Q4 2024 Enerflex Ltd Earnings Call
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Speaker Change: I would now like to hand, the conference over to Jeff Fetterly, Vice President corporate development and capital markets. Please go ahead.
Jeffrey Fetterly: Thank you, Liz, and good morning, everyone. With me today are Marc Rossiter, President and CEO, and Preet Dhindsa, SVP and CFO. During today's call, our prepared remarks will focus on three key areas. One, the continued strong operational performance of the business and our outlook for 2025. Two, capital allocation, including capital spending and direct shareholder returns. And three, our progress in near and long-term strategic priorities.
Speaker Change: Thank you Louis and good morning, everyone with me today are Marc Rossiter, President and CEO and pretends SVP and CFO.
Speaker Change: Today's call our prepared remarks will focus on three key areas. One the continued strong operational performance of the business center outlook for 2025 to capital allocation, including capital spending and direct shareholder returns and three our progress our near and long term strategic priorities before I turn it over to Mark.
Jeffrey Fetterly: Before I turn it over to Marc, 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 the CDAR Plus and EDGAR profiles.
Speaker Change: Everyone that today's discussion will include non ifr us and other financial measures as well as forward looking statements regarding <unk> expectations for future performance and business prospects forward looking information involve risks and uncertainties and the stated expectations could differ materially from actual results or performance for more information.
Speaker Change: <unk> referred to the advisory statements within our news release, MD&A and other regulatory filings all available on our website and under the SEDAR plus and Edgar profiles.
Jeffrey Fetterly: 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.
Speaker Change: 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.
Marc Rossiter: I'll turn it over to Marc Rossiter. Thanks, Jeff, and thank you all for joining us on this morning's call. We delivered a strong finish to the year with solid operating results across Enerflex's geographies and product lines. Our energy infrastructure and aftermarket services business lines continue to provide steady, reliable performance and revenue streams, reinforcing Enerflex's ability to deliver sustainable returns across our global platform. Energy infrastructure and aftermarket services generated 69% of our gross margin before depreciation amortization in 2024, and 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 has resulted in a rapid deleveraging of our balance sheet.
Marc Rossiter: I'll turn it over to Marc Rossiter.
Marc Rossiter: Thanks, Jeff and thank you all for joining us on this morning's call.
Marc Rossiter: We delivered a strong finish to the year with solid operating results across enter flex of geographies and product lines.
Marc Rossiter: Our engine, our energy infrastructure and aftermarket services business lines continue to provide steady reliable performance and revenue streams, reinforcing <unk> ability to deliver sustainable returns across our global platform.
Marc Rossiter: Energy infrastructure and aftermarket services generated 69% of our gross margin before depreciation and amortization in 2024, and we expect these business lines will continue to represent the core of enter flex is profitability in 2025.
Marc Rossiter: Our strong operational performance and focus on maximizing free cash flow has resulted in a rapid deleveraging of our balance sheet.
Marc Rossiter: We reached the low end of our target leverage range, closing 2024 at 1.5 times, compared to 2.3 times at the end of Q4 2023. And we expect to make further progress in 2025. Our business remains strong. Supported by roughly $1.5 billion in contract backlog for our EI assets and a $1.3 billion backlog for our ES business line.
Marc Rossiter: We reached the low end of our target leverage range closing 2024 at one five times compared to two three times at the end of Q4 2023 and.
Marc Rossiter: And we expect to make further progress in 2025.
Marc Rossiter: Our business remains strong.
Marc Rossiter: Supported by roughly $1 5 billion in contract backlog for our assets and a $1 $3 billion backlog for our Es business line.
Marc Rossiter: Okay.
Marc Rossiter: Before reviewing our operational performance and business outlook, I would like to comment briefly on the geopolitical tensions across North America. We continue to closely monitor the situation, including the potential application of tariffs. Based on currently available information, the direct impact of tariffs on Enerflex's business is expected to be mitigated by the company's diversified operations and proactive risk management. Enerflex's operations in the United States, Canada and Mexico are largely distinct in the customers and projects they serve with negligible cross-border traffic for finished goods. The company has been working to mitigate the impact of potential tariffs. The United States is Enerflex's largest operating region, generating 45% of consolidated revenue in 2024 by destination of sale, and we believe the company is well positioned to benefit from growth in domestic energy production.
Marc Rossiter: Before reviewing our operational performance and business outlook I would like to comment briefly on the geopolitical tensions across North America.
Marc Rossiter: We continue to closely monitor the situation, including the potential application of the tariffs based on currently available information the direct impact of tariffs on <unk> business is expected to be mitigated.
Marc Rossiter: The company's diversified operations and proactive risk management.
Marc Rossiter: <unk> operations in the.
Marc Rossiter: The United States, Canada, and Mexico are largely distinct in the customers and projects they serve with negligible cross border traffic for finished goods.
Marc Rossiter: The company has been working to mitigate the impact of potential tariffs.
Marc Rossiter: The United States is enter flex is largest operating region generating 45% of consolidated revenue in 2024 by destination of sale and we believe the company is well positioned to benefit from growth in domestic energy production.
Marc Rossiter: Enerflex's operations in Canada and Mexico generated 10% and 3% of consolidated revenue in 2024, respectively.
Marc Rossiter: <unk> operations in Canada, and Mexico generated 10% and 3% of consolidated revenue in 2024, respectively.
Marc Rossiter: And now a few highlights for each of our business lines. The energy infrastructure business continues to perform well across our three core regions, the United States, Latin America, and the Middle East. In the United States, the fundamentals for contract compression remain strong, led by the expected increases in natural gas production, notably in the Permian Basin. We are pleased with the operational performance of our U.S. contract compression business, reflected in utilization in the mid-90% range for both the quarter and full year 2024. And revenue per horsepower per month... and profitability showing continued momentum.
