Q3 2020 Enerflex Ltd Earnings Call
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Good day, ladies and gentlemen, thank you for standing by welcome to the Interflex limited 2023rd quarter Conference call. At this time I would like to turn the conference over.
Mr. Stephen Ali Sir please begin.
Thank you operator, and good morning, everyone here with me are Mark Rossiter, Interflex, President and Chief Executive Officer, Sanjiv nationwide Interflex as senior Vice President and Chief Financial Officer, and then park Interflex as Vice President corporate controller.
During this call, we'll be providing our financial results for the three months ended September Thirtyth 2020, a brief commentary on the performance of our three business segments.
A summary of our financial position.
Today's discussion will include forward looking statements regarding interflex as expectations for future performance and business prospects forward looking information involves risks and uncertainties and the stated expectations could differ materially from actual results or performance.
For more information please see the advisory comments within our news release, Mdna and other regulatory filings.
Approximately one hour following the completion of this call a recording will be available on our website under the investors section.
During this call unless otherwise stated will be referring to the three months ended September thirtyth 2020, compared to the same period of 2019.
We'll proceed on the basis that you have all taken the opportunity to read Yesterdays press release, I will now turn the call over to Mark.
Thanks, Stephen and good morning, everyone before.
Before discussing the quarter I want to first thank all of Interflex as employees for their continued positivity and commitment to safety protocols.
Our people have worked diligently to limit the impact of COVID-19 on our business, allowing our facilities and assets to continue operating with minimal disruption.
While our ability to maintain unrestricted access to active construction sites was challenged by governmental health and safety protocols in certain countries, we were able to complete and commissioned three boom projects in the quarter and expect to commission a fourth Boone project in the fourth quarter of 2020, barring additional worksite access restrictions and delay.
Ways.
The oil and gas sector continues to see uncertainty around commodity prices driven by the impact of COVID-19 on demand for energy products.
Recent improvements in natural gas benchmark pricing is helpful for industry sentiment, but will take time to translate to increases in customer capex, which is needed to drive the company's engineered systems bookings.
Outside of our traditional engineered systems offerings, we are seeing increasing levels of interest in non traditional applications.
Such as electrified compression and lower carbon intensity projects.
While 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.
Our aftermarket services business continues to show resilience compared to prior downturns supported in part by the return of North American production that was shut in during the early stages of the pandemic.
Amex is most impacted one production volumes decrease but if wells are flowing equipment must be serviced in order to run reliably with broader service capabilities compared to prior downturns and service personnel in all operating regions and our flex is better positioned to manage and HMS downturn in any single region.
During the quarter, our global asset ownership platform performed well with our US fleet, maintaining an average utilization of 81% on steady demand for contract compression.
In addition, we saw contributions from boom projects in Argentina, and Brazil that were commissioned in this quarter with additional contribution from a middle east boom expected to commence in the fourth quarter of 2020.
While stability from the business line as expected significant weakness in the commodity price environment may cause producers in the USA segment to slow production, which could affect demand for our products and services.
In contrast business in our rest of World segment is less sensitive to commodity price fluctuations.
Given that the drivers are more heavily linked to factors such as satisfying local electricity demand.
This dynamic has translated to recent successes in Latin America, including renewed interest in certain units of our Mexican rental fleet and the sale of power and gas treating plant in Colombia that will reduce carbon emission intensity by using recaptured flare gas for local electricity generation.
Similarly, we are seeing projects in the middle East being developed to increase the role of natural gas in regional electricity generation.
And our flex has identified a number of opportunities in the rest of World segment. However, the company's intent on maintaining capital discipline and in the current environment will only pursue the most attractive projects.
Overall 2020 has proven to be a difficult year for the engineered systems business with bookings in revenue down significantly from levels seen in previous years. Despite.
Despite the headwinds faced by the engineered systems product line, we anticipate that the investments we've made in our asset ownership and HMS businesses will drive consistent financial performance for the remainder of 2020 and into 2021.
We continue to monitor performance and outlook in all operating regions and make cost reduction decisions in response to the turbulence across the energy industry.
Remaining vigilant in this regard while maintaining a defensive balance sheet should keep us well positioned to weather this downturn and succeed as the industry recovers.
