Enerflex Ltd. (EFXT) Q3 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Enerflex Third Quarter 2016 Results Conference. During the presentation, all participants will be in a listen-only mode. After which we'll conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Thursday, November 10th, 2016. I would now like to turn the conference over to J. Blair Goertzen, President and Chief Executive Officer at Enerflex. Please go ahead sir.

Thank you, operator, and good morning everyone, and thank you for joining us this morning. And here today with me is James Harbilas, Enerflex’s Executive Vice President and Chief Financial Officer. During this call, we will be providing our financial results for the three months ended September 30th, 2016, a brief commentary on the performance of our three business segments and a summary of our financial position at the end of the third quarter of 2016. Approximately one hour following the completion of this call, a recording will be available on our website under the Investors section. During the call, unless otherwise stated, we will be referring to the three months ended September 30th, 2016 compared to the same period of 2015. I will proceed on the basis that you’ve all taken the opportunity to read yesterday’s press release. Notwithstanding the signs of improvement during the quarter, the global energy market remains depressed from the prolonged downturn and the customers continue to be cautious with their capital spending in this new market reality. However, the recent rise in commodity prices led to an increased level of inquiries and opportunities leading to a rebound in bookings during the quarter. For Enerflex this increase resulted in a $134 million or 57% year-over-year increase in bookings during the quarter and an increase of 141% compared to the second quarter of 2016. The company also saw an increase in backlog of $147 million or 34% from December 31st, 2015 due to the stronger third quarter bookings. The improved bookings trend experienced during the second quarter of 2016 continued into the third. The company is somewhat optimistic that further improvement in commodity price will allow customers to increase investment which should translate into increased demand for the company's products and services. During the quarter, Enerflex issued approximately 8.9 million common shares at a price of $12.85 per share for gross proceeds of $115 million. While the net proceeds of the offering are intended to fund growth initiatives, they were immediately used to reduce amounts drawn on the bank facility and will be redeployed as opportunities present themselves. On November 1st, Enerflex announced a further restructuring of its Gas Drive Canadian business, which will result in the closure of its centralized distribution facility in Leduc, Alberta as well as the relocation of a service branch in Red Deer to a smaller facility. Aftermarket service and inventory requirements will continue to be serviced from Enerflex's extensive regional footprint within this statement. Global headcount decreased in the quarter to just under 1,900 people and a $0.4 million of severance and restructuring costs were recorded during the third quarter with $6.7 million recorded in the first nine months. These steps along with other ongoing cost saving measures include the sale of a Calgary property for approximately $13 million are anticipated to result in material annualized savings. Enerflex's financial performance also continues to benefit from the recurring revenue streams associated with existing and new long-term rental and service contracts and through our geographically diversified business. The