Marc Rossiter: And now a few highlights for each of our business lines. The energy infrastructure business continues to perform well across our three core regions, the United States Latin America, and the Middle East.
Marc Rossiter: In the United States the fundamentals for contract compression remains strong led by the expected increases in natural gas production, notably in the Permian Basin.
Marc Rossiter: We are pleased with the operational performance of our U S contract compression business reflected in utilization in the mid 90% range for both the quarter and full year 2024 and.
Marc Rossiter: And revenue per horsepower per month.
Marc Rossiter: And profitability showing continued momentum.
Marc Rossiter: Slides 18 and 19 of our investor presentation highlight our fleet composition and the strong relative operating performance of the business. Demand for new contract compression equipment in the United States remains strong, and we expect our contract compression fleet will grow from 428,000 horsepower at the end of 2024 to over 475,000 horsepower 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.
Marc Rossiter: Slides 18, and 19 of our Investor presentation.
Marc Rossiter: In light of our fleet composition and the strong relative operating performance of the business.
Marc Rossiter: Demand for new contract compression equipment, United States remains strong and we expect our contract compression fleet will grow from 428000 horsepower at the end of 2024 to over 475000 horsepower. This year new units are being deployed under multiyear contracts and core operating regions with a focus on <unk>.
Marc Rossiter: Larger horsepower natural gas and electric drive applications.
Marc Rossiter: Slide 16 and 17 highlight our international energy infrastructure business, which includes approximately 1.2 million horsepower of operated compression and 26 build, own, operate, and maintain, or what we call BOOM, projects in the Middle East and Latin America. Our two produced water projects in Oman continue to perform very well, and we're in the process of expanding one of the sites, which we highlight on slide 20. Our international energy infrastructure business is supported by approximately $1.4 billion of contracted revenue and an average contract term that exceeds five years.
Marc Rossiter: Slide 16, and 17 highlight our international energy infrastructure business, which includes approximately $1 2 million horsepower of operated compression in 'twenty six build own operate and maintain or what we call boom projects in the middle East and Latin America.
Marc Rossiter: Our two produced water projects in Oman continued to perform very well and we are in the process of expanding one of the sites, which we highlight on slide 20.
Marc Rossiter: Our international Energy infrastructure business is supported by approximately $1 4 billion of contracted revenue and an average contract term that exceeds five years.
Marc Rossiter: Turning to aftermarket services, this business line benefited from strong activity levels and customer maintenance activities. We are especially pleased with the performance of our AMS business in countries where Enerflex also operates EI assets, reflective of a differentiated solution and our strong competitive position in core countries.
Marc Rossiter: Turning to aftermarket services. This business line benefited from strong activity levels and customer maintenance activities. We are especially pleased with the performance of our Ams business in countries, where enter flex also operates EIA assets reflective of a differentiated solution and our strong competitive position in core countries.
Marc Rossiter: On the engineering system side, we recorded bookings of $301 million, inclusive of a $75 million derecognition with no associated gross margin of future revenue related to the termination of the cryogenic natural gas processing facility project contract in Kurdistan. The majority of bookings during the quarter originated in the North American segment and relate to gas compression solutions. Total engineered systems backlog held steady at $1.3 billion, and we expect the majority of this backlog to be converted to revenue over the next 12 months. We are very happy with the continued strong project execution in our ES business, with margins during Q4 of 2024 also benefiting from a favorable product mix.
Marc Rossiter: On the engineered systems side, we recorded bookings of $301 million inclusive of a $75 million day recognition with no associated gross margin of future revenue related to the termination of the cryogenic natural gas processing facility project contract in Kurdistan.
Marc Rossiter: The majority of bookings during the quarter originated in the North American segment and relate to gas compression solutions.
Marc Rossiter: Total entered total engineered systems backlog held steady at $1 $3 billion and we expect the majority of this backlog to be converted to revenue over the next 12 months.
Marc Rossiter: We are very happy with the continued strong project execution in our Es business with margins. During Q4 2024 also benefiting from a favorable product mix.
Marc Rossiter: However, during 2025, ES gross margin before depreciation amortization is expected to be more consistent with historical long-term average for this business line. reflective of the weakness in domestic natural gas prices during much of 2024 and a shift of project mix in Enerflex's ES backlog. Notwithstanding, near-term revenue for this business plan is expected to remain steady. Enerflex is encouraged by initial customer response to improve domestic natural gas prices and the medium-term outlook for ES products and services continues to be attractive, driven by expected increases in natural gas and produced water volumes across Enerflex's global footprint.
Marc Rossiter: However, during 2025 Es gross margin before depreciation and amortization is expected to be more consistent with historical long term average for that business line.
Marc Rossiter: Reflective of the weakness in domestic natural gas prices during much of 2024, and a shift of project mix and interfax.
Marc Rossiter: Flex at Es backlog.
Marc Rossiter: Notwithstanding near term revenue for this business line is expected to remain steady and our flex is encouraged by initial customer response to improve domestic natural gas prices in the medium term outlook for Es products and services continues to be attractive driven by expected increases in natural gas and produced water volumes across and reflects.
Marc Rossiter: Before I turn the call over to Preet, I want to review Enerflex's priorities for 2025. These include number one, enhancing the profitability of core operations, number two, leveraging the company's leading position in core operations to capitalize on expected increases in natural gas and produced water volumes, and three, maximizing free cash flow to strengthen our financial position, provide optionality for direct shareholder returns, and invest in selective customer-supported growth opportunities.
Marc Rossiter: <unk> global footprint.
Marc Rossiter: Before I turn the call over to Pete I want to review enter flex as priorities for 2025.
Marc Rossiter: These include number one enhancing the profitability of core operations number two leveraging the company's leading position in core operations to capitalize unexpected increases in natural gas and produced water volumes.
Marc Rossiter: Three maximizing free cash flow to strengthen our financial position.
Marc Rossiter: Provide optionality for direct shareholder returns and invest in selective customer supported growth opportunities.
