Enerflex Ltd (EFXT) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Enerflex Third Quarter 2017 Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Blair Goertzen. Mr. Goertzen, you may begin.

All right. Thank you, and good morning, everyone, and thank you for joining us. Here with me today is James Harbilas, Enerflex's Executive Vice President and Chief Financial Officer.

During this call, we will be providing our financial results for the 3 months ended September 30, 2017, a brief commentary on the performance of our 3 business segments and a summary of our financial position at the end of the quarter.

Approximately 1 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 3 months ended September 30, 2017, compared to the same period of 2016. I will proceed on the basis that you've all taken the opportunity to read yesterday's press release.

Enerflex's third quarter financial results reflect the challenges faced in the quarter including the impacts of Hurricane Harvey, customer-driven project delays and cost increases to complete projects. Revenue in the third quarter was impacted by the delay of recognition on certain projects while delays and cost increases to complete projects resulted in the erosion of realized margin.

Despite these challenges, the company continued to see steady inquiries from customers translating into bookings of $199 million, predominantly across North America, and has strong backlog of $768 million.

Consolidated revenue for the quarter was $315 million, a 20% increase, which was largely driven by increased Engineered Systems revenues in Canada and the United States. This revenue increase was the result of realization of projects and opening backlog, which was higher due to increased customer capital spending in the first half of the year.

In the Canadian region, while there have been strong bookings in recent quarters, the market has not fully recovered due to lack of meaningful increases in customer spending. Our Canadian customers are cautious with their capital spending, particularly in the third quarter, which impacted regional bookings. However, inquiry levels are higher for both compression and process compared to last year, which will translate into bookings in future quarters. Revenues were also affected in Canada during the bulk of the delay of recognition of certain projects due to customer-driven changes to delivery dates that slowed down project progress.

In the USA, customers remained disciplined with capital spending and Enerflex's bookings in this quarter is consistent with levels experienced in the second quarter of 2017. Similar to the Canadian segment, revenues in the USA have been impacted by delays in revenue recognition for certain projects. In addition, some Enerflex vendors were impacted by Hurricane Harvey, which led to the delay of parts required for those projects.

As we look forward, Enerflex will continue to build on the successes for compression and gas processing solutions for both liquids-rich plays in the region. Further stability and improvement in the commodity prices will be required for customers to continue to increase activity and investment, which should translate into additional opportunities in the region.

The acquisition of Mesa Compression, which has been rebranded to Enerflex Contract Compression, closed in the quarter and adds an established and growing platform, which will increase recurring revenues for this segment. It accelerates Enerflex's ability to deliver full cycle contract services in the USA, as well as increases our coverage in major plays in Oklahoma, Texas and New Mexico. The addition of this Contract Compression business also allows the company to pursue growth opportunities within the Rental product line in the USA segment.

For the quarter, Enerflex Contract Compression contributed $6 million of revenue and $3 million of EBITDA. Since closing the transaction, we have increased horsepower by 13%.

Focusing on the Middle East. Our recent success in Kuwait has served to demonstrate the company's capabilities and led to interest by key customers on further projects. The Kuwait market has significant project plans over the next 5 years, and Enerflex is well positioned to compete for these new opportunities moving forward.

The target for the MEA region remains on large rental and service opportunities where customers have also required construction and installation support at site.

In Australia, the company signed a multi-year service contract with a major natural gas producer for the overhaul and maintenance of their hydraulic power units, which will contribute to the region's recurring revenues in 2018. Within this market, Enerflex is also well positioned to capitalize on the expanding natural gas infrastructure in the country, which is required to meet the growing domestic and export demands for natural gas. Our recent awards for gathering compression and wellhead compression supports our model position in Australia.

In Latin America, specifically South America, Enerflex remains optimistic. In Argentina, the continuing development of the prolific Vaca Muerta shale play in the short to medium term could generate material opportunities for Enerflex's products and services. Subsequent to the end of the quarter, the company was awarded a $25 million contract in Argentina for compression and process assets to be used in the Vaca Muerta shale play.

