Enerflex Ltd. (EFXT) Q1 2020 Earnings Report, Transcript and Summary

Greetings and welcome to the Exterran Corporation First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow a formal presentation. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to your host, Blake Hancock, Vice President of Investor Relations. Thank you. You may begin.

Good morning and welcome to Exterran Corporation’s first quarter 2020 conference call. With me today are Exterran’s President and Chief Executive Officer, Andrew Way; David Barta, Exterran’s Chief Financial Officer; and Girish Saligram, Exterran’s Chief Operating Officer. During this conference call, we may make statements regarding future expectations about the company’s business, management’s plans for future operations or similar matters. These statements are considered forward-looking statements within the meaning of US Securities Laws, and speak only as of the date of this call. The company’s actual results could differ materially due to several important factors, including the risk factors and other trends and uncertainties describing the company’s filings with the Securities and Exchange Commission. Management may refer to non-GAAP financial measures during this call. In accordance with Regulation G, the company provides a reconciliation of these measures in its earnings press release issued earlier today, and a presentation located in the Investor Relations portion of the company’s website. With that, I will now turn the call over to Andrew.

Thanks, Blake and good morning, everyone and thanks for joining the call today. First, I will discuss our organizational response to the COVID-19 pandemic. Then, briefly talk about the first quarter and our business outlook for the remainder of the year. Starting with the COVID-19 and how the organization has responded, I want to say a big thank you to all of our employees around the world, as we’re safely navigating these unique and trying times. Most of our teams have been working remotely and our ability to continue to run our operations efficiently is a testament to the commitment and dedication of our organization and to our customers. I would also like to express our gratitude and admiration for the frontline workers, first responders, medical professionals and various healthcare agencies and bodies that are leading the efforts daily on a global basis. And finally during this time, we are gratified to see our relationships with our long standing partners, customers, suppliers and other stakeholders evolve positively as we have transitioned to virtual collaboration. As the COVID pandemic became more prevalent in February, we put in place our global crisis management team that meets on a daily basis. This has allowed us to act swiftly to ensure the safety of our employees, contractors and customers through this pandemic. We started planning early in the quarter on scenarios for remote working and we ran test trials long before countries began implementing work from home notices. This enabled us to keep a high level of efficiency working remotely. Our biggest challenge is proven to be supply chain and logistics. We’re moving people and parts in and out of countries, with travel restrictions has caused some delays on executing daily activities. I’m happy to report that our many years focusing on local talent development and high levels of regionally-based resources has allowed us to keep the vast majority of our operating facilities running at close to normal levels. The first quarter was a strong quarter for the company, considering the challenges we all faced in March, as we delivered EBITDA, as adjusted of $34 million, which was at the high end of our guidance range. We had a strong commercial start to the year, with over $450 million of Product Bookings and over $200 million of bookings within our Contract Operations segment, and a sizable booking within the aftermarket services. Operating cash flow for the quarter was $9.4 million, and we ended the quarter with over $430 million in liquidity. Clearly, all of our customers are facing the same challenges around the collapse in oil price and demand destruction, especially customers producing associated gas, and while our business is strongly tied to natural gas, the overall environment is challenging. We continue to have daily dialogue with our customers on how we can help them navigate these challenging times. Despite the volatile environment, our strong commercial start to the year provides us greater visibility through early 2022. Last year, we took swift and immediate actions to take cost out of the organization, as we saw orders slowing, especially in the US. Looking back, we guided on our fourth quarter 2018 conference call for SG&A to be between $180 million and 185 million for the full year of 2019. And it came in at around $160 million. We guided this year’s SG&A to $140 million to $150 million on our fourth quarter call and guidance for 2020 is now between $130 million and $140 million. We’re also moving quickly on activity-based costs at our manufacturing facilities, specifically here in the US, as we don’t foresee a rebound in US orders over the next 9 months to 12 months. We have already taken the appropriate actions and continue to right-size headcount. Our international factories are busy executing the awards booked over the last few quarters and we’re currently focused on delivering productivity safely. Additionally, we’re also driving capital efficiency improvements to the maximum extent where possible. Last year, our maintenance and other CapEx was $30 million and for this year, we now expect that to be down around 30% to $20 million. Our growth CapEx is committed to ECO deals, and we continue to look at ways to drive further efficiencies. Although we came into 2020, with known project awards pending and improving expectations for pockets of our business in North America, and the international markets, the dislocations resulting from the pandemic and the rapid decline in oil prices impacting overall sentiment have altered those expectations. Our contracted nature, strong tie to natural gas and commercial successes in the fourth first quarter allows us to continue to have greater visibility than most of the industry, albeit less clear than it was a few months ago. For 2020, our adjusted EBITDA guidance is now between $120 million and $140 million. We have built a few key points into these assumptions. First, no new sizeable product orders for the rest of the year. Second, improvements in travel restrictions and supply chain activities during the second half of the year. Third, we see the need for continued remote collaboration with customers and on-time execution on the key project wins we booked over the past several quarters. And lastly, a slowly improved macroeconomic conditions as it pertains to commodity prices and exchange rates. Despite the current macro challenges our leverage at 2 times – 2.4 times, liquidity exceeding $430 million at the end of the quarter and our net debt maturity, being the revolver, not coming due until 2023 gives us great confidence that we will weather these trying times and come out of this as stronger company. The journey that we have been on over the past couple of years, transitioning from a products company to a contracted business is beginning to have its benefits, given our ability to forecast our operations better than many. We have been progressing to a completed integrated systems and process solutions company with higher margins, higher returns and less cyclical business. The longer-term contracted nature of all three of our segments provide a great platform to launch from with environmentally sustainable solutions compared to alternative choices our customers may have. While we have not formally announced the outcome of our North American compression business review, largely driven by the volatility and uncertainty in the markets the past several months, I can tell you that the business remains non-core to the organization and we will continue to work in parallel on either a sale process or complete wind down over the coming months. We will update you on progress on the quarter 2 earning call. While there’s still a lot of uncertainty regarding the duration of COVID impact and supply demand challenges within the energy industry, we have great confidence that our global footprint and strategy will serve as well. The longer-term and stable nature of the ECO business and portions of the AMS business provide recurring revenue streams that many within energy are not afforded. Combined with our solid margins, ample liquidity and improving return characteristics, we believe we are well positioned to exceed the expectations of our employees, investors and our customers. With that, I’ll now turn it over to Girish.

