Thank you for standing by, and welcome to the Enerflex third quarter 2026 earnings conference call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one one on your telephone. If your question has been answered and you would like to remove yourself from the queue, simply press star one one again. As a reminder, today's program is being recorded. Now I would like to introduce your host for today's program, Jeff Fetterly, Vice President, Corporate Development and Capital Markets. Please go ahead, sir.
Thank you, Jonathan, and good morning, everyone. With me today are Paul Mahoney, President and CEO, Preet Dhindsa, SVP and CFO, and Ben Park, Enerflex's Controller. Before I turn it over to Paul, I will remind everyone that today's discussion will include non-IFRS and other financial measures, as well as forward-looking statements regarding Enerflex's expectations for future performance and business prospects. Forward-looking information involves risks and uncertainties, and the stated expectations could differ materially from actual results or performance. For more information, refer to the advisory statements within our news release, MD&A, and other regulatory filings, all available on our website and under our SEDAR+ and EDGAR profile. I will now turn it over to Paul.
Thanks, Jeff, and thank you for joining us on this morning's call. Enerflex delivered a solid third quarter, highlighted by healthy cash generation, record Engineered Systems bookings and backlog, notable commercial wins for behind-the-meter natural gas fired power generation, and continued progress towards the strategic objectives highlighted during our May investor update. We are pleased with the progress to date and adoption of operational and efficiency initiatives across our integrated company. Our results continue to reflect growing demand across core markets and the strength of Enerflex's integrated platform, which allows us to support customers across compression, gas processing, power generation, and Aftermarket Services. We are increasingly seeing end market opportunities that have the potential to drive meaningful growth across the business for years to come.
While we are positioning the organization to capitalize, we continue to review all opportunities on a risk-adjusted basis and balanced with our focus on operational excellence and disciplined execution. Let me start with our Engineered Systems business. The quarter was highlighted by record bookings of approximately $1 billion. During the first nine months of 2026, Engineered Systems bookings totaled approximately $2 billion, and we are on track to exceed $3 billion during 2026. This compares to our prior annual high watermark of approximately $1.5 billion in 2018. Strong bookings increased our Engineered Systems backlog to $2.1 billion at the end of Q3 and provide visibility into future activity levels through 2028.
End market demand remains broad-based across compression, gas processing, and power generation applications, with bookings in Q3 highlighted by the award of a contract to design, engineer, fabricate, and assemble approximately 450 MW of behind-the-meter natural gas fired power generation units for a North American data center developer. The volume and quality of opportunities we see across end markets reinforces our view that demand for natural gas infrastructure remains durable and supported by long-term fundamentals. We believe Enerflex is well positioned to take advantage of growing end market demand, which was a key factor in our decision to invest in expanding the capacity and capabilities of our Engineered Systems business line. We expect these investments to enhance operational efficiency, support continued execution as activity levels increase, and translate into strong value creation for our shareholders. Power generation has rapidly become an important opportunity for Enerflex.
We continue to see growing customer demand for reliable dispatchable power solutions, particularly in support of data center development and in regions where grid infrastructure remains constrained. With that said, it is important to emphasize that we are taking a disciplined approach in how we review, pursue, and assess risk for power generation related opportunities. This underlies our go-to-market approach, which emphasizes Enerflex's unique capabilities in providing a fully integrated solution, spanning design, engineering, equipment supply, commissioning, operations, maintenance, and optimization, in addition to the project and customers where our team focuses their efforts. We are very pleased with the market response to Enerflex's value proposition and our ability to secure a backlog of behind-the-meter natural gas fired power generation projects that now exceeds 1.75 GW. I would like to recognize our team for these successes and their tremendous efforts over the past year.
