Enerflex Ltd (EFXT) 2013 Q1 法說會逐字稿

Welcome to the Enerflex 2013 first-quarter results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded Tuesday, May 14, 2013.

I would now like to turn the conference over to Blair Goertzen, President and Chief Executive Officer for Enerflex. Please go ahead, sir.

Good morning and thank you for joining us. Here with me today is James Harbilas, our Vice President and Chief Financial Officer. During this call, we will be providing our financial results for the three months ended March 31, 2013, a brief commentary on the performance of our three business segments and a summary of our financial position at the end of the first quarter of 2013.

Please note that effective January 1, 2013, the results of our Production and Processing division were reported as a part of the Canada Northern US business segment, having previously been reported as part of our International business segment. The change was to better align Enerflex's North American manufacturing facilities. Comparative amounts for the first quarter of 2012 have been reclassified to reflect this change. Approximately one hour following the completion of this call, a recording will be available on our website under the Investor Relations section. During the presentation, unless stated otherwise, we will be referring to the three months ended March 31, 2013 compared to the same period of 2012.

I will proceed on the basis that you have all taken the opportunity to read yesterday's Press Release. First -quarter 2013 consolidated revenue was $353 million compared to $356 million in the first quarter of 2012, the decrease being due to lower revenue in Canada and the Northern US, which was largely offset by increased revenue in the Southern US, Latin America and International segments. From a product line perspective, the decrease in results and revenue was a result of lower Engineered Systems revenue due to lower opening backlog, partially offset by higher service and rental revenues for the first quarter of 2013 when compared to the same period of 2012. Higher service revenue resulted from increased activity in the Southern US and Australasia regions. Rental revenue increased due to higher rental unit sales in Canada, and the Northern US. At the end of the first quarter of 2013, North America rental utilization rates increased to 67% compared to 62% at March 31, 2012, and 61% at December 31, 2012.

The Company generated consolidated earnings before finance costs and income taxes or EBIT of $23 million or 6.4% of revenue for the first quarter of 2013 compared to EBIT of $22 million or 6.1% of revenues in the first quarter of 2012. The increase in EBIT for the three months ended March 31, 2013 was a result of the decrease in SG&A expenses which offset the reduction in revenue and in gross margin compared to the same period of 2012. Backlog of $603 million was 35% lower at March 31, 2013 compared to the end of the first quarter of 2012. Sequentially, the backlog has decreased by $80 million from December 31, 2012 or 12%. Bookings of $189 million in the first quarter of 2013 were $33 million lower than the same period of 2012, reflecting decreased bookings in the Canada and Northern US segment. The decrease was a result of continued weak natural gas prices, which have caused lower activity levels in the Western Canadian sedimentary basin.

The Southern US and Latin America segment recorded increased bookings during the first quarter of 2013 when compared to 2012, due to more stable natural gas liquids prices, and the resulting strong activity level in liquids-rich resource basins. Looking for the International segment, we're $8 million lower in 2013 when compared to the same period of 2012. However, these projects have long lead times associated with tendering, bid evaluation and contract awards as they tend to be larger in scale and scope. It's important to highlight that $38 million of the first quarter 2013 bookings recorded in Canada and the Northern US and Southern US and Latin America segment were related to compression and process equipment that will be manufactured in the segment but are destined for International markets compared to the $51 million in the same period of 2012.

I will now turn it over to James Harbilas, our Vice President and CFO to review our financial results.

Thank you, Blair. I will start with a review of our product breakdown in the first quarter 2013 versus the same period of 2012. Engineered system revenue was $269 million for the quarter, which was 4% lower than the prior year as a result of decreased backlog levels entering 2013, compared to 2012. The increases in Engineered Systems revenue in the Southern US and Latin America and International regions were more than offset by decreases in Engineered Systems revenue for Canada and the Northern US compared to the prior year.

Service revenue for the three months ended March 31, 2013 was $68 million, compared to $64 million for the same period of 2012. The Company continued to benefit from increased activity levels in the Southern US and Australasia regions. Rental revenue was higher in the first quarter of 2013 compared to the prior year, coming in at $16 million versus $11 million in the prior period. The increase in Rental revenue was a result of higher sales of Rental units in Canada and the Northern US.