company will look to continue to preserve awarded gross margins and to aggressively manage SG&A expenses. Steps taken last year and through 2016 have allowed a greater focus on key market opportunities. The company has continued to deploy capital and pursue growth opportunities in the EMEA and Latin American regions. Building on the mid-2014 acquisition, Enerflex has successfully positioned itself to diversify its revenue streams and to increase recurring revenue globally. Now turning to the outlook for each of the segments. In Canada, bookings and aftermarket service activity have been negatively affected by the significant decline in activity levels from low natural gas prices. As a result, bookings were $21 million in the third quarter compared to $76 million in the same period 2015. Backlog decreased to $86 million, which is $65 million reduction from December 31st, 2015. While some customers have proceeded with projects, activity has decreased drastically and the competition for the reduced pipeline of work is intense, putting pressure on awarded margins. Even with commodity prices improving recently, it is expected that this segment will continue to face headwinds as customers differ spend on the facilities and service until there is greater clarity to the commodity price environment into 2017. The recent performance of the USA segment has been largely dependent on activity in liquids-rich U.S. gas basins, which gave rise to new orders for compression and process equipment for this region. Despite the significant decrease in oil prices and associated impact on NGL prices, the recent recovery in oil and gas prices have led to an improvement in inquiries and bookings in the USA. For Enerflex, this resulted in bookings of $320 million for the third quarter compared to $102 million for the same period of 2015 and second quarter 2016 bookings of $88 million. At the end of the quarter, backlog was $376 million compared to $132 million in the second quarter of 2016 and $153 million at year end. Again, there is still uncertainty as to the duration of the new market reality in the region, although if current prices hold, we are cautiously optimistic that a continued uptick in the inquiry levels in bookings will follow. Enerflex remains optimistic about the future in Latin America. In Brazil, the company is seeing an increased interest for natural gas fueled projects as a means to reduce the dependency on hydroelectric power. The development of the Vaca Muerta shale play in Argentina in the short to medium term and the ongoing energy reform in Mexico in the medium to long-term could generate material opportunities for Enerflex’s products and services. Additionally, infrastructure developments in Colombia, Peru, and Bolivia are expected to result in an increased Enerflex presence in these countries. In the rest of world, bookings decreased by $28 million in the third quarter of 2016 compared to the same period of 2015. Enerflex continues to pursue a number of large engineered systems and recurring revenue opportunities across the region. Backlog of $112 million at September 30th, 2016 increased by $5 million compared to June 30th, 2016 and decreased by $11 million relative to December 31st, 2015. On another positive note, the company continues to improve its HSE culture and reduced its total recordable injury rate by 23% over the 2016 goal. Enerflex is also tracking above the 20% growth target for gas processing bookings and is currently exceeding its 35% to 40% target of recurring revenue. I will now turn it over to James Harbilas, Enerflex’s Executive Vice President and Chief Financial Officer to review our financial results.