Let me emphasize, we view behind-the-meter power generation as directly connected and complementary to Enerflex's core gas compression and processing capabilities. We are pursuing growth opportunities across all of the company's end markets, including behind-the-meter power generation. Turning to Aftermarket Services, the business continues to perform well and is supported by healthy customer activity levels across our key operating regions. Our global installed base and growing service capabilities position us well to benefit from ongoing maintenance requirements and future service opportunities associated with both traditional Energy Infrastructure and power generation projects. Recent project awards align with Enerflex's commercial capabilities to support the full cycle requirements of behind-the-meter power generation development, and are expected to provide opportunities for future commissioning, installation, and Aftermarket Services support, including digital solutions through Enerflex's ReliaCore Asset Performance Ecosystem.
We continue to view Aftermarket Services as an attractive source of recurring revenue and long-term value creation. Turning to Energy Infrastructure, our U.S. contract compression business continues to perform well as increasing natural gas production supports demand for compression services. Utilization remains strong at 94%, while fleet size increased to approximately 521,000 horsepower at quarter end. We continue to target customer supported fleet growth of 10%-15% during 2026, and are securing long-lead components to support growth into 2030. Our international Energy Infrastructure portfolio also continues to be a durable source of cash flow, supported by long-term customer relationships and contracted assets. During the quarter, we also completed the divestiture of the majority of our Asia Pacific operations.
The transaction advances several of the objectives outlined during our investor update in May, including sharpening our geographic focus, simplifying the business, and further concentrating our efforts on the markets and product lines where we see the greatest opportunities for long-term value creation. As we discussed at our investor update in May, our focus remains on growing revenue ahead of our underlying markets, improving profitability, enhancing cash conversion, and driving higher returns on capital. To support these objectives, we continue to advance initiatives across the organization, including the integration of our North American operations, strengthening our supply chain execution, driving continuous improvement in Lean, and enhanced focus on our commercial execution and advancing digital enablement. The deployment of ReliaCore is an increasingly important component of our integrated service offering.
In addition to supporting our existing installed base, ReliaCore enhances our ability to deliver remote monitoring, operational support, and asset optimization solutions across both traditional Energy Infrastructure and emerging power generation applications. These capabilities extend service coverage, accelerate issue resolution, and build the foundation for advanced analytics and predictive maintenance capabilities that are expected to improve asset performance, reduce downtime, and create long-term economic value for both Enerflex and our client partners. As we look ahead, we believe Enerflex is exceptionally well positioned. Record backlog provides visibility into future activity levels. Our contract compression business continues to grow. Demand for natural gas infrastructure remains constructive, and our emerging power generation platform continues to gain momentum. With that, I'll turn the call over to Preet.
Thanks, Paul, and good morning, everyone. I'll begin by touching on a few highlights from our third quarter financial results. Gross margin before depreciation amortization was $176 million, or 28% of revenue in Q3 2026, compared to $206 million, or 27% of revenue from the prior year period, and $173 million, or 30% of revenue in the second quarter. The year-over-year decline primarily reflects the upfront gain related to commencement of the Bisat-C expansion facility, as well as the achievement of certain Engineered Systems project milestones in the prior year period. Compared to the second quarter, margins reflect a shift in revenue mix and project sequencing, with Engineered Systems revenue improving sequentially and margins consistent with our historical average. Energy Infrastructure and Aftermarket Services once again provided a strong foundation for earnings generation, contributing approximately 68% of consolidated gross margin before depreciation amortization during the quarter.
SG&A was $64 million, down $7 million from the prior year period, primarily due to lower share-based compensation. Core SG&A increased to $58 million from $53 million in Q3 2025, reflecting cost to support growth and operational optimization in the business. Adjusted EBITDA was $129 million, compared to $145 million in the third quarter of 2025 and $128 million in the second quarter of this year. Compared to prior year, results reflect timing of project milestones and a higher level of operational activity in ES during the prior year period. Free cash flow is $102 million, compared to $43 million in the prior year period and $32 million last quarter. The increase of free cash flow compared to prior year and prior period reflected higher CFO, including net working capital recovery of $51 million, being partially offset by higher capital spending compared to the prior year period.