Preet Dhindsa: With that, I'll turn it over to Preet to speak to the financial side of the business. Thanks Marc and good morning everyone. Enerflex delivered fourth quarter results that exceeded the ranges included in our 2024 guide. We're particularly pleased with our ongoing progress in efficiently managing working capital, lowering debt finance costs, and optimizing the company's debt status. I'll start with highlights for our fourth quarter. We reported consolidated revenue of $561 million compared to $574 million Q4'23 and $601 million Q3'24. Gross margin before depreciation and amortization was $174 million or 31% of revenue compared to $158 million or 28% of revenue in Q4'23 and $176 million or 29% of revenue in Q3'24.
Marc Rossiter: With that I'll turn it over to Pete to speak to the financial side of the business.
Pete: Thanks, Mark and good morning, everyone.
<unk> delivered fourth quarter results that exceeded the range are included in our 2024 guidance, we're particularly.
Pete: I'm pleased with our ongoing progress and efficiently manage working capital lower net finance costs and optimizing the company's debt stack.
Pete: I'll start with highlights of our fourth quarter, we reported consolidated revenue of $561 million.
Pete: Compared to $574 million in Q4, 'twenty, three and 601 million in Q3 24.
Pete: Gross margin before depreciation and amortization was $174 million or 31% of revenue.
Pete: Compared to $158 million or 28% of revenue in Q4, 23, and $176 million or 29% of revenue during Q3 'twenty four.
Preet Dhindsa: Adjusted evident was $121 million compared to $91 million in Q4'23 and $120 million in Q3'24. Energy infrastructure performance continued to be strong with gross margin before DNA of $86 million compared to $87 million in Q4'23 and $91 million in Q3'24. Aftermarket services gross margin before D&A was 22% of the quarter, benefiting from strong customer maintenance programs. Enerflex's SG&A of $92 million was $18 million higher year-over-year and up $10 million on a sequential basis, mainly due to increased share-based compensation and a back-up recovery of $9 million in the comparative 2023 period. Cash provided by operating activities was $113 million in Q4'24, which included working capital recovery of $39 million.
Pete: Adjusted EBITDA was $121 million compared to $91 million in Q4, 23 and $120 million in Q3 'twenty for.
Pete: Energy infrastructure performance continued to be strong with gross margin before D&A of $86 million.
Pete: Compared to $87 million in Q4, 'twenty, three and $91 million in Q3 Q4.
Pete: Aftermarket services gross margin before D&A was 22% in the quarter benefiting from strong customer maintenance programs.
Pete: And if I could as SG&A of $92 million was 18 million higher year over year and up $10 million on a sequential basis, mainly due to increased share based compensation and a bad debt recovery of $9 million in the comparative 2023 period.
Pete: Cash provided.
Pete: By operating activities was $113 million in Q4, 'twenty four which included working capital recovery at $39 million. We are pleased with our ongoing global efforts to efficiently manage working capital.
Preet Dhindsa: We are pleased with our ongoing global efforts to efficiently manage working capital. Pre-capital is $76 million compared to $139 million during Q4'23, which included a working capital recovery of $112 million, and $78 million in Q3'24.
Free cash flow was $76 million compared to $139 million during Q4, 'twenty three which included a working capital recovery of $112 million and $78 million in Q3 'twenty four.
Preet Dhindsa: Starting in the fourth quarter, Enerflex modified its calculation of free cash flow, which is now defined as cash provided by operating activities, less total capital expenditures, growth and maintenance. mandatory debt repayments and lease payments while proceeds of asset dispositions are added back. Details of this calculation are included in our press release and MD&A.
Pete: Starting the fourth quarter and reflects monetize calculates to free cash flow, which is now defined as cash provided by operating activity less total capital expenditures growth and maintenance.
Pete: Mandatory debt repayments and lease payments, while proceeds dot asset dispositions are added back.
Pete: Details of this calculation are included in our press release and MD&A.
Preet Dhindsa: Now we'll touch our balance sheet and further de-elaborate. We entered the quarter with net debt of $616 million, which included $92 million of cash and available liquidity of $614 million, compared to $588 million in Q3. During the quarter, Enerflex redeemed $62.5 million of its 9% notes due October 2027. The redemption was completed at a price of 103%, and we expect the ongoing interest savings associated with the notes redeemed will materially exceed the redemption premium paid. As a result of our continued focus on financial discipline and operational execution, we repaid $359 million of debt since the beginning of 2023 and reached the low end of our target leverage range of 1.5 to 2 times.
Pete: Now, let's turn to our balance sheet and further deleveraging.
Pete: We exited the quarter with net debt of $616 million, which included $92 million of cash and available liquidity of $614 million.
Pete: Compared to $588 million in Q3.
Pete: During the quarter enter flex regained $62 $5 million of its 9% notes due October 2027.
Pete: The redemption was completed at a price of 103% and we expect the ongoing interest savings associated with the notes redeemed will materially exceed the redemption premium paid.
Pete: As a result of our continued focus on financial discipline and operational execution, we repaid $359 million of debt since the beginning of 2023 and reach the low end of our target leverage range of one five to two times.
Preet Dhindsa: Further details are included on slide 22 of our investor presentation.
Pete: Further details are included on slide 22 of our Investor presentation.
Preet Dhindsa: Let me shift to capital allocation. First, our CapEx plan. We invested $47 million in the business during the quarter, consisting of $32 million capital expenditures, primarily for maintenance, and $15 million for expansion of an EI project in the Eastern Hemisphere that will be accounted for as a finance lease.
Pete: Let me shift to capital allocation first our Capex plans we.
Pete: We invested $47 million in the business during the quarter, consisting of $32 million capital expenditures, primarily for maintenance and $15 million expansion of an AI project in eastern hemisphere that will be accounted for as a finance lease.
