Thank you, operator, and good morning, everyone. Here with me are Mark Rossiter, Enerflex' President and Chief Executive Officer Sanjay Bishnoi, Enerflex' Senior Vice President and Chief Financial Officer and Ben Park, Enerflex' Vice President and Corporate Controller. During this call, we'll be providing our financial results for the three months ended 03/31/2021, a brief commentary on the performance of our three business segments and a summary of our financial position. Today's discussion will include forward looking statements regarding Enerflex' 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, please see the advisory comments within our news release, MD and A and other regulatory filings. Approximately one hour following the completion of this call, a recording will be available on our website under the Investors section. During this call, unless otherwise stated, we'll be referring to the three months ended 03/31/2021 compared to the same period of 2020. We'll proceed on the basis that you've all taken the opportunity to read yesterday's press release. I will now turn the call over to Mark.
Thanks, Stefan, and good morning, everyone. Our first quarter results benefited from the continued resilience of our recurring revenue businesses and a nascent recovery in Engineered Systems bookings activity. While industry spending is in the early stages of recovering, a stable commodity price environment is assisting our customers in firming their 2021 spending plans, resulting in increased bidding activity across our regions. In particular, we have started to see meaningful opportunities for new equipment orders in our Canada and Rest of World segments and are fielding an increasing number of inquiries for solutions that can lower the intensity of carbon emissions. While it is certainly a positive to see a quarter over quarter build in our Engineered Systems backlog for the first time since early twenty nineteen, additional bookings will depend on the pace at which bidding opportunities are converted to executed contracts and our expectation is for bookings to remain relatively subdued through the first half of twenty twenty one with a modest recovery later in the year.
Our aftermarket services business was stable through the quarter with improved contributions from our Canada and Rest of World segments versus the comparative period, but was impacted by a combination of seasonal weakness and delays caused by extreme weather events in Texas. We are expecting improvement in AMS revenues throughout the year as the industry continues to recover. Our global asset ownership platform continues to perform very well, proving its resilience through the downturn and supporting the company's gross margin profile. In our Rest of World segment, all assets within our BOOM portfolio are performing as anticipated and we continue to see opportunities to grow our portfolio in The Middle East and Latin America. In addition, our U.
S. Contract compression fleet has grown to 375,000 horsepower and maintained a first quarter average utilization rate of 82%, which we expect to gradually improve this year. Overall, I am proud of our team's efforts to keep our assets performing to the benefit of our customers and stakeholders. Turning to our Energy Transition business, our analysis of addressable markets continues to evolve and has so far presented an interesting and diverse opportunity set across several aspects of the energy value chain. Enerflex's near term focus is to continue its work on crystallizing strategies that ensure a sustainable, growth oriented and profitable approach to energy transition and those strategies will be communicated in due course.
Throughout 2021, our focus will remain on strong execution and maintaining the performance of our assets. It is refreshing to see some renewed optimism in the energy space as the industry looks forward to the opportunities that will present themselves in the post pandemic era. Our financial discipline through the downturn leaves us well positioned to compete for these new opportunities moving forward.
I will now turn things over to Sanjay to review our financial results. Thanks, Mark. Fourth quarter revenue of $2.00 $3,000,000 decreased significantly versus the prior year period, due primarily to lower Engineered Systems revenue on weaker bookings in recent periods and reduced contributions from some major projects that were largely complete by the third quarter of twenty twenty. Included in the quarter's $98,000,000 of bookings is the manufacturing portion of the ten year BOOM project booked during the quarter and which we disclosed as a subsequent event with our fourth quarter twenty twenty results. Given its status as a new finance lease on equipment that we will be manufacturing, the manufacturing portion of this project is being included in bookings for the quarter and will be recorded in Engineered Systems, while the finance lease income will be recognized in the rentals product line over the lease term.
Service revenue was lower due to inclement weather in The U. S. During the quarter, as well as pricing pressure on certain service offerings, while rentals revenue decreased due to lower rates on extended contracts in The Middle East and expiration of certain contracts in Mexico during the prior year. Revenue in many of our operating regions was also negatively impacted by a weaker U. S.
Dollar during the period. Gross margins decreased over the comparative quarter on lower revenue, but the decrease was partially offset by increased contributions from recurring revenue product lines, which carry a higher gross margin as a percent of revenue. SG and A was down slightly on the quarter, primarily driven by lower compensation expense and cost recoveries related to government assistance programs, partially offset by higher share based compensation on the increase of the company's share price during the first quarter. The movement in share price resulted in $5,300,000 of share based compensation in the quarter compared to a $5,100,000 recovery in the first quarter of twenty twenty, a net increase of $10,400,000 period over period. Enerflex has continued to make good progress in monetizing our working capital commensurate with our reduced revenue.
