EFXT

Welcome to the Enerflex first quarter 2026 earnings conference call. At this time all participant is only listen-mode. 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, Corporate Development and Capital Markets. Please go ahead.

Thank you, Jill, and good morning, everyone. With me today are Paul Mahoney, President and CEO, Preet Dhindsa, Senior Vice President and CFO, and Ben Park, Enerflex's Controller. During today's call, our prepared remarks will focus on three key areas. One, the continued strong performance of Enerflex's business, two, our outlook for 2026, and three, an update on operational and strategic initiatives. 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 webcast in our investor presentation, which is available through a link on this webcast in 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. I would first like to start by acknowledging our people, our client partners, and stakeholders in the Middle East as they navigate the ongoing conflict. The commitment of our team has been on full display as they support one another and our client partners. Turning to Q1. We are pleased to report another strong quarter of operational and financial performance. Results reflect continued discipline execution across our global footprint as well as our ongoing efforts to optimize and streamline our business. Performance was underpinned by the Energy Infrastructure and After-Market Services business lines, which generated 65% of adjusted gross margin before depreciation and amortization during the first quarter. The Engineered Systems business is demonstrating strong execution and commercial momentum, supported by healthy backlog levels and ongoing bidding activity across key markets, particularly in North America.

A few comments on each of our business lines. ES bookings of CAD 483 million during Q1 2026 compared to a trailing eight-quarter average of CAD 344 million. ES book-to-bill ratio was 1.5x during Q1 2026 and one time on a trailing eight-quarter average, highlighting that the company is consistently replenishing its backlog in line with project execution. The outlook for ES products and services continues to be attractive, driven by expected increases in natural gas, associated liquids, and electric power generation across Enerflex's core operating countries. Enerflex is advancing its electric power generation business, including opportunities associated with data centers. During the quarter, the company was awarded a behind-the-meter power generation project for a data center utilizing reciprocating engine generator sets and secured additional projects supporting island power applications.

Enerflex continues to see strong demand across its Engineered Systems business line and emerging opportunities for After-Market Services support with our current scope of opportunities now exceeding 5 GW. Turning to After-Market Services. This business line continued to reflect steady customer maintenance spending. We are particularly encouraged by the performance of our AMS business in countries where we also operate Energy Infrastructure assets, highlighting the strength of our integrated offering and competitive positioning in key markets. The Energy Infrastructure business continues to deliver solid performance underpinned by approximately CAD 1.3 billion of contracted revenue. Within this segment, Enerflex's U.S. Contract Compression business is performing well, led by increasing natural gas production in the Permian Basin. Utilization remains stable at 94% across a fleet size of 486,000 horsepower.

You can find additional detail on operational KPIs for this segment on slides 15 and 16 of our investor presentation. Enerflex's U.S. Contract Compression market fleet increased by 13% over the course of 2025, and we continue to expect growth capital expenditures will deliver growth at a similar pace or greater during 2026. Enerflex is also securing long lead time components to support further growth in 2027. Turning to our international Energy Infrastructure operations, which are outlined on slide 17 and 18. This portfolio is supported by a strong contract position with a weighted average remaining term of approximately five years, providing durable and predictable cash flow that we expect will continue to support Enerflex's financial performance in the years ahead. I'd like to touch briefly on our operations in the Middle East.

Enerflex is closely monitoring the conflict. To date, the company's operations in the region have operated uninterrupted. Local teams are actively managing with established response processes and contingency planning, ensuring continued safety of our people and reliability of the company operations. Enerflex's operations in Bahrain and Oman comprise 17 distinct natural gas and produced water projects. Once the conflict in the Middle East finds resolution, we see the potential for opportunities across Enerflex's business lines. Our aftermarket services capabilities are well-positioned to support the recovery of operations. Our engineered system solutions enable rapid replacement, debottlenecking, and temporary capacity in the reconstruction of Energy Infrastructure. Enerflex's book provides flexibility to deploy capital toward rebuilding. Beyond the Middle East, we expect energy security, diversification of supply, and emphasis on domestic resources will be enduring themes for our client partners.

We believe this could result in short-cycle energy investments increasing in North America and Latin America, especially if oil prices settle above pre-conflict levels. Under this scenario, Enerflex is well-positioned with our strong market position in those two regions and see the potential for additional demand across our business. Let me now speak to building momentum around execution. We are advancing the implementation of a disciplined enterprise-wide productivity system. Key elements of this include, one, leveraging our full capabilities and scale. Two, a focus on lean and continuous improvement. Three, improving structural cost, competitiveness, and speed of execution. Four, modernizing our IT and automation to enable decision-making and speed. We are excited about early wins and the potential impact across Enerflex and look forward to providing updates on our progress. Lastly, I'd like to touch on our strategic priorities.

