Enerflex Ltd. (EFX) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Enerflex Second Quarter 2026 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 of Corporate Development and Capital Markets. Please go ahead.

Thank you, Shannon, and good morning, everyone. With me today are Paul Mahoney, Enerflex's President and CEO; Preet Dhindsa, Senior Vice President and Chief Financial Officer; and Ben Park, Enerflex's Controller. Before I turn it over to Paul, 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 now turn it over to Paul.

Thanks, Jeff, and thank you all for joining us on this morning's call. During the second quarter, Enerflex delivered solid operational performance, reflecting disciplined execution and our focus on operational excellence. Results continue to be underpinned by our energy infrastructure and aftermarket services business lines, while the Engineered Systems business maintained strong commercial momentum. As we highlighted during our investor update in May, Enerflex is focused on competing intentionally in the markets where we can win, improving relentlessly through operational excellence and delivering disciplined growth for our shareholders. We are moving with urgency to execute on these priorities, including initiatives to enhance collaboration, leverage our scale, improve operational efficiency and strengthen our capabilities across the business. Let me speak in more detail about near-term performance. Starting with Engineered Systems, bookings remained very strong during the quarter at $488 million compared to a trailing 8-quarter average of $363 million. The year is off to a strong start with first half bookings approaching $1 billion or approximately 75% of our full year bookings during 2025. Strong bookings has translated into increasing visibility for our ES business. With a book-to-bill ratio of 1.5x during the first half of 2026 and our forward visibility for ES revenue increasing to $1.5 billion, the highest level in Enerflex's history. ES bookings during the second quarter reflect a broad mix of end markets, including cryogenic gas processing, refrigeration for LNG export, large compression stations and power generation. The outlook for our Engineered Systems business remains strong, supported by healthy demand for compression and processing equipment across our key markets, together with increasing natural gas, associated liquids and electric power generation activity. Interest in distributed power solutions also continues to build with our pipeline of opportunities now exceeding 7 gigawatts across data center and other power generation applications. Turning to aftermarket services. Results improved during the second quarter after a slower start to the year in North America. Performance reflected steady customer maintenance spending, particularly in regions where we also operate energy infrastructure assets, highlighting the strength of our integrated platform and competitive positioning across our core markets. As highlighted during our investor update, our core priorities for the AMS business include: one, growing profitable services, notably in our retrofit segment; two, optimizing costs through basin focus and pooling of resources across AMS and contract compression business lines; and three, capturing opportunities for installation and O&M services associated with power generation. The energy infrastructure business continues to deliver solid performance, supported by approximately $1.2 billion of contracted revenue over the remaining terms of our customer contracts. Within this segment, Enerflex's U.S. contract compression business continues to perform well, led by increasing natural gas production in the Permian Basin. Utilization was strong at 93% across a fleet of approximately 496,000 horsepower. Additional operating KPIs for the business are available on Slides 33 and 34 of our investor presentation. We continue to target customer-supported fleet growth of 10% to 15% during 2026, with the majority of additions in the second half of the year. We are also securing long lead time components to support fleet growth in 2027, 2028 and 2029. Turning to our international energy infrastructure operations, which are outlined on Slides 31 and 36 -- this portfolio continues to be supported by a strong contract position with a weighted average remaining term of approximately 5 years, providing durable and predictable cash flows that we expect will continue to support Enerflex's financial performance for years to come. I'd also like to touch briefly on our operations in the Middle East. While we continue to closely monitor the situation in the region, our operations have remained uninterrupted to date. The safety of our people remains our highest priority, and our local teams continue to execute established response processes and contingency plans while maintaining reliable operations for our customers. Today, Enerflex's operations in Bahrain and Oman comprise of 17 projects, supported by an installed fleet of approximately 350,000 horsepower across compression and power generation applications. We remain focused on supporting our customers while continuing to execute safely and reliably across the region. Let me now speak about progress we are making on the strategic priorities outlined during our investor update in May. We continue to advance a disciplined enterprise-wide approach to operational excellence. We are also progressing the professionalization of our $1.9 billion per year enterprise-wide supply chain, driving productivity improvements and modernizing IT and automation systems. We expect each of these initiatives to be meaningful contributors in achieving our financial objectives. Preet will provide additional detail on the financial impact and targets associated with these priorities during his prepared remarks. We've developed 5 specific work streams with meaningful projects underway in each region and across key partner functions. One example is the recent alignment of our Canadian and U.S. operations under a unified North American framework. This change is designed to unlock greater collaboration, leverage our scale, drive standardization, improve operational efficiency and strengthen customer service. Enerflex reached several important ReliaCore milestones in the quarter, advancing the company's digitally connected service ecosystem. We launched our Houston-based remote operations center, leveraging smart dispatch technology to connect customer assets with technical expertise and intelligent workflows as well as developed and deploying Enerflex's first ReliaCore EDGE devices. Together, these capabilities extend service coverage, accelerate issue resolution and build the foundation for advanced analytics and predictive maintenance capabilities that are expected to improve asset performance, reduce downtime and create long-term economic value for both Enerflex and our client partners. Let me conclude by reiterating that our priorities remain clear. As a company, we are focused on improving productivity across our global operations, pursuing the highest value growth opportunities in markets where Enerflex can win and allocating capital in a disciplined manner to drive long-term value creation. We are encouraged by early progress, and we remain focused on building momentum as we execute against these initiatives. We look forward to providing updates on our progress over the coming quarters. With that, I'll turn the call over to Preet to speak to the financial highlights.

