Q2 2020 Enerflex Ltd Earnings Call

Ladies and gentlemen, thank you for any by and welcome to the end up like second quarter 2020 results Conference call. At this time, all participants I know this year.

On the amount.

After the speaker presentation, there will be question answer session.

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Now they didn't the conference your speaker today.

I'll eat director strategy with an Investor Relations. Please go ahead Sir.

Good morning, everyone. Thanks for joining us here with me virtually or Mark Rossiter, Interflex as President and Chief Executive Officer, Sanjiv, issuing Interflex senior Vice President and Chief Financial Officer.

In Park Interflex as Vice President corporate controller.

During this call will be providing our financial results for the three months ended June Thirtyth 2020, a brief commentary on the performance of our three business segments, and a summary of our financial position.

Today's discussion will include forward looking statements regarding interflex its expectations for future performance and business prospects are forward looking information involves risks and uncertainties and you stated expectations could differ materially from actual results or performance.

More information, we see the advisory Coleman's within our news release, MD any and other regulatory filings.

Approximately one hour following the completion of this call a 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 June Thirtyth 2020, compared to the same period of 20 Nike.

Seat on the basis, you Baltic any opportunity to read yesterday's press release.

I'll turn the call over to Mark.

Thanks, Stephen and good morning, everyone.

We're discussing the quarter I want to first bank Interflex as employees, who have kept the natural gas natural gas liquids and electricity flowing to the benefit of our clients and energy consumers across all of our operating regions.

Our people have limited the impact of covert 19, such that each of our facilities and assets continue to operate without disruption.

I'm proud of the resilience in positivity that all Interflex employees have shown in navigating this uncertain situation.

Globally government health and safety protocols in certain geographies continue to challenge our ability to maintain unrestricted access to active construction sites.

Well, we have adapted to these restrictions in Latin America, or inflight boom project in the Middle East continues to face hurdles in respect of in country logistics and trucking. Nonetheless, we still expect all four previously announced booms to commence operations in mid to late 2020.

Provided at no further restrictions or imposed.

In addition to covert 19, the sector has seen significant volatility in oil prices.

Well, we have seen a strong rebound off the March lows the recovery appears fragile and has not yet translated.

Two an increase in customer capital expenditures.

That said, we're starting to see some demand for non traditional applications.

Including high efficiency gas to power combined cycle technologies.

Combined heat and power project for Canadian grain processor, and a large process refrigeration system for petrochemical plant in Texas.

Well. These are positives, we still anticipate that the broader weakness in engineered systems bookings will persist for at least the remainder of this year and into 2021.

Aftermarket service a mess for short has so far proven resilient compared to prior downturns.

M.S. is an opex oriented business that is most impacted when production volumes decreased but if wells are flowing equipment needs to be service to run reliably.

We now have broader service capabilities compared to prior downturns and have service personnel and all operating regions to cushion Amos downturn in any single region.

For a global asset ownership platform revenues and utilization during the quarter were healthier than anticipated.

With the downside, having so far been tempered by improving commodity prices.

Importantly, we continue to make progress on previously announced projects that will expand our footprint in both Latin American Middle East well in the USA, we maintained an average fleet utilization of 82% during the quarter.

Our teams continue to engage with customers to gain visibility on how fleet utilization might change going forward should the current commodity price environment weaken producers in the USA segment may slow production, which will invariably affect demand for interflex is products and services.

And the rest of World segment, our business and that of our customers has a lower correlation to commodity prices and is instead driven by factors such as satisfying local or electricity demand.

This dynamic has translated to renewed interest in a rental fleet in Mexico, where we will redeploy several units our expected to come online during the third quarter 2020.

Similarly, we are seeing projects in the middle East being developed specifically to increase their old natural gas in regional electricity generation.

Our customers in the region continue to indicate that our natural gas projects and assets are critical to their overall development plans, having extend to two of our boom projects during the quarter.

Subsequent to the quarter. We also executed a letter of intent for a 10 year extension to a middle East boom that has already been operating for nearly a decade.

The significant investments we've made in our asset ownership platform should continue to add stability and predictability tour financial profile.

