Q1 2020 Earnings Call
Greetings and welcome to the Exterran Corporation first quarter 2020 earnings call. At this time, all participants are in listen only mode.
A question answer session will follow a formal presentation if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note that this conference is being recorded.
I'll now turn the conference over to your host Blake Hancock, Vice President of Investor Relations. Thank you you may begin.
Good morning, and welcome to Exterran Corporation first quarter 2020 conference call with me today, our Exterran, President and Chief Executive Officer easier way.
With BARDA experience Chief Financial Officer agree Saligram, Exterran, Chief operating officer.
During this conference call, we may make statements regarding future expectations about the company's business management's plans for future operations or similar matters.
These statements are considered forward looking statements within the meaning of the U.S. securities laws and speak only as of the date this call.
Companies actual results could differ materially due to several important factors, including a 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. The company provides a regular reconciliation of these measures <unk> earnings press release issued earlier today and a presentation located in the Investor Relations portion of the company's website with that I'll now turn the call over to Andrew.
Thanks, Blake and good morning, everyone and thanks for joining the call today first I will discuss our organizational response to the Kobin 19 content pandemic, then briefly talk about the first quarter on our business outlook for the remainder of the year.
Starting with a covert 19 and how the organization has responded I want to say a big Thank you to all of our employees around the world as where safely navigating these unique I'm trying times most of our teams have been working remotely and our ability to continue to run our operations efficiently is a testament to the commitment.
And dedication of our organization into our customers.
I'd also like to express our gratitude and admiration for the frontline workers first responders medical professionals in various health care agencies and bodies that are leading the athletes daily on a global basis.
And finally during this time, we're gratified to see our relationships with all longstanding partners customers supplies and other stakeholders involved positively have we as we have transitioned to virtual collaboration.
As the Koby pandemic became more prevalent in February we put in place all global crisis management team that meets on a daily basis.
This has allowed us to act swiftly to ensure the safety of our employees contractors and customers to this pandemic.
We started planning early in the quarter on scenarios for remote working and we ran a test trials long before countries began implementing work from home notice is.
This enabled us to keep a high level of efficiency working remotely our biggest challenge is proving to be supply chain logistics were moving people and parts in lot of countries with travel restrictions has caused some delays on executing daily activities.
I'm happy to report that all many years focusing on local talent development at high levels of regionally based resources has allowed us to keep the vast majority of our operating facilities running close to normal levels.
The first quarter was a strong quarter for the company considering the challenges we all faced in March as we delivered EBITDA as adjusted of 34 million, which was at the high end of our guidance range. We had a strong commercial start to the year with over 450 million of product bookings and over 200 million of bookings within all contract operate.
Patient segment.
Sizable booking within the aftermarket services.
Operating cash flow for the quarter was 9.4 million and we ended the quarter with over 430 million and liquidity.
Clearly all of our customers are facing the same challenges around the collapse in all price and demand destruction, especially customized producing associated gas and while our business is strongly tied to natural gas. The overall environment is challenging we continue to have daily dialogue with all customers on how weak.
And help them navigate these challenging times.
Despite the volatile environment, our strong commercial stock for the year provides us greater visibility through early 2022.
Last year, we took swift an immediate actions to take cost out of the organization as we saw order slow and especially in the U.S.
Looking back we guided on our fourth quarter 2018 conference call for asked today to be between 180 585 million for the full year 2019, and it came in around 160 million. We guided this year is asked you day 240 250 million.
On our fourth quarter coal and guidance for 2020 is now between 130, I'm 140 million.
We're also moving quickly on activity based cost at our manufacturing facilities, specifically here in the U.S. as we don't foresee a rebound in U.S. orders over the next nine to 12 months.
We have already taken the appropriate actions and continue to rightsize headcount.
Our international factories are busy executing the awards booked over the last few quarters I'm. We're currently focused on delivering productivity safely.
Additionally, we're also driving capital efficiency improvements to the maximum extend where possible last year, our maintenance and other capex was 13 million on for this year, we now expect that to be down around 30% to $20 million.