Preet Dhindsa: Enerflex is targeting a disciplined capital program in 2025 with total capital expenditures of $110 to $130 million. This includes $40-$60 million for growth capital expenditures. Similar to 2024, disciplined capital spending will focus on customer-supported opportunities. The majority of our growth focused on expanding our U.S. contract compression fleet. As Marc mentioned, we expect to grow our fleet by over 10% in 2025, with new units deployed under multi-year contracts in core operating regions.
Pete: And reflected targeting a disciplined capital program in 2025, with total capital expenditures of $110 million to $130 million.
Pete: This includes $40 million to $60 million for growth capital expenditures.
Pete: 2020 for disciplined capital spending will focus on customer support opportunities. The majority of our growth focus on expanding our U S contract compression fleet.
Speaker Change: As Mark mentioned, we expect to grow our fleet by over 10% in 2025 with new units deployed under multiyear contracts and core operating regions.
Preet Dhindsa: And now direct shareholder return. Enerflex returned $2 million to shareholders through dividends in Q4, and this number will increase starting in Q1 2025 with the previously announced 50% bump to our dividends. This increase coincided with Enerflex's leverage ratio falling within the company's bank-adjusted net debt-to-EBITDA ratio of 1.5 digitimes.
Speaker Change: And now direct shareholder returns.
Under flex, we turned $2 million to shareholders through dividends in Q4, and this number will increase starting in Q1 2025 with the previously announced 50% bump to our dividend.
Speaker Change: This increased cost side are better flex this leverage ratio following within the company's bank adjusted net debt to EBITDA ratio of one five to two times.
Preet Dhindsa: 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 increases to the company's dividend, share repurchases, and disciplined growth capital spending. Enerflex will also consider reducing leverage below its target range to further improve balance sheet strength and lower net finance costs. Unlocking greater flexibility positions the company to capitalize on opportunities to optimize its debt stack and respond to evolving market conditions.
Speaker Change: Going forward capital allocation decisions will be based on delivering value to enter flex shareholders and measured against that reflects the ability to maintain balance sheet strength.
Speaker Change: In addition to increase it to the Companys dividend share repurchases and disciplined growth capital spending.
Speaker Change: And our flex will also consider reducing leverage below its target range to further improve balance sheet strength and lower net finance costs unlocking.
Speaker Change: Unlocking greater flexibility positions the company to capitalize on opportunities to optimize its debt stack and respond to evolving market conditions.
Preet Dhindsa: I want to thank Enerflex employees for their efforts in delivering continued strong operational 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.
Speaker Change: I want to thank you and if I could 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 position the company for long term growth and value creation.
Marc Rossiter: With that, I'll turn the call over to Marc for closing. Thanks, Preet. We are proud of the operational, financial, and strategic progress made in recent quarters. I want to emphasize that the underlying macro drivers of our business remain strong, with the ongoing focus on global energy security and the growing need for low-emissions natural gas, resulting in strong demand for Enerflex's energy infrastructure solutions. Against this backdrop, our business lines continue to deliver solid performance, and we are focused on enhancing the profitability and resiliency of our core operations and Enerflex's ability to generate strong returns for our shareholders over the long term.
Mark: That I will turn the call over to Mark for closing remarks.
Speaker Change: Okay.
Mark: Thanks Perry.
Mark: We're proud of the operational financial and strategic progress made in recent quarters.
Mark: And to emphasize that the underlying macro drivers of our business remains strong with the ongoing focus on global energy security and the growing need for low emissions natural gas, resulting in strong demand for inter flex is energy infrastructure solutions.
Mark: Against this backdrop, our business lines continued to deliver solid performance and we are focused on enhancing the profitability and resiliency of our core operations and <unk> ability to generate strong returns for our shareholders over the long term.
Operator: I look forward to building on our progress and we will now hand the call to the operator for questions. As a reminder, if you'd like to ask a question at this time, please press star 1 1. and wait for your name to be called. To withdraw your question, please press star 1.
Mark: I look forward to building on our progress and we will now hand, the call to the operator for questions.
Speaker Change: As a reminder, if you'd like to ask a question at this time. Please press star one on your telephone and wait for your name to be announced.
Mark: To withdraw your question. Please press star one again.
Marc Rossiter: © The Bulletproof Executive 2013 Thanks for the question, Aaron, and I'll ask Preet to lead in just a second here. You know, I would like to acknowledge what you just said. We're really comfortable with our operations. You know, the fact that 69% of our revenues are coming from ES and AMS that we consider quite recurring is a really strong part of our overall thesis. We committed to a range of CapEx spending in the year, and we are committed to, you know, staying within that range of capital spending.
Speaker Change: Please standby, while we compile the Q&A roster.
Speaker Change: Our first question comes from the line of Aaron Macneil with TD Cowen.
Aaron MacNeil: Hey, good morning, all and thanks for taking my questions Mark I can appreciate the desire to have some flexibility in capital allocation.
Speaker Change: Now that you've hit the low end of your debt target range.
Aaron MacNeil: Preventing you from having anymore.
Speaker Change: Scripted capital allocation strategy.
Aaron MacNeil: Yes. Thanks for the question, Erin and I will ask us prudently and in just a second here.
Aaron MacNeil: I would like to acknowledge what you just said, we're really comfortable with their operations.
Aaron MacNeil: The fact that 69% of our revenues are coming from Es and Ams that we consider quite recurring is a really strong part of our overall thesis.
Aaron MacNeil: We committed to a range of Capex spending in the year and we are committed to staying within that range of capital spending and as it pertains to.
Preet Dhindsa: And as it pertains to, you know, other uses of the free cash flow, I'll just pass it over to Preet. Yeah, thanks, Marc. So, I mean, we're at the low end of the 1.5 to 2 range. We may dip a little lower, as mentioned. I mean, we feel at this time it's prudent to further de-leverage, ensure flexibility, two primary reasons, one, optimize our debt stack, reduce interest costs, improve free cash flow, and also just to respond to the evolving market conditions, specifically North American markets, where there's a fair bit of ambiguity around items such as tariffs in the nature, the magnitude, and potential impact to the broader industry is yet to be understood.
