Q1 2024Enerflex Ltd Earnings Call
Operator: Hello and welcome to the Enerflex first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising that your hand has been raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Vice President, Corporate Development, and Investor Relations, Jeff Fetterly.
Hello, and welcome to the <unk> first quarter 2024 earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.
Operator: Ask a question during this session you will need to press star one on your telephone.
Operator: We will then hear an automated message advising that your hand has been raised.
Operator: Your question. Please press Star one again, please be advised that today's conference is being recorded.
Jeffrey Eric Fetterly: It is now my pleasure to introduce Vice President corporate development and Investor Relations, Jeff federally.
Jeffrey Eric Fetterly: Thank you, Andrew, and good morning, everyone. Welcome to our first quarter of 2024 earnings call. With me today are Marc Rossiter, President and CEO, Preet Dhindsa, SVP and CFO, and Ben Park, Vice President, Corporate Controller. During today's call, I prepared remarks to focus on three key areas. First, the strong operational performance of the business during Q1 and our outlook for the balance of 2024. Second, an update on the modularized cryogenic natural gas processing facility in the Middle East that Enerflex has been constructing for a client partner.
Jeffrey Eric Fetterly: Thank you Andrew and good morning, everyone welcome to our first quarter of 2024 earnings call.
Jeffrey Eric Fetterly: With me today are Mark <unk>, President and CEO, Credenza, SVP, and CFO and Ben Park, Vice President corporate controller during todays call. Our prepared remarks will focus on three key areas first the strong operational performance of the business during Q1 and our outlook for the balance of 'twenty 'twenty four second an update on the <unk>.
Jeffrey Eric Fetterly: Modularized cryogenic natural gas processing facility in the middle East that enter flex has been constructing for a client partner and third our progress on near and long term strategic priorities.
Jeffrey Eric Fetterly: And third, our progress on near and long-term strategic priorities. Before I turn it over to Marc, I'll remind everyone that today's discussion will include non-IFRS and other financial measures, as well as forward-looking statements regarding Enerflex's 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.
Speaker Change: Before I turn over to Marc I'll remind everyone that today's discussion will include non IRS and other financial measures as well as forward looking statements regarding enter flexes expectations for future performance and business prospects.
Jeffrey Eric Fetterly: Forward looking information involves risks and uncertainties and the stated expectations could differ materially from actual results or performance.
Jeffrey Eric Fetterly: For more information, refer to the advisory statements within our news release, MDNA, and other regulatory filings, all available on our website and under our CDAR Plus and EDGAR profiles. Additionally, effective January 1, 2024, the company changed its presentation currency from Canadian dollars to U.S. dollars to provide more relevant reporting of Enerflex's financial position. As a result, all amounts discussed on this call are in U.S. dollars unless otherwise stated. As part of our prepared remarks, we will also be referring to slides in our investor presentation, which is available on our website under the investor relations section. I'll now turn it over to Marc Rossiter, Enerflex's President and CEO.
Jeffrey Eric Fetterly: 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 effective January one 2024. The company changed this presentation currency from Canadian dollars to U S dollars to provide more realm.
Jeffrey Eric Fetterly: <unk> reporting of enter flex its financial position as a result, all amounts discussed on this call are in U S dollars unless otherwise stated as.
Jeffrey Eric Fetterly: As part of our prepared remarks, we will also be referring to slides in our investor presentation, which is available on our website under the Investor Relations section I'll now turn it over to Marc Rossiter, <unk>, President and CEO.
Marc Edward Rossiter: Thanks, Jeff, and thank you all for joining us on this morning's call. Yesterday, Enerflex reported its first quarter 2024 results, which reflect solid operating results across our geographies and business lines. The energy infrastructure and aftermarket service business lines continue to generate stable, sustainable returns. These businesses are the foundation of Enerflex's financial performance, generating approximately 73% of our gross margin before depreciation and amortization over the past 12 months, and we believe they underwrite the majority of the company's current debt.
Marc Edward Rossiter: Thanks, Jeff and thank you all for joining us on this earnings call.
Marc Edward Rossiter: Yesterday <unk> reported its first quarter 2024 results, which reflect solid operating results across our geographies and business lines.
Marc Edward Rossiter: The energy infrastructure and aftermarket service business lines continued to generate stable sustainable returns. These businesses as a foundation of enter flex as financial performance generating approximately 73% of our gross margin before depreciation and amortization over the past 12 months and we believe underwrite the majority of the comp.
Marc Edward Rossiter: <unk> current debt.
Marc Edward Rossiter: Turning to the specifics of our business, I'll begin with our energy infrastructure business line, which includes two main parts: Contract Compression Operations in the United States. And two, compression processing and treated water assets located in the Middle East and Latin America. Performance of our US contract compression business continues to be very solid, with a fleet size of approximately 424,000 horsepower and utilization that has exceeded 90% for two consecutive years. The business generated approximately 16% of our gross margin before depreciation and amortization for the past 12 months.
Speaker Change: Turning to the specifics of our business I'll begin with our energy infrastructure business line, which includes two main parts contract compression operations in the United States.
Marc Edward Rossiter: And two compression processing and treated water assets located in the Middle East and Latin America.
Marc Edward Rossiter: Performance of our U S contract compression business continues to be very solid with a fleet size of approximately 424000 horsepower and utilization that has exceeded 90% for two consecutive years.
Marc Edward Rossiter: Business generates approximately 16% of our gross margin before depreciation amortization over the past 12 months.
Marc Edward Rossiter: The fundamentals for contract compression in the United States remain very strong, led by increasing natural gas production in the Permian Basin, and we have been focused on adding electric drive units to support larger client partners in their decarbonization efforts. Further detail of our U.S. contract compression business is included on slide 7 of our investor presentation. Our international energy infrastructure business operates in seven countries and includes nearly 1.5 million horsepower of compression, over 25 natural gas processing plants, and two treated water facilities.
Marc Edward Rossiter: The fundamentals for contract compression in the United States remain very strong.
Marc Edward Rossiter: Led by increasing natural gas production in the Permian Basin, and we have been focused on adding electric drive units to support larger client partners and their decarbonization efforts.
Marc Edward Rossiter: Further detail of our U S contract compression business is included on slide seven of our Investor presentation.
Marc Edward Rossiter: Yes.
Marc Edward Rossiter: Our international Energy infrastructure business operates in seven countries and includes nearly one 5 million horsepower of compression over 25 natural gas processing plants and two treated water facilities, we have approximately $1 5 billion.
Marc Edward Rossiter: We have approximately $1.5 billion of go-forward revenue and payments under contract, with a weighted average contract term exceeding five years and extending out to 2023. Slide 8 of our investor presentation provides more detail on our international energy infrastructure business.
Marc Edward Rossiter: Our go forward revenue and payments under contract with a weighted average contract term exceeding five years and extending out to 2023.
Marc Edward Rossiter: Slide eight of our Investor presentation provides more detail around our international energy infrastructure business.
Marc Edward Rossiter: During Q1'24, Enerflex expanded the scope and extended the term of an existing build-own-operate-maintain contract in the Eastern Hemisphere. The contract supports the expansion of the company's treated water solutions business, increases Enerflex's presence in a core operating country of Oman, and is expected to double Enerflex's revenue from the project and improve the company's returns during its additional four-year As prescribed by international finance reporting standards, the contract is now being accounted for as a finance lease.
Marc Edward Rossiter: During Q1, 'twenty four and reflects expanded the scope and extended the term of an existing build own operate maintain contract in the eastern hemisphere.
Marc Edward Rossiter: Contract supports the expansion of the Companys treated water solutions business increases enter flex his presence in our core operating country of Oman and is expected to double <unk> revenue from the project and improve the company's returns during its additional four year term.
