Q2 2020 Exterran Corp Earnings Call
Greetings and welcome to the Exterran second quarter 2020 earnings call.
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Great question and answer session will follow the formal presentation.
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It's now my pleasure to introduce your host Blake Hancock, Vice President Investor Relations. Thank you you may be gets.
Good morning, and welcome to Exterran Corporation second quarter 2020 Conference call with me today are experienced president and Chief Executive Officer, Andrew way.
David BARDA, Exterran, Chief Financial Officer, and grist Telecom Exterran Chief operating officer.
During this conference call, we may make statements regarding future expectations about the company's business management's plans for the future operations or similar matters.
These statements are considered forward looking statements within the meaning of the U.S. securities laws.
The only after the date of this call.
The company's 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. The company provides a reconciliation that these measures and its earnings press release issued earlier today and a presentation located on the 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 covert 19 development since we last checked in and then discuss the second quarter, along with how we're progressing on our long term strategy.
Koby 19 continues to challenge in many part of our customers vendors and employees' lives, but I'm extremely appreciative of all the collaboration and dedication of our employees have shown doing these trying times as we continue to work to support our customers.
On our last earnings call, we had really only seen the impact of kobin towards the end of the quarter, especially related to close have offices global travel restrictions I, mostly mostly Pos impact you know A.M.S. business.
At the time of the call most of office staff were working remotely today, we're starting to see our middle Eastern Asia offices opening back out on the degree of normalcy is beginning to up here.
North America on Latin America, However continues to see elevated kobin levels, making travel and returning to work more challenging and we continue to monitor local situation very closely.
Our global crisis management team continues its daily operating rhythm to ensure the safety of our employees contractors and customers.
The second quarter came in largely as we had expected from an EBITDA perspective, as we had guided to the low to mid $20 million range. During the quarter Cobiz had an impact across all of our business lines with the largest impacts coming from eco and en masse, where we have to manage challenging customer logistics, specifically the in a bit.
Study to move people around Pops and equipment all around the globe.
We also saw the impact on new bookings with customers delaying decisions, making as they work to normalized their operations before making additional investments.
We have laid out our strategic plan over the past here as we look to move from a product orientated company to a projects and service related business that resembles more of an energy industrial company.
This included our announcement that the U.S. compression fabrication was no longer call to the business.
As of today, we expect to be out of the U.S. compression fabrication business in the fourth quarter.
We are working closely with all potential parties on the outcome, what a fully liquidated also to a strategic buyer present fit present fairly similar outcomes to exterran on our shareholders.
Regardless, we expect to be fully complete with all the current backlog in the fourth quarter.
We continue to control the cost in the business as backlog comes down while ensuring we complete all the work in service commitments from customers and the way that they have come to know and appreciate from Exterran.
For the investment community while today the CFS business is still enough financials. We have provided revenue gross margin and backlog information since the beginning of 2019 in the appendix of today's earnings presentation.
While compression was part of our legacy we've spend a lot of time talking about how water will be key to our future success. Obviously, the downturn has slowed old production, including water. We too are also see it all customers cut their produced water budgets specifically in the U.S.
That said internationally the high water cuts in conventional fields continues to drive demand.
The positive news is that we have not yet seen any project canceled are actually seen a growth in our pipeline, but timing of awards have pushed to the right.
With the current market dynamics as well as Kobin related communication hurdles. These projects are taking time to go through a normal commercial and tendering process. We have a few large projects that are imminent and we are well positioned these projects will be a significant inc. output for the company nobody helping grow our water business.
But also given border its first large global Eagle contract looking at the second half of the year, we're being very forthcoming that we didn't foresee any material product orders for six to 12 months as a north American market appears largely shutdowns for new Capex.
We have started to see some promising signs in North America, and Chris will provide more details in his section.
For planning purposes, we're not incorporating any of this activity into our guidance at this time the international markets continue to show resiliency as we continue to have constructive conversations with customers in all regions.