For the past several months, we have been engaging with internal and external partners in a broader assessment of Enerflex's strategy, capabilities, and market opportunities. The outcomes of this work will be shared in more detail at our virtual investor update on May 27th. For today, let me share that Enerflex's approach to long-term value creation will be anchored on strategic growth opportunities aligned with secular growth trends, a relentless focus on execution, and a disciplined capital structure and capital allocation framework. With that, I'll turn it over to Preet to speak to the financial highlights.

Thanks, Paul, and good morning, everyone. I'll start with highlights from the first quarter. We generated revenue of CAD 584 million compared to CAD 552 million in Q1 2025 and CAD 627 million in Q4 2025. Higher revenue compared with prior year reflects strong execution and high level of operational activity in the Engineered Systems product line. The sequential decline relates primarily to lower parts sales and service utilization in the After-Market Services product line. Gross margin before depreciation and amortization was CAD 179 million, or 31% of revenue, compared to CAD 161 million, or 29% of revenue in Q1 2025, and CAD 177 million, or 28% of revenue during Q4 2025. Energy Infrastructure and AMS product lines generated 65% of consolidated gross margin before depreciation and amortization during Q1 2026.

ES gross margin before depreciation and amortization increased to 19% in Q1 2026 compared to 18% in Q1 2025 and 18% in Q4 2025, primarily related to product mix. SG&A was CAD 79 million for the three months ended March 31, 2026, up CAD 22 million from the prior year period due to higher stock-based compensation. On a sequential basis, SG&A decreased from CAD 83 million, primarily due to lower core SG&A from cost savings initiatives, partially offset by higher stock-based compensation expense. adjusted EBITDA of CAD 137 million compared to CAD 113 million in Q1 2025 and CAD 123 million in Q4 2025.

Cash provided by operating activities before changes to working capital or FFO increased to CAD 95 million in Q1 2026 compared to CAD 60 million in Q4 2025 and CAD 62 million in Q1 2025, a function of higher adjusted EBITDA and lower net finance costs. Cash provided by operating activities was CAD 32 million, which included net working capital investment of CAD 63 million. This compares to CAD 96 million in Q1 2025 and CAD 179 million in Q4 2025. Free cash flow decreased to CAD 15 million in Q1 2026 compared to CAD 85 million during Q1 2025 and CAD 141 million during Q4 2025, with higher FFO offset by investment in net working capital. Return on capital employed was 17.3% in Q1 2026, a new record for the company, compared to 14.2% in Q1 2025 and 16.9% during Q4 2025.

Higher ROCE is a function of the increase in trailing 12-month EBIT and lower average capital deployed, primarily due to a decline in net debt. Net earnings of CAD 43 million, or CAD 0.35 per share in Q1 2026, compared to CAD 24 million or CAD 0.19 per share in Q1 2025, and a loss of CAD 57 million or CAD 0.47 per share in Q4 2025. Compared to Q1 2025, profitability benefited from higher gross margin and lower net finance costs, partially offset by higher SG&A expense. Enerflex exited Q1 2026 with net debt of CAD 505 million, which included CAD 47 million of cash and cash equivalents, a reduction of CAD 59 million compared to Q1 2025. Since the beginning of 2023, Enerflex has repaid approximately CAD 550 million of long-term debt through Q1 2026.

Enerflex's bank adjusted net debt to EBITDA ratio is approximately 0.9x at the end of Q1 2026, down from 1.3x at the end of Q1 2025 and 1x at the end of Q4 2025. Let me shift to capital allocation. We invested CAD 16 million in the business, comprised of CAD 7 million for growth, primarily allocated to expand the company's contract compression fleet in the U.S., and CAD 9 million for maintenance and PP&E. Despite the slower start in Q1, we continue to target organic capital expenditures of CAD 175 million-CAD 195 million during 2026. This includes growth capital of CAD 90 million-CAD 100 million, maintenance capital of CAD 70 million-CAD 80 million, and PP&E and infrastructure investments approximately CAD 15 million to support the company's ES business and activity in adjacent markets, including electric power generation.

Enerflex returned CAD 4 million to shareholders through dividends during the first quarter. There were no repurchases under our NCIB. We continue to allocate capital in a balanced manner across growth investments, shareholder returns, and managing our financial position. The company's focus remains on enhancing profitability in our core operations, executing our Engineered Systems backlog, and maintaining a strong, flexible balance sheet to support long-term value creation. With that, I'll turn the call back over to Paul for closing remarks.

Thanks, Preet. We continue to advance our business and take meaningful steps to support long-term shareholder value creation. While there remains important work ahead to fully realize our ambitions, I am confident in our ability to build on this foundation, and we would like to thank our global team for their continued efforts and commitment. I will now turn the call back to the operator for questions.

