Enerflex - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue was $1.442B (+4% reported, +5% LC), ~$37M above the midpoint of February guidance; Adjusted EPS was $1.53, with GAAP diluted EPS of $1.06.
• Results beat S&P Global consensus: revenue $1.442B vs $1.418B* and adjusted EPS $1.53 vs $1.40*; outperformance was driven by stronger USIS mortgage (prequal/pre-approval), non‑mortgage in Card/Auto, and solid EWS government/talent momentum.
• Equifax maintained FY25 guidance (reported revenue $5.91–$6.03B; adjusted EPS $7.25–$7.65) despite the Q1 beat, citing uncertainty around tariffs, inflation, rates, and mortgage/hiring markets.
• Capital return accelerated: Board authorized a $3B share repurchase (targeted over ~4 years) and raised the quarterly dividend by 28% to $0.50 (from $0.39), reinforcing a durable FCF outlook (~$900M in 2025) and balanced capital allocation.

What Went Well and What Went Wrong

• What Went Well

  • USIS delivered 7% revenue growth with 11% mortgage and 6% non‑mortgage growth; management highlighted stronger card/auto and post‑cloud commercial momentum.
  • Workforce Solutions (EWS) Verification Services grew 5% (non‑mortgage +6%) with better‑than‑expected government growth; EWS adjusted EBITDA margin was 50.1%.
  • Innovation and Cloud execution: Vitality Index reached 11% (above 10% LT goal) and >85% of revenue is now in EFX Cloud; CEO: “Our strong first quarter is a proof point to the power of the Equifax cloud…”.

• What Went Wrong

  • Employer Services declined 8% amid weaker hiring; management continues to expect a softer hiring backdrop near term.
  • International operating margin compressed to 7.8% (from 9.9% YoY) on mix, despite 7% LC revenue growth; Canada and Europe were slightly weaker on macro.
  • Guidance held despite the beat given tariff/inflation/rate uncertainty and recent mortgage softness; management cited mortgage inquiry declines over the last 10 days of the period.

Transcript

Operator (participant)

Thank you for standing by. Welcome to the Enerflex First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Fetterly, Vice President, Corporate Development and Capital Markets. Please go ahead.

Jeff Fetterly (VP of Corporate Development and Capital Markets)

Thank you, Michelle, and good morning, everyone. With me today are Preet Dhindsa, Interim President and CEO; Joe Ladouceur, Interim CFO; and Ben Park, Enerflex's controller. During today's call, our prepared remarks will focus on three key areas: continued strong performance of Enerflex's business and our outlook, capital allocation, including planned spending and direct returns to shareholders, and three, our progress on near and long-term strategic priorities. Before I turn it over to Preet, 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 CEDAR 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 Preet for comments.

Preet Dhindsa (Interim CEO)

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. Our Energy Infrastructure and Aftermarket Services business lines continue to deliver steady performance and reinforce Enerflex's ability to generate sustainable returns across our global platform. Energy Infrastructure and Aftermarket Services contributed 70% of our gross margin before depreciation and amortization in the first quarter of 2025, 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. We exited the first quarter of 2025 at 1.3 times compared to 1.5 times at the end of Q4 2024. Now a few highlights for each of our business lines.

The energy infrastructure business continues to perform well across our three core regions: the U.S., Latin America, and the Middle East. In the U.S., the fundamentals for contract compression remain strong, led by expected increases in natural gas production, notably in the Permian. We're pleased with the operational performance of our U.S. contract compression business, reflecting utilization in the mid-90% range for the quarter, and revenue per horsepower per month and profitability showing continued momentum. Slides 18 and 19 of our investor presentation highlight our fleet composition and the strong relative operating performance of this part of our business. Demand for new contract compression equipment in the U.S. remains strong. We added approximately 20,000 horsepower during the quarter to exit at 448,000 horsepower across our fleet. We expect to be over 475,000 horsepower by the end of 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. Slides 16 and 17 highlight our international Energy Infrastructure business, which includes approximately 1.2 million horsepower of operating compression and 24 build, own, operate, and maintain, or BOOM projects in the Middle East and Latin America. Our two produced water projects in Oman continue to perform very well, and we are in the process of expanding one of these sites, which we highlight on slide 20. Our international Energy Infrastructure business is supported by approximately $1.3 billion of contracted revenue and an average contract term of approximately five years. Turning to Aftermarket Services, this business line benefited from strong activity levels, including customer maintenance activities.