Joe just one of our aspects of differentiation last quarter. When we provided full year guidance I'm pleased to report that out without guidance for the year remains between 120 and $140 million of EBITDA.
Let me remind you want the assumptions, we incorporated last quarter, we achieved this.
We assumed no news sizable product orders for the rest of the year improvements in travel restrictions and supply chain activity. During the second half of the year continued remote collaboration with customers and execution on key project weapons as we booked over the last several quarters slow improvement in macro economic conditions.
As it pertains to the commodity prices and exchange rates.
Today as I reflect on these the open questions still remain around the improvement in travel restrictions and the impact on supply chain affecting product execution. The couldn't manifest itself in the timing of key projects impacting EBITDA out any R&D and cash inflows and outflows going to build cycle.
These challenges I still dependent on country specific cobot outcomes.
On the project execution side I'd like to remind you all we won a large project in the middle East during the first quarter. We continue to work closely with our customer to keep this project progressing.
The first two quarters of the year, we've largely in the engineering phase for the project and required minimum travel a manufacturing we've invested heavily in global and local talent over the past few years and is just another example of our strategic transformation from a products company to one that can handle complex projects, where our engineering.
On operational expertise differentiate us from where the company was several years ago.
Our global Engineering teams did an outstanding job of completing the critical milestones of hotdog How's it in Threed models. Another facility from January through June all achieve remotely lost leverage in the technology tools, we spoke about last quarter with that I'll now turn it over to garish.
Thanks, Andrew.
I will start to the large middle East project that Andro touched upon and engineering success, we have had year to date I.
I would like to second just common that's it's a huge on taking an accomplishment for the team to be able to execute up to this point largely working remotely on such a complex project.
In addition, we continue to further develop I dunno tools and systems. So that we can leverage this optimized methodology of global efficiency and productivity as volumes pick up.
In addition to the engineering focus we have also been utilizing the past few months to further enhance and develop our organization.
We have use this opportunity to put a significant focus on creating and development that have successfully delivered a significant amount of technical training to our operating teams.
This ensures that we remain fully certified and flying while also ensuring that we're sharing best practices around the world.
We're also making inroads on brought a partnerships and greater value addition from our supply base.
Well the macroeconomic situation has seen many operators and our customers request concessions. We have long stay focused initiative to improve our value equation to better terms and cost from our key suppliers, yet again looking to collaborate towards value creation, rather than simply shedding the pain.
This includes opportunities for consolidated volume purchases across regions more local sourcing more cost efficient designs et cetera.
Since our last call we have made a lot of headway with our customers as we continue to work with them as we all navigate this pandemic along with the market itself.
Cobot endemic along with the pressure just creating under supply demand balance of the commodities continues to put tremendous pressure on my customers and their operations.
Do they should not be some factors weighing on tellapart customers pushing them to assess all of that operations. Some facilities as everyone. In the industry is doing balancing near term spending and operations, but longer term needs.
The longer this proceeds the more pressure on customers are coming under the greater scrutiny, all up their contracts and facilities Commando.
Our strong contracts and long term relationships allow us to be collaborative customers, but it is important for us to ensure long term stability, if our customers and lead to lead to future success for both extension and them.
Collectively this is about a coordinated and focused effort across our operating functions to ensure that we are getting the maximum efficiencies as we operate in the field and our factories. This in turn provides us the bandwidth to engage our customers in meaningful contract discussions.
Now turning to a global overview market demand dynamics.
The North American market continues to be extremely quiet as demand for incremental facility needs for 2020 are limited.
That said compared to last call I would say the U.S. market does have a pulse I'll be faint.
We are beginning to see some signs of life has opportunity Snowdonia rice, which are more unique mitch customer needs rather than broad based demand signals.
Well I am a bit more optimistic about the U.S. and I was last quarter. Our view has not changed that we don't foresee any significant demand in the region for the immediate future.
We are progressing well on some initiatives, helping us expand potential processing capabilities, along with some unique power generation applications. While these maybe small they have the potential to help us bridged the gap until our more product core product lines normalize.