Marc Edward Rossiter: As prescribed by International Finance reporting standards. The contract is now being accounted for as a finance lease.
Marc Edward Rossiter: Turning to the aftermarket services business, this segment is benefiting from increased activity levels, inflationary price adjustments, and continued strong demand for spare parts. We expect these trends to continue throughout 2024. Our engineering systems product line recorded strong bookings and is steadily executing through its backlog. Our book-to-bill ratio was above one time during the quarter, as we received several large orders, resulting in our order backlog increasing to $1.3 billion at the end of Q1, a new quarterly record for Enerflex.
Marc Edward Rossiter: Turning to the aftermarket services business. This segment is benefiting from increased activity levels inflationary price adjustments and continued strong demand for spare parts. We expect these trends to continue throughout 2024.
Marc Edward Rossiter: Our engineered systems product line recorded strong bookings and a steadily executing through its backlog.
Marc Edward Rossiter: Our book to Bill ratios above one time during the quarter as we received several large orders, resulting in our order backlog increasing to $1 3 billion at the end of Q1, a new quarterly record for Interfax, we're especially pleased with the success of our cryogenic natural gas processing business line with enter flex receiving orders for six large.
Marc Edward Rossiter: We are especially pleased with the success of our cryogenic natural gas process and business line, with Enerflex receiving orders for six large-scale facilities during 2023 and two additional facilities thus far in 2024. This demand is a reflection of our expanded product offering stemming from the Exterra transaction. While we are relatively while we are actively monitoring the near-term impact of weak natural gas prices on customer demand, notably in North America, order activity and engineered systems continue to benefit from activity in oil-producing regions and with customers who maintain a positive medium-term view of U.S. natural gas fundamentals.
Marc Edward Rossiter: Gil facilities during 2023 and two additional facilities. Thus far in 2020 for this demand is a reflection of our expanded product offering stemming from the external transaction.
Marc Edward Rossiter: While we are relatively well we are actively monitoring the near term impact of weak natural gas prices on customer demand, notably in North America order activity in engineered systems continues to benefit from activity in oil producing regions and with customers, who maintain a positive medium term view of U S natural gas fundamentals.
Marc Edward Rossiter: As previously mentioned, the fundamentals for contract compression in the U.S. remain strong, led by increasing natural gas production in the Permian Basin. Now, I'd like to provide an update on a modularized cryogenic natural gas processing facility in the Middle East, which we will refer to as the EH Cryo project. As of March 31, 2024, construction of the EHPRIO project was approximately 85% complete. However, construction has progressed at a slower pace than expected, and the expected costs to complete have increased.
Marc Edward Rossiter: As previously mentioned the fundamentals for contract compression in the U S remains strong led by increasing natural gas production in the Permian Basin.
Marc Edward Rossiter: Now I'd like to provide an update on our Modularized cryogenic natural gas processing facility in the middle East, which we will refer to as the <unk> Cryo project.
Marc Edward Rossiter: As at March 31, 2020 for construction of the EHR project was approximately 85% complete however.
Marc Edward Rossiter: However, construction has progressed at a slower pace than expected and the expected cost to complete have increased.
Marc Edward Rossiter: As a result gross margin and adjusted EBITDA were reduced by $41 million based on the company's estimate of the remaining spend to complete the project of approximately $105 million.
Marc Edward Rossiter: As a result, gross margin and adjusted EBITDA were reduced by $41 million based on the company's estimate of the remaining spend to complete the project of approximately $105 million. However, subsequent to Q124, in response to a drone attack that resulted in fatalities at an operational facility in proximity to the EH crowd project, Enerflex has provided its client partner with notice of force majeure, suspended activity at the project site, and demobilized its personnel. We extend our deepest condolences to the families of the people killed and those that have been affected by this attack.
Marc Edward Rossiter: However, subsequent to Q1 'twenty four in response to a drone attack that resulted in fatalities at an operational facility in proximity to the ICH crowd project enter flex has provided its client partner with notice of force majeure.
Marc Edward Rossiter: Suspended activity at the project site and demobilize our personnel.
Marc Edward Rossiter: We extend our deepest condolences to the families of the people killed and those that have been affected by this attack.
Marc Edward Rossiter: While no Enerflex personnel were injured, and there was no physical damage to the company's assets, work at the site is suspended as Enerflex evaluates the situation in collaboration with our client partner and assesses next steps. As we look to the remainder of the year, we will continue to focus on enhancing our financial flexibility and strengthening the balance sheet. We were pleased to have repaid an additional $72 million of debt during Q1, bringing the total debt reduction since the beginning of 2023 to $193 million.
Marc Edward Rossiter: While no enter flex personnel were injured and there is no physical damage the company's assets work at the site is suspended as enter flex evaluate the situation and collaboration with our client partner and assesses next steps.
Marc Edward Rossiter: As we look to the remainder of the year, we will continue to focus on enhancing our financial flexibility and strengthening the balance sheet. We were pleased to have repaid an additional $72 million of debt during Q1, bringing the total debt reduction since the beginning of 2000 $23 million to $193 million.
Marc Edward Rossiter: Our leverage ratio was reduced to two two at the end of March.
Marc Edward Rossiter: Our leverage ratio was reduced to 2.2 at the end of March. In 2024, we will continue to prioritize generating free cash flow, repaying debt, improving our leverage ratio, and lowering our overall net finance costs. Before I turn the call over to Preet, I want to emphasize that the underlying macro drivers of our business are strong, with the ongoing focus on global energy security and the growing need for low-emissions natural gas, resulting in strong demand for Enerflex's energy infrastructure and energy transition solutions.
Marc Edward Rossiter: In 2024, we will continue to prioritize generating free cash flow repaying debt, improving our leverage ratio and lowering our overall net finance costs.
Preet: Before I turn the call over to Pete.
Marc Edward Rossiter: I want to emphasize that the underlying macro drivers of our business are strong with the ongoing focus on global energy security and the growing need for low emissions natural gas, resulting in strong demand for <unk> energy infrastructure and energy transition solutions.
Marc Edward Rossiter: Against this backdrop, our business lines continue to deliver solid performance, and we are focused on enhancing the profitability of our core operations and Enerflex's ability to focus on growth and return of capital to shareholders. With that, I'll turn the call over to Preet, speak to the financial highlights of the quarter, and provide an update on Enerflex's outlook for 2024.
Marc Edward Rossiter: Against this backdrop, our business lines continue to deliver solid performance and we are focused on enhancing the profitability of our core operations and enter flex his ability to focus on growth and return of capital to shareholders.
Preet: With that I'll turn the call over to Pete to speak to the financial highlights of the quarter and provide an update on <unk> outlook for 2024.
Preet Dhindsa: Thanks, Marc. Good morning, everyone.
Preet: Thanks, Mark Good morning, everyone. During the first quarter consolidated revenue of $638 million increased both sequentially and year over year.
Preet Dhindsa: During the first quarter, consolidated revenue of $638 million increased both sequentially and year-over-year. Higher revenue is mainly attributable to the EI product line and the conversion of the treated water solutions project, Marc referenced earlier, from an operating lease to a financial lease. Gross margin before depreciation and amortization this quarter of $119 million, or 19% of revenue compared to $156 million or 26% of revenue in Q1 2023 and $159 million or 28% of revenue during Q4 2023. Adjusted evidence was $69 million compared to $90 million in Q1'23 and $91 million during Q4'24.
Preet Dhindsa: Higher revenue is mainly attributable to the EI product line and conversion of the treated water solutions project Mark referenced earlier from an operating lease to a finance lease.
