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Enerflex Ltd
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Good day, ladies and gentlemen, and welcome to the Enerflex Fourth Quarter 2017 Results Call. [Operator Instructions] As a reminder, this call is being recorded.I would now like to turn the call over to Blair Goertzen, President and CEO. You may begin.
Well, thank you, operator, and good morning, everyone, and thank you for joining us this morning. Here with me today is James Harbilas, Enerflex's Executive Vice President and Chief Financial Officer.During this call, we will be providing our financial results for the 3 months ended December 31, 2017, a brief commentary on the performance of our 3 business segments and a summary of our financial position. Approximately one hour following the completion of this call, a recording will be available on our website under the Investors section.During this call, unless otherwise stated, we will be referring to the 3 months ended December 31, 2017 compared to the same period of 2016. I will proceed on the basis that you've all taken the opportunity to read yesterday's press release.Enerflex's fourth quarter financial results, which include the company's highest revenue as well as the strongest reported EBIT and adjusted EBIT seen over the past 2 years, was driven by an increase in global activity, robust bookings and improved progress on major projects. Fourth quarter results also included significant contributions from projects, where revenue recognition shifted from the third quarter into the fourth quarter of the year, which we communicated during the third quarter results conference call.The positive bookings trend over the past 6 quarters continued into the fourth quarter and is anticipated to remain strong in the USA and Rest of World segments throughout 2018.Increases in customer activity and inquiries translated into bookings of $224 million, which was predominantly from the USA segment in spite of a slowdown in Canadian bookings and a customer cancellation of previously recorded project due to market conditions.Engineered Systems backlog was $671 million, an 8% increase compared to backlog at the end of 2016, which provides good visibility for Engineered Systems revenue into 2018. Consolidated revenue for the quarter was $450 million, a 31% increase, which was largely driven by improved Engineered Systems revenues in Canada and The United States. This revenue increase was the result of the realization of bookings from the previous quarters and revenue recognition on certain projects shifting from the third to the fourth quarter. In the Canadian region, commodity prices and growth plans remained soft, as Canadian producers continued to be constrained by a lack of export options, and Western Canadian production continues to be priced at significant discount to other North American benchmark pricing. Natural gas prices in this market have declined over the last half of 2017 and into 2018, which has impacted many of our customers.However, there continues to be demand for NGLs and options for NGL exports, which should allow for some stability and capital investment, particularly in liquids-rich areas. We expect that 2018 activity in the Canadian region will be subdued compared to 2017 and will remain so until there are improved demand opportunities and export solutions for Western Canadian production.It is important to highlight the company's strategic and strategy of geographic diversification has significantly lessened the impact of the challenges of the Canadian market, and Enerflex is not solely dependent on Canadian activity to drive growth in financial results.Moving on to the USA. With improvements in commodity prices continuing from the second half of 2016, the industry experienced a surge in activity and saw an increase in production, resulting in higher inquiry levels and bookings as well as strengthened financial performance for the company. There has been an increase in the diversity of bookings by customer and customer type, relative to previous years, with a significant portion of work being related to assets for the Permian basin.Subsequent to the quarter end, Enerflex sold its first cryogenic gas plant, a 200 million standard cubic foot per day facility in Northern USA. As we look forward in this market, Enerflex remains focused on building its successes for Engineered Systems products for liquids-rich plays in this prolific region.The company expects 2018 to be a year of continued steady demand for our products and services, as evidenced by the strong bookings in the fourth quarter and throughout the year, and it is optimistic that these successes should translate into additional opportunities in the region. The acquisition of the rental assets from Mesa Compression in the third quarter and the subsequent rebranding of our USA Rental business to contract compression has added an established and growing platform, which contributed to increasing recurring revenues for the segment. With approximately 20,000 horsepower of gas lift compression added to the fleet since the close of the acquisition, the contract compression business contributed revenue of $17 million, $4 million of EBIT and $9 million of EBITDA. Enerflex is focused on growing and investing in these assets throughout 2018 as production in the Permian continues to expand. The company sees additional growth opportunities in this high-demand market.Looking at the Middle East. This region continues to provide stable Rental