Q3 2024 Enerflex Ltd Earnings Call
Yeah.
Speaker Change: Good day and thank you for standing by welcome to the Flex third quarter 2024 earnings Conference call. At this time all participants are in a listen only mode. Please be advised that today's conference is being recorded after the speaker's presentation there'll be a question and answer session to ask a question.
Speaker Change: Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again I would now like to hand, the conference over to your Speaker today, Jeff Fetterly, Vice President corporate development and Investor Relations.
Jeff Fetterly: Thank you Josh and good morning, everyone welcome to our third quarter of 2024 results call with me today are Mark <unk>, President and CEO and pre Denzer SVP and CFO.
Jeff Fetterly: During todays call our prepared remark remarks will focus on three key areas first the strong operational performance of the business during Q3, and our outlook heading into 2025 second capital allocation, including direct shareholder returns and capital spending and third our progress on near and long term strategic priorities.
Jeff Fetterly: Before I turn it 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 <unk> expectations for future performance and business prospects.
Jeff Fetterly: Forward looking information involve risks and uncertainties and the stated expectations could differ materially 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 the SEDAR and Edgar profiles as part of.
Jeff Fetterly: Our prepared remarks, we will be referring to slides in our updated investor presentation, which is available.
Speaker Change: As part of the conference call link on our website under the Investor Relations section I will now turn it over to Mark.
Mark: Thanks, Jeff and thank you all for joining us on this morning's call.
Mark: We're pleased to report another quarter of strong operational performance with third quarter results, reflecting solid execution across the company's business lines as well as our hard work over the last few years building a strong resilient company positioned for.
Mark: For sustainable growth and value creation.
Mark: The energy infrastructure and aftermarket services business lines continue to deliver steady performance Gen.
Mark: 65% of our gross margin before depreciation and amortization during the quarter.
Mark: <unk> 11 in our updated investor presentation highlights how enter flex as business has shifted over the past five years and the increased stability. We expect this will provide in our results over the coming years.
Mark: Thus far in 2024, we have successfully reduced leverage to within our target range of one five to two <unk>.
Mark: We've been disciplined with growth capital and continued to reduce the cost of our debt.
Mark: Visibility across the company's business lines remained solid including approximately $1 $6 billion of contracted revenue supporting our assets and a $1 3 billion engineered systems backlog.
Mark: As a result, <unk> is able to increase direct shareholder returns with the board approving a 50% increase to our quarterly dividend.
Mark: I'll now briefly touch on a few highlights for each of our business lines.
Mark: Energy infrastructure continues to perform well across our three regions. The U S Latin America and the Middle East.
Mark: In the U S. Our contract compression fleet continues to benefit from the increasing natural gas production in the Permian Basin.
Mark: Operating at 94% utilization during the quarter across 428000 horsepower.
Mark: The business generated revenue of $37 million and gross margin before depreciation and amortization of 70% during Q3, 2024 compared to $33 million and 67% in the prior year.
Mark: Slides 18, and 19 highlight our fleet composition and the strong relative operating performance of this business.
Mark: Demand for new contract compression equipment in the United States remains strong and we are selectively expanding our fleet.
<unk> units are being deployed under multiyear contracts and core operating regions with the focus on large horsepower natural gas and electric drive applications.
Mark: Slide 16, and 17 of the Investor presentation highlight our international energy infrastructure business, which includes approximately $1 5 million horsepower of operated compression in 'twenty six build own operate and maintain or boom projects in the middle East and Latin America.
Mark: Our two produced water projects in Oman continued to perform very well and we are in the process of expanding one of those sites.
Mark: Our international Energy infrastructure business is supported by approximately $1 $5 billion of contracted revenue and.
Mark: And an average contract term that exceeds five years.
Mark: Turning to aftermarket services. This business line benefited from strong activity levels in customer maintenance activities. During the quarter. We expect these trends to continue into 2025 on.
Mark: On the engineered systems side, we recorded bookings of $349 million in the quarter and maintained our backlog at $1 3 billion.
The majority of this backlog is scheduled to be converted into revenue over the next 12 months facility.
Mark: Facility throughput remains steady and margins for this business line had benefited from favorable product mix and strong project execution.
Demand for new engineered systems equipment and services in North America has been impacted by an extended weakness in domestic natural gas prices. This combined with the anticipated overall mix of projects and <unk> engineered systems backlog is expected to run.
Mark: <unk> and gross margin before depreciation and amortization more consistent with the long term average for this business line.
Notwithstanding the near term revenue for this business line is expected to remain steady in the medium term outlook for engineered systems products and services continues to be attractive.
