Q3 2023 Enerflex Ltd Earnings Call
Okay.
Thank you for standing by and welcome to enter Flex third quarter 2023 earnings conference call.
At this time all participants are in a listen only mode.
After the Speakers' presentation, there'll be a question and answer session.
I asked a question at that time, Please press star one on your telephone.
Please be about in today's call is being recorded.
I'll now turn the call over to your host Mr. Jeff Fetterly, Vice President corporate development and Investor Relations. Please go ahead.
Thank you Valerie and good morning, everyone welcome to our third quarter 2023 earnings call with me today is Marc Rossiter, President and CEO Ginza.
Ginza interim CFO and Ben Park, <unk>, Vice President corporate controller during today's call, we'll touch on highlights from our third quarter results and provide an update on guidance and how we are progressing on our near and long term strategic priorities.
Before I turn over turn it over to Marc I'll remind everyone that today's discussion will include non Io for us and other financial measures as well as forward looking statements regarding <unk> expectations for future performance and business prospects forward looking information involves risks and uncertainties and the stated expectations could differ materially.
<unk> from actual results or performance for more information refer to the advisory statements within our news release MD&A and other regulatory filings all available on our website and under our SEDAR plus and Edgar profiles. All dollar amounts discussed today are in Canadian dollars twice stated.
With that I'll turn it over to our president and CEO Marc Rossiter.
Thanks, Jeff and thank you all for joining me on this morning's call.
Last night <unk> reported its third quarter 2023 results, which reflect the significant progress, we're making in advancing our strategic priorities, including the continued integration of Exterran.
Our recent results and progress to date also underscore that we have more work ahead of us to unlock the full potential of our combined company.
Our global footprint expanded product offerings and deepen the ability to serve the energy value chain is generating operational results that are less influenced by the economics rig counts and commodity prices of any single region or producing basin during.
During the first nine months of 2023, approximately 60% of <unk> gross margin was generated from recurring sources and.
In markets outside North America contributed 43% of the company's total gross margin during the same period.
I'm pleased to report that we delivered strong operating results across all of our geographies.
Integration and synergy realization activities related to the external acquisition.
Acquisitions remain on track since closed Exterran has captured approximately $50 million sorry enter flex has captured approximately $50 million U S of annual run rate synergies and expect to realize the remaining U S $10 million for a total of USD $60 million of anticipated synergies within the next six months.
In.
The company continues to review opportunities to optimize its geographic footprint and business platform.
To this end we are in the process of consolidating our global manufacturing facilities from five to three and in the early part of the fourth quarter completed the sale of two noncore assets for gross proceeds of approximately $40 million.
We expect these actions combined with additional optimization efforts will drive cash flow enabled long enable continued debt reduction and enhance our ability to generate shareholder returns over the mid and long term.
Touching briefly on the quarter and reflects delivered adjusted EBITDA of $122 million in operating cash flow of $71 million.
Demonstrating the strength and continued momentum from our recurring businesses as well as the North American engineered systems product line.
We recorded strong engineered systems bookings in the quarter of $560 million, bringing our year to date total in the first nine months of 2023 to one 4 billion.
An increase of approximately $500 million year over year.
Our bookings reflect demand originating from three continents, and highlight robust customer activity levels, particularly in North America, and notably for cryogenic and low carbon solutions.
Our bookings during the first three quarters of 2023 include a $153 million for cryogenic projects outside of North America, and U S $111 million related to projects that advance our energy transition business strategy.
Our record engineered systems backlog of $1 6 billion provides strong visibility into revenue generation and business activity levels for 2024.
Energy infrastructure contributed approximately 40% of gross margin during the quarter. This business is generating stable results and we continue to evaluate opportunities to maximize performance across our geographic platform.
Our U S contract compression fleet is operating at high utilization rates of 93% in the quarter.
The aftermarket services business is benefiting from increased activity levels inflationary price adjustments and continued strong demand for spare parts.