Aaron MacNeil: Other uses of the free cash flow I'll just pass over to Pete.
Pete: Yeah, Thanks, Mark so.
Speaker Change: Warehouse at the low end at the one five to two range, we may dip a little lower as mentioned.
Speaker Change: We feel at this time its prudent to further deleverage to ensure flexibility two primary reasons, one optimize our debt stack reduced interest cost improved free cash flow and also just to respond to evolving market conditions, specifically, north American markets, where theres, a fair bit of ambiguity around items, such as tariffs and the nature of that magnitude.
Speaker Change: And potential impact to the broader industry is yet to be understood. We feel it is prudent to be.
Preet Dhindsa: And we feel it is prudent to be, you know, it's prudent to be further de-leveraging today.
Speaker Change: It's proving to be further deleveraging today and as we get further down the line capital allocation, we're disciplined growth capex committed to the range. We provided share buybacks is something we'll also consider increased dividends. We've done that recently and consider that going forward also as part of direct shareholder returns.
Preet Dhindsa: And, you know, as we get further down the line, capital allocation, we're disciplined growth CapEx, committed to the range we provided, share buybacks is something we'll also consider, increased dividends, we've done that recently and consider that going forward also as part of direct shareholder returns. And also for the debt reduction, we do think prudence is important today. And this is all balanced against continued balance sheet strength and health. Well, let's continue to stay in the 1.5 to 2 range, and once again, we may dip lower for the reasons I noted, but our range is still as stated.
Speaker Change: And also further debt reduction we do think prudence is important today and this is all balanced against continued balance sheet strength and health.
Speaker Change: And just as a follow up do you have a specific leverage target in mind or is it just.
Speaker Change: A broader.
Generalization at this point.
Speaker Change: I will let Sarah let's continue to stay at the one five range and once again, we may dip lower for the reasons I noted on our range is still that stated.
Speaker Change: Sure.
Speaker Change: You noted in the backlog and the disclosures that the backlogs predominantly compression based can you speak to the processing opportunity pipeline is it just a function of lumpiness or are there other macro factors at play there.
Marc Rossiter: I'd say, Aaron, lumpiness, and I think what I'd like to point out is that our Q4 bookings were largely compression-oriented, but that doesn't mean that our total backlog is compression-oriented. You know, we had three-quarters of pretty significant process bookings. Q4 had a little bit more compression than process. But the process stuff is lumpy, but I don't see any indication from our customers of a deprioritizing of processing activity. It's just when the projects come and go, and they are much bigger, and they come in bigger chunks than the compression, which is really more of a drumbeat-type order book.
Speaker Change: I would say are in Lumpiness and I think what I'd like to point out is that our Q4 bookings were largely compression oriented but that doesn't mean that our total backlog is compression oriented.
Speaker Change: We had three quarters of pretty significant process bookings Q4 had a little bit more compression than process.
Speaker Change: The process steps is lumpy.
Speaker Change: But I don't see any indication from our customers of a de prioritizing a processing activity. It's just when the projects come and go and they are much bigger and they come in.
Speaker Change: In bigger chunks in the compression, which is really more of a drumbeat type order book.
Speaker Change: Thanks, Tony I appreciate the feedback.
Operator: As a reminder, if you would like to ask a question at this time, please press star .
Speaker Change: As a reminder, if you'd like to ask a question at this time. Please press star one on your telephone.
Tim Monachello: Your first question comes from a line of Tim Monachello with ATB Capital Markets. Hey, good morning. Hey, Tim.
Speaker Change: Our next question comes from the line of Tim Monticello with <unk> capital markets.
Tim Monticello: Hey, good morning.
Speaker Change: Tim.
Tim Monachello: Sorry, I'm getting a little bit of chalkiness on the line, so if I cut out.
Speaker Change: Alright, and then again, a little bit of Choppiness on the line cut out.
Speaker Change: It's not my fault.
Speaker Change: Yeah.
Tim Monachello: I just want to ask a little bit about the margins. ES margins were particularly strong in the fourth quarter and you guys have been sort of talking about this normalization and ES margins. for a couple quarters now.
Speaker Change: I just want to ask a little bit about the margins.
Speaker Change: Es margins were particularly strong in the fourth quarter and you guys have been sort of talking about this normalization, yes margins for a couple of quarters now.
Tim Monachello: Can you elaborate on your expectations for that margin and when we might start to see that normalization and perhaps talk a little about the magnet.
Speaker Change: Can you elaborate on your expectations for that margin when we might start to see that normalization and perhaps that you can talk a little.
Speaker Change: You too.
Jeffrey Fetterly: Hey, Tim, it's Jeff. As Marc highlighted in his prepared remarks, the fourth quarter results benefited from very good execution and a favorable product mix. As was referenced in Aaron's question, we've seen an increased proportion of compression bookings going into the backlog, which typically generate lower margins relative to processing. And so when we look at the expectations for 2025, it's a function of that mix playing into it. And also some of the pricing impacts that we saw over the course of 2024 associated with weaker natural gas prices, especially on the compression side.
Speaker Change: Hey, Tim it's Jeff as Mark highlighted in his prepared remarks, the fourth quarter results benefited from.
Speaker Change: Very good execution and a favorable product mix as was referenced in Aaron's question. We've seen an increased proportion of compression bookings going into the backlog, which typically generate lower margins relative to processing.
Speaker Change: And so when we look at the expectations for 2025, it's a function of that mix playing into it and also some of the pricing impacts that we saw over the course of 2024 associated with weaker natural gas prices, especially on the compression side.
