Enerflex Ltd (EFXT) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Enerflex 2013 second 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, Thursday, August 15, 2013. I would now like to turn the conference over to Blair Goertzen, CEO. Please go ahead, sir.

Good morning, everyone, and thanks for joining us. Here with me is James Harbilas, Enerflex's Vice President and Chief Financial Officer. During this call, we will be providing our financial results for the three and six months ended June 30, 2013, a brief commentary on the performance of our three business segments, and a summary of our financial position at the end of the second quarter of 2013. 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 thee and six months ended June 30, 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.

Consolidated revenue for the second quarter of 2013 was CAD311 million, compared to CAD355 million in the second quarter of 2012. The decrease of CAD44 million was due to lower revenue in all three business segments. For the first six months of 2013, revenue of CAD664 million was CAD46 million lower than the same period of 2012, as lower revenue in the Canada, Northern US, and Southern United States and Latin America segments were more than offset -- more than offset the increase in revenues in the International segment. The Company generated consolidated earnings before finance costs and income taxes, or EBIT, of CAD27 million for the second quarter of 2013, compared to EBIT of CAD29 million in the second quarter of 2012. EBIT for the first six months of 2013 and the first six months of 2012 was CAD50 million.

In 2013, EBIT was negatively impacted by warranty expenses incurred primarily at the Casper, Wyoming, manufacturing facility, as well as the restructuring costs associated with its closure. During the second quarter of 2013, Enerflex closed its Casper, Wyoming, compression and process manufacturing facility, recording a CAD1 million in restructuring and related expenses. The Casper new unit packaging facility opened in 2006 for the primary purpose of serving the Wyoming Powder River Basin. However, this region is no longer active area for Enerflex in the compression business. In addition, Enerflex has experienced manufacturing performance challenges at the facility, which has resulted in warranty expenses of approximately CAD10 million in the area. Sales, service, rentals, and retrofit operations in the area will continue as before. Equipment scheduled to be packaged in the Casper area will now be completed in either the Calgary facility or at Enerflex's recently-expanded Houston facility.

Also, during the second quarter of 2013, the Company completed the sale of the European discontinued operations to a company specializing in combined heat and power fabrication and service. As part of the arrangement, Enerflex transferred specific maintenance contracts and certain obligations associated with these contracts and employees to the purchaser. In the AustralAsian region, Enerflex signed a long-term maintenance agreement valued at over CAD70 million for initial eight-year term. This contract is related to the maintenance of all of the compression equipment currently deployed by the Queensland Gas Company, the British gas group company in Australia. Enerflex is pleased to announce the employment of Ms. Helen Wesley as Director and Member of the Audit Committee. Ms. Wesley, a chartered financial analyst and an Executive Vice President for Talisman Energy, has extensive knowledge of the International oil and gas industry. Ms. Wesley replaces Mr. Kenneth Bruce as a Director and a Member of the Audit Committee. The Board accepted Mr. Bruce's resignation, effective June 30, 2013.

Overall, Enerflex reported results for the second quarter and first half of 2013 that were consistent with the same period of 2012, with earnings from continuing operations totaling CAD18 million and CAD34 million, respectively, compared to CAD19 million and CAD34 million for the same periods of 2012. Bookings for the second quarter of 2013 totaled CAD317 million, which is an increase of CAD51 million, or 19%, compared to the same period of 2012. This increase was primarily due to increased booking activity in the Canada and Northern United States and International segments, partially offset by lower activity in the Southern US and Latin America segments. Higher bookings for the Canada and Northern US segment for the first six months of 2013, partially offset by lower bookings in the Southern US and Latin America and International segments, led to increased bookings for the first six months of 2013. The increase over the same period of 2012 was CAD17 million, or 4%.