We will continue focusing our efforts on what we can control.

Taking action to protect returns on our investments maintain customer relationships preserve fleet utilizations and keep our customers assets performing as promised.

2020 will be difficult year for the engineered systems business, while the pace of global oil and gas demand recovery creates uncertainties for other enter flex products and services.

Despite these headwinds, we expect or asset ownership in M.S. businesses will drive financial performance for the remainder 2020 in into 2021.

We continue to monitor performance and outlook in all of our operating regions and make cost reduction decisions in response to what we're seeing across the broader energy industry.

Being proactive in this regard and maintaining a defensive balance sheet should keep us well positioned to whether this downturn and succeed as the industry recovers.

I will now turn things over to Sanjay to review our financial results.

Thanks Mark.

Second quarter revenue of $287 million decrease substantially versus the prior year period, due primarily to lower engineered systems revenue on a weaker bookings through 2019, and the first half of 2020.

Service revenue was down approximately 17% on decreased activity and parts sales well until those declined due to lower utilization of the rental fleet in Latin America, but was mostly offset by the organic growth of our U.S. contract compressor fleet, which now totals approximately 335.

I wasn't horsepower.

Gross margins decreased over the comparative quarter, but gross margin percentage.

Due to contributions from our higher margin generating recurring revenue product lines.

Continued recognition.

And the large high margin engineered systems projects that were booked during the second half of 2018.

Looking forward the company expects its margins from engineered systems to decrease over the next couple of quarters and contribution from recurring revenues to make up a larger proportion of total gross margin over that timeframe.

Cost cutting measures have been effective in reducing selling general and administrative expenses, but overall as she in a in the quarter increased over the comparative quarter driven by increased bad debts from expected credit losses in the U.S. business.

We believe that the current provision appropriately reflects the best estimate the feature expected credit losses, and we remain vigilant controlling costs across the platform to align with expected activity levels.

Reflected in adjusted EBITDA for the quarter was $6 million related to government grants received in Canada and rest of world segments.

Growth of our asset ownership platform continued in the quarter as 30 million of capital was deployed towards the U.S. rental fleet and international brewing projects.

As described in our MD, though we're committed to 2020 gross capital expenditures required to fulfill obligations for the completion of five and tenure broom contracts in our rest of world segment and for our U.S. contract compression fleet.

Our previously provided expectation of 105 million growth and maintenance Capex has been impacted by the addition of one small boom project.

Final project scoping.

Foreign exchange impacts.

Cost due to cope with 19 induced delays, increasing our expected growth and maintenance Capex, which we now anticipate will total between 125 million to 130 million for Twentytwenty.

Working capital saw net decrease the $37 million in the quarter in response to our slowing of supply chain transactions.

Current market conditions.

As expected inventory levels peaked in the first quarter and should continue to decrease as we realize these goods into engineered systems projects.

New contract compression units overtime.

Notably these inventory items or non perishable and are fungible across our engineered systems and run offerings.

So we can consume them in either business line globally.

As previously mentioned certain receivables within the U.S. segment right side late in the quarter as being at a higher risk credit losses as a result of recent market events.

We have therefore increased the allowance for doubtful accounts provision at June Thirtyth 2020 by approximately 13 million.

From a capital allocation perspective, we continue to focus on two areas.

Completing those capital expenditures as required to fulfill patients related to our organic rental fleet additions and preserving balance sheet strength.

And our Flexes board will continue to evaluate dividend payments on a quarterly basis.

Based on the availability of cash flow and anticipated market conditions yesterday declared a two cents per share dividend.

We paid on October Onest 2020.

With respect to liquidity, we exited quarter at a net debt to EBITDA of 1.2 times, which is unchanged from our position at March 31st.

Our net debt has produced approximately 18 million March 31st which shows Interflex is disciplined any cash flow to decreased net leverage in anticipation of our toward trailing 12 month EBITDA falling during the cold It 19 pandemic and the downturn in oil and gas industry.

Maintaining a strong balance sheet remains the top priority for and the flex going forward.

