Q3 2019 Earnings Call
Greetings and welcome to extend that caught out 2019 earnings conference call.
At this time, all participants are in listen only mode.
A question answer session will follow the formal presentation.
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I'll turn the conference over to your host it's a Blake Hancock you may begin.
Good morning, and welcome to Exterran Corporation's third quarter 2019 conference call.
With me today, our experience President and Chief Executive Officer, Andrew way.
The BARDA experiments Chief Financial Officer, Ingersoll, Exterran, Chief operating officer.
During this conference call, we may make statements regarding future expectations about the company's business management plans for future operations or similar matters.
These statements are considered forward looking statements within the meaning of the U.S. security laws and speak only as of the date of this call. The company actual results could differ materially due to several important factors, including the risk factors and other trends and uncertainties, describing the company's filings with the Securities and Exchange Commission.
Management may refer to non-GAAP financial measures. During this call in accordance with regulation G. Become company provides a reconciliation of these measures and its earnings press release issued yesterday and a presentation located in the investor relation portion of the company's website with that I will now I'll turn the call over to Andrew Thanks, Blake I could.
Morning every one of the thanks for joining the call.
I'll stop I cover and a few of the key announcements included in our earnings release.
As we shared in the release, we are announcing the appointment of Roger George to lead our global water solutions business.
Roger has been with the comedy approximately three years, and it's had various responsibilities, including technology and engineering, new product development and product line management. Its commercial experience technical expertise will serve us well as he focuses on the significant opportunity. We see a had this water business is a growing segment.
For us in what we believe as a 4 billion addressable global market.
We continue to expand the pipeline of immediate opportunities and now we have a pipeline that is well over two times what it was at the beginning of the year and it's still growing our technology and expertise allows us to provide solutions in greenfield or brownfield situations that requires better performance lower cost more environment.
At least on solutions.
We have shared for some time now our goal to shift from primarily fabricating oil and gas equipment to providing complete systems and process solutions in energy and industrial applications and ultimately become a high margin high return less cyclical business, we believe it the water business along with our eco.
M.S. and processing product lines provide a great platform to build on launch from.
The longer term contract nature of the eco business on portions of the A.M.S. business provides stability that is not present in the profile of most energy oriented companies, coupled with a solid margins and return characteristics. We believe we're on a journey to create a very unique company that can exceed the expectation of armed.
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Imagine a company with a multibillion contracted backlog EBITDA margins greater than 20% that although requires capital investments realizes significant returns on those investments well above its cost of capital all while providing resiliency more aligned with an industrial business.
This is a summary of the company that we're working to build.
So along with investing in the businesses within our portfolio that are accretive to this vision. We've also taken definitive action with Pops, the portfolio, which did not support the overall objective since the spin in 2015, we exited the lally EGPC business and so the body's CPT North America PQ business.
Building on the actions we've taken today and in line with our goal that Sanders on providing complete systems and process solutions. We are now considering options for our U.S. compression fabrication business.
This is a business that exacerbate self cyclicality, both in terms of revenue and margins. Our goal is to pursue a strategy that will meaningfully reduce the dilution. This product has had on the remainder of our business. We started this process by consolidate in our two facilities in Houston.
A project that is nearing completion and ahead of schedule. We're now review in further options to consider for the business.
As we move through this process, we look forward to provide you with updates.
When you look at the business beyond compression. The remaining business is supported by our significant eco backlog at high margins on projects that target mid teen IR hours on the initial terms NMS business, that's been steadily growing and provides cash flow given its limited capital requirements.
Our processing and treating an integrated plan products, which are mission critical to the natural gas value chain has significantly better margins than total product margins, you've seen and allows us to differentiate versus peers.
Our water business, which has a unique environmentally sustainable technology strong margins and accretive returns with fundamentals that suggest ample growth over the coming years and lastly, our power business, which is just in its early in.
The last two also provide us an industrial application diversification over the longer term.
This journey is designed to create value to all of our stakeholders and I'm excited about how far the company has come and even more excited about what the future holes.
Now turn the call a triggering.
Thanks, Andrew I wanted to start today with the water business, which had a strong commercial quarter as Andrew alluded to.
We received an order from a globally MP for brownfield facility in the Middle East. This brings our orders in this business to over $50 million for the year already well in excess of prior year levels.
