Ladies and gentlemen, thank you for standing by. Welcome to the Enerflex First Quarter 2017 Results Conference. During the presentation, all participants will be in a listen-only mode. Afterwards, we’ll conduct a question-and-answer session. I will now turn the conference over to President and CEO, Blair Goertzen. Sir, you may begin.

All right. Thanks, operator, and good morning, everyone. Thank you for joining us today. Here 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 March 31, 2017, a brief commentary on the performance of our three business segments, and a summary of our financial position at the end of the quarter. Approximately one hour following the completion of this call, a recording will be available on our website under the Investor section. During the call, unless otherwise stated, we will be referring to the three months ended March 31, 2017 compared to the same period of 2016. I will proceed on the basis that you have all taken the opportunity to read yesterday’s press release. Enerflex’s first quarter financial results demonstrated the continued momentum experienced over the second-half of 2016. With the ongoing stability in commodity prices. Enerflex saw an increase in inquiries and opportunities, which lead to stronger results and the fourth quarter consecutive bookings were increased at the same quarter of the comparative period. Enerflex’s quarterly bookings were $319 million, 390% increase year-over-year compared to the $65 million in the same period of 2016. The company also saw a significant increase in backlog at March 31, 2017 of $71 million, which is a 11% higher than December 31, 2016, due to the strong bookings in the quarter. As a result of this increased activity and the recent bookings trend, the company has seen the positive impacts on revenues and overall financial performance. As of today, Enerflex has recorded bookings for the second quarter of 2017 in excess of $250 million. This includes approximately $160 million of new bookings in the Middle East, Africa and Latin American regions, as well…

Thank you, Blair. Financial results for the quarter strengthened year-over-year, largely due to strong bookings over last-half of 2016 and into 2017, as well s restructuring activities, which reduced SG&A costs year-over-year. Adjusted EBITDA for the first quarter of 2017 was $50 million versus $30 million in 2016. EBITDA adjusted for restructuring costs, gain on the sale of PP&E and goodwill impairments. The underlying increase was largely driven by the improved results in the USA and Rest of World segments. Consolidated revenue for the first quarter was $355 million. This significant 31% increase compared to 2016 was due to increased revenues in Canada and the USA, partially offset by lower revenues in the Rest of World segment. Consolidated gross margin for the three months ended March 31, 2017 was $73 million, or 21%, compared to $46 million, or 17% in the same period of 2016. Gross margin increased due to higher project profitability, improved overhead absorption, lower inventory reserves, and lower restructuring costs. The company’s geographic and product line diversification also preserved margins in a competitive and constrained economic environment. Selling, general and administrative expenses were $43 million, a decrease of $5 million, as compared to $48 million in 2016. The decrease was a result of the effects of restructuring activities undertaken in prior periods, partially offset by higher stock-based compensation costs, driven by higher share prices. EBIT for the quarter was $33 million compared to a loss of $91 million in the same period of 2016, driven by improved operational results in 2017 and the goodwill impairment recognized in the first quarter of 2016. The adjusted EBIT for the first quarter was $30 million compared to $7 million in the same period of 2016. During the quarter, Enerflex also generated net earnings from continuing operations of $25 million, or…

[Operator Instructions] Our first question comes from the line of Ben Owens with RBC Capital Markets. Your line is open. Please go ahead.

Hi, good morning.

Good morning.

Good morning.

You guys mentioned in some of the outlook commentary in the filings that, due to the competitive environment that some of the margins or new awards to be under pressure. I was wondering if you could maybe kind of speak to the magnitude of the, maybe margin compression year-over-year and then what regions you’re seeing that the competitive bidding process having the most impact?

Yes, I mean, we have seen margins remain relatively flat in the prior years in the Canadian markets and the U.S. markets. I mean, we have seen an uptick in activity. And the comment was really to highlight for readers with financials and investors that we would expect that margin traction on engineered systems products would most likely happen in the back-half of 2017 if we continue to see activity at this rate in the North American markets. When you start to see activity ramping up, it starts to absorb a lot of the idle capacity that exists in the system from a manufacturing standpoint and delivery start to get pushed out. And that’s where you start to get some pricing traction in that product line.

