This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good morning, ladies and gentlemen, and welcome to InterFlex fourth quarter and year-end 2022 earnings conference call. At this time, all participants are on a listen-only mode. Following InterFlex prepared remarks, we will conduct a question and answer session. Instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Stephan Alley, Vice President, Strategy and Investor Relations. Please go ahead.
spk07: Thank you, operator, and good morning, everyone. Thanks for joining us on our fourth quarter and year-end 2022 earnings conference call. With me on the call today are Mark Rossiter, President and CEO, Sanjay Bishnoi, Senior Vice President and CFO, and Ben Park, Vice President, Corporate Controller. During today's call, we'll touch on highlights from our fourth quarter and year-end results, comment on our integration efforts related to the Exterrin acquisition, and outline our strategic priorities for 2023. Before I turn it over to Mark, I'll remind everybody that today's discussion will include non-IFRS and other financial measures, as well as forward-looking statements regarding Enerflex's expectations for future performance and business prospects. Forward-looking information involves risks and uncertainties, and the stated expectations could differ materially from actual results or performance. For more information, refer to the advisory statements within our news release, MD&A, and other regulatory filings, all available on our website and under our CDAR and EDGAR profiles. All dollar amounts discussed today are in Canadian dollars unless otherwise stated. I'll now turn it over to our President and CEO, Mark Rossiter.
spk06: Thanks, Stephan, and thanks to all our listeners for joining today's call. Just over a year ago, we announced the transformational acquisition of Xterrax. a transaction that would deliver on a decade-long strategy to grow our energy infrastructure platform to become more resilient, profitable, and better positioned for long-term success. Enerflex is now an infrastructure-first company that is strategically positioned to enable a sustainable future for energy through our vertically integrated low-carbon solutions. We're only four months into integration, and we're already realizing many of the strategic benefits of the Xterra acquisition. Our geographic footprint is concentrated in global gas-producing regions with approximately one-third of our gross margin deriving from each of North America, Latin America, and the Eastern Hemisphere, thereby insulating us from weakness in any single market, including a recent weakness in North American natural gas prices. Our expanded product offerings, namely compression, cryo or deep cut, and carbon capture and water treatment, are leading to constructive customer discussions across this broader opportunity set. Our scale and synergy realization has created operational efficiencies within our business lines. And finally, our large base of energy infrastructure will stabilize business performance no matter the macro environmental backdrop. Before I outline our strategic priorities for 2023 and speak to the considerable progress we're making on integration, I want to briefly address Enerflex's 2022 financial and operational results. Our energy transition team delivered in 2022, securing over $160 million of bookings, relate primarily to carbon capture projects that will collectively capture and permanently sequester over 1 million tons of co2 annually once in operation further within our north american business we sold over 500 000 horsepower of electric compression in 2022 two-thirds of our compressor sales in the region and we electrified a portion of our u.s contract compression fleet which entirely eliminates meaningful scope 1 greenhouse gas emissions for our customers As our customers strive to minimize their environmental footprint through carbon capture and electrification, we expect the demand for our energy transition solutions to grow meaningfully over time, making it a very important profit-making business line for our company. We also reported year-over-year increase across key financial metrics. Revenues are up $820 million. The majority of our gross margin came from occurring sources, Our adjusted EBITDA was $90 million higher, though it was impacted by foreign currency exposure, which Sanjay will discuss later. And our engineered systems bookings grew by almost $550 million, allowing us to expand our backlog by nearly $1 billion to close the year at a record $1.5 billion. Through the Exterrin acquisition, a large portion of our business is energy infrastructure assets in Latin America and the Eastern Hemisphere. where the need for reliable energy backstops the long-term fundamentals for natural gas. Our U.S. contract compression fleet continues to benefit from high demand, with utilization rates averaging over 95% in the fourth quarter and showing no sign of abating. In North America, more broadly, we do not anticipate that near-term weakness in natural gas prices will significantly impact our pipeline of opportunities. Our business is predominantly driven by energy infrastructure, which is insulated from commodity price volatility, and our North American engineered systems business makes up a smaller part of our global platform following the acquisition. For our engineered systems business, the vast majority of our recent bookings have been concentrated in crude oil or liquids-rich resource plays. Building on a solid 2022 results and our positive outlook on the key drivers of our business, our 2023 objectives remain keenly focused on the strategic priorities we laid out last year. The first being to maximize cash flow generation to deleverage as quickly as possible. Three of the four major infrastructure projects we developed last year are now in commercial operation, meaning we have significantly de-risked the cash flows associated with those projects. Like most of our large energy infrastructure assets, These three projects are underwritten by long-term take-or-pay contracts, where Enerflex carries no commodity, price, or volumetric risk. Coupled with the extern synergies we've captured in our record engineered systems backlog of over 1.5 billion, we have a clear line of sight in meeting our deleveraging target by the end of this year. It's worth noting quickly that the fourth major project, the cryogenic facility in Kurdistan, experienced some customer delays in 2022. However, the site was reanimated in the fourth quarter and is substantially back to full staffing levels. We now expect this project to be completed in 2024. The second strategic priority for 2023 is the successful integration of Xterrin. In the first 100 days post-close, we captured $40 million, or two-thirds of the $60 million target of synergies that we identified through the evaluation process. Finally, we have built a business that will continue to harness the strength of its diversification. whether that's geographic, counterparty, or product offerings, to capitalize on the global opportunity set, withstand market volatility, and continue executing on our business plan to generate value for our shareholders. I'll now turn it over to Sanjay to speak to the financial highlights from last night's release.