Remaining direct material inventories will be realized into Engineered Systems projects and new contract compression units over time. During the quarter, we invested $10,000,000 of capital towards units in our USA rental fleet, which has grown to approximately 375,000 horsepower. From a capital allocation perspective, growth CapEx will continue to be limited to those opportunities that satisfy stringent investment criteria, prioritizing higher margin, less cyclical businesses with attractive returns. Enerflex continues to maintain a conservative leverage position with a bank adjusted net debt to EBITDA of 1.37 times. With significant liquidity on our revolver, the potential for additional harvesting of working capital and the possibility that engineered systems activity could pick up, Enerflex is well positioned to consider additional growth CapEx should attractive opportunities present themselves.
Our net debt decreased by over $40,000,000 in the quarter and we continue to using cash to decrease net leverage and strengthen our balance sheet. With respect to liquidity, Enerflex has $111,000,000 of cash on hand and access to $638,000,000 on our bank facility, which gives us the flexibility to manage the business through the current downturn, manage our upcoming note maturity and to consider organic and or inorganic growth. In addition, subsequent to the quarter, a subsidiary of the company finalized credit facility secured by certain of its assets. This asset backed credit facility of up to US52.5 million dollars is non recourse to the company and will provide flexibility in efficiently financing our asset ownership investments. Lastly, Enerflex's Board will continue to evaluate dividend payments on a quarterly basis based on the availability of cash flow and anticipated market conditions, yesterday declaring a dividend of $0.02 per share to be paid on 07/08/2021.
This completes the formal component of the webcast. Additional details can be found in our May 5 press release. We will now be happy to take any questions.
Our first question comes from the line of Michael Robertson of National Bank. Your question please.
Hey, good morning everyone. Thanks for taking my questions. In your outlook, you mentioned that bidding activity appears to be picking up for Engineered Systems opportunities related to the energy transition towards less carbon intensive energy sources. Was wondering if you could provide some additional color on that front regarding the specific types of projects as I'm curious if you're seeing more potential opportunities related to carbon capture and storage or RNG or hydrogen or if it's sort of an even mix at this point?
Hey, Michael, this is Mark Rossiter speaking. Thanks for the question. We are seeing inquiries in decarbonizing oil and gas customers. We're seeing inquiries in carbon capture. We're seeing inquiries in landfill gas and renewable natural gas and we're also bidding hydrogen compression.
And I guess as a follow-up to that, looking at those channels, is there a standout in terms of equipment intensity as it would relate to potential demand for anaphylaxis equipment? Or maybe put another way, if you're looking at projects in those realms that were of similar scale, would one offer more upside to Enerflex in terms of the amount of equipment required that would be in your sort of wheelhouse?
Based on what we know today, we feel that decarbonizing the oil and gas industry, which would be electrification, carbon capture and storage and also carbon capture and storage for other industries are very equipment intensive and we think they really lend themselves to a modularized approach. And we've got good experience lists in both of those areas already from the last forty years of our business. So we think those things are the most equipment intensive.
Got it. That's helpful color, Mark. I appreciate that. And sort of just as a last follow-up, I know this is a tough comparison given the sort of breadth of the different end users of your equipment. How would that equipment intensity sort of stack up to your more traditional projects?
A carbon capture and storage system of size from a distance would look very similar to a large gas plant or a big compressor station. So it's tough for me to give you a great answer to that, but like you said, which ones are the most equipment intensive? Carbon capture and storage is quite equipment intensive, but it's the same pressure vessels, compressors, pipe, heat exchangers, etcetera, that would be all sort of put together to make a gas plant. Decarbonizing oil and gas operations, which is in addition to carbon capture and storage, is a lot of electrification. From a distance, that would look very similar to a normal compressor station or gas plant, just with fewer gas engines, more electric motors.
Got it. That's really helpful color, Mark. I will turn it back. Appreciate you taking the call.
Okay. You're welcome.
Thank you. Our next question comes from the line of Aaron McNeal of TD Securities. Your line is open.
Hey, good morning all. Sanjay mentioned the potential for growth CapEx and given investors continued focus on capital discipline in the energy sector, how do you expect to balance future growth against those views? And what characteristics would a potential capital project have to have for you to give it the green light?
Yes. Good morning, Aaron. Thanks for the question. We feel like the competitive environment has certainly reflected what you've just mentioned, which is that there is a little bit more discipline on capital. So we're actually seeing healthy returns on the projects that we're looking at.