We remain committed to enhancing our financial position and we repaid $41 million of long term debt in the quarter, which is consistent with our focus on strengthening the balance sheet and enhancing the company's financial flexibility.
However, our reported long term debt declined by only $5 million in the quarter due to the negative impact of a strengthening U S dollar versus Canadian dollar.
On today's call I also have the pleasure of introducing pre tinder, who announced we announced as our interim CFO last month and Jeff that early as our new VP of corporate development and Investor Relations.
As a seasoned financial leader with more than 25 years of experience primarily in the energy and financial service industries.
He brings a proven track record of leading large international finance organizations, including through post merger integration activities.
Jeff is well known to many listeners as a well regarded thought leader in energy equity analysis IMAX.
I am excited to be working with Jeff and treat at this important time for our company and I'm confident that their experience will serve enter flex shareholder as well.
Before I turn the call over to Pete I'd like to emphasize that the underlying macro drivers for our business are robust with the ongoing focus on global energy security.
The growing need for low emissions natural gas, resulting in a strong demand for <unk> energy infrastructure and energy transition solutions.
As customers aimed to decarbonize their operations enter flex is poised to capitalize on the growing demand for sustainable energy infrastructure.
Through our vertically integrated natural gas produced water treatment and energy transition offerings.
With that I'll turn it over to Pete to speak to the financial highlights of the quarter and provide an update on <unk> outlook for the balance of 2023 and 2024. Thank.
Thank you Mark and good morning, everyone I'm excited to step into the CFO role to get pivotal time for NSX I've hit the ground running to support our strong global finance team as you work to ensure the company has financial stability and flexibility through industry cycles, our consolidated third quarter revenues of $778 million was driven by.
<unk> strong performance from enter flex is recurring businesses in North American engineered systems product line.
<unk> gross margin was $146 million or 19% of revenue comparable to Q2 2023.
Energy infrastructure gross margin decreased quarter over quarter to 30% primarily related to higher depreciation.
Engineered systems gross margin improved to 15% as we execute on higher margin backlog.
Our after market services gross margin was 17% in Q3 2023 compared to 20% in the prior quarter reflective of a sales mix that included a higher proportion of part sales compared to most recent quarters.
And I'd like to have SG&A of $115 million increased by $15 million over the second quarter, which is largely driven by a one time bad debt recovery of $12 million does recognize in the second quarter.
Transaction restructuring and integration costs were $6 billion in Q3 compared to $12 million in Q2, we.
We do expect to see additional cost for restructuring and optimization, although as Mark mentioned integration and synergy realization activities remain well on track.
This brings me to our adjusted EBITDA of $122 million in the third quarter.
Included adjusted EBITDA or foreign exchange losses of $17 million during the quarter related to the devaluation of the Argentine peso.
We continue to actively manage this closure and generated $11 million in offsetting gains from associated instruments. The majority of this amount is reported net finance cost and excluded from the adjusted EBITDA number we reported.
Excluding the impact of foreign exchange, our business in Argentina continues to perform well and generate strong operating cash flow for the company.
And reflects also continues to manage foreign exchange volatility with the majority of exposure to the Argentine peso offset by associated instruments.
Cash provided by operating activities was $71 million in the quarter, which included a working capital recovery of $15 million.
Comparatively in the second quarter cash used in operating activities was $4 million.
A $75 million positive swing Q over Q.
We invested $26 billion in capital expenditures, including eight mailing of maintenance capital across the global energy infrastructure fleet and returned $3 million to.
To shareholders through dividends.
Enter flex his primary focus for 2023 is to progress the integration of Exterran and strengthened our financial position.
During the third quarter, we repaid $41 million of long term debt, although reported long term debt declined by only $5 million.
Including the impact of a strengthening U S dollar.
We reduced our bank adjusted net debt to EBITDA ratio to two seven times at the end of Q3 from three three times at the end of 2022 and we are on track.
To achieve a ratio of slightly less or less at two five times by year end 2023.
We are reaffirming all of our full year 2023 financial guidance as last provided with our second quarter results.