spk09: Thanks, Mark, and good morning, everyone. Today, I will briefly touch on the key financial results from our release before turning to our updated financial guidance for 2023. First, readers of our financial statements will note that we have resegmented our reporting in an effort to align with external disclosures with how we make decisions within the business. Our new reporting segments are North America, encompassing Canada and the United States, Latin America, and Eastern Hemisphere. In addition, we are now including the net impact of finance leases in our adjusted EBITDA calculation And we have introduced a distributable cash flow measure to best illustrate or better illustrate our cash generating capabilities and assist users of the financial statements in understanding and assessing our operating cash flows and the free cash that we are generating to fund other non-operating activities. Distributable cash flow for 2022 was $45 million or $116 million when $71 million of the one-time transaction costs are backed out. With the transaction behind us, the company can be expected to generate significant distributable cash flow, which can be used to strengthen the balance sheet, increase returns of capital to shareholders, and continue growing the business. So as Mark mentioned, we closed the year in a position of considerable strength. Year-over-year improvements in revenue, gross margin, and adjusted EBITDA were driven by increased activity in our North American Engineer Systems business and from the partial quarter of contribution from Externe. Regarding fourth quarter results, top line revenues reached 690 million and our gross margin was 127 million, two-thirds of which was generated from recurring sources. As a percentage of revenue, our gross margin of 18.4% was down slightly from the third quarter due to a lower average margin profile associated with the acquired Externe portfolio. In the fourth quarter, Enerflex recognized an adjusted EBITDA of $86 million. Higher revenues and gross margins were partially offset by a foreign exchange loss of $18 million recognized in our Latin American segment. These losses were driven by the ongoing devaluation of the Argentinian peso and from a legacy hedge that was placed by Exterin Management prior to the transaction close. While not included in our adjusted EBITDA, we offset some of these losses with $7 million of interest income from associated instruments. With the transaction behind us, we anticipate utilizing Enerflex's more holistic and efficient approach to managing foreign currency risk, which should significantly improve our position by the end of the second quarter. Enerflex's reported distributable cash flow, which incorporates both foreign exchange gains and losses, as well as interest income earned, will be a useful financial metric to assess our company's cash generating capabilities going forward. Alternatively, if interest income was above the adjusted EBITDA line, which it is not, adjusted EBITDA for the quarter would have been $93 million. Next, having inherited three large in-flight projects from Exterin, our energy infrastructure capital expenditures and work in progress related to finance leases were higher in the fourth quarter. In the quarter, we invested $47 million in growth capital, $15 million in expenditures for finance leases, and another $20 million in maintenance capital. That brings me to our financial position. As we alluded to on our last call, we expected that these capital and work in progress investments would drive up our leverage ratio through the end of the year and would peak in early 2023. This is playing out as we expected. Enerflex exited 2022 with a net debt balance of about $1.1 billion and a bank-adjusted net debt to EBITDA ratio of 3.3 times. With three of the four in-flight projects now in commercial operation and a $1.5 billion backlog that we will execute over the course of 2023 and into 2024, We are reaffirming our expectations that we will hit our debt target by the end of the year and reduce our leverage to below 2.5 times. Building on that point, we have revised our guidance for 2023 to incorporate the updated completion dates for our in-flight projects. But first, let me address the items that did not change from our last guidance update in August. We are still targeting total synergies of 60 million U.S. dollars to be realized within 12 months to 18 months of closing, having captured 40 million U.S. dollars by mid-January. And we expect adjusted EBITDA to range from 380 to 420 million U.S. dollars, which we will utilize to fund our non-discretionary expenses, allocating distributable cash flow to the balance sheet. Now, in terms of what has changed, Work in progress is now expected to range from $40 to $50 million. This is a shifting of spending required for the cryogenic facility, moving costs from 2022 into 2023 due to customer delays. Counterbalancing this shift in cash flows into 2023 is a positive trend on cash collections that we have seen in the broader business, which still keeps us comfortable that Enerflex will have sufficient distributable cash flow to deliver on our strategic priority of deleveraging, which will provide us with additional strength and flexibility to deliver increased returns to shareholders and evaluate accretive yet disciplined growth opportunities thereafter. Finally, Enerflex remains committed to paying a sustainable dividend to our shareholders. Last night, the board declared a dividend of 2.5 cents per share, which will be paid on April 6th, 2023 to shareholders of record on March 16th, 2023. With that, I will hand it back to Mark to provide some closing remarks.