Thanks, Paul, and good morning, everyone. I'll start with highlights from the second quarter. We generated revenue of $582 million compared to $615 million in Q2 '25 and $584 million in Q1 '26. Lower revenue compared with the prior year was primarily driven by project sequencing and resource allocation for expansion of Enerflex's U.S. contract compression fleet within the Engineered Systems product line. ES book-to-bill ratio calculated as bookings divided by revenue was 1.6x during Q2 '26 and 1.5x during the first half of the year. This translates into our backlog increasing to a record $1.5 billion at the end of Q2. Gross margin before depreciation and amortization was $173 million or 30% of revenue compared to $175 million or 29% of revenue in Q2 '25 and $179 million or 31% of revenue during Q1 '26. Energy infrastructure and AMS product lines generated 69% of consolidated gross margin before depreciation and amortization during the quarter. ES gross margin before depreciation and amortization of 18% in Q2 '26 compared to 18% in Q2 '25 and 19% in Q1 '26 with a sequential decrease related primarily to revenue mix and project sequencing. SG&A was $81 million for the 3 months ended June 30, 2026, up $20 million from the prior year period due to higher stock-based compensation expense and investments to support growth and operational improvements. Core SG&A was $58 million for the 3 months ended June 30, 2026, compared to $52 million in Q2 '25 and $55 million during the first quarter of 2026. Adjusted EBITDA of $128 million compared to $130 million in Q2 '25 and $137 million in Q1 '26. Cash provided by operating activities before changes in working capital or FFO of $87 million in Q2 '26 compared to $89 million in Q2 '25 and $95 million in Q1 '26, a function of lower adjusted EBITDA. Cash provided by operating activities or CFO, was $89 million, which included net working capital recovery of $2 million. This compares to cash used in operating activities of $4 million in Q2 '25 and cash provided by operating activities of $32 million in Q1 '26. Free cash flow increased to $32 million in Q2 '26 compared to a use of cash of $39 million during Q2 '25 and a source of cash of $15 million during Q1 '26. The increase in free cash flow compared to prior year and prior period reflected higher CFO being partially offset by higher capital spending. Return on capital employed was 15.4% in Q2 '26 compared to 16.4% in Q2 '25 and 17.3% during Q1 '26. Lower ROCE primarily reflects a decrease in trailing 12-month EBIT, which is impacted by unrealized gains on redemption options related to the senior secured notes recognized in prior periods, partially offset by lower average capital employed, primarily due to decline in net debt. Net earnings of $30 million or $0.25 per share in Q2 '26 compared to $60 million or $0.49 per share in Q2 '25 and $43 million or $0.35 per share in Q1 '26. Compared to Q2 '25, profitability benefited from lower net finance costs, however, it was offset by higher share-based compensation expense and an unrealized gain of $15 million related to the redemption options of the senior secured notes recognized in the prior year. Enerflex exited Q2 '26 with net debt of $455 million, which included $74 million of cash and cash equivalents, a reduction of $153 million compared to Q2 '25 and $46 million since the beginning of 2026. Enerflex's bank adjusted net debt-to-EBITDA ratio is approximately 0.8x at the end of Q2 '26, down from 1.3x at the end of Q2 '25 and 0.9x at the end of Q1 '26. On June 24, Enerflex entered into an amended and restated credit agreement with respect to our syndicated secured revolving credit facility. The maturity date of the RCF has been extended to June 30, 2029, and availability is unchanged at $800 million. The limit under the RCF may be increased by up to $200 million at the request of the company, subject to lenders' consent compared to $50 million previously. Enerflex also continues to maintain a $70 million unsecured LC facility with one of its lenders in its RCF syndicate. Let me shift to capital allocation. We invested $53 million in the business during the second quarter, comprised of $35 million for growth, primarily allocated to expand the company's contract compression fleet in the U.S. and $18 million for maintenance in PP&E. Enerflex is refining its capital expenditure range for 2026, now targeting organic growth capital expenditures of $185 million to $195 million compared to prior guidance of $175 million to $195 million. The updated guidance includes organic growth capital expenditures of approximately $100 million, prior guidance of $90 million to $100 million maintenance capital expenditures of $70 million to $80 million, unchanged from original guidance and PP&E and infrastructure investments of approximately $15 million to support the company's ES business and activity in adjacent markets, including electric power generation. Enerflex continues to evaluate selective disciplined bolt-on acquisition opportunities. Inorganic growth will be focused on enhancing capabilities and accelerating scale in the company's core North American markets. All opportunities will be balanced with Enerflex's focus on maintaining a strong financial position and opportunities to provide direct shareholder returns. Lastly, I would like to touch on the value creation drivers connected to our strategic objectives. These were highlighted during our Investor Day in May and are summarized on Slide 16. Our objectives on a full cycle basis are to grow our business ahead of underlying markets, increase profitability and prioritize disciplined capital allocation. Specifically, we are focused on increasing adjusted EBITDA margin by 200-plus basis points, improving cash conversion ratio by 200-plus basis points and to drive return on capital employed 200-plus basis points higher. As highlighted by the steady improvement in adjusted EBITDA margin shown on Slide 9, we are encouraged by early progress and look forward to providing further updates. With that, I'll turn the call back over to Paul for closing remarks.