We anticipate adjusted EBITDA is currently reported to be at the low end of its guidance range inclusive of the impact from volatility in foreign exchange markets, specifically Argentina.
Please note foreign exchange losses of $41 million during the nine months ended September 2023.
Latest devaluation of the Argentine peso is included in our adjusted EBITDA.
We continue to target total 2023, PP&E and growth capital expenditures of $80 million to $90 million.
Which includes two large water projects that were commissioned in the first quarter and various small scale.
<unk> section project in the U S Latin America and eastern Hemisphere.
Heading into 2024, we expect our performance to be underpinned by recurring energy infrastructure and aftermarket services product line and a robust engineered systems backlog.
And I'd like to targeting a disciplined capital program in 2024, consistent with our current focus we will continue to prioritize debt reduction synergy realization and operational efficiency.
The company continues to review its target long term capital structure and capital allocation parameters and we expect to provide more clarity in the coming months.
Finally enter flex is committed to delivering a sustainable dividend to shareholders with our board declared a quarterly dividend of $2.05 per share.
The dividend is payable on January 10 to shareholders of record on November 21.
Before I turn it over to Mark I would conclude by saying that within the supportive and reflects a strong leadership team and talent in place we are proving that profitability and resiliency of the global business with an objective to generate sustainable cash flow I am excited to have joined this team and to help unlock the businesses full potential for the benefit of our shareholders.
<unk> customers employees and stakeholders with that over to Mark for closing remarks.
<unk> third quarter financial and operating results highlight our continued ability to successfully execute against our strategy.
Across our three core businesses around the world our commitment to our key priorities remains steadfast as we work to maximize free cash flow generation strengthening our financial position and realize the benefits and synergies from the acquisition and continue to offer best in class natural gas produced water and energy transition solutions to our.
<unk> across the globe.
I look forward to building on our progress to create significant value and optionality across geographies customers and product lines.
I will now hand, the call back to the operator for questions.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone again to ask a question. Please press star One line one moment for your first question.
Our first question comes from the line of Aaron Macneil of TD Cowen Your line is open.
Hey, good morning, and thanks for taking my questions can.
Can you give us a sense of.
Spending for working capital work in progress asset sales.
Any other discretionary cash flows for Q4, so we can get a sense of conversion rates of EBITDA into cash and maybe if you have any preliminary thoughts on 2024 for these types of flows that would also be very helpful.
Yes sure Erinn. This is mark and I'm going to ask Jeff to answer that with a little bit more specificity, but we did confirm guidance and guidance goes into a fair amount of detail on some of those cash flows.
And I don't think we're in a position right now to provide any more guidance on specific areas of cash flow in Q4.
Jeff do you have anything to add to that yes.
To reiterate Erin we talked about from a capital expenditure standpoint, including contract assets, a target range of $160 million to $190 million U S for 2023, and the other non discretionary expenditures, which is composed of the working capital finance costs cash income taxes and dividends of between 100.
80, and $210 million U S and as Mark said, we reiterated those and we remain on track to meet those targets for this year.
Going into 2024 as we as we said in the script for the prepared remarks, we're targeting a disciplined capital program for <unk> for the year and we will continue to prioritize debt repayment.
Okay.
Can you speak to the types of energy transition related bookings in the quarter is it predominantly electric drive compression or is there any other carbon capture or biofuels or other projects in there.
The majority of the bookings is electrification.
Understood. Okay. Thanks ill turn it over.
Okay. Thank you one moment please.
Our next question comes from the line of Keith Markey.
Of RBC capital markets. Your line is open.
Hi, Good morning, first wanted to just start out on the margin profile in energy infrastructure noticed it's trended down a little bit in this quarter. It's just just Nick below the 55% to 65% target range or or approximate range on a cash basis can you just speak to the fab.
Actors behind where margins are in that business now I noticed the U S contract compression utilization trended down slightly so can you just speak to the factors behind where margins are now and hopefully, we're where we should be thinking about margins going over over the next three to four quarters.