In Mexico, we remain cautious as there are short-term risks with numerous rental and service contracts that are set to expire over the next year and we are currently under negotiation for extensions. The country has seen significant declines in natural gas production as a result of the lack of investment. However, Enerflex sees more medium- to long-term opportunities developing as a result of the ongoing energy reform with new producers potentially entering the market.

In Brazil, the company is expecting to see more stable environment and an increased interest for natural gas fuel projects as a means to reduce dependency on hydroelectric power.

Additionally, infrastructure developments in Colombia and our new foothold in Bolivia should result in an increased Enerflex presence in these countries.

The company remains focused on integrated turnkey projects and build-own-operate-and-maintain solutions for customers in Latin America and has had some early successes, primarily in Argentina and Colombia. Our rental project awarded in 2017 in Colombia is on track and should start contributing to earnings during the fourth quarter.

Future and natural gas opportunities in Brazil, the energy reform in Mexico and the expected need for natural gas infrastructure projects throughout the region are opportunities for Enerflex to expand our presence in Latin America.

The company's balance sheet remained strong even after the closing of the Mesa acquisition during the quarter. The rental revenue from this acquisition, along with recent wins and long-term service contracts, fit within Enerflex's strategic goals of increasing recurring revenue. Moving forward, the company will continue to diversify its revenue streams from multiple markets to grow its backlog and ensure profitable margins globally by aggressively managing costs.

Steps taken over the last 24 months have allowed for a greater focus on key global market opportunities. Given Enerflex's positive outlook and our priority to grow the dividend, the Board of Directors has approved an increase to the dividend of $0.38 per year, which represents a 12% increase. Enerflex has increased its dividend by 58% since reemerging as a public company in 2011.

I will now turn it over to James Harbilas, Enerflex's Executive Vice President and Chief Financial Officer, to review the financial results.

Thank you, Blair.

Financial results for the third quarter strengthened year-over-year, largely due to the gain on disposition of an idle manufacturing facility and higher revenues, which was offset by increased project costs. Higher revenues were the result of stronger bookings over the last half of 2016 and into 2017, which drove significant increases in Engineered Systems revenue in Canada and the USA.

The company's quarterly bookings were $199 million, which represented a 47% decrease year-over-year compared to the $372 million in 2016, which included a number of large project bookings in the USA segment.

Enerflex saw $146 million increase in backlog at September 30, 2017, compared to December 31, 2016, resulting from stronger bookings particularly in the first half of 2017. This provides strong visibility for Engineered Systems revenue for the balance of 2017 and into 2018.

Adjusted EBIT for the third quarter was $14 million compared to $24 million while adjusted EBITDA was $34 million versus $48 million. EBIT and EBITDA were both adjusted for the gain on sale of an idle manufacturing facility in Canada, restructuring activities in ex of Mesa Compression. The underlying decrease in adjusted EBIT and EBITDA is largely driven by project margin erosion and delays in revenue recognition in the Canada and USA segments as well as a change in product mix with higher revenues from lower-margin projects.

Consolidated revenue for the third quarter was $315 million. This 20% increase was largely driven by increased Engineered Systems revenue in the USA and Canada segments. Rental revenues declined over the prior year due to lower utilization and rental rates in Mexico, partially offset by revenue generated by the Enerflex Contract Compression in the USA segment.

Consolidated margin for the quarter was $52 million compared to $64 million, and gross margin as a percentage of revenue decreased to 16% from 24%. This decrease was due to margin erosion on some significant projects in the USA and Canada segment segments, which totaled $9 million or roughly 3% of margin, as well as a change in product mix with the higher percentage of revenue from the lower-margin Engineered Systems product line.

Gross margins were also lowered due to the completion of higher-margin projects in the prior year.

Selling, general and administrative expenses were $39 million. The slight decrease of $1 million was the result of lower share-based compensation costs, higher foreign exchange gains and the effects of restructuring activities undertaken in prior periods, offset by higher legal and acquisition expenditures.

During the quarter, Enerflex also generated net earnings from continuing operations inclusive of gains on disposal of PP&E of $25 million or $0.28 per share compared to net earnings of $18 million or $0.23 per share in 2016.