Tim Monachello: So it's not necessarily something that we think will happen in a single quarter, but as the $1.3 billion backlog is executed, that's where we think margins normalize themselves to that long-term average. Okay, so you're thinking, I guess, sort of progressively lower. that business line for the next few quarters. That's a reasonable way to think about it.
Speaker Change: So it's not necessarily something that we think will happen in a single quarter, but as the $1 $3 billion backlog has executed that's where we think margins normalize themselves to that long term average.
Speaker Change: Okay, So you're thinking I guess sort of progressively lower margins.
Speaker Change: In that business line.
Speaker Change: In the next few quarters.
Speaker Change: I think thats, a reasonable way to think about it.
Okay.
Tim Monachello: And then. The U.S. rental compression business broke at the margins in this quarter, pretty impressive, and saw some growth even quarter over quarter. certainly screens well above peers. Do you think that level of margin Yeah, I think so, Tim. You know, as far as relative to the contribution Enerflex's overall margin production.
Speaker Change: And then.
Speaker Change: The U S rental compression business you guys broke out the margins in this quarter.
Speaker Change: Pretty impressive.
Speaker Change: Growth quarter over quarter.
Speaker Change: And certainly.
Speaker Change: Certainly screens well above peers.
Speaker Change: Do you think that level of margin contribution.
Speaker Change: Stable.
Speaker Change: Yes, I think so Tim.
Tim Monticello: Do you mean as far as relative to the contribution to <unk> overall margin production.
Marc Rossiter: Thanks for joining us. It's been an honor to serve. Yeah, I think so. I mean, right now, the market is good in the United States for contract compression. There's a lot of capital discipline amongst the big providers. There's a lot of need for gas compression, as the producers in the Permian are experiencing higher gas-to-oil ratios in new production, and volume of gas that they need to handle and get to market is increasing. So, the demand is there for these services. We've got a high-quality fleet, and it's not the biggest fleet, but it allows us to be purposeful in the customers that we work with and make sure that we do.
Speaker Change: You mean on a percentage basis.
Speaker Change: Yes, I think so I mean right now the market is good in the United States for contract compression.
Speaker Change: There is a lot of capital discipline amongst the big providers.
Speaker Change: There's a lot of need for gas compression as the producers in the Permian are experiencing higher gas to oil ratios and new production.
Speaker Change: And volume of gas that they need to handle and get to market is increasing so the demand is there for these services.
Speaker Change: We've got a high quality fleet and it's not the biggest fleet, but it allows us to be purposeful in the customers that we work with and make sure that we do there's a lot of things that go into driving that kind of a gross margin performance and we're really focusing on having the best quality.
Marc Rossiter: There's a lot of things that go into driving that kind of a gross margin performance, and we're really focusing on having the best quality assets, the best quality people operating those assets for our customers, and try to work with the customers that are most oriented with Enerflex's long-term growth plan. That's helpful.
Speaker Change: Assets of this quality people operating those assets for our customers and try to work with the customers that are most oriented put enter flex as long term growth plans.
Speaker Change: Okay.
Speaker Change: That's helpful.
Speaker Change: On tariffs.
Speaker Change: Can you talk a little bit about I guess, the internal thought process around what the impact could be.
Operator: Clearly, stocks are all reacting negatively.
Clearly stocks are all reacting negatively to.
Speaker Change: Tariff sentiment.
Speaker Change: Although your business I assume somewhat insulated just given.
Speaker Change: There are certain geographic.
Speaker Change: No.
Speaker Change: Encapsulation I suppose.
Marc Rossiter: So, what do you think the downcase scenario is and where do you get to at a point where your leverage ratios feel comfortable enough that you could... We, tariff impacts for us are largely a supply chain issue and in our, you know, 70% of our business roughly is infrastructure and AMS. And in the infrastructure business especially, you know, our three biggest costs are lubricants, people, and spare parts. And the spare parts are largely sourced out of the United States and we've been working closely with the providers of those spare parts to understand if they anticipate any increases in prices based on having to buy materials that will now have tariffs on them.
Speaker Change: So like what do you think the down case scenario is in where you get to a point where your leverage ratios.
Speaker Change: Feel comfortable enough eight could use.
Speaker Change: Outside of the stock as a buying opportunity for share repurchases.
Speaker Change: We.
Speaker Change: Tariff impacts for us are largely a supply chain issue and in our 70% of our business roughly is infrastructure and Ams.
Speaker Change: And in those two best in the infrastructure business, especially in our three biggest costs, our lubricants people in spare parts and the spare parts are largely source out of the United States and we've been working closely with the providers of those spare parts to understand if they anticipate any.
Speaker Change: Any increases in prices based on having to buy materials that will now have tariffs on them and we've been working with those suppliers for going on six months now and like we said in the prepared remarks, we are being proactive in doing our best to mitigate the potential impact, but again, that's that's the third out of the three costs on pretty high margin.
Marc Rossiter: And we've been working with those suppliers for going on six months now. And like we said in the prepared remarks, we're being proactive and doing our best to mitigate the potential impact. But again, that's the third out of the three costs on pretty high margin businesses.
Marc Rossiter: The engineered systems business is... is the one that has the biggest supply chain management requirements of us, and in the United States, which is our biggest engineered systems business by far, we source in the United States and build equipment for U.S. customers, primarily. And so, again, we've been working with those, with our supply chain to try to understand the impact of any price increases, but know also that when we quote new equipment, we put pretty short pricing validities on those quotations, and as soon as we get the orders, you know, we work very diligently to lock in all of our major expenditures with our suppliers.
Speaker Change: Mrs.
Speaker Change: In the engineered systems business is.
Speaker Change: Is the one that has the biggest supply chain.
Speaker Change: Management requirements of us and in the United States, which is our biggest engineered systems business by far we source in the United States and build equipment for U S customers, primarily and so again, we've been working with those with our supply chain to try to understand the impact of any of any price increases but know also that.