In Latin America, the effects of the current environment have been particularly out of the currencies in several countries.
Do you have explained in prior calls how we manage this and while there is a top line impact of risk our margins are significantly protected.
Our customers continue to feel pressure from the commodity declines and this weekend is where we continue to have the most customer discussions around operations and how we can be collaborative to benefit both us and our customers over the near to longer dough.
The middle East continues to be the region of the highest activity and we are seeing new project tenders and inquiries through this period.
We continue to see demand from I've gotten customer base, but do customers, an additional product line opportunities, including water and all train needs are growing as well.
Capex spend in the region has been more resilient than most and while timing of the awards is always difficult we do see the potential for some ventilator into your early 2021.
Finally in Asia Pacific R.M.S. business continues to grow as we continue our new projects into the segment.
But the first time in a while we're also beginning to see some demand for our processing and treating facilities in the region and although the total number of opportunities are smaller than the rest of the world. These can be meaningful to the region and the teed up to our overall business.
Overall, our team and operations continued to do an outstanding job managing got customers that operations largely to mostly our mission critical equipment and facilities have allowed us drop constructive conversations with our customers that are mutually beneficial, but many of our customers remain expose specifically the oil and largely in North America are struggling.
This time, our heavy international waiting and greater type of natural gas provides us more stability and a stronger opportunity set for the quarter stucco, but that I will now turn it over to Dave.
Thanks, Chris despite a challenging quarter managing the impact from commodity price declines in coated we delivered results in line with our expectations with EBITDA as adjusted 24 million on revenue of 172 million.
You have to pressure manufacturing contributed revenue of 41 million gross margin of 2 million U.S. compression backlog at the end of June was 29 million and as Andrew said, we expect this to be completed during the fourth quarter.
From a segment perspective revenue for contract operations was 78 million well gross margin was 54 million resolving the gross margin rate of 70%.
Revenue declined sequentially, primarily due to the impacts of the previously discussed asset sales of contracted equipment that occurred during the first quarter, along with unfavorable FX and co with 19 impacts.
Gross margin percent increase due to continued focus on driving efficiencies through operations.
Go backlog at the end of the quarter stood at 1.25 billion.
[noise] four M.S. revenue was 25 million in gross margin was 6 million. This resulted in the gross margin rate of 24%.
The revenue decline was driven largely by the covert 19 impact limiting the company's ability to move people and equipment around countries into sites and reduce customer maintenance activities.
Revenue in the product segment was 69 million and gross margin was a loss of 2.1 million resolving the gross margin rate of negative 3%.
Archon declined due to the continued fixed costs under absorption at our manufacturing facilities, which was roughly 4 million.
Product mix and customer negotiations, which was always the scope changes incremental associated costs.
We're beginning to see the under absorption abate as as we ramp up on projects was June was less than $1 million.
Our product sales backlog was 576 million at the end of the second quarter compared to 648 million at the end of the first quarter.
That's you know expenses were 34 million down from the 38 million into first quarter.
Moving to the balance sheet net debt at the end of the second quarter was 457 million our leverage ratio is three times compared to 2.4 times at the end of the first quarter.
This increase in leverage was expected with a year over year reduction in EBITDA.
We had total available liquidity of over 266 million also remind you that we have no near term maturities our next maturity as our revolver in 2023.
Even in the current environment, our capital allocation strategy hasn't changed we will be responsible what the balance sheet leverage levels, while prioritizing funding organic growth opportunities.
During the quarter. We also bought back roughly 19 million of our bonds at a roughly 14% discount after accrued interest and fees. We will continue to be opportunistic to put capital to work regarding potential eco deals as well as buybacks with a focus on maintaining a strong balance sheet.
Well leverage move higher or lower even though we continue to have ample liquidity available our revolver with no near term maturities.
Our 20 turret handler touched on are unchanged EBIT outlook for 2020, which does include the U.S. depressing fabrication business. However, the exclusion of the U.S. fabrication business.
Not changed even a ranges as presented for 2020 and even there should be in the range of 120 to 140 million.