I'll now turn things over to Sanjay to review our financial results.
Thanks, Mark third quarter revenue of $265 million decrease substantially versus the prior year period, due primarily to lower engineered systems revenue on weaker bookings through 2019, and the first half of 2020.
Service revenue was down 11% due to travel restrictions related to COVID-19 and pricing pressure on certain service offerings in the us while rentals improved slightly on the organic growth of our us contract compression fleet, which now totals approximately 350000 horsepower.
Although gross margins decreased over the comparative quarter gross margin percentage is consistent due to increased contributions from the recurring revenue product lines.
Looking forward the company expects gross margins from engineered systems to decrease and margin contribution for recurring revenues to make up a larger proportion of total gross margin.
SDMA was lower in the quarter due to decreased compensation expense on reduced head count and decreased profit share on lower operational results as well as cost recoveries recoveries related to government assistance programs.
In addition cost cutting measures have been effective in reducing travel marketing and non critical expenditures.
While interflex remains vigilant in controlling costs across the platform SDMA was negatively impacted by bad debt expenses from expected credit losses in the rest of World segment.
The work related to the bad debt some of which commence as early as 2017 was largely collected in prior periods and the provision represents only be outstanding balance owing at September Thirtyth 2020.
Bad debt that was provided for in the second quarter of 2020 was settled in accordance with management's estimate and the receivables and associated provision were de recognized.
While head count is down across many of the company's operating regions Interflex has utilized available government assistance programs to mitigate job losses.
Reflected in adjusted EBITDA for the quarter was $6 million related to government grants received in the Canada and rest of world segments.
We saw $18 million of capital deployed towards previously committed projects in the U.S rental fleet and completion of international boom projects three of which were commissioned during the quarter with a fourth expected to be commissioned in the fourth quarter.
Capital spending for 2020 is now estimated at approximately $135 million to $140 million compared to the previously disclosed $125 million to $130 million.
The increase is primarily due to project completion cost for inflight booms, resulting from COVID-19 induced worksite access restrictions and delays.
In addition.
We capitalized make ready costs for the redeployment of certain assets within our Mexican rental fleet.
Working capital saw a net decrease of $56 million in the quarter in response to a slowing of supply chain transactions to align with current market conditions.
Inventory levels decreased in the quarter at a faster than expected pace and harvesting of our accounts receivable.
Remaining inventories will be realized into engineered systems projects and new contract compression units overtime.
Notably these inventory items, our non perishable and are fungible across our engineered systems in rental offerings. So we can consume them in either business line globally.
From a capital allocation perspective, our near term focus is on preserving balance sheet strength and completing capital expenditure commitments related to organic rental fleet additions.
Interflex has identified a number of opportunities to deploy capital globally.
However, as previously stated by Mark the company, we will be disciplined in the assessment and pursuit of additional projects.
Interflex his board will continue to evaluate dividend payments on a quarterly basis.
Per share dividend to be paid on January seven Twentytwenty one.
With respect to liquidity, we exited the quarter at a net debt to EBITDA of 1.2 times, which is unchanged from our position at June Thirtyth.
Our net debt decreased by $62 million in the quarter and has reduced by 80 million since March 30, onest demonstrating enter flexes discipline in using cash flow to decrease net leverage.
With 100 million of cash on hand, and available liquidity of $567 million, we had the flexibility to manage the business through the current downturn.
This completes the formal component of the webcast additional details can be found in our November 5th press release.
We will now be happy to take any questions.
Okay.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
Again, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
Our first question or comment comes from the line of Michael Robertson from National Bank Financial Your line is open.
Hi, Good morning, Gents, Thanks for taking my call.
Good morning.
I understand the challenges in this environment of offering guidance not knowing that potential demand impact of any further way the COVID-19.
Utilization levels for the contract compression fleet hanging in at current levels or do you expect further deterioration regardless based on what you're seeing today.
Michael that's a big assumption and a lot of hypotheticals there.
And I don't really want to answer those hypotheticals directly I would say that we've had two quarters now a pretty stable utilization in the fleet in the middle of the pandemic, it's been tough and I think the prognosis for our fleet in the US is more stable now than it was six or seven months ago. So we're feeling good about it but.
We definitely would stop short of making any predictions about where utilizations going though in subsequent months.