Moving on to our regional results. The Canadian region recorded bookings of $43 million in the third quarter, a $22 million increase over the same period in 2016. Backlog also increased to $284 million, which is $116 million increase from December 31, 2016.

Revenue in the Canada segment during the third quarter was $82 million, a $22 million increase primarily attributed to higher revenue from the Engineered Systems product line. This increase was largely driven by the realization of strong bookings from the first 9 months of 2017, which, in turn, were driven by higher customer demand due to stability in commodity prices.

Revenues in the third quarter were impacted by the delay of recognition on certain projects as a result of customer-driven changes to delivery dates that slowed down project progress. The delay in revenue recognition can be seen in the large increase in work-in-process inventory, which was up by $22 million for the Canadian segment at September 30, 2017, compared to the balance at June 30, 2017. These costs in work-in-process and the related revenues will be recognized in the fourth quarter of 2017.

Operating income for the third quarter improved by $3 million as a result of increased revenues and lower SG&A costs, partially offset by project margin erosion. The reduction in SG&A expense was attributable to previously undertaken restructuring activities around compensation and occupancy expense. The margin erosion is the result of higher estimated costs to complete a significant project that impacted margins by $2 million in the quarter.

EBIT for the quarter benefited from the previously mentioned gain of $19 million on the sale of an idle manufacturing facility.

In the USA segment, Enerflex's bookings of $158 million decreased by $162 million compared to the third quarter of 2016, which included a significant booking for 1 project. At the end of the period, backlog remains healthy at $390 million, which is consistent with the backlog at year-end 2016.

Revenue in the USA segment during the third quarter 2017 was $153 million. The increase of $49 million was attributable to improved revenues across all product lines.

Engineered Systems revenue increased due to the realization of strong bookings that started in the back half of 2016 and continued through the Q3 of 2017.

Revenues have been impacted by delay in revenue recognition for certain projects. Additionally, some of the company's vendors were impacted by Hurricane Harvey, which led to delays of parts, which resulted in delayed revenue recognition for the projects.

The USA segment experienced a $16 million increase in work-in-process balance at September 30, 2017, compared to the balance at June 30, 2017. These costs and related revenues will also be recognized in the fourth quarter.

Service revenue increased slightly over the same periods from the prior year. However, there was one O&M contract canceled during the quarter.

Rental revenues increased as result of the rental assets acquired from Mesa.

Operating income for the third quarter decreased by $2 million due to lower gross margins resulting from project margin erosions as well as the completion of higher-margin projects in the comparative period. Project margin erosion is a result of increased estimated costs of completion on a number of significant projects and resulted in the loss of $7 million of margin in the quarter.

In the Rest of World, the negative bookings in the quarter was the result of changes in exchange rates negatively impacting foreign currency-denominated backlog. This segment does not have the steady smaller bookings that the Canada and USA segments have as bookings are typically larger in nature, and as a result, are less frequent.

Backlog of $94 million at September 30, 2017, increased by $30 million relative to December 31, 2016.

Revenue in the Rest of World segment for the third quarter was $79 million. The decrease of $19 million was attributable to reduced revenues in all product lines, particularly Rentals. The decrease in Rental revenues is due to lower utilization and rental rates in Mexico resulting from a 31% decline in natural gas reinjections and lower production in locations where our rental assets are deployed, as well as a rental contract for large gas processing facility not being renewed in 2017.

Engineered Systems revenue in the quarter was also lower due to the completion of 2 projects within Argentina in prior periods.

Service revenue decreased in the quarter with lower service activity in Latin America and Australia as well as reduced parts sales in Australia and Asia.

Operating income of $7 million decreased by $11 million over the same period of 2016 due to lower revenues and gross margin. The decrease in gross margin was the result of lower revenues, a change in products mix with the lower proportion of sales coming from high-margin revenue streams and the completion of a high-margin project in 2016.

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 at September 30, 2017, the company held cash and cash equivalents of $260 million and had drawn $427 million against the bank facility, leaving it with access to $299 million for future drawings.

