Earnings Call Transcript - EFXT Q1 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Enerflex First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Fetterly, Vice President, Corporate Development and Capital Markets. Please go ahead.

Jeff Fetterly, Vice President, Corporate Development and Capital Markets

Thank you, Michelle, 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 three key areas: continued strong performance of Enerflex's business and our outlook; capital allocation, including planned spending and direct returns to shareholders; and 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 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 plus 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 for comments.

Preet Dhindsa, Interim President and CEO

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. Our Energy Infrastructure and Aftermarket Services business lines continue to deliver steady performance and reinforce Enerflex's ability to generate sustainable returns across our global platform. Energy infrastructure and aftermarket services contributed 70% of our gross margin before depreciation and amortization in the first quarter of 2025. We expect these business lines will continue to represent the core of Enerflex's profitability in 2025. Our strong operational performance and focus on maximizing free cash flow have resulted in a rapid deleveraging of our balance sheet. We exited the first quarter of 2025 at 1.3 times compared to 1.5 times at the end of Q4 2024. Now, a few highlights for each of our business lines: the Energy Infrastructure business continues to perform well across our three core regions: The US, Latin America, and The Middle East. In the US, the fundamentals for contract compression remained strong, led by expected increases in natural gas production, notably in the Permian. We're pleased with the operational performance of our US contract compression business, reflecting utilization at the mid-90% range for the quarter, with revenue per horsepower per month and profitability showing continued momentum. Slides 18 and 19 of our investor presentation highlight our fleet composition and the strong relative operating performance of this part of our business. Demand for new contract compression equipment in the US remains strong. We added approximately 20,000 horsepower during the quarter to exit at 448,000 horsepower across our fleet. They expect to be over 475,000 horsepower by the end of this year. 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. Slide 16 and 17 highlight our international energy infrastructure business, which includes approximately 1.2 million horsepower of operated compression and 24 build, own, operate, and maintain or broom projects in The Middle East and Latin America. Our two produced water projects in Oman continue to perform very well, and we are in the process of expanding one of these sites, which we highlight 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 aftermarket services, this business line benefited from strong activity levels, including customer maintenance activities. We're especially pleased with the performance of our AMS business in countries where Enerflex also operates EI assets, reflective of differentiated solutions and a strong competitive position in core countries. On the Engineered Systems side, we recorded bookings of $205 million during Q1. First quarter bookings were tempered by accelerated customer activity in the latter part of the fourth quarter of 2024, which resulted in select orders being pulled forward and customers pausing some decisions on expenditures due to commodity price volatility and evolving market conditions. We continue to have a strong ES backlog exiting Q1 2025 with approximately $1.2 billion, the majority of which is expected to convert into revenue over the next 12 months. During 2025, ES gross margins are expected to align more closely with historical averages, reflecting both weaker domestic natural gas prices through much of 2024 and a shift in product mix. While near-term ES revenues are expected to remain steady, Enerflex continues to closely monitor evolving market conditions and increased near-term uncertainty, including the impact of tariffs and lower oil prices, and we will adjust our business as appropriate. The company expects to be partially protected from the direct and indirect impact of tariffs through its diversified operations and ongoing risk management efforts. Enerflex's operations in the USA, Canada, and Mexico are largely distinct in client partners and projects they serve. The United States is Enerflex's largest operating region, generating 45% of consolidated revenue on a trailing 12-month basis by destination of sale. We believe the company is well-positioned to benefit from growth in domestic energy production. Enerflex's operations in Canada and Mexico generated 11% and 3% of consolidated revenue on a trailing 12-month basis, respectively. Despite increased near-term risk and uncertainty for the ES product line, recent domestic natural gas prices have been constructive, and the medium-term outlook for ES products and services remains attractive, supported by anticipated growth in the natural gas produced water volumes across Enerflex's global footprint. I want to reiterate Enerflex's priorities in 2025. These 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 opportunities for growth. Before I turn the call over to Joe, I would like to comment briefly on our recently announced 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 Ladouceur as Interim CFO. The Board is undertaking a comprehensive search to identify the company's permanent CEO and has retained a global executive search firm to assist with this process. The search process is making good progress, but we will not be commenting further. With that, I'll turn it over to Joe to speak about the financial side.