Mark: Driven by increases in natural gas oil and produced water volumes across enter flex a global footprint and.
Mark: And de carbonization activities.
Speaker Change: Before I turn the call over to Pete I want to emphasize that the underlying macro drivers for our business are very strong.
Speaker Change: With the ongoing focus on global energy security and the growing need for low emissions natural gas, resulting in a strong demand for enter flex is energy infrastructure and energy transition solutions.
This backdrop, our business lines continued to deliver solid performance and we are focused on enhancing the profitability of our core operations and <unk> ability to focus on growth and return of capital to shareholders.
With that I'll turn it over to <unk> to speak to the financial highlights of the quarter.
Thanks, Mark and good morning, everyone. During the third quarter, we reported consolidated revenue of $601 million compared to $588 million in Q3, 'twenty three and $614 million in Q2 24, as we benefit from additional project volumes in our engineered systems.
Speaker Change: As a client.
Speaker Change: Gross margin before depreciation and amortization was $176 million or 29% of revenue compared to $150 million or 26% of revenue in Q3, 2003, and $173 million or 28% of revenue during Q2 'twenty four.
Speaker Change: Adjusted EBITDA was 120 million compared to 90 million in Q3 dollars 23 and $122 million.
Q2 2024.
Speaker Change: Energy infrastructure gross margin before D&A of $91 million compared.
Compared to $77 million in Q3 23 in the same in Q2 24, as we benefited from higher utilization and price increases on renewed contracts.
Speaker Change: Aftermarket services gross margin before D&A with 19% in the quarter benefiting from strong customer maintenance programs.
Speaker Change: And flex with SG&A at $82 million was $7 million higher year over year and on a sequential basis, mainly due to increased share based compensation.
Speaker Change: Foreign exchange losses that loss from associated instruments remain such during Q3, 'twenty four reflective of global cash management strategies and lower cash balances in Argentina.
Speaker Change: Cash provided by operating activities was $98 million in Q3, 'twenty four which included a working capital recovery of $35 billion.
Speaker Change: We are pleased with our ongoing global efforts to efficiently manage working capital free cash flow was $78 million compared to $29 million. During Q3, 'twenty three and a use of cash of 6 billion in Q2 24.
We invested $33 million in the business during the quarter, consisting of $16 million capital expenditures, primarily for maintenance and $17 million for expansion of an AI project in eastern hemisphere that will be accounted for as a finance lease <unk>.
Speaker Change: And it reflects also returned $2 billion to shareholders in Q3 through dividend.
Speaker Change: We exited the quarter with net debt of $692 million, which included $95 million of cash and had available liquidity of $588 million.
Speaker Change: In October at a flex redeemed $62 5 million of its 9% notes due October 2027 <unk>.
Speaker Change: The redemption was completed at a price of 103% and funded with available liquidity, which includes cash and cash equivalents and the undrawn portion of enter places lower cost 800 million revolving credit facility.
We expect the ongoing interest savings associated with the notes redeemed will materially exceed the redemption premium paid.
Speaker Change: As a result of our continued focus on financial discipline and operational execution, we have repaid $268 million of debt since the beginning of 2023 and now reached our target leverage range of one five to two times.
Speaker Change: We expect to make further progress in coming quarters and remain committed to lowering net finance costs and optimizing the company's debt stack.
Speaker Change: In line with our efforts to maintain a healthy balance sheet and optimize operations. We are revising our guidance for capital spending in 2024 to $80 million to $90 million compared to previous guidance of $90 million to $110 million.
We continue to deploy selected growth capital to customer supported opportunities in the U S and middle East are expected to generate attractive returns and deliver value to <unk> shareholders.
Speaker Change: While FX continues to develop its capital spending plans for 2025, the company expects growth capital will remain below its long term historical average.
Speaker Change: Similar to 2020 for continued disciplined capital spending we will focus on customer support and opportunities in the U S Middle East.
Speaker Change: Further details will be provided in conjunction with the release of the Companys full year 2025 guidance in early January.
Providing meaningful returns to shareholders are a priority for endo flex with the company now operating within its target leverage range of bank adjusted net debt to EBITDAR ratio of one five to two times and reflects is positioned to expand its capital allocation priorities to include more direct returns to shareholders.
Speaker Change: This is reflected in the board of Directors' decision to increase the company's quarterly dividend by 50%.
Speaker Change: Increased quarterly dividend of Canadian $3 75 per share payable on January 16, 2025 to shareholders of record on November 26.
Speaker Change: Going forward capital allocation priorities include further increase to the Companys dividend share purchases disciplined growth capital spending <unk> further repayment of debt that would help lower net finance costs.
