Q3 2022 Enerflex Ltd Earnings Call
Yeah.
Yeah.
Good morning, ladies and gentlemen, and welcome to the <unk> third quarter 2022 earnings Conference call.
At this time all participants are in a listen only mode.
And reflects his prepared remarks, we will conduct a question and answer session.
Tuck ins will follow at that time.
This conference call is being recorded.
I'd now like to turn the call over to your host Stefan Ali Vice President strategy and Investor Relations. Please go ahead Sir.
Thank you operator, good morning, everyone and thank you for joining us on our third quarter 2022 earnings Conference call with me on the call today are Marc Rossiter, President and Chief Executive Officer, Sanjay <unk>, <unk>, Senior Vice President and Chief Financial Officer, and Ben Park, Vice President corporate controller.
During today's call, we'll touch on highlights from our third quarter 2022 results comment on the performance of our three business segments and provide an update on the current acquisition, which we closed on October 30.
Unless we state otherwise they are adults referenced today represent standalone enter flex performance only.
Before I turn it over to Marc I'll remind everybody that today's discussion will include non IRS and other financial measures.
Forward looking statements regarding <unk> expectations for future performance and business prospects.
Forward looking information involve risks and uncertainties and the stated expectations could differ materially from actual results or performance.
For more information please refer to the advisory statements within our news release, MD&A and other regulatory filings all of which are available on our website and under our SEDAR and Edgar profile.
All dollar amounts discussed today are in Canadian dollars, unless otherwise stated.
With that I'll turn it over to our president and CEO Mark Rothera.
Sure.
Thanks, Stephanie and thanks to all our listeners for joining today's call. This is an exciting time in <unk> history, having close the Exterran acquisition just for short weeks ago.
Operationally the timing of the acquisition is very good considering the strength of today's global macro natural gas environment.
Natural gas is an increasingly important component of the global energy mix with energy security and de carbonization at the forefront and.
<unk> is ideally positioned with our technical capabilities.
Spaniard offerings and larger geographic footprint.
Before I speak to our integration efforts and what lies ahead for under flex I want to briefly address enter flex the standalone third quarter results.
As they were solid and represent current momentum.
Mentum of our industry.
During the quarter, we recorded sequential improvements across all key financial metrics.
Including expanded margins in each of our product lines are engineered systems bookings were nearly $350 million and included an impressive $100 million of energy transition projects, which I will speak to momentarily.
Despite producers continuing to exercise capital restraint or manufacturing capacity is tightening which has allowed us to capture expanded margins on new bookings and grow our backlog to $884 million at period end.
Together with experienced product sales backlog, our combined pro forma backlog of $1 5 billion.
Represents excellent visibility into our revenue generating capabilities next year and it de risks our near term deleveraging plan.
Our USA segment continued to be a leading contributor to our business performance as Permian basin activity and growth in LNG exports drove demand for our products and services.
Notably our USA contract compression fleet reached a record high average utilization rate of 95%.
Alright, Thats enrollment performed as expected given the large portion of our business in Latin America, and the Middle East that is recurring in nature we.
We are progressing construction of the large natural gas infrastructure project that was awarded last year in the middle East and expect to bring that facility online in the fourth quarter.
And while we have seen year over year improvements in our Canadian business, we expect activity to increase on a mutually beneficial resolution has reached between the Blueberry River first nations and government of British Columbia regarding future resource development in the province.
As I alluded to earlier enter flex continues to expand its energy transition business in earnest, we are seeing significant demand for our energy transition solutions as our customers look to reduce their corporate emissions.
And as we jointly drive the global Decarbonization agenda forward.
During the third quarter, we secured approximately $100 million in energy transition bookings, which will collectively capture and permanently sequester over 1 million tons of Sidoti <unk> once the projects are in operation.
For several decades enter flex has been a trusted partner in delivering these types of Modularized integrated solutions to serve this growing market and I look forward to continuing to report on the successes of our energy transfer transition business over the coming quarters.
Now turning to the Exterran acquisition.
The only been four weeks since we closed the acquisition we have been busy integrating the two organizations.