Specific project Leverages, our patented water technologies to retrofit and existing facility, giving customers better throughput and recovery efficiency extend their existing traditional flotation solutions and providing keynote water for possible reuse.
The retrofit allows for a long yume flow data up to 1.2 million barrels a day. This project highlights the global opportunity set to utilize our technology upgrade existing tax with older and less efficient technology beyond the natural Greenfield opportunities. This is especially attractive for customers that marginal wells.
Well the use of steam for enhanced oil recovery drives the need deficiency and totally treat produced water.
Another exciting development, we announced that we have signed a memo you with Antelope water management in the United States, where they will be looking to build 100000 battle per day water treatment facility.
We believe this is a very attractive fit for our technology and can provide significant benefits under a long term contract.
Our technology is gaining traction as a differentiator in the industry with the ability to recycle and reuse produced water economically.
We have now proven out our environmentally sustainable technology with producers midstream worse and disposal facilities and I'm looking at other players to the space to broaden our reach.
The opportunity set continues to grow on a quarterly basis, and our global footprint as allowing for greater adoption.
Moving onto contract operations, we successfully commenced operations with a large compressor station in Latin America, this quarter, adding to our working asset base.
In Latin America, political and economic events are dominating the new cycle over the past few months, but we remain focused on the safe and stable operations for multiple facilities.
Currency volatility, especially in Argentina has created challenges and a bit of the headwind, but given our relationships and contract structure, we remain confident in our business in the country and in the region.
We continue to monitor the region carefully, but believe that new developments, especially the about coming out I should continue to progress and while there will be ebbs and flows we remain committed to the region and our customers.
Dave will provide you guidance for Q4 in a bit but I want to note that we had having a couple of commercial negotiations with customers on ongoing equal projects that could result in a transfer of asset ownership to the customer by the ended the year.
This could potentially lead to a positive impact in the fourth quarter with change of ownership and then a normalization and revenue on a go forward basis.
That is also the potential that of one or more of these contracts where to have a change of ownership that our mass business would benefit as we would likely get the OEM contracts with the facilities, which were partially offset the eco revenue drop.
As an illustration I'd like to give you a benefit insight on one of these contracts and the most impactful wanted grainy 20, if that is an ownership change. This is a facility. We have operated for the customer for 10 years and during that time have had two expansions on multiple renewals that are done so on our capital investment have exceeded 20%.
And it has also been very rewarding for our customers sometimes after a long theaters such as this customers choose to on the asset directly as the current book value has been significantly depreciated at or are there ownership philosophy has evolved.
While it does represent a potential drop in revenue. It is a natural confusion for a capital asset investment of this nature, but just throwing off cash for a decade.
This demonstrates the power of our eco model along with the cash and returns power of renewals on this contract we would likely get an M.S. contract going forward and this project truly exemplifies the interconnected nature and power up our go to market strategy.
The Middle East continues to provide the greatest opportunity set for new contracts and be immediate future geopolitical tensions are high return projects that we're bidding on I'm expecting to come to market remain on track.
As we discussed last quarter, we continue to have promising conversations on additional trains and equipment for projects, which we had previously one and commenced operations on.
Regarding gms it continues to provide stability and the board organic growth continues.
We received additional OEM contracts during the quarter across the globe and our transactional service model continues to gain traction.
We also saw an increase NMS revenue in Q3, driven by pull through from an equal contract further demonstrating the symbiotic nature of our reported segments.
Moving to product sales, we had an uptick in orders in the quarter as expected driven by our water business and international markets and we'll talk to you about the success. We have had in water and we are seeing green shoots in power that are providing additional opportunities in the coming year.
The processing and treating orders in the U.S. remains slow driven by overall market caution unrestrained on capital spend.
We continue to see good bid activity, but feel that conversion would remain at a low point for the immediate future.
Orders into fourth quarter are likely to remain at levels. We have witnessed throughout the course of this year driven by typical Q4 seasonality at this point most customers that assessing 2020 budgets and many in the space are working through recent acquisitions early indications suggest 2020 capital spend we remain depressed, but we believe that a few.
Critical projects that will likely get the green light.
At the same time, we believe our global footprint will prove to be a differentiator to provide us additional avenues for product sales as the U.S. finds a sporting under the current environment.