Thank you, Blair. Financial results for the quarter weakened over the same period last year on lower gross margins in Canada and the USA, largely on reduced revenues, partially offset by an increase in the rest of world segment and by lower SG&A expenses. Consolidated revenue for the third quarter was $262 million. This decrease of $163 million was due to lower revenue in all three segments. Consolidated gross margin for the three months ended September 30th, 2016 was $64 million or 24% compared to $86 million or 20% in the same period of 2015. Gross margin decreased in the Canada and USA segments, partially offset by an increase in the rest of world segment. The increase in gross margin percentage was attributable to project margin improvement and an increased proportion of higher margin rental revenue, partially offset by ongoing warranty disputes and severance costs. Selling, general, and administrative expenses for the third quarter was $40 million compared to $48 million in 2015. The decrease was a result of a continued focus on controlling costs, including lower compensation expense, partially offset by bad debt expenses. Compensation expense was lower due to lower headcount; reduced incentive accruals based on decreased profitability, partially offset by larger mark-to-market impacts on share based compensation and unfavorable foreign exchange movements. EBIT for the third quarter of the year was $24 million compared to $41 million in the same period of 2015. The decrease was due to lower operating income as a result of lower gross margin on reduced revenues in engineered systems and service, partially offset by reduced SG&A expenses. For third quarter 2016, Enerflex generated net earnings from continuing operations of $18 million or $0.23 per share compared to net earnings of $32 million or $0.40 per share in 2015. Over the course of the third quarter, Enerflex generated $19 million of cash flows from operations and for the first nine months, $87 million. Coupled with reduced capital expenditures and the equity offering, the company reduced debt by $128 million in the quarter and by $167 million during the first nine months of the year. Continuing with the review of our product breakdown, engineered systems revenue decreased to $143 million for the third quarter, which was 51% lower as a result of reduced opening backlog in Canada and rest of world, partially offset by an increase in the USA segment. Service revenue for the third quarter was $73 million a decrease of 25% due lower parts sales and service revenues in all three segments. This decrease in service revenue was most significant in Canada and Australia, which was impacted by the changes to its distribution agreement and the deferral of maintenance work by customers. Rental revenue for the third quarter was $47 million, which was a 30% increase over the third quarter of 2015. This was driven by increased activity in EMEA and Latin America regions and an increase on customer contracts in the U.S., partially offset by a slight decrease in Canada rental revenue. Moving on to our regional results, in Canada revenue decreased by $60 million during the third quarter as a result of lower revenue across all three product lines, largely driven by the current economic environment. Engineered systems revenue decreased due to lower opening backlog of $151 million compared to $332 million at the start of 2015. Service revenue was lower due to reduced parts sales, while rental revenue was lower due to reduced utilization rates and lower unit sales. Operating income for the third quarter of 2016 decreased by $10 million as a result of lower gross margin, partially offset by decreased SG&A expenses. Lower gross margin was attributable to reduced revenues, lower project margins, and lower overhead absorptions in our manufacturing facilities. The decrease in SG&A was attributable to lower compensation expense on reduced headcount and lower office and occupancy costs, partially offset by higher bad debt expenses. In the USA segment, revenue for the third quarter of 2016 was $104 million. The decrease of $76 million was attributable to lower engineered systems revenue as a result of a decrease in opening backlog of $153 million compared to $412 million at the start of 2015 as well as lower service revenue on reduced parts sales. This was partially offset by higher rental revenue on increased customer contracts. Operating income for the third quarter decreased by $6 million due to lower gross margin, partially offset by reduced SG&A expenses. The decrease in gross margin was attributable to lower revenues, partially offset by project margin improvements related to product mix and stronger facilities utilization and overhead absorption. Reduced SG&A expenses was primarily a result of decreased compensation expense on lower headcount. Revenue in the rest of world segment for the third quarter was $98 million. The decrease of $27 million was attributable to reduction in engineered systems revenue on lower 2016 opening backlog of $123 million compared to $172 million at start of 2015 as well as a decrease in service revenue. This was partially offset by an increase in rental revenue with new rental projects in Latin America and EMEA. Service revenue decreased during the quarter on lower activity in Latin America and Australia and reduced parts sales in Australia and Asia, partially offset by increased activity on long-term service contracts in the EMEA region. Operating income of $18 million increased by $2 million in the same period of 2015, as a result of improved gross margin and lower SG&A expenses. The increase in gross margin was a result of project margin improvements and an increased proportion of higher margin rental revenue, partially offset by the impact of lower revenues. The decrease in SG&A expenses resulted from lower compensation expense on reduced headcount. In managing liquidity, the company has access to a significant portion of its bank facility for future drawings to meet the company's future growth targets. As of September 30th, the company held cash and cash equivalents of $162 million and had drawn $376 million against the bank facility, leaving it with access to $333 million for future drawings. The company continues to meet its bank facility covenant requirements with a net debt to EBITDA ratio of less than 1.3 to 1. In summary, our third quarter financial results reflected the continuing reality surrounding global commodity prices. We expect the commodity price challenges to remain through the remainder of 2016 and into 2017, notwithstanding the significant uncertainty; Enerflex has increased recurring rental revenues, improved project margins, and increased bookings. The company continues to focus on controlling costs, preserving the strength of our balance sheet and generating free cash flow, positioning us to weather this prolonged downturn. We have deployed capital and will continue to pursue opportunities in those regions where there's economic growth, such as the USA, Middle East, Africa and Latin America regions. This completes formal component of the webcast. Additional details can be found in our November 9th press release. We will now be happy to take any questions. Operator?