Thanks, Andrew. I would like to start with the commercial successes that we had during the quarter, that not only provide us additional backlog visibility for the coming years, but also exemplify the mission criticality of our products and services. Despite the obvious challenges, we saw very significant wins across all of our reported segments, and in all of our regions, showcasing the power of the one Exterran philosophy, the continued commercial intensity of our regional teams and the value of the integrated business model we have. As we highlighted on our fourth quarter call, we won a project for a fully integrated gas processing facility in the Middle East at a value in excess of $300 million along with a five-year operations and maintenance services agreement. Well, this project is a strategic win in its own right. We’re also excited by the potential for future expansions that this customer envisions. We are off to a strong start on execution, despite the challenging environment. Our engineering teams are leveraging technology tools, and setting the standard for virtual workplace collaboration to ensure that the initial design phase is robust and on track. We have also continued to drive strong interaction with our customer, key vendors and partners through remote video and collaboration technologies. While supply chain’s logistical routes and ports begin to fully reopen, our teams are ensuring that we are progressing on this and other projects to the maximum extent possible. We expect this project to materially contribute to revenue and margins, starting in the second half of this year and through the beginning of 2022 with ongoing contributions complemented by the AMS services after commissioning, In ECO, we had an important success in Latin America, where we signed an eight-year extension with one of our key customers worth approximately $150 million. We have been operating essential gas compression infrastructure in the region over several decades. And this win is a great demonstration of our strong customer relationships, the resiliency of the ECO renewal paradigm and our operational excellence in critical midstream infrastructure. Lastly, in AMS, we continue to develop traction on a global basis, spearheaded by our team in the Asia Pacific region. While we are seeing a delay on the more transactional services due to logistical challenges posed by COVID-19, we were awarded a significant long-term win in the Asia Pacific region in Q1. We won a five-year contract for maintenance services with an IOC that builds on the services we already provide to them. This is a great example again of the stickiness of our customer relationships, as well as a demonstration of the ongoing value we provide to our customers through operational excellence. The overall contract is worth close to $25 million, which is a significant long-term commitment in this segment. While we do see the current situation having a significant negative impact on demand in the short to mid-term, these successes give us a strong backlog to execute while we continue to develop longer-term projects. As Andrew mentioned, we are engaging in constructive and collaborative dialogue with many customers globally to help them navigate the current environment. While it may be natural to assume that that’s a euphemism for giving discounts, our strong contracts and long-term relationships truly allow us to center discussions on value creation, where both parties can benefit. As we have highlighted previously, our equal backlog provides stability of revenue and cash flows over the long-term. This view is built on a foundation of strong contracts that protect us to commodity cycles. At the same time, we have always believed in the adage that we succeed when our customers are successful. As a result, while there may not be a contractual basis, we are making a conscious decision to support customers and ensure that we grow our mutual longer-term benefit. Thought it would be helpful to give you a couple of examples of how we are collaborating with customers today to provide some perspective on what this means. We have an ECO customer where we operate multiple gas cranes, due to production cuts, the customer is looking to reduce OpEx and asking how we can help. Rather than a simplistic price reduction, what we are working with them on is a solution that has three potential elements. One, adding a pre-treatment solution that will save them millions annually. Second, changing the scope of services that would allow some cost reduction. And third, given the characteristics of the field and extension of the contract beyond its current period at today’s rates. The net result could be a scenario where the customer does save money on OpEx in totality, and we preserve our margin rates, while locking in a longer-term, thereby improving return on capital. As another example, we have a customer with a project that is mostly complete on our end, but is facing significant delays on the on-site work and may need to be delayed by up to two years. We are working on an arrangement with the customer to provide options for storage, preservation and ancillary services. While this might delay some of our final billing milestones, and might cause a short-term change to the revenue and margin due to change in scope, it provides incremental sources for revenue and a stronger longer-term cash flow. In all of the cases where we are going through these types of discussions, we are following these key principles. First, ensuring the credit worthiness and long-term stability of the customer to be very confident in their continued viability and success. Second, optimizing the balance between EBITDA and cash for Exterran. Third, being fair and principled in our negotiations. And finally, number four, recognizing and leveraging the strategic relationships we have, and especially where they can lead to future success for both Exterran and our customer. Lastly, I’d like to go through our view of global demand and activity, recognizing that it is a very fluid environment. The North American market is one where demand signals have significantly dampened over the past couple of months. Given the pressures on producers, we are not expecting to see any significant demand in this region over the next 6 months to 9 months. While we continue to be a strong believer in the US shale story and the importance of gas in the energy value chain, we think the industry will need time to stabilize and consolidate before launching new projects. Further, the days of incremental processing capacity of 2 BCF to 3 BCF per year may not recur for some time. And we are therefore working to establish new applications where we can bring our expertise to bear. Through our strategic growth plan process, we are analyzing the broad trends of signals and determining opportunities that fit in well with our existing capability set. In the meantime, our strong international backlog allows us to leverage our expertise in the US to work on those projects and we are maintaining critical operating capacity in engineering, manufacturing and sourcing through the cycle. Our global capability with common processes and tools allows us to execute more effectively and seamlessly despite the disruptions from COVID-19. In Latin America, the effects of the current environment have been particularly hard on the currencies in several countries. We have explained in prior calls, how we manage this and while there is a top line impact and risk, our margins are protected. Argentina especially continues to be an important country for us as they navigate the potential default. The ramifications of that will be significant in terms of both capital controls, as well as the oil and gas policy, which will have a significant bearing on the development of Vaca Muerta. The Middle East continues to be the region of the highest activity, and we are seeing new project tenders and inquiries through this period. We remain enthusiastic about our prospects in this region and look forward to building on our prior successes. Well, there may be a delay due to the production cuts and current environment on actual project awards, the level of activity is encouraging. Finally in Asia Pacific, we are seeing a rebound of activity levels from the first quarter in a couple of countries but don’t see a material shift on new projects from the slow pace of the last couple of years. Our focus on AMS in this region has been paying off. And we are also positioned well for new product orders building on the successes of 2019. To wrap up, clearly the world is very different today relative to our last call. While our business is not immune to the global impact of either the pandemic or the commodity price shocks. We believe we remain well positioned in the long-term. Our leverage to natural gas and strong contracted backlog gives us greater visibility and resiliency into our future compared to many. With that, I will now turn it over to Dave.