Preet Dhindsa: Gross margin before depreciation and amortization this quarter of $119 million or 19% of revenue compared to $156 million or 26% of revenue in Q1, 'twenty, three and $159 million or 28% of revenue during Q4 2023 adjust.
Preet Dhindsa: Adjusted EBITDA was $69 million compared to $90 million in Q1, 'twenty, three and 1990 $1 million during Q4 'twenty three.
Preet Dhindsa: Delays and increased costs in the completion of the EH CRIO project reduced gross margin adjusted by $41 million during the first quarter. This project is recognized as a sale within the engineered systems product line as construction proceeds and is presented as an unbilled contract revenue asset on Enerflex's consolidating statements of financial position. The net unbilled contract revenue asset recognized for the EH Cryo project at the end of Q1'24 was $147 million, and remaining revenue to be recognized is approximately 7% of the company's engineering systems backlog. There can be no assurance that the security situation will improve, and while work is suspended, Enerflex will not incur any material construction expenditures to complete the EH-CLIO project.
Preet Dhindsa: Delays and increased costs and the completion of the EHR higher project reduced gross margin adjusted EBITDA by $41 million during the first quarter. This.
Preet Dhindsa: This project is recognized as a sale within the engineered systems product line as construction proceeds and is presented as an unbilled contract revenue asset on <unk> consolidated statements of financial position.
Preet Dhindsa: Net unbilled contract revenue asset recognized for the <unk> project at the end of Q1, 'twenty four is $147 million and the remaining revenue to be recognized as approximately 7% of the company's engineered systems backlog.
Preet Dhindsa: There can be no assurance that the security situation will improve and while work is suspended enter flex will not incur any material construction expenditures to complete the <unk> project.
Preet Dhindsa: Excluding the impact of the EH-CLIO project, gross margin before D&A for our engineering systems business was 19% compared to 16% in the first quarter of 2023. Energy infrastructure growth margin before DNA of $80 million was relatively consistent with recent quarters and reflective of the strong contract position that supports our assets. Our aftermarket services gross margin before depreciation and amortization was 22% in the quarter, benefiting from increased activity levels, inflationary price adjustments, and continued strong demand for spare parts.
Preet Dhindsa: Excluding the impact of the <unk> project gross margin before D&A for our engineered systems business was 19% compared to 16% in the first quarter of 2023.
Preet Dhindsa: Energy infrastructure gross margin before D&A of $80 million was relatively consistent with recent quarters and reflective of the strong contract position that supports our assets.
Preet Dhindsa: Our aftermarket services gross margin before depreciation and amortization was 22% in the quarter benefiting from increased activity levels inflationary price adjustments and continued strong demand for spare parts.
Preet Dhindsa: Enerflex's SG&A of $78 billion was steady year over year, but declined sequentially as a result of lower transaction restructuring and integration. Foreign exchange losses and losses from associated instruments were down significantly from Q4-23, reflective of cash management strategies and lower cash balances remaining in our system.
Preet Dhindsa: And reflected SG&A of $78 million was steady year over year, but declined sequentially as a result of lower transaction restructuring and integration costs.
Preet Dhindsa: Foreign exchange losses, and losses from associated instruments were down significantly from Q4, 'twenty three reflective of cash management strategies and lower cash balances remaining in Argentina.
Preet Dhindsa: Cash provided by operating activities was $101 million in Q1'24, which included a working capital recovery of $83 million. In the fourth quarter, we generated $158 million of cash from operations, including $110 million from the recovery of working capital. We are pleased with our ongoing global efforts to efficiently manage working capital, although we do not expect the magnitude of the recovery realized over the past two quarters will be repeated. During the first quarter, Enerflex generated $78 million of free cash flow compared to $140 million in Q4'23 and a use of cash of $3 million in the comparable quarter of 2020.
Preet Dhindsa: Cash provided by operating activities was $101 million in Q1, 'twenty, four which included a working capital recovery of $83 million.
Preet Dhindsa: In the fourth quarter, we generated $158 million of cash from operations, including a $110 million from the recovery of working capital.
Preet Dhindsa: We are pleased with our ongoing global efforts to efficiently manage working capital, although we do not expect the magnitude of the recovery realized over the past two quarters will be repeated.
Preet Dhindsa: During the first quarter and reflects generated $78 million of free cash flow compared to $140 million in Q4, 'twenty three and a use of cash of $3 million in the comparable quarter of 2023.
Preet Dhindsa: We invested $17 million in the business during the first quarter, including $8 million of growth investments, and returned $2 million to shareholders through dividends. We reduced net debt by $72 million during the quarter, exiting at $743 million, and reduced our bank-adjusted net debt to EBITDA ratio to 2.2 times.
Preet Dhindsa: We invested $17 million in the business during the first quarter, including $8 million of growth investments and returned $2 million to shareholders through dividends.
Preet Dhindsa: We reduced net debt by $72 million during the quarter exiting at $743 million and reduced our bank adjusted net debt to EBITDA ratio to two two times.
Preet Dhindsa: The company maintains strong liquidity with access to $548 million under its credit facility at the end of Q1, and we continue to look at opportunities to extend our maturities and optimize our debt. As Marc mentioned, Enerflex will continue to focus on debt reduction and lowering net finance costs in 2024, which will improve our ability to deliver on further growth and provide shareholder returns over the medium and long term. Let me shift to our outlook, where visibility for the majority of the company's operations is strong.
Preet Dhindsa: The company maintains strong liquidity with access to $548 million under its credit facility at the end of Q1, and we continue to look at opportunities to extend our maturities and optimized our debt stack.
Preet Dhindsa: As Mark mentioned and a flexible continued focus on debt reduction and lowering net finance costs in 2024, which will improve our ability to deliver on further growth that provides shareholder returns over the medium and long term.
Preet Dhindsa: Let me shift to our outlook where visibility for the majority of the company's operations is strong we continue to expect the energy infrastructure and aftermarket services product lines will account for 55% to 65% of gross margin before D&A during 2024.
Preet Dhindsa: We continue to expect the energy infrastructure and aftermarket services product lines will account for 55 to 65% of gross margin before DNA during 2024. The majority of the record engineering systems backlog of $1.3 billion, as of March 31, 2024, is expected to convert into revenue over the next 12 months. Enerflex continues to target a disciplined capital program in 2024, with total expenditures of $90 to $110 million. This includes a total of approximately $70 million of maintenance and PPD capital expenditures.
Preet Dhindsa: The majority of the record engineered systems backlog of $1 3 billion at March 31, 'twenty four is expected to convert into revenue over the next 12 months.
Preet Dhindsa: And reflects continued targeted disciplined capital program in 2024 with total expenditures of $90 million to $110 million. This includes a total of approximately $70 million of maintenance at PPD capital expenditures.
Preet Dhindsa: Investments to expand the energy infrastructure business are discretionary and will be allocated to customers who support opportunities that are expected to generate attractive returns and create value for Enerflex shareholders. Enerflex is committed to paying a sustainable quarterly dividend to its shareholders. The Board of Directors declared a quarterly dividend of Canadian 2.5 cents per share, payable on July 11, 2024, to shareholders of record on May 23, 2024. Finally, on April 29th, we announced that a Mexican court ruled in favor of Enerflex relating to a long-standing dispute over employee severance pay following termination of employment in 2015.
Preet Dhindsa: Investments to expand the energy infrastructure business are discretionary and will be allocated to the customer supported opportunities. They are expected to generate attractive returns and create value for <unk> shareholders.
Preet Dhindsa: And in flex is committed to paying a sustainable quarterly dividend to shareholders. The board of directors declared a quarterly dividend Canadian two five cents per share payable on July 11, 2024 to shareholders of record on May 23, 2024.