Speaker Change: Allocation decisions will be based on providing the most attractive shareholder returns and measured at the end of flexibilities to maintain balance sheet strength.
Speaker Change: I want to thank all <unk> employees for their great efforts in delivering another strong quarter I will now turn the call over to Mark for closing remarks.
Mark: We're proud of the operational financial and strategic progress made in recent quarters and remain focused on our key objectives of.
One enhancing the profitability of core operations to simplifying our operational and geographic footprint and three maximizing free cash flow to strengthen our financial position and enhance shareholder returns.
Speaker Change: I look forward to building on our progress to create significant value for shareholders I will now hand, the call back to the operator for questions.
Speaker Change: Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment for questions.
Speaker Change: Our first question comes from Aaron Macneil with TD Cowen you May proceed.
Aaron MacNeil: Morning, all thanks for taking my questions.
Speaker Change: Mark I can appreciate it.
Speaker Change: Comments, you sort of <unk>.
Speaker Change: Highlighted that enter flex could look at a whole host of different shareholder returns but.
Speaker Change: Since you've started to make that pivot I've got a couple specific.
Speaker Change: Questions.
Speaker Change: I guess one.
How do you think how often do you think youll evaluate the dividend.
Speaker Change: Historically, it's been annually.
Speaker Change: What's your ultimate target shareholder return over time.
Speaker Change: And is there the potential that we could see.
A change in the target leverage range or is it appropriate to just assume that.
Speaker Change: Shareholder returns are enhanced as you sort of trend towards the bottom end of that range.
Speaker Change: Thanks for the question Erin.
Speaker Change: We're happy with our target leverage range of one five to two point al.
Speaker Change: It's our intention and indeed, our priority to enhance those returns alongside further debt reduction in the coming quarters, but I think it would be premature to speculate or to provide any long term guidance to that end.
Fair enough.
Speaker Change: You mentioned that you're kind of look at selectively expanding.
Speaker Change: Contract compression fleet.
Just give us a bit more context in terms of the.
Speaker Change: The potential quantum.
Speaker Change: In terms of total horsepower adds and then.
Speaker Change: To the extent extent possible shareholder.
Speaker Change: What a hurdle rate might look like as well as sort of.
Speaker Change: A minimum contract duration terms.
Speaker Change: Yes, Erin will.
Speaker Change: To provide further guidance in the first week of 2025 as to our capital spending plans.
Speaker Change: That year, we would expect maintenance capital for the whole enterprise to be pretty.
Speaker Change: 2025 will be pretty similar to 2024, and we will provide further guidance on growth cap expenditures for 2025 and in January.
Speaker Change: And we don't have a certain horsepower, we're looking to add what we're really looking to do is make investments with our best customers and the best equipment that provides the best long term returns for our flex and in the prepared remarks, we did we took some.
Speaker Change: It was important for us to point out that any new growth capital that we've deployed in 2024, which has been modest and discipline.
Speaker Change: Been deployed under multi year contracts and indeed, the contracts that we're getting in the contract compression business.
Speaker Change: The last tranche of capital we spent have all been in excess of four years initial term, which is which is two or three times longer than what you would have seen a number of years ago. So the returns on that on that product as is well in excess of what it was a number of years ago, primarily because.
Speaker Change: The landscape for that asset class has gotten a lot better in the last number of years demand has gone up.
Speaker Change: Supply has been consolidated really amongst three big public companies and.
Speaker Change: We benefited from an improved revenue profile and contract term profile for those assets.
Speaker Change: So I think thats, the really appealing parts of that asset class and as far as the quantum in any long term goals. We will look forward to talking to the market a little bit more in the first week of January in that front.
Speaker Change: Makes sense, thanks, Mark I'll turn it back.
Speaker Change: Thank you and as a reminder to ask a question. Please press star one on your telephone.
Speaker Change: Our next question comes from Tim Monticello at ATV capital markets.
Speaker Change: <unk>.
Speaker Change: Thanks very much.
Speaker Change: I just wanted to understand a little bit around the capital return strategy EM and <unk>.
Speaker Change: <unk> go with sort of token dividend increase versus.
And then is that.
Speaker Change: A reflection of just trying to preserve capital considering I mean.
Speaker Change: You mentioned that you would cost a lot of money or there are other considerations there.
Speaker Change: Kevin Hi, Derek trades.
Now that we're in the target leverage range, our priority is to enhance shareholder return alongside further debt repayment.
Speaker Change: What we're at one nine times between $1 five two and the first good step we felt that with board approval is it an increase in the dividend to $3 75 per quarter Canadian del going forward every quarter. We will continue to look at our key financial priorities.