Thanks, Girish. The first quarter reflected another solid performance with EBITDA, as adjusted of $33.8 million on revenue of $210 million. Operating cash flow from continuing operations was $9.4 million. The US compression manufacturing business contributed $49.5 million of revenue and while we don’t measure EBITDA at that level, we estimate the business was slightly above breakeven on an EBITDA basis. So excluding the results for US compression, the EBITDA margin for the remaining business is approximately 20%. From a segment perspective, revenue for Contract Operations was $95 million. Our gross margin was $63 million, resulting in the gross margin rate of 67%. As we discussed on the past two calls, there were two ECO projects where the customers were considering purchasing the assets. In the first quarter, there were completed and there was a one-time benefit of roughly $10 million of revenue and $8 million of gross margin, which was included in our quarterly guidance given on our last call. We will continue to have an AMS contract for both facilities going forward. For AMS, revenue was $28 million and gross margin was $7 million. This resulted in the gross margin rate of 24%. Revenue was down sequentially as the first quarter is typically the low for the year driven by seasonality, and as we previously discussed, we experienced logistical challenges late in the quarter, because COVID-related travel and supply chain interruptions. Revenue in the Product segment was $88 million and the gross margin was $3 million, resulted in the gross margin rate of 4%. This also included roughly a $5 million impact of fixed overhead under absorption. Bookings for the quarter were $458 million, and our Product Sales backlog was $648 million at the end of the first quarter, compared to $278 million at the end of the fourth quarter. The US compression fabrication business makes up approximately 11% of first quarter ending backlog. SG&A expenses were $38 million, included in the $38 million is roughly $3 million associated with an increase in our bad debt reserve. The increase in the AR reserves is driven by an increase in our general reserve and not related to any specific customer, reflecting the current market condition and aligns with experiencing similar historic periods. Moving to the balance sheet, total debt at the end of the first quarter was $435 million. Our leverage ratio is in very good shape at 2.4 times and compares to of 2.1 times at the end of 2019. We got total available liquidity of over $430 million. I will highlight as Andrew did, that we have no near-term maturities and our next maturity date is at 2023 which is the revolving credit facility. Our capital allocation strategy hasn’t changed. We’re responsible with a balance sheet and leverage levels while prioritizing funding organic growth opportunities and we’re positioned to consider M&A prospects as well. The buyback of both bonds and stock also remain in options. We have stated since the spin, that maintaining the solid balance sheet with a fundamental principle of the way we manage the company and because of this, we are well prepared for the market conditions we are facing. Andrew provided you with our updated outlook for 2020, which does include the US compression fabrication business. However, the exclusion of the US compression fabrication business does not change the EBITDA ranges as presented. So for 2020 EBITDA, as adjusted should be between $120 million and $140 million. Our prior guidance assumed roughly a $15 million contribution from new processing, treating and water orders coming largely from the US market. Given the current market conditions, we have removed this from our guidance. Andrew in his earlier remarks laid out the other key assumptions in order to achieve the guidance. SG&A for the year is now forecast to be between $130 million and $140 million. As a reminder, our SG&A includes roughly $20 million of revenue base taxes associated with our South American business. We’ll continue to stress productivity and efficiencies as we look for opportunities to further reduce SG&A. Cash taxes to be roughly in a range of $20 million to $25 million and interest expense between $35 million and $40 million. Committed growth CapEx for 2020 is expected to be between $65 million and $75 million, with reimbursable CapEx around $20 million, and maintenance and other CapEx should be approximately $20 million. We have good visibility for the full year given our backlog and the contracted nature of our business, but there still remains some degree of uncertainty regarding timing of certain activities that can be impacted in our revenue. As well the risk provided insight on what we’re doing to collaborate with our customers in order to have mutually beneficial outcomes in these difficult and uncertain markets, which may also have short-term impacts. Turning to the second quarter, the ECO plant sales, I will not repeat, which was a contribution of $8 million in gross margin. We also continue to assume continued travel related and disruptions related to AMS, which will have a small impact. While our ECO business is contracted, we have included some short-term impacts to this segment as well based on the customer interactions Girish described. To summarize our view for the second quarter as adjusted EBITDA will be in the low $20 million range. There are no new product bookings included in the second quarter outlook or for that matter in the full year guidance. Clearly our guidance for the full year is greater than the second quarter or even the first half annualized. The second half step up is driven primarily by our backlog and in particular, the large Middle East project we won during the quarter. As well we have assumed a gradual return to more normal work routines within ECO and AMS. This is of a course is a difficult factor to call given the unpredictability of country and customer actions. And with that, I’ll now turn the call back over to Andrew for his closing remarks.