Joe Ladouceur, Interim CFO

Thank you, Preet, and good morning, everyone. Enerflex delivered strong first quarter results, and we are particularly pleased with our ongoing progress in efficiently managing working capital, lowering net finance costs, and reducing the company's leverage ratio. I'll start with highlights from the first quarter. We recorded consolidated revenues of $552 million compared to $638 million in Q1 2024 and $561 million in Q4 2024. Gross margin before depreciation and amortization was $161 million or 29% of revenue compared to $119 million or 19% of revenue in Q1 2024 and $174 million or 31% of revenue during Q4 2024. ES gross margin before depreciation and amortization decreased compared to Q4 due to product mix. As Preet referenced, the EI and AMS product lines generated 70% of consolidated gross margin before depreciation and amortization during Q1 2025, and we continue to expect approximately 65% for the full year of 2025. Adjusted EBITDA was $113 million compared to $69 million in Q4 2024 and $120 million during Q4 2024. The year-over-year increase in adjusted EBITDA was primarily due to costs recognized related to an international ES project in Q1 2024. Energy infrastructure performance continued to be strong with gross margin before D&A of $86 million compared to $80 million in Q1 2024 and $86 million in Q4 2024. Aftermarket services gross margin before D&A was 22% in the quarter, benefiting from strong customer maintenance programs. Enerflex's SG&A of $57 million was $21 million lower year-over-year and down $35 million on a sequential basis, mainly due to decreased share-based compensation and lower depreciation and amortization expense. Cash provided by operating activities was $96 million in Q1 2025, which included a working capital recovery of $34 million. We are pleased with our ongoing global efforts to efficiently manage working capital. Free cash flow increased to $85 million in Q1 2025 compared to $72 million during Q1 2024 and $76 million during Q4 2024, primarily due to lower maintenance capital spend. Now I'd like to touch on our balance sheet and deleveraging. We exited the quarter with net debt of $564 million, which included $75 million of cash and available liquidity of $672 million compared to $614 million in Q4. As a result of our continued focus on financial discipline and operational execution, we have repaid $433 million of debt since the beginning of 2023. Our leverage ratio was 1.3 times at the end of Q1. Further details are included on slide 13 of our investor presentation. Let me shift now to capital allocation. First on our CapEx plans. We invested $33 million in the business during the quarter, consisting of $14 million capital expenditures, primarily for maintenance and $19 million for the expansion of an EI project in the eastern hemisphere that will be accounted for as a finance lease. Enerflex is targeting a disciplined capital program in 2025 with total capital expenditure guidance of $110 million to $130 million, which is unchanged. This includes $40 million to $60 million for growth capital expenditures. Similar to 2024, disciplined capital spending will be focused on customer-supported opportunities, with the majority of our growth focused on expanding our US contract compression fleet. We expect to grow our fleet to over 475,000 horsepower by the end of 2025 with new units deployed under multi-year contracts in core operating regions. To direct shareholder returns, Enerflex returned $6 million to shareholders through dividends in Q1. Our NCIB commenced on April 1 and authorized the company to repurchase up to approximately 6.2 million shares through March 2026. During April 2025, Enerflex repurchased 690,500 common shares at an average price of CAD10.15 per share. 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 given evolving market conditions. In addition to increases in the company's dividend, share repurchases, and disciplined growth capital spending, 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. Finally, I want to thank Enerflex's employees for their efforts in delivering continued strong operational and financial results. Our focus remains on generating sustainable free cash flow, further improving balance sheet health, and positioning the company for long-term growth and value creation. With that, I will turn the call back to Preet for his closing remarks.

Preet Dhindsa, Interim President and CEO

Thanks, Joe. We've made significant operational, financial, and strategic strides in recent quarters. Despite increasing near-term risk and uncertainty, the fundamental drivers behind our business remain intact: global energy security and the shift towards low emissions natural gas. Each of our business lines are delivering solid results that we believe are all well positioned to benefit from these fundamental drivers. Moving forward, we're sharpening our focus on boosting profitability and strengthening the resilience of our core operations, ensuring Enerflex generates sustained, attractive returns for shareholders over the long term. I look forward to building on our progress. And we'll now turn the call back over to the operator for questions.

Operator, Operator

Thank you. Our first question is going to come from the line of Michael Barth with Raymond James. Your line is open. Please go ahead.

Michael Barth, Analyst

I was just wondering if you can comment on bookings trajectory into the second quarter, like are you seeing a rebound from the first quarter, just pace? Or are there sort of more deferrals?

