Enerflex Q2 2025 Earnings Call Transcript

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Provided by Quartr
August 7, 2025

Key Takeaways

  • Positive Sentiment: Enerflex reported a record quarterly adjusted EBITDA of $130 million, with Energy Infrastructure and Aftermarket Services generating 65% of gross margin before depreciation and amortization.
  • Positive Sentiment: Utilization in the U.S. Contract Compression fleet remained above 90% for the 14th consecutive quarter, and the fleet is expected to surpass 475,000 horsepower by year-end under multiyear contracts.
  • Neutral Sentiment: Engineered Systems maintained a backlog of $1.2 billion with Q2 bookings of $365 million (1.1× book-to-bill), though gross margins are anticipated to normalize amid tariff and commodity price risks.
  • Negative Sentiment: Free cash flow was a use of cash of $39 million in Q2 2025, driven by growth CapEx, strategic inventory investments, working capital build-up, and executive transition costs.
  • Positive Sentiment: Enerflex extended its $800 million revolving credit facility to July 11, 2028, preserving $630 million of liquidity and achieving a net debt/EBITDA ratio of 1.3×, underscoring financial strength.
AI Generated. May Contain Errors.
Earnings Conference Call
Enerflex Q2 2025
00:00 / 00:00

There are 6 speakers on the call.

Speaker 4

Good day, and thank you for standing by. Welcome to the Enerflex Ltd. second quarter 2025 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press *11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press *11 again. Please be advised that today's conference is being recorded. I'll now hand the conference over to our first speaker today, Jeff Fetterly, Vice President of Corporate Development and Capital Markets. Please go ahead.

Speaker 2

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 four 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.

Speaker 2

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 CDAR+ 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.

Speaker 1

Thanks, Jeff, and thank you all for joining us on this morning's call. We are pleased to report another strong quarter of financial 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 maintain solid visibility on our Engineered Systems business, supported by a healthy $1.2 billion backlog at the end of the second quarter.

Speaker 1

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.

Speaker 1

New units are being deployed under multi-year contracts in core operating regions, with a focus on larger horsepower natural gas and electric drive applications. Slides 16 and 17 highlight our 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 two 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 five 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.

Speaker 1

On the Engineered Systems side, we maintained our backlog at $1.2 billion at the end of the quarter, consistent with the eight-quarter average U.S. backlog of approximately $1.2 billion. This sustained level of backlog over a two-year period reflects stable demand for Enerflex's U.S. solutions across global energy infrastructure markets. Enerflex recorded U.S. bookings of $365 million during the three months ended June 30, 2025, compared to $331 million during the same period of 2024, and the eight-quarter average of $329 million. The U.S. product line maintained a book-to-bill ratio calculated at bookings divided by revenue of 1.1 times 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 U.S.

Speaker 1

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 U.S. 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 U.S. products and services is attractive, supported by anticipated growth in natural gas and produced water volumes across Enerflex's global footprints. Enerflex's priorities in 2025 include enhancing the profitability of core operations, leveraging the company's legal 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.

Speaker 1

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 we will not be commenting further. With that, I'll turn it over to Joe to speak to the financial side.

Speaker 2

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 2024 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 Energy Infrastructure and After-Market Services 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 depreciation and amortization of $86 million compared to $77 million in Q2 2024 and $86 million in Q1 2025.

Speaker 2

After-Market Services gross margin before depreciation and amortization was 23% in the quarter, benefiting from strong customer maintenance programs. SG&A was $61 million for the three 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 one-time integration costs that were incurred in Q2 2024. Adjusted EBITDA was $130 million, which represents a new quarterly record for Enerflex Ltd. This compares to $122 million in Q2 2024 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 2024 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.

Speaker 2

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 2024 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 increase in gross capital spending and a build in net working capital. Notably, strategic inventory investments to support future projects, including work in progress related to Energy Infrastructure 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.

Speaker 2

We exited the quarter with a 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 1.3 times at the end of Q2 2025. That is down from 2.2 times 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 three years to July 11, 2028, and availability is unchanged at $800 million. Now, let me shift to capital allocation. First, on our CapEx plans.

Speaker 2

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 Energy Infrastructure 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.

Speaker 2

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 authorized 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 $10.08 Canadian 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.

Speaker 2

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.

Speaker 1

Thanks, Joe. We've 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.

Speaker 4

Thank you. At this time, we'll conduct the question-and-answer session. As a reminder, to ask a question, you will need to press *11 on your telephone and wait for your name to be announced. To withdraw your question, please press *11 again. Please stand by while we compile the Q&A roster. Our first question comes from a line of Keith MacKay of RBC Capital Markets. Your line is now open.

Speaker 3

Oh, hi. Good morning. 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? Ultimately, what underpins your confidence in increasing your investment in that division now?

Operator

Morning. Morning, 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 three 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. 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.

Operator

We believe those investments are de-risked by the longer duration contracts that have been put in place to support those assets.

Speaker 3

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, you know, two, four-plus quarters, to the extent that you can kind of map the investment and the market into, you know, your financial results?

Operator

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, end of 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. 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. We don't expect any significant impact from that side in terms of the financial performance for our contract compression business.

Speaker 3

Understood. That's it for me. Thanks very much.

Speaker 4

Thank you. One moment for our next question. As a reminder, to ask a question, you will need to press *11 on your telephone. Our next question comes from the line of Tim Monachello of ATB Capital Markets. Your line is now open.

Speaker 4

Hey, good morning, everyone. Can you hear me?

Speaker 3

Yeah, good morning, Tim.

Speaker 3

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

Speaker 3

Sorry, can you just repeat the last part of that, Tim?

Speaker 3

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

Speaker 3

Yeah, 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. It just positions us well for taking advantage of any further follow-on activity that we can execute on through that plant.

Speaker 3

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

Speaker 3

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. Overall, we've got sufficient capacity, and that additional land creates optionality for future growth of the business, the U.S. side of the business.

Speaker 3

Okay, got it. I'm 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.

Speaker 3

I'll start with it. Maybe Jeff will lead into that. Recently, we just announced $60 million growth, 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. 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 is highly constructive, good economics, meaning utilization and revenue per horsepower per month. We feel good about what we've invested and plan to invest this year and will follow on in 2026.

Operator

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. 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 customer's planning cycle and our strategic partnerships that we have in that business. 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 and growth intentions going into next year.

Operator

Okay, got it. 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?

Operator

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

Operator

You'd have a cost advantage as well, I imagine.

Operator

We believe so, yes.

Operator

Okay. Booking summary is 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?

Operator

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 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.

Operator

We expect, as we've talked about, sort of when you look at the eight-quarter average for bookings at about $330 million, we continue to target a book-to-bill ratio of around one time in incoming quarters.

Operator

You had been calling for a normalization in margins in the U.S. segment for a number of quarters now. It hasn't really come to fruition. How much can you talk about when you expect that normalization to start to hit financials?

Operator

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 in the shift more towards compression-based work relative to gas processing work. 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.

Operator

Do you think it's plausible 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 two quarters?

Operator

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

Operator

Okay. The 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 2025 and into the out years?

Speaker 3

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. 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 of legal entities that are somewhat dormant, and just look at our geographic footprint. We're consciously looking at ways to simplify and optimize our business, and G&A is a key metric that we continually focus on.

Speaker 3

Okay. Appreciate it. I'll turn it back. Congrats on a great quarter.

Operator

Thanks, Tim.

Speaker 3

Thank you.

Speaker 4

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

Speaker 1

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.

Speaker 4

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

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