Although natural gas prices weakened during the second quarter, the Canada and Northern US segment recorded bookings that were CAD54 million higher in 2013, compared to 2012, primarily driven by customer orders destined for International markets. Bookings in the Southern US and Latin America segment remained steady over the first six months of the year, as a result of strong activities in the levels in the liquids-rich resource basins, despite a recent weakening in natural gas liquids prices. The International segment recorded bookings of CAD76 million in the second quarter of 2013, which was CAD3 million higher than bookings recorded in the same period of 2012. These projects have long lead times associated with tendering, bid evaluation and contract award, as they tend to be larger in scale and scope.

It is important to highlight that for the first three and six months ended June 30, 2013, the Company recorded CAD82 million and CAD120 million respectively, in bookings in the Canada and Northern US, and Southern US and Latin America segments, that were related to compression and processing equipment that will be manufactured in these segments, but are destined for International markets. This compares to CAD36 million and CAD87 million respectively recorded in the same periods of 2012. Backlog of CAD698 million was 24% lower at June 30, 2013, compared to the end of the first quarter of 2012. However, sequentially, backlog increased by CAD15 million, or 2%, from December 31, 2012, and by CAD95 million, or 16%, at March 31, 2013. I will now turn the call over to James Harbilas, Enerflex's Vice President and Chief Financial Officer, to review our financial results.

Thank you, Blair. Starting with a review of our product breakdown, in the second quarter and first six months of 2013, versus the comparable periods of 2012, engineered systems revenue was CAD223 million for the quarter, which was 18% lower than the prior year, as a result of decreased backlog levels entering 2013, compared to 2012. For the first six months of 2013, engineered systems revenue was CAD492 million, or 11% lower than the same period of 2012. The decreases in revenue were due to lower revenue in the Canada and Northern US -- United States, and Southern United States and Latin America segments, while revenue for the International segment was lower for the second quarter, but higher for the first six months of 2013, compared to the same periods of 2012.

Service revenue for the three and six months ended June 30, 2013, was CAD79 million and CAD147 million respectively, compared to CAD73 million and CAD137 million respectively for the same periods of 2012. The increases in service revenue were a result of the Company continuing to benefit from increased activity levels in Canada, the Southern United States and AustralAsia region. Rental revenue was slightly higher in the second quarter of 2013, coming in at CAD9 million, compared to CAD8 million in the same period of 2012. On a year-to-date basis, rental revenue was CAD25 million, which was CAD6 million, or 33%, higher than the first six months of 2012, due primarily to higher rental sales in Canada and Northern United States. These higher rental unit sales also contributed to the increase in North American utilization rates, which should remain at 67% during the second quarter of 2013, compared to 63% during the same period of 2012.

Consolidated gross margin decreased by 2% for the second quarter, and first six months of 2013, totaling CAD64 million and CAD125 million respectively, compared to CAD66 million and CAD128 million for the same periods of 2012. When expressed as percentage of revenue, gross margin for the quarter increased from 18.6% in 2012 to 20.7% in 2013, and from 18.1% in 2012 to 18.9% for the first six months of 2013. The decrease in gross margin was primarily due to lower gross margin in the Canada and Northern United States segments, and for the second quarter of 2013, lower gross margin in the Southern United States and Latin America segments, due to lower engineered systems revenue. This was partially offset by strong gross margin performance by the International segment, both for the quarter and first six months. Gross margin for the three and six months ended June 30, 2013, was negatively impacted by warranty expenses and costs associated with the closure of the Casper, Wyoming, facility.

Approved variation claims in the International segments for the second quarter and first six months of 2013 positively impacted gross margin. Selling, general, and administrative expenses for the quarter ended June 13 were -- 2013, were CAD38 million, which was consistent with the same period in 2012. For the first six months, SG&A expenses were CAD77 million, which is CAD2 million lower than the first six months of 2012. The decrease in SG&A expenses in the first six months was due to reduced office and occupancy expenses, lower IT costs, and favorable foreign exchange movements, which were partially offset by higher depreciation and amortization expense. Operating income for the quarter was CAD26 million, which is a decrease of CAD2 million over the second quarter of 2012. Operating income also decreased CAD2 million to CAD48 million for the first six months of 2013. When expressed as a percentage of revenue, operating income in the second quarter and first six months of 2013 increased to 8.4% and 7.3%, compared to 8% and 7% for the same periods in 2012.

