Enerflex Ltd (EFXT) 2014 Q3 法說會逐字稿

Welcome to the third quarter 2014 results conference call. During the presentation, all participants are in a listen-only mode. Afterwards, we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded Friday, November 7, 2014. I will hand the conference over to President and CEO, Blair Goertzen. These go ahead, sir.

Thank you operator. Good morning everyone and thank you for joining us. 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 three months ended September 30, 2014, a brief commentary on the performance of our three business segments, and a summary of our financial position at the end of the third quarter of 2014. Approximately one hour following the completion of this call, a recording will be available on our website under the investors section.

During the presentation, unless otherwise stated, we will be referring to the three months ended September 30, 2014 compared to the same period of 2013. I will proceed on the basis that you have all taking the opportunity to read yesterday's press release.

Over the course of the last month, we have experienced declining oil prices and negative market confidence, along with some uncertainty around the timing of LNG development in Canada. Natural gas prices, however, have been relatively stable and are starting to have modest increases, reflecting the ramp up in demand as winter weather takes hold and storage levels remain the low the five-year average.

We are closely monitoring the drivers of the uncertainty in market in addition to the activities spending plans of our customers. That being said, Enerflex has delivered strong quarter and continues to see strong bidding activity in all of our markets at this time, which positions us well entering 2015.

The Company continued to build on momentum in liquids-rich plays in Canada and the United States and electric power opportunities, which materialized into strong bookings for the quarter and an increased backlog of CAD866 million at September 30, 2014. Bookings for the third quarter were CAD342 million, an increase of CAD95 million compared to the same period of 2013.

The Company achieved important milestones on the international project in Oman, with the plant receiving gas and moving into the commissioning phase. During October 2014 commissioning was completed and mechanical completion achieved in readiness for gas and condensate export. The project continued to experience a few customer-driven scope and design variations which negatively impacted gross margin on the quarter. With the project nearing completion, the Company has been able to advance variation claims discussions with the customer.

During the third quarter of 2014, Enerflex was provided with the letter of intent for two new turnkey rental contracts in the Middle East region, including the compressor and the gas processing equipment, and the associated operations and maintenance. Coupled with the rental contracts awarded earlier in the year in the Middle East and Latin American regions, the total awarded horsepower on these five projects is approximately 88,000.

The Canadian/Northern US and Southern US and Latin American segments performed well in the third quarter of the year. These regions have shown positive trends in revenues and bookings, and are entering the fourth quarter of 2014 with strong backlog levels. Bookings for the international segment were slightly lower for the third quarter of 2014, coming in at CAD20 million.

Natural gas fundamentals will improve as LNG projects in western Canada progress, and as the development of the Duvernay shale plays expands. In October the British Columbia government released its LNG two-tier tax regime which should provide project owners with the fiscal clarity to move forward with investment decisions. We have seen activity in traditional processing equipment destined for Alberta oil sands, and in compression and processing equipment related to natural gas liquids opportunities such as the Alberta Deep Basin, Bakken, Duvernay, and the Montney reservoirs.

The Canada and northern US segment recorded bookings of CAD99 million for the third quarter of 2014, driven primarily by activity in these liquids-rich plays in the region, and the electric power opportunities. Since the beginning of the year, backlog levels have decreased to CAD296 million at the end of September 2014 compared to CAD307 million at the end of December 31, 2013 as backlog conversion to revenue outpaced bookings for the first nine months of 2014.

Market fundamentals in the southern US have remained steady despite weak NGL prices which have resulted in a significant increase in new domestic orders for compression and processing equipment for the southern US and Latin American segment. The results for this segment were also improved due to the contribution of the acquired Axip business in Latin America during the third quarter of 2014. Therefore the Company continues to be optimistic with respect to the region.

Bookings for the region in the third quarter of 2014 were CAD223 million, an increase of CAD72 million over 2013. The increased domestic bookings were partially offset by lower orders destined for international markets. At the end of the third quarter of 2014, backlog increased by CAD113 million from the start of the year to CAD472 million, which included CAD19 million from the acquired Axip entities.

In the international segment, increased activity in the Australasia region led to an increase in bookings in the first half of 2014 compared to the same period of 2013. Bookings of CAD20 million in the third quarter were slightly lower than the same period in 2013. International backlog was CAD98 million at September 30, 2014 compared to CAD129 million at December 31, 2013, a decrease of CAD31 million. And this decrease was primarily due to the bookings level being lower than the conversion rate of backlog revenue in the first nine months of 2014 as well.

We expect to deliver strong results through the remainder of 2014 as higher opening backlog is converted to revenue, and as we continue to deliver improved recurring revenue from our service business. I would now like to turn it over to James Harbilas, Enerflex's Executive Vice President and Chief Financial Officer, to review our financial results.

Thank you, Blair. For the third quarter of 2014 Enerflex generated net earnings of CAD30 million, or CAD0.39 per share, compared to net earnings of CAD13 million or CAD0.16 per share for the same period in 2013 as a result of higher revenues and gross margin. Consolidated revenues for the third quarter was CAD479 million, representing an increase of CAD88 million over 2013, as higher revenue in the Canada and northern US and southern US and Latin American segments was partially offset by lower revenue in the international segment.