Thanks, Dave. As I reflect back, last year was a challenging year for the industry as it adjusted to new returns focus, an emphasis on capital discipline. Entering this year, we felt better about the market we were serving, underlined with the commercial successes we had in Q1. It has now become evident very quickly, that at least 2020 will prove to be possibly the most challenging year any of us have had in our careers. Our focus nevertheless remains twofold. First, protect the balance sheet, and second, we execute on key projects. We will control what we can control to ensure we protect the core of the organization and to set the company up to succeed in the coming years. Our strong liquidity position and balance sheet affords us the ability to weather these storms over the coming quarters. I believe our Middle East exposure will serve us well over the coming year and provide us with some additional opportunities in these challenging markets. I will reiterate what I said last quarter, we would expect 2021 to be a growth year for the company as we execute on our backlog and as the world returns to a new normalcy. Despite these times, I would like to leave you all again with a company where transitioned to. One, with a multibillion dollar contracted backlog, EBITDA margins greater than 20% that although requires investment, realizes significant returns on those investments well above its cost of capital, all while providing the consistency more aligned with an industrial business. With compression been a smaller part of our portfolio, our Product Sales segment will have a higher margins, predictable supply chain cycles and aligned to more mission critical infrastructure. This new model is much more stable, and given the criticality of our product offerings is much more resilient even if the market slows. This is the transformation that we are well into. And while the current environment may limit the number of large opportunities we had planned short-term, our strong backlog and diverse base of natural gas production focused facilities positions Exterran uniquely relative to many in this environment. And with that, I’ll now turn the call back to the operator.