Speaker Change: When we quote new equipment.
Speaker Change: And we put pretty sharp pricing validity is on those quotations and as soon as we get the orders we worked very diligently to lock in all of our major expenditures with our suppliers.
Marc Rossiter: And, you know, when there's not a lot of So we're not talking about tariffs. We're talking about tariff noise going on. You could give a client a quote and it's good for 30 days, maybe 60 days, and you could pretty reliably, you know, represent that price if you get an order. These days, we've got price validities to say 10 days or five days, and we're in constant communication with our suppliers to make sure that they're not expecting price increases, because if they're expecting and they tell us about it, we can capture it and make sure our customers know very quickly, you know, so that we're not caught.
Speaker Change: When there's not a lot of.
Tariff noise going on you could give a client a quote and its good for 30 days, maybe 60 days and you can pretty reliably represent that price. If you get an order. These days, we got price related these to say 10 days or five days and we're in constant communication with our suppliers to make sure that that theyre not expecting price.
Speaker Change: Increases because if they are expecting and they tell us about it we can capture it and make sure our customers know very quickly so that we're not caught.
Marc Rossiter: so that we're not caught unawares. And in a well over 60% of our costs for an engineer systems project are locked in within the first couple of weeks of getting the order. So it all happens very quickly.
Speaker Change: So that we're not caught unawares.
Speaker Change: Well over 60% of our costs for an engineered systems projects are locked in within the first couple of weeks of getting the order. So it all happens very quickly and unfortunately, we at the bus stop the playbook from 2016, where we had the exact same situation going on when there are still tariffs put in place by the first Trump.
Marc Rossiter: And unfortunately we had to bust out the playbook from 2016, where we had the exact same situation going on when there were steel tariffs put in place by the first Trump, um, administration and so we've been exercising those same plans really since back in October when you know the run-up to him being elected and his you know having some tariff talk in his in his campaign speeches. So it's something we're on I would think of it largely a supply chain for us and largely in engineered systems and know that we've got you know teams of people that are very used to managing the prices we quote customers and the supply chain costs in like every hour we're making updates to these kinds of things.
Speaker Change: Administration and so we're we've been exercising those same plans really since back in October.
Speaker Change: When the run up to him being elected and is having some tariff talk in his in his campaign speeches. So it's something we're on I would think of it largely as supply chain for us and largely in engineered systems.
Speaker Change: And know that we've got teams of people that are very used to managing.
Speaker Change: The prices, we quote to customers and the supply chain costs and like every hour, we're making updates to these kinds of things now I do think that Canadian producers.
Marc Rossiter: Now I do think that Canadian producers could experience, at least in the first quarter, a bit of a wait-and-see attitude as it pertains to their own capital planning for new infrastructure, as they try to understand the impact and magnitude, if indeed they're producers that market their products south of the border, which I think a lot of Canadian producers do. We had a really good year in 2024, getting orders for Canadian infrastructure providers, mostly midstream providers in the Monty Shale, Prince Rupert, etc. We're just going to have to see how it impacts the overall Canadian oil and gas patch spending.
Speaker Change: Could experienced at least in the first quarter a bit of a wait and see attitude as it pertains to their own capital planning for new infrastructure as they try to understand the impact and magnitude. If indeed, they are producers that that market their products south of the border, which I think a lot of Canadian producers do we had a really good year in <unk>.
Speaker Change: 24, getting orders for Canadian infrastructure providers, mostly midstream providers in the Montney shale I'd, Prince Rupert et cetera.
Speaker Change: We're just going to have to see how it impacts the overall Canadian oil and gas patch spending.
Marc Rossiter: But again, Canada is 10% of our business. It impacts the engineered systems portion of our Canadian business primarily. And I think that our global portfolio and our ability to really serve and focus customers in those regions from operations in those regions is doing a lot to not eliminate tariff risk, but definitely to provide a significant tariff risk mitigation.
But again, Canada is 10% of our business.
Speaker Change: <unk> the engineered systems portion of our Canadian business, primarily and I think that our global.
Speaker Change: Our global portfolio, and our and our ability to really serve and focused customers in those regions from operations in those regions is doing a lot to do not eliminate tariff risk, but definitely to provide a significant tariff risk mitigation.
Marc Rossiter: Okay, got it.
Preet Dhindsa: And then just quickly, Preet, can you talk a little bit about working capital? Yeah, you know what, I mean, we expect a little bit of unwind. We had a good year 2024, finished the year well, debt reduction came down pretty significantly in Q4. So expect a little bit of an unwind. We have built a global discipline in working capital management, centrally managed, deployed globally and very pleased with where we're at.
Speaker Change: Okay got it and then just quickly pre can you talk a little bit about.
Speaker Change: Working capital.
Speaker Change: Patients in flows for 2025 versus 24.
Speaker Change: Yes, you know what I mean, we expect a little bit of unwind that we had a good year 2024 finished the year well debt reduction came down.
Speaker Change: Pretty significantly in Q4, so expect a little bit of an unwind we have built a global disciplined working capital management centrally managed deployed globally and very pleased with where we're at so expect us modest unwind, but nothing significant.
Preet Dhindsa: So expect a modest unwind, but nothing significant that we So you're expecting investment in working capital in 2025. Just to clarify. Somewhat stable, once again, unwind a little bit and then keep it stable most of the year going forward beyond Q1, but like I said, we're focused on it heavily and we don't expect a significant swing.
Speaker Change: Alright.
Speaker Change: So you're expecting investment of working capital in 2025.
Speaker Change: Just to clarify.
Speaker Change: Yes, somewhat stable once again unwind a little bit and then keep it stable most of most of the year going forward beyond Q1, but delegates that we're focused on in heavily and we don't expect significant slates.
Preet Dhindsa: Okay, thanks very much.
Speaker Change: Okay. Thanks very much.
Speaker Change: Our next question comes from the line of Jamie Kubik with CIBC.