Preet Dhindsa: Finally on April 29, we announced that a Mexican court ruled in favor of enter flex relating to a long standing dispute of an employee severance pay following termination of employment in 2015.
Preet Dhindsa: The matter has now been returned to the Labor Board to issue a new judgment in accordance with the court's ruling, which supports Enerflex's view that the ultimate resolution of this matter by the Labor Board will be immaterial. I'll conclude by saying that, with the support of Enerflex's strong global leadership team and Taliesin employees, we are improving the profitability and resiliency of our global business with an objective to generate sustainable free cash. With that, I'll turn the call back over to Marc.
Preet Dhindsa: The matter has now been returned to the labor board tissue, new judgment in accordance with the court's ruling which supports <unk> view that ultimate resolution of this matter by the Labor Board will be immaterial.
Marc: I'll conclude by saying that with the support of and reflect strong global leadership team Metallics employees, we are improving the profitability and resiliency of our global business with objective to generate sustainable free cash flow.
Marc: That I will turn the call back over to Mark for closing remarks. Thanks.
Marc Edward Rossiter: Thanks, Preet. Enerflex's first quarter operational results highlight our continued ability to successfully execute a strategy across three core businesses around the world. Our commitment to our key priorities remains steadfast. We're focused on ensuring the safety and security of our personnel while we work to further enhance profitability of core operations, simplify our operational and geographic footprint, maximize cash flow generation to strengthen our financial position, realize the benefits and synergies from the Xerran acquisition, and continue to offer best-in-class natural gas, treated water, and energy transition solutions to our customers. I look forward to building on our progress to date to create significant value across geographies, customers, and product lines. I will now hand the call back to the operator for questions.
Operator: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. And our first question comes from the line of Aaron MacNeil with TD Cowan.
Marc: Thanks, Perry and.
Marc Edward Rossiter: <unk> first quarter operational results highlight our continued ability to successfully execute our strategy across three core businesses around the world.
Operator: Our commitment to our key priorities remain steadfast we're focused on ensuring the safety and security of our personnel. While we work to further enhance profitability of core operations simplify our operational and geographic footprint maximize cash flow generation to strengthen our financial position and realize the benefits and synergies from the <unk> acquisition.
Operator: And continue to offer best in class natural gas treated water and energy transition solutions to our customers.
Operator: I look forward and building on our progress to date to create significant value.
Operator: Across geographies customers and product lines.
Operator: I will now hand, the call back to the operator for questions.
Aaron MacNeil: Thank you.
Operator: A reminder to ask a question. Please press star one on your telephone and wait for your needs to be announced towards draw. Your question. Please press star one again.
Aaron MacNeil: And our first question comes from the line of Aaron Macneil with TD Cowen.
Aaron MacNeil: Morning, thanks for taking my questions. Marc, if I remember correctly, the Kurdistan project was sanctioned by Xterran prior to the acquisition. So I guess, if appropriate, can you sort of walk us through how this project is different from other cryogenic projects that you perform internationally? And I guess, what can we expect from Enerflex on a go forward basis for the product line?
Aaron MacNeil: Good morning, Thanks for taking my questions.
Aaron MacNeil: Mark if I remember correctly that the Kurdistan project was sanctioned by Exterran prior to the acquisition so.
Aaron MacNeil: I guess if appropriate.
Aaron MacNeil: Can you sort of walk us through how this project is different from us.
Aaron MacNeil: Other cryogenic projects that you'd perform internationally.
Aaron MacNeil: I guess, what can we expect from <unk> reflects on a go forward basis for the product line.
Marc Edward Rossiter: Thanks, Aaron, for that question. You know, in the prepared remarks, we mentioned that we booked six cryogenic projects in 2023 and two additional ones in Q1. Not a single one of those bookings included any construction risk or operations outside of Enerflex manufacturing facilities.
Marc: Thanks, Aaron for that question in the prepared remarks, we mentioned that we booked six cryo projects in 2023 and two additional ones in Q1, not a single one of those bookings include any construction risk our operations outside of enter flex manufacturing facilities.
unknown: I can appreciate that there's only so much you can say about the project, and it won't weigh in on what you think might happen, but without giving the likelihood of any given outcome, can you sort of help us understand what the potential range of outcomes for the project could be and how they might impact the company?
Speaker Change: Makes sense.
Marc Edward Rossiter: I can appreciate that there's only so much you can say about the project.
unknown: You won't weigh on and on what you think might happen with.
unknown: Giving the likelihood of any given outcome can you sort of help.
unknown: I understand what the potential range of outcomes for the project could be and how they might impact the company.
Marc Edward Rossiter: I'll talk operationally, and then I'll ask Preet to go over some of the numbers that we provided in the press release. We're in force, Majeure.
unknown: I'll talk operationally and then I'll ask <unk> to go over some of the numbers that we provided in the press release.
Marc Edward Rossiter: The most important thing for Enerflex is safeguarding our people and our assets, and until we're satisfied that the security situation is appropriate, we will not be restarting the site. And it's extremely difficult to try to predict if and when that'll ever happen.
Marc Edward Rossiter: Enforced measure the most important thing for and reflects a safeguard safeguarding our people and our assets and until we're satisfied that the security situation as appropriate we will not be re animating the site and it's an extremely difficult to try to predict if and when that will ever happen. So.
Preet Dhindsa: So as such, we did our best in the press release to provide information as at the end of March to give investors some idea of what the range of outcomes could be. Preet, do you want to go over some of those numbers? Sure. I mean, as at
Preet Dhindsa: As such we did our best in the press release to provide information as at the end of March to give investors some idea of what the.
Preet Dhindsa: Range of outcomes could be you want to go over some of those numbers sure as at March 31, 2020 for I mean, you've seen a loss in the P&L of $41 million based on an updated cost to complete of $105 million. It's important to know about $105 million as we are paused waiting for next steps look our client partner were not.
Preet Dhindsa: Sure, I mean, as of March 31, 2024, I mean, we've seen a loss in the P&L of $41M based on an updated cost to complete of $105M. It's important to know that $105M, as we are paused, waiting for next steps with our client partner, we're not spending that $105M on any construction-related activities. And also, it's 85% complete, we've done good quality work, and there have been no disputes with our client on this or the work done to date, and that underpins $147M in net receivable on our balance sheet.
Preet Dhindsa: Pending that earned $5 million on any construction related activities and also its 85% complete we've done good quality work no disputes with our client on this on the work done to date and that underpins the $147 million net receivable on our balance sheet hardest surmised how this moves forward, but as we noted the security.
Preet Dhindsa: It's hard to surmise how this moves forward, but as we noted, the security situation in the region, we'll watch how this unfolds over time, but we're carefully considering with our advisors and our clients how we move forward in the best interest of our employees and Enerflex overall.
Preet Dhindsa: Situation in the region now we'll watch how this unfolds over time, but we're carefully considering with our advisers and our clients. How we move forward in the best interest of our employees and reflects overall.
unknown: I appreciate the time. I'll turn it over.
Speaker Change: I appreciate the time I will turn it over.
Operator: Thank you. One moment, please, for our next question. The next question comes from the line of Tim Monachello with ATB Capital Markets.
Speaker Change: Thank you.
Tim Monachello: For next question.
Tim Monachello: And our next question comes from the line of Tim Monticello with <unk> capital markets.
Tim Monachello: Hey, good morning.
Tim Monachello: Just following up on Aaron's question there. What type of contract clauses you have in that Kurdistan project that might, Yeah, give you some protections around a force majeure or, or give you some security around getting paid on 147 million in unbilled contract assets?
Tim Monachello: All right.
Tim Monachello: Just following up on Aaron's question there.
Tim Monachello: What type of contract clauses you have in.
Tim Monachello: Tourist and project debt.