Okay, that’s helpful. And then, as a follow-up, I was just curious maybe you could talk a little bit more about the pipeline of opportunities that you see in the Rest of World segment for fabrication and kind of what regions and project are – maybe going to be up in the most – in the near-term outlook?

Yes, certainly, when we think about the Rest of the World, the Gulf Coast countries, Oman, is very good for us at the moment too with opportunities Kuwait and Bahrain. So those are the three countries in the GCC that look opportunistic for us. And then, as we mentioned in the script just now that, Argentina, Brazil, Colombia and Bolivia and Latin America are all still very active in terms of the inquiries.

Okay, that’s great. I’ll turn it back over. Thanks.

Thanks, Ben.

Thank you. And our next question comes from the line of Greg Colman with National Bank Financial. Your line is open. Please go ahead.

Thanks very much, guys. Actually I wanted to build on Ben’s first question there. He was talking about margin pressure with a competitive dynamic and James appreciate your color. When we think about that that backlog and those bookings, I’m assuming from a pricing perspective, you’re talking about sort of same product here apples-to-apples comparison and since the prices aren’t likely to go off right now, they’ll be later in the year. But from a mixed perspective, I know that in Q4, the U.S. facilities were about 65% processing, is what you’re putting through there, and that tends to be a bit higher margin. Can you comment on the bookings that are added in Q1 and the weightings there? Was that a similar kind of waiting towards the processing side, or was it materially different from that?

Yes, I know, it’s a good follow-up question, Greg. So if I look at the Canadian bookings and I’ll start with Canada and then I’ll deal with your question on the U.S. as well. If I look at the Canadian bookings that we booked in Q1, those were much more heavily weighted to gas processing and much less though to compression. You touched on it in Q4, our backlog coming out of 2016 in the U.S. was about 65% processing and 35% compression. Of the bookings that we booked in Q1 in the U.S. segment, we had a little bit more of that that’s kind of weighted to gas compression. So our overall weighting at the end of Q1 has come down to about 60% gas processing, which is still at a higher margin business and about 40% compression. So there’s a little bit of a shift to the product mix at the end of Q1, but still very much weighted towards the gas processing side of the business.

Got it. Okay, thanks for that color. Moving over to the rental side, make sure when on the 1400 horsepower there, can you let us know where that is, if you mentioned in prepared remarks, I’m sorry, I missed it, and also the geographies you’re looking at for the additional international rental opportunities?

Yes. So the – it wasn’t Latin America and it was 14000 horsepower that we renewed for an additional five-year term. The other opportunities that we’re looking at right now from a rental standpoint continue to be in Latin America. And Blair touched on the Middle East as an area where we continue to pursue opportunities as well and that’s in Bahrain and other GCC countries.

Got it. Okay. And then my last one, just shifting over to sort of forward-looking on the backlog here, I don’t want to end on a sour note at all, but can you remind us what kind of risk there’s associated with the progress kind of in the backlog? I mean, obviously, we’ve seen some really good backlog additions over the past few quarters here, I think four quarters in a row now if we count to for end of Q1. But there has been just lately a little bit more commodity price weakness. At what point would you start to kind of just circle back with guys to make sure that that backlog is stable? And then also could you just remind us from a history’s perspective, what kind of cancellations in the past have you seen from your backlog? And what type of macro environment does it tend to occur, or is it simply a micro situational one-off with a customer that has a change of plans?

We don’t see any risk in the current backlog, given the type of projects that we have in our backlog, both here in Canada and in the U.S. And traditionally, we see very little cancellation and we have cancellation clauses that are contractually bound that protects our downside risk with respect to our cost and margin in completed activities. So going forward, it hasn’t been something that we’ve experienced a great deal of in the past with cancellations. But given the fact the mix that we’ve got in the backlog, the projects where they are, we have to see something very materially happen that’s different than today. And what we have seen in the past and still not really incurred the type of cancellations that would be a disadvantage to us commercially.

And if I could just add something to that, Greg, just to put it into perspective. When we entered the – this latest economic downturn related to the economic cycle, we entered it with a backlog that was just north of $900 million. And over the – over that period of time, we experienced cancellations that were probably $25 million to $30 million with the cost that we had incurred covered under contrast. So I just wanted to put it into perspective in terms of the magnitude of those cancellations historically.