Speaker Change: At financial position balance sheet health and leverage free cash flow also visibility into our sustainable revenue streams going forward both sides there.
Speaker Change: The business.
Speaker Change: And then look at the different levers continued dividend versus share buybacks.
Speaker Change: Capex Mark already talked about we'll put some messages out early January very disciplined approach in growth Capex and maintenance Capex next year like we did this year and also further debt reduction that's still a high priority. So every quarter, we'll look at the different levers balance with where we are from a financial position balance sheet.
Speaker Change: <unk> P&L and cash flow and we will make some calls on a quarter by quarter basis. So that's the that's kind of the next little while 11 in January and into February will advise again, but we feel good about this initial step with the dividend and we've got the other linguistic consider every quarter as we move forward.
Speaker Change: Okay. That's helpful.
Speaker Change: On the engineered.
Speaker Change: Energy infrastructure side of the business.
Speaker Change: We saw a nice uptick in gross margins.
Quarter, two the LOE savings from the middle East on a year over year.
Speaker Change: Quarter over quarter basis.
Speaker Change: How should we think about that is that something we should expect going forward.
Joe: Hey, Tim it's Joe.
Speaker Change: There's really three things to reference there. The first is we had some higher overhaul work, especially in the middle East during the third quarter.
Speaker Change: The asset utilization across the EI platform continued to be very strong in Q3, and we're also benefiting from some rate increases across a number of the asset basis as well.
On a go forward standpoint, the overhaul is more sporadic and I would include that in your outlook going forward utilization.
Speaker Change: Utilization should be fairly steady and normalized and we do expect the rate increases to largely stay for us as well. So we were above sort of a more typical gross margin range in absolute and percentage terms in Q3.
Take the Q3 number.
Speaker Change: Normalized going forward.
Speaker Change: How significant was the overall work.
Speaker Change: We can't get into the specifics of it but it certainly did benefit the margin in the quarter.
Speaker Change: So should we think about somewhere between the most.
Speaker Change: <unk> on a go forward basis.
Speaker Change: Yeah.
Speaker Change: We'll step back from providing formal guidance on that but I think referencing the Q3 number relative to where we've been on a more typical basis in recent quarters as a good reference point.
Speaker Change: Okay.
Speaker Change: Emily.
Our systems business.
Speaker Change: I'm just trying to.
Speaker Change: But our understanding.
Speaker Change: How the mix in the backlog looks there is some commentary suggesting that.
Speaker Change: Production are the same.
Speaker Change: So on equipment.
Speaker Change: Thanks Ben.
Speaker Change: Strong demand and there will be a higher margin business line.
Speaker Change: And sort of weakening demand on that.
Speaker Change: Compression side, but then you also mentioned.
Speaker Change: And I guess, reaching margins on the compression side.
Speaker Change: You mentioned, a mix shift which is going to negatively impact margin. So I'm just trying to.
Speaker Change: Bridge the gap there.
Mark: Yes, Tim this is mark.
Mark: We're really happy with the bookings, we got in the quarter maintaining.
Mark: Maintaining our backlog of $1 3 billion within that backlog, there is a significant breadth and depth of products and regions that we're supporting.
Mark: From cryo plants to LPG export terminals LNG.
Mark: LNG projects to compression.
Mark: We delivered some ccs projects in Canada in the last quarter.
Mark: Good mix and when we look at the embedded margin. We did indicate in the prepared remarks that the embedded margin as we look at it is closer to our long term averages and that's despite our breadth of products and our.
Mark: And geographies.
Weak natural gas price in North America combined.
Mark: Combined a little bit with the effects of consolidation in the Permian Basin Consolidators, taking a more long term view of managing that resource.
Mark: We'd like to point out that the great results our people delivered in Q3 on Es.
Mark: That we see that sort of averaging back moving back closer to the average that you've seen over the last couple of years.
Mark: Okay.
And then.
Mark: <unk> got some nice tailwind in.
Mark: U S rental.
Mark: Compression space signing some.
Mark: Standard length contract it looks like pricing is moving higher.
Mark: But then that contrasts with sort of a week.
Mark: <unk>.
Mark: Compression margins on sales so.
Mark: How are your customers thinking about.
Mark: Compression and the decision to own versus rent.
Mark: And that change.
Tim Monticello: I don't think it's really changed Tim.
Tim Monticello: The dynamic that we have to pay really close attention to is how the consolidators, especially in the Permian basin are thinking about infrastructure I would say a word I would use right now is purposeful there've been quite purposeful and they are taking a very long term view of how to manage that resource and how best.
Build up the infrastructure to get that resource to market.
