Enerflex Ltd

TSX:EFX

Q2-2025 Earnings Call

[Operator]

Good day, and thank you for standing by. Welcome to the Enerflex Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jeff Fetterly, Vice President, Corporate Development and Capital Markets. Please go ahead.

[Jeffrey Fetterly, executive]

Thank you, Marvin, and good morning, everyone. With me today are Preet Dhindsa, Interim President and CEO; Joe Ladouceur, Interim CFO; and Ben Park, Enerflex's Controller. During today's call, our prepared remarks will focus on 4 key areas: one, the continued strong performance of Enerflex's business; two, our outlook and Enerflex's strategic positioning; three, capital allocation, including our refined capital spending program for 2025 and direct returns to shareholders; and four, our progress on near- and long-term strategic priorities. Before I turn it over to Preet, I'll remind everyone 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 SEDAR+ and EDGAR profiles. As part of our prepared remarks, we will be referring to slides in our updated investor presentation, which is available through a link on this webcast and on our website under the Investor Relations section. I'll turn it over to Preet.

[Preet Dhindsa, executive]

Thanks, Jeff, and thank you all for joining us on this morning's call. We are pleased to report another strong quarter of financial and operating results that translated into a quarterly record for adjusted EBITDA. These results reflect solid performance across our geographies and business lines as well as our ongoing efforts to optimize and streamline our business. Our Energy Infrastructure and After-Market Services business lines continue to deliver steady performance and reinforce Enerflex's ability to generate sustainable returns across our global platform. Energy Infrastructure and After-Market Services contributed 65% of gross margin before depreciation and amortization in the second quarter of 2025, and we expect these business lines will continue to represent the core of Enerflex's profitability.

We also maintained solid visibility in our Engineered Systems business, supported by a healthy $1.2 billion backlog at the end of the second quarter. And now a few highlights from each of our business lines. The Energy Infrastructure business continues to perform well, supported by approximately $1.5 billion of revenue under contract. Our U.S. contract compression fleet is an important part of our Energy Infrastructure asset base and the fundamentals for this business remain strong, led by increasing natural gas production in the U.S. We're also pleased with the operational performance of our U.S. contract compression business, reflective of utilization remaining above 90% for the past 14 quarters and solid revenue per horsepower per month and profitability.

These KPIs are highlighted in Slides 18 and 19 of our investor presentation. Demand for new contract compression equipment in the U.S. remains strong. We exited the quarter with 456,000 horsepower and expect to be over 475,000 horsepower by the end of this year. New units are being deployed under multiyear contracts in core operating regions with a focus on larger horsepower natural gas and electric drive applications. Slide 16 and 17 highlight the international Energy Infrastructure business, which includes approximately 1.1 million horsepower of operated compression and 23 Build, Own, Operate and Maintain or BOOM projects in Bahrain, Oman and Latin America. Our 2 produced water projects in Oman continue to perform very well, and we commissioned an expansion of one project in early Q3, which is highlighted on Slide 20.

Our international Energy Infrastructure business is supported by approximately $1.3 billion of contracted revenue and an average contract term of approximately 5 years. Turning to After-Market Services. This business line benefited from increased activity levels and customer maintenance activities during the quarter. We expect these trends to continue throughout the remainder of 2025. On the Engineered Systems side, we maintained our backlog at $1.2 billion at the end of the quarter, consistent with the 8-quarter average ES backlog of approximately $1.2 billion. This sustained level of backlog over a 2-year period reflects stable demand for Enerflex-ES solutions across global energy infrastructure markets.

Enerflex recorded ES bookings of $365 million during the 3 months ended June 30, 2025, compared to $331 million during the same period of 2024 and the 8-quarter average of $329 million. The ES product line maintained a book-to-bill ratio calculated as bookings divided by revenue of 1.1x during the second quarter of 2025, indicating that new bookings are generally keeping pace with revenue recognition. The current balance between bookings and revenue supports near-term revenue visibility and reflects a stable demand environment. We expect ES revenue to remain steady in the near term and for gross margin from this business to align more closely with historical averages, reflective of a shift in product mix. Demand across the ES product line remains constructive as we continue to actively monitor near-term risks and uncertainties, including the impact of tariffs and commodity price volatility.

We believe the medium-term outlook for ES products and services is attractive, supported by anticipated growth in natural gas and produced water volumes across Enerflex's global footprint. Enerflex's priorities in 2025 include enhancing the profitability of core operations, leveraging the company's leading position in core operating countries to capitalize on expected increases in natural gas and produced water volumes and maximizing free cash flow to strengthen Enerflex's financial position, provide direct shareholder returns and invest in selective customer-supported growth opportunities. Before I turn the call over to Joe, I'd like to comment briefly on our leadership transition.

