Hello, thank you for standing by and welcome to the Enerflex Third Quarter 2021 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. Please be advised that today's conference maybe recorded. I would now like to hand the conference over to your speaker today, Stefan Ali. Please go ahead.

Thank you, operator and good morning everyone. Here with me are Marc Rossiter, Enerflex's President and Chief Executive Officer; Sanjay Bishnoi, Enerflex's Senior Vice President and Chief Financial Officer; and Ben Park, Enerflex's Vice President, Corporate Controller. During this call, we will be providing our financial results for the three months ended September 30, 2021, a brief commentary on the performance of our three business segments and a summary of our financial position. Today's discussion will include 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, please see the advisory comments within our news release, MD&A and other regulatory filings. Approximately one hour following the completion of this call, a recording will be available on our website under the Investors section. During this call, unless otherwise stated, we will be referring to the three months ended September 30, 2021 compared to the same period of 2020. We will proceed on the basis that you have all taken the opportunity to read yesterday's press release. I will now turn the call over to Marc.

Thanks, Stefan and good morning, everyone. The third quarter saw continued strength across global energy markets as economies continued their recovery from the COVID induced downturn. Across each of our operating regions market fundamentals remain very constructive, as global energy supplies tightened, commodity prices are responding, rig counts are accelerating, natural gas production is reaching new highs in key locations such as the Permian Basin, and demand for natural gas liquids is increasing. Concurrently, the industry's commitment towards maintaining capital discipline has further strengthened the bullish undertones for the energy complex, setting the stage for another industry upcycle. This dynamic was reflected in our third quarter financial results where for the fourth consecutive quarter, we saw continued improvement in activity, booking $191 million in new engineered systems projects and increasing our backlog to $375 million, its highest point since the first quarter of 2020. Demand was broad based with roughly half of these new projects being destined for end users in international markets and half for North American markets. New bookings also benefited from emerging demand for low carbon solutions, where we sold over 10,000 horsepower of electrified compression, and multiple landfill gas handling applications. In addition, we successfully completed the construction of an important power and gas treatment plant in Colombia. Once commissioned, the system will reduce flare gas and CO2 emissions through a uniquely engineered solution that leveraged our cross regional experience and is a win for the environment. While bidding activity remains strong across each of our three segments, navigating through these challenges will be front of mind. The manufacturing business is in the early stages of the recovery in a very competitive environment, which may pressure margins until such a time as excess industry capacity is put to work. In addition, global supply chain constraints that…

Thanks Marc. Second quarter revenue of 231 million decreased versus the prior year period, due primarily to lower engineered systems revenue on lower opening backlog and reduced contribution from some major projects that were largely completed by the third quarter of 2020. Despite lower engineering systems revenue, bookings of 191 million improved our backlog by over 150% relative to December 31, 2020, reflecting the improving conditions for the oil and gas industry, and for our engineering systems business. Aftermarket service revenue improved versus the comparable period, as the industry activity continued to improve. Rentals revenue also benefited from a more constructive operating environment compared to the same time last year when the COVID-19 pandemic took significant volumes of production offline. Rentals continue to benefit from improved utilization of our US contract compression fleet and contributions from our growing portfolio of international BOOM and natural gas infrastructure assets. Gross Margin decreased over the comparative quarter on lower revenue, but the decrease was partially offset by increased contributions from recurring revenue product lines, which yield a higher gross margin as a percent of revenue. Overall, gross margins as a percent of revenue was in line with the competitive quarter, but may be pressured in the near term until excess manufacturing capacity is utilized and supply chain constraints are resolved. SG&A increased versus the comparative period driven by higher overall compensation costs and the wind down of pandemic related government subsidies. During the quarter, we invested 9.4 million of capital towards units in our asset ownership platform, the majority of which funded the organic expansion of our US rental fleet, which has grown to approximately 385,000 horsepower. From a capital allocation perspective, we are seeing several opportunities to deploy growth CapEx globally at attractive returns, and with counterparties, with whom we have deep…

Our first question comes from Aaron MacNeil of TD securities. Your line is open.

