Good day, ladies and gentlemen, and welcome to the Enerflex Second Quarter 2017 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. And as a reminder, this conference call is being recorded. I’d now like to introduce your host for today’s conference, Mr. Blair Goertzen, President and Chief Executive Officer. Sir, you may begin.

Thanks, operator, and good morning, everyone. Thank you for joining us. 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 June 30, 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 June 30, 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 second quarter financial results reflect the improved market dynamics which was demonstrated by the company’s strengthened operating income and earnings relative to last year. With the improved market conditions and the stability in global commodity prices, Enerflex saw an increase in inquiries and opportunities leading to over $400 million in bookings in the quarter, the fifth consecutive period where bookings increased over the same quarter from the comparative period. This rise in inquiries and opportunities drove the 71% increase in revenue to $433 million in the quarter. Enerflex is optimistic that further stability or improvement in commodity prices will continue to drive the inquiries, bookings and revenue through the remainder of 2017 and beyond. Enerflex’s financial performance also continues to benefit from the strategic decision to focus on recurring revenue stream derived from new and existing rental and service contracts. However, we anticipate that in Canada and Mexico these product lines will remain under pressure until we see a return to more profitable commodity pricing. In…

Thank you, Blair. Financial results for the second quarter strengthened year-over-year, largely due to stronger bookings over last-half of 2016 and into 2017, which drove significant increases in engineered systems revenue. The company's quarterly bookings were $400 million a 159% increase year-over-year compared to the $154 million in 2016. Enerflex also saw a significant increase in backlog at June 30, 2017 which was $152 million higher than December 31, 2016 due to the stronger bookings in the quarter. As a result of this increased activity and the recent booking trends the company is seeing positive impacts on revenues and overall financial performance. As of today, Enerflex has recorded bookings for the third quarter of 2017 in excess of $92 million the majority of which is in the USA segment. Enerflex remains optimistic with further improvements in commodity prices will allow customers to continue increase their capital investments which should translate into further demand for the company’s products and services. Adjusted EBIT for the second quarter was $34 million compared to $22 million with adjusted EBITDA being $4.5 million versus $45 million. EBIT and EBITDA were both adjusted for restructuring costs, gain on the sale of PP&E and goodwill impairments and acquisition costs related to the Mesa Compression acquisition. The underlying increase and adjusted EBIT and EBITDA is largely driven by the improved operational results in 2017 primarily in the USA segments. Consolidated revenue for the second quarter was $433 million. This significant 71% increase was due to increased revenues in all three segments. Consolidated gross margin for the three months ended June 30, 2017 was $77 million compared to $64million. Gross margin increased due to higher revenues, improved overhead absorption, lower inventory reserves, and lower restructuring costs. The company’s geographic and product line diversification also preserved margins in a competitive…

[Operator Instructions]. And our first question comes from the line of Greg Colman with National Bank Financial. Your line is now open.

Just focus on the backlog for a little bit. First question I would like to ask is regarding some commentary we’re seeing out of other channel partners that you -- they will be suppliers for some of the engines and what not, stating increasing delays of delivering Caterpillar engines to the field sometimes stretching as far as a year. I am wondering if you are seeing these kinds of impacts and what kind of financial results -- what kind of financial implication they have, whether it’s taking the backlog and pushing out what it’s likely to hit the income statement or does it mean your cost of goods are rising and hence we should be worried about margins, or does this allow the channel to have a little bit more pricing tension in it and implies that in fact prices will be increasing on the producer side and therefore margin expansion? I am just trying to understand the dynamics of the tightened supply chain here?

