Q1 2020 Earnings Call
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Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
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Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2020, Interflex earnings Conference call.
This time, all participant lines are in listen only mode.
After the speakers presentation, there will be a question and answer session.
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Please be advised of today's conference maybe recorded.
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I'd now like to end the conference over to your Speaker today Mr. seven Ellie Director Investor Relations. Please go ahead Sir.
Thanks for joining us.
Here with me virtually Aramark Rossiter, Interflex as President and Chief Executive Officer, Sungy. Additionally, Interflex as senior Vice President and Chief Financial Officer, and Ben Park, Interflex, Vice President corporate controller.
During this call will be providing our financial results for the three months ended March 30, Onest 2020.
Commentary on the performance of our three business segments at a summary of our financial position.
Today's discussion will include forward looking statements regarding interflex is expectations for future performance and business prospects.
Forward looking information involves risks and uncertainties and the stated expectations could differ materially from actual results or performance.
Please see the advisory comments within our news release, Mdna and other <unk> regulatory filings for more information on forward looking statements and associated risk factors, including those related to potential impacts the cobot 19 pandemic.
Approximately one hour following the completion of this call recording will be available on our website under the Investor section.
During this call unless otherwise stated we'll be referring to the three months ended March 30, Onest 2020, compared to the same period of 2019.
We'll proceed on the basis that you've all taking the opportunity to read yesterday's press release.
Ill now turn the call over to Mark.
Thanks, Stephen and good morning, everyone.
Before discussing the quarter, let's see first thank enerplus employees, who have worked tirelessly to making a high level of operational integrity for both enerplus lets customers.
Saturday resilience performance and positivity in an otherwise challenging environment.
Our quarters, all flexion of their stride.
And as much as first quarter results reflected the continued execution of high margin engineered systems projects in our backlog and grown contributions from our asset ownership platform.
Like most others in the sector.
Because the Nike bad debt is pretty much uncertainty in the market.
Thank you have all employees is of Paramount importance.
Happy to report that we've yet to experience a co lead Nike in case, among all of our employees who operate across 17 countries.
Each of our facilities and assets under contract continued offering disruption.
We remain vigilant in or health and safety efforts.
We've implemented several business continuity measures to mitigate potential impacts of corporate banking.
Including social distancing measures to dilute personnel density hard shops and in the field implemented additional cleaning measures for communal spaces.
Institute as additional E protocols.
Quite uncertain equal to participate in temperature checks and help questionnaires and installed additional handwashing stations.
Office employees, we've also implemented work from home strategies to minimize physical presence in our offices.
Probably the challenge. We're currently seeing is around making unrestricted access she active construction sites, particularly within geographies, where governmental restrictions on women are impacting site access.
We have two sites in Canada that are still progressing the domain relatively unaffected.
But we are more closely monitoring our international boom sites that under construction.
Work started in Argentina was restricted for a few weeks, we're now back on site.
Our access restrictions occurred at one of our Brazilian sites, which has slowed our progress, but which we continue to advance most impact it has been a site in the middle East as a result of restrictions on in country logistics and trucking.
Overall, the three previously announced two projects that we anticipated would commence operations through to mid Twentytwenty.
Our now more likely to commence operations in mid to late 2020 provided at no additional restrictions are close.
In addition to covert Nike in the sector has also impacted by the severe downturn in oil prices.
Typically our business slides modest price action and associated impacts that to drill bit by 46 months.
You are still very early stages of assessing adverse impacts from this down Jeff.
That said.
While we had a relatively healthy first quarter. We've seen continued pressure on engineered systems business in North America.
Where the big pipeline is not as strong as what we were seeing two months ago.
Earlier in here, we were cautiously optimistic that we've seen improvement in bookings as the year progress, but thats something that has changed in lock step with current macro picture for energy.
As a result, we expect engineered system in 10 left to be very quiet, while the USA will also be slow but somewhat better.
Ultimately engineered systems is a business that is tied to the capex of our customers so with reductions across the space. We expect this business to be question for at least or maybe this year.
No too and until we see an improving supply and demand picture for oil and gas.
[noise] grew our global asset ownership platform revenues and utilization were strong during the quarter and we entered twentytwenty with a healthy demand indicators for the U.S. the rest of world regions.
In the USA clients demand signals were tempered as a macro picture deteriorated.
Consequently, we anticipate a reduction in that demand and halted capital spending appropriately.
This decision prioritize balance sheet strength during your time with great uncertainty.
The macro picture remains uncertain.
Our teams have been actively engaging with customers to gain visibility on how seat utilization might change going forward.
The current commodity price environment.
Rentals, we'll see pressure as oil wells are shut in and associated gas volumes are reduced.