Our growth Capex is committed to eco deals and we continue to look at ways to drive further efficiencies.
Although we came into Twentytwenty with known project awards, pending and improve and expectations for pockets of our business in North America on the international markets, the dislocations, resulting from the pandemic and the rapid decline in oil prices impacting overall sentiment have all did those.
Citations.
All contracted nature strong tied to natural gas and commercial successes in the fourth first quarter allows us to continue to have greater visibility than most of the industry, albeit less clear dining was a few months ago.
For Twentytwenty, our adjusted EBITDA guidance is now between 120 at 140 million. We have built a few key points into these assumptions first no new sizable product orders for the rest of the year.
Second improvements in travel restrictions and supply chain activities during the second half of the year.
Third we see the need for continued remote collaboration with customers and on time execution on the key project wins, we booked over the past several quarters.
Lastly, a slowly improved macro economic conditions as it pertains to commodity prices and exchange rates.
Despite the current macro challenges our leverage at two times 2.4 times liquidity exceeding 430 million at the end of the quota.
And our next debt maturity being the revolver not coming due until 2023 gives us great confidence that we will whether he's trying times they come out of this a stronger company.
The journey that we have been on over the past couple of years transitioning from a products company to a contracted business is beginning to habits benefit given our ability to forecast our operations better than many.
We have been progressing to a completed integrated systems and process solutions company with higher margins high returns and less cyclical business.
Longer term contracted nature of all three of our segments provide a great platform to launch from with environmentally sustainable solutions compared to alternative choices our customers may have.
While we have not formally announced the outcome of our North America compression business review, largely driven by the volatility and uncertainty in the markets. The past several months I can tell you, but the business remains non core to the organization and we will continue to work in parallel on either a sale.
Yes, that's all complete wind down over the coming months, we will update you on progress on the quarter to earning call.
While there's still a lot of uncertainty regarding the duration of cobot impact and supply demand challenges within the energy industry, we have great confidence that our global footprint and strategy will serve us well the longer term and stable nature of the eco business and portions of the mass business pro.
Slide recurring revenue streams that many within energy I'm not afforded.
Combined with our solid margins ample liquidity and improve in return characteristics. We believe we are well positioned to exceed the expectations of our employees investors and our customers.
With that I'll now turn it over to garish.
Oh.
Thanks, Andrew I.
I would like to stock with the commercial successes that we had during the quarter, but not only provides us additional backlog visibility for the coming years, but also exemplified the mission criticality of pork products and services.
Despite the obvious challenges, we saw very significant rents across all of our reported segments at an all of our regions showcasing the power of the one exterran philosophy.
The continued commercial intensity, if our regional teams and the value of the integrated business model.
As we highlighted off fourth quarter call. We want me project for a fully integrated gas processing facility in the middle East.
Value in excess of $300 million, along with a five year operations and maintenance services agreement.
While this project at the strategic win in its own right. We're also excited by the potential for future expansions that this customer ambitions.
Got off to a stalled stock on execution despite the challenging.
Our engineering teams are leveraging technology tools and setting the standard for virtual workplace collaboration to ensure that the initial design based is robust and on track.
We have also continued to drive strong interaction with that customer key vendors and partners to remote video and collaboration technologies.
One supply chain logistical routes and sports begin to fully reopened our teams are ensuring that we are progressing on this and other projects to the maximum extent possible.
We expect this project, but do you really contribute to revenue and margins starting in the second half of this year and through the beginning of 2022 with ongoing contributions complemented by the M.S. services after commissioning.
In equal we had an important success in Latin America, maybe signed an eight year extension, but one of our key customers worth approximately a $150 million.
We have been operating essentially gas compression infrastructure in the region over several decades and this win is a great demonstration of our strong customer relationships. The resiliency of the eco renewal paradigm and our operational excellence and critical midstream infrastructure.
Lastly in M.S., we continue to develop traction on a global basis.
How did that theme in the Asia Pacific region.