It's been yes, those margins are kind of well within expectations for that business on a run rate basis. If you take a look back to Q2 I think we're closer to that than we were for last than we were last quarter or sorry, Q1 and.
Q2, but it's well within the range there.
Got it okay.
And preach.
Steve joined the organization just just recently.
Certainly as you mentioned at a pivotal time can you just speak to.
As you've as you've kind of gotten into that into the into the company and seeing people and operations can you just speak to some of the maybe some of the strength in the organization that you've seen in your first impressions as well as some of the areas where you think there.
There could be optimization for the future.
Sure. Thank you. Thank you for that and so I've been here just under four weeks out total time and the great place to be very happy to be here a wonderful group of people I think the executive team good interaction with our board. This week in my Global Finance team is fantastic. So good group of folks all around and I would like to scale it.
<unk> of the organization and we're working through integration as some of our priorities are where my focus is as integrations clearly important that we've put a milestones out there 12 to 18 months to complete most of that.
Number two free cash flow generation debt reduction is a very important vehicle and we have committed we will be under two five times. The key leverage metric by year end and then going forward the long term capital structure and capital allocation priorities, we're working towards that to find out how we should be structured as a combined global SD post.
<unk> given the mix of our business tied to recurring revenues and also the.
Other side of the business, where we're kind of that carefully and dividend falling to that leverage metrics falling to this optimal debt amounts. So those are my priorities I would say and.
I look forward to working with the team and very pleased to be here.
Okay. Thanks, that's it for me I'll turn it back.
Thank you.
Please.
Our next question comes from the line of.
Kevin Marcelo of ATB capital markets. Your line is open.
Hey, good morning, everyone.
Yes, Sir good morning, good morning, Tim.
Okay.
Sure.
We're here first question just on the <unk>.
<unk> systems.
Margins at Ciena is taking up a little bit.
Booked five cryo clients in 2023.
I imagine those are a little bit longer lead builds but you've got the $1 2 billion and your systems backlog, you're expecting to recognize over the next 12 months can you talk a little bit about how that margin.
Embedded margins.
Backlog compare to where you are today.
It's in line with where we are executing right now.
Tim and I think we've been pointing to.
A mid teens sort of targeted minimum margins in that business and we definitely would like to move it up higher through operational execution.
Knowing knowing the embedded backlog and what we're booking things at it gives us a lot of visibility too.
Revenue streams from that business line going all the way out through the end of 2024 and that mid teens target for for operating margin is pretty close to where we're going to be in my expectation.
Okay. That's helpful.
And then in the energy infrastructure business revenue was down a little bit quarter over quarter not much.
But I would have expected to see some growth in that revenue line, just given those water projects coming on.
Through the first half of the year.
Was there any.
And your contract book there.
So Tim it it wasn't that we expected the revenues to be pretty stable in from Q2 to Q3, the water projects. Some of them started up in Q1 and Q2. So it's not surprising that said it was stable quarter over quarter.
Okay.
Yes, I think you answered all the rest of my questions I appreciate it.
Thank you.
One moment please.
Our next question comes from the line of Jamie Kubik.
CIBC Your line is open.
Yes. Good morning, Thanks for taking my question I've got two here for you.
On the.
Engineered systems bookings can you just talk about maybe the split between Canada and the U S.
Are you seeing much recovery on the Canadian side, given the agreement NBC between the first nations and government to start the year. Thanks.
So yes, the bookings in the quarter.
They were very international we had orders from Latin American segment, we had orders in.
From U S customers Canadian customers and indeed from customers in the eastern Hemisphere.
Those engineered systems orders go through the U S and Canadian shop so.
But yes, very very broad base of orders to go to Canada specifically.
We've seen an increase in <unk>.
Inquiry levels and I think a lot of our midstream customers have been looking at projects for some time and it feels like the conversations we've been having there is an increased conviction to start moving on adding.
<unk> gas processing and liquids processing infrastructure in the northwestern Alberta, northeastern BC area.