Consolidated gross margin for the first quarter of 2013 with $61 million compared to $62 million, a decrease of 2% from the same quarter of 2012. The decrease was primarily due to lower gross margins in the Canada Northern US segment, partially offset by strong gross margins performance in the Southern US and Latin America, and International segments. Gross margin was lower as a result of weaker plant utilization, warranty claims that were higher than historical averages on three projects in the Canada Northern US segment, and cost escalation on International projects. These items had a $5.4 million or 1.53% impact to EBIT and EBIT margin respectively during the quarter. Selling, general and administrative expenses for the three months ended March 31 decreased to $39 million when compared to $41 million incurred in the same period of 2012. When expressed as a percentage of revenues, SG&A decreased by nearly 1% in the first quarter of 2013 compared to the same period of 2012. The decrease in SG&A expenses was a result of lower compensation and incentive costs and favorable foreign exchange wins, which were partially offset by higher occupancy costs.

Operating income was $22 million, which is an increase of $1 million over the first quarter of 2012. EBIT during in the first quarter of 2013 was $23 million or 6.4% of revenue compared to $22 million or 6.1% in the same period of 2012. The increases in operating income and EBIT were due to lower SG&A expenses, partially offset by lower gross margin. EBIT as a percentage of revenue for the trailing 12 months ended March 31 was 7.9%, which is progressing toward the Company's medium-term objective of 10%. Income tax expense was 28% of earnings before tax for the first quarter 2013 compared to 26% in the same period of 2012. Enerflex's income tax expense and effective tax rate increased in the first quarter as a result of higher pretax earnings, the impact of statutory rate reductions in the first quarter of 2012 that did not recur in 2013, and variations in the mix of earnings in foreign operations for the comparative period.

First quarter earnings per share from continuing operations were $0.20 in 2013 compared to $0.19 in the same period of 2012. This represents an increase of 5% over the prior year. The increase was a result of higher net earnings resulting from lower SG&A expenses, partially offset by lower gross margins and higher income tax expense. Earnings before finance costs, tax, depreciation and amortization or EBITDA from continuing operations for the first quarter of 2013 increased by 4% to $33 million compared to $31 million in the same period of 2012. Return on capital employed increased from 9.6% in the first quarter 2012 to 13.4% in the first quarter 2013.

Moving on to our regional results, when comparing the first quarter 2013 to the same period of 2012, revenue for the first quarter for Canada Northern US decreased to $120 million from $184 million, due to lower Engineered Systems revenue, resulting from lower opening backlog. This was partially offset by higher Rental revenue compared to 2012, which resulted from increased Rental unit sales. Service revenue was slightly higher in the first quarter of 2013 due to increased parts and engine sales. Continued weak natural gas prices have caused lower activity levels in the Western Canadian sedimentary basins, which in turn is reflected in decreased bookings. As a result, backlog levels have decreased to $164 million in the segment at the end of the first quarter of 2013.

Operating income for the first quarter of 2013 decreased to $3 million from $12 million during the same period of 2012. This decrease was a result of lower revenues and lower corresponding margins as well as weaker gross margin performance resulting from lower manufacturing utilization rates and warranty issues for Engineered Systems jobs. This was partially offset by lower SG&A expenses, due to lower compensation and incentive costs. Revenue for the first quarter of 2013 for the Southern US and Latin America segments increased to $115 million compared to $113 million in the same period of 2012. The increase in revenue in 2013 was a result of higher Service revenue due to increased Service calls and parts sales compared to the same period in 2012.

Engineered Systems revenue in the first quarter of 2013 was consistent with 2012 despite the impact of the lower opening backlog to start 2013. Revenue was consistent because the Company was able to utilize the additional capacity resulting from the Houston manufacturing facility expansion, which was completed during the second quarter of 2012, to convert its existing backlog. Backlog was lower to open the first quarter of 2013 due to booking activity slowing down during the third quarter of 2012 as a result of lower NGL prices. NGL prices stabilized in the fourth quarter of 2012 and into the first quarter of 2013, resulting in an increase in bookings when compared to the same period in 2012. Operating income for the first quarter of 2013 increased to $13 million from $10 million in 2012 due to improved gross margin performance and Engineered Systems jobs. The increase in gross margin was partially offset by higher SG&A expenses, as a result of an increase in amortization expense, for intangible assets, and higher costs related to the expansion of the Houston facility, which became operational in the second quarter of 2012.