Tim Monticello: With several consolidators, we do service and new unit sales and we provide contract compression services. So I'm happy that we've got the scale the breadth of offerings to address them no matter, where they are and how they decide to.
Tim Monticello: Execute on that infrastructure Bill.
Okay. That's helpful. Jonathan.
Speaker Change: Thank you I would now like to turn the call back over to Marc Rossiter for any closing remarks.
Since there are no further questions I'd like to thank everyone for joining today's call. We look forward to providing you with our year end financial results in late February.
Speaker Change: Thank you. This concludes the conference. Thank you for your participation you may now disconnect.
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Speaker Change: Good day and thank you for standing by welcome to the <unk> third quarter 2024 earnings Conference call. At this time all participants are in a listen only mode. Please be advised that today's conference is being recorded after the speaker's presentation. There will be a question and answer session.
Speaker Change: Ask a question a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again I would now like to hand, the conference over to your Speaker today, Jeff Fetterly, Vice President corporate development and Investor Relations.
Jeff Fetterly: Thank you Josh and good morning, everyone welcome to our third quarter of 2024 results call with me today are Marc Rossiter, President and CEO and pre Denzer SVP and CFO.
Jeff Fetterly: During todays call our prepared marks remarks will focus on three key areas first the strong operational performance of the business during Q3, and our outlook heading into 2025 second capital allocation, including direct shareholder returns and capital spending and third our progress on near and long term strategic priorities.
Jeff Fetterly: Before I 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.
Jeff Fetterly: Forward looking information involve risks and uncertainties and the stated expectations could differ materially 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 the SEDAR and Edgar profiles.
As part of our prepared remarks, we will be referring to slides in our updated investor presentation, which is available.
Mark: As part of the conference call link on our website under the Investor Relations section I will now turn it over to Mark.
Mark: Thanks, Jeff and thank you all for joining us on this morning's call.
Mark: We are pleased to report another quarter of strong operational performance with third quarter results, reflecting solid execution across the company's business lines as well as our hard work over the last few years building, a strong resilient company positioned for sustainable growth and value creation.
Mark: The energy infrastructure and aftermarket services business lines continued to deliver steady performance generating 65% of our gross margin before depreciation and amortization during the quarter.
Mark: Slide 11 in our updated investor presentation.
<unk> business has shifted over the past five years and the increased stability. We expect this will provide in our results over the coming years.
Thus far in 2024, we have successfully reduced leverage to within our target range of $1 five <unk> to two <unk>, we've been disciplined with growth capital and continued to reduce the cost of our debt.
Mark: Visibility across the company's business lines remained solid including approximately $1 $6 billion of contracted revenue supporting our EIA assets and a $1 3 billion engineered systems backlog.
As a result enter flex is able to increase direct shareholder returns with the board approving a 50% increase to our quarterly dividend.
I will now briefly touch on a few highlights for each of our business lines.
Mark: Energy infrastructure continues to perform well across our three regions. The U S Latin America and the Middle East.
Mark: In the U S. Our contract compression fleet continues to benefit from the increasing natural gas production in the Permian Basin.
Mark: Operating at 94% utilization during the quarter across 428000 horsepower.
Mark: The business generated revenue of $37 million and gross margin before depreciation and amortization of 70% during Q3, 2024 compared to $33 million and 67% in the prior year.
Mark: <unk> 18, and 19 highlight our fleet composition and the strong relative operating performance of this business.
Mark: Demand for new contract compression equipment in the United States remains strong and we are selectively expanding our fleet new.
Mark: New units are being deployed under multiyear contracts and core operating regions with the focus on large horsepower natural gas and electric drive applications.
Mark: Slide 16, and 17 of the Investor presentation highlight our international energy infrastructure business, which includes approximately $1 5 million horsepower of operated compression in 'twenty six build own operate and maintain or boom projects in the middle East and Latin America.
Mark: Our two produced water projects in Oman continued to perform very well and we are in the process of expanding one of those sites.
Mark: Our international Energy infrastructure business is supported by approximately $1 $5 billion of contracted revenue.
Mark: And an average contract term that exceeds five years.
Mark: Turning to aftermarket services. This business line benefited from strong activity levels in customer maintenance activities. During the quarter. We expect these trends to continue into 2025.
Mark: On the engineered systems side, we recorded bookings of $349 million in the quarter and maintained our backlog at $1 3 billion.
Mark: The majority of this backlog is scheduled to be converted into revenue over the next 12 months facility.
Mark: Facility throughput remains steady and margins for this business line had benefited from favorable product mix and strong project execution.
Mark: Demand for new engineered systems equipment and services in North America has been impacted by an extended weakness in domestic natural gas prices. This combined with the anticipated overall mix of projects and <unk> engineered systems backlog is expected to result in gross margin before depreciation and amortization more consistent with the law.