spk06: When I look back at 2022, we reached some significant milestones that have important implications for Enerflex's long-term success. The health of our business has never been better. The utilization of our energy infrastructure assets is as high as it's ever been. We've completed three large infrastructure projects that have bolstered our cash flow profile, and activity within our manufacturing business is very robust. When coupled with our rapid synergy capture and the execution of the largest backlog in our company's history, I'm confident that Enerflex will deliver on the priorities we've outlined. Maximize cash flow to reduce debt, deliver on the integration, and enable the energy transition by providing best-in-class energy solutions to our customers across the globe. I'll now pass the call back to the operator for questions.
spk01: Thank you. Ladies and gentlemen, to ask the question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.
spk00: Our first question comes from Erin McNeil with TD Security.
spk01: Your line is open.
spk11: Hey, morning all. Thanks for taking my questions. Sanjay, a lot's changed since you introduced 2023 guidance over a year ago. You know, you've largely obviously maintained that with this quarter, but I'm hoping you can give us a bit more details on some of the puts and takes, you know, comparing the current guidance to the original guidance. And, you know, specifically, I'm wondering, are synergy realizations happening faster or slower than you expected? Is the backlog for engineered systems above or below your expectations? Are engineered systems margins above or below your expectations? Is US contract compression pricing better or worse than you expected? What about utilization? What's the negative impact of the delays for the Kurdistan project or any other slippage in large project timelines? And when you take all of these variables together, presumably others as well, Have your internal projections increased or decreased over the past year, and what's the order of magnitude?
spk09: Okay. Well, good morning, Aaron. I need a solid cup of coffee to get all those in. I guess I'll start with your synergy question. I would say that our guidance of $60 million remains unchanged. I think the $40 million that we've been able to realize by day 100 is a little bit ahead of schedule, so I think that's a net positive. I think that you mentioned engineered systems backlog and margin. The bookings have been healthier, and I think it was really a lot of pent-up demand that we saw. We do expect things ultimately will normalize, but with the bigger company, You know, we do expect that we're going to see stronger bookings. So I think the bookings have been a positive to the forecast. I would say on the margin side, you know, we were expecting a recovery, and I'd say that the recovery in margins is really on schedule. I don't think that we're ahead or behind there. You asked a little bit about the ECC business. You know, really proud of our ECC team in the States. They continue to really optimize the assets that we have. So I would say that the utilization has been ahead of our expectations when we first put guidance forward after completing the transaction. And then you also asked about Kurdistan. But before I go to Kurdistan, I do want to talk a little bit about just better tailwinds in the business. Like we are, you know, because of the bookings, we're seeing a little bit more activity in I think our AMS business, our teams around the world have done a great job, not only of increasing margins in that business, but they're doing a fantastic job of collecting cash. And that really helps us from just cash collection and cash position standpoint. We've had one or two really positive events where cash has come in ahead of schedule on some big projects. And so those are the things that have been really helping from a forecast perspective. As we mentioned in the table in our press release on the guidance, the Middle Eastern cryogenic project, that will slip to the right. It's not really a net negative from an overall project margin standpoint. It's just that we're shifting more of the project out of 22 and into 23. And therefore, there's going to be some extra expenditures in 2023 versus what we had initially anticipated. But those are kind of the puts and takes. And then I would say, you know, we've also now incorporated a little bit of a headwind from, you know, foreign exchange issues that we alluded to on the opening comments. But we also adjusted the EBITDA definition and we've we've just sort of normalized how the EBITDA will flow through the projection. So the new definition of adjusted EBITDA is consistent with the 380 to 420 guidance that we put forward. So Aaron, hopefully I hit all the questions that you had in there, but let me know if I missed anything.
spk11: No, that's great. I guess just the one, just overall, I don't want to put words in your mouth, but it sounds like your internal projections have probably... increased since you originally put that guidance out. Is that a fair statement?
spk09: Yeah, I would say, you know, we're reaffirming the guidance, the 380 to 420, and I think our confidence in that has gone up, so that's probably a different way to put it. But certainly, you know, we're feeling really good about the initial modeling that was done and the expectations of what this transaction would bring to Enerflux.
spk11: Maybe just as one follow-up question, one of your competitors in the U.S. contract compression space suggested that it will be pushing pricing higher. With its Q4 disclosures, are there opportunities in your mind to reprice the U.S. fleet higher over the next 12 months, and is that contemplated in the guidance?