The positive is not a rental fleet is mostly fungible and can be directed towards gas plays and cost advantaged shale basins throughout the rest and the rest of world regions.
Yes, and any other different set of drivers.
And last time, many of our natural gas projects and assets are focused on domestic electricity demand and are not directly correlated to Brent or W are T I could pricing.
Similarly, middle East projects are developed by customers, mostly analyses analyses.
Specifically to increase the role of natural gas in regional electricity generation.
Clients continue to indicate that our natural gas projects and assets are critical to their overall development plans.
The investments were made in our asset ownership platform, our Sal and we'll continue adding stability and predictability to our financial profile.
At the current macro picture has driven the industry into uncharted waters, and we would be remiss to speculate as to what the ultimate ramifications to a rental business could be.
We want to stay focused efforts on what we can control.
Taking action to protect returns on investments maintaining customer relationships, presumably utilization and keep our customers assets performing as promised.
All of which can assist in mitigating pressure to our asset ownership business.
Aftermarket service any unnecessary card has performed well for the past several quarters. It has been resilient in the early stages of the pandemic.
Hey, messes that offsets oriented business.
And we'll be most impacted by production shut ins.
Well, just slowing equipment needs to be service to run reliably we.
We have service personnel in all major basins in North America, and all other operating regions globally.
This diversification should provide defensiveness through the remainder here.
The current operating environment has the challenges and likes to which you industry participants of C.
It will be a difficult year for the engineered systems business.
And the demand destruction for crude oil has created uncertainties for other and reflects products and services.
We expect 2020 financial performance to be underpinned by our asset ownership and M.S. businesses.
Both of which may see some pressure.
Well, which we anticipate will carry through this downturn.
I will focus is to maintain a defensive balance sheet as we navigate the cycle.
We went several analyses to plan for a broad range of industry activity.
We'll continue to monitor and they cost reduction decisions accordingly.
The proactive in this regard should keep as well position to whether this downturn.
Exceeded the industry recovers.
I'll now turn things over to Songy to review our financial results.
Thanks Mark.
Fourth quarter revenue of 366 million decrease versus the prior year period due to lower engineered systems revenue on the weaker booking through 2019 and lower services revenue on decreased activity in part due.
This decrease was partially offset by increased contribution from our drilling contract compression fleet.
Our U.S. contract compression fleet totals approximately 325000 horsepower with an 87% utilization rate at March 31st 2020, compared to approximately 310000 horsepower within 87% utilization rate at December 31st 2019.
Although revenues decreased gross margins increased over the comparative quarter, driven primarily by high margin engineered systems projects that were booked near the end of 2018.
Certain of these projects were completed during the quarter well change orders have extended the project scope and duration for which others will contribute to revenue.
We expect to complete these high margin projects during the second quarter.
Quarterly consolidated gross margins of 26% represent the highest quarterly gross margins in the company's history.
But again as these high margin projects are completed in 2020 gross margins from are engineered systems business will decrease and margin contribution from our other product lines will make up a larger portion of total gross margin.
As Mark mentioned engineered systems bookings activity is anticipated to be slow for the remainder of 2020, well the market navigate the impact of cobot 19, and global demand destruction for oil and gas products.
Selling general and administrative expenses decreased over the comparative quarter due to lower compensation costs associated with the share based compensation.
Were partially offset by unfavorable foreign exchange movements.
We remain vigilant in controlling costs across the platform to align with expected activity levels.
Cost savings initiatives include a combination of workforce reductions.
Temporary leave of absence.
On paid time off plan shop, shutdowns and reduced travel and other discretionary budget.
EBIT increased versus the comparative period.
As a result of the increase gross margin and lower as DNA costs, while adjusted EBITDA, including the impact from share based compensation was consistent with 2019.
Growth of our asset ownership platform continued in the quarter with rental revenues of approximately 54 million, representing a 12% increase over the comparative quarter.
During the quarter 63 million of capital was deployed towards U.S. rental fleet and international boom projects.
At an approximately 60 40 split.
As described in our operational update during the quarter. We're committed to 2020 gross capital expenditures of approximately 90 million to fulfill obligations for the completion of five and 10 year boom contract you know rest of World segment and for our USA contract compression fleet.
With the capital plan being front loaded in the first half of 2020.
Maintenance capex across our platform is estimated to be approximately 15 million for 2020.
Exact values for expenditures will depend on foreign exchange rates and final project scope.
Working capital in the quarter saw net increase of 44 million since December 30 Onest.
We entered 2020 with what appeared to be a robust backdrop for U.S. contract compression and an improving view of the engineered systems order book.