Revenue for the International segment doubled from $59 million to $118 million for the first quarter of 2013 as a result of higher Engineered Systems revenue in the Australasia and MENA regions and higher Service activity levels in Australasia. The Australasian region continues to benefit from high activity levels generated from [full steam] gas to LNG projects while gas processing and compression projects continue to drive demand and activity levels in the MENA region. Backlog was lower at the end of the first quarter of 2013 compared to the first quarter of 2012, due to lower bookings during the first quarter of 2013, and the partial fulfillment of projects in Australia and in Oman.

Operating income increased to $6 million in the first quarter of 2013 compared to an operating loss of $1 million in 2012 due to higher revenues and associated gross margin, and higher manufacturing utilization rates. This was partially offset by the impact on gross margin of cost escalation on Engineered Systems jobs as well as higher SG&A expenses attributable to increased compensation incentive and occupancy costs. Cost escalations impacted EBIT and EBIT margins by $1.8 million or 1.53% in the segment.

Turning our focus to Enerflex's financial position, the Company continues to strengthen the balance sheet, which in turn provides us with financial flexibility. At the end of the first quarter 2013, the Company held $152 million in cash and had $287 million of available credit facilities. With a debt balance of $111 million, Enerflex had no debt, net of cash. Enerflex used $8 million in cash for operations for the three months ended March 31, 2013 compared to cash provided by operations of $22 million for the same period in 2012. The decrease for the quarter was due to higher working capital requirements, partially offset by the improvements in operating results.

I would now like to turn the call back over to Blair to provide an outlook for each of our regional segments.

Thanks, James. Backlog in the Canada Northern US segment was $43 million lower at the end of the first quarter of 2013 compared to the end of the first quarter of 2012, due to lower activity in Canada as a result of these weak natural gas prices. Enerflex expects this trend to continue for at least the first half of 2013. Activity levels could rebound if natural gas fundamentals improve, especially on the demand side. In addition, the advancement of LNG facilities in British Columbia can have a meaningful impact on activity levels within Canada. However, we are uncertain of the timing of these projects.

Enerflex is well positioned in the Southern US and Latin America segment given backlog levels, which stood at $243 million at the end of the first quarter of 2013, albeit $54 million lower than at the end of the first quarter of 2012. The Southern US and Latin America segment has seen a slight increase in bookings due to strong activity levels consistent with current NGL prices. Despite recent improvements in bookings, we do remain cautiously optimistic for the remainder of the year in this segment. International backlog was $228 million lower in 2013 compared to the same period of 2012, which included a large order for a natural gas processing plant awarded to the Company in the fourth quarter of 2011.

The International Region continues to hold considerable long-term opportunity; however, as mentioned, we expect that these potential project awards have the long lead times as evidenced by the $56 million in bookings in the segment subsequent to the end of the first quarter of 2013. Activity in this region continues to benefit from increased activity in Australia's natural gas industry, and the domestic demand for natural gas in the Middle East North African region. The Company is well-positioned to compete for future gas gathering infrastructure projects in Australia, and for compression processing equipment and aftermarket Service support specifically in Oman, Bahrain and other select countries within the Middle Eastern region.

In summary, the Enerflex Management team is pleased with our first quarter of financial results. As a result of steady revenue levels from our geographical diversification and disciplined cost control, we have recorded strong first-quarter results. The Canada Northern US market continues to struggle with weak natural gas prices, and this trend is expected to continue through at least the first half of 2013. The Southern US and Latin American segment has been stable from a bookings standpoint, and we do, as we said, remain cautiously optimistic about the remainder of 2013 for this region.

Finally, there continues to be opportunities in our International segment; however, we do expect that these potential awards will have the longer lead times again as evidenced by the over $55 million in bookings that the segment had subsequent to the end of the first quarter of 2013. With a strong balance sheet and continued focus on expanding our capabilities and a focus on controlling our costs, we are currently rightsized for any challenges during 2013, and more so, well-positioned to capitalize on any opportunities that will arise.

This does complete the formal component of the webcast. Additional details can be found on our May 13, 2013 Press Release. We will now be happy to take any questions. Operator?

Thank you.

(Operator Instructions)

Dana Benner, AltaCorp Capital.

Good morning, guys. I wanted to start with margins, and I know that they can bounce around somewhat. And I understand the guidance you've given by way of bookings, although those too can bounce around. And I wonder, of we think about the balance of the year, to what extent can we read into the margins that we've seen in the first quarter as being broadly indicative of trend line for the rest of the year?