With operations in over 100 locations in more than 25 countries. We are quickly realizing the benefits of our highly complementary product lines and geographic footprints.
I am pleased with the progress the teams have made so far as we focus on delivering our expected annual run rate synergies of $60 million U S as quickly and efficiently as possible.
Currently we are on track to capture about half of the expected synergies within six months of closing and the balance over the course of 12 to 18 months.
Improving our free cash flow position and the underlying profitability of our business.
We're also taking the time to learn and understand experience cryogenic and produced water technologies in greater detail as we incorporate them into our broader portfolio.
This includes completing three external projects in the middle East that are underway to water facilities and one cryogenic natural gas facility.
One of the water facilities became operational just this week and the other two projects will be completed in 2023 now.
I'll now turn it over to Sanjay to touch on the financial highlights from the quarter.
Thanks Mark.
<unk> saw continued strength across all business segments and product lines during the third quarter, given the supportive natural gas supply and demand dynamics at play. This morning, I will briefly touch on the key financial figures from the quarter before turning to the new debt capital structure, we established as part of the external acquisition and what our deleveraging.
Strategy it looks like moving forward.
Reflecting increased business activity and reflects this topline revenue of $393 million increase for the sixth consecutive quarter.
Revenue increased by approximately $20 million or 6% sequentially and resulted from a larger opening engineered systems backlog.
A record high average utilization rates on our U S contract compression fleet and favorable currency translation effects from a strengthening U S dollar.
Our gross margin also continued to trend upward in the third quarter, expanding the $79 million.
Or 20% as a percentage of revenue while the lower margin work awarded during the slowdown.
Now largely complete.
Gross margins for all three product lines improved from the second quarter.
With these improvements in revenue generation and margin expansion and reflects recognized in adjusted EBITDA of approximately $53 million during the quarter $8 million higher than the second quarter of 2022 and $20 million higher than the third quarter of 2021.
Enter flex recognized a net loss of $33 million during the period.
Withstanding the positive impacts of strong business performance rising interest rates drove a $48 million noncash goodwill impairment for our Canada segment.
This goodwill predominantly related to goodwill recognized when <unk> was spun out of <unk> in 2011.
Lastly, on our third quarter financial results, we invested $46 million in energy infrastructure capital expenditures and work in progress related to finance leases.
Of this $27 million was directed at our rental assets and $19 million was directed at the large natural gas infrastructure project underway in the middle East that Mark referred to earlier.
Now turning to the new debt capital structure that we put in place in October as a part of the external acquisition.
Through the refinancing we established approximately $1 5 billion U S dollars of total credit capacity for the company, which includes 700 million U S. Dollar three year secured revolving credit facility.
$625 million of aggregate principle amount of 9% senior secured notes due in 2027.
And $150 million three year secured term loan facility.
Upon close we used the net proceeds of the notes and the term loan facility along with an initial draw on the revolver and cash on hand to extinguish the existing enter flex and Exterran notes and credit facilities.
Today, the company's net debt balance is approximately $136 billion Canadian dollars, which is in line with our prior expectations.
That brings me to our near term deleveraging profile, which remains a top priority for <unk>.
Over the next several months as we fund the completion of our in flight projects. Our net debt balance is expected to peak by early 2023.
We expect to reduce our bank adjusted net debt to EBITDA ratio to below two five times by year end 2023 as in flight projects come online and our $1 5 billion combined backlog is processed through the P&L.
Thereafter enter flex is free cash flow will grant the flexibility to allocate capital between further debt reduction shareholder returns and disciplined growth with the objective of enhancing shareholder value over the long term.
Finally enter flex remains committed to delivering a sustainable dividend to our shareholders.
Knight The board declared a dividend of $2 five per share, which will be paid on January 12, 2023 to shareholders of record on November 17th 2022.
With that I will hand, it back to mark to provide some concluding remarks.
In closing the outlook trend reflects is as strong as ever.
Having just completed our transformational acquisition of Exterran, we're ready to harness the robust macro natural gas environment by leveraging our increased scale geographic reach and ability to serve a broader customer base and key natural gas gas growth regions across the globe.