Good morning all. Thanks for taking my questions. Sanjay, could you perhaps engage in a bit more hand holding for us as it relates to the $200 million BOOM project and in terms of revenue recognition, funds flow and any other notes on accounting treatment, since it's being accounted for as a financing lease.

Sure, yeah. Good morning, Aaron. So it is a finance lease. And the number that was disclosed is sort of the lifetime revenue associated with the contract. It'll be much like the other finance lease contracts that we've signed. It will not be counted as CapEx, but there will be an upfront cash outlay on the deal. And then we earn back the revenue over a 10 year period. And it's a high quality international counterparty and we're pretty excited about the deal.

Can you give us a sense of like, what kind of work in progress inventory build we should expect or any of the moving parts in terms of the materiality?

Yeah, so really round numbers. Let's call it 100 million.

Okay. It's helpful. And then a bit more high level for Marc. Assuming we can all agree on the merits of incremental BOOM projects, what would you say to investors that maybe would have liked to see the company prioritize other capital allocation initiatives, such as a dividend that represented a much larger portion of free cash flow, share buybacks or further debt reduction over and above growth in the infrastructure?

Aaron, I'd say that this investment in the Middle East is exactly the kind of thing that's been part of a core part of our strategy for a number of years now. And we've signaled all of investors that investing in in good return, steady projects with good counterparties as a priority. And so that's what I would say to them. That is, this is exactly the strategy we've been talking about for a few years, it's a great win for us, we'd like the business, and it falls well within our ability to fund it. And we've got low leverage. So I feel like this project is just a great project exactly what we're trying to do and in line with our strategy.

Great. Last one for me, on the energy transition initiatives. I know it's early days, but can you maybe give us an update on the types of business models you might pursue or a potential timeline of when we might expect to hear a bit more?

Sure, I'll take that one Aaron. We're really excited about carbon capture. It really plays off our modular equipment history and expertise. We'll play in carbon capture as owners or manufacturers and servicers of the equipment. It's uncertain how that market will shake out. And I think it'll be different in Canada and the United States where we're currently looking at projects, whether there's asset ownership opportunities for us, or if it'll be mainly as equipment providers and service providers to our equipment. Renewable natural gas, non-fossil fuel gas, we're a natural gas company, so we absolutely want to be in any new sources of natural gas, which is RNG and landfill gas. You'll notice in the quarter, we had a good win for some landfill gas opportunities in North America, we're excited about that. We're looking really closely into RNG and trying to understand the space, we think it's a critical component of the natural gas grid going forward. Although the market opportunity is quite a bit smaller than how we would evaluate carbon capture and storage. But it's interesting to us. It's modular, it's natural gas, it's something we should be involved with, so we're looking pretty closely at that. I'd say hydrogen is sort of third place for us. We think it's a little bit longer term. It may not play into our modular capabilities quite as nicely as CCUS and RNG. But we've got a long history of building equipment for hydrogen, mostly blue hydrogen manufacturers, and we're quite active in bidding equipment in that industry still, but it's not as much of a really differentiated ETX place, it is participating with our clients that have always been in hydrogen. Timing, Stefan and Sanjay will be working on better disclosures and descriptions of our strategy for ETX, early 2020, mid-2022, will come out with more clarity what our strategy is there.

Great. Appreciate the time. Thanks for taking my questions. I'll turn it over.

Thank you.

Thank you. Our next question comes from Tim Monticello at ATB capital markets. Your line is open.

Hey, good morning everyone.

Good morning.

Markets that you're focusing, I would imagine on the margin degradation in the engineering system segment. So I'm wondering if you could speak a little bit to what you're seeing on the cutting edge in terms of new bookings that are coming in, what is the margin profile look like that on that compared to what you have in your backlog.