We don't think that what we've reported in the first quarter of 2013 is going to be indicative of the rest of the year. We did touch on the International segment been impacted by cost escalation which impacted EBIT margins by 1.53%. We talked about Canada, Northern US in terms of some of their warranty claims, and that impacted margins in that segment by about 3%. So, if you normalized for those items, then I think what we would see for the rest of the year would probably be more indicative of those normalized margins.

Right. To what extent do you think -- I mean Q1, tending to be a seasonally weaker quarter, to what extent do you think we've been seasonality rear its head in these numbers overall?

Well, in terms of revenue levels, if you look at it sequentially compared to Q4, we are lower, and we said on the year end call that the Q1 revenues tend to be lower and Q4 revenues tend to be higher. I don't basically attribute the weaker operating margin performance, to seasonality, Dana. I really just attribute it to the factors that I discussed earlier.

Right, but even moving up for margins, just generally to -- it's a broader question than just on margins, how much you think there is a seasonal factor to what we see in the first quarter versus maybe other issues that might last another quarter or two or not?

Well, if your question is do we expect operating margins to get stronger in the coming quarters, my answer would be yes, that's what we expect.

Right, but if we were to move up to say top line?

Well, top line would get a little stronger too in the Southern US and South America and International regions. The Southern US and South America was impacted also by the fact that Q3 bookings in 2012 were very low. So, we did have a lower labor hours going through that facility and lower levels of work on the Engineered Systems side going through that facility.

Right. I guess moving to the two deep cut plants that you're working on in the US, any update there as to will they be out on time and client interest, et cetera?

Client interest has been good. And, once we have both of them secured with either letters of intent or POs, then we have no question about delivering them on time.

Okay, and just one final question, then I'll turn it back. We are starting to see evidence of a spending ramp in certain areas of oil services related to the LNG projects, be it deeper drilling rigs or signing up of larger frac crews for certain areas, et cetera. And I wonder if you find yourself in those same types of discussions in a -- over time period that might give you some visibility on an uptick in your Canadian business outside of say higher natural gas prices or better what we called gas fundamentals versus more project specific work?

We are hearing some of that type of discussion out there today. Obviously, we've lagged the drill bit by six months, but a lot of the project work will start to be and has been discussed already for Northern Canada. So, the short answer is, there is some discussion that is already starting to take place if in fact these final investment decisions are I think approved this year.

Okay, guys, that's all I've got, thank you.

Brian Purdy, GHS Canada.

I just wanted to ask, you got some -- the bookings in Canada, obviously a little weaker year-over-year, but did show positive trend from what we saw in the second half of 2012. And, as you look into 2013 here, I'm just wondering if you think it's -- if there is much to be read into the sequential improvement there or should we be looking more at the year-over-year levels?

I think year-over-year levels would be the right way to look at it and, we still think at this point in the year that year-over-year we will be lower than where we were last year from -- for Canada, Northern US just given activity levels right now. But, Blair touched on it, as you can see any meaningful orders come out of the Duvernay play or some of the other LNG plays that are be discussed right now in the back half of the year, that could definitely change things. But right now, the year-over-year we do expect bookings to the lower.

Okay, and you mentioned the orders that you received in the International segment, I'm just wondering, is there any rule of thumb that we can use in terms of when bookings turn into revenue? The cycle seems to be a bit longer in the International segment, so I just thought I would see if there is any guidance you can give us there?

It is hard to whittle that down to a rule of thumb. If it is equipment orders that are being booked into the International segment, then they could start to generate revenue for us the next quarter. If it's larger EPC projects, it usually takes about a quarter after those bookings are recorded to start to generate revenue on a percentage of completion basis. As you start to ramp up, do engineering, start to do some of your procurement, you start to incur costs, right? So for Engineered System or -- sorry, EPC type work, it would probably take us another quarter from announcing the bookings to start to recognize revenue. With -- if it's equipment orders, then we could start to recognize revenue in the same quarter, depending on whether or not there is production capacity on the floor.

Okay, great. And then, I just want to ask -- obviously you guys are building up a little bit of cash balance here. I'm just wondering if you have plans to maybe retire some of the debt on the balance sheet or if there's anything else you can share with us that might be under discussion?

Right now in terms of retiring debt, we did have some short term borrowings in the quarter to fund some working capital requirements on some of our projects internationally. But, the rest of the debt, $90.5 million of it is term debt to five- and ten-year maturities. We wouldn't be retiring that early. In terms of other plans, we would just continue to look for opportunities to grow the business organically, expand into Southeast Asia, perhaps organically. Or we would even look for other opportunities on the M&A side that would make sense for us to be able to grow our footprint in certain geographical areas or expand product lines.

