Q2 2025 Enerflex Ltd Earnings Call

Good day, and thank you for standing by, welcome to the inner Flex. Second quarter 2025 earnings conference call. At this time, all participants are on listen-only mode. After the speaker's presentation, there will be a question and answer session to ask a question during the session. You'll need to press star 1 on your telephone, you will then hear automated message. Advising. Your hand is raised to withdraw your question. Please press star 11 again.

Please be advised, that today's conference is being recorded all night, had a conference over to your first Speaker today. Jeff said early vice president corporate development and capital markets. Please go ahead.

Thank You, Marvin. And good morning everyone with me today. Are pretty denza, interim, president, and CEO, Joe, Joe, let user interim CFO, and Ben Park interflex controller.

During today's call our prepared, remarks will focus on 4 key areas 1 the continued strong performance of vendor flex's business to our Outlook. And interflex strategic positioning 3 Capital allocation, including our refined Capital spending program for 2025 and direct returns to shareholders and for our progress on near and long-term strategic priorities.

Before I turn it over to pre, I'll remind everyone that today's discussion will include non-ifrs and other Financial measures as well as forward-looking statements regarding enerflex 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 mdna, and other regulatory filings all available on our website and under our seeder 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 pre.

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 that translate into a quarterly record for adjusted EBITDA.

These results reflect solid performance across our geographies of business lines as well as our ongoing efforts to optimize and streamline our business.

Energy infrastructure and aftermarket Services. Contributed 65% of gross margin before depreciation and amortization and the second quarter of 2025. And we expect these business lines will continue to represent the core of that influxes profitability.

We also maintain solid visibility on engineered systems business supported by healthy. 1.2 billion dollar backlog. At the end of the second quarter.

And now, a few highlights from each of our business lines.

The energy infrastructure business continues to perform well, supported by approximately $1.5 billion of revenue under contract.

our us contract compression Fleet is an important part of our energy infrastructure, asset base and the fundamentals for this business group being strong led by increasing national gas production in the US

We're also pleased with the operational performance of our us contracts compression business reflected by utilization remaining above 90% for the past, 14 quarters and solid revenue for horsepower per month and profitability.

These kpis are highlighted in slide, 18 and 19 of our investor presentation.

Demand for new contract compression equipment in the US remains strong. We exited the quarter with 456,000 horsepower, and expect to be over 475,000 horse, powered by the end of this year.

New units are being deployed under multi-year contracts and core operating regions with the focus on larger horsepower, Natural, Gas and Electric Drive applications.

Slide 16 and 17, highlighted International Energy infrastructure business, which includes approximately 1.1 million, horsepower of operated compression and 23, build own operate, and maintain or boom project in Bahrain, Oman and Latin America.

Are 2 produce water projects in Oman. Continue to perform very well and we commissioned expansion of 1 Project in early Q3 which is highlighted on slide 20.

Our international energy infrastructure business is supported by a process, $1.3 billion of contracted revenue, and an average contract term of approximately five years.

Turning to aftermarket services, this business line benefited from increased activity levels in customer maintenance activities during the quarter. We expect these Trends to continue throughout the remainder of 2025.

On the engineering system side, we maintained our backlog at 1 to 0.2 billion dollars. At the end of the quarter consistent with the 8 quarter average, yes, backlog of approximately 1.2 billion dollars.

Just the state level of backlog over a 2-year period. Reflects stable demand for interflex ES Solutions across Global energy, infrastructure, markets,

and reflects recorded es bookings of 365 million due to the 3-month ended, June 3020 compared to 331 million during the same period of 2024 and the 8 quarter average of 329 million,

DS, product line maintained a book to Bill Ratio calculated. That bookings divided by revenue of 1.1 times during the second quarter of 2025 indicating that new bookings are generally keeping Pace with Revenue recognition,

The current balance between bookings and revenues supports near-term revenues visibility and reflects a stable, demand environment.

We expect es Revenue to remain steady in the near term and for gross margin from this business. To allow more closely with historical averages reflective of a shift in product mix.

Demand across the US product, line remains constructive, as we continue to actively monitor near-term, risks and uncertainties, including the impact of tariffs and commodity price volatility.

We believe the median term outlook for yes, products and services is attractive supported by anticipated growth and natural. Gas and produce water falling into cross and reflexes Global footprints.