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Kyle May with Capital One Securities. Please state your question.

Good morning. I wanted to well, first appreciate the updated outlook and assumptions as you’ve provided for the year. But I was wondering if you could walk through the different puts and takes of each segment in your new outlook to get us a better idea to kind of have a frame of the year?

Hey, Kyle, this is Dave. I guess just overall you know as I mentioned in the comments, if you take you know this quarter, second quarter or first half and annualize, you obviously have a step up as you mentioned and you know the vast majority of that is driven by things that are either contracted or in our product backlog. So you have probably the most significant step up would be on the Product side with the large order we talked about that we won in the first quarter will begin – we are beginning to executing that. So that’ll pick up in terms of its impact on revenue and margin in the third quarter and then further in the fourth quarter. We also have a couple of ECO contracts that are – will be kicking off late this quarter. So you have that as well. They’re smaller in terms of the overall impact between those two drivers. That is the far and away that in the vast majority. And we do, as we’ve mentioned in the comments have assumption that we do see a very gradual return to more normal activity around, particularly around travel. So, for example, on the AMS side, we need to be able to get people in and out of countries and have them mobile within a country. So there’s a bit of an improvement as a smaller assumption in the third quarter, but then in the fourth quarter relative to the second quarter a bigger impact. So that would be the – that’s kind of the general drivers of the changes.