While we have seen the delay on the more transactional services due to logistical challenges posed by Cobot 19, we were awarded a significant long term Ben the Asia Pacific region in Q1.
We won a five year contract for maintenance services, but then I, you'll see that builds on the services, we already for white to them.
It's a great example, again of the stickiness with our customer relationships as well as a demonstration of the ongoing value will be per whitewave customers through operational excellence.
The overall contract is worked close to $25 million, which is a significant long term commitment in this segment.
Well, we do see the current situation, having a significant negative impact on demand in the short to mid dumb. These successes give us a strong backlog to execute while we continue to develop longer term projects.
As Andrew mentioned, we are engaging and constructive and collaborative dialogue with many customers globally to help them navigate the cotton deadline.
Well it may be natural to assume that that's a euphemism for giving discounts are strong contracts and long term relationships truly allow us to centered discussions on value creation, they're both parties can benefit.
As we have highlighted previously are equal backlog provides stability of revenue and cash flows over the long term. This view is built on a foundation a strong contracts that protect us to commodity cycles at the same time I've always believed in the adoption that we succeed when a customer so successful.
As a result, while there may not be a contractual basis, we are making a conscious decision to support customers and ensure that we grew our mutual longer term benefit.
But it would be helpful to give you a couple of examples of how we are collaborating with customers today to provide some perspective on what this means.
We have an eco customer where we operate multiple gas krantz due to production cuts the customers looking to reduce opex and asking how we can help rather than a simplistic price reduction what we're working with them on is the solution that I see potential elements.
One I didn't get pretreatment solution that will save them millions annually.
Second changing the scope of services that would allow some cost reduction and third given the characteristics of the field an extension of the contract beyond its gotten theater at today's rates.
The next itself could be a scenario, where the customer does save money on opex in totality and be preserve our margin right why locking in a longer term, thereby improving their done on capital.
As another example, we have a customer but the project that is mostly complete on Iran.
It's facing significant delays on the on site work and may need to be delayed by up to two years. We're working out in the range went with the customer to provide options for storage graduation, and ancillary services. While this my belief come up our final billing milestones and might cause it shark don't change did the revenue and mark.
Due to change at school.
It provides incremental sources for revenue and a strong the longer term cash flow.
In all of the cases, where we're going to these types of discussions we are following these key principles first.
Ensuring the creditworthiness and long term stability of the customer it'd be very confident in their continued liability and success.
Second optimizing the balance between EBITDA and Kasperek step.
Third being there and principled and I'd negotiations and finally number floor, recognizing and leveraging the strategic relationships, we have and especially where they can lead to future success for both extension and our customer.
Lastly, I'd like to go to our view of global demand that activity recognizing that it does a very fluid environment.
The North American market, as one where demand signal to have significantly dampened over the past couple of months.
Given the pressures on producers, we're not expecting to see any significant demand in this region over the next six to nine months.
Well, we can do you used to be a strong believer in the U.S. shale story and the importance of gas in the energy value chain.
We think the industry will need time to stabilize and consolidate before launching your projects.
Further the days of incremental processing capacity of two to three Bcf per year may not recur for sometime.
We had therefore working to establish new applications, where we can bring that expertise to bear.
Through our strategic growth plan process, we are analyzing the broad trends at signals and determining opportunities that fit in well, but that existing capability set.
In the meantime, our strong international backlog allows us to leverage our expertise in the U.S. to work on those projects and we are maintaining critical operating capacity in engineering manufacturing and sourcing through the cycle I.
Doable capability, but common processes and tools allows us to execute more effectively at seamlessly despite the disruptions from corporate banking.
In Latin America, the effects of the current environment have been particularly hard on the garden season several countries.
We have explained in prior calls how we manage this and while there is a top line impact and risk our margins are protected.
Argentina, especially continues to be in one country for us as they navigate the potential default.
The ramifications of that there'll be significant in terms of both capital controls as well if the oil and gas policy, which will have a significant betting on the development of welcome left though.