From a cash flow perspective, we take comfort that are most draconian modeling scenarios are not playing out despite having planned around them.

And with available liquidity of 532 million, our debt position remains healthy leading 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 August six press release, we won't be happy to take any questions.

As a reminder to ask a question you will need to press star one on your telephone I saw your question press the pound King Please stand by what we compile the Q1 a roster.

Our first question comes on line of Michael Robertson from National Bank Finance. Your line is now open.

Hey, good morning, all thanks for taking my call.

Welcome.

Quick just a couple of quick ones for me you noted some problem restrictions on the quarter impacting the service segment, specifically or would you see people to look the mostly lifted at this point, although still some logistical challenges.

I think that it's really more of a logistical challenges and travel specifically.

It's still not easy.

To get a industrial size products, where shipments or people for that matter moving freely.

Especially in the Aro W. segment, so those have not been lifted and we're.

Thing about 17 different countries within which we operate so it's difficult to make a sweeping statement.

But a lot of those countries are still on stricter Lockdowns, then what you'd be experiencing in Canada for instance.

Got it got a that's helpful. Thank you switching gears a.

We'd be anticipating a similar impact from.

The cws or government grants.

How should we think about moving forward.

Yeah, you've probably seen the news Michael this is sanjay that those programs have been extended we do.

So the subsidies that we outlined.

In in the disclosure materials.

Include.

The cws, but also some other geographies around the world.

And so it really is dependent on on how those individual programs or.

Extended throughout the year, you've probably seen the news that the Cws in particular is expected to continue into into the late fall.

And so I think you can expect to see some subsidy going forward in Q3 and hopefully in Q4.

Okay, that's great.

Lastly from me.

The last call you spoke a in a bit of detail regarding.

Can capital release or monetization through the downturn and hopes to be neutral or or better from that standpoint.

Looking at inventories and they are sequentially.

Looks like you're off to a pretty good start there should should we be expecting more of the same going forward a I'm just sort of wondering if your your thoughts have changed on that front since we last spoke about it.

Yeah pretty similar thoughts still like again, you know most of your most of the sell side models or are counting on some release of working capital we would agree directionally.

It is tough in this environment to really sort of plan around it though but I think our our overall expectation is that we'll continue to monetize.

Inventory will continue to monetize.

Accounts receivable and contract assets and we as you pointed out we were successful in doing that in the second quarter.

Okay, Oh, that's a that's helpful. I will open about thanks a lot.

Thank you.

Thank you as a reminder to ask a question you want me to press Star one on your telephone to withdraw your question press the pound King. Our next question comes from the line of being below from thing I'd be seen your line is now open.

Good morning, everyone.

Could you maybe just to follow up on your earlier comments, specifically related to the government subsidies are seeing internationally can you maybe just talk about what countries. Those are in any reason that contribution could be dallas up or down going into the back half of the here.

Yes, we really were not going to break out the details in specifics of all the programs that were able to participate in.

So I can't I can provide you a whole lot of detail on out Unfortunately day.

Okay, and that's the problem understandable.

Just maybe.

[laughter] looking at U.S. rental utilization could you maybe just walk through how much that number moved around every quarter in the context of production shut ins.

Yeah. We did you know we did certainly see some movement in the number but I would say it was a pretty steady it directionally. It was it was pretty steady and things seems to have leveled off. So we saw when the shut ins were occurring kind of a really the core of the shut ins were happening in.

Late March and April and that's when we did see utilization drop as you know, we had 80, 86% or 87%.

At the end of Q1, and we reported 82% a this quarter and so we saw most of that that fall through the month of April and then things as things have stabilized quite a bit. So we were viewing that as as a positive sign that were sort of through the through the worst of the shut in.

And the pressure on utilization.

Right. So I guess, maybe not surprised for too much information, but is it fair to say.

The exit rate would be higher than the key to average, but maybe not quite recovered to pre coated levels.

It's it's pretty in line or you know if you looked at average versus versus exit.

Gotcha Gotcha. Okay. Thanks, that's good color when it comes to incremental growth capital cap capital is there any possibility the 110 million moves higher this year, if there is incremental boom or rental opportunities that make sense from a risk reward perspective.