earnings with a fleet of approximately 100,000 horsepower. The company's recent success in Kuwait has served to demonstrate our capabilities and has led to additional work with key customers on future projects. The Kuwait market has significant project plans over the next 5 years, and Enerflex is well positioned to compete for these new opportunities moving forward. Subsequent to the quarter end, the company also executed an expansion and 4-year extension of a rental contract with a key customer in Bahrain, contributing to recurring revenue. The customer -- I'm sorry, the company continued to explore new markets and opportunities within this diverse region in order to enhance recurring revenues as well as focusing on integrated turnkey and build-own-operate-maintain projects.In the Latin American market, specifically, Mexico, which is still recovering from the crash in commodity prices, it is evident that new production is required in many of these countries. As a result, Enerflex believes that there are near-term prospects within the Argentina and Colombia markets and mid-term, longer-term prospects in Brazil and Mexico. Our bid pipeline for the region is the highest it's been over the past 3 years. In Argentina, the company recently completed a significant project in the Vaca Muerta shale play. Further development opportunities exist in this formation as producers expand their production with Enerflex positioned to capitalize on these opportunities.During the quarter, the company commissioned our first 10-year build-own-operate-maintain project in Colombia. The first of the 2 plants was installed and operating within the fourth quarter of the year, and the project will be fully operational in the first quarter of 2018, contributing to recurring revenue in the region. As capital investments increased to support Colombia's underdeveloped infrastructure, there will be further opportunities for Enerflex's products and services.Looking to Mexico. The upcoming presidential elections will provide more clarity on the direction of the energy reform. However, it is evident that further investment is required. Enerflex's recurring revenue product lines will remain under pressure in Mexico until we see a return to commodity pricing that will allow customers to increase capital spending.As we move forward, Enerflex remains focused on delivering Engineered Systems, aftermarket service and build-own-operate-maintain solutions for customers across this region. The company's balance sheet remains strong with a net debt-to-EBITDA ratio of approximately 1:1 and sets us up to pursue opportunities with focus on recurring revenue.Rental revenue from the contract compression acquisition along with the recent BOOM projects wins and long-term service contracts fit within Enerflex's strategic goal of increasing recurring revenue.Moving ahead, the company will continue to grow its revenue streams from multiple markets. Given Enerflex's positive outlook, the Board of Directors has approved the quarterly dividend of $0.095 per share, which is $0.38 per share on an annualized basis. Enerflex has increased its dividend by 58% since reemerging as a public company in 2011.I will now turn it over to James Harbilas, Enerflex's Executive Vice President and Chief Financial Officer, to review our financial results.
Thank you, Blair. Financial results for the fourth quarter strengthened year-over-year, largely due to increased revenues from improved progress on projects that were delayed from the third quarter into the fourth quarter and the realization of strong bookings from prior periods as well as lower SG&A costs. The company's quarterly bookings were $224 million, which represents a 15% decrease year-over-year compared to the $262 million booked in 2016, predominantly due to a decrease in the Canada segment.Enerflex saw a $49 million increase in backlog at December 31, 2017 compared to the prior period, reflective of stronger bookings that began in the last half of 2016 and continued through 2017. Adjusted EBIT for the fourth quarter was $48 million compared to $34 million, while adjusted EBITDA was $69 million versus $58 million.EBIT and EBITDA were both adjusted for impairments, gains on asset sales and restructuring activities. The underlying increase in adjusted EBIT and adjusted EBITDA was largely driven by the increase in revenue, as previously mentioned. Revenue showed a significant improvement with the company generating $450 million, a 31% increase, which was primarily driven by Engineered Systems revenue in the USA and Canada segments. Consolidated gross margin for the quarter was $84 million compared to $69 million, while gross margin as a percentage of revenue slightly decreased to 19%. This 1% reduction was largely due to higher contribution from the lower-margin Engineered Systems product line.Selling, general and administrative expenses were $38 million. This decrease of $10 million was due to the restructuring costs incurred in 2016 and the resultant reduction in core SG&A costs in 2017 as well as an FX gain and the reduction to stock-based compensation due to the decreased share price in the quarter.During the quarter, Enerflex also generated net earnings from continuing operations of $27 million or $0.30 per share compared to a net loss of $45 million or $0.54 per share in 2016.Moving on to our regional results. The Canadian region recorded bookings of $31 million in the fourth quarter, a significant decrease over the same period in 2016, resulting from customers