Mark: Long term average for this business line.
Mark: Notwithstanding the near term revenue for this business line is expected to remain steady in the medium term outlook for engineered systems products and services continues to be attractive.
Mark: Driven by increases in natural gas oil and produced water volumes across enter flex a global footprint.
Mark: And de carbonization activities.
Before I turn the call over to Pete I want to emphasize that the underlying macro drivers for our business are very strong.
Mark: With the ongoing focus on global energy security and the growing need for low emissions natural gas, resulting in a strong demand for enter flex is energy infrastructure and energy transition solutions.
Against this backdrop, our business lines continued to deliver solid performance and we are focused on enhancing the profitability of our core operations and enter flexibility to focus on growth and return of capital to shareholders.
With that I'll turn it over to Pete to speak to the financial highlights of the quarter.
Pete: Thanks, Mark and good morning, everyone. During the third quarter, we reported consolidated revenue of $601 million compared to $580 million in Q3, 'twenty three and $614 million in Q2 24 as you benefit from additional project volumes in our engineered systems business.
Mark: Hi.
Mark: Gross margin before depreciation and amortization was $176 million or 29% of revenue compared to $150 million or 26% of revenue in Q3 dollars 23, and $173 million or 28% of revenue during Q2 'twenty four.
Mark: Adjusted EBITDA was $120 million compared to 90 million Q3 dollars 23, and $122 million during Q2 2024.
Mark: Energy infrastructure gross margin before D&A of $91 million.
Mark: Compared to $77 million in Q3 dollars 23, and the same in Q2 24, as we benefited from higher utilization and price increases on renewed contracts.
Mark: Aftermarket services gross margin before D&A with 19% in the quarter benefiting from strong customer maintenance programs.
Mark: And in flex with SG&A of $82 million was $7 million higher year over year and on a sequential basis, mainly due to increased share based compensation.
Mark: Foreign exchange losses that loss from associated instruments remained modest during Q3, 'twenty four reflective of our global cash management strategies and lower cash balances in Argentina.
Mark: Cash provided by operating activities was $98 million in Q3 dollars 24, which included a working capital recovery of $35 billion.
We are pleased with our ongoing global efforts to efficiently manage working capital free cash flow was $78 million compared to 29 million during Q3, 'twenty three and a use of cash of 6 billion in Q2 24.
Mark: We invested $33 million in the business during the quarter, consisting of $16 million capital expenditures, primarily for maintenance and $17 million for expansion of an AI project in eastern hemisphere that will be accounted for as a finance lease.
Mark: And it reflects also returned $2 billion to shareholders in Q3 through dividend.
Mark: We exited the quarter with net debt of $692 million, which included $95 million of cash and had available liquidity of $588 million.
Mark: In October at a flex redeemed $62 5 million of its 9% notes due October 2027.
Mark: The redemption was completed a price of 103% and funded with available liquidity, which includes cash and cash equivalent and the undrawn portion of <unk> lower cost 800 million revolving credit facility.
Mark: We expect the ongoing interest savings associated with the notes redeemed will materially exceed the redemption premium paid.
Mark: As a result of our continued focus on financial discipline and operational execution, we have repaid $268 million of debt since the beginning of 2023 and now reached our target leverage range of one five to two times.
Mark: We expect to make further progress in coming quarters and remain committed to lowering net finance costs and optimizing the company's debt stack.
Mark: In line with our efforts to maintain a healthy balance sheet and optimize operations. We are revising our guidance for capital spending in 2024 to $80 million to $90 million compared to previous guidance of $90 million to $110 million.
Mark: We continue to deploy selective growth capital the customer supported opportunities in the U S and middle East are expected to generate attractive returns and deliver value to <unk> shareholders.
Mark: Well it reflects continuous develop its capital spending plans for 2025, the company expects growth capital will remain below its long term historical average.
Similar to 2020 for continued disciplined capital spending will focus on customer supported opportunities in the U S. The middle East.
Mark: Further details will be provided in conjunction with the release of the Companys full year 2020 guidance in early January.
Mark: Providing meaningful returns to shareholders are a priority for Ana flex with the company now operating within its target leverage range of bank adjusted net debt to EBITDAR ratio of one five to two times and reflects is positioned to expand its capital allocation priorities to include more direct returns to shareholders.
Mark: This is reflected in the board of Directors' decision to increase the company's quarterly dividend by 50%.
Mark: <unk> increased quarterly dividend of Canadian $3 75 per share payable on January 16, 2025 to shareholders of record on November 26.