Well certainly you are correct in your assessment or your information around certain supply chain items and caterpillars, one today are in excess of 52 weeks on certain product lines and so just to speak to the current backlog, the current backlog that we have today already has equipment designated for the backlog that we discussed that we said that was 73 million, 771, so that’s not a risk for deliveries in any or margin that rose in anyway shape or form. Now our discussions with our customers, then we need to talk about deliveries and what tension that puts in the overall market dynamic in terms of pricing traction, deliveries and the alternatives, so that’s where we find ourselves today and pretty much everybody else is in the same. We have inventory as well in certain product lines that are going to give us along with anyone else's starting [ph] inventory some of them have an advantage over the next 12 months but if we continue with the types of bookings we've got that inventory will be used up pretty quickly and deliveries will be on certainly compression will be stretched out to over a year. So that again will come with certain and different dynamics but we approach it on a cost filled basis for compression, each time we go to market with our quotes, whether is a North America or globally so it's all of those delivery and how we manage the delivery cycles and maybe some creativity as well around different options instead of going with single equipment, try to do something different. So anyway, that’s the piece right now but we are not at risk for margins around extended delivery for product.

And Greg the other part of your question, dealt with the timing of revenue recognition of the existing backlog, so Blair touched on this, so there is no price erosion that we are expecting or margin erosion with respect to that backlog but there are no delays in the timing of revenue recognition and deliver because the engine as Blair said we're in inventory and already have been designated to these projects.

So, it sounds as though the tightness of the caterpillar engine market is actually, it does impact you at all from a current backlog perspective again because of your inventory. And then looking forward as you continue to get new orders from now on in, your kind talked a little bit about it but does that imply that you should be able to be moving through higher pricing just because it is a tight market.

Well its only one, it is the bottleneck and it is along the item but everybody has the same situation. The only thing that you’re going to get in margin is if you have inventory and you can deliver quicker then somebody else, if your delivery for the caterpillar engine is 52 weeks and somebody else's is 52 weeks you may be able to get a little bit but now you're really competing on an apple to apples basis. You got to have better delivery to start to get margin traction in this environment.

Okay understood, just staying on the backlog for a minute there, you mentioned no risk of margin erosion because of [indiscernible] we touched on, but is the type of margin we saw in Q2 associated with your backlog that was burned through in revenue in Q2, is that indicative of what we should see for the balance of the year or is the margin held in backlog, either materially higher or materially lower that what we've recognized so far in the year.

Is your question with respect to that margin on a consolidated basis or specific to region? I just want to clarify that before I answer your question.

I'm going to say regarding your engineered systems, not on original basis but the entire backlog as four engineered systems.

Yes, so look if we look at engineered systems there is going to be a couple of items that are going to impact realized gross margins between now and the end of the year and one of the biggest ones is going to be product mix. So, we started the year, we started 2017 with a very high proportion of gas processing in our overall backlog relative to compression which has a higher margin. The bookings that we are seeing coming in here through Q2 and the start of Q3 are little more skewed to gas compression, not gas processing. So, we are starting trying to see a little bit of the rebalancing in that mix for the back half of the year. But we feel that any kind of softness in that type of mix will be offset by increased absorption. Canada, we expect the margins in Canada on engineered systems to continue to improve into the back half of the year because backlog has ramped up some of the lower margin work that we had in the backlog in Q4 '16 has already come through the revenue, the revenue line in the first six months of the year so the back half will be a lot stronger and then we will get better absorption. So, we feel that the product mix shift will be offset by better absorption and some higher margin work in Canada for that product line on a consolidated basis.

Got it, it makes sense. Shifting away to more just the [style demand] [ph] I mean I guess keeping in mind what you are talking about on compression we're seeing a shift from smaller horsepower stuff away from that to more larger central processing facilities. How does that play into your kind of strengths and capabilities both in terms of the rental products that you are looking to put out with your recent Mesa acquisition but also your manufacturing capabilities and specialties?

Yes, absolutely in the fair way larger projects, integrated solutions are right in the fair way of what Enerflex's expertise is and to speak to the Mesa acquisition obviously gas lift is traditionally lower horsepower, it's also moving up the horsepower chain as well, so it's not as large a horsepower as some of the other compression business that we are doing out there but clearly anytime there is a larger gas plant, larger compression facilities that are looking for that integrated turnkey solution it is where the sweet spot is for Enerflex, North America and globally.