[Operator Instructions] Our first question comes from the line of Scott Treadwell from TD Securities. Please go ahead.

Thanks. Good morning, guys and congratulations on just a great quarter.

Thanks Scott. I just wanted to mention that there are 1,900 people in this company that me this quarter and of course this company the way it is today. Their intellect and tenacity to win is representative of what we're doing now in this company and I think that's a note that has to be recognized by everybody.

Yes, well said, well said. I just wanted to touch first on the on the U.S., the bookings obviously, a meaningfully and you kind of hinted when you said you know still cautiously optimistic. But this Q3 represent may be a run rate and then there was some event-driven stuff on top of that or is that sort of the potential that you can -- you see with inquiries and discussions today that kind of booking rate can continue?

Well, it would be challenging to say that it could continue at that pace at this very moment, but I can say that the funnel of activity and the inquiries that are occurring every region in the world is much better than it was six months ago. And, again, we look at each one of those opportunities and we rank them as you know low to medium to high. And I would say that we have a much better view of medium to high opportunities that would fit with what Enerflex does in their core business than we've had probably may be in six to 12 months. So, it's a better environment today for opportunities and we saw that come through in Q3. I would say it has been a very good quarter, but we expect future quarters to be better than certain we've seen in the first half of 2016.

Okay. And secondly just a follow-on the U.S., when do you expect those bookings to start to impact the engineered services revenue in the U.S. in a sort of similar trend where you see that sort of large step-up?

Yes, so we've seen -- we've seen a little bit of that benefit in Q3 obviously and that resulted in better facilities overhead absorption, which also contributed to a higher operating margin sequentially quarter-over-quarter. But we'll start to feel a stronger benefit of that in Q4 and then continue into Q1 and Q2 of 2017, right. So, that's where a lot of that bookings that came through the quarter will start to benefit engineered systems revenue and obviously, facilities absorption going into future quarters.

Okay. You actually sort of half answered my question. What -- how much more capacity do think your U.S. operation has before you need to think about meaningfully either capital or P&L additions to expand capacity?

I mean they've been hiring back labor through Q3 to deal with the uptick in backlog and that's labor that's in the shop. I think that the staffing levels are where they need to be in the shop right now. In terms of capacity expansion of the shop itself, I don't anticipate that that would be necessary with this booking. I mean even if bookings continued at the same clip into Q4 which we don't expect, I don't -- we don't expect that run rate into Q4, I don't think we need to add any capacity to the shop in the U.S.

Okay, perfect. Last one from me just on the rental side, you've talked about the number of opportunities that are out there, can you just give us any update on what the timing of some of these look like, do you expect that you could be signing things before the end of the year or generally their international opportunities, is that sale cycle is still pretty slow?

Yes, I think there's probably opportunity between now and the end of the year, but it would -- again, you get closer -- every day you get closer to the middle of December becomes more problematic for getting something done. So, if it doesn't happen this year, we do expect Q3 to start to look at a better time for signing.

Okay. The last kind of detail I was going to ask about, is your supply chain largely I think on the capital side engine, the compressors, how your conversations with supplier has been? What's their supply chain like? And what's their ability to respond to -- you know what looks like at a decent uptick in bookings, which is obviously going to translate into demand for those capital components?

Yes, we're in -- and obviously because of our size and the needs that we have on an ongoing basis. We're very close to our major suppliers. Lead-times for our major components have obviously come down, but again, we're talking about sophisticated OEMs for the most part and they would be able to meet any of these demands certainly that we've got today and we've got a little bit of inventory as well that provides a bit of a cushion to for some of the lead-times. So, we're not anticipating any constraints or bottlenecks on deliveries of major components to meet any of the deadlines that we've got today.

Thank you. Our next question comes from the line of Jon Morrison from CIBC World Markets. Please go ahead.

Good morning all.

Good morning.

Of the incremental bookings that you guys had in the U.S. this quarter, how much of that equipment would be earmarked for domestic use in the U.S. versus being built in Houston and shipped to other international regions?

I would say the majority of the bookings that came through the U.S. are for U.S. -- the U.S. domestic market, probably two-thirds of that is destined for the U.S. domestic market with maybe about a third destined for the Middle East.

Was the bulk of all the stuff that you were awarded in the U.S. largely Permian Basin in terms of associated gas volumes, are you seeing an uptick in Haynesville and return to some of the work that you guys did in the Marcellus and Utica over the last couple of years?

I think it would be fair to say that the bookings in the U.S. were largely driven by activity in the Permian.

Okay. Just following Scott's question about international rental award that you guys have been working on and talking about for the past six months. Has there been any of those that have been awarded that you weren’t successful on today? Or nothing just hit the actual formal tender process at this point?

Yes, there has nothing really that's come out that we haven't been able to secure. I mean there was one large one we talked about earlier in Latin America that went on a different path than what would be, I would say, our core competency. But outside of that, we certainly haven't lost anything that we had thought was either medium or high, high opportunity.

I mean just add -- build on what Blair is saying, it really comes down to the timing of these international opportunities and how long it takes from initial RFP to award.