Got it, that’s helpful. And the next question I was curious about was in the Product Sales segment of the business. I know you’ve been working on the strategic review of the US compression business or US compression fabrication, and it sounds like you’re getting a little bit closer, but just wanted to get your latest thoughts around when you expect to see the inflection point in those margins?

So Kyle, I mentioned in the – in my prepared remarks that we are working a dual path right now and we have been for some time. So we’re clearly working through the backlog. And that should be taken us through some time into the third quarter with backlog that we have in the facilities. We have been able to remain open at the facilities during the past several months with regards to focusing on the quality of the work and making sure that we safely exit the work content that we have in the facility as we go through the coming quarters. So, as we think about the next couple of months ahead of us, we have a dual process that we talked about. It’s been a very difficult environment to get anything done, but nevertheless, should we not get to a place where we have one of the alternatives then, we’ll in the Q2 earnings call, we’ll announce and update you on that current status at that point. And so both plans are working in parallel. We have been adjusting the structure of the facility, the cost of the organization that we’ve been working through and keeping our customers informed of that process. And so right now, depending on which outcome that we work through in the course of the next, I’d say five weeks to six weeks, we’ll get to a conclusion of the decision that we’ll announce and update you all at that point. We also indicated in the first quarter as we had higher revenue, and I think Q1 will be the higher revenue that we’ll see for our compression business. If you look at the outcome of that business, as we explained – as Dave explained, it was slightly above breakeven slightly at an EBITDA level. So if you actually back out the compression business from the first quarter, you’ll get to close to 20% EBITDA margin as a company, just from what happened in the first quarter. And so what we expect here over the course of the next three quarters or four quarters, and really as we look into 2021 and beyond, as we talked about high grade in the portfolio, and as we talk, in my final part of the prepared remarks in terms of a multibillion backlog contract and margins above 20%, hopefully you can start to see that becoming realized as a result of what we just delivered in Q1 and the indication of that. So once we get to that conclusion, we’ll communicate that to you, I think it’ll likely be at our Q2 earnings call. And then we’ll have some visibility into what that looks like for the balance of the year.

Okay, that’s very helpful. And one more for me, you touched on the ECO contract extensions, and I was just curious how the re-contracting compares to the prior contract and also versus your expectations?

Sure. Kyle, this is Girish. You know in terms of expectations, I’d say very positively. I think one of the important things to note is, we’ve been operating in Argentina for several decades. And this isn’t a contract that it’s, you know, coming up for the first time as a renewal. We’ve actually had it in operation for several years, gone through multiple rounds of renewals. So the characteristics are a little different than a contract that we have run for the initial term and then coming off for a renewal, which allows us to therefore keep our margins pretty much intact. You know the contract typically is made up of a variety of different factors, obviously price is one of them. Scope is another various other contractual terms. So we’ve been working very closely with our customer for several months and getting to this point, because it is a fairly long extension, and therefore a complex contract. And we’re very pleased as is the customer with the overall outcome, which gets them what they want and allows us to keep our margins pretty much intact.

Yeah that sounds great. All right, I’ll turn it back. Thank you.

Thanks, Kyle.

Thank you. [Operator Instructions] Our next question comes from Tim Monachello with AltaCorp Capital. Please state your question.

Hey, good morning, everyone. Thanks for all the detail in the prepared remarks. That’s great. First question I’ll start with here just on the water business. Just curious in the $120 million to $140 million 2020 guidance range, did I hear correctly there’s $15 million to $20 million that was previously included for water projects on the margin basis there?

Tim, it was actually – this is Dave. Tim that was actually a new product orders we sort of included both process and the treating and water you know again –

Okay got it.

Mark-to-market US market assumption.

Okay, got it. And then I was just curious if you could provide some detail around how that business has progressed in the current market environment. Have you seen the same slowdown in water as you have in your other business lines?