being cautious as commodity prices remain impacted by pipeline constraints in Western Canada as well as a customer cancellation of a previously recorded booking due to market conditions.However, backlog saw an increase to $173 million, which is slightly above backlog from December 31, 2016. Revenue in the Canada segment during the fourth quarter was $160 million. This $106 million increase represents a 200% improvement over the prior year's quarter and is primarily attributable to higher revenue from the Engineered Systems product line, driven by progression on projects where revenue recognition was shifted from the third quarter into the fourth quarter and the realization of strong previous period bookings. Operating income for the fourth quarter improved by $22 million, as a result of increased revenues and lower SG&A costs, due to previously undertaken restructuring activities, partially offset by project margin erosion. EBIT for the quarter benefited due to improved operational results, leading to an $80 million increase when compared to the prior year, which included a goodwill impairment.In the USA segment, Enerflex's bookings of $161 million represented an increase of $18 million or 12% when compared to the fourth quarter of 2016. In addition, we saw increased diversity of bookings by customer and customer type with a significant portion being related to assets that will be deployed into the Permian basin. At the end of the period, backlog remains healthy at $395 million, which is consistent with the backlog at year-end 2016.Revenue in the USA segment during the fourth quarter was $205 million. The increase of $47 million was attributable to improved revenues across all product lines. Engineered Systems revenue increased by $27 million due to the realization of strong bookings that started in the back half of 2016 and continued through 2017 and revenue on projects shifting from the third quarter into the fourth quarter. Service revenue saw an increase due to higher activity levels, and Rental revenues improved as a result of the acquisition of the contract compression business from Mesa and the buildout of the contract compression fleet over the last half of 2017. Operating income for the fourth quarter increased by $2 million due to higher revenues, offset by increased SG&A costs, driven by higher compensation costs and lower bad debt recovery. In the Rest of World, the $32 million of bookings, primarily relates to a project booked in Argentina. This segment's bookings are typically larger in nature and, as a result, are less frequent. Backlog of $103 million at December 31, 2017 increased by $39 million relative to December 31, 2016.Revenue in the Rest of World segment for the fourth quarter was $86 million. The decrease of $46 million was attributable to reduced revenues in all product lines. Engineered Systems revenue was lower due to the completion of projects within Latin America in the fourth quarter of 2016. The decline in Rental revenues was due to lower utilization and rental rates in Mexico. Lower Service levels in Latin America and reduced parts sales in Australia and Asia both contributed to the decrease in Service revenue. Operating income of $13 million represents a slight increase over the same period of 2016 due to lower SG&A costs on lower onerous lease provisions and higher foreign exchange gains.Turning to the balance sheet. During the quarter, Enerflex closed a private placement offering of senior unsecured notes for gross proceeds of USD 175 million and CAD 45 million. The proceeds were used to repay borrowings under the existing credit facility and has improved the company's liquidity as of the end of 2017.In managing liquidity, the company has access to a significant portion of its bank facility for future drawings to meet the company's future growth targets. As at December 31, 2017, the company held cash and cash equivalents of $227 million and had drawn a $161 million against the bank facility, leaving it with access to $561 million for future drawings.The company improved net debt as compared to the prior year and continues to meet its bank facility covenant requirements with a net debt-to-EBITDA ratio of approximately 1:1 as calculated for covenant purposes.Demand for natural gas is growing globally and with the return to some much needed stability in commodity pricing and even recent pricing gains outside of Canada, Enerflex is optimistic that customers will increase capital spending in production, translating into increased demand for Enerflex's products and services. We anticipate increases in activity levels in the USA and Rest of World segments will more than offset challenges in the Canadian market. Building off the success of adding assets, which contributed to recurring revenues in 2017, the company remains committed to the strategy in the USA and Rest of World segments in 2018.This completes the formal component of the webcast. Additional details can be found in our February 22 press release. We will now be happy to take any questions. Operator?
[Operator Instructions] Our first question comes from Greg Colman of National Bank Financial.
Just want to start with digging into Q3 versus Q4. As you mentioned, Blair, at the beginning of the call, a large part of the quarter or a portion of the quarter was driven by the delays in Q3 and revenue recognition shifting into Q4. If we talk on the EBITDA line as just a reference number, could you quantify how much of the quarterly EBITDA was pushed forward from the Q3 delays?