It reflects the priorities in 2025 include enhancing the profitability of core operations leveraging. The company's legal position. Core operating countries to capitalize on expected increases in natural gas, that produced water volumes and maximizing, free cash flow to strengthen and reflect financial position. Provide Direction shareholder returns and invested selective customer supported growth opportunities.

Before I turn the call over to Joe, I would like to call it briefly on our leadership, transition on, March 19th and a flex. Announced that Mark Ross your step down is President, CEO and director.

Currently I assume the role is interim president CEO. And Joe as in terms of CFO the board is entertaining, a comprehensive search to identify the companies permanent CEO and has retained a leading Global search firm to assist. With this process. The search is for great. The search is for processes, making good progress and will not be, and we will not be commenting further.

With that, I'll turn it over to Joe to speak to the financial side.

Thank you, breed. And good morning, everyone. I'll start with highlights from the second quarter.

Million in.

Q2, 24 and 552 million in q1, 2025?

Gross margin before depreciation and amortization was 175 million or 29% of Revenue compared to 173 million or 28% of Revenue in Q2 2024 and 161 million or 29% of Revenue during q1 2025.

As pre referenced, the EI, and AMS product lines generated 65% of Consolidated, gross margin before depreciation, and amortization during Q2 2025, and we continue to expect similar results for the remainder of the year.

Energy, infrastructure performance continued to be strong with gross margin before DNA of 86 million compared to 77 million in Q2 24 and 86 million and q125.

Aftermarket Services, gross margin before DNA was 23% in the quarter, benefiting from strong customer maintenance programs.

Sgna was 61 million for the 3 months, ended June 30th, 2025 down 14 million from the prior year period. This is driven by cost-saving initiatives improved operational efficiencies and the absence of 1-time integration costs that were incurred in Q2 of 2024

Adjusted Eva dog was 130 million which represents a new quarterly record for endoflex.

This compares to 122 million in Q2 24 and 113 million during the first quarter of 2025.

Cash provided by operating activities before changes in working capital or ffo increased to 89 million in Q2, 2025 compared to 63 million in Q2 24, and 62 million in the first quarter of 2025. This is a function of higher adjusted. Eva lower net Finance costs.

And lower current tax expense.

Free cash flow was a use of cash 39 million in Q2 20225 compared to a use of cash of 4 million during Q2 24. And a source of cash of 85 million during q1 2025,

Compared to the second quarter of 2024 and increase in ffo was more than offset by an increase growth Capital spending and a build a networking Capital, notably strategic inventory Investments to support future projects, including work and progress related to E assets and purchases of Select major components with increasing lead times.

Income taxes payable, and finally, executive transition costs.

Compared to the first quarter of 2025 networking Capital was also impacted by an increase in accounts receivable, which related to strong Revenue recognition, during the latter part of the quarter, which we expect to normalize.

Now, I'd like to touch on our financial position.

We exited the quarter with net debt of 608 million, which included 71 million of cash and available. Liquidity of 630 million compared to 672 million in the first quarter.

And reflexes Bank adjusted. Net debts. I-bidder ratio was approximately 1.3 times at the end of Q2 2525 that is down from 2.2 times at the end of Q2, 20224 and consistent with q1 2025.

Further details are included on slide 13 of our investor presentation.

In earning Q3 Ander entered into an amended and restated credit agreement with respect to its syndicated secured. Revolving credit facility, the RCF.

Maturity date of the RCF has been extended by 3 years to July 11th 2028 and availability is unchanged at 800 million.

Now let me shift the capital allocation.

first on our capex plans,

We invested 71 million in the business, consisting of 34 million in capital expenditures, 23 million of, which was for growth.

And 37 million for expansion of an EI project in our Eastern Hemisphere region. That was commissioned in Q3 2025 and is now accounted for as a finance lease.

full year, 2025 Capital spending is now, expected to approximate 120 million compared to our previous guidance of 110, million, to 130 million

This includes a proximately 60 million earmarked for growth initiatives compared to the previous guidance of 40 to 60 million.

Growth investment will focus on customer supported opportunities. Primarily in the US contract, compression business line, where the fundamentals remain strong,

And this is reflective of our continued efforts to realize efficiencies across our operations.

And now I'll turn to direct shareholder returns.

Enerflex returned, 18 million to shareholders in Q2 through dividends and share repurchases.

Our ncib commenced on April 1st and authorizes the company to repurchase up to approximately 6.2 million shares through the end of March 2026.