EBIT for the second quarter 2013 was CAD27 million, or 8.7% of revenue, compared to CAD29 million, or 8% in the same period of 2012. For the first six months of 2013, EBIT was CAD50 million, or 7.5% of revenue, compared to CAD50 million or 7.1% of revenue in the same period of 2012. The decrease in operating income and EBIT were due to the same factors, contributing to the reduced gross margin, and for the second quarter of 2013, the higher SG&A expenses, partially offset by higher earnings from associates and joint ventures. For the first six months ended June 30, lower SG&A expenses partially offset the impact of lower gross margin. Second-quarter earnings per share from continuing operations were CAD0.24 in 2013, a decrease of CAD0.01 over the same period of the prior year. The decrease was a result of the factors discussed earlier, which were partially offset by lower income tax expenses. For the first six months of 2013, earnings per share from continuing operations were CAD0.44, which was consistent with the comparable period of 2012.

Moving on to our regional results, when comparing the second quarter and first half of 2013 to the same periods of 2012, revenue for the second quarter and first six months of 2013 for Canada and Northern United States decreased to CAD122 million and [CAD242 -- CAD42] million, respectively, from CAD143 million and CAD327 million, respectively. These decreases in revenue were due to lower engineered systems revenue caused by lower backlog to start 2013, partially offset by higher rental revenue compared to 2012, resulting from increased rental unit sales. Service revenue was slightly higher in the second quarter and first half of 2013, due to increase in engine and part sales, when compared to 2012. Although natural gas prices weakened during the second quarter, bookings recorded in this segment were CAD54 million and CAD25 million higher for the second quarter and first six months of 2013, compared to 2012, driven primarily from bookings destined for International markets. As a result, backlog levels compared to the start of 2013 have increased to CAD217 million at the end of the second quarter 2013.

Operating income for the second quarter decreased to CAD5 million from CAD9 million during the same period of 2012, due to lower gross margin and higher SG&A expenses, including costs associated with the closure of the Casper, Wyoming facility. For the first half of 2013, operating income decreased from CAD21 million to CAD8 million, due to lower gross margin, partially offset by lower SG&A expenses. The lower gross margin for both the three and six months was a result of lower revenues and associated margins, weaker plant utilization, and lower labor hours on engineered systems jobs, warranty cost, and restructuring costs at the Casper, Wyoming facility. In the Southern United States and Latin America segment, revenue for the second quarter and first half of 2013 decreased by CAD4 million and CAD1 million respectively, to CAD99 million and CAD215 million, when compared to the same periods of 2012. The decreases in revenue in 2013 were due to lower engineered systems revenue, partially offset by higher service revenue as a result of increased service calls and part sales.

Engineered systems revenue in the second quarter and first six months of 2013 decreased as a result of the impact of lower opening backlog to start 2013. The effect of the lower opening backlog was largely offset by the additional capacity provided by the extension of the Houston manufacturing facility, completed during second quarter 2012, which led to an increase in backlog conversions. Despite a recent weakening in natural gas liquids prices, the decrease in domestic activity levels and bookings in the region have been offset by increased bookings destined for International markets. And as a result, bookings have remained consistent with the prior year on a quarter- and year-to-date basis. Backlog for Southern US and Latin America increased from CAD228 million, to start 2013, to CAD278 million, at the end of the second quarter. Operating income for the second quarter 2013 decreased to CAD11 million from CAD13 million in 2012, due to weaker plant utilization, and therefore lower gross margin performance, on engineered systems jobs, partially offset by lower SG&A expenses.

