled $29 million for the third quarter compared to $26 million last quarter and $19 million in the prior year period. We had higher technology spending as well as an increase in the compensation expense as we reinstated pre-pandemic salaries for our employees. In addition, the year-over-year comparison was impacted by the $7 million net…

[Operator Instructions]. Your first question comes from the line of Daniel Burke from Johnson Rice.

Let's see. Brad, in your overview, you noted the EIA's forecast for U.S. dry gas production essentially returning in 2022 to pre-COVID 2019 levels. Of course, back at that time, your utilization was in the upper 80s. Right now, you're in the lower 80s. Is it reasonable to think your utilization walk would mirror that upturn in -- expected upturn in gas production? Or what are the factors we need to consider?

So we cannot predict utilization level for a period of time. But I'll share with you that we are absolutely focused on restoring our utilization into the upper 80s and beyond as a goal. How fast we can get there? The market will dictate in pace. Our customer activities will dictate in reality, but it absolutely is our ambition to keep this business, especially during a recovery -- as a result of recovery up into the high 80s or better utilization range.

Okay. I'll stay with that for just 1 more question. You highlighted fleet mix is, if anything, or is a bit more weighted towards large units. Does that make it easier to get to sort of that 90% effective utilization cap? Or do you still have the same amount of friction in the system, even with a fleet mix that's more aligned or weighted to large units?

We believe that the improvements we've made into the fleet that have produced a fleet that is younger, that is more competitive, composed primarily of larger horsepower and in configurations more desired by the market should give us more momentum to increase our utilization rate compared to the fleet that we operate in the past.

Got it. Okay. And then, I guess, to pivot maybe as a follow-up. You mentioned the beginning of some price increases being implemented in Q4 and maybe more widespread increases early next year, maybe the more typical pricing season. Can you talk about the mechanics of implementing price increases, the time line to see them across the fleet? And then -- how do we think about the ability to achieve net pricing gains when you guys are contending pretty successfully at least in Q3 with rising costs?

Sure. So the mechanics of increased prices are, we have a number of units that have automatic in indexing built into them, and that covers approximately 1/3 of our operating fleet that's subjected to index base or automatic price increases inherent in the contract structure. And then for the other 2/3 of the fleet, it's -- for those units that are out of term, we have the ability to ensure that we've repriced those units at market. And as contracts expire and roll off, we similarly have the ability to increase pricing to bring it up to market. And so the mechanics are just like that communication to the customers to what we're doing and what lies ahead, and that price increase that was implemented for Q4 will continue rolling for every quarter forward until we've accomplished getting the units that are available for price increase back the 2/3 that are open for price increase back to market.

Got it. I appreciate that. I guess we'll stay tuned for '22 guidance in a quarter or so to get a sense for what you can achieve on the margin side into next year as you balance pricing and costs. Okay. I'll leave there actually maybe 1 small last question. The -- Doug, you made reference to the sale of $18.5 million of annualized EBITDA. Was that -- is that all horsepower sold year-to-date? Or was it specific to the July transaction? I guess I just want to make sure I had the right clarity on that.

Yes, Daniel, it's all horsepower sold year-to-date, and that's obviously annualized. So we're trying to help -- we're not yet, as we talked about ready to give '22 guidance, but also want folks to be cognizant of -- we absolutely believe operationally and for all the reasons Brad described, that was the right decision and our fleets getting younger and more standardized. But in the near term, that's also EBITDA that we'll be looking to replace with new horsepower in 2022.

[Operator Instructions]. There are no more questions. Now I'd like to turn the call back over to Mr. Childers for final remarks.

Great. Thank you, operator. Thank you, everyone, for participating in our third quarter earnings call. As we noted, we continue to drive strong customer activity and believe we're well positioned operationally and financially to capitalize on opportunities in a compression market as the demand for our services increases. I look forward to updating you again on our fourth quarter and year-end 2021 call. Thank you.

This concludes today's conference call. Thank you, everyone, for participating. You may now disconnect.