That is what I was looking for. Thanks, both. That’s it for me.

Thank you. [Operator Instructions] Our next question comes from the line of Jon Morrison with CIBC. Your line is open. Please go ahead.

Good morning, all.

Good morning.

James, in Canada engineered systems, facility throughput improves in the quarter, but bookings and backlog would indicate that that improvement is likely to accelerate in the next few quarters, as that unfolds? Do you expect Canadian EBIT margins to turn positive in 2017?

I would fully expect EBIT margins to turn positive in 2017. If I can just take listeners back to our Q4 comments, we did talk about an acceleration of bookings in Q4 of 2016. And we also talked about an expectation that those bookings would continue to be strong in Q1 of 2017. But we also said that we didn’t expect those bookings that materially contribute to EBIT margins in Canada in Q1. We expected that to be more of a Q2 through Q4 2017 story in terms of threat converting that backlog into revenue and obviously positive EBIT margins. And we continue to believe that that’s how it’s going to unfold. We would expect to see a stronger Q2 and then an acceleration into Q3 and Q4 as that equipment starts to get delivered.

Okay, appreciate the clarity there. Just a follow-up on previous questions and sort of harp on again. But your key message here is that the bookings that you guys made in Q1 and so far in Q2, the embedded margins in those are probably relatively in line with what you already had within the backlog. Although maybe margins see some upward mobility as you get better fixed cost absorption, is that the message that’s being delivered?

That’s right. I mean, we are – we would expect to see stronger overhead absorption in our manufacturing facilities. And we’ve already experienced that in the U.S. and we’re experiencing in Canada and that’s going to accelerate going forward. So that will improve margins. But the other thing that I think is important in the Canadian backlog is that, Q1 bookings were much more heavily weighted to gas processing, which typically that carries within a higher margin.

Okay. In terms of the U.S. bookings were made in Q1, is it still largely all Permian in Stack/Scoop at this point, or are you starting to see work order in other regions as well?

I – we have seen continued activity that’s been very, very healthy in the Permian, as well as the Stack/Scoop, but we’ve also seen some order flow coming out of the Marcellus and the Utica in Q1 and into Q2.

Okay. On the international awards, is it fair to assume that the bulk of the Q2 bookings that you mentioned in the release are all much more heavily weighted to the Middle East than they are Latin America at this point?

That is a fair comment.

Yes. Is it specific to one country or spread across GCC?

It’s multiple countries in the Middle East.

Can you give any sense of how we should be thinking about a delivery schedule of those international awards that you announced in the quarter? And I’m not trying to get too granular just that it’s obviously a tough segment to model, as it is lumpy. So just any guidance you can give how we should be thinking about those bookings converting into revenue would be appreciated?

Yes, what we can say is that, with the booking happening in Q2, we don’t expect those to contribute, obviously, to Q2 revenue. I would see them starting to contribute to Q4 revenue of 2017 and then into 2018 from a delivery standpoint.

Okay.

And you’re right, it is, I mean, Rest of World has always been a very lumpy segment when it comes to engineered systems. We get much, much longer periods between RFP and award and this year has been no exception.

Okay, perfect. Yes, and basically what I was getting at was, it’s not like the awards that you got in International are going to be under an accelerated timeline or if you like that from a delivery perspective?

No.

Okay. You referenced some of the challenges around rental rates in utilization of equipment in Mexico. Can you give any idea of how meaningful that was in the quarter? And was that a portion of your installed base coming to the end of the contract and not getting renewed, or what drove that utilization variability?

Yes. So it’s been two things predominantly that have contributed to that kind of pullback in Mexico. One is, just reduced gas flows of some of the equipment that is in specific fields within Mexico. So we’ve seen some gas flows in those fields reduced by about 20%. And as a result, some of that equipment goes into standby mode, or is idled by the producer. And then we also had a gas plant that came to the end of its life and was not renewed during Q1, so that was a contributor as well. So the lion share of the reduction that we’ve experienced in our Rest of World rental comes from those two dynamics that are at play right now in the Mexican gas market.