And then just the last one from me, I have started to dominated questions here. We've seen receivables push out quite a bit now over 100 days in three straight quarters now, still seeing good free cash flow generation but just wondering how we should think about that? Is that sort of thing that this is the level we are going to see in this cycle should we be [indiscernible] the day sales outstanding are rising or falling as we take a look at our working capital expectations?

No, the expectation is for them to continue to fall, not to continue to rise, I mean we've talked about it a couple of times now on previous calls where we as an organization made a strategic decision to fund the working capital requirements aggressively on certain projects here during the downturn and we have completed those projects now and we are going to start to collect some of those milestone payments that were backend loaded on some of these projects and tied to deliveries, so we would expect the DSOs to start coming down here as we return to more traditional forms of milestone payments and progress billings with these new orders.

Thank you. And our next question comes from the line of Jon Morrison with CIBC Capital. Your line is now open.

Can you give any more color on how throughput in Houston is expected to look in the coming period? Like should it be declining based on the high throughput that we saw on a trailing basis in Q2 or based on your bookings that you are seeing today you can actually revenue and throughput could rise from Q2 levels?

No, we think that the back half of the year just given the activity that we continue to see and bookings in the US segment could keep revenue in that segment in the back half consistent to what we have seen here in the first half of the year.

Okay. Would you expect, based on your line of sight for new orders, would you expect book-to-bill to be below one times in that case, since you are running such a high throughput?

Well we continue to see strong bookings activity in that segment Jon, so I wouldn’t expect it to fall below one.

Okay. And you talked about the OEM supply chain and working through that, when you are going on doing your work today, are you messaging that delivery schedules will be extended not from an OEM supply chain perspective but just through physical capacity in Houston at this point or you feel you can continue to scale up and execute under what we call a normal delivery schedule?

We can scale up Jon. We've got that capacity. It will come down too, yes, we are messaging to our customers today and everyone in the world is acutely aware of the bottleneck around large horsepower category engines.

Okay. Can you talk about the composition of the bookings in backlog in US right now, is it primarily weighted towards the Permian and are you seeing any slowdown in order inquiry at this time?

It is primarily in the Permian, and no, we are not seeing a slowdown in order inquiries or bookings at this point in that region.

Okay. Is there any more commentary you can give on the international margins in the quarter? I realize that you mentioned sales mix being a driver and you had elevated engineered systems revenue which will dilute the margins. But just wondering how we should think about go forward margins for the next little while based on what you have booked in -- embedded in [north of 1]?

Yes, we think that if we look at international margins for Q2, there was a few items in there that are worth mentioning in terms of having a negative impact on those margins. So, we had -- given the weakening US dollar relative to some of the currencies internationally, we’ve seen about $2 million swing in FX year-over-year that impacted operating income in that segment and then we also had about $1 million of impairments and restructured provisions that we took as we consolidated our footprint in Southeast Asia and streamlined our costs. And then the all set legal cost in the quarter also had a drag of about $2.4 million on operating income. So, if we look at a net of those items, the EBIT margin or operating margin was about 10.5%. Looking into the back half of the year though another item that’s noteworthy to mention is that some of the discounts that we had given customers on rental contracts in that segment during the downturn which is something that also these providers, including our competitors had to do, those are starting to [the loss] and we are going back to that historical rates on some of these contracts as well. So that should offset some of the softness in operating margins that we saw in the Rest of World segment during Q2.

Perfect, an update on the international right now you saw bookings in the quarter but I think majority of those were pre-announcement, you had put your Q1 numbers, so just wondering if there is any large project opportunity there right now.

Yes, both in LatAm and the Middle East, we're seeing enquires, some of them been around the couple of years and again as we continue to talk about the gestation period as it takes to bring those across the line and some of those ones that have been around one or two years or longer and are very much back in the books again as high medium [tie highs] [ph]. So, we expect to see some of that as well and the attention that we’re giving that comes two fruitions over the six to nine months in both LatAm and the middle east.

James quite profitability in Canada improved nicely from negative territories last couple of quarters, would you expect that trend to continue in Q3 based on all the awards that you’ve been given to date and the embedded margins you planned to make those.