Aniflex. Repurchased 1,899,200 common shares at an average price of $108 Canadian per share. During the second quarter.

Going forward capital allocation decisions will be based on delivering value to nureflex shareholders and measure it against nureflex visibility to maintain balance sheet strength.

In addition to discipline growth, Capital spending, share repurchases, and dividends and reflects 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.

I want to thank interflex employees for their efforts in delivering strong operational Financial results.

We continue to prioritize profitability and operational, resilience to ensure interlex delivers, strong, and reliable, returns for our shareholders.

With that, I will turn the call back to preach for closing remarks.

Thanks Joel.

We've made significant operational, financial, and strategic strides in recent quarters. I want to thank the Flex team across our global operations for their efforts in delivering these results. We believe the long-term fundamentals driving our growth, including global energy security and the continued increase in demand for natural gas, remain firmly in place. We believe that Flex is well positioned for those fundamentals, and we are focused on taking advantage of opportunities across our global platform.

I look forward to building on our progress, and with that, we will now turn the call to the operator for questions.

Thank you at this time. Answer session as a reminder, to ask a question, you will need to press star 1 on your telephone and wait for your name to be announced to withdraw your question. Please, press star 1 1 1, again please, stand by while we compile the Q&A roster,

And our first question comes from the line of Keith Mackey of RBC Capital markets. Your line is now open.

Oh, hi. Good morning. Um, just curious if you can comment a little bit more on what's driving the tightness in utilization in US contract compression? Uh, how sustainable do you think that is? And ultimately what underpins your confidence in increasing your investment uh, in that division now?

Morning morning case. It's, it's Jeff. Um,

As we've talked about in in Prior quarters, we're seeing a favorable Supply demand balance across the US contract compression market. And the supply side is very much is very much a function of the discipline we're seeing from the 3 largest competitors.

Underlying that is the market continues to grow nicely uh in line with the supply growth from the natural gas standpoint in the us as well.

Um, as we've talked about in previous quarters, the, the contract durations that we're signing for both new equipment and on renewals of existing equipment, have continued to lengthen over the last year.

And our expectation is that, um, we'll continue to see those fundamentals in place.

So the the increase in our guidance from a growth Capital standpoint to the top end of the range is to support the continued demand that we're seeing from customers and opportunities across the US, especially in the Permian.

Um, and we believe those Investments are de-risked by the longer duration contracts that have been uh, put put in place to support those assets.

Understood. Can you comment a little bit more on the type of growth you expect to see out of that division over the next

You know, 2 4 plus quarters, um, to the extent that you can kind of map, the investment and and, and the market into, you know, your financial results.

Go on contract and go on rent, so we'd expect the financial performance of the business to uh, to move concurrently as the fleet continues to grow as pre-t talked about in his prepared, remarks, our expectation and visibility is for utilization and pricing to remain stable um and attractive across that business. So we don't expect any significant impact from that side in terms of the financial performance for our contract, compression business.

I understand that's it for me. Thanks very much.

Thank you. 1 moment for our next question.

Again, as a reminder to ask a question, you'll need to press star 1 1 on your telephone.

In our next question, comes on line of Tim mannello of ATB Capital markets and Line is now open.

Hey, good morning, everyone.

Um, can you hear me?

Yeah, good morning Tim. Okay cool. Um, I'm just curious, um, press release mentioned uh expanding the North American manufacturing facility. Can you elaborate on what you're doing there?

Yeah. Can you just repeat the last part of that? Tim?

Sorry, I'm just wondering if you can elaborate on what you're doing in the without expansion.

Yeah, so we took on a little bit more land adjacent to our us facility in Houston. Uh, we, uh, we had the option to take it. Our view is that given the constructive natural gas macro. We've got great production out of that facility and just to keep optionality for future growth as and when appropriate, uh, we've got um, a significant facility there as well as Broken Arrow and the opportunity to come up to take the land, so we did it. And once again it's just positions us, well, um, for taking advantage of any further follow-on activity that we can execute on through that plant.

Okay. But are you um, running anywhere close to capacity in your current

Manufacturing facilities in North America.

We still have a fair bit of capacity and we've got a great talent pool, and we can Flex up and down as necessary with that talent pool in Houston as we're talking about, primarily, but overall, we've got, uh, sufficient capacity and that is that additional land, increase optionality for future. Growth of the business. Yes, out of the business.