That's a direct result of the blueberry first nation agreement or not is difficult to say, but we do expect bookings in Canada in 2024 to be more robust than we saw in 2023 and the most obvious macro drivers for that expectation really is a blueberry first nations in the LNG Canada.
The two big drivers and I think a lot of our a lot of the producers in Canada and a lot of the midstream reporting to those same macros for why they see some continued positivity in the Canadian market for next year.
Okay. That's helpful and then just.
Second question for me is a bit of along the same lines as what Aaron was asking.
And with respect to if you don't want to provide more granularity on this but I'll ask it anyways, but just with respect to 2020 for Ya <unk>.
Indicate youre targeting a disciplined capital program for next year can you just outline a bit what that ultimately means does it mean.
Capital spending in this year.
And then you do talk about.
Evaluating a target long term capital structure and capital allocation parameters.
What is what does that mean.
Should we think about two and a half turns of debt relative to ebitdas.
Sort of the high watermark for where you want that to be and then should we think about shareholder returns increasing it.
At levels below that can you just.
Touch on those items a bit further if youre willing to thanks.
Hey, Dan it's Jeff.
Capital spending standpoint.
<unk> talked about this in recent calls.
After heavy investments in 2022 and 23, the expectation is that capital spending will come down and be lower in 2024.
We are still in the process of evaluating our capital program for next year and expect to provide clarity to the market in coming months on that specifically, but from a directional standpoint, I think thats reasonable to see.
In terms of.
The debt and the leverage side.
As <unk> said in his prepared remarks.
We're on track to reach a leverage ratio of under two five times by the end of 2023 debt repayment will remain a priority for the company in 2024, both in absolute terms and on a relative leverage ratios ratio basis.
And we also continue to evaluate whats the optimal capital structure and long term ratio is for the company and we expect to provide more clarity on that in coming months as well.
Okay. Thank you.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone one moment for our next question.
Our next question comes from the line of John Gibson at BMO Capital markets. Your line is open.
Good morning, most of my questions have been answered, but I've got one here.
I guess more high level, we're just over a year post closing of the external transaction.
<unk> seen some noise in the early part of the year I guess, how close are you to getting the pro forma entity.
We wanted to in terms of like your facility footprint cost in the system et cetera.
The project the most as you've worked through the integration over the past year or so.
John We are we are.
Pretty much complete on the vision of what we want to enter flex to be long term.
We've executed on 90% of the people related streamlining and synergies we've got work to do on the processes and systems and that's going to be a big part of the of the effort through 2024 going into 2020 fives I want the company to be integrated streamlined all operating in the same process.
As a systems, but what youll see from US operationally in 2024 is very close to the long term and reflects with respect to the markets. We address the geographies were present in and our emphasis on our three core business lines of engineered systems energy infrastructure and aftermarket services and are sort of.
Big macros of natural gas produced water and energy transition.
We're kind of there we're going to be getting out of the.
Two shops that were closing by the end of this year early next year and the cost to complete some of those exits has been better than we anticipated if I want to flip to some of the things that were a little unanticipated.
We do want to exit a lot of countries that we don't view as core and move on the cost to exit some of those countries was a little bit higher than we thought and we will be.
Putting some more thought into that.
Additionally, making sure that the company's Sox compliant in accordance with our SEC filing and our NYSE listing.
That's a lot of work and Thats something that our employees have been working really hard on all year to achieve that Sox compliance and thats something that will require a focus of <unk> team and a lot of operational folks into to close out the year and into the first quarter 2024.
Thanks, a lot great response.
Sure.
Thank you.
One moment please.
Our next question comes from the line of Nick Corcoran.
Acumen capital your line is open.
Good morning, most of my questions have been answered, but I think in the prepared remarks, you mentioned non core asset sale. After quarter end can you give a little bit more color on that.
What that was and whether there is any other options coupon types.
Sure Nick.
We sold.
Set of assets in Latin America, and a set of assets in North America.
And in both instances we had.
The Counterparties, we sold two approached us and.
Thoughtful discussions about above.