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first call comes from the line of Aaron MacNeil with TD Cowen. Go ahead, your line is open.

Hey, morning all. Thanks for taking my questions. When you think about opportunities in the Middle East, can you give us a sense of what sort of boxes you'd need to check in order to get to a positive FID, from a build multiple contract duration perspective, as well as any other important metrics that you'd want to highlight?

Good morning, Aaron. Thanks for the question. First, staying extremely close to our knitting, meaning, you know, focused on gas treating, gas processing, compression, very strict discipline around project activity, whether it be assessment through engineering, audits, whether it be engineering work all the way through a full BOOM engagement, the digital element being on top of that. We also participate, as you know, in the water business. We do have a nice installed base. As that installed base takes on additional requirements or advances, we participate there with our engineering know-how and our abilities. Certainly, driving a return focus, a disciplined return focus on our capital allocation.

Working very hard on our execution, our operational position for cost, whether it be any of the lines. We have a strict discipline on that. Looking for solid returns, contract durations that extend at least beyond our break-even periods and then some. More opportunities, a little bit different in today's environment. More audit assessment, AMS focus as we look at potential debottlenecking. Prior to contract, there was a growing opportunity list. Like I said, it was very, very close to our knitting and gas processing, treating, and compression.

Okay, fair enough. It looks like your purchase obligations stepped up by about CAD 230 million this quarter, including CAD 138 million in 2028. Can you say how much of the increase is tied to backlog additions? What's speculative? On the working capital build this quarter and in light of a very good outlook, how should we think about that working capital balance going forward?

Hi, Aaron, it's Preet. I'll touch on both those points. Number one, you're right. We have, as we've mentioned, Paul mentioned today, and we mentioned earlier, that we have been getting ahead of the curve on long lead time major components and largely for the ES line of business. We've secured our place in line well into 2027, 2028, and we're looking forward to 2029 also. We've got the capacity capability through our plants to execute, but we wanna make sure we're not stalled by any supply chain constraints. We've been, as you've seen, the purchase obligations have increased materially year-over-year out to 2028 versus 0 in 2028 as of a year ago. It's important to note also that there's minimal cash outlay for these.

These are spots in line, so we can execute, but not a ton of cash that's going out the door. Managing very carefully our obligations, managing our place in line, so we continue to execute effectively going into next year and the following year. On working capital, if you look at Q4, we had a harvest of CAD 119 million. Q1, we had CAD 63 million use or investment of working capital across AR inventory primarily. This is aligned to obviously the lead times that we just discussed on some of the inventory and pre-deposits down. Also, with respect to receivables, we received a significantly large cash deposits late in Q4, and we're now returning to more normalized working capital metrics, DSO, DPO inventory turn as at Q1.

Going forward for the remainder of 2026, largely, I would say relatively flat working capital movement, maybe some movement quarter-over-quarter, but for the next three quarters, approximately flat. That's what I think that would be the best estimate as we look out the rest of the year. Q1 was a little more normalized relative to Q4.

Gotcha. Thanks, guys. I'll turn it back.

Thank you. One moment for our next question. The next question comes from the line of Keith Mackey with RBC Capital Markets. Go ahead, your line is open.

Hey, thanks, and good morning. Paul, as you've gotten to learn the different parts of the business over the last, you know, several months, can you just talk about some of the parts of the business that you think, whether it be product, service or region that you think have been sort of underappreciated or, you know, maybe don't get the same attention as the power side of the business does now that, you know, you've found have been, you know, very good parts of Enerflex that you'd like to highlight?

Sure. First, good morning, Keith Mackey, and thank you for the question. Look, there's several areas that are exciting within the portfolio, whether it's product or geo. We're quite pleased as I learn about our gas processing capabilities. Our cryogenic processing capabilities are quite strong, very encouraging. The other elements, our After-Market Services business, especially those tied to our Energy Infrastructure and our international markets are quite strong and very well-positioned and differentiate, I believe, Enerflex in the marketplace. When it comes to maybe under appreciation, you know, I'm just coming back recently from a trip to the Southern Cone, Brazil, Argentina.

I had a chance to meet several of our employees, visit all of our facilities, visit six, seven customers. Quite impressed with the operational excellence first off there. I'm not sure that's fully understood or appreciated. The brand equity tied to Enerflex plus Exterran history is quite strong. Good installed base. That would be an area that I would highlight, Keith. It's an area that certainly we bring discipline to the approach, the Vaca Muerta being, you know, a world-class asset, bringing all of the right controls, treasury controls, financial discipline is important.