spk06: There is the opportunity. There has been the opportunity over the past couple of quarters. And indeed, the return we're getting on those assets is higher than it has been in previous quarters. I don't know that that asset class in and unto itself and those incremental price increases on their own are enough to drive guidance higher. I think that there's a lot of good things going on with the business early in the year. And, you know, we'll see how the following quarters go. Thanks.
spk11: I'll turn it over.
spk01: Thank you. Please stand by for our next question. Our next question comes from the line of Keith Mackey with RBC Capital Markets. Your line is open.
spk10: Hi, good morning and thanks for taking my questions. Just wanted to start out in engineered systems. Some very strong bookings of $1.3 billion or so in 2022. Can you just talk, Mark, if you think we've hit peak booking levels, or do you think 2023, 2024 could match or exceed what you saw in the business in 2022?
spk06: You're right. 2022 is a good year. I'm always very careful about providing guidance on go-forward bookings because it's difficult to do. Our pipeline of opportunities are robust. They're global in nature. They include compression and gas processing in just about every region within which we operate. So we are definitely working hard and we have internal targets for this year to be at least as good as last year. But I'm not gonna say, I really can't predict right now what 2023 is gonna look like.
spk10: Okay, fair enough. And maybe just finally on the synergies. So Sanjay mentioned you've got the 40 million of the 60 so far, a little bit ahead of what you might've thought. Do you think ultimately the synergy number comes in ahead of that $60 million number? And what types of things do you think that would have to happen to exceed that number?
spk09: Yeah, I think, you know, I'll give you my comments and maybe Mark can chime in too. But we're, you know, again, I want to come back to we're reaffirming the $60 million guidance. Like that's our confidence in the number has gone up. And I think delivering 40 million in the first 100 days is a really good data point that we have really good line of sight to that 60. But yeah, I think we're sort of assessing you know some of the puts and takes that we would have in synergies and right now feel very comfortable with the 60 and don't really feel like we want to Expand that number, you know Maybe mark can comment on a few things that might be might be sort of like positives or negatives But but you know right now our official guidance is still the 60 Keith our goal
spk06: We will hit the $60 million. That's something we're very convicted on. But our long-term goal really reaches beyond hitting a synergy number. Our long-term goal in this consolidation transaction was to really deliver sector-leading SG&A levels, sector-leading cost structures, and to use that extra volume to be a really competitive, cost-efficient business long-term. That's what we're really focused on. Putting a target out there for synergies and hitting the target for synergies is very important for short-term discipline and to make sure the market knows exactly what we're doing. But our goals are to get a company that's really efficient, that's got the lowest possible overhead, and that could very well point to synergies that are higher than $60 million. For now, I think that we stick to the 60. Our integration team and our leadership team is highly focused on getting that $20 million. And if we feel that it's materially higher than that, we'll communicate it to the market at that time.
spk10: Okay, thanks for that. And maybe just a quick follow-up on the Q&A then. I know it's all embedded within the guide, but the total number, 175 for Q4, What do you think is a good, clean cash G&A quarterly number for 2023? Is it somewhere around that $90 million number?
spk09: You know, so, Keith, I would say that if you backed out all the one-timers and, you know, really important to recognize that we've got $57 million of deal expenses and that's going through SG&A. We've got $18 million that related to the foreign exchange issue, which doesn't count the seven of interest that you get back. That happens below the line. But we've got $18 million that hit us because of the FX issue. And we've got $12 million in share-based compensation that hit us there. We've also got some amortization of customer relationship assets that we've had to recognize as a result of the transaction that are non-cash items. that are going through SG&A. So when you add all that up and you subtract it out of the 175, it actually gets you to like a mid-80s number. But that's understanding that we haven't really taken any of the synergies out yet because we've made a lot of the decisions that lead to the synergies, but it was late in Q4, early in Q1, So I think a lot of that run rate of synergy is ahead of us, and a lot of those synergies, like 90-plus percent of the synergies, hit the SG&A line. So I actually think we should be able to do better than that $90 million number that you're putting out there because of the synergies.
spk10: Okay. Thanks very much. Appreciate the comments.
spk01: Thank you. Please stand by for our next question. Our next question comes from the line of Andrew Bradford with Raymond James. Your line is open.
spk05: Good morning, guys. Thanks for taking my call or my questions here. I just want to, like, right from where you left off there, Sanjay, 90% of the synergies are at the SG&A line. And I'm wondering, have you identified in the time since taking it all in now any more operating-oriented synergies It could develop over the next while. It would be above and beyond the $60 million.