Tim Monachello: In light.
Tim Monachello: Yeah.
Tim Monachello: Give me some protections around a person here or or give you some security around getting paid on 947 million of Unbilled contract asset.
Marc Edward Rossiter: Yeah, thanks, Tim. That's a good question. At this point in time, we're not in a position to go over the details of our contract with our customer. We are in force majeure, which is a defined thing within the contract. And while we're in force majeure, we're going to be considering all the different steps we can take to protect the interests of Enerflex's people and its shareholders going forward. But to give you much detail beyond that, I think it's premature to do so.
Tim Monachello: Yeah, Thanks, Thanks, Tim and.
Marc Edward Rossiter: Good question at this point in time, we are not in a position to go over the details of our contract with our customer we are enforced, Missouri, which is a defined thing within the contract.
Marc Edward Rossiter: While were enforced reserve, we're going to be considering all the different steps, we can take to protect the interests of enter flex as people enter flex shareholders going forward, but to give you much detail beyond that.
Marc Edward Rossiter: But it's got 100% of management's attention, and despite it having our attention, it's not going to distract us from focusing on our long-term strategic priorities of reducing debt, increasing free cash flow, and prioritizing our infrastructure investments. That's what we're working on. Now, we're going to be very proactive in this particular situation to make sure we do our very best to protect Enerflex's people and our financial interests
Marc Edward Rossiter: I think it's premature to do so, but it's got 100% of management's attention.
Marc Edward Rossiter: And despite it having our attention it's not going to distract us from focusing on our long term strategic priorities of reducing debt increasing free cash flow prioritizing our infrastructure investments. That's what we're working on now we're going to be very proactive on this on this particular situation to make sure we do.
Marc Edward Rossiter: Our very best to protect and reflects people and our financial interests long term.
Tim Monachello: Given that this event only happened, you know, a couple weeks ago, I'm sure it's still fresh with you guys. But it doesn't sound like there's any real visibility to when safe operations could commence again, and given the dynamic nature of the region, I don't know if that visibility is going to improve anytime soon. Do you have a timeline for when you expect to make a decision or a strategy on how to move forward with this?
Marc Edward Rossiter: And given that this that only happened a couple of weeks ago and shared sale pressure yes.
Tim Monachello: But it doesn't sound like there is.
Tim Monachello: Any real visibility to win.
Tim Monachello: <unk> operations to commence again.
Tim Monachello: And given the dynamic nature of the region I don't know if that visibility improve anytime soon do you have a timeline for when you expect Jamaica.
Tim Monachello: Decision or a strategy on how to move forward with us.
Marc Edward Rossiter: Yeah, Tim, good observation. It is very difficult to predict, you know, if and when the security situation will rise to Enerflex's standards. We're working very quickly and decisively, like we have been so far within the two weeks since the incident to protect our people and our interests. So it's, like I said, it's got the full attention of management. It's not going to distract us from operating the balance of our assets, but we're going to move quickly and decisively to make sure we make the best next steps for their client partners.
Speaker Change: Yes, Tim the good observation it is very difficult to predict if and when the security situation will rise to enter flex standards.
Marc Edward Rossiter: We're working very quickly and decisively like we have been so far within the within the two weeks since the incident to protect our people and our interests. So it's like I said, it's got full attention of management, it's not going to distract us from operating the balance of our assets, but we're going to move quickly and decisively to make sure. We make the best next steps for their client partner.
Marc Edward Rossiter: Okay, yeah, unfortunately, it happened, just kind of distracting from some of the positive things in the quarter, one of which was that water solutions project extension. Can you talk a little bit about the timeline on that? When you expect to have it deployed, and any capital requirements that you're expecting to incur related to that extension in 2024?
Marc Edward Rossiter: Okay, Yeah. Unfortunately happen.
Marc Edward Rossiter: Kansas tracking comes with positive things in the quarter.
Marc Edward Rossiter: One of which wells that water solutions project extension can you talk a little bit about the timeline on that when do you expect to have it deployed in any capital requirements.
Marc Edward Rossiter: Starting to occur.
Marc Edward Rossiter: The extension and 24.
Marc Edward Rossiter: Yeah, sure, Tim. Thank you. And to remind listeners, we executed two significant treated water solutions projects in Oman in 2022 and early 2023. One of those facilities, the one that we received the order to expand, was commissioned on November 22. It immediately met all the performance targets and exceeded our OPEX estimates.
Speaker Change: Yes, sure Tim Thank you and to remind the listeners we executed two significant treated water solutions projects.
Marc Edward Rossiter: In Oman in 2022 in early 2023.
Marc Edward Rossiter: And within a few months, the customer engaged us on an expansion of that facility, and we got that order in the first quarter. That project is slated to be, the expansion work is slated to be up and running mid-2025, and we negotiated a relatively creative expansion contract with our customer where they're contributing a significant portion of the growth capex. And that's allowing us to further a lot of activities this year to get the contract executed, but also staying within our CAPEX guidance provided in January.
Marc Edward Rossiter: One of those facilities. The one that was that we received the order to expand was commissioned in November 'twenty. Two it immediately met for all of the performance targets exceeded our Opex estimates and within a few months to customer engaged us on an expansion of that facility and we got that order in the first quarter.
Marc Edward Rossiter: That project is slated to be expansion work is slated to be up and running mid 2025, and we negotiated a relatively creative.
Marc Edward Rossiter: Expansion contract with our customer where they're contributing a significant portion of the growth capex.
Marc Edward Rossiter: And that's allowing us to further a lot of activities. This year to get the contract executed, but also staying within our Capex guidance provided in January.
Marc Edward Rossiter: Upon completion in mid-2025, the overall plant will be extended on a take-or-pay basis for an additional four years, bringing the overall contract to just under eight years total from when it was built. So it's right on strategy for us. It's one of our best operating countries. It's one of our best customers. We were able to find a way to do this big expansion in a way that was capital efficient for Enerflex, and for people that are interested in this sort of thing, when we're done, that particular facility will treat just under 900,000 barrels a day of gross liquids. So it will have a meaningful impact on the oil production in Oman, which is one of our best countries.
Marc Edward Rossiter: Upon completion in mid 2025, the overall plant will be extended on a take or pay basis for an additional four years, bringing the overall contract to just under eight years total from when it was built so it's.
Marc Edward Rossiter: It's right on strategy for Us, it's one of our best operating countries. It's one of our best customers.
Marc Edward Rossiter: We're able to find a way to do this big expansion in a way that was capital efficient Brenner flex.
Marc Edward Rossiter: And for people that are interested in this sort of thing when we're done that particular facility will treat just under 900000 barrels a day of gross liquids. So a meaningful impact on the oil production in Oman, which is one of our best countries.
unknown: That's really helpful. I'll turn it back. Thanks for taking it. Thanks, Tim.
Speaker Change: Okay. That's very helpful. I'll turn it back thanks for taking my questions.
Operator: Thank you. One moment, please, for our next question. And our next question comes from the line of Cole Pereira with Stiefel.
Speaker Change: Thanks, Tim.
Speaker Change: Thank you.
Cole J. Pereira: Please for our next question.
Cole J. Pereira: And our next question comes from the line of coal.
Cole J. Pereira: With Stifel.
Cole J. Pereira: Hi, morning all. So thinking about the Kurdistan facility, prior to the drone attack, were some of those cost inflation issues specific to that asset and that region only? Or could they theoretically occur at future projects as well? And how do you think about managing those risks?
Cole J. Pereira: Hi, Good morning, also thinking about the Kurdistan facility prior to the drone attack.
Cole J. Pereira: Where some of those cost inflation issues specific to that asset in that region, only or could they theoretically occur at future projects as well and how do you think about managing those risks.
