Enerflex Ltd. Q2 FY2024 earnings call

• Strong operational results led to a high watermark for adjusted EBITDA. - Energy Infrastructure and Aftermarket Services delivered steady performance, with Energy Infrastructure having ~$1.6 billion in revenue under contract and U.S. Contract Compression fleet at 94% utilization. - Engineered Systems had a $1.3 billion backlog, with favorable product mix and stronger execution. - Aftermarket Services benefited from increased activity levels and customer maintenance. - Cryogenic natural gas processing facility in Kurdistan had force majeure declared, with work suspended. - Generated $72 million of free cash flow in H1 2024; full year 2024 capital spending expected at low end of $90M-$110M range. - Focus on enhancing financial flexibility, repaying debt, improving leverage ratio, and lowering net financing costs.

The Energy Infrastructure and Aftermarket Services business lines generated 62% of the gross margin before depreciation and amortization during the quarter. Energy Infrastructure had approximately $1.6 billion of revenue under contract, with the U.S. Contract Compression fleet operating at 94% utilization, generating $37 million in revenue and 62% gross margin before D&A in Q2 2024. The International Energy Infrastructure business had ~1.5 million horsepower of compression, over 25 natural gas plants, etc., with remaining contract tenor ~5.5 years and over 50% of revenue from the Middle East. Aftermarket Services benefited from increased activity levels, with 23% gross margin before D&A. Consolidated revenue for Q2 2024 was $614 million, up from $579 million in Q2 2023. Gross margin before depreciation and amortization was $173 million (28% of revenue), and adjusted EBITDA was $122 million.

• Full year 2024 capital spending expected at low end of $90M-$110M guidance range. - Target bank adjusted net debt to EBITDA ratio of 1.5 to 2 times over medium-term. - Expect net working capital movement to be modest source of cash in H2 2024. - Board declared quarterly dividend of CAD 0.025 per share payable October 2, 2024.

• Near-term impact of weak natural gas prices on customer demand, notably in North America. - Force majeure declared on the modularized cryogenic natural gas processing facility in Kurdistan, with work suspended.

Q: How are you thinking about booking activity in relation to rig count and commodity price?

A: Engineered Systems backlog traditionally lags rig count by 6-9 months. Q2 bookings were better than expected, driven by liquids infrastructure. We're watching gas price weakness, but cryogenic side still has prospects.

Q: Talk about CapEx and leverage target. How are you driving CapEx to lower end of range?

A: Being judicious in deploying capital, focusing on free cash flow and hitting leverage target. Maintenance and growth CapEx are being refined; back half of year expected to be constructive for free cash flow.

Q: Margins and optimization potential. Are margins strong due to synergies or structural factors? Any optimization in regions?

A: Margins had strength from mix and execution, but gas price weakness affects compression margins. Mid-teens gross margin before D&A more realistic. Don't draw long-term conclusions from quarterly regional results; focus on improving margins across regions.