spk06: Yeah, Andrew, this is Mark. In that $60 million in synergies, we had definitely contemplated simplification of the business, reduction in geographic footprint, and focusing our assets, especially our manufacturing assets around the world. We reaffirmed the $60 million. Um, we are striving to get more than that. It'd be the best possible company we can be. Uh, but we, you know, as of today, we're not going past the 60, but I guess rest assured that the simplification and focus theme is alive and well, and it was something that will continue for the next year and beyond that. Okay. Okay.
spk05: Thanks. I'll just switch back over maybe just for a second to the backlog. If you, if you don't mind, uh, I wonder if you could just maybe speak to what the margin embedded in the backlog. And I appreciate all this would be in your guidance, but how does the margin embedded in that backlog compared to what we've seen involved in the last few quarters in engineered systems revenue? And maybe describe any changes in the composition of the backlog as well. And also, I'm kind of interested in the residency time. projects within the backlog? Is that shortening or is it extending?
spk06: I'll take that Andrew. Like we said in previous quarters, the margin in the backlog represents an improvement over what we saw really from mid 2020 through 2021 and 2022. We have to deliver on it and the supply chain issues that have largely disappeared from the headlines are still alive and well in execution. You know, to take new orders today, either for compression or gas processing, you're looking at 9 to 12 months delivery. Indeed, we've already booked some things so far in 2023 that have a 2024 delivery date. So there is an extension of time that's happening, as you can imagine, when the backlogs build up. The nature of the backlog early in the pandemic recovery was heavily dominated by compression. And we talked about that, you know, in those quarters. We've definitely seen more carbon capture. We've seen more gas processing. And we've seen more downstream processing orders come into the backlog. And those traditionally have been higher margin than compression. And so we look at the backlog and we work all those expected margins into the guidance and we reaffirm the guidance. So it's sort of the sum total of all those things. But in general, the backlog and the composition and the margin is better than it was a year ago. And I think that's pretty obvious, and I think we've been transparent from that point of view.
spk05: I appreciate that.
spk06: Thank you.
spk05: And last question would be just, you know, earlier in your commentary, you identified that, you know, one of the reasons why the margin was, the gross margin was sequentially lower was simply the lower margin profile from the acquired experiment business. And I'm just wondering is, Are those margins, so those are gross margins, so operating at the operating line? Yes. Is that part of, like, is remedying that, or can we see a convergence of that acquired margin to Interflex's more traditional margins, or is that kind of all part and parcel with the synergy guidance?
spk09: Yeah, so, you know, I'd say... The lower margins were really, there was kind of two drivers, I would say. The first driver is on the manufacturing side. We actually had a few projects and one big one that was on hold, if you will. So we're earning some revenue but not really making any profit there until that one sort of goes back into completion mode. So there was certainly an effect on the engineered system side of the business on margins there, but then we also had an effect on just the infrastructure. And that was really just sort of bringing it into the house, operating things a little bit more efficiently per the way that the Enerflex team is going to operate going forward. And per that point, Andrew, I would expect that we will see a normalization there. of how assets perform once we're fully integrated. So, yeah, and, you know, I guess the third point is we are bringing online, you know, three big projects. In fact, you know, they're all online now, and those have very healthy margin profiles to them and have been going very well so far, knock on wood, and congratulations to the water team and and our Middle Eastern team for bringing those assets online. So, yeah, I think you'll see a normalization to historical margins that you have seen from the infrastructure side of the house.
spk05: Perfect. That's it for me. Thank you very much.
spk01: Thank you. Please stand by for our next question. Our next question comes from the line of Tim Monticello. With ATB Capital Markets, your line is open.
spk03: Hey, good morning, everyone. First question for me just on the Argentina FX losses that you had in the quarter. Obviously, there's a lot of devaluation in the pace of this quarter, and it's tough to repatriate cash, and you guys don't really disclose what your cash balances are in each geography, but can you help frame the conversation around how this looks like, how it might look going forward. Were cash balances higher than they have been historically, average levels? And how do you think about the Argentina business on a go-forward basis? Obviously, Exterin had a pretty large presence in Argentina.
spk09: Yeah, Tim, I'll take the first half. Maybe I'll turn the second half over to Mark on how we see the business You know, so I think it's really important to quantify this $18 million loss. So where I would start is that it was really $14 million that was directly allocated to the devaluation. And then there was $4 million that was related to the cost of a hedge that was put in place by the legacy extern team. which it actually didn't protect us, and so we won't be occurring that cost going forward. So really, we've got not an $18 million issue, we've got a $14 million issue. As you mentioned, the devaluation in the PESA was pretty strong in the quarter, but even if we assume that that continues, which I think is a conservative assumption, You know, you've got to offset the $7 million that we gained in investing that cash. So really, it's a $7 million issue. And what I would tell you is that our team feels pretty strongly that we can do a better job on earning money on that money versus investing. what we were historically seeing. So I think we're going to be able to skinny this out to even below it being a $7 million issue. But that's not to say that it won't be an issue going forward. It will be there. We're planning that it will be there. I just think that we're going to be able to manage it down to a very efficient number here. And the other thing that I would tell you, Tim, is that our expectation of the impact that this is going to have on 2023 is already baked into that 380 to 420 guidance that we've provided.