Yes, you name for the years still forecasted to be between 130 and 140 million.
As a reminder, RSU now includes roughly 20 million of revenue base taxes associated with our South America business.
Cash taxes should be around 20 million interest expense between 35 and 40 million.
Committed growth Capex for 2020 is expected to be between 65 75 million with Reimbursable capex around 7 million.
Maintenance another capex should be approximately 20 million.
During the first half of 2020, Reimbursable Capex was 6.7 million with no real reimbursements plan for the second half of the year.
Turning to the third quarter, we expect adjusted EBITDA of a route to be around 30 million.
There are no new product bookings included in the third quarter outlook or for that matter for the full year guidance.
With all the moving parts. We were just we have discussed between progress in customer conversations we won't be given EBITDA guidance for the quarter.
But we as we expect the second half should be much better than what we saw during the second quarter annualized as business activity has started to open up an execution will continue on our middle East project.
Andrew talked about Tobin really the logistical challenges, resulting in timing changes like keep projects that we continue to work through with our customers and these are all baked into our for your guidance.
Well the remains a great deal of uncertainty and variability in the business environment. We're also beginning to 2021 planning process. We're certainly not in a position to provide quantitative guidance today as Andrew mentioned on a prior quarterly call. We're set up to grow in terms of revenue and EBITDA 2021. This is largely due to the middle East project awarded and.
In Q1.
We continue to work with a customer on the project schedule given those just a couple challenges we feel confident we will make significant progress on the project as we move forward recognizing the revenue and gross margin on a PRC basis I will mention that the project will result in the use of working capital and 2021, given its size and structure with that I'll turn the call back over to Andrew for closing.
Remarks.
Thanks, Dave the organization responded exceptionally well in the first off the year from managing customers to working remotely for over five months thus far.
Early to respond with cost out initiatives, we put in place in 2019, which is reaping the benefits today and our ability to handle the current macro environment. We continue to focus on managing cash flow on our balance sheet, while working hard and working hand in hand, with our customers on project execution and operations.
Our strong balance sheet with no near term maturities allow us plenty of flexibility to manage through the coming quarters. While all of this is important to protect the core of the business. We're spending significant time on the company we plan to be post the U.S. compression fabrication exit you all know the financial transformation we are progressing.
Towards as I've laid out a company, where we have a strong backlog, 20% or greater EBITDA as adjusted margins would improve returns over the coming years.
Business continues to transition to one from a short cycle products with less than desirable margins to one tied to a larger facilities and projects, where we can bring how engineering supply chain and operational expertise to the table to create real value.
Portfolio, which can retry internal capital for projects will have longer bill cycles, lower in backlog chair and giving us greater visibility to the quarters ahead.
And while our order book is likely to be lumpy given the largest scale I'm project focus the overall company margin profile should continue to improve as the world normalizes in the quarters in years ahead.
While we don't see meaningful orders for the remainder of this year, a strong backlog and characteristics I just spoke about continuing to give me confidence that 2021 will be a growth here for the company and with that I'd now like to turn the call back to the operator. Thank you.
Thank you we will now be conducting a question and answer session.
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One moment, please while we Paul for your questions.
Our first question it's come from the line of Kyle May have capital one Securities. Please proceed with your question.
Good morning, and appreciate the additional insight this morning.
Good morning wanted to start when you start with the third quarter guidance and I realize there's still a lot of uncertainty ahead, but just wondering if you could give us any drivers are things to consider that could put you north or south of the $30 million watermark.
So Kyle I think as Dave laid out we have a pretty good visibility to the backlog and as we do every quarter, we take into consideration what we have booked in the pipeline from an N.S.M.S. perspective, and then clearly eco which is far more predictable I'd say, two things and I really outlined a couple of points.
In my prepared remarks, but really the two things that will have an impact on that exact question is how our customers and continuing to operate.
Well, we have the ability to have people moving in certain locations will our factories continued to be operating at the rate that we see coming out of the second quarter as we already indicated we had some challenges in certain locations, but our assumptions is that the Asia location I know a middle east operations will be back too.