On March 19, Enerflex announced that Marc Rossiter stepped down as President, CEO and Director. Concurrently, I assumed the role as Interim President and CEO and Joe as Interim CFO. The Board is undertaking a comprehensive search to identify the company's permanent CEO and has retained a leading global search firm to assist with this process. The search process is making good progress and will not be -- and we will not be commenting further. With that, I'll turn it over to Joe to speak to the financial side.

[Joe Ladouceur, executive]

Thank you, Preet, and good morning, everyone. I'll start with highlights from the second quarter. We reported consolidated revenues of $615 million compared to $614 million in Q2 '24 and $552 million in Q1 2025. Gross margin before depreciation and amortization was $175 million or 29% of revenue compared to $173 million or 28% of revenue in Q2 2024 and $161 million or 29% of revenue during Q1 2025. As Preet referenced, the EI and AMS product lines generated 65% of consolidated gross margin before depreciation and amortization during Q2 2025, and we continue to expect similar results for the remainder of the year. Energy Infrastructure performance continued to be strong with gross margin before D&A of $86 million compared to $77 million in Q2 '24 and $86 million in Q1 '25.

After-Market Services gross margin before D&A was 23% in the quarter, benefiting from strong customer maintenance programs. SG&A was $61 million for the 3 months ended June 30, 2025, down $14 million from the prior year period. This is driven by cost-saving initiatives, improved operational efficiencies and the absence of onetime integration costs that were incurred in Q2 of 2024. Adjusted EBITDA was $130 million, which represents a new quarterly record for Enerflex. This compares to $122 million in Q2 '24 and $113 million during the first quarter of 2025. Cash provided by operating activities before changes in working capital or FFO increased to $89 million in Q2 2025 compared to $63 million in Q2 '24 and $62 million in the first quarter of 2025.

This is a function of higher adjusted EBITDA, lower net finance costs and lower current tax expense. Free cash flow was a use of cash of $39 million in Q2 2025 compared to a use of cash of $4 million during Q2 '24 and a source of cash of $85 million during Q1 2025. Compared to the second quarter of 2024, an increase in FFO was more than offset by an increased growth capital spending and a build in net working capital, notably strategic inventory investments to support future projects, including work in progress related to EI assets and purchases of select major components with increasing lead times, income taxes payable and finally, executive transition costs.

Compared to the first quarter of 2025, net working capital was also impacted by an increase in accounts receivable, which related to strong revenue recognition during the latter part of the quarter, which we expect to normalize. Now I'd like to touch on our financial position. We exited the quarter with net debt of $608 million, which included $71 million of cash and available liquidity of $630 million compared to $672 million in the first quarter. Enerflex's bank-adjusted net debt-to-EBITDA ratio was approximately 1.3x at the end of Q2 '25. That is down from 2.2x at the end of Q2 2024 and consistent with Q1 2025. Further details are included on Slide 13 of our investor presentation. In early Q3, Enerflex entered into an amended and restated credit agreement with respect to its syndicated secured revolving credit facility, the RCF.

The maturity date of the RCF has been extended by 3 years to July 11, 2028, and availability is unchanged at $800 million. Now let me shift to capital allocation. First, on our CapEx plans. We invested $71 million in the business, consisting of $34 million in capital expenditures, $23 million of which was for growth and $37 million for expansion of an EI project in our Eastern Hemisphere region that was commissioned in Q3 2025 and is now accounted for as a finance lease. Full year 2025 capital spending is now expected to approximate $120 million compared to our previous guidance of $110 million to $130 million. This includes approximately $60 million earmarked for growth initiatives compared to the previous guidance of $40 million to $60 million.

Growth investment will focus on customer-supported opportunities, primarily in the U.S. contract compression business line, where the fundamentals remain strong. Maintenance and PPE capital expenditures are now expected to be approximately $60 million compared to our prior guidance of $70 million, and this is reflective of our continued efforts to realize efficiencies across our operations. And now I'll turn to direct shareholder returns. Enerflex returned $18 million to shareholders in Q2 through dividends and share repurchases. Our NCIB commenced on April 1 and authorizes the company to repurchase up to approximately 6.2 million shares through the end of March 2026. Enerflex repurchased 1,899,200 common shares at an average price of CAD 10.08 per share during the second quarter.