Okay. Great, that's all I had, thanks very much.

Scott Treadwell, TD Securities.

I guess a follow-up on the guys in front of me there, on the LNG side, given that it's a bit of a different production profile where if it all goes ahead, we're going to be drilling for a few years before the gas actually starts to flow presumably to the West Coast. Does that change how you look at where Enerflex falls in relation to drilling and completion were? Are producers going to look at it as -- we need to get it done and we'll do at the same time as we're drilling and completing as per normal or, we're going to do it two or three years down in the last year before? Do you get any sense that there's a change there?

Not really. We certainly believe from historical views, not only here in Canada, when gas is being produced, but also internationally that we do traditionally follow six to nine months behind the drill bit. And even though this gas theoretically won't flow West until 2016 or later, that the equipment that's needed and associated for this in terms of any treating or processing and compression will take the traditional route in terms of timing. And so that's the way it has happened traditionally, and certainly, as I mentioned to Dana earlier, that we're already starting to hear some discussion around what's possible.

Great. The second one relates to the comment around M&A, as you look to some of these emerging and new markets whether it Southeast Asia or Mozambique or some of these places where there is substantial gas resource, does Enerflex need to look to buy their way in even with a small toehold acquisition? Or, is it more likely that it will just take a year of some real grinding on the ground to get some traction there? Any thoughts on how that plays out?

We look at all options in terms of growth for the organization including greenfield partnerships and acquisitions. So, as we look at new areas, those will be the three ways that we approach it, and we'll make the best decision for the organization at the time.

Okay. Yes, I didn't think there was much of a preference there. And actually, that's all the questions I've got, guys. Thanks very much for the color.

Jon Morrison, CIBC World Markets.

Is there anything you can provide in terms of your expectations for resolution to the CHP process? In terms of timeline or whether your view towards a possible or partial sale changes?

Yes, so our views haven't changed, and we continue to work to try to get the remaining contracts in that business assigned to a third-party along with the remaining employees. But, between the announcement of it being carried as a discontinued operation and today we've done a lot to restructure the business and terminate a lot of unprofitable contracts. So Jon, we're close, we would've liked to announce something in Q1 but, we're not yet there and we have to work with interested parties and our works council in Europe to try to get something completed. (multiple speakers) -- sorry, go ahead.

Sorry, go ahead. I didn't mean to cut you off.

I was just going to say the process there requires a lot of work council input. There is works councils within our organization and other organizations that do business in Europe where, you've got to discuss those plans and work with them to get them improved.

Okay, thank you. In Australia, can you give any color around the longer term product support contract wins that you're going after and whether you believe you're still on target to gain some of those in the next 12 months?

There are a number of contracts that are available today, and I wouldn't say where we are. They're yet to be awarded, so we certainly believe that we're competitive in the area.

On the project award for the compressor station that was announced subsequent to quarter end, is that a new customer or existing customer?

It's an existing customer we've got relationships with in Australia.

How many other similar sized projects like that are you currently bidding on right now?

Well, there are other projects in the International domain and the markets where we got irons in the fire that are similar in size to that one, and I probably put it about two or three that are similar in size. So, that one could unfold here within the next three to four quarters.

Just a final one for me, building on Brian's question, just the building cash balance. What's your view on the US Rentals market, and would you potentially look at using some of your cash and idle capacity in the US to start building out a more meaningful Rental fleet since that market seems to be going okay right now?

We would concur with your observation that the US Rentals business is going okay right now with respect to returns that we would want to realize. So, if there was an opportunity and it presented itself to Enerflex that we would not be above looking at the Rentals business in the US to use some of this cash to get started in either a partnership, acquisition or greenfield manner.

Is it just a function of getting customer support for that as compared to just doing on a speck basis?

Well, any time -- your plan would certainly like to include some customer support. So we haven't ventured into this business over the past six or seven years for a variety of reasons, but, it certainly is an interesting recurring revenue stream and theme for us. So, it's something that we would be interested in under the right circumstances.

Thanks a lot, I'll turn it back.

There are no further questions on the phone lines at this time. I would like to turn the conference back to you.

All right, thank you operator. And since there are no further questions, I would like to once again thank you all for joining us on the call, and we look forward to giving you our second quarter results in August later this year. Bye for now.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.