spk06: And Tim, this is Mark on the second part of your question, where does Argentina fit? It's a good question. We like our people in the region. We like our assets in the region. We have really good customer relationships in the region. And they're all sitting on top of one of the best shale resources in the world. From that point of view, I believe it's a very good operating region going forward. I've got a high degree of trust in Sanjay and his treasury team that we will manage the currency as best we can. But we are fully prepared for there to be some decay from quarter to quarter because of those things. When you add it all up, it's still a very attractive asset for us. It's a very attractive country to be in. And we'll operate it as such.
spk03: I guess one follow-up question there then. Can you talk about the contract terms that you have specifically when the contract or contracts generally expire? And I guess how do you compensate yourself in those contracts for the level of risk you're taking? Because clearly this currency risk is pretty significant.
spk06: You're right, it's significant. Our customer contracts in Argentina are a blend of rental contracts and boom contracts. The revenues are pegged to the U.S. dollar and all the risk happens when we receive payment on a monthly basis. Now, this isn't new to Interflex. We've been in Argentina since 2014, and our teams have done a very good job of managing the currency since 2014 when we entered that market. Do we go for returns that are above average, sort of a risk-adjusted return? Absolutely. And that risk-adjusted return and how much do you have to put on top of normal returns to account for the fact that the The currency risk is more significant in Argentina than anywhere else. That's something that we've got experience in doing. And, you know, we will have continued challenges on the currency. But, again, I've got a lot of faith in our commercial teams and our treasury teams to nullify that as much as possible and still maintain solid operations. And, like I said before, is on top of one of the best shale resources in the world.
spk03: Are the contracts there large and lumpy, or are there a number of smaller contracts that expired over a period of time?
spk06: It looks more like our U.S. rental fleet than it does large and lumpy.
spk03: Got it. Okay. Moving on, I'm just curious about how you're thinking about organic CapEx in 2023. Obviously, you put some guidance out there, but You know, if you were to see some high-return projects or opportunities come through, how are you managing those? And is there wiggle room on the CapEx? And maybe you can just talk a little bit about the opportunities that you're seeing today for boom projects globally.
spk09: Yeah, sure, Tim. You know, first and foremost, I want to reiterate that our number one objective is is de-levering the balance sheet and getting below two and a half times leverage ratio. So we are spending very little right now from a discretionary growth CapEx perspective. And that will continue until we have a very clear line of sight to getting below two and a half times. And we're obviously, with the excess cash there, going to start thinking about how we return money to shareholders at that time. But really, right now, we are spending very little, you know, with the primary goal of getting leverage down below two and a half times.
spk03: And then once you're below that level, you know, what should we expect for organic CapEx? And, like, how has the opportunity set globally, like, demand for these types of projects changed, I guess, over the last six months?
spk09: Yeah, look, I mean, I'd say demand is very strong. I think our teams have done a marvelous job of figuring out how to work constructively with our customers to take something that would have been a capital-intensive project and make it into something that we can either sell or something that we can run on an O&M basis. They've been very creative to do that. So the demand for the products and services that Enerflex provides is is incredibly strong. And, you know, so that part hasn't gone away. I would say, you know, going forward, of course, we're going to look at how do we grow the business. It's going to come after we've delevered the balance sheet below two and a half times. And it's going to come after we've decided what the right method and quantum of returning value to shareholders is. And at that point, we'll assess, you know, the projects, and we'll be looking at investing in ways that will be accretive to the company at that point. But it really is sort of a conversation that we are not prioritizing right now because we want to make sure that we get leverage, very clear line of sight to getting leverage down below two and a half times.
spk03: Okay, got it. CCUS bookings were a step change in 2022. How are you thinking about the quantum? And obviously bookings are hard to call, but I guess opportunities then in CCUS for 23 relative to 22.
spk06: I think, like I said to Keith earlier, the pipeline's positive and we're working real hard to try to make 2023 at least as good as 2022. That's our goal. And we'll take it quarter by quarter. You'll see the bookings as we report the quarters and that's about as forward looking as I would like to get on that front.
spk03: Okay. And then last one for me. You've got, you know, two water projects commissioned now that were in flight. And Xterra was very enthusiastic about his water business. How are you guys thinking about it? And are you as enthusiastic as they were?