James is it fair to assume that we should be thinking of the international margins this quarter as a high benchmarking and you expect them to slip in the coming quarters or this is just what the business can do, it doesn't have any unexpected cost in the quarter?

No, I think this is a high watermark for the international regional. I mean there was a little bit of -- weather was a stronger contribution from the overall rental fleet and it represented a higher proportion of our overall revenues in the quarter. But I would consider that a high watermark for international in terms of operating margins.

Was there anything one-time in nature that would have boosted margins higher than you would have expected from -- I guess I'm thinking of a one-time revenue recognition where cost already incurred in the previous quarter?

Yes. So, sequentially we wouldn’t -- we had -- so if you look at rental revenue sequentially for the rest of world segment, Q3 to Q2. Q2, we obviously went live on a couple of rental projects, but they weren't contributing for the full month and we were still in start-up mode and incurring costs related to the start-up mode without the corresponding revenues. And there were some standby fees that were being charged as opposed to the full fee that was -- should be charged once the plant is fully operational. Going into Q3, we had a catch-up with respect to that revenue that probably contributed about 300 -- 250 to 300 basis points of additional operating margin where the costs were recorded in a previous period. So, there was a bit of an uplift as a result of that catch-up in Q3.

Blair of the incremental changes that you announced in Gas Drive, was the bulk of that a function of the change in your GE relationship and trying to right-size your business to that reality more so than the cyclical deferral cycle and service work that we're seeing in Canada right now?

Yes, I'd say it's the former. Certainly distributorship had me or GE that from central distribution inventory and warehouse management. Those things are no longer necessary and so I would certainly say that it's a combination of both, but certainly the GE relationship in the distribution relationship changing was the major driver for our central distribution business closing down and redistributing those activities to the branch infrastructure.

Blair in the Q2 call you had reference that dollar rates were obviously under pressure just given the limit of work that was out there, has that carried forward in Q3 or are you starting to see a stabilization and pricing for service work specifically in Canada?

Yes, in Canada, no, I said it was intense and it is intense. We're sort of looking at this as labor light or service light at the moment where with the reduced trucks that we brought on the road, we've got a great utilization of those trucks and people. But it's not doing the type of work, the overhauls and -- with our large parts component to it. So, that, in fact, also has a rate of deterioration or degradation against it. So, it's very competitive here in Canada. We're seeing a little bit of a bright spot in the United States in terms of the customers are now starting to do a little bit more maintenance, at least, they are talking about it for 2017, late 2016. Whereas in Canada, we're still looking is crash maintenance the next thing that we start to realize here. But at the moment, we're not seeing any bright spots in Canada with respect to the margins and labor -- and service.

Okay. James, can you give any color on the expected delivery schedule of the bookings that you had in Q3. I think in Q2, you referenced that some the bookings you had in the quarter and subsequently would be under little bit more of an expedited delivery schedule? Did the same -- or did the same thing hold true for these bookings or is it more under your line of backlog being chewed through in kind of 12 to 18 months?

No, I think it would be fair to say that the Q3 bookings have deliveries that are Q2 2017, early Q3 2017 related right. So, we would see a lot of that that coming equipment through our shops in Q4 of 2016 and into Q1 early Q2 of 2017.

Last one just from me. Can you share what the total value -- book value of the property that you have for sale is right now outside of the successful sell that you announced post-quarter end?

Well, the book value -- I mean we gave disclosure on the sale price and obviously, the gain on the sale of that property. So, this is a property that's been on the books for quite some time. It had a low historic net book value.

So, I guess I was just meaning do you have anything else that's out for sale that could--?

Idle facilities?

Idle facilities that perhaps could be up for sale and we should be thinking about maybe being an incremental cash add to your balance sheet go-forward?

Look we -- I mean we still have properties in this Q view that we're looking to move and there's a couple of properties in Wyoming and then some smaller properties that remain here in Calgary as we continuously rationalized our footprint through this downturn. I -- we don't want to disclose the total net book value of that equivalent, but if we can move it, it will have a positive impact on our cash flow generating ability and obviously, our cost structure going forward, because these are owned properties.