We're especially pleased with the performance of our AMS business in countries where Enerflex also operates EI assets, reflective of a differentiated solution and strong competitive position in core countries. On the Engineering System side, we recorded bookings of $205 million during Q1. First quarter bookings were tempered by accelerated customer activity in the latter part of the fourth quarter of 2024, which resulted in select orders being pulled forward and customers pausing some decisions on expenditures due to commodity price volatility and evolving market conditions. We continue to have a strong ES backlog exiting Q1 2025 with approximately $1.2 billion, the majority of which is expected to convert into revenue over the next 12 months. During 2025, ES gross margins are expected to align more closely with historical averages, reflecting both weaker domestic natural gas prices through much of 2024 and a shift in product mix.

While near-term ES revenues expect to remain steady, Enerflex continues to closely monitor evolving market conditions and increased near-term uncertainty, including the impact of tariffs and lower oil prices, and we will adjust our business as appropriate. The company expects to be partially protected from the direct and indirect impact of tariffs through its diversified operations and ongoing risk management efforts. Enerflex's operations in the U.S., Canada, and Mexico are largely distinct in the client partners and projects they serve. The United States is Enerflex's largest operating region, generating 45% of consolidated revenue on a trailing 12-month basis by destination of sale, and we believe the company is well positioned to benefit from growth in domestic energy production. Enerflex's operations in Canada and Mexico generate 11% and 3% of consolidated revenue on a trailing 12-month basis, respectively.

Despite increased near-term risk and uncertainty for the ES product line, recent domestic natural gas prices have been constructive, and the medium-term outlook for ES products and services remains attractive, supported by anticipated growth in the natural gas and produced water volumes across Enerflex's global footprint. I want to reiterate Enerflex's priorities in 2025. These include enhancing the profitability of core operations, two, leveraging the company's leading position in core operating countries to capitalize on expected increases in natural gas and produced water volumes, and three, maximizing free cash flow to strengthen Enerflex's financial position, provide direct shareholder returns, and invest in selective customer-supported opportunities for growth. Before I turn the call over to Joe, I would like to comment briefly on our recently announced leadership transition. On March 19, Enerflex announced that Mark Rossiter stepped down as President, CEO, and Director.

Concurrently, I assumed the role as Interim President and CEO, and Joe Ladouceur as Interim CFO. The board has undertaken a comprehensive search to identify the company's permanent CEO and has retained a global executive search firm to assist with this process. The search process is making good progress, but we will not be commenting further. With that, I'll turn it over to Joe to speak about the financial side.

Joe Ladouceur (Interim CFO)

Thank you, Preet, and good morning, everyone. Enerflex delivered strong first-quarter results, and we are particularly pleased with our ongoing progress in efficiently managing working capital, lowering net finance costs, and reducing the company's leverage ratio. I'll start with highlights from the first quarter. We recorded consolidated revenues of $552 million compared to $638 million in Q1 2024 and $561 million in Q4 2024. Gross margin before depreciation and amortization was $161 million, or 29% of revenue, compared to $119 million, or 19% of revenue in Q1 2024, and $174 million, or 31% of revenue, during Q4 2024. ES gross margin before depreciation and amortization decreased compared to Q4 due to product mix. As Preet referenced, the EI and AMS product lines generated 70% of consolidated gross margin before depreciation and amortization during Q1 2025, and we continue to expect approximately 65% for the full year of 2025.

Adjusted EBITDA was $113 million, compared to $69 million in Q4 2024, and $120 million during Q4 2024. The year-over-year increase in adjusted EBITDA was primarily due to costs recognized related to an international ES project in Q1 2024. Energy Infrastructure performance continued to be strong, with gross margin before D&A of $86 million compared to $80 million in Q1 2024 and $86 million in Q4 2024. Aftermarket Services gross margin before D&A was 22% in the quarter, benefiting from strong customer maintenance programs. Enerflex's SG&A of $57 million was $21 million lower year-over-year and down $35 million on a sequential basis, mainly due to decreased share-based compensation and lower depreciation and amortization expense. Cash provided by operating activities was $96 million in Q1 2025, which included a working capital recovery of $34 million. We are pleased with our ongoing global efforts to efficiently manage working capital.