For the first half of 2013, the Southern United States and Latin America segment generated operating income of CAD24 million, an increase of CAD2 million, due to improved gross margin performance and lower SG&A expenses when compared to 2012. Revenue for the International region was CAD19 million lower in the second quarter of 2013 when compared to 2012, but was CAD40 million higher than 2012 for the first six months of the year. Engineered systems revenue was lower in the second quarter of 2013, as a result of lower opening backlog levels. However, higher activity levels in the AustralAsia and MENA region resulted in an overall increase in revenue for the first six months of 2013 compared to 2012. The International segment recorded bookings for the second quarter and first half of 2013 that were comparable with the same periods of 2012. Backlog was CAD203 million at the end of the second quarter, which is a CAD94 million increase from the 2013 opening backlog total of CAD297 million. Operating income increased to CAD10 million and CAD15 million in the second quarter and first six months of 2013, respectively, compared to CAD7 million and CAD6 million in the same periods of 2012. Operating income for 2013 increased as a result of higher gross margin, including variation claims, that offset prospect relations on certain engineered systems jobs, partially offset by higher SG&A expenses.

Turning our focus to Enerflex's financial position, the Company continues to maintain a strong balance sheet. At the end of the second quarter 2013, the Company held CAD78 million in cash, CAD96 million in debt, and had CAD302 million of available credit facilities. The Company exited the quarter with a net debt to EBITDA ratio of 0.12 to 1 and 0.13 to 1 for the first six months of 2013, compared to a net debt to EBITDA ratio of 0.3 and 0.32 to 1 for the same periods of 2012. The Company has experienced heightened working capital requirements for the quarter in the Southern US -- Southern United States and Latin America segments, as well as the Middle East and North Africa region. These requirements are to advance projects before payment milestones are met. We anticipate that the trend that we have witnessed in the second quarter will reverse over the remainder of the year, as milestones on these projects are billed and collected. Return on capital for the trailing 12 months increased from 11.1% in the second quarter of 2012 to 13% in the second quarter of 2013. I would now like to turn the call back over to Blair to provide an outlook for each of our regional segments.

Thanks, James. Our backlog in the Canada, Northern US segment was CAD217 million at the end of the second quarter of 2013, compared to CAD182 million at June 30, 2012, an increase of CAD35 million. Sequentially, backlog for the segment has increased by CAD58 million, from December 31, 2012. The increase in backlog was despite continued weakness in domestic natural gas prices, and was driven largely by increases in orders destined for International markets. In absence of a material short-term increase in the demand for domestic natural gas, or a reduction in production and storage levels, natural gas prices are expected to remain low or range-bound. This, in turn, results in a reduction in capital spending directed at dry gas exploration and production, and negatively impacts bookings for Enerflex's engineered systems business, and challenges revenue for the service and rental business.

Enerflex expects this trend to continue through the remainder of 2013, unless there is a significant improvement in natural gas supply and demand fundamentals, or until liquefied natural gas, or LNG, projects in Canada progress, or the development of the Duvernay Shale play expands. Recent LNG-related awards for drilling, fracking and transportation make us cautiously optimistic for the back half of 2013. Enerflex is well-positioned in the Southern US and Latin America segment, given backlog levels which stood at CAD278 million, at the end of the second quarter 2013, albeit CAD53 million lower than the end of the second quarter of 2012. Sequentially, backlog has increased by CAD50 million from CAD228 million at the end of December 31, 2012. Activity in liquids-rich US gas basins has remained steady for the first half of 2013, despite a recent weakening in NGL prices. As such, Enerflex continues to be optimistic yet cautious with respect to the region.

International backlog at June 30, 2013, was CAD205 million lower than at the end of the second quarter 2012. However, the segment recorded strong bookings for the second quarter of 2013 totaling CAD76 million, which is CAD3 million higher than the same period in 2012. Bookings for the first half of 2013 were comparable with the prior year. Activity in this region continues to benefit from increased activity in Australia's natural gas industry, and domestic demand for gas in the MENA region, as evidenced by bookings recorded in the Canada and Northern US and Southern US and Latin America segments, which are, again, destined for International markets, but not presented in the International segment. Bookings recorded in the Canada, Northern US and Southern US and Latin America segments for equipment destined in International markets totaled CAD82 million in the second quarter of 2013, and CAD120 million for the first six months of 2013, compared to CAD36 million and CAD87 million for the same periods in 2012. There continue to be significant growth opportunities in Australia, the MENA region and Southeast Asia, including after-market service opportunities, as evidenced by the recent long-term maintenance agreement for over CAD70 million, signed with Enerflex during the second quarter.