Return on capital employed was 15.8% in Q3 2026, compared to 16.9% in Q3 2025 and 15.4% in Q2 2026. The sequential increase benefited from lower average capital employed, predominantly due to a reduction in net debt. Compared to Q3 2025, ROCE reflects lower trailing 12-month EBIT as the prior year period benefited from the upfront gain related to recognition of the Bisat-C expansion as well as lower share-based compensation. Net earnings of $55 million, or $0.45 per share, compared to $37 million or $0.30 per share in the prior year period, and $30 million or $0.25 per share in the second quarter. Turning to the balance sheet, Enerflex ended the quarter with net debt of $312 million, including $227 million of cash.
The increase in cash reflects proceeds of $62 million from APAC divestiture on September 30th, as well as strong free cash flow generation, including collections of customer deposits near the end of the quarter. Our bank adjusted net debt to EBITDA ratio improved to approximately 0.6 times. Let me shift to capital allocation. First, on our CapEx plans and growth. We invested $42 million into business during the third quarter, comprised of $26 million for growth, primarily allocated to expand the company's US contract compression fleet, and $16 million for maintenance and PP&E. Enerflex is refining its organic capital expenditure guidance for 2026.
The company continues to target spending of $185 million-$195 million during the year, which includes organic growth capital expenditures of approximately $100 million, unchanged from prior guidance, maintenance capital expenditures of approximately $55 million versus prior guidance of $70 million-$80 million, and PP&E and infrastructure investments of $30 million-$40 million versus prior guidance of $15 million. The reduction in forecasted maintenance capital reflects efficiencies as well as a shift of some spending into 2027. The additional investments in PP&E infrastructure will be used to support the company's ES business line and activity in adjacent markets, including electric power generation. As we announced in early October, Enerflex has authorized investments to expand its ES facilities and capabilities, including $30 million-$40 million, including Enerflex's 2026 capital expenditure guidance and $85 million expected to be incurred during 2027.
These investments, combined with ongoing initiatives to enhance collaboration, leverage scale, improve operational efficiency, and solidify capabilities are expected to significantly increase revenue capacity of Enerflex's ES business line. Enerflex also continues to evaluate selective, disciplined tuck-in acquisition opportunities. Inorganic growth will remain focused on enhancing capabilities and accelerating scale in the company's core North American markets. All opportunities will be balanced with Enerflex's focus on maintaining a strong financial position and providing direct shareholder returns. Now shifting to direct shareholder returns. Enerflex's board of directors has increased the company's quarterly dividend by 17% to $0.035 per common share, effective with the dividend payable in November 2026. The board's decision to increase the dividend for a third consecutive year reflects confidence in our business, given Enerflex is in a strong financial position and aligns with our objective of providing meaningful direct shareholder returns.
With that, I will turn the call back to Paul.
Thanks, Preet. The third quarter represented another meaningful step forward as we continue to execute on the priorities outlined during our investor update in May. We generated strong free cash flow, delivered record bookings and backlog, increased our dividend for a third consecutive year, and continue executing towards the strategic objectives. As we look ahead, we believe Enerflex is well positioned to capitalize on growing demand for natural gas infrastructure and power generation solutions. With Engineered Systems bookings on track to more than double our previous annual record and backlog at an all-time high, we remain focused on converting these opportunities into long-term value for shareholders. I would also like to thank our employees for their continued commitment and dedication, and our client partners, suppliers, and stakeholders for their ongoing support. I will now turn the call back to the operator for questions.
Certainly. Ladies and gentlemen, as a reminder, if you do have a question at this time, please press star one one on your telephone. Our first question for today comes from the line of Aaron MacNeil from TD Cowen. Your question please.
Hey, morning all. Thanks for taking my questions. I wanted to start by focusing on the strong bookings for the quarter, particularly within the core business of compression and processing. Did the bookings include anything unusually large, like a cryo order, or was it just the results or another indication of the broad-based strength you are seeing across the platform?