We provided some guidance on the Q3 call with respect to that, and we said it was going to be a range between $6 million to $10 million. We were at about $7 million to $7.5 million of that revenue -- of that EBITDA being shifted from Q3 into Q4, based on the revenue recognition. We couldn't get all the way to the $10 million, the high end of that range as a result of some delays in the delivery of Cat engines. The lead times continued to be pushed on the Cat product line, the 3600 product line. So we will see a little bit of a catch-up here in Q1 of 2018 on -- in the U.S., specifically related to Cat engine deliveries.
Okay. Great. So that actually is my follow-on there. We should see still a little bit of the surge or push forward EBITDA in Q1 still?
Yes. There is a little bit of catch-up to happen in Q1 as well.
Focusing on Canada for a second there. Could you quantify the size of the canceled Canadian contract? And give us some insights as to where in the market it occurred. What type of customer? What type of contract it was? Did you view it as a risk? Or was it more of a surprise?
No. I mean, given the egress issues that Canada has and some of the pricing, I mean, it wasn't a surprise to us. We talked about a potential slowdown in bookings activity in Canada on the Q3 call. With respect to where it was, it was in BC, and we don't -- we won't quantify the amount of the contract just for competitive purposes.
Got it. And if it wasn't a surprise to you, could you opine on the strength of your -- or the quality of your Canadian backlog now?
Yes. We wouldn't expect any other cancellations with respect to what we have in backlog in Canada.
Great. And then just one last one from me, and then I'll pass it back. If we're looking at the new cryo facility that you installed in the U.S., how should we be thinking about that in terms of profitability or return on capital as it starts to emerge in the Engineered Systems line versus compression versus processing equipment? What should we be thinking of in terms of margin expansion or contraction, as that product line starts to emerge?
Yes. So there will be margin expansion given the model. So cryo plants in the U.S. fall into that integrated turnkey solution mix. And with that brings a stronger margin, higher revenue overall than kind of our traditional compression business in the U.S.
And Greg, I just want to correct a statement that you made on -- to start your question. We haven't installed that cryo facility yet. It was awarded to us in Q1 of 2018.
I'm sorry, I thought it was completed in Q1.
No. It was awarded to us in Q1 of 2018.
When should we expect to see that flow through the income statement?
In the latter part of 2018, so probably beginning with Q3 and Q4.
And also to clarify, this won't be sitting on our balance sheet. So it's not part of the recurring revenue. It's an integrated turnkey product solution where we engineer, design, build the cryo plant and do the installation and then it's a sale.
Our next question comes from Benjamin Owens of RBC.
Just as a follow-up to Greg's question. The cost for new build 200 Mcf cryo facility, would that be in the $100 million to $150 million range, if it's a good range?
No. It's not. So Ben, we wouldn't comment on the value of that contract just for competitive reasons, right. I mean, it's one specific booking. So it's a significant milestone for us because it is our first 200 million a day cryo, but we're not going to comment on the quantity or the quantum of that booking.
Okay. That's fair. So you guys have obviously had a nice run of Engineered Systems bookings in the U.S. over the last 6 quarters. And I think total 2017 bookings in the U.S. were only down 6% from 2014. Given the duration of the cycle recovery in the U.S. and the amount of infrastructure put in place over the last 1.5 years, just wondering what's your sense of maybe what inning you're in, in terms of where you see the rest of the cycle playing out in the U.S., specifically?
We've continued to see very strong activity in the Permian in the U.S., but we've also seen some activity in other basins now in 2018. And we expect that to continue throughout the balance of the year. What we are also seeing as an add-on benefit for us is obviously a pickup in our Service business. As a lot of this equipment gets delivered into the field and gets commissioned and has been started up, it's going to require ongoing service with respect to the horsepower that's been delivered and commissioned. And we are also continuing to see strong demand on the Rental side of the business with the acquisition we did on Mesa on gas lift as production starts to increase in the Permian, and we're also seeing some activity levels and demand for gas lift in Oklahoma as well. So we feel very confident that 2018, we've got very strong visibility in the U.S. with respect to all 3 product lines.
Okay. That's helpful. When you guys talk about customer type diversification, are you talking about E&Ps versus midstream customer? And I guess, how has that mix shifted recently?