Free cash flow increased to $85 million in Q1 2025, compared to $72 million during Q1 2024 and $76 million during Q4 2024, primarily due to lower maintenance capital spend. Now I'd like to touch on our balance sheet and deleveraging. We exited the quarter with net debt of $564 million, which included $75 million of cash and available liquidity of $672 million, compared to $614 million in Q4. As a result of our continued focus on financial discipline and operational execution, we have repaid $433 million of debt since the beginning of 2023. Our leverage ratio was 1.3 times at the end of Q1. Further details are included on slide 13 of our investor presentation. Let me shift now to capital allocation.

First, on our CapEx plans, we invested $33 million in the business during the quarter, consisting of $14 million in capital expenditures, primarily for maintenance, and $19 million for expansion of an EI project in the Eastern Hemisphere that will be accounted for as a finance lease. Enerflex is targeting a disciplined capital program in 2025, with total capital expenditure guidance at $110 million-$130 million, and that is unchanged. This includes $40 million-$60 million for growth capital expenditures. Similar to 2024, disciplined capital spending will be focused on customer-supported opportunities, with the majority of our growth focused on expanding our U.S. contract compression fleet. We expect to grow our fleet to over 475,000 horsepower by the end of 2025, with new units deployed under multi-year contracts in core operating regions. Enerflex returned $6 million to shareholders through dividends in Q1.

Our NCIB commenced on April 1 and authorized the company to repurchase up to approximately 6.2 million shares through the end of March 2026. During the month of April 2025, Enerflex has repurchased 690,500 common shares at an average price of CAD 10.15 per share. 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 given evolving market conditions. In addition to increases in the company's dividend, share repurchases, and disciplined growth capital spending, Enerflex 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 opportunities to optimize its debt stack. Finally, I want to thank Enerflex's 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 positioning the company for long-term growth and value creation. With that, I will turn the call back to Preet for his closing remarks.

Preet Dhindsa (Interim CEO)

Thanks, Joe. We've made significant operational, financial, and strategic strides in the recent quarters. Despite increasing near-term risk and uncertainty, the fundamental drivers behind our business remain intact: global energy security and the shift towards low-emissions natural gas. Each of our business lines is delivering solid results, and we believe we are all well positioned to benefit from these fundamental drivers. Moving forward, we're sharpening our focus on boosting profitability and strengthening resilience of our core operations, ensuring Enerflex generates sustained, attractive returns for shareholders over the long term. I look forward to building on our progress, and we'll now turn the call back over to the operator for questions.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for our first question. Our first question is going to come from the line of Michael Barth with Raymond James. Your line is open. Please go ahead.

Michael Barth (Equity Research Analyst)

Hey, good morning, and thanks for taking my question. I was just wondering if you can comment on bookings' trajectory into the second quarter. Are you seeing a rebound from first quarter, just pace, or is there sort of more deferrals?

Preet Dhindsa (Interim CEO)

Yeah, thanks, Michael. So bookings, as we know, Q1 was a little bit light at $205 million. As noted, some of the activity was pulled into Q4, which was quite constructive. What we are seeing in Q1 and Q2, some of our customers and their end customers are tempering some of the decisions, especially in Q1. Backlog is good at $1.2 billion. What we are seeing now is there is continued depth and opportunities in the market, both processing and compression. The question would be the timing. When do these hit? We continue to feel good, and we felt that Q1 was a little light relative to Q4, but good backlog, and we see good opportunities going forward.

Michael Barth (Equity Research Analyst)

Great. Thanks. I'll turn it back.

Operator (participant)

Thank you. One moment for our next question. Our next question is going to be from the line of Aaron McNeil with TD Cowen. Your line is open. Please go ahead.

Aaron MacNeil (Director and Equity Research Analyst)

Good morning, all. Thanks for taking my questions. Preet, a bit of a broader question for you, and I can appreciate that your role as Interim CEO is somewhat limiting in terms of your ability to set the strategic direction of the company. I also noted the comments on strategic priorities for the year. You are in the role today. Just wondering if you can give us any insights of being in the role, if anything, that you think should be changed or improved across the platform going forward.