Yeah. Good morning, Aaron, and thank you for the question. There's nothing really significantly different than what we've been observing over the last few quarters. The $1 billion bookings has a healthy power component, as we've discussed. I mean, nothing unusually large in the balance of compression or gas processing. However, we did have a nice incremental win in Latin America, in Argentina, in our gas processing business. That was a nice order, but it's well within the trailing eight-quarter line in our core business. Nothing unusual. As I said, we've added the power generation win to that.
Okay, fair enough. Then, maybe shifting to shareholder returns. The balance sheet's in good shape. You've got clear visibility to future earnings, and I can appreciate the dividend increases meaningfully in percentage terms, but maybe not meaningfully on a use of cash perspective. I guess I'm wondering about the continued reluctance to sort of enhance direct shareholder returns more meaningfully from current levels.
Thanks, Aaron. We did do the dividend increase third year in a row, and you're right, 17%, a decent increase over 10% last year and 50% the year prior. We continue to assess all capital allocation levers, including direct shareholder returns, including share buybacks. As we've discussed many times, our growth agenda, organic and inorganic tuck-ins in good markets, good asset classes, primarily in the U.S., is something we're focused on. This is all in context of a very strong balance sheet, which we feel very good about where we are today. Some of the cash inflows, we will be deploying those towards execution of the ES projects that are currently in our high-quality backlog. But to say we assess all different levers, we assess direct returns, inorganic, organic growth in context of continuing to paying down debt.
But we feel good about where the balance sheet's at, and once again, we have these discussions, management and the board. There's no reluctance, but there's often a lot of assessment in different levers at different points in time. Some of our CapEx requirements to be able to execute on the power gen transactions are something we are also focused on, which is why we're refining our CapEx guidance this year and put a marker out for next year.
Fair enough. Thanks, everybody. I will turn it back.
Thank you. Our next question comes from the line of Keith Mackey from RBC Capital Markets. Your question, please.
Hey, thanks, and good morning. I guess I will start out with the data center bookings. Certainly very strong bookings in Q3 and coming up in Q4. But certainly, there is concern around data center backlash, and potentially what might happen from a regulatory standpoint if we see the U.S. turn more, call it blue, in the House and the Senate after the midterms. Can you just talk about, in more detail, some of those gating factors and some of the scrutiny you conduct when you accept or when you bid on these awards and ultimately win them? And ultimately, what drives your confidence in being able to execute these projects that you have booked?
Yeah. Thanks. Thanks, Keith, and good morning. As we have talked over several quarters, that we have had originally a little over 7 GW of commercial activity and opportunity. I am quite happy and pleased with the team's ability to strategically look at the 7 GW. If you remember, a couple of quarters ago, we started to zero this down into 2 GW of seriousness. A lot of that is a reflection of that strategic filtering. So when I think about companies that have really, really strong investment-grade positions, creditworthiness, strong counterparties that have well-developed line of sight of engineering, well-developed line of sight of the regulatory environment, very close to the local markets that they are participating in, we have really focused on those.
I would tell you that I am very happy, very pleased with the commercial activity in the business units to build this filtering process, to whereby this 1.8 GW in our backlog that we see now, we feel very, very good about. Certainly, it is an ongoing discussion. We stay close to it, but we have done our best to participate and partner with those that are lower risk.
Okay. Appreciate the comments there, Paul. Just maybe a follow-up on the data center pipeline then. So narrowed the 7 GW down to roughly the 2 GW that you have already won. What is your outlook for replenishing of that pipeline of new projects that would potentially also fit in your wheelhouse over the next several years? Or are you pretty much happy with what you have booked and that is it for the data center opportunity?