Got it. Appreciate the comments. Paul, just on the, on the productivity system, can you just expand upon maybe what you hope to achieve with the implementation of that? Is there a margin improvement target you can highlight for us or any other targets that you'd like to achieve as you, as you implement this system?

Yeah. No, great question, Keith. You know, simply think of Enerflex as a CAD 2.6 billion enterprise. The integrated capabilities of a CAD 2.6 billion enterprise give us a lot of opportunity. You know, there's some key areas I would highlight. Our core priorities when it comes to the productivity system are to leverage that scale and operating footprint. That comes from structure, design, things like that. You know, the business procures well over CAD 1.6 billion on supply chain materials around the world.

We see opportunities there to act and behave and bring forward an integrated approach to the supply chain. One really big area is to build a culture around lean continuous improvement, where employees engage daily on identifying waste, improving knowledge engagement in the system, as well as be very formalized in Kaizen projects that go across the enterprise that will bring us some nice productivity gains. Lastly, technology. Whether technology is in its OT form, where we provide technology to customers in digital areas, or we leverage IT automation systems internally on cleansed data to take advantage of that across the different value streams in the business. Really excited about what we can do on this front. The company has demonstrated quarter to quarter now, many quarters of improving margin.

We'll be talking more in depth about those commitments here coming up in our virtual investor day on May 27th.

Okay. Thank you very much.

One moment, please. Our last question will come from Tim Monachello with ATB Capital Markets. Please go ahead, your line is open.

Thanks for taking my questions. It strikes me that you're working in a fairly strong demand environment and lead times for critical components are extending. Within that construct, your pre-order behavior somewhat dictates your capacity to, for throughput over the next couple years. Can you talk to us a little bit about how you're thinking about that and the visibility to growth that you're modeling within the Engineered Systems business?

Sure. Tim, I'll start, and then, if we need to add. It's a great question. Having had the opportunity to visit some of our large equipment OEM factories and suppliers, first off, I would say a fair amount of capital is being deployed to better lead times. We've watched lead times on equipment extend. We've seen a pretty robust ordering environment. I would say, you know, that this comment or question around productivity, you know, presenting Enerflex wide in a strategic way with equipment vendors has been very beneficial for us to be able to negotiate and get a position that secures that, I mean, well beyond 2026, 2027. We're talking about 2028 type negotiations for equipment.

That position, in a constricted environment is quite strategic. It affords us opportunities, in the marketplace as well. I would tell you 2026 is secured, 2027. A lot of these relationships as the capital deployed by the equipment vendor starts to take hold really come into play in 2028.

Okay. How should we think about the growth profile for, I guess, power gen is probably the one where you're seeing the most inflection. Maybe start there, and then maybe if you have a comment on.

Yeah.

Gas.

Yeah.

And compression processing as well along those same lines, that'd be helpful.

Yeah. Great, great question. Maybe I'll start backwards here. Commitment on growth capital in our contract compression business has been there. You know, we expect another 13%+ year-over-year growth in contract compression. We are also seeing a pretty favorable environment in our Engineered Systems business, non-power. So that's a place where we see, you know, above market type of position on growth. Then the wild, I think I've used the word embryonic in the past, on power. Look, that changes daily, weekly, monthly. You can see our visibility and commitment to the market has grown from, what, 1.5 GW of visibility to over 5 GW of visibility. That does line up with the ability of equipment there.

Look, I think it's hard to say. We're ready to participate. We have the capacity. We have the operational bandwidth. as we close some of these opportunities, we'll be able to talk more firmly about that at that time.

Okay. That's helpful. The margins were strong, particularly in Engineered Systems and Energy Infrastructure in the quarter. Do you expect that level of margin to persist through the year?

Good morning, Tim Monachello. It's Jeff Fetterly. Splitting those apart. On the Energy Infrastructure side, we did have some margin benefit in the first quarter as it relates to some performance bonuses and KPIs as part of our Energy Infrastructure contracts, especially in the eastern hemisphere. We don't necessarily expect that that'll be a continuing element in subsequent quarters. In terms of the Engineered Systems margins, we've talked in the past about mix being a factor there, and we certainly continue to see strong demand in the gas processing side, which is typically accretive to margins on a consolidated basis for ES. We're seeing fairly stable pricing environment today. As Paul Mahoney referenced, the efforts around continuous improvement and operational improvements and continuous or lean is also an ongoing initiative within the company.

All right. That's helpful. Appreciate the time. I'll turn it back.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Paul Mahoney for closing remarks.

Thank you for joining today's call. We are excited about the path ahead for Enerflex and look forward to providing more detail around Enerflex's strategy, capabilities, and market opportunities at our virtual investor update on May 27th.

Thank you for.

Thank you for joining.

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