Appreciate the color. Great quarter to you and team. I'll turn it back.

Thanks Jon.

Thanks.

Our next question comes from the line of Greg Colman from National Bank. Please go ahead.

Thanks. Just drawing on Jon's last question there about the -- sort of not necessarily hidden assets, but stuff that could be freeing up cash flow. James I understand you're not willing to put a book value out there, but can you give us an idea of the size relative to the stuff that you have already monetized? Would it be in aggregate roughly the same sizably larger or it's much smaller than that?

No, I mean if you add up the Wyoming facilities that we haven't sold yet and the [Indiscernible] facilities, the size of those facilities would be larger than the facility that we just completed this one here in Calgary.

Okay, great. Directionally, that's helpful. Just want to come back to some earlier comments on contracts are all on the look for -- Blair, appreciate the color on the timing there and understanding the international market is difficult to predict that we're coming up to serve a holiday break not too far distant future. You did mention that it could spill into -- and I might have been sure, but you did say I think Q3, did you mean Q1 that it could spill into Q1. So, if we don't hear it in December, we're talking January. I just want to sure I didn't mishear that?

You misheard and it should have been Q1, January of 2017 to February, that's right.

Okay, great. And is that the kind of thing that you would deem as a newsworthy event or would it be rolled into sort of your quarterly announcement when we put out your Q4 Q1 numbers?

We haven't had a history of the press releasing contracts as they come up unless they have been very material like north of $100 million. So, typically we roll them into the quarterly press release.

Okay. That's kind of what I expected; I just wanted to clear that. And I kind of keeping it on the same dynamic there, has your tone or has your belief in your competitive positioning for these contracts changed at all since we heard you speak last time in Q2 where was a fairly, fairly optimistic that that one of not a few of them would be wanted. Has that tone changed at all?

Not at all.

Excellent. Okay, shifting gears a little bit talking about Canada, we were talking about -- and have been for some time now that the lack of willingness for operators to engage in preventative maintenance and then he brought up determine we've been talking about now the potential for sort of crash maintenance happening in the future. Have you see that show up in any meaningful way if not and I suspect the answer is no, but if not, when would you expect that to happen in the future based on your knowledge of the equipment and the current maintenance attitudes that are out there?

You're correct; we haven't seen any material crash maintenance at this point. It's hard to predict because we don't know how hard they are running those assets and you can turn down and run at 80% or 75%, which has a different impact on the longevity of the asset as well to and as long as you're change, well, which is again this is sort of a maintenance light that we're seen you can run an all quite long time, pass the service and roller major top end, you could -- maybe you get the double, but 2017 I think will be a year of reckoning a lot of the places here and in and in the United States, but which they are starting to recognize now, but we're going to start seeing some of this come back again in 2017 for sure.

Makes sense. And is there a seasonal -- is there seasonally risky. For serve crash to occur weather, it's some of the heat of the winter with cold anything they could exacerbate or shorten the life of the asset with the maintenance hasn't been (inaudible)?

Absolutely, you hit the selling [ph] point; winter is the worst time for rotating equipment.

Okay. So, would you see anything happening? We could sort of occur in the Q1 timeframe?

Yes. And a lot of that happens just naturally because of the weather.

Right.

Unfortunately, winter starts a lot earlier in Alberta sometimes than January.

I've heard these rumors, yes. Just one last one from me and is this is -- you mentioned in your prepared remarks that recurring revenues now so that your target 35% to 40% of topline, can you give us an idea what percentage of your EBITA that would represent with the understanding of course that the rental revenue tends to be at higher margin than all of the other areas?

I mean, we have said along that even though rental revenue and service revenue represent the smaller share of our overall revenue from our EBITDA standpoint it is a material contributor, so it would north of 40%.

Would you be willing to get any more precise on that or no?

No, I think that’s a fair our directional comment that we feel comfortable with, we don’t want to give an exact number.

That was worth the shot. Thanks a lot and congratulations to all 1,900 of you for great quarter.

Thank you.

Thank you.

Our next question comes from the line of Jeff Fetterly from Peters & Co. Please go ahead.