Okay. Blair, I apologize to keep asking about this quarter-after-quarter. But can you give any update on the Canadian product support market? And I guess, my real question is, is pricing starting to level off, and then it’s not seem to be under more pressure. And is there any signs of an uptick for the coming quarters if you guys starting to do more maintenance and rebuilt and renewal of installed base that’s been lost somewhat along for awhile?

Jon, it’s still very flat for the Canadian service business. It’s extremely competitive. Our product sales, while we have had some improvement in part sales, we’re still not seeing the maintenance schedules return to additional levels. And we still see that occurring through the first-half of the year. And so it’s now about our cost inputs managing what we do with respect to our service delivery and ensuring that we maintain an operating structure that’s not only effective, but also cost-efficient. So we haven’t seen any change to the business that we would have reported over the past three quarters.

Okay. Last one for me, Blair, your positive comments on Brazil. Are those based on ongoing customer conversations right now that could translate into something more meaningful in terms of an award in the next 12 t o 18 months, or is it more of a comment just high-level positive long-term constructive things that you see in in the market?

It’s two things. It’s the latter and it’s the constructive nature of that market in Brazil, as it has come through some fairly tumultuous times, both governmental and really from an energy standpoint. And then the former being our conversations with customers that are looking at this piece of gas in a way to convert that to electricity and possibly other uses within the country as well. So there are meaningful conversations and they’re certainly at a progressive state, and we’d like to continue that on as we go forward and see. Brazil, as one of those countries in Latin America that has 5 to 10 -year horizon for Enerflex.

I appreciate the color. I’ll turn it back, guys.

Thanks.

Thank you.

Thank you. And our next question comes from the line of Elias Foscolos with Industrial Alliance. Your line is open. Please go ahead.

Good morning.

Good morning.

Good morning.

Couple of questions. Blair, touching on your 10% EBIT comment, I was wondering if you can kind of frame that in the 2017 timeframe. Do you see achieving a 10% EBIT in 2017 as achievable at this point?

With the backlog that we’ve got and we’re already through almost half of the year. And so the embedded margins that we have today in the product mix, we see ourselves moving closer to that certainly than we were in 2016. However, it would probably be a challenge with the mix that we’ve got in engineered systems to achieve that. Q4, a lot of the bookings that we’ve got today, as James said, will start to generate revenue in Q4 through the backlog. And so, I would say, just it would be a challenge to get there all the way in 2017. But certainly, trend in the right direction.

Okay. So following-up on that, you have another target, which is 35% to 40% recurring revenue. And as engineering systems ramps up, do you see that as being more of a challenge, and if so, how would you look at maybe filling that gap?

Well, it will be a challenge. Obviously, as we say, it’s a percentage of revenue. But I think, the other side of that equation is in absolute dollars, so I don’t think we can disconnect the two. In an absolute dollars, it’s still trending up even with the challenges we’ve had in the Canadian and Australian service business over the past few years. So to fill the gap, it will be more build, operate and maintain contracts globally. And it is still within our purview in the contract compression business in United States to actively look at if that’s the market that we should be in and if so, how do we advance our position in that, whether it’s Greenfield or by way of acquisition suit. Again, bolster that recurring revenue from an asset ownership standpoint. So it’s still very much front and center for the organization to move the words up, but the metric as well for lobsters, our engineering systems revenue increase as the absolute dollars of recurring revenue.

And if I can just add something to Blair’s comments on another component of recurring revenue would be service. We do have opportunities, but we are going to be starting up in Q2 on the O&M side where we are going to be operating and maintaining a couple of plants in the U.S. and we are going to continue to pursue opportunities like that to be able to grow our service business, which is the other leg of the stool from a recurring revenue standpoint.

Okay, great. Well, thank you very much for the color. I’ll stop at this point.

Thank you.

Thank you. And our next question comes from the line of Jeff Fetterly with Peters & Company. Your line is open, please go ahead.

Good morning guys.

Good morning Jeff.

A few random questions. First, James, on the balance sheet side, the big bump up in accounts receivable and days of sales outstanding, can you provide about what that is and how you think that’s going to trend?