The company improved net debt as compared to the prior year and continues to meet its bank facility covenant requirements with a net debt-to-EBITDA ratio of less than 1:1 as calculated for covenant purposes.

This completes the formal component of the webcast. Additional details can be found in our November 9 press release. We will now be happy to take any questions. Operator?

(Operator Instructions) And our first question comes from Greg Colman with National Bank Financial.

I was wondering if I could start by talking about the cost overruns in the quarter. I think it came out to an $8.4 million in the margin erosion due to that. Can you give us some added detail as to what was their nature, are they expected to continue and for how long? Just a little bit more color there. I mean, I know we've seen very, very high level of tightness in cat engine supply this year. Is it specifically regarding that? Is it something else? Just trying to get some color on those cost changes.

Yes, so with respect to cost overruns related to engine deliveries, I would say, no, that's not the case, but let me answer the question that you asked about the cost overruns. If you look at the cost overruns that were incurred, roughly $7 million of the $8.4 million happened in the U.S. It occurred on 6 large plants that we're executing in the U.S. and the cost increases that we experienced were on the construction and commissioning side of those projects. We do not expect them to continue into Q4. Approximately half of projects have been -- or plants have been completed, the other half will be completed in Q4 and we don't anticipate any further cost erosion on those projects. The one in Canada was modular supply of equipment and we just incurred cost overruns in the delivery of that equipment. It was a bit unique in terms of the design and we don't anticipate that any further cost erosion will occur on those projects either. That project has been completed. And the last thing I want to say that both of those projects were still profitable at completion. We expect them to be profitable. It's just that we had to take our recognized margin down from the awarded margin during Q3.

Okay. It was a little unusual because typically we don't see that kind of cost overruns for you guys. Is there a correction of errors to ensure this kind of thing is less likely or unlikely to happen in the future? Or is this just par for the course and sometimes cost overruns like this will be occurring?

I think we've got measures in place that will always look after protecting the margin as we work through larger projects like this. And I can't say that it'll never happen again. Certainly, we've tightened up certain processes as well on the commissioning of product within the United States and here in Canada.

Got it. And secondly, on the project delays or the changes in scope of the project that's pushed up from Q3 into Q4, there was a couple of moving parts that you talked about in Canada and in the U.S. Could you quantify the amount of revenue that has been moved from Q3 into Q4? And does that indeed suggest that Q4 is going to see a surge in revenue? Or does it have a bit of a domino effect where it gets pushed into Q4, which then pushes some Q4 into Q1?

No, we would expect that the delays that we experienced in Canada are going to be made up in Q4. And I would say the same thing for the U.S. where we would see the shift from Q3 to Q4 as a result of delays related to Hurricane Harvey or even disruptions to the supply chain. What I can say is if you want to look at it on the range from an EBITDA standpoint, we expect that roughly $6 million to $10 million of EBITDA had been shifted from Q3 into Q4 with 2/3 of that residing in the U.S. and 1/3 of it in Canada. Now the only thing that I do want to point out is that cat engine deliveries are long lead time items, as Blair referred to on previous calls, but we would expect that, that shift is going to happen into Q4. So between $6 million and $10 million with 2/3 in the U.S. and about 1/3 in Canada.

Got it. And then related to that, can we talk about the risk associated with cancellations out of your backlog. Can you just give us a bit of a reminder of a history lesson over the past X number of years, whatever you feel is appropriate, how many times have you seen projects put into your backlog that are then subsequently removed from it?

Cancellations, we tend to experience them when the macro environment pulls back significantly. So we have seen those in both 2009 with the pullback and we saw it again in 2015 when we started this downturn. And both times, I think it was in the neighborhood of about $20 million to $25 million of cancellations overall on the backlog, Greg.

And would you classify the current, I guess, maybe customer trepidation potentially for delaying projects in Canada as anything close to what you've seen in the past when projects were canceled? Or is it not yet at that point?