Tim, sector fundamentals are improving, but the pricing pressures remain high. And there's a risk of supply chain disruptions further challenging the margins going forward. The Q3 and Q2 were great quarters for bookings. But there was a lot of margin pressure in those quarters. We're seeing maybe in the last five weeks, since the close of Q3, the markets continue to tighten, we feel that our - the one portion of our engineered systems business compression packaging, there is a lot of supply of packaging capacity. And we don't feel that that is so full, that there's going to be a significant inflection in margins on that part of our business right away. International work gas processing process, refrigeration is a different story. And we really hope that in the coming quarters, there'll be the ability for us to garner more traditional margins.

Okay, that's helpful. In the commentary, you'd also mentioned outside of that one large project that you won subsequent to the quarter is encouraging. A few other projects that you won that I imagine are smaller in nature, I wonder if you can just speak to that.

Sure. They're in our ROW segment. And they're sort of a blend of re-contracting, and moving idle assets to other locations, installing them and getting them running. So sort of a combination of our ITK business where we do the installation, reactivating idle equipment, expanding certain facilities that we had operating. So let's say, around six, a little bit less than six projects throughout the RW region, modular equipment compression, gas processing right down the strike zone of what we're going to add.

Okay, would those be ownership opportunities?

Yeah, they are. Yeah, they're BOOM projects with existing customers.

Okay, how should we think about CapEx for 2022?

So, Tim, usually, we talk about the capital program in conjunction with Q4 results. I guess, what I would say is philosophically I wouldn't expect any change from how we've been managing the company roughly living within cash flow.

Okay. And then last one to me, just on supply chain. Can you speak to the lead time for new projects? Is there - is that extended materially just given the ability to source parts and critical inputs for compression processing facilities?

It's longer lead times today than it was let's say a quarter ago. It's manageable and I still think that the lead times for our equipment is within the normal planning cycle for E&P companies and midstream operators.

Okay, appreciate all the details. I'll turn it back.

Our next question comes from Cole Pereira of Stifel. Please go ahead.

Hey, good morning, everyone. Just wanted to maybe start on the margin. So you've kind of identified two factors here, call it a ramp up of manufacturing and maybe some work mix. And then on the other hand, you have supply chains, I guess. Which one do you really see as being more material and more of a threat to forward margins because one kind of screens is more transitory, whereas the supply chain issue might be around a little longer term?

Cole, this is Marc. I would say that the margin pressure sort of supply demand was the more dominant issue the last two quarters and going forward, it very well could flip over to the supply chain portion of it.

Okay, that's, that's helpful. Thanks, I guess. With that in mind, I mean, you kind of touched on it earlier. But how should we be thinking about margin improvement into Q4 and maybe into Q1?

It's difficult for us to predict I expect the margin pressures will hang around for at least another couple of quarters as the supply side gets busy. But what's - we're optimistic about what might bring that in, is the fact that we all know the commodity macro is extremely positive. And customers have been showing a lot of capital discipline. They continue to do so. However our bid pipeline is more solid, it continues to be quite positive on that side. And so if we're going into our third quarter after the inflection from the crisis, and as people continue to buy stuff then we expect the margins will come up. When we compare this down cycle to other ones definitely hasn't come up as fast as you may have modelled from 2015, '16, or even from the global financial crisis. And I think the thing that's making it less of a snappy rebound is definitely the capital discipline story amongst the operators in our main shale basins in North America. The good part of it is our exposure internationally, the international customers, not quite as cyclical as North America. And we pointed out in our script that about half of our bookings were from international markets. And that's really positive for us. We're very happy to have that exposure. There was one more thing I wanted to mention on that front. No, I guess that's it. Thanks, Cole.

Okay, thanks. And as well, just your comments on the landfill gas project, I assume that was the non-fossil fuel based engineered systems work. And are you able to just quantify exactly how much that was or maybe give some kind of goalposts?

I mean, we obviously know how much it was, but it's not something we would disclose. It was meaningful enough for us to mention. But we'll leave it at that.

Okay, that's fair. That's all for me. I'll turn it back. Thanks.

Thank you. At this time, I'd like to turn the call back over to Marc Rossiter for closing remarks.

Since there are no further questions I'd like to once again thank you for joining us on the call. We look forward to giving your fourth quarter results in February.

This concludes today's conference call. Thank you for participating. You may now disconnect.