Operator: Yeah, good morning. Thanks for taking. soon to talk about further M&A for the company, and if not, could you just remind us?
Jamie Kubik: Yes. Good morning, Thanks for taking my question.
Speaker Change: In just over three years since center flexion announced the acquisition of Exterran.
Speaker Change: Company's debt levels returned to the low end of its targeted range.
Speaker Change: Is it too soon to talk about further M&A for the company and if not could you just remind us of the <unk> acquisition criteria.
Marc Rossiter: It is a little bit too early to talk about new M&A.
Speaker Change: It is a little bit too early to talk about new M&A Jamie. Thanks for the question. This is mark.
Jamie: Jamie, thanks for the question.
Marc Rossiter: This is Marc. We're really happy with what we got right now. We're number one provider of engineered systems and infrastructure and services in our core markets. And I think there's a lot of value to be generated by working that competitive position and proving gross margins, growing revenues with the really strong macro of North American natural gas. And I really don't see any immediate or midterm need for acquisitions from Enerflex's point of view to continue shareholder value creation. You never say no to anything, but it's really not part of what I would perceive as being important Enerflex.
Speaker Change: We're really happy with what we got right now.
Speaker Change: We're number one provider of engineered systems and infrastructure and services in our core markets and I think theres a lot of value to be generated by working that competitive position and improving gross margins.
Speaker Change: Growing revenues with with the really strong macro of North American natural gas and I really don't see any immediate or midterm need for.
Speaker Change: Acquisitions from <unk> point of view to continued shareholder value creation.
Speaker Change: You never say no to anything, but it's really not part of what I would perceive as being important in our flex. We've got I think we've got a much greater ability to grow shareholder value organically and inorganically.
Marc Rossiter: I think we've got a much greater ability to grow shareholder value organically than inorganically.
Tim Monachello: Great. And then can you talk a little bit about the dynamic? Canada and the U.S. right now with... Natural Gas. Have you seen more interest in your U.S. operators and potential expansions relative to Canada?
Speaker Change: Yes.
Speaker Change: Okay, Great and then can you talk a little bit about the dynamic between.
Speaker Change: Canada and the U S right now with respect to.
Speaker Change: Just where natural gas prices have moved to in the in the two different markets have you seen more interest in your U S.
Speaker Change: Operators and potential expansions relative to Canada and can you just expand a little bit further on what youre seeing on that side.
Marc Rossiter: You know, we had a really nice, a really nice, I call it the Trump bump after Trump got elected. There was a big run up in activity in in the latter half of November and throughout December from U.S. operators. And I think they were actually holding on a little bit in the run up to the election to see what they ought to do. And so that and I would just say the United States is steady as she goes. We've experienced good levels of demand from midstream companies and E&P companies in the United States going on a couple of years now.
Speaker Change: We had a really nice really nice I call. It the Trump bump after Trump got elected.
Speaker Change: There is a big run up in activity in the latter half of November and throughout December from U S operators and I think they were actually holding on a little bit in the run up to the election to see what they ought to do.
Speaker Change: And so and I would just say United States is steady as she goes we've experienced.
Speaker Change: Good levels of demand from midstream companies and E&P companies in the United States going on a couple of years now and I don't expect that to change much consolidation in the U S has had a big role to play in that it's not nearly as as peaky and cyclical over the last couple of years as it was throughout the shale growth.
Marc Rossiter: And I don't expect that to change much. Consolidation in the U.S. has had a big role to play in that. It's not nearly as as peaky and cyclical the last couple of years as it was throughout the shale growth from 2003 up to 2016. So steady as she goes, the United States, you know, we keep our eye on produced gas volumes in the United States and they continue to grow. And we're a big player in that market. And as gas volumes grow, we'll we'll be selling and operating new equipment for those customers.
Speaker Change: <unk> 2003 to 2016, so steady as she goes the United States.
We keep our eye on produce gas volumes in eight states and they continue to grow and we're a big player in that market and as gas volumes grow we will be selling and operating the equipment for those customers in Canada. We had a great 2024 Canadian infrastructure companies definitely had some some very attractive growth projects that they invested.
Marc Rossiter: In Canada, we had a great 2024. Canadian infrastructure companies definitely had some some very attractive growth projects that they invested in and we benefited from those investments. Like I said just a few minutes ago, I think it'd be quite reasonable to see Canadian infrastructure providers wait a little bit. And as they talk with their producer partners to try to decide the impact of tariffs and if indeed their growth capital spending would be at all impacted by the uncertainty in the markets in the near term. So we're keeping a close eye on that. All that being said, we got a great backlog in our Canadian manufacturing shop and we got good service business in our Canadian operations.
Speaker Change: And and we benefited from those investments like I said, just a few minutes ago.
Speaker Change: I think it would be quite reasonable to see Canadian infrastructure providers wait a little bit and as they talked with their producer partners to try to decide the impact of tariffs and F&D there growth capital spending would be at all impacted by the uncertainty in the markets in the near term. So we're keeping a close eye on that all that being said, we got a great backlog.
Speaker Change: Our Canadian manufacturing shop, and we got good service business and our Canadian in our Canadian operations, and I think thats going to provide a relatively good 2025.
Marc Rossiter: And I think that's going to provide a relatively good 2025.
Operator: Thank you for that.
Speaker Change: Thank you for that that's it for me.
Speaker Change: That concludes today's question and answer session I would like to turn the call back to Marc Rossiter for closing remarks.
Operator: Since there are no further questions, thank you for joining today's call and we look forward to providing you with our first quarter financial results in early May.
Marc Rossiter: Since there are no further questions. Thank you for joining today's call and we look forward to providing you with our first quarter financial results in early May.
Marc Rossiter: This concludes today's conference call. Thank you for participating you may now disconnect.
Marc Rossiter: Okay.
Marc Rossiter: [music].