Preet Dhindsa (Interim CEO)

Aaron, thanks for the question. When I took the role about seven weeks ago, we determined that it's still best to continue to move the business forward, have some prudence given what's going on geopolitically, tariffs, oil prices, et cetera, working on our debt stack and free cash flow, refinancing. Joe can get into that if we need to in a few moments. We have got a good footprint, and we will continue to refine that global footprint. Cost savings is another important element to post-integration as we simplify, optimize our business globally. Interest and tax is another area that improves free cash flow. We have focused on that for quite some time. Overall, capital allocation, work priorities, growth capital in the U.S. fleet, 2025, very important. We will watch the markets carefully, and if we need to refine or adjust our trajectory for the year, we will.

We have a few levers we can do it, but we are committed to growing our business organically, largely in the U.S., using precision managing maintenance capital where we have uncommitted opportunities. We may temper back, but still stay range-bound. Overall, I'm very pleased with the operations. We've got excellent leadership in all the regions, strong finance and corporate functions. I feel good about what we've accomplished, and during this interim period, Joe and I with our colleagues around the globe will continue to advance the business.

Aaron MacNeil (Director and Equity Research Analyst)

Makes sense. Yeah, I know this is challenging given the uncertainty as well, but lots of good free cash flow in the quarter, a working capital release, a credit to Joe to be sure. Based on what you can see today, how would you rank the various capital allocation priorities between the ones you mentioned in the prepared remarks?

Preet Dhindsa (Interim CEO)

I'd say capital allocation, we've been consistent in stating the various levers that we have. Direct shareholder returns, Q3 last year, a 50% dividend bump we initiated. Share buybacks, we've been active, effective April 1, and Joe has talked about those amounts. We have a year to buy up to 5% of public float, as noted. Growth capital, earmarked for the U.S., and we've rangebound growth as $40 million-$60 million, maintenance as $70 million. Once again, we feel really good about the economics of the U.S. fleet, the utilization, increased horsepower we're putting into the market, and we'll do further horsepower increases by the end of this year. The revenue per horsepower per month is still quite constructive, a little over $28, $29. We feel good about the economics on the U.S. fleet.

As Joe noted, debt reduction, prudence in today's environment, we feel is still relevant. We will continue to focus on free cash flow, effective working capital management globally that you have referenced, and debt reduction. As we go to the market to refinance the debt, we look for even more constructive terms.

Aaron MacNeil (Director and Equity Research Analyst)

Thanks, everyone. I'll turn it back.

Operator (participant)

Thank you. One moment for our next question. Our next question is going to be from the line of Keith McKay with RBC Capital Markets. Your line is open. Please go ahead.

Keith McKay (Analyst)

Hey, good morning, and thanks for taking my questions. Just wanted to go back to the bookings topic. Obviously, last cycle, bookings got fairly low for a number of quarters. Do you think we're headed into that type of environment again? Can you just talk about what you're seeing in the market as far as where the weakness is and where the strength might be, i.e., if the current gas strip holds? Do you think that there could be some pickup in gas year basis? Just some more commentary on the bookings would be helpful.

Jeff Fetterly (VP of Corporate Development and Capital Markets)

Hey, Keith, it's Jeff. As Preet referenced in his remarks, we continue to see good depth of opportunities, especially in the U.S., and those touch on both the processing side and the compression side. Obviously, just given the weighting of activity, the Permian figures prominently into that number as well. As we referenced in the release and was also in the prepared remarks, there is some constructiveness on the gas side, but at this point, I think we view it more as optionality than necessarily a core driver of demand. As you referenced, there's precedent in our business for significant weakness in ES bookings in previous downturns. Where we see it today, the market continues to be fairly strong in terms of opportunities.

The question is just going to be, at what point do the operators execute on those opportunities, and what conviction will they have on it as well? That's something that's still, I'd say, evolving and that we're trying to assess as quickly as possible.

Keith McKay (Analyst)

Got it. Okay. That's helpful. Just on the contract compression side, certainly there have been some announcements for rig count reductions in the Permian. Can you just talk about the visibility you have into the potential impact that decreased oil drilling might have on the demand for contract compression in the Permian? Are you still comfortable putting out the incremental horsepower that you have planned? What type of contract visibility do you have on the new stuff, but also some equipment that may have expiries upcoming?