Going forward, capital allocation decisions will be based on delivering value to Enerflex shareholders and measured against Enerflex's ability to maintain balance sheet strength. In addition to disciplined growth capital spending, share repurchases and dividends, Enerflex will also consider further debt reduction to strengthen its balance sheet and lower net finance costs. Unlocking greater financial flexibility positions the company to respond to evolving market conditions and capitalize on opportunities to optimize its debt stack. I want to thank Enerflex employees for their efforts in delivering strong operational and financial results. We continue to prioritize profitability and operational resilience to ensure Enerflex delivers strong and reliable returns for our shareholders. With that, I will turn the call back to Preet for closing remarks.

[Preet Dhindsa, executive]

Thanks, Joe. We made significant operational, financial and strategic strides in recent quarters. I want to thank the Enerflex team across our global operations for their efforts delivering these results. We believe the long-term fundamentals driving our growth, including global energy security and the continued increase in demand for natural gas remain firmly in place. We believe Enerflex is well positioned for those fundamentals, and we are focused on taking advantage of opportunities across our global platform. I look forward to building on our progress. And with that, we will now turn the call to the operator for questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Keith MacKey of RBC Capital Markets.

[Keith MacKey, analyst]

Just curious if you can comment a little bit more on what's driving the tightness in utilization in U.S. contract compression. How sustainable do you think that is? And ultimately, what underpins your confidence in increasing your investment in that division now?

[Jeffrey Fetterly, executive]

Keith, it's Jeff. As we've talked about in prior quarters, we're seeing a favorable supply-demand balance across the U.S. contract compression market. And the supply side is very much a function of the discipline we're seeing from the 3 largest competitors. Underlying that is the market continues to grow nicely in line with the supply growth from a natural gas standpoint in the U.S. as well. As we've talked about in previous quarters, the contract durations that we're signing for both new equipment and on renewals of existing equipment have continued to lengthen over the last year.

And our expectation is that we'll continue to see those fundamentals in place. So the increase in our guidance from a growth capital standpoint to the top end of the range is to support the continued demand that we're seeing from customers and opportunities across the U.S., especially in the Permian. And we believe those investments are derisked by the longer duration contracts that have been put in place to support those assets.

[Keith MacKey, analyst]

Understood. Can you just comment also a little bit more on the type of growth you expect to see out of that division over the next 2, 4-plus quarters to the extent that you can kind of map the investment and the market into your financial results?

[Jeffrey Fetterly, executive]

So from a fleet side, we exited Q1 at just under 450,000 horsepower. We're at 456,000 coming out of the end of the quarter ended June. As we've talked about in guidance, the expectation is that the fleet will be over 475,000 horsepower by the end of the year. We do expect those additions to be more weighted to the fourth quarter than the third quarter, but those assets as they're deployed, go on contract and go on rent.

So we'd expect the financial performance of the business to move concurrently as the fleet continues to grow. As Preet talked about in his prepared remarks, our expectation and visibility is for utilization and pricing to remain stable and attractive across that business. So we don't expect any significant impact from that side in terms of the financial performance for our contract compression business.

[Operator]

[Operator Instructions] And our next question comes from the line of Tim Monachello of ATB Capital Markets.

[Tim Monachello, analyst]

I was just curious, press release mentioned expanding the North American manufacturing facility. Can you elaborate on what you're doing there?

[Preet Dhindsa, executive]

Can you just repeat the last part of that, Tim?

[Tim Monachello, analyst]

Right. I'm just wondering if you can elaborate on what you're doing with that expansion.

[Preet Dhindsa, executive]

Yes. So we took on a little bit more land adjacent to our U.S. facility in Houston. We had the option to take it. Our view is that given the constructive natural gas macro, we've got great production out of that facility and just want to keep optionality for future growth as and when appropriate. We've got a significant facility there as well as Broken Arrow and the opportunity came up to take the land. So we did it. And once again, it just positions us well for taking advantage of any further follow-on activity that we can execute on through that plant.

[Tim Monachello, analyst]

Okay. But are you running anywhere close to capacity in your current manufacturing facilities in North America?

[Preet Dhindsa, executive]

We still have a fair bit of capacity, and we've got a great talent pool, and we can flex up and down as necessary with that talent pool in Houston as we're talking about primarily. But overall, we've got sufficient capacity, and that additional land creates optionality for future growth in the business, the ES side of the business.

[Tim Monachello, analyst]

Okay. Got it. Wondering if you can perhaps talk a little bit about what CapEx might look like in 2026 and beyond and I guess your longer-term expectations as they stand for growth of the U.S. compression fleet.