spk06: We are. Yeah, we are. I mean, I'm pretty sure we mentioned this part of the transaction. Some of the water technology and the relationships they have provides this new set of growth opportunities for us. There are customers that we know, there are regions that we know, they're in sort of geopolitical risk that's very good for us. So we like the opportunity set and we'll evaluate growth opportunities after we get below two and a half of the water jobs right next to all of our natural gas and energy transition projects. And the projects that generate the best return will be the ones that get that excess cash flow. But we do like it. The team, you know, the two projects we did in 2022 represented about $200 million worth of capital, roughly, and they executed them really well, and more or less on budget, more or less on time, and so far generating the turns that were anticipated in the model. So from that point of view, our confidence, sort of Enerflex leadership confidence in the water businesses' ability to land projects, deliver them, and operate them is very high. So it provides sort of another leg to the stool, if you will, in our energy infrastructure strategy.
spk03: Okay. And I guess I lied. I got one more follow-up on that. When you look across all of the portfolios that Xterra brought along with it, and now that you have it under your umbrella, can you talk a little bit about the return profile of Xterra's business on a project basis compared to, you know, what your expectations and hurdle rates are and an anaphylaxis?
spk06: They're similar. You know, they're similar to what we used before. You know, that being said, The go forward is pretty straightforward. You know, we know what our cost of capital is. We know what we have to do with respect to debt and returning cash to shareholders. I think there'll be plenty of free cash flow to go around in 2024 and beyond to get us that modest growth algorithm that we want to deliver. But, you know, to mention specific returns on specific extern assets, it's in line with the business and we haven't been greatly surprised.
spk03: Okay, thanks a lot. I really appreciate it.
spk01: Thank you. Please stand by for our next question. Our next question comes from the line of one moment. Jamie Kubik with CIBC. Your line is open.
spk08: Yeah, good morning. Thanks for taking my question. Most of them have been answered here, so I only have one, but can you provide any added commentary on the resolution of the BC government and Blueberry River First Nations and maybe the types of projects you're potentially seeing coming here and when you believe that could start to favorably impact your operations. Thanks.
spk06: Thanks, Jamie. I think that the Canadian, the Western Canadian Sedimentary Basin and specifically the Montney area is in need of liquids projects. There are several midstreamers that have talked about sanctioning liquids projects, and we play a role in those. You know, we've got the ability to build gas processing and liquid handling projects in Canada we have in the past, and those are good projects. So to the degree that that settlement will further development of that kind of critical infrastructure in the basin, we will do our very best to be involved. And indeed, the sentiment from our customer base has definitely ticked upwards in the last month since that happened, no doubt about it. I think it's early innings on whether or not you'll see significant changes in our backlog driven by that decision specifically. But I think it's maybe the best news to come out of the Canadian macro story in a long time. And we'll see if the orders flow in subsequent quarters.
spk08: Okay, that is helpful. And I'll sneak one more in here, actually. I mean, it's a bit on the same lines that Tim was asking is just, As it relates to your capital allocation priorities, when you hit your net debt to EBITDA target at two and a half times, how should we be thinking about shareholder returns changing at that point? And can you talk a little bit more on that?
spk06: Once we get the debt below two and a half, we will have the freedom to think about what cash return to shareholders looks like of a junior infrastructure company. you know, which is really what we are becoming and how we want to manage the business. You know, once we think about what those kinds of returns look like for a junior infrastructure company, I think there will be free cash flow left over for the most accretive growth projects. And so it's balance. You know, it's 100% balance once we get below the two and a half is we're going to balance our return of cash and balance the smart conservative growth going forward. That's the 2024 story and beyond. That's how we're thinking about it.
spk08: Okay. That's it for me. Thanks.
spk01: Thank you. Please stand by for our next question. Our next question comes from the line of Cole Paria with Stifel. Your line is open.
spk02: Hi. Good morning. On the USES margin front, Do you think they could hit prior cycle peaks or is that unlikely, just given the change in the US shale strategy? And do you think any weakness in gas markets, call it the Marcellus and Haynesville, could impact the margin recovery or is that just a different type of compression unrelated to your more Permian focused footprint?
spk06: Cole, we're not going to say exactly where we expect margins to shake out in U.S. engineered systems. We do expect them to go upwards. Whether or not they're going to hit the peak of 2018 is just something we're not going to comment on. Secondly, I think your question was around, does the current gas price have an impact on margins? Is that right?
spk02: Yeah.
spk06: Does that work? Yeah. Yeah. It's not helpful. We went to lengths in our prepared commentary to say a lot of our business is coming from crude oil plays, and through that you can read Permian. We don't have a significant amount of business in the Hainesville or the Marcellus. It's opportunistic, but it's not the core of our U.S. engineer system strategy. The core of our business is really in the Permian and the Eagleford and the Bakken to a certain degree, and international. Our U.S. engineer systems business It's under their revenue line in the disclosures, but a lot of that represents business that the destination is overseas, eastern hemisphere. So you really can't draw a straight line between Henry Hub Price and the engineered systems margin, which we think is a really positive thing. And it's sort of by design, if you will.