The middle East continues to be the region of the highest activity and we have seen new project tenders and inquiries through this period, we remain enthusiastic about our prospects in this region and look forward to building on our prior successes.
Well, there maybe a delayed due to the production cuts and current environment on actual project awards the level of activity is encouraging.
Finally in Asia Pacific, we're seeing a rebound if activity levels from the first quarter in a couple of countries, but don't see a material shift on new projects from the slow pace at the last couple of years.
Our focus on the M.S. in this region has been paying off and we had also positioned well for new product orders building on the successes of 2019.
To wrap up clearly the world is very different today relative to our last call.
Our business is not immune to the global impact of either the pandemic all the commodity price shops, we believe me to being well positioned in the long though.
A leveraged in natural gas and strong contracted backlog gives us greater visibility and resiliency into our future compared to many.
But that I will now turn it over to Dave.
Thanks, Chris the first quarter reflected another solid performance with EBITDA as adjusted of 33.8 million on revenue of 210 million.
Operating cash flow from continuing operations was 9.4 million.
The U.S. compression manufacturing business contributed 49.5 million a revenue and while we don't measure EBITDA at that level. We estimate the business was slightly above break even on an EBITDA basis. So excluding the results for U.S. compression the EBITDA margin for the remaining business is approximately 20%.
From a segment perspective revenue for contract operations was 95 million or gross margin was 63 million resolving the gross margin rate of 67%.
These were completed and there was a onetime benefit a roughly 10 million of revenue and 8 million of gross margin, which was included in our quarterly guidance given on our last call.
We will continue to have an Airbus contract for both facilities going forward.
Oh, sorry, I'm ESS revenue was 28 million in gross margin was 7 million. This resulted in the gross margin rate of 24%.
Revenue was down sequentially. That's the first quarter is typically the low for the year driven by seasonality and as we previously discussed we experienced logistical challenges late in the quarter, because covert related travel and supply chain interruptions.
Revenue in the product segment was 88 million in the gross margin was 3 million, resulting the gross margin rate of 4%.
Also included roughly a 5 million dollar impact a fixed overhead under absorption.
Bookings for the quarter were 458 million our product sales backlog was 648 million at the end of the first quarter compared to 278 million at the end of the fourth quarter U.S. compression fabrication business makes up approximately 11% or first quarter ending backlog.
The increase in the our reserves was driven by an increase in their general reserve and not related to any specific customer, reflecting the current market conditions and aligns with experience in some more historic periods.
Moving to the balance sheet total debt at the end of the first quarter was 455 million.
Our leverage ratio isn't very good shape up 2.4 times in person 2.1 time at the other 2019.
Total available liquidity of over 430 million.
I will highlight this ever did that we have no near term maturities. Our next maturity date as a 2023, which is the revolving credit facility.
Our capital allocation strategy hasn't changed we responsible what the balance sheet and leverage levels, while prioritizing funding organic growth opportunities, we're positioned to consider M&A prospects as well the buyback of both bonds and stock also rooming options. We have stated since the spin, but maintaining a solid balance sheet.
Well the fundamental principle or the way we manage the company because of this we're well prepared for the market conditions, we are facing.
Andrew provided you with our updated EBITDA outlook for 2020, which does include the U.S. compression fabrication business. However, the exclusion of the U.S. compression fabrication business does not change that EBITDA ranges as presented.
So for 2020, but doesn't you asked it should be between 120 in 140 million.
Our prior guidance assume roughly a 15 million dollar contribution from new concentrating on water orders coming largely from the U.S. market.
Given the current market conditions, we have removed this from our guidance.
We entered as early remarks laid out the other key assumptions in order to achieve the guidance.
I see an eight for the years now forecast to be between 130 940 million.
As a reminder, or else DNA includes roughly 20 million a revenue base taxes associated with our South American business.
It could you need the stress productivity and efficiencies as we look for opportunities to further reduce I see an eye.
Cash taxes to be roughly in a range of 120 to 25 million and interest expense between 35 and 40 million.