[Preet Dhindsa, executive]

I'll start with it and maybe Jeff will lead into that. So this -- recently, we just announced $60 million growth that primarily earmarked for the U.S. contract compression fleet. We do feel good about the depth of the market and the constructive natural gas macro, as we mentioned, and continue to build to the end of this year in the U.S. fleet up around 475,000 horsepower from [ 428,000 ] at the end of last year. But overall, growth is a very important lever that we can deploy free cash flow. And we do feel the market in the U.S. fleet, highly constructive, good economics, meaning utilization and revenue per horsepower per month. So we feel good about what we've invested and plan to invest this year and will follow on in 2026.

[Jeffrey Fetterly, executive]

Tim, as Joe mentioned in his prepared remarks around the working capital side, we've been making strategic investments on the inventory side reflective of increasing lead times on equipment, especially the engine side. And so we're starting to make commitments for CapEx and growth for 2026 to reflect the realities of the supply chain and also trying to align ourselves with the customers' planning cycle and our strategic partnerships that we have in that business. And so we're still formulating our formal plans for 2026, but we are certainly progressing quicker than in prior years associated with mapping out our growth intentions going into next year.

[Tim Monachello, analyst]

Okay. Got it. And I guess, given that you're a vertically integrated player in the U.S. rental compression space, what do you think your time to market is for new compression versus what it might be for some of your competitors that use third-party manufacturing?

[Jeffrey Fetterly, executive]

A little bit of a subjective question because it depends on application, equipment and scheduling. But we still believe that our time to market is a competitive advantage relative to other players in the market and those especially that are not vertically integrated.

[Tim Monachello, analyst]

And you'd have a cost advantage as well, I imagine?

[Jeffrey Fetterly, executive]

We believe so, yes.

[Tim Monachello, analyst]

Okay. Bookings number was really strong in the quarter. Was there anything lumpy in that? And can you provide any commentary on what you're seeing on the leading edge in the first sort of month or so of Q3?

[Jeffrey Fetterly, executive]

As Preet talked about in his prepared remarks, we saw a much more normalized reflective order structure during the second quarter. As we talked about back in May, first quarter bookings for us were partly impacted by a pull forward into the fourth quarter, but then also some selective pauses on the customer side. We saw a much more normalized cadence for order flow in the second quarter. To your specific question, there's nothing significant and lumpy in the second quarter bookings that we don't expect to be normal course.

As we look forward into the third and fourth quarters, we continue to see good depth and good opportunities within the market. They touch on both the compression and the gas processing or deep cut side. And we expect, as we've talked about sort of when you look at the 8-quarter average for bookings at about $330 million, we continue to target a book-to-bill ratio of around 1x in coming quarters.

[Tim Monachello, analyst]

Okay. And you guys have been calling for a normalization in margins in the ES segment for a number of quarters now hasn't really come to fruition. How much, I guess -- can you talk about when you expect that normalization to start to hit financials?

[Jeffrey Fetterly, executive]

You've seen some indications of it, but the team has done a fantastic job of executing and delivering margins that are higher than we've seen on a historical basis. The guidance that we're providing, we believe, is reflective of embedded margin, but also the mix that we're seeing and the shift more towards compression-based work relative to gas processing work. So we're still comfortable with margins trending towards the long-term average, but also very much reflective of the strong operational execution our teams have been doing as well.

[Tim Monachello, analyst]

So do you think it's possible that if your teams continue to execute, you can continue to maintain margins at or above the level that you've seen over the last few quarters?

[Jeffrey Fetterly, executive]

We continue to challenge them to deliver strong margins, but our guidance is reflective of what we believe a good base case is today.

[Tim Monachello, analyst]

Okay. And then last one for me, I promise. G&A was a strong number in Q2, down from Q1. Where do you see G&A trending as we go forward in '25 and into the out years?

[Preet Dhindsa, executive]

Tim, as we've been mentioning over several quarters, integration was done last year. We've got some synergies out of integration. Full run rate synergies are going to be achieved this year and next year. So we feel good about the level of G&A, and that's a high focus of ours as we continue to simplify our business, get out legal entities that are somewhat dormant and just look at our geographic footprint. So we're consciously looking at ways to simplify and optimize our business and G&A is a key metric that we continually focus on.

[Operator]

I'm showing no further questions at this time. I would now like to turn it back to Preet Dhindsa for closing remarks.

[Preet Dhindsa, executive]

Since there are no further questions, thank you for joining today's call, and we look forward to providing you with our third quarter financial results in November.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.