Enerflex Ltd. Q3 FY2024 earnings call

• The company had strong operational performance in Q3 with energy infrastructure and aftermarket services delivering steady results. In the U.S., the contract compression fleet operated at 94% utilization during the quarter across 428,000 horsepower, generating $37 million in revenue and 70% gross margin before D&A. International energy infrastructure includes approximately 1.5 million horsepower of operated compression and 26 BOOM projects, supported by $1.5 billion of contracted revenue. Aftermarket services benefited from strong activity levels and customer maintenance activities. Engineered systems maintained a backlog of $1.3 billion with $349 million in bookings. The company successfully reduced leverage to within the target range of 1.5x to 2.0x and the Board approved a 50% increase to the quarterly dividend.

Consolidated revenue for the third quarter was $601 million, up from $580 million in Q3 '23. Gross margin before depreciation and amortization was $176 million (29% of revenue). Energy infrastructure gross margin before D&A was $91 million, an increase from $77 million in Q3 '23. Aftermarket services gross margin before D&A was 19% for the quarter. Adjusted EBITDA was $120 million. Cash provided by operating activities was $98 million, with a working capital recovery of $35 million. Free cash flow was $78 million. Enerflex exited the quarter with net debt of $692 million, including $95 million of cash. Energy infrastructure in the U.S. had revenue of $37 million and gross margin before D&A of 70% in Q3 2024. International energy infrastructure has approximately $1.5 billion of contracted revenue. Engineered systems recorded bookings of $349 million and maintained a backlog of $1.3 billion.

• Revised 2024 capital spending guidance to $80 million to $90 million from the previous range of $90 million to $110 million. 2025 growth capital spending is expected to remain below the long-term historical average. The Board increased the quarterly dividend by 50%. Enerflex expects ongoing interest savings from the redemption of $62.5 million of its 9% notes due 2027 to materially exceed the redemption premium paid.

Q: How often do you think you'll evaluate the dividend? And is there the potential that we could see a change in the target leverage range?

A: Marc Rossiter stated that he wouldn't speculate or provide long-term guides, and he is happy with the target leverage range of 1.5x to 2.0x.

Q: Could you just give us a bit more context in terms of the potential quantum in terms of total horsepower adds for selectively expanding the U.S. contract compression fleet, as well as sort of minimum contract duration terms?

A: Marc Rossiter said the company will provide further guidance in the first week of January 2025 regarding capital spending plans for 2025. They are looking to make investments with best customers under multiyear contracts, with recent contracts in the contract compression business having initial terms in excess of 4 years.

Q: I just want to understand a little bit around the capital return strategy and the decision to go with a sort of token dividend increase versus an NTIB. Is that a reflection of just trying to preserve capital considering, I mean, assuming it's an NTIB, it would cost a lot of money or is there other considerations there?

A: Preet Dhindsa responded that now being in the target leverage range, the priority is to enhance shareholder returns alongside further debt repayment. The initial step with the Board approval is a 50% increase in the dividend to CAD$0.0375 per quarter, and they will continue to evaluate key financial priorities on a quarter-by-quarter basis.

Q: How should we think about the engineered systems gross margin uptick in the quarter? Is that something we should expect going forward?

A: Jeff Fetterly said there were three factors in Q3: higher overhaul work in the Middle East, strong asset utilization, and rate increases. Overhaul is more sporadic and shouldn't be included in forward-looking outlooks, utilization should be steady, and rate increases should largely stay, so Q3 margin wasn't typical going forward.

Q: In the engineered systems business, how should we bridge the gap regarding backlog and margin commentary?

A: Marc Rossiter said they are happy with the $1.3 billion backlog with significant breadth and depth of products and regions. The embedded margin is moving back closer to long-term averages due to weak natural gas prices in North America and other factors, with results averaging back closer to previous couple of years' averages