We are our initial swag is to say we're going to live within cash flow, but we also are taking a look at the balance sheet. And Enerflex is in really good shape from a balance sheet perspective. So we continue to balance our views on leverage and just looking at balance sheet capacity and trading that off with returns on the projects And where we see healthy opportunities to grow the business and good returns, we're going to take them.
Maybe a good segue into the next question. Can you walk us through the decision to pursue a non recourse credit facility in terms of overall rationale, if it has any advantages in terms of interest rate or other terms? And would you use this sort of instrument more in the future? And what that might that imply for future leverage?
Sure. Yes. Great question. We've always had the ability to do this within our existing financing documents. So this has always sort of been a built in feature that we had and it was largely an acknowledgment that the businesses that we're getting into, namely the asset ownership businesses, they can carry more leverage than the traditional Enerflex manufacturing and service businesses.
So it's really just an articulation of that strategy and feature that we've had in our existing finance agreements. When you look at some of the assets in our rental portfolio under contract, good names, recurring revenue, those all sort of lend themselves to really competitive rates and the ability to access more capital. And so this was very much just realizing that our assets are getting to a point where we should think about doing something non recourse. And we took advantage of available financing that was out there. So I think it net net improves our ability to access capital.
I think you can expect us to continue to look at additional opportunities here. I don't think it's going to be a sea change in terms of our view of how we manage the company. I think we're still going to be very conservative with leverage. But there's certainly some pockets of capital out there that we can access really efficiently when we think about non recourse.
Got it. And then last question for me. You mentioned you evaluate the dividend quarterly. And historically, I guess,
Enerflex has made changes to
the dividend with the third quarter results. Is that still the MO of the Board? Or do the unusual circumstances around COVID make that decision a bit more fluid?
We sort of we take those decisions quarter by quarter. They're always subject to our board's approval. And therefore, I think we'll just continue to evaluate those and let you know when there's any change to the strategy there.
Okay, great. That's all for me. I'll turn it over.
Thank you. Our next question comes from Tim Manicello of ACD Capital Markets. Your line is open.
Hey guys. I don't think I heard that one. I like to tell. First question is just around the finance lease structure. So my understanding anyway is that the contract will be monetized the same way normal boom would like you did most of the cash flows over the ten year term.
That means that the bookings that you're getting now as you recognize revenue on the manufacturing component will largely be devoid of associated cash flows over the near term. So I'm curious how much you expect deferred revenue component to be in 2021 and 2022 associated with that one contract?
Yes. Hey, Tim, this is Sanjay. I'll take a first stab at that one. Unfortunately, you're a bit muffled in your transmission. So hopefully, we got it right here, but let us know if we didn't and we can clarify.
You're absolutely right. And I think you're referring to the new booking that we announced. And you're right, like from an economic perspective, that is it's a typical BOOM contract, which is a ten year term, including the construction period. And we get paid for we get paid a steady state rate throughout that ten year term. So economically, there is really nothing different.
What is different is the accounting treatment and that's very much related to IFRS16 16 as I think we've talked about in prior discussions. The effect of that accounting treatment is that we end up pulling forward a lot of the revenue, a lot of the profit, and then we basically have a finance lease receivable and the earnings associated with that are accounted for over the ten year term. We typically don't disclose particulars on specific deals. So unfortunately, we won't give you any guidance in terms of this particular contract, what you can expect over the next ten year period. But again, we think the predominant thing to keep your eye on here is the fact that the cash flow is steady over the ten year term of the contract.
Okay, got you. And then on the Rest of World Rental segment, I guess the commentary a year ago would have been you have three BOOM contracts coming online over the next back half of twenty twenty and into 2021. Fast forward to say you have all three of those contracts commissioned, rental revenue was down on a year over year basis and understanding that you've had some renegotiations around contracts and you mentioned some Mexican expirations. But how should we be thinking about rental revenue in the Rest of World segment progressing through the rest of the year?
Yes, I think we had a lot of moving parts there. And unfortunately, I wish the accounting standards, their hearts are in the right place to make this more understandable to investors. But it does actually sort of move it moves things around a bit. And I think that's what leads to a lot of these questions. I would say that now that we're sort of over the noise of the three projects coming online and a lot of the recontracting, I would expect that we should level out quite a bit throughout the rest of the year.
Some of the variables there might be our U. S. Fleet where we do expect utilization to increase, so that might be a variation to the positive. And we're also looking at we're continuously looking at new deals and feeling really good about the pipeline there as well. So that might introduce some new deals that we need to talk through, but I think those are all things for the future.