In summary, the Enerflex management team remains cautiously optimistic at the end of the second quarter, given the improvement shown in backlog levels and the opportunities currently being pursued. Our healthy balance sheet leaves the Company right-sized for any potential challenges over the remainder of the year, and well-positioned to capitalize on any opportunities that may arise. This completes the formal component of the webcast. Additional details can be found on our August 14 press release, and we would be happy to take any questions at this point. Nicky, questions, please?

(Operator Instructions)

Dana Benner, AltaCorp Capital.

I wanted to start on the International environment. I acknowledge that a lot of the bookings end up getting put into the other segments for reporting purposes, but nevertheless, the booking rate was pretty good. Could you give us a bit more color on maybe the regional exposure that is contained within those numbers?

Yes, a lot of the -- sorry, within the -- are you asking for the International bookings that are going to go through the International segment, or all of the International bookings that are in the various segments?

All of the International bookings.

Yes. In terms of the International bookings, there is a big chunk of them, obviously, that are focused in Australia, and that is what has gone through the International segment for EPC and construction-related turnkey projects that we have undertaken in that region. And then the ones that are in Southern US, Latin America and Canada, Northern US, again, are predominantly in Indonesia, Africa, and some equipment going into Australia as well.

Great. Do you think that -- is this a sustainable -- is this something -- are we seeing an acceleration, regardless of how you book them, they are still Internationally-derived. Are we seeing an acceleration of activity Internationally, or just a good steady long-term trend out there?

I would say it is probably a steady trend, Dana. I -- we certainly have visibility in a lot of projects and opportunities in the International environment, and as we always say, they are long in terms of gestation and bringing them across the line. So the opportunity funnel or hopper certainly isn't smaller than it is a year ago or six months ago, so we still see this as the trend going forward.

Right. I want to turn to the margin side, specifically the fact that, even though revenues declined, your margins went up, which is a very difficult thing to do. And I wonder if you could maybe give us some color on how you were able to -- what are the most important reasons behind the margin increase that we're seeing corporately in Enerflex right now, through International? Is it good market? North America still has its challenges, so to pull that off in this environment is pretty impressive. Maybe you can give us some color.

In terms of the margin performance, we've had better margins in backlog to begin this year, which started to contribute to better EBIT margins --better gross margins in backlog that have contributed to better EBIT margins. And we did -- we were successful in securing some variation -- approval of some variation claims in our International segments that also helped with margins this quarter.

Right. Two more quick questions, if I may. With the Wyoming plant closed, what type of a go-forward margin impact might we see by virtue of moving that manufactured product flow either north to Calgary or south to Houston?

We would expect to see an improvement in the gross margin performance by moving to Houston or Canada, just given some of the challenges that we've experienced out of that facility over the last 24 months from an execution standpoint.

Right. That I have no doubt of. I guess I was hoping you could maybe quantify.

No, we wouldn't quantify it at this point, Dana.

(laughter) But you -- would it -- will we notice it?

If the execution is there, then I see no reason why we wouldn't notice it and have it flow through the bottom line.

Okay. And just one final question. The CAD70 million service agreement in Australia, you note that it may be a precursor of more to come. Could we see -- is this the -- given the amount of installed compression that has gone into Australia in the last few years, could we see a number of agreements like this? Or is it just a rising base that may not be captured in a broad framework agreement like this?

There are a limited number of clients with large bases of horsepower in Australia, so the two or three that are there now with large bases of horsepower are under similar contracts, maybe not as long-term. And so I think over the years to come, we will see maybe more of a migration to longer-term agreements as more and more installed base arrives in Australia. So again, though, it is relatively limited customer base there, but I think that the model in Australia does serve well to longer-term service agreements, going forward.

Okay, guys, I will turn it back.

(Operator Instructions)

Jon Morrison, CIBC World Markets.

Can you give any additional data points on Casper, in terms of facility utilization in recent years? Or a sense of total revenue throughput in that facility in the last year?