Yeah. No. Great question, Keith. As we work through our strategic priorities, and built our strategic plan, clearly the avenue here and this adjacency was to build an install base and harvest the Aftermarket Services over time. So, we did and walked into a 7 GW set of opportunities. We narrowed it to our best view. We focused on bringing those home in the 1.8. I would tell you today, that I see probably an additional 1.5-2, in a very filtered manner, to the description that I laid out there. The gating item obviously is going to be equipment supply. So the timing of what that looks like is something to walk through. But I would say right now, 1.5-2 gigawatts falls into the similar realm.
Okay. Appreciate it. Thanks very much.
Thank you. Once again, ladies and gentlemen, as a reminder, if you do have a question at this time, please press star one one on your telephone. Our next question comes from the line of Tim Monachello from ATB Cormark. Your question please.
Hey, good morning, everyone. Just wanted to ask about the Engineered Systems margins in the quarter. We saw those dip down from, I guess, the range they have been running at for the last few quarters. Was there anything one time in the margin profile there?
Yeah, I mean, primarily it is mix, project sequencing, and these margins that we reported in Q3 are aligned fairly well with the historical average. Nothing obvious jumps out at us that way, but just those criteria is what I would say.
When you look at the backlog of projects you have, and clearly with the power generation win coming through, I would think that margins are going to tick higher. Do you have any guidance or provide any context on where you think margins are heading in ES?
What we have been saying about the win that we had in Q3 and the subsequent win that is going to be reported in Q4 in power generation, we feel those margins are accretive to our current reported historical ES margins. That is not going to hit until likely late 2027, call it Q4 into 2028. But overall, we have got pretty healthy historically aligned gross margins in the ES business, and we will continue to optimize to try to improve that going forward.
Okay, got it. With the increase in the PP&E spend in 2026, is that more a pull forward of spend that you are expecting to happen in 2027 and 2028, or is that incremental? Will that increase your capacity in any way versus what your expectations were?
Yeah, so we talked about $15 million PP&E for 2026 and $85 million in 2027. Some of that will be pulled forward into 2026. What we did, we took the maintenance CapEx, dropped that at midpoint of about $20 million, increased the PP&E, reflecting some pull forward, but also increasing capabilities and capacities above and beyond what we mentioned a few weeks ago. But overall, we think it is still a healthy range of PP&E and maintenance CapEx. Some of it we feel we can defer into 2027. But overall CapEx guidance is in the same range of $185 million-$195 million.
I guess what I am trying to get at is that, sorry, go ahead.
No, Tim, I was just going to add to Preet, just for maybe helping as well conceptually. In our Tulsa facility, we're talking about adding acreage, right? The question of is this incremental? It's incremental acreage, it's incremental buildings. There'll be a test building and there'll be a fabrication building. These are incremental. To really start to zero in conceptually, is this going to give us increased capacity? The answer is yes.
Tim, sorry, it's Jeff. Just one more item to clarify. We're also investing across all of the ES facilities, including in Canada and the Broken Arrow facility in Oklahoma. That's reflective of end market demand and also the desire to solidify capabilities across the businesses that we're executing on.
Okay. Got it. I guess what I'm trying to get at is, clearly there's some capacity constraints within the ES business, which you're addressing with these expansions, which will largely come in for 2028. Is there any other levers you can pull to try to expand capacity sooner? Maybe you could help by just providing some bookends on where you think your manufacturing throughput stands for 2027 and 2028, given the expansions that you're doing.
There's several things, Tim, that we've been looking at. Nothing concrete at this point, but certainly how do we accelerate with partners? That's definitely something we're working through. We're not ready to kind of come forward with that. We're looking to expand in other ways as needed.
Okay, great. I appreciate it.
Thank you. This does conclude the question and answer session of today's program. I would like to hand the program back to Paul Mahoney for any further remarks.
Well, thank you for joining today's call and for your continued interest in Enerflex. We appreciate your time and look forward to sharing our fourth quarter and year-end results with you in February. Thank you.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.