Yeah. So I think it’s really a business of two markets, as we’ve described, pretty much largely with the rest of the product business, we feel very good in the Middle East. We’ve got projects that are continuing to progress from a commercial bid activity. In the last five weeks or six weeks, we’ve been active, and still been working with our customers to spec and to scope projects that we see visibility for the second half of 2020. It’s very clear that in the last five weeks or six weeks when you’re trying to work through commercial propositions and various proposals and technical evaluations, doing them in people’s living room on zoom is not the most effective, but nevertheless, customers are still being working with us on that. So I’d say there has definitely been a little bit of a pause in terms of some of the timing that we saw on the projects. But the good news is that we haven’t seen a dramatic change in some of the long-term plans and the visibility that our customers have. I’d say here in the US a little bit of a different story for sure. Both on the assets that we have operate in, and the outlook, I think there’s a little bit more of an unclear picture right now as operators and people really work towards their ultimate production goals. And as the oil production slows for sure, we’re seeing that impact in the water needs. And so I’d say we’ll probably need another five weeks or six weeks to really understand the implications of what that means for us for 2021 with our water business here in domestic US. For the guidance that we gave, that was very little in the water business for the second half of this year. So there’s no real big material changes to what we’ve already guided. But here in the US paying close attention customer by customer, site by site, well by well to understand their needs and then internationally still seeing interested outlook and working towards some of the second half closure on maybe some of those projects.

Okay, very helpful. Thank you. Second question on the Product Sales margins. Understand there’s some under absorption in the second, sorry in the first quarter, and based on the guidance that you don’t see a ramp up in those large or I guess the manufacturing those larger product bookings till the second half, would you expect to see margins in that same range or lower in the second quarter for Product Sales?

Yeah, I think we’re going to still see a similar absorption impact in Q2 as we saw in Q1. So, from a mix standpoint, again, similar type margins, I think it’s probably safe to say and then as we go into the second half, we’ve got a couple of product orders in hand, the big one that we’ve talked about the Middle East, that’s kind of an engineering phase. So it’ll have a gradual pickup in terms of helping us with some of the fixed costs, first with the engineering team, and then as it transitions into the parts of that, that will be manufacturing. And then, as Andrew talked about, you’ve got the other piece, which is the compression piece, which again, we will hope to have an update by the end of the second quarter in terms of where we’re going with that, but you know, that business will resolve that and that will alleviate some of the pressure we have around fixed costs there, regardless which path we take.

Okay, great. Then the next one here, just in terms of the guidance as well. You mentioned that it includes an assumption that you’ll have better access internationally I guess borders opening up or the travel restrictions taken away. What – do you have a sense of what that guidance could look like if that doesn’t happen?

Yeah, I think it’s not a, I think when we gave that range we’ve kind of – we looked at this probably 15 different ways as you can imagine. And when we gave that range, we have scenarios in there, where it doesn’t – we don’t fall outside there. So that the low end of the range had some puts and takes, but that assumes somewhat of a continuation of these at least in the nearer term for the next couple of quarters.

Okay, got it. And then my last one –

Bottom end of the guidance.

Got you. And then just my last one on the renewals. Just curious if there’s any significant CapEx associated with that renewal? And if you have any other, you know, material and that are coming up that might be at risk in this environment?

Kyle this – Tim, sorry, this is Girish. No – no significant CapEx. As I mentioned earlier, you know, given that this is not the first cycle of renewal, we have done this a couple of times. There really isn’t a lot of incremental CapEx, as you know, it is a large fleet that we have in Latin America and Argentina, particularly. So there is maintenance CapEx that’s covered in the guidance that we mentioned, but other than that, not a significant amount. The other projects that we’ve talked about are already, you know, covered. They’re covered within the guidance that we have given and don’t see a significant change there.

Okay, understood. Thank you very much.

Ladies and gentlemen, there are no further questions at this time. I’ll turn it back to management to conclude. Thank you.

Thanks, everyone for dialing today and having an update on our first quarter earnings. We look forward to getting through the second quarter and coming back to you at the end with another update. So appreciate it, and have a great day.

Thank you. This concludes today’s conference. All parties may disconnect. Have a good day.