Okay, got it. Um, wondering if you can

perhaps uh talk a little bit about what capex might look like in 2026 and Beyond and and I guess your longer term

Expectations as they stand for growth of the US compression Fleet.

I'll start with it, maybe Jeff will, um, lead into that. So this recently, we just, uh, just announced

60 billion growth, uh, primarily earmarked for the US contract compression. Fleet that we do feel good about the depth of the market and the constructive natural gas macro as we mentioned. And, uh, continue to build to the end of this year. In the US. Fleet up around 475,000 horsepower from 428,000 at the end of last year, but overall, um, you know, growth is a very important lever that, uh, we can deploy a free cash flow and we do feel the market in the US Fleet, highly constructive, good economics. Meaning utilization and revenue for Horse Park per month. So we feel good about what we've invested in plan to invest this year and we'll follow on and um, in 2026.

as Tim is Tim is Joe mentioned, in his prepared, remarks around the working capital side, we've been making strategic Investments on the end of inventory side, reflective of of increasing lead times on equipment, especially the engine side

And so we're starting to make commitments for capex and growth for 2026 to reflect the realities of the supply chain. And also trying to align ourselves with the customers planning cycle, and our strategic Partnerships that we have in that business.

and so, we're still formulating our formal plans for 2026, but we are certainly progressing quicker than in Prior years associated with the mapping out, our growth growth, intentions going into next year,

Okay, got it. And

I guess given that you're a vertically integrated.

player in the US, rental compression space, what do you think you're

Trying to Market is for new compression versus what it might be for um some of your competitors that use third-party manufacturer.

The market is a competitive Advantage relative to other other players in the market and those especially that are not vertically. Integrated

And you'd have a cost Advantage as well as an added.

We believe. So yes.

Okay. Um,

Booking Summers really strong in the quarter. Uh, was there anything lumpy in that and can you provide any commentary on what you're seeing on the Leading Edge in the first sort of month or so of Q3

Is, is this pre-t talked about and is prepared remarks. You know, we saw much more normalized reflective of order structure during the second quarter.

As we've talked about back in May, you know, first quarter bookings for us, were were partly impacted by a pulled forward into the fourth quarter. But then also some selected pauses on the customer's side, we saw a much more normalized Cadence for order flow in the second quarter to your specific question. There's nothing significant in. Lumpy in the second quarter, bookings. That we don't expect to be normal course as we look forward into the third and fourth quarters. We continue to see good depth and good opportunities within the market. Uh, they touch on both the compression, and the Go gas processing or deep cut side. Um, and we expect as we've talked about sort of, when you look at the 8 quarter average for bookings at about 330 million,

Continue to uh to Target a book to Bill ratio of around 1 time since coming quarters.

Okay. Um, and the other thing calling for a normalization in margins in the es segment for a number of quarters. Now, hasn't really come to fruition. Um,

how much I guess can you talk about when you expect that normalization to start to hit financials?

You, you've seen you've seen some indications of it but the the team has done a fantastic job of executing and delivering margins that that are higher than we've seen on historical basis. Uh, the guidance that we're providing, we believe, is reflective of embedded margin, but also the mix that we're seeing in the shift more towards compression, based work relative to gas processing work

So we're still comfortable with margins trending, towards the long term average, but also very much reflective of the strong operational execution. Our teams have been doing as well.

So do you think it's plausible that if your teams continue to execute you can continue to maintain margins at or above the the level that you've seen over the last 2 quarters.

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

Okay, and then the last one for me, I promise. GNA was a strong number in Q2, down from Q1. Where do you see GNA trending as we go forward in 2025 and into the out years?

As we've been mentioning over several quarters integration was done last year. We've got some synergies out of integration full run rate, synergies that are going to be cheap this year and next year so we feel good about the level of GNA and that's a high focus of ours as we continue to simplify our business. Um you know get out of legal entities that that are somewhat dormant and just look at our Geographic Footprints. So we're consciously looking at ways to simplify and optimize our business and GNA is a key metric that we continually focus on.

Okay, I appreciate it. Um I'll turn it back. Congrats on a great for.

Thank you sir. Thank you.

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

Is there? No further questions. Thank you for joining today's call and we look forward to providing you with our third quarter Financial results in November,

Thank you for your participation. In today's conference, this does conclude the program. You may now disconnect