Our commercial engineering and operational teams, we continue to be a differentiator for us as we continue to work closely with our customers to find solutions for their problems, but other than just being an equipment provider, which over the longer term should drive opportunities for greater value added partnerships, leading to improved Readouts I'll now pass it over to Dave to discuss.
Third quarter financial results. Thanks, Chris the third quarter reflects another solid performance with EBITDA as adjusted a 50 million on revenue of 302 million and was in line with our expectations as Andrew mentioned operating cash flow from continuing operations were 37 million.
From a segment perspective contract operations posted revenue of 96 million well gross margin was 62 million resulted in the gross margin rate of 64%.
Revenue increased as we commenced operations for facility in Latin America during the quarter.
For CMS revenue was 35 million gross margin was 9 million.
This resulted in the gross margin of 25%.
The sequential revenue increase was result of positive contract adjustments in Latin America as with incremental pull through from an eco project again, highlighting the power of our business model.
Revenue in the product segment was 171 million gross margin was 18 million, resulting in a gross margin rate of 11%.
Bookings for the quarter were 118 million.
Our product sales backlog was 308 million at the end of the third quarter compared to $759 million at the end of the third quarter of 2018.
That's Gina expenses were 38 million down 17% sequentially as we continue to focus on driving efficiencies across our organization.
Moving to the balance sheet total does it ended the third quarter was 496 million with available credit or if it's a 473 million.
We reported about 20 million in the quarter to repurchase about 1.8 million shares, bringing the year to date repurchases to 39 million.
Our leverage ratio is in great shape at 2.3 times and compares to two times at the end of second quarter of 2019.
We would expect total debt at year end to be below the third quarter levels.
Now turning to the fourth quarter contract operations revenue should be in the mid 90 million range with gross margin rate in the mid 60% range for HMS revenue should be in the low 30 million dollar range margins for the segment should remain relatively flat.
And our product sales segment revenue should be in the low 130 million range and this is only converting revenue from current backlog and not assuming any sales of spec equipment during the quarter.
Gross margin the segment should be between seven and 8% as we preserve critical mass in our core operations.
That's DNA should be similar to the third quarter level.
EBITDA as adjusted for the fourth quarter should be in a low to mid 40 million range as product revenue declines will be partially offset by some of the cost actions we've taken.
Capex for 2019 is expected to be around 190 to 200 million on the gross basis advanced payments should be roughly 100 million, putting net capex for 2019 around 90 to 100 million.
The potential ownership changes on the eco projects the grist discuss that could occur in this quarter or not including any of these projections.
Well, we're still in the planning phase for 2020 as of right. Now are committed net growth Capex for next year is pegged at around 40 million.
Given our strong eco and water opportunities that we hope to add to this number next year with projects to generate returns at or above our historical targets.
And with that I'll now turn the call back over to Andrew for closing remarks. Thanks, Dave The first three quarters of the year was supported by our backlog ended in 2019, along with exceptional execution.
While we were optimistic orders would respond meaningfully by this point in time, especially in the U.S. that is not being the case, we believe in controlling the fact is that out within our control and have focused on reducing costs and driving cash through working capital and Capex management. We took quick action this year seeing the benefits in Q4.
Especially as we think about 2020.
Next year, maybe a bit of a transition year as our products backlog at this point in the years roughly down 60% compared to where we were in 2018 and the eco contracts. We're currently working through that garish spoke to may weigh on the segment.
I'm excited about where the organization is headed given our differentiated product offerings in water and power along with our substantial eco backlog and the substantial pipeline of equal opportunities across the market.
Our goal and focus is to demonstrate differentiation and high on our business by improving return on invested capital cash flow generation, along with the leveraging the power of our global footprint.
Our products and services lead ourselves to being a true long term solutions provider that is more representative of an industrial business rather than a traditional energy company driving improved EBITDA margins cash flow and ultimately leading to a multiple re rate in higher I'm with.
I will now turn the call back to the operator.
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One moment, please well we poll for questions.
Our first question comes from Kyle May from capital One Securities. Please go ahead.
Good morning.
Good morning Carl.
I was wondering if you could perhaps talk a little bit more about the options you're considering for the U.S. compression fabrication business.