Preet Dhindsa, Interim President and CEO

Yes. Thanks, Michael. So bookings, as we know, Q1 was a little bit light at $205 million. As noted, some of the activity was pulled into Q4, which is quite constructive. What we're seeing in Q1 and Q2 is some of our customers and their end customers tempering some of the decisions, especially in Q1. Backlog is good at $1.2 billion. What we're seeing now is continued depth and opportunities in the market, both processing and compression. The question will be the timing and when these hit, but we continue to feel good. We felt that Q1 was a little light relative to Q4, but good backlog and we see good opportunities going forward.

Operator, Operator

Our next question is going to be from the line of Aaron MacNeil with TD Cowen.

Aaron MacNeil, Analyst

Preet, a bit of a broader question for you, and I could appreciate that your role as Interim CEO is somewhat limiting in terms of your ability to set the strategic direction of the company. I also noted the comments on strategic priorities for the year. But you're in the role today. Just wondering if you can give us any insights based on being in the role, if there's anything that you think should be changed or improved across the platform going forward?

Preet Dhindsa, Interim President and CEO

Aaron, thanks for the question. When I took on the role about seven weeks ago, we determined that it's still best to continue to move the business forward, while exercising some prudence given what's going on geopolitically, tariffs, oil prices, etc. Working on our debt stack and free cash flow refinancing, Joe can get into that if we need to in a few moments. But we've got a good footprint, and we'll continue to refine that global footprint. Cost savings is another important element to post integration as we simplify and optimize our business globally. Interest and tax is another area that improves free cash flow. We've focused on that for quite some time. Overall, capital allocation is important, with growth capital in the US fleet being very crucial for 2025. We'll watch the markets carefully, and if we need to refine or adjust our trajectory for the year, we will. We have a few levers we can pull to do this, but we are committed to growing our business organically, largely in the US, using precision in managing maintenance capital where we have uncommitted opportunities. We may temper back but still remain within range. Overall, I'm very pleased with the operations, we've got excellent leadership in all the regions, and strong finance and corporate functions. I feel good about what we've accomplished. During this interim period, Joe and I, along with our colleagues around the globe, will continue to advance the business.

Aaron MacNeil, Analyst

Yes, I know this is challenging given the uncertainty as well. But lots of good free cash flow in the quarter, working capital release, a credit to Joe to be sure. But based on what you can see today, how would you rank the various capital allocation priorities between the ones you mentioned in the prepared remarks?

Preet Dhindsa, Interim President and CEO

I think we have been consistent in stating the various levers that we have for capital allocation. Direct shareholder returns, in Q3 last year, a 50% dividend bump. We initiated share buybacks, and we've been active and effective since April 1. Joe has discussed those amounts. We have a year to buy up to 5% of public float. Growth capital has been earmarked for the US, and we've range-bound growth as $40 million to $60 million. Mesa is at $70 million. We feel really good about the economics of the US fleet, the utilization, and the increased horsepower we're putting into the market. We will continue to increase horsepower by the end of this year, and the revenue per horsepower per month is still quite constructive, a little over $29. We feel good about the economics on the US fleet, and as Joe noted, debt reduction prudence in today's environment is still relevant. We'll continue to focus on free cash flow and effective working capital management globally, as you've referenced, and debt reduction. When we go to the market to refinance the debt, we're seeking better terms.

Operator, Operator

Our next question is going to be from the line of Keith MacKay with RBC Capital Markets. Your line is open. Please go ahead.

Keith MacKay, Analyst

Just wanted to go back to the bookings topic. Obviously, last cycle bookings got fairly low for a number of quarters. Do you think we're headed into that type of environment again? And can you just talk about what you're seeing in the market as far as where the weakness is and where the strength might be, i.e., if the current gas strip holds? Do you think that there could be some pickup in gas in your basins? Just some more commentary on the bookings would be helpful.

Jeff Fetterly, Vice President, Corporate Development and Capital Markets

As Preet referenced in his remarks, we continue to see good depth of opportunities, especially in the US. Those touch on both the processing side and the compression side. Given the weighting of activity, the Permian figures prominently into that number as well. As we referenced in the release and was also in the prepared remarks, there is some constructiveness on the gas side. At this point, I think we view it more as optionality than a core driver of demand. As indicated, there has been significant weakness in ES bookings in previous downturns, but where we see it today, the market continues to present fairly strong opportunities. The question is when the operators will execute on those opportunities and what conviction they will have. That's still evolving, and we're trying to assess it as quickly as possible.