Mark: Going forward capital allocation priorities could include further increase to the Companys dividend.
Mark: Share purchases disciplined growth capital spending <unk> further repayment of debt that would help lower net finance costs.
Mark: Allocation decisions will be based on providing the most attractive shareholder returns and measured against enter flexibilities to maintain balance sheet strength.
Speaker Change: I want to thank all <unk> employees for their great efforts in delivering another strong quarter I will now turn the call over to Mark for closing remarks.
Mark: Thanks, Craig we're proud of the operational financial and strategic progress made in recent quarters and remain focused on our key objectives of one.
Mark: One enhancing the profitability of core operations to simplifying our operational and geographic footprint and three maximizing free cash flow to strengthen our financial position and enhance shareholder returns.
Mark: I look forward to building on our progress to create significant value for shareholders I will now hand, the call back to the operator for questions.
Speaker Change: Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment for questions.
Our first question comes from Aaron Macneil with TD Cowen you May proceed.
Aaron MacNeil: Hey, good morning, all thanks for taking my questions.
Speaker Change: Mark I can appreciate and fit in <unk>.
Speaker Change: Comments, you sort of highlighted that enter flex could look at.
Speaker Change: We'll host of different shareholder returns, but.
Speaker Change: As you've since you've started to make that pivot.
Speaker Change: Got a couple.
Speaker Change: Specific questions.
One how do you think how often do you think youll evaluate the dividend.
Speaker Change: Historically, it's been annually.
Speaker Change: What's your ultimate target shareholder return over time.
Speaker Change: Is there the potential that we could see.
Speaker Change: No.
Speaker Change: A change in the target leverage range or is it appropriate to just assume that.
Speaker Change: Shareholder returns are enhanced as you sort of trend towards the bottom end of that range.
Speaker Change: Hi, Thanks for the question Erinn I wouldn't we're.
Speaker Change: We're happy with our target leverage range of one five to two point al.
Speaker Change: It's our intention and indeed, our priority to enhance those returns alongside further debt reduction in the coming quarters, but I think it would be premature to speculate.
Speaker Change: Or to provide any long term guidance to that end.
Speaker Change: Fair enough.
Speaker Change: You mentioned that you're kind of look at selectively expanding the U S contract compression fleet.
Speaker Change: Could you just give us a bit more context in terms of.
Speaker Change: The potential quantum.
Speaker Change: In terms of total horsepower adds and then.
Speaker Change: To the extent extent possible sure.
Speaker Change: You know, what our hurdle rate might look like and as well as sort of.
Speaker Change: Minimum contract duration terms.
Speaker Change: Eric will provide further guidance in the first week of 2025 as to our capital spending plans for that year, we would expect maintenance capital for the whole enterprise to be pretty.
Speaker Change: 2025 will be pretty similar to 2024, and we will provide further guidance on growth cap expenditures for 2025 and in January.
Speaker Change: And we don't have a certain horsepower, we're looking to add what we're really looking to do is make investments with our best customers and the best equipment that provide the best long term returns for our flex and in the prepared remarks, we did we took some.
Speaker Change: It was important for us to point out that any new growth capital that we've deployed in 2024, which has been modest and discipline they've been deployed under multi year contracts and indeed, the contracts that we're getting in the contract compression business.
Speaker Change: And the last tranche of capital. We spent have all been in excess of four years initial term, which is which is two or three times longer than what you would have seen a number of years ago. So the returns on that on that product as is well in excess of what it was a number of years ago, primarily because.
Speaker Change: The landscape for that asset class has gotten a lot better in the last number of years demand has gone up.
Supply has been consolidated really amongst three big public companies and we benefited from an improved revenue profile and contract term profile for those assets.
Speaker Change: So I think thats, the really appealing parts of that asset class and as far as the quantum in any long term goals. We will look forward to talking to the market a little bit more in the first week of January in that front.
Speaker Change: Makes sense, thanks, Mark I'll turn it back.
Thank you and as a reminder to ask a question. Please press star one on your telephone.
Speaker Change: Our next question comes from Tim Monticello with ATV capital markets.
Speaker Change: <unk>.
Speaker Change: Thanks very much.
Speaker Change: I just wanted to understand a little bit.
Speaker Change: Around the capital return strategy and the decision to go with sort of token dividend increase versus.
Speaker Change: And then <unk> is that.
Speaker Change: A reflection of just trying to preserve capital considering I mean.
Speaker Change: <unk> cost a lot of money or is there other considerations there.
Tim Monticello: Tim Hi, there, it's great I mean now that we're in the target leverage range. Our priority is to enhance shareholder return alongside further debt repayment.