But we had since load our supply chain transactions to align with current market conditions.
Inventory levels increase during the quarter due to purchases of major equipment with long lead times, which were ordered in prior period and delivered during the first quarter.
The company expects inventories to peak in Q1.
And we'll realize these goods into engineered systems projects and new contract compression units as demand for these products return.
Notably these items are non perishable and fungible across our engineered systems and rental offering so we can consume them in either business line globally.
In addition to inventory receivables become a more salient topic in this environment.
While it's still early days, we have not seen material challenges in our pace of collections and our local finance teams and treasury groups are engaging in weekly updates to ensure that we're staying on top of it.
In addition, our assets are spread across the global footprint and across multiple basins, which assists in mitigating counterparty credit risk that can result from customer concentration.
While the current environment may stretch a are.
In the coming months, we do ultimately expect harvest cash out of a are as the year progressed.
As Mark mentioned, the covert 19 situation has created some operational challenges for inflate construction projects as a result of government instituted restrictions on movement in and out of countries and or Worksite.
The ramifications of these restrictions have resulted in schedule slippages for the expected start date three of our previously announced boom project.
Which in our last earnings call, we anticipated would commence operations and begin generating revenues in mid Twentytwenty.
That timing has been pushed out and we expect the respective boom projects to begin generating revenue by mid to late 2020.
The most significant of these three boom projects is located in the middle East.
Where government restrictions on access to site have resulted in transportation delays to and from site.
We fully expect that work will continue as expected once these restrictions or relax.
For other rental assets, namely the U.S. contract compression fleet, we do expect some softness to hit this segment as the year progressive.
Driven by a reduction in produce oil and gas volumes.
Prolonged commodity price weakness is likely to reduced demand for interflex is products and services.
Ultimately, we are watching fleet utilizations closely and working with customers as best we can define mutually agreeable arrangement to maximize our interest and theirs.
The majority of our U.S. rental fleet is located within the Permian Basin.
Where we have maintained a presence into since 2005.
We believe in the long term potential of the Permian and anticipate that it will be a significant part of our operating footprint going forward.
Demand for Interflex is products outside of North America is more productive and within North America, and we continue to assess opportunities that would be accretive to our asset ownership platform.
From a capital allocation perspective, our priorities in 2020 are focused on two area.
Completing those capital expenditures as required fulfill obligation related to our organic rental fleet addition.
And preserving balance sheet strength to whether the current downturn.
The latter of which was reflected in our proactive dividend reduction of 83%.
Interflex his board will continue to evaluate dividend payment.
On a quarterly basis based on the availability of cash flow and anticipated market condition.
Yesterday, declaring a two cents per share dividend to be paid on July 2nd 2020.
With respect to liquidity, we exited the quarter at net debt to EBITDA of 1.2 times, which represents a slight increase from our net debt position a onetime EBITDA at December 30 Onest.
The $70 million increase in net debt is attributed attributable to first foreign exchange fluctuations between U.S. dollar in Canadian dollar, where the strengthening U.S. dollar during the quarter contributed to approximately 30% of this increase.
And second previously mentioned expenditures on inventory and Capex commitments, which again are front loaded for the year and we'll see a significant slowing as the year progress.
With available liquidity of 530 million our debt position remains healthy.
And leaves us flexibility to manage the business through the current downturn.
This completes the formal component of the webcast additional details can be found in our may 7th press release.
We will now be happy to take any questions.
As a reminder, ladies and gentlemen, if he would like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
Again that is star then one I'd like to ask a question at this time.
Please standby only compound acuity roster.
My first question comes from Great Coleman with National Bank Financial your line is that we'll see.
Hi, guys. Congrats on a solid and looking to start to the year I know, it's going to change a little bit but.
Yes, we see some good numbers in Q1.
I wanted to start by by focusing on the engineered systems bookings or not but not side of the business. I was wondering if you could give us a little bit more detail on the the cadence of the bookings have you saw in the quarter.
155 million was more than we were expecting it was actually an uptick sequentially.
You know in your prepared remarks, you talked about how you entered the you're optimistic and that's kind of trailed off as we've seen the impact of coated and demand destruction come through it was that the sort of thing where those bookings were very much the beginning of the quarter and we should probably look for bookings to slow aggressively from that level into Q2 and beyond or is that sort of a reasonable level.
For us to be thinking about in the next couple quarters, which was quite frankly better than we were expecting Q1.
Hey, Chris This is mark Rossiter speaking thanks for the question.
The the first quarter January February was good and wants to covert situation and not surprisingly there was a real slowdown in and purchase orders.