Keith MacKay, Analyst

Got it. Okay, that's helpful. And just on the contract compression side, certainly, there have been some announcements for rig count reductions in the Permian. Can you just talk about the visibility you have into the potential impact that decreased oil drilling might have on the demand for contract compression in the Permian? Are you still comfortable putting out the incremental horsepower that you have planned? And what type of contract visibility do you have on the new equipment alongside upcoming expiries?

Jeff Fetterly, Vice President, Corporate Development and Capital Markets

From a demand standpoint, you've seen our utilization and our commentary. When you look at the other public companies that compete in that space, their commentary in recent days has also been quite constructive on the market. We continue to see good fundamentals that we expect will persist. As mentioned, there have been indications from the operators of pulling back on activity and capital spending, but the derivative impact on the contract compression side specifically is still unclear. We've been signing multi-year contracts to support these new assets, and we remain committed to the capital program guidance we discussed for 2025. This segment of the business continues to yield good returns, and we believe it remains an attractive area for growth.

Operator, Operator

Our next question is going to be from the line of Tim Monachello with ATB Capital Markets. Your line is open. Please go ahead.

Tim Monachello, Analyst

Wanted to ask a little bit more on the demand front, maybe have a better idea of the sources of demand and what they're levered to. You've got some capital being pulled back by E&Ps with crude coming down, but then you've also got a wall of LNG export capacity coming online, doubling North American LNG export capacity through 2028. When you look across your customer base, can you talk a little bit about the mix of customers that might be building capacity and infrastructure related to longer-term strategic growth and those more impacted by near-term commodity prices?

Jeff Fetterly, Vice President, Corporate Development and Capital Markets

As we've discussed in previous calls, our customer base is biased and weighted towards larger operators, especially in the Permian. These operators have on average been the consolidators during the recent phase. Our expectation is that with these relationships and the weighting of our customer base, we will see more stability in their plans. Those customers are focused on the medium and long-term outlook for LNG export in the US and growing gas demand overall in the US market. There is some uncertainty in the near term and increasing risks referenced by Preet and Joe, but we continue to focus on the medium and long-term fundamentals of the business, which we believe remain attractive.

Tim Monachello, Analyst

Just given that the uncertainty part seems somewhat flat quarter over quarter, but you had some items pulled into Q4 and Q1. Do you think Q2 bookings will end up higher or lower than Q1?

Preet Dhindsa, Interim President and CEO

Tim, it's hard to get too deep into that right now. But as I mentioned, we see good opportunities in the market, and the question remains when they'll hit and how successful our team will be in winning the work. However, we feel positively that the market is constructive, and we're very active in that space.

Tim Monachello, Analyst

Okay, fair enough. I want to talk a little bit about the free cash. You've done a really good job of managing working capital over the last 18 months. What are your expectations for free cash flow? You can't give guidance on that, or you won't. But should we expect to see more working capital release through the year, or how should we think about that?

Joe Ladouceur, Interim CFO

As we've mentioned previously, Tim, our expectation is to have a more stable or neutral working capital position in 2025. Obviously, we are very happy with the working capital recovery in the first quarter. However, we do expect to see a modest build of working capital through the remaining quarters of 2025. The fundamental view of maintaining a fairly neutral working capital profile in 2025 remains intact.

Tim Monachello, Analyst

Just talking about improving profitability, and you've touched on optimizing the tax impact and perhaps seeing some improved interest expense when you refinance the stack. Is there anything more operational that you're doing, I guess, on a segment basis that we should be thinking about?

Preet Dhindsa, Interim President and CEO

Tim, what I would say is on the operational side, you'll see our cost structures come down quarter over quarter. As I mentioned in earlier calls, the first 18 months was primarily focused on integration, which was quite heavy in SG&A. However, we're now at a stage where we continue to simplify and optimize our geographic footprint and how we invest in our people, processes, and systems post-integration. This is a longer exercise, but you'll see improvements in our cost structure and SG&A, which will enhance profitability and free cash flow. Additionally, we've alluded to the impact of interest and taxes as well.

Operator, Operator

Thank you. And I would now like to hand the conference back over to Preet Dhindsa for closing remarks.

Preet Dhindsa, Interim President and CEO

Since there are no further questions, thank you for joining today's call. We look forward to providing you with our second-quarter financial results in August.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.