Our asset base of nearly 2 million horsepower compression and over 25 natural gas infrastructure facilities is designed to be stable and low risk with its diversity of geographies counterparties and underlying commodity drivers.
Our near term priorities integrating the two organizations and deleveraging as quickly as possible, we will increase our ability to create significant shareholder value as we continue to deliver on our vision of transforming energy for a sustainable future.
And with that we are happy to take questions.
Thank you.
Ask a question you will need to press star one one on your phone. Please standby, while we compile the Q&A roster.
One moment, please our first question.
Our first question will come from Michael Robertson of National Bank Financial Your line is open.
Hi, there thanks for taking my questions Congrats on a solid quarter.
I just had a sort of follow up on some of the opening commentary I believe Mark you said that you guys were expecting on.
Being able to extract roughly half the synergies in the coming six months I was just wondering if you could provide some more color on sort of the I guess like the low hanging fruit versus <unk>.
Some synergies that will take longer to extract it.
I assume some of that stuff do you expect to be able to do quicker might just be.
Starting a redundant positions facilities, but any thoughts on that would be helpful.
Yes sure. There is a group of people that that were dismissed from the counterparty pretty much on day, one knows their executive management team primarily in some senior leaders Andrew.
And reward costs that were able to avoid right out of the gates and in the first six months, it's largely it's largely redundancies in people.
Got it got it.
Okay, that's great I'll jump back in the queue.
Thank you.
One moment. Please next question.
Our next question will come from Keith Mackey of RBC capital markets. Your line is open.
Hi, good morning, and thanks for taking my question.
Just to start off I know, you've got a pretty healthy.
The projects you are currently working on.
On the energy infrastructure side, but maybe mark if you could just talk a little bit more about what youre seeing in the bid pipeline for energy infrastructure projects is there anything to that.
That you are currently active on or what does the market look like for a new opportunity.
The pipeline is pretty quiet right now Keith.
Not working to actively on any particular investments and thats, primarily because our number one priority of deleveraging the business.
Got it.
Thanks, Thanks for that and then second question would be just on the new energy type bookings.
Maybe you can give us a little bit more color on what you booked for that 100 million 100 million in bookings this quarter end and you have a target for kind of how you see that.
Industry or that they.
In this segment are unfolding as far as what type of financial impact of new energy could make too to the combined that reflects in the next call. It one to two years.
The projects are carbon capture projects.
Where we're supplying modularized integrated carbon capture facilities there in the United States.
They are in Canada the projects.
In the United States are largely funded by 45, Q and the inflation reduction Act and Canada projects are more pilot in nature with some.
Premier oil and gas companies that are looking to get a head start on post combustion carbon capture.
That's the nature of them their equipment sale contracts and it's important to note I think that that these there is a small component in the $100 million that I would call pilot projects, but the vast vast majority are operational commercial industrial scale carbon cap.
Projects.
They're not experiments theyre not trials, they're not pilots there and reflects please build a plant because we want to start sequestering seeded to right away and I think for a lot of people that are paying attention, especially to the Canadian space that is not being heard anywhere in Canada that people are actually doing projects that they have a vision to getting this stuff in the <unk>.
Ground and <unk>.
12 to 24 months, so I think thats one of the benefits of our global reach is that we're exposed to different.
Government frameworks that are moving at different paces to get the Ccs projects.
Going we're definitely a big participant in Canada, but it's much slower as there is not a clear government framework for making these projects successful and I think the Canadian projects will take years to a number of years may be up to 10 years to fully be realized whereas the projects in the United States.
Are happening right away. So we're really excited about our footprint in the us and giving us access to those projects.
These projects come with next to zero technical our execution risks is things that we've been doing for decades, almost 150 projects in total and we're really happy to be chosen as a partner in these project, especially that one where we're doing 450000 tons at a single facility. That's a very exciting project for us.
As far as the size of the prize.
I believe in the past we've said this could be a $200 million per annum revenue business.
And I could see a window to that $100 million for the bookings in a single quarter I think a $200 million average run rate from an engineered systems point of view of near term is not is not at all being too aggressive on that front.