Marc Edward Rossiter: And, you know, Cole, within the engineered systems product line, other than PERL, we've got immaterial amounts of construction risk in our engineered systems backlog. That's probably the most important message to get across to shareholders. Enerflex's priorities are our energy infrastructure and recurring revenues.
Cole J. Pereira: And coal within the engineered systems product line.
Marc Edward Rossiter: Other than per all we've got immaterial amounts of construction risk and our engineered systems backlog thats.
Marc Edward Rossiter: Thats, probably the most important message.
Marc Edward Rossiter: Get across to shareholders and reflects his priorities as our energy infrastructure and recurring revenues.
Marc Edward Rossiter: We're not interested long term in adding unnecessary execution risk within our EES portfolio of businesses. And that's led to our backlog that we've built up over the last two years having an immaterial amount of construction risk. So to answer your question, there are no other engineered systems projects that we believe carry any level of construction risk going forward that investors and shareholders need to know about. And to further explain, this is our only operating project in that region of Iraq. We don't have any other projects in that area, and everything else we do in the Middle East outside of Oman and Bahrain is a supply of equipment that comes out of our Houston, Tulsa, and Calgary shops.
Marc Edward Rossiter: We're not interested long term and in adding <unk>.
Marc Edward Rossiter: Unnecessary execution risk within our es portfolio of businesses.
Marc Edward Rossiter: And that's led to a backlog that we built up over the last two years of having an immaterial amount of construction risk. So to answer your question. There are no other engineered systems projects.
Marc Edward Rossiter: We believe carry any level of construction risk going forward that investors and shareholders need to know about.
Marc Edward Rossiter: And to further this is our only operating project in that region of Iraq. We we don't have any other projects in that area and everything else, we execute in the middle east outside of Oman, and Bahrain, our supply of equipment that come out of our Houston saw sudden Calgary shops.
Marc Edward Rossiter: Got it, thanks. And then kind of just going back to what you just said, would it be fair to say, you know, from a security risk standpoint, that this asset is kind of differentiated as well, that you don't think any other of your Middle East assets could have a similar event occur, acknowledging that it's a fluid region?
Speaker Change: Got it thanks, and then kind of just going back to what you just said.
Marc Edward Rossiter: Would it be fair to see from a security risk standpoint that this asset is differentiated as well that you don't think any other of your middle East assets.
Marc Edward Rossiter: Could have a similar event occur acknowledging that.
Marc Edward Rossiter: It's a fluid region.
Marc Edward Rossiter: Yeah, we have our infrastructure primarily in Oman and Bahrain. And those are two countries that we have decades of experience in and decades of successful experience from a safety, security, and client relationship point of view. So it is safe to say that this particular project is the only one that is in that region that has this particular level of geopolitical or security risk. We've shaped our backlog and engineered systems to specifically de-risk it from these types of things.
Marc Edward Rossiter: Yes.
Marc Edward Rossiter: Our infrastructure is primarily in Oman and Bahrain.
Marc Edward Rossiter: And those are two countries that we have decades of experience and decades of successful experience from a safety security and client relationship point of view.
Marc Edward Rossiter: So it is safe to say that this particular project is the only one.
Marc Edward Rossiter: That is in that region that has this particular level of GOP.
Marc Edward Rossiter: Geopolitical or security risks, we've shaped our backlog and engineered systems to specifically derisking from these types of things and in our energy infrastructure business line, we are only going to invest investors and shareholders capital and countries that we feel very very safe about getting the 10 year take or pays that we have.
Marc Edward Rossiter: And in our energy infrastructure business line, we are only going to invest investors' and shareholders' capital in countries that we feel very, very safe about getting the 10-year take or pays that we have under contract. And that's all backed by, again, decades of experience in those countries.
unknown: Got it. That's helpful. Thanks. I'll turn it back on.
unknown: Under contract and Thats, all backed by again decades of experience in those countries.
Speaker Change: Got it that's helpful. Thanks, I'll turn it back.
Operator: Thank you. Once again, ladies and gentlemen, to ask a question, please press star one one on your telephone. Once again, to ask a question, please press star one one on your telephone. And our next question comes from the line of Keith MacKey with RBC Capital Markets.
Speaker Change: Thank you.
Operator: Once again, ladies and gentlemen to ask a question. Please press star one on your telephone once again to ask a question. Please press star one on your telephone.
Keith MacKey: And our next question comes from the line of Keith Mackey with RBC capital markets.
Keith MacKey: Hi, good morning. Marc, I just wanted to continue on that line of questioning relative to risks, you know, notwithstanding this project. More broadly, can you just give us a bit more context on how you think that the overall free cash flow profile of the business is matched with the underlying risk profile of the business? Certainly, investors and the street are looking for a lot more free cash flow to be generated by the business, and I think maybe some additional context on how risky it is going to be to get that cash flow would be very helpful to frame out a little bit more.
Keith MacKey: Hi, good morning.
Speaker Change: Mark I just wanted to continue on that line of questioning relative to risks notwithstanding this project.
Keith MacKey: And more broadly can you just give us a bit more context on how you think that the overall free cash flow profile of the business is matched with the underlying risk profile of the business.
Keith MacKey: Certainly investors in the street are looking for a lot more free cash flow to be generated by the business and and I think maybe maybe some additional context of how risky is it going to be to get that cash flow.
Keith MacKey: It would be very helpful to frame out a little bit more it sounds like this pro project is more of a onetime thing, but can you just kind of run through some of the inputs to both the free cash flow and the risk side that might help get people a little bit more comfortable with where things are at.
Keith MacKey: It sounds like this professional project is more of a one-time thing, but can you just kind of run through some of the inputs to both the free cash flow and the risk side that might help get people a little bit more comfortable with where things are at?
Marc Edward Rossiter: that are going to generate free cash flow for our investors. The first one is our global EI business. And like I mentioned in the prepared remarks, 16% of the company's gross margin comes from our US contract compression plate, which we think is a very low risk asset base, and it's been performing very well over the last two years. So that's the first part.
Marc: Yes sure Keay. Thanks for that question. There's two main business lines that are going to generate free cash flow for our investors. The first one is our global <unk> business and like I mentioned in the prepared remarks, 16% of our company's gross margin comes from our U S contract compression fleet, which we think is very low risk asset base and it's prudent.
Marc Edward Rossiter: We're forming very well over the last two years. So that's the first part the second part of our <unk> business is the one 5 million horsepower compression that <unk> 25 gas plants and treated water facilities that today under contract of $1 $5 billion in revenue under contract and those are in.
Marc Edward Rossiter: The second part of our EI business is the 1.5 million horsepower compression, the 25 gas plants, and treated water facilities that today under contract have $1.5 billion in revenue under contract. And those are in, you know, I would say, five core countries where we have decades of experience and where we feel very comfortable about the security situation and the overall operational risk. We feel that they're very much within the risk appetite of Enerflex and our shareholders.
Marc Edward Rossiter: Say five core countries, where we have decades of experience and we feel very comfortable about the the security situation.
Marc Edward Rossiter: And the the overall operational risk, we feel that they're very much within the risk appetite of enter flex in our and our shareholders.
Marc Edward Rossiter: The engineered systems product line is the next big generator of cash. You know, we've added to the backlog this quarter, and the vast majority of that backlog is products that we will build within the four-wall confines of our shop in Tulsa and Houston and Calgary.
Marc Edward Rossiter: The engineered systems product line as the next big generator of cash we've added to the backlog this quarter and that backlog is the vast majority of that backlog is products that we will build within the four wall confines of our shops.