Hey, Tim, this is Mark. Rest of World Rentals is a critical part of our business. We like it. There's a way more good news than bad. During the pandemic, there is a small number of blend and extends, which is somewhat negative that we gave some lower rates, but the upside is we got long term extensions.
In some cases, assets that we had operated for ten years got another ten year extension. So it really provides some stability to our cash flows for a long time. The U. S. Rental fleet like Sanjay said, it's you asked about ROW, but U.
S. Rental fleet is a big component of our asset ownership strategy. And the trajectory we've seen there throughout the pandemic and indeed through Q1 has been very positive, both on adding new horsepower and the utilization of the overall fleet. But your question is well made that ROW, we did start a bunch of boom contracts and you're like, where is this all adding up? The impact of shifting some of the assets to a finance lease does make it complex when you're trying to analyze it on an earnings point of view.
And I would say that impact is probably more significant
than any
of the blend and extend things we had during the pandemic. And in general, the cash flows we're getting from all those assets, the diversity of the countries we're operating in and the clients that we have, I really like the portfolio of assets we've built up. And like Sanjay said, it's got a lot of upside going forward.
Okay. That's helpful. One more question here just on CapEx. Understanding that the finance lease contract there is probably going to be accounted for like it would be on an Engineered Systems project. So that won't be a CapEx item anymore.
So what is the CapEx range you're expecting now on an adjusted basis for 2021?
Yes. And so leaving that out, Tim, I guess I'd go back to the guidance that we gave earlier, which was $50,000,000 to $100,000,000 of growth CapEx on the year. And so I think that if you take the announcement of this ten year project out of those numbers, I'd say that the range is still where our heads are right now. Having said that, I do want to say that we're constantly looking at the balance sheet. We're constantly looking at the Engineered Systems business and the outlook for that.
And we believe that there's a lot of great projects out there right now. And so, we're always going to be evaluating whether we should bump that up. I don't see that necessarily that range that we gave you. I don't see that coming down. But I could see under the right circumstances us wanting to get some more good business on the books.
Okay, great. I'll turn it back. Thanks, guys.
Thank you. Our next question comes from the line of Keith Mackey of RBC. Your question
please. Hi, good morning. Thanks for taking my question. I just wanted to maybe start out with the gross margins on a pre depreciation basis in Engineered Systems, around that 15% number for this quarter. How should we think about that over the summer quarters or so, given where the backlog is, what projects are in it and your expectation that bookings remain muted for the next couple of quarters?
Keith, this is Mark. We don't give specific guidance around gross margins, but macroeconomically, the industry is very competitive. And the backlog popped up in the quarter, which was really nice. It was helped by the BOOM contract we booked in the ROW segment. But in North America, activity we stated is quiet.
We don't want to say there's a major inflection going on. So it's going to continue to be competitive. But sort of beyond that, we're not going to provide too much commentary about the gross margin built into our current backlog.
Got it. Okay. And I guess maybe just a bit more commentary around your thoughts given where things have gone and where you expect them to go. But how do you plan to manage cash generation given the margin commentary that you just made for the enterprise over the next few quarters or even going into 2022 should the industry continue to stay challenged and bookings remain a little bit more scarce or the margins on the projects are stay skinny as you mentioned?
Yes. Keith, this is Sanjay. I'll take that one. I'd say that that was a big part of our thinking through the pandemic. And it was really the planning that we were doing around managing cash flow through 2020 that's put us in a really good position from a balance sheet perspective to see us through the remainder of the downturn.
So while we're expecting things to pick up, even if things don't pick up, we will be just fine from a cash flow and the health of the balance sheet's perspective. So I think it's really about what we did last year that put us in a good position this year.
Got it. Okay. So maybe just to clarify, is it fair to say then that you can flex your growth CapEx to stay free cash neutral or positive in most booking scenarios then? Is that have I gotten that right?
Yes, I think if you look at the range that we gave, I think that we're in that range can stay within cash flow for the year. And I think even beyond that, the balance sheet is in great shape. So we can always look to the balance sheet if we see projects that we just have got to have and we want to stretch a bit to get them.
Got it. Okay. Thanks very much. That's it for me.
Thank you. At this time, I'd like to turn the call back over to President and CEO, Mark Rossiter, for closing remarks.
Thank you, operator. Since there are no further questions, I would like to once again thank you for joining us in the call. We look forward to giving you our second quarter results in August.
And this concludes today's conference call. Thank you for participating. You may now disconnect.