Perfect. Thanks, Thanks for that color and maybe finally, one for Sanjay.
Thanks for the.
Current net debt number.
Maybe if you could just sort of run through what you expect for the rest of the quarter as far as cash and Capex and ultimately where you think that gets you to.
Net debt wise closer to the end of the year I know you mentioned you expected that the peak.
In early 2023, but just sort of.
Looking to get a little bit more goalpost on or what we should be looking at or targeting for the end of the year that'd be helpful.
Yes sure Keith.
Look I think we sort of gave you the latest and greatest data. We had was I think it was in November 9th is at.
The data, we tagged I think.
So it's.
I'd say, there's not a whole lot that we materially expected change between November 9th in the end of the year.
Would you expect the balance will move up a little bit, but I don't expect it's going to be any material movement.
Got it thanks, that's it for me I'll turn it back.
Thank you.
As a reminder to ask a question you will need to press star one one on your phone.
One moment please for our next question.
Our next question will come from Tim Monticello of ATB capital markets. Your line is open.
Hey, thanks, everyone.
First question just to follow up on me.
On the synergies target.
And the integration I'm, just wondering if and when you guys will be looking at potential to consolidate the footprint. If there was any more upside to that $60 million.
U S figure that you've stated.
We're looking at it right now and that's a part of the integration effort that we're working on in and if there is rationalization of geographic footprint, we'll be communicating that in subsequent quarters.
Okay.
Anything you've learned through the early stages of.
<unk> been doing pre integration work.
Until the deal closed, but as the deal closed and show you got more access to facilities.
Yes.
And data is there any learnings that you've seen come through.
I mean, there is definitely with full access to all the data and reflects.
And reflects people in all of our new teammates are definitely getting to know how each other does business there hasnt been any significant.
Really significant positive or negative learnings.
It's a business that we understand so everything we see once we sort of translate it into the numbers in the language that enter flex management is used to seeing it as a pretty traditional business and no big surprises.
Okay.
There was one line.
And DNA just talking about.
You guys are looking at other reporting segments and evaluate how you might report them going forward I would have thought.
They are failing analogous but maybe there is something that I'm missing so I'm curious what.
Gives and takes in that in that discretionary.
Yes.
Tim This is sanjay.
Currently looking at it we will.
We'll probably roll out some more formal guidance when we talk about Q4.
But as you are aware.
Some of our businesses has just gotten bigger like our middle Eastern business is bigger.
Our Latin American business is bigger and so it just begs the question how should we be reporting we don't see a wholesale change we still think we're going to stick to.
Geography, being the primary variable by which we segment the business.
But we are thinking about how do we break it out to provide a little bit more transparency.
Oh I see okay. So then maybe adding another gallagher here, a little bit more granularity around the rest of world segment.
Yes, those are the questions. We are currently evaluating.
Got it okay.
And then I'm curious if you can provide a little bit.
I have an outlook on how demand is shaping up sure.
Natural gas related engineered systems products as you get $100 million of the bookings.
<unk>, which we knew we would have seen a decrease in <unk>.
U S.
Bookings around natural gas is that a function of.
Reduced demand timing.
Is there an element that may be you guys are passing on some projects because you don't want the working capital drag.
Leverage.
Okay.
Tim I don't think that our pipeline of opportunities would reflect any decrease in demand for <unk>.
Compression in natural gas processing.
On the call that our traditional es business it is quite robust.
Okay.
That's all for me Thanks, a lot guys.
Okay.
Thank you.
Again to ask a question. Please press star one one on your phone.
One moment, please as we compile the Q&A roster.
And with no further questions in the queue I would now like to turn the conference back to Marc Rossiter for closing remarks.
With no further questions I want to thank everyone for joining today on the eve of remembered stay in the Commonwealth and veterans day in the United States I'd like to thank all of my <unk> teammates that served in uniform.
We'll be thinking of you tomorrow.
We look forward to connecting with our investment with the investing community in the new year to discuss our full year results and our first quarter of integrated reporting.
This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.
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