As we've discussed today, we continue to make meaningful progress executing our strategy while maintaining a disciplined focus on operational excellence, profitable growth and capital allocation. We believe the fundamentals across our core markets remain attractive, and Enerflex is well positioned to capitalize on those opportunities through our integrated platform, global footprint and long-standing customer relationships. While there is still work ahead, I am confident in our team's ability to create long-term value for our shareholders. I'd like to thank our employees around the world for their continued dedication, and I'd also like to thank our client partners, suppliers and stakeholders for their ongoing support. I will now turn the call back to the operator for questions.

[Operator Instructions] Our first question comes from Keith MacKey from RBC Capital Markets.

Just firstly, on the capital investment raise or refinement. Can you just kind of run through the priorities for that spend? What gives you the confidence in the returns that you'll generate from it? And is this -- is the increase based on inflationary factors? Or is it an increase in the amount of work you're actually able to put out?

Yes. Good question, Keith. I mean, as you know, it's primarily our contract compression business. And so the refinement on the upper range is really a confidence in our ability to contract business. We do have our '26 log filled. We do have portions of our '27 log filled. And so it's more of increasing capability than it is an inflationary-related item.

Got it. Appreciate the color there, Paul. Maybe just a follow-up on the bookings, certainly very strong this quarter. Can you comment on the mix of those bookings? Was there any data center activity in those? And ultimately, do you expect the $400 million to $500 million range to be the new normal for Enerflex over the next 12 months? Or was this an exceptional quarter -- exceptional first half, I should say.

Yes. Great question, Keith. And along our commitments in our Investor Day regarding growing above market, this is yet another quarter in a row of increasing bookings. Q2 is a watermark for us. It does not include any bookings for data center in there. There's the cryogenic gas processing. There's refrigeration processing for LNG export, large compression and some industrial-related power in that. So this has been a multi-quarter expression of bookings. We see this continuing here into Q3. And just to reiterate, Q2 does not have data center elements in it.