Committed growth Capex for 2020 is expected to be between 65 and 75 million.
Reimbursable capex around 20 million and maintenance and other capex should be approximately 20 million.
We have good visibility for the full year, given our backlog the contracted nature of our business, but there still remains some degree of uncertainty regarding timing a certain activities. It can be impacted our revenue.
As well where is provided insight on what we're doing to collaborate with our customers in order to mutually beneficial outcomes and he is difficult and uncertain markets, which may also have short term impacts.
Turning to the second quarter Eco plant sales will not repeat which was the contribution of 8 million in gross margin. We also continue to assume continue travel related disruptions related to M.S., which will have a small impact.
Our eco business is contracted we've included some short term impacts to this segment as well based on the customer interactions groups described.
To summarize our view for the second quarter adjusted EBIT, albeit in a low $20 million range. There are no new product bookings included the second quarter outlook or for that matter in the full year guidance.
Clearly our guidance for the full year is greater than the second quarter, even the first half annualized the second half step up is driven primarily by our backlog and in particular, the large middle East project, we won during the quarter.
As well we have assumed a gradual returned to more normal work routines within eco on M.S. This is of course is a difficult factor the call given the unpredictability of country and customer actions.
I'll now turn the call back over to Andrew for closing remarks.
Thanks, Dave as I reflect back last year with a challenging year for the industry.
When adjusted to new returns focused on emphasis on capital discipline.
Andrew and this year, we felt better about the market, we were serving underlined with the commercial successes we had in Q1.
It has now become evident very quickly that at least 2020 will prove to be possibly the most challenging you any of us I've had in our careers.
Our focus Nevertheless remains twofold first protect the balance sheet.
And secondly, execute on key projects.
We will control what we can control to ensure we protect the core of the organization and to set the company up to succeed in the coming years off strong liquidity position and balance sheet affords us the ability to whether these storms over the coming quarters.
I believe our middle East exposure will serve us well over the coming here and provide us with some additional opportunities and these challenging markets.
I will reiterate what I said last quarter, we would expect 2021 to be a growth here for the company as we execute on our backlog as the world returns to a new normalcy.
Despite these times I would like to leave you all again of the company we're transitioning to.
One with a multibillion dollar contracted backlog EBITDA margins greater than 20%, but although requires investment realizes significant returns on those investments while above its cost of capital all while providing the consistency more aligned with an industrial business.
With compression being a smaller part of our portfolio our product sales segment will have a higher margins predictable supply chain cycles and align to more mission critical infrastructure.
This new model is much more stable and given the criticality of our product offerings as much more resilient, even if the market slows.
This is a transformation that we are well into I'm, while the current environment may limit the number of large opportunities. We had planned short Tim off strong backlog and diverse base of natural gas production focus facilities positions exterran uniquely relative to many in this environment.
And with that I'll now turn the call back to the operator.
Thank you.
At this time will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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One moment, please lollipop of car poll for questions. Thank you.
My first question comes from Kyle May with capital One Securities. Please state your question.
Good morning.
Wanted to well first appreciate the update outlook in assumption that you provided for the year, but I was wondering if you could walk through the different puts and takes a each segment in your new out what to get us a better idea to kind of how to frame up the year.
Hey accounts with Dave.
The overall.
Most of the comments if you take this quarter second quarter first half would annualize you obviously have a step up as you mentioned and the majority of the vast majority of that is driven by things that are their contracted or in our product backlog. So you have.
Probably the most significant step up would be on the product side with the large order we talked about that we wanted the first quarter will begin we are beginning to executing that so that will pick up or in terms of a its impact on revenue and margin.
The third quarter and further in the fourth quarter. We also have a couple of eco contracts that are will be.
Kicking off a weak this quarter. So you have that as well there they're smaller in terms of the overall impact between those two drivers that is the far outweighs the vast majority and we do as we mentioned in the comments have a assumption that we do see it very gradual return to more normal activity around.
We were on travel so.