How about those sales so it's good in a way that we sold one of the packages to an existing customer.
The positive is that they are going to have a long term O&M contract with <unk> to keep those assets running.
It's good news it helps us reinforce our debt reduction priority.
The non core assets don't have material EBITDA that will be taking off from our forecast because of the sales and it's in my opinion. It said, it's a bit of a win win story that we were able to achieve those those sales subsequent to quarter close.
And just a related question are there other assets that you can monetize them from Lora.
Well, we're always open to conversations with customers and business partners and if our customers our business partners see significant value in some of our assets and it makes sense for us and our shareholders. We would have those conversations I wouldn't say that we're actively.
Looking to pare back our business or make any significant transactions, but we're always in the market. We're always looking for thoughtful conversations with counterparties to make sure that we maximize.
Enter flex shareholder value long term.
Okay. That's good color and then I think you you kind of touched on this in the split between USA Chad that back.
Theres been some consolidation in the Permian are you expecting that to have any impact on your business.
I think it's going to have a positive impact Nick.
I think the whole industry came out of Covid.
The consolidation theme has been a theme in the service sector in the midstream sector and in the E&P sector.
The enter flex Exterran situation was part of that consolidation theme.
One of the reasons, we consolidated is that our customers are looking for solutions to bigger more complex more long term problems and to that end our bigger enter flex is better able to serve bigger customers.
One of the things I liked as an industry participant with the consolidation in the Permian and the Montney is that you've got a fewer number of players that have very long term sustainable outlooks on developing the overall basin and so if we could get more stability and less boom bust cycles in the market through the consolidation that would be wonderful.
<unk> ability to respond to these bigger and more sophisticated customers has always been we're reposition ourselves and so I do think it does play into our strategic positioning in the market and it also plays into a more long term sustainable development of those assets.
Thanks, That's all for me I'll pass along.
Thank you one moment please.
Okay.
Our next question comes from the line of.
Coal perea.
Stifel. Your line is open.
Hi, good morning, all.
Some good color on how youre thinking about 2020 for Capex and can appreciate that it's still a work in process, but high level should we assume that your 2023 maintenance capital guidance is kind of a reasonable run rate for the business going forward.
That's a reasonable.
Starting point, yes.
Okay got it that's all for me thanks.
Thank you one moment please.
Sure.
Our next question comes from the line of Tien Monticello.
From ATB capital market. Your line is open.
Hey, just to follow up on that.
Non core asset sale can.
Can you quantify what the proceeds might be and then.
Anywhere.
For the quarter here.
How should we be thinking in terms of the direction of long term debt.
September 30 year end and net debt.
In the non core asset sales Tim are going.
Generate roughly $40 million in.
And cash proceeds to enter flex.
And the second part of your question, where do we see total debt going for the balance of the year, Yes, I think we talked about the pay down this quarter of $41 million Canadian dollars.
But we got the offset on the U S dollar strengthening FX impact as we discussed but I think Q4 think about something similar we are continuing to focus on debt repayment, maybe a little bit more than where we're at today. However, the key metric will be we're targeting under two five times.
And just to be sensitive to the U S dollar continuing to strengthen as at now versus at quarter end Q3, and just keep an eye on the U S dollar exchange, but.
That may also offset or temper our debt reduction that we will be breaking those out also at the end of the year.
Okay. Thanks, a lot.
Thank you.
Im showing no further questions at this time I will turn the call back over to Mark for any closing remarks.
Thanks, operator, I'd like to thank everybody for dialing in today to reiterate our strategic priorities for the close of 2023 and into 2024 is having a disciplined capital program through 2020 for focusing on generating free cash flow repaying debt and setting enter flex up for the future.
I would like to take this opportunity to thank all current and former <unk> teammates that serve their companies and uniform as we prepare to remember those unremembered stay in the Commonwealth and veterans day in the United States. Thank you for your service.
We look forward to talking to our investors and stakeholders again wanted to report Q4 earnings in February.
You.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now disconnect have a great day.
Okay.
[music].
Okay.