Jeff Fetterly (VP of Corporate Development and Capital Markets)

From a demand standpoint, you've seen sort of our utilization and our commentary. When you look at the other public companies that compete in that space, their commentary in recent days has also been very constructive on the market. We continue to see good fundamentals at play that we expect will continue. As you said, there's been some indications from the operators of pulling back activity and capital spending, but it's still unclear what derivative impact that could have into the contract compression side specifically. As we've previously talked about, we are signing multi-year contracts to support these new assets that we're putting in, and we remain committed to the capital program guidance that we've talked about for 2025. That's a side of the business that we continue to see good returns in and we believe is an attractive area for us to grow our business.

Keith McKay (Analyst)

Okay. Thanks very much. That's it for me.

Operator (participant)

Thank you. As a reminder to ask a question, please press star 11 on your telephone. Our next question is going to come from the line of Tim Monachello with ATB Capital Markets. Your line is open. Please go ahead.

Tim Monachello (Research Analyst)

Hey, good morning, everyone. I wanted to ask a little bit more on the demand front, maybe have a better idea of, I guess, the sources of demand and what they're levered to. Obviously, you've got some capital being pulled back by EMPs with the crude quote coming down, but then you've also got sort of a wall of LNG export capacity coming online, the doubling of North American LNG export capacity through 2028. When you look across your customer base, can you talk a little bit about, I guess, the mix of customers that might be building capacity and infrastructure related to longer-term strategic growth and ones that are more impacted by near-term commodity prices?

Jeff Fetterly (VP of Corporate Development and Capital Markets)

Tim, it's Jeff. As we've talked about in previous conference calls, our customer base is biased and weighted towards larger operators, especially in the Permian, and operators that have, on average, been the consolidators during the recent phase. Our expectation is, with those relationships and that weighting of our customer base towards those type of operators and midstream entities, we expect that we'll see more stability in their plans and that those customers are focused on the latter of those two aspects that you referenced in terms of the medium and longer-term outlook for LNG and LNG export in the U.S. and growing gas demand overall in the U.S. market as well.

There's obviously some uncertainty in the near term and some increased risk, as Preet and Joe referenced in their remarks, but we continue to focus on the medium and long-term fundamentals of the business, which we believe remain attractive.

Tim Monachello (Research Analyst)

Okay. Just given the fact that, let's call the uncertainty part sort of flat quarter over quarter, but you had some stuff pulled into Q4 and Q1. Do you think Q2 bookings end up higher or lower than Q1?

Preet Dhindsa (Interim CEO)

Tim, it's hard to get too deep into that right now, but as I mentioned, we see good opportunities in the market. The question is, when do they hit? What quarter do they hit? And how successful is our team in winning the work? We feel good that the market is quite constructive, and we're very active in that space.

Tim Monachello (Research Analyst)

Okay. Fair enough. I want to talk a little bit about the free cash. You guys have done a really good job of managing working capital over the last sort of 18 months. What are your expectations for free cash? I know you can't give guidance on that or you won't, but should we expect to see more working capital released through the year, or how should we take note of that?

Jeff Fetterly (VP of Corporate Development and Capital Markets)

As we've talked about previously, Tim, our expectation is to have a more stable or neutral working capital position in 2025. Obviously, with the working capital recovery, we're very happy with the working capital recovery in the first quarter, but we do expect to see a modest build of working capital through the remaining quarters of 2025. The fundamental view that we have in terms of trying to maintain a fairly neutral working capital profile in 2025 remains intact.

Tim Monachello (Research Analyst)

Okay. Last one for me. Just talking about improving profitability, and you've touched on optimizing the tax impact and perhaps seeing some improved interest expense when you refinance the stack. Is there anything more operational that you're doing, I guess, on a segment basis that we should be thinking about as well?

Preet Dhindsa (Interim CEO)

Tim, what I would say is on the operational side, you'll see our cost structures come down quarter over quarter. As I mentioned on earlier calls, the first 18 months plus a bit was integration focused, fairly heavy SG&A. Now we're in a stage of continuing to simplify and optimize our geographic footprint, but also how we invest in our people, our process, our systems post-integration. That's a little bit of a longer exercise. Take a look at our cost structure. We're heavily focused on SG&A. That's another area that you'll see a little bit more improvement that'll improve profitability and free cash flow. Obviously, below the line, interest and taxes, we've alluded to that a fair bit too.

Tim Monachello (Research Analyst)

Okay. I really appreciate the commentary. I'll turn it back. Thanks, guys.

Operator (participant)

Thank you. I would now like to hand the conference back over to Preet Dhindsa for closing remarks.