For example on my side, we need to be able to get people hit an all the countries and have them mobile within a country. So there's a bit of an improvement it's a smaller assumption in the third quarter, but then it before fourth quarter.
Relative to the second quarter, a bigger impact so that.
Would be the general drivers of the phases.
Got it the that's helpful and the next question I was curious about was in the in the product sales segment of the business I know you've been working on the strategic review of the U.S. compression business for you as compression fabrication and it sounds like you're getting a little bit closer, but just wanted to get your.
Latest thoughts around when you expect to see the inflection point in those margins.
So Kyle I I mentioned in the in my prepared remarks that we're working to dual path right now and we have been for some time. So we're clearly working.
Through the backlog and that should be taken a through some time into the third quarter with backlog that we have in the facilities.
We have been able to remain open at the facility due in the past.
Several months with regards to focusing on the quality of the work and making sure that we safely exit the a the work content that we have in the facility as we go through the the coming quarters. So.
As we think about the next couple of months ahead of US we have a do a process that we talked about its been a very difficult environment to to get anything done but nevertheless.
Should we not get to a place where we have one of the alternatives that will into Q2 earnings call. We'll announce an update you on that current status at that point and so both plans are working in parallel we have been a just in the structure of the facility the cost to the organization, we'd be working through and keep it up.
Customers informed us that process and so right now [noise], depending on which outcome that we work through in the in the course, the next I'd say five to six weeks.
Well get to a conclusion that decision that was announced an update you all at that point. We also indicated in the first quarter as we had high revenue and I think Q1 will be the high revenue that will see for our compression business. If you look at the outcome of that business as we explained as Dave explained it was it was slightly above.
Breakeven to slightly I didn't EBITDA level. So if you actually back out the compression business or from the first quota you'll get to close to 20% EBITDA margin as a company just from what happened in the first quarter and so what we expect here over the course of the next three or four quarters and really as we look into 2021 and beyond.
As we talked about high grade in the portfolio I know, we talk a and my final part of the prepared remarks, and tens of a multibillion backlog contract and margins above 20% hopefully you can start to see that becoming realized as a result of what we just delivered in Q1 in the indication of that so once we get to that conclusion, we'll communicate that.
To you I think it will likely be I'm, not our Q2 earnings call a and then we'll have some visibility into what that looks like for the balance of the.
Okay. That's that's very helpful and one more for me you touched on the eco contract extensions and I was just curious how the re contracting compares to the prior contract and also versus your expectations.
Sure I'm kind of this is getting yeah in terms of expectations I'd say, a very positively I think one of the important things to note is we've been operating in Argentina for several decades and this isn't a contract that it's coming up for the first time as a as it a new ones. We've actually had it in operation for several years gone through multiple rounds of.
A new world so the characteristics that a little different than a contract that we have run for the initially and then coming off for for renewal, which allows us to therefore keep our margins pretty much intact. Yeah. The contract typically is made up a variety of different factors. Obviously price is one of them scope is another various other contracts what.
So we've been working very closely with our customer for several months and getting to this point because it is a fairly long extension and therefore, a complex contract I'm very pleased as if a customer with the overall outcome, which gets them what they want and allows us to keep our margins pretty much intact.
Got it that sounds great all right I'll turn it back thank you.
Thanks all.
Thank you in just a reminder to ask a question at this time press Star one on your telephone keypad presses Starkey followed by the number two tier move your question.
Our next question comes from 10, Marcelo with Altacorp capital. Please state your question.
Hey, good morning, everyone. Thanks for all the the detail in the prepared remarks, that's great first question I'll start with here just on the water business I'm.
Just curious in.
120 to 140 million.
2020 guidance range. It did I hear correctly, there's $15 million to $20 million previously included after water.
Projects on the margin basis there.
If it was actually this is Dave I was actually a new product orders, which were included both processing and treating and water.
And again, Okay got it all.
Mark to market are you up market assumptions.
Okay got it and then I was just curious if you could.
Provide some detail around how.
That business is progressing the current market environment have you seen the same slowdown in in water as you have in your other business lines.
