Release Date: November 14, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Enerflex Ltd (EFXT, Financial) reported strong operational performance in Q3 2024, with solid execution across business lines.
- The company successfully reduced leverage to within its target range of 1.5x to 2.0x, demonstrating financial discipline.
- Enerflex Ltd (EFXT) increased direct shareholder returns with a 50% increase in its quarterly dividend.
- The energy infrastructure and aftermarket services business lines generated 65% of the gross margin before depreciation and amortization.
- The company has a strong backlog with approximately $1.6 billion of contracted revenue supporting EIA assets and a $1.3 billion Engineered Systems backlog.
Negative Points
- Demand for new engineered systems equipment and services in North America has been impacted by extended weakness in domestic natural gas prices.
- Enerflex Ltd (EFXT) experienced increased SG&A expenses, mainly due to higher share-based compensation.
- The company anticipates gross margin for engineered systems to be more consistent with long-term averages, indicating potential margin pressure.
- Despite strong performance, the company faces challenges in maintaining high gross margins in the energy infrastructure segment due to sporadic overhaul work.
- Enerflex Ltd (EFXT) is cautious about capital allocation, indicating potential constraints on growth capital spending.
Q & A Highlights
Q: How often will Enerflex evaluate the dividend, and is there potential for a change in the target leverage range?
A: Marc Rossiter, President and CEO, stated that Enerflex is content with the current target leverage range of 1.5x to 2.0x. The company intends to enhance shareholder returns alongside further debt reduction, but it is premature to speculate on long-term guidance regarding dividends or leverage changes.
Q: Can you provide more context on the potential expansion of the US contract compression fleet?
A: Marc Rossiter explained that Enerflex will provide further guidance in early 2025. The focus is on making investments with the best customers and equipment for long-term returns. New growth capital has been deployed under multiyear contracts, with recent contracts exceeding four years, indicating improved revenue and contract terms.
Q: Why did Enerflex choose a dividend increase over a share buyback for capital returns?
A: Preet Dhindsa, CFO, noted that with Enerflex now within its target leverage range, the priority is to enhance shareholder returns alongside debt repayment. The initial step was a dividend increase, and future capital allocation decisions will be made quarterly, considering financial position, cash flow, and sustainable revenue streams.
Q: Should the recent uptick in energy infrastructure gross margins be expected to continue?
A: Jeff Fetterly, VP of Corporate Development and Investor Relations, mentioned that the Q3 margin increase was due to higher overhaul work and rate increases. While utilization should remain steady, the overhaul work is sporadic, so the Q3 margin should not be considered a new norm.
Q: How is the mix in the engineered systems backlog affecting margins?
A: Marc Rossiter highlighted that despite a diverse product and geographic mix, the embedded margin is closer to long-term averages due to weak North American natural gas prices and consolidation in the Permian Basin. The company expects margins to average back to historical levels.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