spk02: Got it. That's helpful. Thanks. And just quickly on the Kurdistan project. So theoretically, if the project costs were to increase, can you just remind us if there's some sort of mechanism to recover that within the contract?
spk06: There's no automatic mechanism, but we have a good contract. We understand it very well. We've developed excellent relationships with our customer. And I'd like to say that I feel our team is managing any increase in costs very well. And all of that is included in the confirmation of our guidance.
spk02: Got it. That's all for me. Thanks. I'll turn it back.
spk01: Thank you. Please stand by for our next question. We have a follow-up from the line of Aaron McNeil with TD Securities. Your line is open.
spk11: Thanks. I'll squeeze one more in. Can you? You give us a sense of the owned and operated compression horsepower, gas processing capacity, and water infrastructure capacity split by the two new international segments, the Latin American and Eastern Hemisphere segments. Even a rough split would be great. And what I'm ultimately trying to get at is the drivers of each of those segments.
spk06: So you're asking, like, of the revenue in Eastern Hemisphere, how much comes from gas processing, how much comes from compression, how much comes from water in energy infrastructure specifically?
spk11: Yeah, and just, you know, obviously there's no specific disclosures on horsepower by segment. So just trying to get a sense.
spk09: Yeah. You know, I guess what I'd say, because, you know, we don't disclose that level of detail, Aaron, but I do think that it's helpful to know that our businesses in Latin America and the Eastern Hemisphere are very leveraged towards the recurring side of the business. So a lot of energy infrastructure in both of those areas and some aftermarket services as well. So that's generally speaking. As we sit here today, it's predominantly gas business, but the two water projects that have been brought online are in the Middle Eastern region. So that water exposure is really 100% right now in the Middle East. But we have a very energetic water team, and their ambitions are global. So they're always looking at opportunities outside of the region. But I would say that most of what they are looking at today is really focused on the Middle Eastern region. And I expect that that's what we'll see from them in the short to medium term.
spk11: Maybe the better way to ask the question is, you know, you've split the rest of world segment into, you know, what's the split of invested capital between, like, is it 50-50, 60-40? Like, even just trying to get a sense of, you know, the magnitude.
spk09: I don't know that we disclose that.
spk04: There's total assets that are disclosed in the note disclosure in terms of associated with that, but I guess you could use that as a rough proxy. That's not exactly, I think.
spk09: And that's at which note?
spk04: It's in the segmented notes in the notes for the financial statements.
spk09: Okay, okay. So, yes, I think if you look through the segmented information in the financial statements, you'll get total assets by region. Okay, great.
spk11: I'll turn it over. Thanks.
spk01: Thank you. Please stand by for our next question. We have a follow-up question from the line of Andrew Bradford with Raymond and James. Your line is open.
spk05: Thanks. To be fair, that disclosure was probably on page like 98, and it was late last night. But so the one follow-up I have here is just thinking about the discussion around the lead time on major components as we were talking about that in the context of engineering systems, but I'm sort of thinking about it also in the context of EI projects, which, as you said, you're not going to do much in 2023 as the priority is to allocate capital to the balance sheet, or cash flow to the balance sheet. But as 2023 progresses, your guidance range is going to narrow, obviously, and your confidence on timing of hitting your debt thresholds will improve and as that threshold date approaches, will you be in advance? I guess short question, should we expect in 2023, even before you hit that debt threshold, that you'll start talking more openly about what the dating pipeline looks like on boom projects or anything like that?
spk06: Yes, Andrew, I think that's all very logical. You know, we're being quite pedantic about assuring the investor community that we're focused on debt reduction, and we are. At the same time, we are challenging our commercial teams to look at projects because some of the projects, especially in the Eastern Hemisphere and Latin America, can take years to develop. So they're not doing nothing during this period of time where our primary capital allocation focuses debt reduction. And we feel very comfortable that Interflex has an attractive growth algorithm going forward once we get our balance sheet to where we think it needs to be, you know, long term. So the commercial teams are working. We've given them high hurdles and high targets to make sure that they're developing the very best possible business. And I think it's quite reasonable that in, you know, future quarters, we'll be able to communicate to the market the nature of the growth that we would look at once we reach those targets.
spk05: That's perfect. Thank you very much, Mark.
spk01: Thank you. I'm sure no further questions in the queue. I will now like to send the call back to Mark for closing remarks.
spk06: Thank you very much, operator. With no further questions, I would like to thank everyone for joining us today. We appreciate your time and interest in Aeroflex, and we look forward to connecting with you for our next update in May.
spk01: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Disclaimer