Okay fair enough.
In terms of pricing pressure.
Seems like.
You and your your peers in that regard or being pretty disciplined.
Can you provide any color on sort of the.
Sentiment and telling you are seeing this discussion declines right now.
I think your your characterization of the situation where the providers are being disciplined is quite accurate and a lot of our customers in the first few months. The pandemic, we're very price sensitive and they still are but they've got a high high need for reliability and good service and so I think the company.
That can provide that need to get paid for that reliability and good service and I think thats was what sort of providing the stability in pricing.
All right. Thanks, Thanks for that John So I will turn it back.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
Our next question or comment comes from the line of Keith Mackie from RBC. Your line is open.
Hi, Good morning, Thanks for taking my question just wanted to start out on the Capex number.
So the creep due to the pandemic certainly understandable, but just wondering how confident and comfortable you are your current controls to mitigate risks as you look to increase your asset ownership as well as you know.
Stability and assumptions around around your returns modeling for these types of projects lot, where you take on the capex and risk upfront and and that only asset.
Yes, good morning, Keith This is Sanjay.
I think we feel we do feel good after going through.
The four projects that were bringing online this year and most of those are online.
And one of those is actually in the commissioning phase now so looking back at those projects I think we feel pretty good about our underwriting process and.
How we've evaluated risk I think.
Overruns that we've seen this year really a reflection.
A lot of market volatility you know all these projects that were spending money on.
Were signed up in in 2018, and so we're excuse me 2019.
So what we've gone through in 2020.
There was really.
No way to sort of predict what were what we were going to see through the covert pandemic and I think we're actually quite pleasantly surprised with the execution of the team.
Given some of the dislocations that we've experienced.
So so going forward new projects I think you always learn and that sort of adds to your bank of knowledge and allows you to de risk projects.
But we also feel like the four that were in flight are.
Largely behind us at this point as well.
Got it thanks for that and just secondly, sticking with the Capex theme can you have a approximate range of what you think you might spend for for 2021, especially assuming the environment does not improve.
Yeah, we're still obviously going through the budgeting process. So.
I think it's still a bit early for us to put any guide.
Guidance down in terms of in terms of Capex.
At this point Keith.
Got it okay. Okay thats it from me thanks very much.
Thanks.
Thank you. Our next question or comment comes from the line of Tim Marcelo from eight TB capital markets. Your line is open.
Hey, good morning, everyone.
I have just one question for you guys.
Bookings.
And what you're hearing from customers throughout 2021. Some of your competitors have sort of said that green shoots are starting to appear it might just be budgetary and then you said that 2021, the likely depressed, but have you seen any increase in demand around sort of gas.
His drilling in Canada, or the U.S. reclaimed whalen.
Tim Thanks for the question. This is mark we've definitely been watching the quarterly releases of a lot of the drillers and fracking companies over the past couple of weeks and indeed, a lot of them are signaling.
Q3 that was more positive than Q2.
And if that continues we'll see some benefits and customer inquiries and orders.
Three to six months later I don't want to comment about our how we're feeling about our engineer systems pipeline today, we don't typically comment about that but I think that the a lot of the macro indicators would say that theres, a very muted yet positive comeback in Canada and the United States.
We very much like the fact that we're having a good customer base both in the Montney and the Permian those are two basins that we believe will.
Our good basins to be in and that will be part of the recovery as we go through this so we're optimistic like we said in the press release we.
Have been cutting costs in our engineered systems business quite significantly because we don't really forecast as the shaped recovery in that business, we expect it's going to be.
Lower for longer and we're adjusting our cost basis, accordingly, and competing hard for anything that is in the offering.
Okay.
I guess, we're entering sort of uncharted territory in terms of where the backlog sits.
Yes.
Could you comment a little bit about the cost structure in the engineered systems business and what level of throughput you need to see sort of breakeven cash flows on a quarterly basis.
No not really we are not going to get into that level of detail, but the the.
Really the last.
Three quarters has been very very low for engineered systems.
Especially it's difficult as most people know coming off such a peak in 2019, it's it's challenging for management to rightsize the business as quickly as the market has rightsizing orders.