Yes, sure. So so Kyle I think over the last few years, we've continued to demonstrate.
Raising the bar in our products and making sure that the either technology or the market's seat sort of the longer Tim Gogo vision that we have as an organization and we feel that this is just a natural step in that direction clearly the market. This year have been challenging it's clearly an area that highlights the most six.
Cannot be that we have within the portfolio.
And compression will continue to be an integral part of our global business. This this announcement that we announced today really doesn't impact our ability to support amas all eco.
Nor does it impact the ability for us to add compression to say integrated plans for the U.S. market where necessary.
Also said before that compression as a standalone product in North America is dilutive to our product margins and hence our overall reported EBITDA rate. So so there are a wide range of options that we're working through.
I will say that we hope to be completed this review in the fourth quarter and give you all a better update at year end.
Got it that's helpful.
And also appreciate the preliminary look in 2020.
Just wondering if you could talk a little bit more about the different fundamental factors that you're seeing and how that could affect the business next year.
Yeah I think.
Tile.
For next year and some of the points to keep in mind really Q2 main or Pixthree band things number one.
Obviously, a product backlog that although marginally.
Well in wireless where we've been.
Yes.
Backlog this down considerably from where it was a year ago as part of the biggest single impact on next year.
Theres still the open question that both duration I mentioned regarding a couple of these ito contracts that.
Yes.
Customer they exercise the by option and if that happens that would have an impact obviously on the eco of them.
On the flip side of it we've got the full year impact over the two eco contracts that started up this year and then on top of that as Chris mentioned.
Really healthy orders this year on the water business, which will be.
You know a positive for next year as well as we all the order rate this year.
As you know basically double what our annual revenue is sourcing in a nice uptick there so.
Products on the negative side, we've got an open question all these plants and then.
Certainly with the full year impact to the eco contracts in water business. Those will be helpful last year, and then on top of that as noted in our.
Slide pack that.
Actually in a cost with the reductions we've made we're at a much lower run rate for us DNA going into next year. So that also be the help when it comes to.
EBITDA right.
Okay got it that's that's helpful and one more if I can.
Nice to see more focused on the water business and the new order and I know this is something that you guys have been working on for quite awhile.
Just wondering if you can give us any details about maybe the broader opportunity set did you see in the water business for for Europe .
Particular products.
So.
We're excited about the water space as you can see in so by making the decision. This this past few weeks on the implication of Rogen now full time in our water business. It supports an underpins the capabilities of what we see in the market and what we hope to be an acceleration of that space you know the past 12.
Months, we've continued to develop the technology add new patents, we have been learning a lot about the water space in terms of how to commercialize the product and what we're seeing right now on a number of fact is one.
In the U.S., there's a lot more focus around regulation, we've got technology that allows our customers to reuse reuse the water and so in the example of Antelope that we just described.
It's almost a similar product model as you think about him I missed a municipality where people bring water the clean the water and then are able to use the water to go back into the facilities as opposed to using freshwater we've seen a significant interest in that space in a number of states a number of counties.
Both that.
Commercial level and also to state level and so we continue to see the technology that we have applied across those platforms be it the smaller barrel of of water capability up this sort of 20 550000 barrels and ultimately up to the larger tanks that we're seeing some potential capability. So I'd say the tech.
I wanted you plays into the customers in the industry that really a focus on MSG and sustainability and being able to provide reuse technology and water applications in markets, where they see the scarcity or there is a big consent. So we've seen a lot of traction there both with customers individually and also aggregation of customers through this technique.
Energy with the model like an envelope.
Internationally, we see a similar trend it's been something we've seen for a while we were continuing to develop better relationships in the middle East and starting to in Latin America and also starting to work through some ideas off shore of how we can bring the similar technology, but in a bigger scale.
The announcement that we made this quarter was actually replicating what the customer had but through a different technology that brings them better sabins better cost efficiency cleaner environmental.
So this is actually a retrofit this is a customer that's been operate and for some time over a million barrels of water a day, a utilizing a certain technology that they found wasn't something that they wanted to continue with and we came in and provided some trials show them, our technology and we're actually retrofit in a facility. This already went up.
Running and we feel that this technology has the capabilities to do both just that both brownfield, where we can retrofit technology. This already out there and also greenfield to help our customers be more efficient and ultimately provide them better savings and so so we feel that were right at the other at a place where this technology is.