And I would say that our pipeline the quality of the president pipeline for new orders going forward softened after the covert pandemic started referencing middlemarch.
Hi, I think anybody thats looking at the macro in North America would be.
Expecting the rest of year to be stock on engineered systems and Thats what were preparing for it.
Got it Ah that's good color and you touched on geography that would just started leading to my next part.
You give us nice.
Nice geographic Segmentations for the bookings.
I think we saw a 100 million in the U.S.
And then the balance was split between sort of rest of the world in Canada somewhat evenly in in historic quarters bookings.
Location like the 100 million in the U.S. is where its manufactured but not necessarily end market is that 100 million definitely a U.S. focus.
Market, there or as far as a component of that actually targeting the rest of the world just looking for that color.
Well, we don't provide that that level of detail for competitive purposes.
The man I would say in the first quarter, we definitely sorry third the North American activity.
January February like I said after four quarters of of relatively low bookings in North America.
So we were not going to give you details and how much is going to do you have how much is going internationally, but it was it was sort of.
A little bit of or the weakening in the in the North American land market on for new orders from the first quarter.
Got it no worries, Okay, and then Sanjay you started talking about the working capital there and it sounds like.
It sounds like.
Thanks for your comments, you're pointing to a working capital release, beginning in Q2 I'm just wondering in my reading the tea leaves correctly.
Yeah. That's its a good question, Greg I think you know that certainly Oh, you know what a lot of the external model. So I believe including your model is predicting and.
We've got reasonably that that's.
A good way to think about it in a good way to model. It we haven't seen any.
Real concerns yet in terms of customers that are you know that are that are going to extend.
Payments or you know be challenge today, I mean, we continue to watch those very closely.
But by and large yes, we are we are anticipating through the year to see some monetization of working capital.
And just in terms of the magnitude I know, what's the dynamic situation, there and I don't want to hold you to a specific number however, the current working Sir capital surplus is a record high 360 million. When we look at when we look at the company's history sort of been between $120 million to $160 million of working capital surplus.
Understanding this is of course I would just sort of the Delta 200 million understanding of course. It. This is a unique time, you know inventories probably aren't gonna come down that much but can you give us an idea as to what your target working capital surplus would be over over the balance of the year. So we can have some kind of idea of how much of that working capital will be released and can go towards that.
That production.
Yeah, it's its a tough thing for us to give guidance on right a lot of the I'm, especially in this industry setting is tough to predict and so I think we're we're just not comfortable kind of putting out guidance on on that number right now.
I would say qualitatively I think your statement is correctly. We you know we actually do you anticipate that we'll have more luck will be a our ATP side of working capital then we will with inventory and I think.
It really is you know what we're gonna have to see a turnaround in the engineered systems order book.
Before I think we had a chance of.
Significantly digging into inventory and monetizing now.
Okay. That's good color said you. Thank you and then last one from me before I turn it back just on the rental market and shut in risk can you talk about how that's manifesting now as we're in April here you know, we've got 2.2 billion cubic feet a day shut in the eye is talking about that ramping to 11 billion in the U.S., what what kind of what kind of return.
Have you seen in your rental market now are you likely to move in line with the U.S. shutting average or is there a reason that your shut ins might your returns might be either higher or lower than than 10 10, the than the average there based on your side just progression packages and the geographic location.
Hey, Greg This is mark we're going to be very careful to not predict utilizations going forward, it's the dynamic situation.
Our fleet is relatively small and so I would caution against any direct correlation between big picture macro impact in our particular we.
We did customers.
In basins that our challenge to different degrees and we'll just have to see how that shakes out.
Yeah, that's a really dollars part mark.
Just talking about what we're currently seeing now can you give us not forecasting at all but can you talk about sort of today, we're seeing a a low single digit percentage of U.S. natural gas shut in.
Because your fleet is so small that percentage could be wildly different from what you're saying that's your point and is it or is that at least at the moment reasonably close to two the to the macro numbers.
Hi, Greg you just have to wait for Q2 numbers to come out on that front it'd be little bit too dangerous breast is start giving they indications of realization like we have to be quite strict I'm, just saying, we don't provide guidance on that and you will know one Q2 numbers come out.
I understood I'll give it one more shot which is some of your peers have talked about sort of 6% to 10% decline in a pretty and I'm. Just wondering when you look at your peers commentary, where are you surprised by that commentary or not surprised by it.
Well I would say that if we can lever appears out of it for a moment when we looked at.
The last couple of big cycles in the rentals.
Which we looked at very closely before we invested in this business and decided to invest in it as the line specifically lower 40, United States.
We saw pretty clearly where utilization when.
16, and again during the mortgage crisis and if those are the downside cases in the rental thesis than we were comfortable with that.