Tim Monticello: We're at one nine times between one five to two and the first good step we felt that with board approval is it an increase in the dividend to $3 75 per quarter Canadian del going forward every quarter. We will continue to look at our key financial priorities.
Tim Monticello: Look at financial position balance sheet health and leverage free cash flow and also visibility into our sustainable revenue streams going forward. Both sides. They are all sides of the business.
Tim Monticello: And then look at the different levers continued dividend versus share buybacks.
Speaker Change: Capex Mark already talked about we'll put some messages out early January very disciplined approach in growth Capex and maintenance Capex next year as we did this year and also further debt reduction that's still a high priority. So every quarter, we'll look at the different levers balance with where we are from a financial position balance sheet.
Speaker Change: <unk> cash flow and we will make some calls on a quarter by quarter basis. So that's the that's kind of the next little while 11 in January and into February will advise again, but we feel good about this initial step with the dividend and we've got the other leavers to consider every quarter as you move forward.
Speaker Change: Okay. That's helpful.
Speaker Change: On the engineered.
Speaker Change: Energy infrastructure side of the business.
Speaker Change: Saw a nice uptick in gross margins.
Speaker Change: Or to the LOE savings from the middle East on a year over year and quarter over quarter basis.
Speaker Change: How should we think about that is that something we should expect going forward.
Speaker Change: How significant was the overall work.
We can't get into the specifics of it but it certainly did benefit the margin in the quarter.
Speaker Change: So should we think about somewhere between the low <unk> on a go forward basis.
Speaker Change: We'll step back from providing formal guidance on that but I think referencing the Q3 number relative to where we've been on a more typical basis in recent quarters as a good reference point.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Our systems business.
Speaker Change: Okay.
Speaker Change: I'm just trying to yes.
Get a better understanding.
Speaker Change: The mix in the backlog levels, there was some commentary suggesting that.
Speaker Change: The production.
Speaker Change: Also on equipment.
Speaker Change: It's been.
Speaker Change: Strong demand there will be a higher margin business line.
Speaker Change: And sort of weakening demand on the compression side, but then you also mentioned.
Speaker Change: And I guess retain margins on the compression side, but then you mentioned a mix shift which is something that will be impacting margins on this China.
Bridging the gap there.
Speaker Change: Yes, Tim this is mark.
Speaker Change: Really happy with the bookings we got in the quarter.
Speaker Change: Maintaining our backlog of $1 3 billion.
Within that backlog, there is a significant breadth and depth of products and regions that we're supporting from cryo plants to LPG export terminals, two R&D projects to compression.
Speaker Change: We delivered some Ccs projects in Canada in the last quarter, So really good mix and when we look at the embedded margin. We did indicate in the prepared remarks that the embedded margin as we look at it is closer to our long term averages and that's despite our breadth of products in our in our.
And geographies.
Speaker Change: Weak natural gas price in North America combined.
Speaker Change: Combined a little bit with the effects of consolidation in the Permian Basin Consolidators, taking a more long term view of managing that resource.
Speaker Change: We'd like to point out that the great results our people delivered in Q3 on Es.
Speaker Change: That we see that sort of averaging back moving back closer to the average that you've seen over the last couple of years.
Speaker Change: Okay.
Speaker Change: And then.
Speaker Change: <unk> got some nice tailwind.
Speaker Change: U S rental.
Speaker Change: Compression space Bennington.
Speaker Change: Extended linked contract it looks like pricing is moving higher.
Speaker Change: But then that contrasts with sort of a weakening U.
Speaker Change: Compression margins on sales so.
Speaker Change: How are your customers thinking about.
Speaker Change: Compression and the decision to own versus rent.
Speaker Change: Does that change.
Speaker Change: I don't think it's really changed Tim I think the dynamic that we have to pay really close attention to is how the consolidators, especially in the Permian basin are thinking about infrastructure.
Speaker Change: Say a word I would use right now is purposeful there've been quite purposeful and they are taking a very long term view of how to manage that resource and how to best.
Speaker Change: Build up the infrastructure to get that resource to market with.
With several consolidators, we do service and new unit sales and we provide contract compression services. So I'm happy that we've got the scale the breadth of offerings to address them no matter, where they and how they decide to.
Speaker Change: Execute on that infrastructure Bill.
Speaker Change: Okay. That's helpful.
Speaker Change: Thank you I would now like to turn the call back over to Marc Rossiter for any closing remarks.
Marc Rossiter: Since there are no further questions I'd like to thank everyone for joining today's call. We look forward to providing you with our year end financial results in late February.
Speaker Change: Thank you. This concludes the conference. Thank you for your participation you may now disconnect.