Hi, Jane I would say that there is if there is a really nice project, where we'd like to terms and we like the returns.

Management will exercise some discretion there however, I'll emphasize that our number one goal is to make sure that our balance sheet as an order exiting the year well. We spent in the press release was once theres less uncertainty in engineered systems will have more confidence to invest and I would say that's still.

Our marching orders.

That just in you know the engineered systems has such a big impact on our cash flow that it's really nice to have an idea where that is before you start spending on capex.

Now what we would look at as is smaller projects like the one discussed in the press release, where we're redeploying existing fleet equipment, where you need to add I would say relatively small amounts of money to get that equipment back in the field under good terms will exercise discretion, there, but any large boom contracts it'll be it'll be live.

The difficult for us to sanction those until we have more certainty in are engineered systems business.

Understood that that's a great color. Thank you Mark I guess, maybe just following up to on your engineered systems Collins.

How should we be thinking about gross margins in the back half. Your I mean is it possible those could get closer to breakeven levels just given the magnitude of the slowdown or is there are no enough cost to comply with the platform, where maybe that wouldn't necessarily be the case.

I don't want to give you too much predictions about gross margins in the last few quarters. We said expect engineered systems gross margins to decrease because we've got some great backlog that that is sort of pushing the numbers above average I'm not going to get into predictions beyond that.

I have said in the past that we expect all of our core businesses in each region to stand on its own two feet and be profitable. So we definitely are pushing for the business leaders in engineered systems to keep their shops their business lines profitable as much as possible. So that's.

Even the focus than ever since really the first of January is to make sure. Those businesses are as good as they can be we've aggressively cut costs in those businesses and if the business is don't pick up I would say that we're not done cutting costs.

Understood understood that makes a lot makes total sense.

That's all I had so appreciate the color guys I'll turn the call back.

Thank you. Our next question comes on the line of keep Mackie from RBC capital markets. Your line is now open.

Hi, good morning.

Good morning, Keith.

Hey, just a question on the on the backlog cadence so you've got 291 million currently.

What kind of a run rate do you expect that to go like should we be thinking about.

Q3 for.

Looking similar or I would imagine lower than then then Q2. So just just you know just a question about how long we should expect your current backlog to to last given the pace at which you're you're executing.

I hate to give you any predictions Keith on that front I think we've said.

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For quite awhile now that engineered systems bookings is uncertain.

We're watching it very closely and it's very difficult to say, what the bookings levels will be in subsequent quarters R&D, how the backlog response to it.

On a on a positive note we mentioned in the press release that we've we've been working on some we'll call it unconventional compared to what people is seen as book the last three or four years activities and we've had a good suite of engineers really smart people that are good at packaging things. It doesn't just have to be natural gas. So.

Teams are all working and looking at different opportunities to get as much work in house as we can possibly get but to try to help you understand or forecast order backlog seem to be in subsequent quarters isn't something we do.

Fair enough just a question on those unconventional projects with these where these projects that have always been around but you never really chase before or or were they just sort of onetime onetime projects at all happen during the during at the same time.

I'd like to I'll, let you know that we've got a long history.

Servicing industries other than upstream natural gas, we've done that for 30 years.

So to a large degree the I would say the natural gas business just overshadowed this quote unquote unconventional business that we've really been pursuing nonstop.

As long as we've been in operation Theres sort of coming to the for now because the natural gas fueled by the shale Revolution is sort of backing off a little bit and these jobs are becoming a little bit more material, hence, we really need to talk about them. They're in powergen there in downstream petrochemicals those sorts of industries and we've always said.

Those industries.

Okay, Okay fair enough.

Okay. That's that's it for me thanks very much for after the color.

Welcome.

Thank you at this time I'm showing no further questions I would like to turn the call back over to Mark Rossiter for closing remarks.

Thank you operator, I'd like to thank everybody for dialing into listen to our earnings call today have a great weekend and we look forward to talking to again in November.

Ladies and gentlemen, this concludes today's conference call. Thanks for participating you may now disconnect.

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