Yes, we can. So, we said in – during 2016 that on a couple of very large engineered systems opportunities that we were pursuing in the Middle East at that time that we had decided to use the balance sheet from a milestone standpoint to fund those projects and those projects are starting to be delivered. So the milestone payments related to those projects is – was obviously backend-loaded to delivery, installation and commissioning and those units are starting to be delivered here in Q2, and will continue through Q2 from a delivery standpoint, but during that build cycle and obviously the manufacturing cycle, we have seen a ramp-up in our days sales outstanding as a result of those milestone payments being backend-loaded.

Do you have a sense for how long it might take to get back to that 80 day to 85 day range you were normally in?

Yes, well, these are – like I said Jeff, that these are large projects and they are going to be shipped and installed and started up in Q2, so once we collect, build and collect the milestones related to these projects, I would fully expect that days sales outstanding and our working capital would follow suit.

On the rental side, I know you addressed the specifics in Mexico, but how much of the existing rental contract base is subject to renewal or do you think could be at risk of seeing either a rate deterioration or utilization deterioration here in 2017?

Well, I think right it would be fair to say that if you look at the horsepower that’s been deployed internationally, we feel like a lot – most of the horsepower in the Middle East is under contracts that don’t up for renewal for quite some time. In Latin America we have a big chunk of a fleet that comes up for renewal all the time, especially in Mexico and we’re going to have those type of renewal discussions within 2017. But when it comes to the reduction in rental revenue, I go back to the comments I made, right now it’s because of reduced gas flows within the Mexican market and some of these equipment has gone into standby mode. But the largest single contributor for the reduction in rental revenue was that gas plant coming to the end of its term and not being renewed in the Mexican market.

And we don’t expect any further reductions or discounts provided in 2017 on the rental fleet.

So looking at the revenue run rate for the international rental business in Q1 is not a bad proxy to go forward for you?

I think it would be a fair proxy.

Okay, the U.S. service side, I know you mentioned the contract that starts to kick in Q2, but your overall outlook continues to be fairly cautious on service business in the U.S. Can you provide a little bit of color or sort of how do you think about the opportunity set on the service side for that market, beyond the one contract in Q2, or two contracts in Q2?

The service business in the U.S. really does go more on lockstep with the capital spend programs and the geographic diversification and the coverage that we have in the U.S. is very good and so as we look at not just the Permian, but the scoop/stack, the maintenance that’s happening in Eastern U.S. and Pennsylvania and New York. So we’re seeing that actually mature at the same sort of pace that we’re seeing the capital spend happen. So we’re thinking that certainly if that continues to happen that from a retrofit and a parts and maintenance standpoint that the service business in the U.S. improves in the back half of the year and through the platform that we’ve got there, and that’s what at least the customers are saying to us now in terms of major maintenance.

Okay. Last thing, on the international side, the comment in the MD&A about a new foothold in Bolivia, I know you talked about it being a market opportunity, but what exactly does that mean?

We put a service facility in Bolivia last year and we have gone after maintenance, third-party call of maintenance in the area and it’s been successful to-date. As you know we are hull parts sales and of course the manager there is also tasked with the responsibility of sales and in Bolivia as well, being the large gas production area that it is.

Okay. Thank you, I appreciate the color.

Hey, Jeff, thanks.

[Operator Instructions] We have follow-up question from the line of Greg Colman with National Bank Financial. Your line is open, please go ahead.

Hey, thanks a lot, just a quick one here. Guys on the Q4 call you mentioned the book-to-bill of over one times was a reasonable assumption here at all of 2017 in the U.S. I’m wondering, first of all, if that’s been the case as a reasonable assumption for the year, I’m assuming yes, but I just wanted to check? And secondly, how that compared to the Canadian book-to-bill expectations for the year?

I would say, it’s still a fair assumption in the U.S. and in Canada you would be a little lower than that.

Okay, that was it from me, thanks.

Thanks.

Thank you. And I’m showing no further questions at this time. And I would like to turn the conference back over to Blair Goertzen for any closing remarks.

Yes, since there are no further questions, I’d like to thank everyone again for joining us on the call, and we look forward to giving you our second quarter 2017 results in August. Thanks, have a good weekend.

Ladies and gentlemen, that does conclude the conference call for today. Thank you for your participation and ask that you please disconnect your lines. Everyone have a great day.