No, we don't break it down by facility, Jon, so we wouldn't do that at this point, even now that it is closed.

Okay. Is there still a meaningful service business to be had there, or is it largely an exit from that region altogether?

No, it is not an exit from the standpoint of our service and retrofit business. We still -- those two businesses are currently still located in the Casper, Wyoming facility in about 20,000 square feet. And we would never exit the region from a service standpoint anyway, because we are the authorized Waukesha distributor -- GE Waukesha distributor in that region. So we would have a presence from a service standpoint. We are going to continue to have a presence from a retrofit standpoint. And if the Powder River Basin ever becomes active again, we feel very confident that we can service that facility through our Calgary facility and our Houston, Texas facility.

And Jon, to add to that, we have a very sizable sales and engineering organization in Denver, as well, that services and serves that area from a sales and application standpoint. So it is not that we're exiting that area any way, shape or form in terms of our sales and engineering coverage, either. So it is a meaningful area. The Powder River is just not meaningful for us. Rockies gas, Bakken gas, is still a meaningful business for Enerflex.

I appreciate the color. How much of the stuff in the Bakken was being serviced out of Calgary versus Casper to begin with?

There is a split, really, depending on customer and how we drew the customer lines between Canada and the US, and who provides that equipment.

Okay. Just to build on Dana's question on Australia, how many other similar-sized contracts, or potential contracts, are floating in the market right now that you're bidding on? And how much of that service market altogether is, call it more spot or short-term base, similar to Canada?

The market in Australia, as I said, is relatively a small, limited number of customers that have install base there. And this is the first long-term formal agreement that has been let due to the significant increase in horsepower in the install base. The remainder of the market is either under a call-out basis, with, I would say, less formal agreements. But we will see how that goes in terms of the long-term model in Australia and wanting to look at single providers to manage the activity for the producers there. So as I said to Dana, that we think the model, and certainly the environment, the business climate in Australia is one that is quite accepting to long-term service agreements.

Within the former Enerflex Europe, is there any outstanding liabilities at this point, either from an employee or a warranty perspective in that region?

Was your question related to Europe, the discontinued ops?

Yes, Enerflex Europe service.

Sorry, didn't catch the first part. So in terms of ongoing obligations, we do have liabilities on the balance sheet right now that are related to paying out any accrued liability with respect to any vehicles that weren't assumed by the purchaser. There is the facility there that we would buy out the remainder of the lease for. So those are the type of liabilities that we're carrying on our books right now. And then there is a small -- there is three or four residual contracts that we are going to terminate there in the region that weren't assumed by the purchaser. So it's -- those are the types of liabilities that we have got on our balance sheet right now.

Okay. Any update on Singapore, since you guys opened the sales office last year, in terms of traction or opportunities being seen there?

Certainly we're seeing and getting visibility on more opportunities. We've had some traction there as well, as some of the International bookings would indicate, that James alluded to. So we're very pleased at this point with the activity and the visibility that we have in Singapore and that region.

I would assume the Indonesian customer that was mentioned would be a new one? Or the Indonesian work that was booked?

Yes. And it was undertaken under the -- from the Singapore office. They were very involved in that.

Okay. Just lastly, on the two cryo facilities. Any update in terms of customer appetite to take on those two units? And views on that being a growth market on a go-forward basis?

Certainly we are aggressively and very active in the market in looking at how we can place the two cryo plants that we announced, and that is ongoing. I think there is a bit of a slowdown right now, in terms of what the market looked like in the cryo business for the US, perhaps a couple of years ago. But we still believe that, going forward, this is a market and a product line that we want to be involved in. And therefore, we continue to be aggressive in looking at how we integrate this with other pieces of our business and product.

Appreciate the color. Good quarter, guys. I will turn it back.

Mr. Goertzen, there are no further questions at this time. I will now turn the call back to you.

All right. Thank you. Since there are no further questions, I would like to once again thank everyone that joined the call, and we look forward to giving you our third-quarter results in November of this year.

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