Being embraced.
It takes a while to get this technology accepted into the industry, but we feel with the the progress we've made in the focus that we're going to bring now with additional leadership, where we're excited about where you can go and so hopefully that gives you a little bit of a sense of what we're working on.
Yes, that's really interesting well that's that's all from me I'll turn it back I appreciate the update guys.
Thanks Scott.
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Your next question comes from Tim wanted shallow from Altacorp capital. Please go ahead.
Hey, good morning, everyone.
Just a few questions for me here you had alluded to the fact that product.
Sales bookings have continued to be a little bit sluggish in the fourth quarter I'm. Just wondering if you get some context around that and what conversations with your customers are like.
All right do you expect probably sales to be flat up down from the third quarter.
Yeah. Tim this is good each having a lot of good robust conversations with customers on stock that saying, yes. This year, we've seen a pump very positive lift from our international side of the business and that continues to be a factor and we expect our debt to continue in the fourth quarter as well on state side the.
Discussions are really driven by this whole notion of five capital to screen, that's been driving the conversations from a customer standpoint, so really what customers are doing is using the excess capacity. That's in the system right now to absorb that incremental demand. We're also seeing producers really limit their capital spending.
To maintain production if you will be just also causing a little bit of a damper on especially new plant additions, having said that give as we pointed out we believe at some point in time to stay can make capacities increase and more incremental production does come on because we do see that production growing there will be a few projects that will.
That will get Greenlighted next year.
But it's not going to be to the level that we saw back in 17 and 18 for sure so still be a bit muted.
Having said that look we continue to work very closely with all of our customers and have good visibility into their pipelines as well listen to what did expected time frames are.
And then as those opportunities develop will continue to provide them to support they need.
Okay.
[noise] in terms of the stateside aspect I have you seen a material change inquiry levels.
Mentioned at the time, the second quarter the inquiry levels has actually grown.
But you know conversions are still weak.
Yeah. So you know.
Yes, so I think and good question look we did see that uptick as we mentioned in the second quarter. It's remained relatively stable or flat a lot of it is also to a certain extent customers revalidating and understanding different options. So you're looking for example on on processing plants different sizing.
Options different methodologies, you know what they want to do with detain et cetera. So there's more often optionality set that customers are discussing but we havent seen a fundamental shift in the overall demand profile.
Okay.
Next on for me just round low water business isn't as a business shifts away from a U.S. compression fabrication and towards.
Power generation water things of this nature, what do you expect the margin differential between those businesses would be.
On the product sales business.
Yes, so sitting in my prepared remarks, I talked about a company that has EBITDA margins over 20% and so you could you can kind of back into that we don't have.
Today the.
Explicit guidelines on product margins on a component by level, but but needless to say compression was dilutive and still is dilutive to the overall business and water is accretive to the overall business and so I think it's a good thing as you will see as we continue to build out the water business and power that that way.
We'll have a strong positive impact on the overall company and so.
Hopefully that will help.
Okay, Yeah, well that's helpful. And then are you able to provide any.
Contacts or quantify what you expect the range and outcomes could be if the eagle contractor or converted product sales in the fourth quarter in terms of upside in the fourth quarter, two product sales and downside to eagle going for.
Yes, so Tim its krish again.
I did overall level sort of looking at the to blending of all of this it's a fairly wide range given that will in the discussions right now, but it's about the restricted for about 5% to 10% as kind of the boundary limit style I'll start and fatality restocking.
Annual correct.
On an annual basis on equal segment alone.
Right, Okay and then.
As a one time in the fourth quarter would you expect that range would be if they were converted.
But we're not going to talk about that at this point, that's still a discussion thats ongoing with customers.
Okay Fair enough you expect that if these are converted that you had a press release those before the fourth quarter, though just kind of fourth quarter.
Tim This is Blake that would probably just cannot know fourth quarter earnings release.
Okay. Thanks, so much for your time today.
Thank you we have reached the end of the question answer session and I will now turn the call a that's miss to Andrew Wang for closing remarks.
Thanks, everyone for dialing in listening in today, we look forward to update new at the end of the fourth quarter and have a good day. Thanks a lot.
Okay.
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