Normality.
And that will allow us to have greater visibility so really it's more.
Colgate related I'm, just physical operations than it is going to win booking new orders converting that activity. We have the backlog, we just need to have could be to get through through the quarter.
Got it got it that makes sense and as we think about the business going forward without us compression fabrication.
How should we be thinking about the segment margins in that piece of the business in the back half of the year and then what does that mean for EBITDA margins going forward.
Yeah, we I think a you'll see in the presentation that flake posted some historic information on compression. So you can certainly go back in time and take the U.S. compression a piece out of the product results, but as we look forward and is somewhat is.
Based on current volume levels, you know, we would see gross margins in that segment and the low to mid or probably mid.
Teams and again that also is certainly right now there's a color volume penalty as our.
Process and treated water business is certainly aren't operating at a high utilization levels. So overtime, if we see volume, but coming back in pretty good a pnp business, we would see those margins move up into the high teens and take your EBITDA margins into the into the high teens as well and as Andrew said, we see this business.
No.
Pro forma basis without that a U.S. manufacturing suppression manufacturing business.
EBITDA margins north of 20% in a more normalized point in the cycle for total company.
Okay got it that that's helpful. And then maybe just one more you you've kind of mentioned some of your comments around starting to see the beginning of global improvements and better ability to move employees and equipment around I'm just wondering if there's any additional.
Color insight on what you're seeing a you know more recently and how this compares to your expectations. When you provided revised guidance last quarter.
Sure Kyle I think you know when we started out does ginnie and especially last quarter to still at the very beginning of the process and a lot of countries within the law flux in terms of to specific shutdowns and what's their arrangements where vis-a-vis other countries I think today, we've got onto one.
On hand, a little bit more clarity instability, and we're starting to see it. Okay. Reopening. So you know it's a lot of different contracts. So for example, you've got to you a he where you know you people are now being allowed to move in and out and you've got a lot more movement on the other hand, you've got on mine, which is still fairly restricted you've gotten Nigeria that.
Starting to open up and we still don't have the ability to move from people into international flights et cetera, but absent. The U.S.. We have still has always had the ability to move people around so it's a very mixed bag on a global basis, what has been encouraging though.
He is to see the industry as a whole adopt do the remote work from home, that's a concept and a lot of customers adopting and working with US collaboratively, we've seen tender activity, especially in the middle East I'd be very strong and all of that has been done through a remote fashion. So we're definitely seeing an overall improvement, but also just kinda dependent on.
How dependent pans out.
Okay. That's very helpful. I'll turn it back thanks, guys.
Thank you. Our next question it's come from the line of Tim Marcelo based TV capital markets. Please proceed with your question.
Hey, good morning, everyone.
Refueling curious or that the reimbursable capex for the year guidance there change from the 20 million to 7 million I'm, just maybe if you could provide a little bit more detail that change.
Yeah. So yeah. The Reimbursable Capex is always a highly likely to be dependent upon progress on a project. So we've got a project. It's a there's potential reimbursable capex for the fourth quarter late fourth quarter at this point, we see just based on schedules and some of these difficult.
These are.
Getting the sites and so forth I, probably falling into next year, there's still possibility that could get pulled back was really related to one particular eco project.
Okay got it and then the eco backlog came down a little bit in the quarter, but hundred million Bucks.
I guess I'm just curious if that had more to do with deferrals on renewals or if it's timing or anything as you know materially change in regards to how you do that that that are progressing.
Sure Tim There was a few different factors that drove it we did have a number of extensions on that did happen, but one of the phenomena that we saw was given the nature of customer operations getting disrupted that customers chose in many cases, they didn't really have the ability to do otherwise shocked.
Some extensions versus sign up for the longer term extensions that we've still fully expect again, the third quarter and then subsequent quarters. So we saw extensions in the range of two months to even six or seven months worsen. The natural one between would expect to get a multi year type of extensions, we still very much on track for that and expire.