Consolidated gross margin for the third quarter was CAD92 million, or 19% of revenue, an increase of CAD31 million. The increase was due to higher gross margin in all three segments. Gross margin for the Canada and northern US and southern US and Latin American segments was higher due to the positive impact of higher revenue, improved project margins, and improved plant utilization. In the international segment, gross margin for the third quarter of 2014 was higher than the same period of 2013 due to stronger project margins, partially offset by the impact of lower revenues.

Selling, general and administrative expenses for the third quarter were CAD49 million or 10% of revenue. The increases were a result of higher compensation expense, driven by increased staffing levels to support growth initiatives and as a result of the Axip acquisition. Higher office and occupancy costs and higher depreciation and amortization expense also contributed to the increase.

Income tax expense for the third quarter totaled CAD13 million, or 29% of earnings before tax, compared to CAD6 million or 32.9% in the third quarter of 2013. The increase in income tax expense for the third quarter was due to higher earnings before tax compared to the prior year.

Continuing with the review of our product breakdown, engineering systems revenue increased to CAD344 million for the third quarter, which was CAD51 million or 17% higher than the prior year. The higher revenue was primarily a result of higher backlog to start the year in the Canada, northern US and southern US and Latin America segments compared to the prior year. This was partially offset by lower revenue and opening backlog in the international segment.

Service revenue for the third quarter was CAD102 million, compared to CAD87 million for the same period of 2013, an increase of 18%. Service activity levels improved in all segments when compared to the prior year, with the Company continuing to benefit from increased activity in Canada, the United States, Australia, MENA, and from the aftermarket service business acquired from Axip.

Rental revenue for the third quarter was CAD33 million, which was 67% higher than the third quarter of 2013, largely as a result of rental contracts acquired with the Axip business. On a global basis, the Company now has a rental fleet of 432,000 horsepower. North American rental utilization levels remained the same during the third quarter of 2014. That resulted in lower rental revenue as a result of the decrease in total horsepower under rental contracts in Canada and a decrease in rental unit sales.

Moving on to our regional results, in Canada and the northern US, revenue increased by CAD35 million during the third quarter as a result of higher engineered systems revenue due to higher opening backlog, partially offset by service revenue that was slightly lower than in the third quarter of 2013. Rental revenue for the third quarter was CAD5 million lower than in 2013 as a result of the decrease in the total horsepower under rental contracts and a decrease in rental unit sales.

Operating income for the third quarter increased by CAD3 million to CAD11 million due to higher gross margins, partially offset by higher SG&A expenses. Gross margin was positively impacted by higher revenue and lower warranty expense. The increase in SG&A was due to higher compensation expense associated with an increase in headcount to support growth in the segment.

In the southern US and Latin America segment, revenue for the third quarter was CAD235 million. The increase of CAD71 million was attributable to higher engineered systems revenue as a result of higher opening backlog, higher service revenue on increased service calls and parts sales, and the contribution of the business acquired from Axip.

Operating income for the third quarter increased by CAD12 million and to CAD31 million due to higher gross margin, partially offset by higher SG&A expenses. The increase in gross margin was attributable to higher revenues, in part due to the Axip acquisition and improved plant utilization. SG&A expenses were higher in 2014 compared to 2013 as a result of higher compensation expense, higher office and occupancy costs, and higher depreciation and amortization expense. The increase in compensation expense was due to an increase in the number of employees, partly due to the Axip acquisition and partly to support growth in the segment.

Revenue in the international segment for the third quarter was CAD74 million. The decrease of CAD17 million compared to the same period in 2013 was the result of lower engineered systems revenue due to lower opening backlog, partially offset by higher service and rental revenues coming from increased activity in the Australasia and MENA regions, and the contribution of the rental business acquired from Axip.

The segment reported operating income of CAD2 million for the third quarter compared to an operating loss of CAD7 million in 2013 as a result of improved gross margin, partially offset by higher SG&A expenses. For the third quarter, higher gross margin was due to improved project margins, partially offset by the impact of lower revenues.

Turning our focus to Enerflex's financial position, the Company continues to maintain a strong balance sheet. Cash totaled CAD114 million at the end of the third quarter of 2014. The Company drew proceeds of CAD331 million from its credit facility in the second quarter of 2014, and exited the third quarter with a net debt to EBITDA ratio of 2.01 to 1. The increase in net debt was primarily due to drawings on the Company's credit facilities which were used to fund the Axip acquisition.

In summary, the Company is built on momentum in liquid-rich plays in Canada and the United States, which have translated into higher bookings in the third quarter when compared to the same quarter of 2013. The Company entered 2014 with strong backlog levels and exited the quarter with a closing backlog of CAD866 million, which positions us well for the remainder of 2014 and into 2015.

Enerflex's recent acquisitions produced improved recurring revenue streams and entrance into new geographic markets, which is consistent with the Company's strategy. Current market dynamics coupled with our recent acquisitions have positioned the Company well to capitalize on opportunities as they arise.

This completes the formal component of the webcast. Additional details can be found in our November 6 press release. We will now be happy to take any questions.

(Operator Instructions). There are currently no questions.

All right, operator. Well, thank you -- thanks for joining us, and again, I'd like to thank everyone for joining us on the call. We are available throughout the day today if anyone wants to give us a ring. Have a good weekend. Bye for now.

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