Yes. I mean, it's still heavily dominated by midstream activity. But yes, we have some -- we have seen some E&Ps. I think the more important trend that we're seeing in 2018 is the fact that we're not exclusively reliant on the Permian. We have seen a little more diversity in terms of activity levels with respect to other basins in the U.S.
Okay. And then the last one I had on Mesa. You guys have obviously done a nice job growing that since you made the acquisition. Do you have any specific growth targets in terms of horsepower additions for 2018 you'd like to see?
We'd like to see the kind of growth that we saw in the last 5 months on an annualized basis into 2018. And as I stated, we are seeing very, very strong demand in the SCOOP/STACK and the Permian for that product. So if we can replicate what we saw in the last 5 months in 2018, I think we would be very, very happy from an organic growth standpoint.
[Operator Instructions] Our next question comes from Jon Morrison of CIBC Capital Markets.
Can you talk a bit more about the Cat engine availability? And is there any potential that we should be thinking about your current backlog having an extended tail to being converted over to revenue, just given some of the tightness that you're seeing in OEMs, backlogs and their own supply chain issues? Or does it feel like most of that gets resolved in 2018?
I think it's resolved in 2018. Early in 2018, we see deliveries being tightened up in terms of their delivery deadlines. So I think Q1 is kind of the last of it, certainly looking forward. But it doesn't eliminate the need for the immediacy. So everyone's gone out and bought a bunch of engines basically. And so they're being delivered over the next 35 to 50 weeks. And so if you have a job that comes up that may not fit that slot, then you're scrambling to get it. So outside of that, Jon, I don't see anything else being an extension to the work that we have in the view at the moment and -- with any other OEM, and certainly Cat looks like they're tightening up on their delivery schedules as well.
So then maybe the backlog conversion is a little bit slow in Q1, but pretty normal otherwise?
I would suggest that's right.
Okay. Within Canada, is it fair to assume that Q4 is going to be the high watermark for operating margins? And the Street should be thinking about those coming down decently in the next few quarters?
I think that it would be a very safe assumption to consider that a high watermark from a margin standpoint. But I wouldn't say it would come down materially in 2018. I think it will -- it could settle around the 4% to 5% range, but that would definitely be the high watermark for us in quite some time.
Given some of the slowdown in Canada, does it make sense to move any U.S. Engineered Systems production through Calgary and ship it to the U.S.? Or the transportation cost is just too high?
In the Northern U.S., we already do that for certain clients. And as we look at other projects, depending on where they are in the bid process and the engineering and design, we've considered that for sure, Jon.
Okay. Southern U.S. would be of tough, though? Or maybe it makes some sense in this sort of case?
Yes. It would be very challenging to move this equipment 2,000 miles with the availability in the U.S. at the end of the day. Northern U.S. and other projects internationally, again, remembering that Houston is our international ES business plant. So we can take and shift some of that international work to Canada as well, if in fact it's caught early enough.
Within international, do you expect the exit of the onerous lease that you referenced in the results to impact you in the next few quarters when we think about year-over-year costs in the same way from reducing your fixed costs?
Sorry. Did you ask the question about the onerous lease in the context of the U.S., Jon?
No, no, no. International, you said that you exited the onerous lease, which is a boost to margins. Should we be thinking about the next 3 quarters having a similar follow-on effect to what you referenced?
Yes, the onerous lease was part of restructuring activities that we had to undertake in 2016. So that -- the costs related to that lease are behind us now. So it will benefit future quarters, for sure.
Okay. You referenced the Colombia BOOM project taking off in the quarter. What's bidding activity for those types of projects right now, broadly speaking?
In the -- in Latin America, overall, it's the strongest bid pipeline we've had in the past 3 years. And so -- and it includes those types of projects in Latam as well.
So Blair, when you referenced bidding activity internationally being at your all-time high in your opening remarks, was that specific to Rentals or Engineered Systems sale opportunities, or both?
Both.
Okay. On the cryo side, I realize that we don't want to get too far ahead of ourselves, but congrats on the order. If all goes well, do you believe that builds a resume where you can start winning more of those projects, say, over the next 2 to 3 years?
Well, we sure hope so. I mean, it's been hard, as you know, to get serial #1 out. And now that that's there, and it's with a customer that we know very well. And so our expectation is, is that we are now in the market as long as we deliver and execute as we certainly believe we can.