We were definitely happy to see core profitability in Canada here for the first time after a couple of quarters especially now because I can shave this bear that I have been growing waiting for that to happen. Looking at the back half for the year we expect that to improve not only as a result or a function of stronger margins in the backlog relative to some of the work that we booked in Q4, '16 but just better throughput into the facilities and better overhead absorption in those facilities as well, will continue to help us improve that margin going into the last six months of the year.

You guys officially closed Mesa. I think that you probably spend quite a bit more time at the management team and platform now. How do you feel about the opportunities that they had getting into the market when you acquired them and some more to accept when you completed the deal in 2014, would it be a stretch to think that, Enerflex contract compression win rate runs at elevated levels for the next six plus months? I am assuming that that they were probably bidding on projects and Enerflex is bidding on projects independently without Mesa?

We're much more optimistic in terms of how impressed we're with the business first of all just generally speaking. We're also impressed with the level of enquiries that have come through the door. We were actually bidding against Mesa in the areas that they are operating in at all, so collectively our sales forces have been able to look at the market in totality and bring a lot more opportunities to the Mesa business even in the past three months so. We're very impressed with the people and the business and we're very impressed with the enquiries and the quality of the enquiries that have come in over the past three months.

Just as a point of clarification is the growth in U.S. products specifically in Q2 weighted towards spot market wins or did that reflect largely some of the longer terms contracts you won in conjunction with some of the large equipment delivery awards that you had.

Jon, it was the latter, so it was these contracts that we announced when we announced our Q1 results that have become operational now. We ramped up and mobilized and started to provide services under those contracts so that was the primary driver but spot market part sales have also contributed to a rebound and strengthened that service segment in the U.S.

Last one just for me on the dividend, can I ask whether an increase was discussed with the board this quarter and where you guys had and payout on a go forward basis.

We discussed it each third quarter and it will be again discussed at the third quarter, so that’s the position that we've always done for the last four or five years and that will be the same position this year Jon.

Thank you. [Operator Instructions] Our next question comes from the line of Ben Owens with Royal Bank of Canada. Your line is now open.

I wanted to follow up on the question on margins. I think on the first quarter call you guys talked about having a line of sight on overall company operating margins approaching 10% by the end of the year, just wanted to get your thoughts on whether that is still on track given what's in backlog at this point?

I think that the margins as I said in response to couple of earlier question is going to continue to improve through the back half of the year through the back six months just based on the stronger throughput in the engineered systems product line and better overhead absorption, stronger margins coming online on net engineered systems product line in Canada. And then obviously the discounts rolling off so we will start to creep higher through the back half of the year and the target is for us as an organization is that to get that 10% or as close to that 10% as possible over the remainder of the year.

Okay, thanks. Then just a follow-up just on the bookings that you already have booked to the third quarter you mentioned the strong pipeline of bidding and booking activity particularly in the U.S. based on what you are tracking today do you think there is a chance that third quarter bookings in aggregate could exceed which you have pointed for the second quarter?

No, I think that at this point based on the visibility that we have in front of us it feels very much like Q2 is going to be the high watermark from the standpoint of bookings in the year at $400 million. We still have very strong line of sight in the U.S. segment as we've touched on and we continue to see strong activity in places like the Permian and places like the stack and even some activity in the Marcellus. The real wild card for us will be the international opportunities that tend to be a little lumpy when they usually hit bookings they are large and they tend to come in bunches. So, assuming that those had to follow a historical pattern I think that Q2 bookings will be the high-water mark for the year as 400.

Thank you. And at this time, I’m showing no further questions. So, I would like to return the call to Mr. Blair Goertzen for any closing remarks.

All right thanks operator and, since there are no further questions, I’d once again like to thank you for joining us on the call today, and we really look forward to giving you our third quarter 2017 results in November. Have a good weekend. Bye for now.

Ladies and gentlemen, thank you for participating in today conference. This does conclude the program and you all disconnect. Everyone have a great day.