Marc Edward Rossiter: So from a risk point of view, I think shareholders should consider that the vast majority of our free cash flow generation will come from these long-term, 10-year taker pays in our core international jurisdictions, the US contract compression fleet, and their engineered systems business that's executed in North America in our shops. In our investor presentation, on slide 11, it gives a lot more detail around the 10 or over contracts, the margin of the contracts, and our key counterparties.
Marc Edward Rossiter: And Tulsa, and Houston, and Calgary, So from a risk point of view I think shareholders consider the vast majority of our free cash flow generation will come from these long term.
Marc Edward Rossiter: 10 year take or pays and our core international jurisdictions. The U S contract compression fleet in our engineered systems business, that's executed in North America in our shops and in our Investor Our new Investor presentation on Slide 11. It gives a lot more detail around the tenor over contracts the margin of the contracts and are key.
Marc Edward Rossiter: I think that slide should give investors a lot of confidence. And I think what can really give investors confidence is when you look at what we've done, the decisions we've made in the last couple of years. We prioritized shop-based engineered systems contracts with no construction risk. We prioritize capital investments in the United States and in Oman, two countries where we have decades of experience generating very good risk-adjusted returns. So I would say judges for what we've done in the last couple of years, and what we've done is 100% oriented towards building a steady suite of assets and orders that provides very good risk-adjusted returns for shareholders.
Marc Edward Rossiter: Router parties.
Marc Edward Rossiter: Think that slides should give investors.
Marc Edward Rossiter: Lot of confidence and I think what can really give investors confidence is when you look at what we've done the decisions. We've made in the last couple of years, we prioritized shark based engineered systems contracts with no construction risk, we prioritize capital investments in the United States and in Oman to countries, where we've got decades.
Marc Edward Rossiter: A experience generating very good risk adjusted returns so I would say judges for what we've done in the last couple of years and what we've done is 100% oriented towards building.
Marc Edward Rossiter: Our steady suite of assets and orders that provides very good risk adjusted returns to our shareholders.
Marc Edward Rossiter: Okay, got it. And just following up on the engineered systems business and bookings, there is a building expectation of increased natural gas demand in the United States, you know, low current prices notwithstanding. Can you just talk about the potential opportunity for you there if we do see incremental demand from whether it be LNG exports or other local uses of natural gas? Can you just talk about the opportunity there and whether you're seeing any of that yet beyond what, you know, the strong bookings you're seeing today?
Speaker Change: Okay got it and just following up on the engineered systems business and bookings.
Marc Edward Rossiter: There is.
Marc Edward Rossiter: Our building expectation of increased natural gas demand in the United States.
Marc Edward Rossiter: Low current prices notwithstanding.
Marc Edward Rossiter: Talk about the potential opportunity for you there if we do see incremental demand from whether it be LNG exports or or other local uses of natural gas can you just talk about the opportunity there and whether youre seeing any of that yet beyond what the.
Marc Edward Rossiter: Strong strong bookings youre seeing today.
Marc Edward Rossiter: So, you know, Keith, our engineered systems business is largely a North American story, and we feel really good about natural gas fundamentals long term in North America, basically underpinned by LNG exports, both in Canada and the Gulf Coast of the United States. One of our key basins, or two of our big key basins, is the Montney Shale and the Permian Basin. Both of those basins will really benefit from increased LNG export
Speaker Change: So Keith or our engineered systems business is largely a north American story, and we feel really good about natural gas fundamentals long term in North America, basically underpinned by LNG exports, both in Canada, and the Gulf Coast of United States. One of our key basins are two of our big key basins as the Montney shale and the Permian.
Marc Edward Rossiter: Listen.
Marc Edward Rossiter: Both of those basins will really benefit from increased LNG export and so we're happy with our position we're a market leader in both of those markets. We've got good engineered systems business in the United States. We've got an excellent contract compression business, which provides a steady revenue and in both markets. We have got I would say market leading service businesses. So.
Marc Edward Rossiter: And so we're happy with our position. We're a market leader in both of those markets. We've got a good engineered systems business in the United States; we've got an excellent contract compression business, which provides that steady revenue. And in both markets, we have, I would say, market-leading service businesses. So we think that North American natural gas macro is one of the it's probably one of the top two key macro themes for Enerflex over the next three to five years. Transcribed by https://otter.ai
Marc Edward Rossiter: I think that the north American natural gas macro as one of the it's probably it's one of the top two key macro themes for <unk> over the next three to five years.
unknown: Okay, thanks. And one more question, if I could squeeze it in: the force majeure on the project, was that strictly due to the security risk, or was there anything else in there that caused you to declare the force majeure?
Speaker Change: Okay, Thanks, and one more if I can squeeze it in the forest measure on the project was that strictly due to the security risk or is there anything else in there that caused you to declare force majeure.
unknown: The security situation as a result of the drone attack. OK.
Speaker Change: The security situation as a result of the drone attack.
unknown: Okay, thanks very much. That's it for me. Thanks, Keith.
Speaker Change: Okay. Thanks, very much that's it for me.
Operator: Thank you. One moment, please, for our next question. And our next question comes from the line of Jamie Kubik with CIBC.
unknown: Thanks Keith.
Speaker Change: Thank you Laura please.
James Kubik: Please for our next question.
Operator: And our next question comes from the line of Jamie Kubik with CIBC.
James Kubik: Yeah, good morning, and thanks for taking my question. Just wanting to dig a little bit deeper on the Kurdistan Cryo project. Can you talk a little bit more about the details of the source of the cost overruns and delays in that project? And also, I'm just curious as to what the trigger was to record the entire charge this quarter versus... in previous quarters or in future quarters given the project is suspended? Thanks.
James Kubik: Yes, good morning, and thanks for taking my question just wanted to dig a little bit deeper on the Kurdistan Cryo project can you talk a little bit more on the details of the <unk>.
James Kubik: The source of the cost overruns and delays in that project.
James Kubik: Also I'm just curious as to what the trigger was to record the entire charge this quarter versus.
James Kubik: In previous quarters or in future quarters, given the project is suspended.
Preet Dhindsa: Hi Jamie. Thanks for the question. So, on the delay side, in Q1, we reassessed some of the activities, largely subcontractor-related. You know, we're 85% done. We're in the last 15% of construction, and certain delays we're trying to manage effectively, but we did realize those delays resulted in increased cost estimates. So, in Q1, after a fair bit of discussion with our folks on the ground, we decided to increase our costs, and so the total increased cost to complete is now $105M at the end of Q1. This is mainly due to subcontractor delays and issues at the site level.
Speaker Change: Hi, Jamie Thanks for the question so on the delay side in Q1, we reassess some of the some of the activities largely sub contractor related where 85% done were in the last 15% construction and certain delays are.
Preet Dhindsa: We're trying to manage effectively but we did realize those delays that resulted in increased cost estimate. So in Q1 after a fair bit of discussion with our folks on the ground we decided.
Preet Dhindsa: Increased our costs and so the total increase cost to complete is now $105 million at the end of Q1 to completion and mainly due to subcontractor delays and issues on the at the site level. So that's the delays and costs.
Preet Dhindsa: So, that's the delays and costs. And overall, what we did, we took an imminent loss of $41 million at the end of the contract. When we increased the cost estimate, it produced a negative margin on the project, so we recognized that imminent loss at the end of the contract term. You'll see in the financials, we have an asset on our books of $166 million, and that's receivable for the 85% of good quality work done.
Preet Dhindsa: And overall, what we did we took the imminent loss of $41 million at the end of the contract when we increased the cost estimate it produced a negative margin on the project. So we recognize that imminent loss to the end of the contract term youll see in the financials.
Preet Dhindsa: We have an asset on our books of $166 million.