Last one just for me follow-on to the questions about Mesa's bidding activity. Can you give us any sort of a reference point to where bidding is relative to something in the past? So where is bidding relative to the installed equipment base in the U.S.? Or where is bidding activity relative to where -- when you acquired Mesa? Just give some order of magnitude for how active you really are right now.
Sorry, Blair. If you look at the last 5 months, I mean, we were able to grow the fleet by roughly 20,000 horsepower, which is about 18% growth. I would think that we've got opportunities in front of us that are at least 20,000 horsepower, if not more. And it's a lot higher than what we saw when we've started to look at this platform back in early 2017. The growth is probably twice as fast as what we've seen in early 2017.
And that's the feedback from the founder of the company as well that really going back over the past 3 years, the opportunities are about double any time that he's seen in the past, and -- which is a good thing, and now it's just, again, about getting the right people in the field to support those installations.
And is that a function of just overall activity levels rising? Or does it help them to be part of your organization?
I think there is both, and that is, again, feedback. That's not our cavalier view of the world. But [ Alex ] said that he believes being part of Enerflex is a major benefit and the market has improved as well.
Our next question comes from Elias Foscolos of Industrial Alliance.
Just a couple of questions. The first one related to EBIT margin. In the past, there has been a goal of 10%. How do you -- and in the quarter, you came pretty close to that. How do you see that shaping up for 2018?
Well, I think we're going to continue to make progress towards that goal, Elias. Some of the initiatives that we undertook in 2017 that are going to help us with that is, obviously, the fact that we monetized a lot of the idle facilities that we had in our footprint, which has removed a lot of sunk costs in the form of, obviously, operating costs and then depreciation and amortization, which we won't incur going forward. So we feel that we're going to make progress towards that goal in 2018 as a result of those activities. And then, obviously, as we continue to invest in the recurring revenue stream and increase our rental fleet, we feel that that's going to help us from a product mix standpoint to get closer to that goal as well.
Okay. The next one is, in the past, you have occasionally given some quarter-to-date booking numbers. So I thought I would be the good analyst and try to see if there is any color you can add on that?
We've seen some very strong bidding and booking activity in Q1 of '18 in the U.S. and, obviously, internationally. And we would estimate that those today are about roughly $100 million where we sit today.
[Operator Instructions] Our next question is a follow-up from Greg Colman of National Bank Financial.
Just a couple of quick follow-ups here. In the past, you've kind of opined on the mix in your backlog in terms of compression versus processing versus your trailing revenue stream. I was wondering if you could give us the same color now.
If you look at where we're at, at the end of the year, we've seen a bit of a shift away from processing and closer to compression. So we're probably sitting at about 50-50 gas processing, gas compression at the end of '17. But that mix could change going into 2018, obviously, with the booking of the cryo plant, which is clearly a processing opportunity, and we continue to pursue other processing opportunities in Canada and the U.S. But currently, it's about 50-50 split.
Okay. And on that, you mentioned $100 million to Elias. Is the cryo plant in that?
No, it isn't. Only a small portion of it is at this point.
Got it. Couple of other quick things here. Can you remind us of any sizable rental contract bids that you're currently waiting for an award? Or do you hear if you got or not?
So Blair touched on it. I mean, the bid pipeline in the Rest of World segment is the most robust we've seen in 3 years. So there are a few opportunities that are outstanding right now that we continue to pursue, and we'll update the markets as we make progress.
Great. And then just finally, and this is it for me. As you mentioned in your disclosure, there is still a little bit of OOCEP arbitration costs in Q4. Have they all wrapped up now? Or do we still expect to see a bit of trickle in Q1?
No. The arbitration wrapped up in December of '17. So it's in the hands of the tribunal now. So we're waiting for a decision. We don't expect any additional legal costs in 2018 related to that.
And when do you expect to hear back from the panel?
Well, if the tribunal respects the timelines put in place by the ICC, we would expect something at the end of June, early July of '18.
There are no further questions. I'd like to turn the call back over to Mr. Goertzen for any closing remarks.
Yes. Thanks, operator. Since there are no further questions, I'd like to thank everyone again. And we look forward to giving you our first quarter 2018 results in May. Have a good weekend.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.