As Sanjay mentioned, we're right in the middle of doing a lot of capital planning for 2021 and getting those cost structures in place for what we feel will be the level of activity not just in 2021, but really going forward and the 12 to 36 month period is probably the most important thing that Aeroflex management is doing today, but as far as giving you sort of numbers.
Of what Breakevens are and what not we don't we won't give that amount of detail out.
Okay, and as you look forward and sort of understanding of the business is extremely cyclical and orders can come through pretty lumpy.
What are the challenges that might you might see in ramping up.
The business again, and do you think your supply chains are.
Properly prepared for that sort of.
Potential ramp up not that it's on the horizon today, but it will likely over the mid to long term.
Hi, Tim the most inelastic resource when it comes to growing again coming out of the downturn is our people, our engineers and our designers and our craft labor.
And therein lies the Rob with trying to fix the cost structure, because if you cut too deep on the people your ability to snap back is some is significantly limited I don't see an issue in the supply chain.
Talking to a lot of our bigger suppliers, they're chomping at the bit to get going.
Engines compressors air coolers, and indeed, all the welded fabricated equipment, we havent seen a real problem with any of the supply chain of the China, which is where a lot of the valves and piping and whatnot comes from so I don't see a problem with the supply chain. What Interflex management has to do is make sure that we thread that needle between getting our cost structure right to be compare.
Going forward to provide the kind of returns our investors want but also hanging on to that real talent that allows us to outperform the competition coming out of the out of the this pandemic induced downturn. So it's a challenge, but we've done it before this is a is a deeper and longer than what we're used to but.
We're we're on it as the best I can say without being too flippant.
Okay, Great and sorry, just one more I will try to take up too much time here, but could.
Could you guys just comment a little bit around the car, but your comment on the electrified compression and sort of all other alternative demand sources like.
The size today gnashing, it's really relatively small.
How how do you see that playing out going forward.
It's well and we're very interested in seeing how it plays out Tim there's.
It's really customers are thinking about either scope, one our scope to see two missions that they buy an engine driven package, they're going to add two to admissions to their scope one if they get electric drive they're going to add it to scope to and it's interesting for us to see how our customers are going to start making business decisions based on those cars in North America. There is.
Not a lot of actual financial impacts of moving emissions from a scope one new scope to.
Some people are looking to go electric because they're planning for potential carbon tax in the future I suppose, but it's difficult for us to understand exactly what's driving those those decisions.
A lot of the decision around electric versus engine driven compression. It does come down to Opex that you may be trade, some natural gas consumption and a little bit more complicated operations on an engine drive unit for something that's a little bit simpler on electric drive, but now you got to buy electricity and Thats very specific to the grid where people are.
Operating the economics of gas versus an electric drive in that location I, we've been building electric drive compression for over 20 years. So it's not new to US I think what we'll be watching for is any shifts wholesale and going electric drive in the big basins. We've been operating in over the course of the next six to 12 months.
But it's not a capability that we need to work on we have it in spades already so if the customers I'd like to shift some of their attention to electric drive we're ready.
Okay, and I guess just to follow on on that does that give you reason to pause or think about how you go for building out your your rental fleet.
I wouldn't say it gives us pause, but it's definitely it's definitely in consideration when we talk to a lot of our customers that are that are looking for rental services.
So we don't think that the engine drive is going the way the dodo anytime soon.
But theres more people that would like to talk about what electric driven rentals look like.
Okay, Great I will turn it back.
Thank you I'm showing no additional questions in the queue at this time I would like to turn the conference back over to Mr., Mark Rossiter for any closing comments.
Since there are no further questions I would like to once again. Thank you for joining us on the call. We look forward to giving our fourth quarter results in February.
Remembrance day is next week on Wednesday Veterans day in United States Remembrance day, and the British Commonwealth Interflex will be taken that day off in Canada, and we will for a long time, we're going to honor that as the stat holiday as long as I've got to say in the matter I would like to recognize Pete.
People in United States, New Zealand, Australia, Canada, whose ancestors.
Should be remembered from their contributions in World War, one that finished 102 years ago next Wednesday, and as we take that day off to consider those sacrifices it really puts the sacrifices of the last year in the middle of the pandemic in perspective. So again, thanks, everybody for calling and we look forward to talk.
Acne in February.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
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