To get down more significant extensions into second half of the year, but that's really what drove it. In addition to that we had a couple of other things happened like FX.
And some of the contract changes as customers are relooking at that overall operations and deciding how much capability and how much fleet they want to deploy.
A lot of shocked dumb dynamics versus any real fundamental long term change.
Okay. That's good Skandia and then there was also.
Curious if you had anymore.
He doesn't understand these negotiations are probably on going but to the comments around that to imminent large water projects I'm. Just curious if that you expect that to your 2020 event.
And how material could that be.
Business that's your projects.
Well as I said in my prepared remarks, we continue to.
Really a good pipeline an opportunity in activity the majority of which is in the middle East. Our team has been doing a great job. During the last few months really working again remotely with our customers are laying out the plans for the actual projects themselves and so.
If I if I was to answer that question, which I think I hear don't intend to timing.
The second half of this year is when we would expect the award to be made and they are sizable and they will have a meaningful impact on the company. So we're working through the define a detailed of those projects as we speak a lot of the technical alignment has already been addressed the technology that we haven't come to create has already been proven.
With this particular customer I'm very happy with the outcome of the overall designs and what kind of working through right now the the finalization on on time and the specific applications. So we would hope that in the second half of this year late third quarter, maybe early fourth quarter, we should see some activity.
Okay, great. So I guess just follow up there.
[music].
Is the uncertainty around that contract just due to finalizing Smith. Some final details it sounds like that might be the case or are there other parties sitting on the work as well.
Yeah, I'd say, it's just timing in general I mean, they just purely on the operational front end of what we've been dealing with what we read on the news and what we've seen globally in terms of coded when you put that into practical terms I mean, the world has been turned upside down from an operations and so just being able to get hold of people.
Okay and make sure that you have alignment on both ends has been.
An incredible tasking itself and so when your customers operations on functioning as normal people are still working remotely and many locations. It's just timing and so as we as we work through the implications of these projects. It's a that were always checking and making sure that is the project going to go ahead and are we going to be successful.
Those too when you combine news, we feel fairly confident that the second half is when the projects would be awarded.
Got it Okay. That's helpful. And then last one for me I just regarding the U.S. fabrication backlog that you still happen and maybe just a comment around.
The broader market.
It's it looks like the margin has come down pretty substantially above 5% yet on that backlog through the second quarter from about 10% last year that are a result of just fixed cost absorption on lower revenue.
Or is that have to do the actual margin implied in that that changing.
No the <unk> the margins being in the backlog since we sold a projects and haven't seen a material change and how that market looks we haven't been seen a significant new build opportunity for other customers and as we've said for many months, where we're running the business down and we've been liquidating inventory.
And been dealing with out in a very careful contract by contract kind of customer by customer perspective. So we have held a certain amount of cost do not period to finish the projects probably a little more than what we would normally that's been our intent to make sure that we do the right thing for our customers. It makes you the product leaves with the right quality that tends to come way.
As a cost structure in some areas, that's being a little higher than what we have in the past we have taken out a significant amount of costs. This year in that business, but just not the pacing, which the volume has come down. So we have a good line of sight now unit by unit customer by customer to to run off that backlog here over the next few months will work.
That was on that on a city in parallel we're working to to liquidate the assets as we talked about with the potential strategic sale. We're also working through so that will come to light here in the next few months.
Which will be which would be good and will be through that process by the time, we get through fourth quarter and be able to communicate more clearly once we're through that.
Okay. Appreciate the details I'll turn it back.
Okay.
There are no further questions at this time I'll now hand, the call back over to management for any closing remarks.
Oh, thanks, Thanks, everyone for dialing in and listening today as I said in the prepared remarks and garish also highlighted we wanted to thank all of our employees that have really done an outstanding job. The past few months working through very difficult conditions I spend in time, making sure that they focus on the customer.
And it's been really appreciated so with that I'd like to say, thank you and we look forward to update you ask the next quarter. Thank you.
This does conclude todays call you may disconnect. Your lines at this time. Thank you for your participation and have a great day.