Preet Dhindsa: And Thats a receivable for the 85% good quality work done and there is a provision of $19 million. The net asset is $147 million underpinned by the work we've already created so I don't expect any other construction related expenditures of $105 million estimate cost to complete is parked for now.
Preet Dhindsa: And there's a provision of $19 million. The net asset is $147 million underpinned by the work we've already created, so I don't expect any other construction-related expenditure. So the $105 million estimate cost to complete is parked for now, as we are in force majeure assessing all options. But the time in Q1 was a result of an upgraded estimate of cost and the imminent loss. And that was our rationale for it.
Preet Dhindsa: As we are enforced mature assessing all options, but the timing Q1 <unk> results.
Preet Dhindsa: Upgrade estimate of cost and the imminent loss and that's that was our rationale for it.
Preet Dhindsa: Okay, understood, and then maybe to ask a little bit more on that just the... The full charge being recognized this quarter versus the previous, is this project assessed yearly, is it quarterly, or monthly in terms of its remaining costs? I'm just curious as to what drove all of it in Q1.
Speaker Change: Okay understood and then just maybe to <unk>.
Preet Dhindsa: To ask a little bit more on that just the.
Preet Dhindsa: The full charge being recognized this quarter versus previous as this project assessed yearly.
Preet Dhindsa: Is it a quarterly monthly in terms of its remaining costs I'm just curious as to.
Preet Dhindsa: As to what drove all of it in Q1.
Preet Dhindsa: Yeah, so we review this project. It's a significant project reviewed on a monthly basis as an executive team at corporate and at site level. And so, at that quarter end, year end, we had a point of view on the cost, and then further delays in Q1, we decided to increase our cost estimate, which is why we did it in Q1. And once again, the $105 million is parked. We do not expect to incur construction-related costs.
Speaker Change: Yes. So we review this project, it's a significant project we viewed on a monthly basis as an executive team at corporate and at site level and so.
Preet Dhindsa: And as at quarter end year end, though we had a point of view on the cost and then further delays in Q1, we decided to.
Preet Dhindsa: We increased our cost estimate which is why we did it in Q1 and once again the $105 million is part we do not expect to incur construction related costs. So right now we're in a holding pattern until we assess all options.
Preet Dhindsa: So right now, we're in a holding pattern until we assess all options. And the data points you pointed out, we had not been this granular in the past, but $41 million imminent loss, we've got the $105 million we've pointed out that we're not spending right now, and the net receivable $147 million. Those are the facts today, and then we'll just, you know, significantly focus on this over the next several weeks.
Preet Dhindsa: And the data points you pointed out we have not been this granular in the past, but 41 million imminent loss, we've got $105 million, we pointed that we're not ending right now and the net receivable of 147 million those are the facts today and then we will just add.
Preet Dhindsa: Significantly focused on this debt over the next several weeks.
unknown: Okay, thank you. That's it for me.
Speaker Change: Okay. Thank you that's it for me.
Operator: Thank you. One moment, please, for our next question. The next question comes from the line of Tim Monachello with ATB Capital Markets.
Speaker Change: Thank you.
Tim Monachello: Please for our next question.
Tim Monachello: And our next question comes from the line of Tim Monticello.
Tim Monachello: <unk> capital markets.
Tim Monachello: I just want to follow up and talk a little bit about the strong bookings in the quarter. Outside of the booking that would have been related to the IFRS 16 Accounted Finance lease, we had some pretty strong bookings in North America. Are you seeing continued momentum into Q2, or were there anything that was sort of lumpy in nature in Q1?
Tim Monachello: Hey, just wanted to follow up and talk a little bit about <unk>.
Tim Monachello: Bookings in the quarter.
Tim Monachello: Outside of the booking.
Tim Monachello: Have been related to <unk>.
Tim Monachello: Our F 16 accounted finance leases.
Tim Monachello: You had some pretty strong bookings in North America.
Tim Monachello: Are you seeing continued momentum into Q2 or was there anything lumpy in nature in Q1.
Marc Edward Rossiter: On Q1, you know, the conversion of that water project to NIAP for our lease accounting had an impact on the bookings. Also, we had two nice cryogenic plant orders out of our business in Broken Arrow. I think that it's difficult to say right now what we're going to expect from Q2, but to a certain degree, we are seeing the very beginnings of some impacts of the lower gas price in some areas of the United States.
Tim Monachello: Our Q1.
Marc Edward Rossiter: The.
Marc Edward Rossiter: The conversion of that water project to <unk> for our lease accounting had an impact on the bookings.
Marc Edward Rossiter: Also we had two nice cryo plant orders.
Marc Edward Rossiter: Out of our business in broken Arrow.
Marc Edward Rossiter: And I think that the it's difficult to say right now what we're going to expect from Q2, but to a certain degree we are seeing the very beginnings of some impacts of the lower gas price in some areas of the United States like I said earlier Montney Permian liquids rich plays.
Marc Edward Rossiter: Like I said earlier, Montney, Permian, liquids-rich plays; activity is largely driven by oil, but I do think after almost two years of really busy activity on the engineered system front in North America, we could see that slow down just a little bit. It's tough to say with exact certainty on that front.
Marc Edward Rossiter: Activity is largely driven by oil, but I do think after almost two years of really busy activity on the engineered system front in North America, we could see.
Marc Edward Rossiter: That slowdown just a little bit.
Marc Edward Rossiter: It's tough to say with exact certainty on that front.
Tim Monachello: Okay, so when you put everything together that happened this quarter together, how do you view your targets for deleveraging for 2024 versus where you would have thought you would be, you know, at the end of 2023?
Marc Edward Rossiter: Okay.
Tim Monachello: I guess when you put everything together the happened in this quarter.
Tim Monachello: How do you view your targets for deleveraging for 2024 versus where you would have thought.
Tim Monachello: At the end of 2023.
Preet Dhindsa: Tim, as you noticed, we did pay out $72 million in debt, pre-cash flow was good, and working capital was constructive. So these are our continued priorities, and we leverage about 2.2 times. And as I noted, the $105 million estimated cost to complete, we're not spending that. So overall, we are looking carefully at how we continue to deleverage. The cryo project that we're immensely focused on is not taking us off our priorities. In the coming months, we will set a leverage target that we've been talking about for a while, and we're still trending in a positive direction. So we're confident about where we're trending, and our priorities have not changed.
Speaker Change: Yes, Matt as you noticed that we did pay down $72 million in that free cash flow is good working capital was constructive. So these are our continued priorities leveraged batting two two times and as I noted $105 million cost estimated cost to complete we're not spending that so overall we are.
Preet Dhindsa: We're looking carefully at how we continue to deleverage.
Preet Dhindsa: This cryo project that we're immensely focused on is not taking us off of our priorities.
Preet Dhindsa: In the coming months, we will we will set a leverage target that we've been talking about that for a while and we are still trending in a positive direction. So we're confident where we're at where we're trending towards and our priorities have not changed.
unknown: Okay, thanks very much.
Tim Monachello: Okay. Thanks very much.
Marc Edward Rossiter: I'll now hand the call back over to President and CEO, Marc Rossiter, for any closing remarks.
Speaker Change: Thank you.
Marc Edward Rossiter: Now I'll hand, the call back over to President and CEO, Marc Rossiter for any closing remarks.
Operator: Thank you, Operator. Since there are no further questions, we'd like to thank everybody for joining today's call. We look forward to providing you with our Q2 results in August.
Marc Edward Rossiter: Thank you operator since there are no further questions we'd like to thank everybody for joining today's call. We look forward to providing you with our Q2 results in August.
Operator: Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.
Speaker Change: Ladies and gentlemen, thank you for participating this does conclude today's program and you may now disconnect.
Operator: Okay.
Operator: [music].
Operator: Okay.
Operator: Okay.