Good morning, guys.

Hey, Jeff.

Good morning.

In terms of bookings, will it be seen thus far tin Q4, have you seen the continuation of the trend that you just talked about in terms of Q3, especially in U.S.?

So, we've seen inquiry levels remain relatively high to past quarters and I would make that comment not only for the U.S., but for Canada as well the inquiry levels have come up, relative to Q1 and Q2 of this year. In terms of actual bookings, to start the quarter, we haven't been converting them at the same rate as we did in Q3, so we have seen a bit down tick down. I mean, if we look at Q3 bookings that could be the high watermark for the year, but were still seeing very healthy activity levels in the U.S. from an inquiry standpoint, which and we expect to convert some of those into the last quarter of the year and we expect to convert some of the Canadian inquiries. And then in the rest of world segment, that's still been a very, very active market, but conversion in bookings takes a little longer. So we've seen continued positive momentum on inquiry levels into Q4.

The decrease in conversion rate is that the market-specific saying, is that your hit rate going down relative to some of the competitive elements that are out there thus far in Q4?

I think, it’s always a combination of both of those factors, Jeff. I we were very successful in Q3. I'm not saying that we cannot be as successful in Q4, but obviously the competitive environment is tough out there and people are aggressive.

Okay. I know you referenced the competitive intensity on the Canadian side, how would you characterize the competitive dynamic for the U.S. orders and manufacturing opportunities right now?

I think it’s just a strong -- I think we've got some very strong competitors in the U.S. and it would be just as strong as what we’ve seen in Canada.

The order flow in the book and backlog that you ran through in Q3, how would characterize the margin expectation of that relative to your backlog going into the quarter, would it be accretive to your margin expectations?

So, I want to make sure I understand your -- I want to understand your question. Are you asking the margin on the bookings in Q3 relative to the margin that was embedded in opening backlog in Q3?

Yes.

Yes, it would be accretive and largely as a result of product mix rights, so the bookings that we enjoyed in Q3 there was a heavier weighting to a gas processing which is a typically at – and we said historically it’s typically at a better margin that what we’ve been able to experience on the gas compression side.

Okay. I think last thing, just around the cost structure, do you believe that you’ve right-sized pro forma this Gas Drive restructuring that you’ve announced in November, do you believe that the organization is right-sized and/or give a sense of how much incremental work you could potentially handle for before you have add costs into the U.S. or otherwise?

Yes, Jeff. I think we’re right-sized for what we see today. Obviously, that can change. We believe that we have some elasticity in the business enable to scale up even in the cost structures and directionally where we are today with respect to facilities and facility locations because winter tends to be, as I said, a busier time for us. We need a business that can actually scale as well, so I think we right sized appropriately for that and we'll see month-to-month as the winter unfolds.

Great. Thank you guys. Appreciate the color.

Thanks.

[Operator Instructions] Our next question comes from the line of [Indiscernible] with Industrial Alliance. Please go ahead.

Hi, it's Elias Foscolos. I'll step in and ask a question or two.

Hi Elias.

Is the cash flow question more than anything because I think everything else has been asked. Given the results in the quarter and relatively high backlog orders or sorry improving backlog and improving compression rental revenue, would you look at funneling excess cash flow into growth opportunities or -- I'm sure no one has brought this up on any other call, look at potentially recommending a dividend increase at some point.

You know Elias we've always stated over the number of years that our number one objective with cash flow is to grow the organization while maintaining a responsible dividend. And that responsible dividend really the definition of is it affordable and is it sustainable? So, in the environment we find ourselves in where opportunities for growth are probably as good or better than they have been in the past. I think the direction of our cash flow and certainly the equity offering that we did was based on the fact that we see growth opportunities and that's where we would see the priority for cash flow to be directed.

Good. Well, thank you very much for that color. That's it for me.

Well, thank you and thanks for the call.

And we have no more questions at this time.

All right. Well, thank you Herman and since there are no further questions, I would, once again, like to thank everyone for joining the call and we look forward to our fourth quarter results in March of 2017. And be thoughtful and remember to stay [ph] tomorrow. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.