You know I, obviously, you read the quarterly results of our of our peers or companies that will be buyer and the numbers that they're talking about in their prediction very much look back to 15 16 as for example, but very into you know, we really have to point out that every downturn is different.
And the downturn in this situation is different than it was in 15, and so difficult to drive direct conclusion.
What I can tell you you know and in our investors is.
We've spent a lot of time stress testing our business with a variety of.
Potential downside cases, and we're comfortable with our investment we're comfortable with our ability to manage through and to be a strong company on the back end of it.
Hi, so that I will pass it back.
As a reminder, ladies and gentlemen, if he would like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telethon.
Our next question comes from Keith Mckey with RBC capital markets. Your line is now open.
Good morning, Thanks for taking my questions and hope everybody is doing well.
Just first question here for you guys.
Talking about your medium term goals as a 10% EBIT margin was 10% to annual growth in recurring revenue you know this year, obviously going to be different. So just what are your targets for managing this year are you thinking about the business in terms of free cash flow neutrality do you think thats achievable or how are you thinking.
About getting through 2020.
Yes, thanks for the question Keith.
I think you're you're right like its you know the growth metrics, especially are things that I think we really need to put on the shelf for a bit right I think at just appropriate given the severity of this downturn that we focus on balance sheet strength.
And and that's really how were reprioritizing our goal.
No I would say that a free cash flow neutrality I believe it is absolutely possible and you know a lot of that is going to depend on what Greg was asking us about with it.
Monetizing our working capital and I think as long as we do a decent job of that I think we can we can certainly manage within the free cash flow neutrality.
Got it makes sense. Thank you for that and last question for me is just.
In the backlog just can you give us an idea maybe of the split between projects that are underway versus projects that have yet to be started.
Sorry can you can you repeat that one.
Yes, so I just just curious about the backlog you know roughly 400 million is a lot of that you know projects that maybe halfway through completion or partially through completion versus projects that are in the queue to be delivered in haven't been necessarily started yet.
Yeah, I think Thats fair statement, I think I'm, a big a big chunk of our.
Of our backlog is certainly stuff that's in flight.
Okay got it. Thanks, that's it for me I'll turn it back.
We have a follow up question from the line of Greg, calling with National Bank Financial Your line is now open.
Sorry, I found more frustrating questions I'm.
Just on on the on the Capex program just wanted some clarity here you call. It 90 million girl 15 million maintenance kind of weighted it's got 67 million in Q1, I just want to make sure that I'm not nothing that's one of the you know simple math is 38 million to be spend the rest of the year, except probably mostly in Q2 or is it kind of weighted throughout the rest of the year.
It's its weighted throughout the year, Greg I think you know the the X factor here for US is the delays on some of the international boom project and so.
You know we were anticipating that those projects would be online in the first half of 2020 and you know we're managing.
Access to those sites, we still feel really good about all all three of those projects, but probably coming online.
Second half of 2020 as opposed to first half of 2020 so.
When that Capex gets realized is a little bit of a function of what timeline were on on those projects.
Got it the projects you were mentioning in your earlier comments.
Yes.
And then lastly from me and related to the Capex you know the 63 million in the quarter was deployed towards rentals.
This is getting a little cute here, but can you give us idea of the cadence during the quarter to that cat losses at the beginning and we saw the full benefit of that capital during the quarter.
Was it at the very ended the quarter and we didn't see any country contribution from you does those rentals went to the market or sort of evenly weighted just trying to appeal for the I guess lift from that capitalize it spend deployed in Q1.
Yeah.
No I.
I'm not even sure so I know that it to that level of detail. Greg I think it was pretty is pretty flat and you know pretty ratable across the quarter and again I guess I would point to you know that Capex spend was you know again split pretty equally rest of world versus the United States rental fleet.
And so the the rest of World stuff was definitely you know just on a schedule and and so I.
I think it really comes down to digging into the U.S. numbers and.
You know just just got feel they feel pretty they felt pretty ratable to me, but honestly I'd have to dig into detailed are really to really I get you didn't answer.
No worries will follow up offline that was that for my follow ups. Thank you.
I'm showing no further questions in queue at this time I'd like to turn the call back to Mr. Rosner for closing remarks.
Hi, since there are no further questions I'd like thank you once again for joining them a call I'd like to point out that on the 75th anniversary of victory Europe day I'd like to thank all those employees, who have family members that were part of the Allied forces hearing that.
That time, just thank you for your service.
In all their employees and clients that have family members that are currently serving in the armed forces.
Thank you to them for their service as well.
Oh, we look forward to give you our second quarter results in August have good weekend.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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