Yeah. So I think it so it's really a business a two markets as we described pretty much largely with the rest of the product business. We feel very good in the middle East. We got projects that are continuing to progress from a commercial bid activity in the in the last five or six weeks we've been active.
I'm still been working with our customers to spec and to scope projects that we see visibility for the second half of Twentytwenty. Its very clear that in the last five or six weeks when you're trying to work through commercial propositions and various proposals and technical evaluations doing them in people.
Those living room on zoo is not the most effective but nevertheless customers are still being working with us on that so I'd say there has definitely been a little bit of a pause in terms of some of the timing that we saw on the projects, but the good news is that we haven't seen dramatic change in some of the long term plans and the visibility that our customers have.
I'd say here in the U.S., a little bit of a different story for sure. Both on the assets that we have operated and on the outlook I think there's a little bit more of a an and clear picture right now as as operators and people really work towards their ultimate production goals and as the oil production slows for sure.
We're seeing that impact in the water needs and so I'd say, we'll probably need another five or six weeks to really understand the implications of what that means for us for 2021 without water business here in domestic U.S. fall for the guidance that we gave there was very little in the water business for the second half this year. So there's no real big material.
Changes to what we've already guided but here in the U.S., playing it paying close attention customer by customer site by site Wildlight well to understand any today and into an actually still see and interested outlook and working towards some of the second half closure on maybe some of those projects.
Okay very helpful. Thank you second question on the product sales margins I understand there's some under absorption in the second actually in the first quarter.
And based on the guidance that you don't see a ramp up in those large or I guess the manufacturing this larger product bookings till the second half would you expect to see margins that same range are lower in the second quarter for probably sell.
Yeah, I think we're going to still see a similar absorption impact in Q2 as we saw in Q1.
So.
From a mix standpoint, again similar type margins like it's probably safe to say and then as we go into the second half. We've got a couple of ER product orders in hand, the big win a that we've talked about the middle East that's kind of an engineering phase. So it'll have a gradual pick up in terms of helping us with some of the fixed costs.
First with the engineering team and then as it transitions into other parts of that that will be manufacturing and then a as Andrew talked about you've got the other piece, which is a compression piece, which again, we will do well have an update about into the second quarter in terms of where we're going with that but that business or.
It's all that to that will alleviate some of the pressure whatever on fixed costs, there regards which path.
Okay great.
Then the next one here just in terms of the guidance as well.
You mentioned that it includes an assumption that you'll have that are axis internationally, I guess borders opening up or or travel restrictions taken away well do you have a sense of what that guidance could look like if that doesn't happen.
Yeah, I think it's not it.
I think it when we gave that range, we've kind of book we've looked at this probably 15 different ways, you can imagine and well be give that range. We have scenarios and there were a is it doesn't.
We don't qualify that lowered the rate.
It takes but that assumes somewhat of a continuation of these at least the nearer term for the next couple of quarters.
Okay got it warm weather in my life.
Bottom and the Guy.
Gotcha.
And then just my last one on the renewals I'm just curious if there's any significant capex associated with that renewal and if you.
I have any other no material ones that are coming up that might be at risk in this environment.
Kaczynski Tim's rises garish no no no significant capex as I mentioned earlier, you know given that a this is not the first cycle of renewal of you've done. This a couple of times. So there really isn't a lot of incremental capex does scale. It doesn't large fleet that we have a in Latin American Argentina, particularly.
He said that it's a maintenance capex, that's covered and Oh the guidance that we mentioned, but the other than that that not at not a significant amount of the other projects that we've talked about are already.
Hi word that covered within the guidance that we have given and don't see a significant change there.
Okay understood. Thank you very much.
Ladies and gentlemen, there are further questions at this time I'll turn it back to management to conclude thank you.
Thanks, everyone for dialing in today and have an update on our first quarter earnings we look forward to.
Getting through the second quarter and coming back to you at the end with or another update so appreciate it and.
Have a good day.
Thank you. This concludes todays conference all parties may disconnect have a good day.