No, I mean, Blair touched on it in our prepared remarks that we're still seeing very high inquiry levels for both gas compression and gas processing in Canada, in fact, higher than when they were a year ago at this time and we would expect that those are going to translate into bookings in the future. I think customers are just being guarded as they're completing their CapEx plans for 2018. So for Q4, we think that Canada will probably be comparable from a bookings standpoint, maybe slightly higher than where we were at Q3. But we still see healthy inquiries and we would expect that to translate into bookings. It just might take a little longer and we might see bigger bookings quarters in early '18 once people have finalized their CapEx budgets for the year.

It's great color. And then my last one here and then I'll get off so I don't dominate the call, but you mentioned a large gas processing facility rental not being renewed in 2017 in Latin America. Can you just give us a little bit of an impact as to what happened there, when it hits, like at the beginning or end of the quarter? And where is it likely to be redeployed?

So that plant was particularly in Mexico and it was in our revenue for all of 2016 and we recognize revenue for all of 2016. They did not renew it starting January 1, 2017, and obviously, revenue has been lower in Latin America as a result of that. And if we quantify that, that's probably anywhere between a $12 million to $15 million reduction in revenue just from that 1 plant alone. In terms of its redeployment, we're looking for opportunities in Latin America to redeploy the plant and the associated compression we feel that we can also redeploy to markets like Colombia or even Argentina and Bolivia when we see additional opportunities there.

And our next question comes from Ben Owens with RBC Capital Markets.

Just wanted to circle back on the comment you made about $6 million to $10 million of EBITDA that got pushed into the fourth quarter, I might have missed it. Did that include the impact of Hurricane Harvey? Or was that strictly from the customer-driven project delays?

So no, that included the impacts of Hurricane Harvey and any delays to delivery dates that were driven by customer changes in Canada. So that was in its entirety.

Okay. And then did you guys give a number for bookings quarter-to-date?

Blair touched on it in his prepared comments in terms of Latin America, so we did focus on what we're seeing in Latin America bookings subsequent to the quarter and that was roughly $25 million. If I was to add North American bookings quarter-to-date, that probably takes us to just over -- between $85 million to $90 million of bookings quarter-to-date.

(Operator Instructions) And our next question comes from Jon Morrison with CIBC Capital Markets.

My apologies to get granular here, but I just wanted to make sure that all my interpretations aren't out to lunch and we fully understand kind of some of the noise that happened in the quarter. My interpretation would be that there was 4 core buckets that caused noise: one, Hurricane Harvey; two, the U.S. turnkey execution issues that we've talked about; three, customer delays; and four, OOCEP. Is it fair that, that broadly captures all the buckets of challenges that you had in the quarter?

That is accurate, Jon. But just from a clarification standpoint, with respect to OOCEP, it was the legal fees related to OOCEP that impacted the quarter. I just want to clarify that.

Yes, totally. And can we just go through into little bit more detail starting with Harvey? Can you talk about the physical damage that happened to the Houston plant and whether all of the repair work is now done as of to date and whether throughput in the facility is partially handicapped at all at this stage today?

So the physical damage to the plant was minor. We didn't have any damage to production bays in the plant. We had some damages to offices, which have now been fully repaired. The disruption to the plant obviously happened as a result of employees not being able to get to the plant because they were dealing with personal issues and flooding at home. Roads were also impassable for a period of time, and as result, we lost more than a week of production time with our employees physically present at the plant. Once the plant was back up and running, there were also delays in terms of the supply chain network and logistics, which drove further revenue shift from Q3 to Q4. But I can confirm that the plant is fully operational now and the damage that we did, in fact, get impacted by was to the offices and has now been completely repaired.

Okay. Given the delays that were caused by Harvey, there's obviously a large revenue and margin capture that's rolled over into Q4. But should we be thinking about that delayed Engineered Systems work is simply being additive to Q4? Or does it push out the delivery schedule at all?

No, we don't anticipate it pushing revenue that otherwise would have been recognized in Q4 into Q1. It would be additive to what we would have expected in Q4.

Okay. On the U.S. turnkey execution, can you give any more color on what specifically made the field construction and commissioning more challenging than you would have expected or projected going into those contract wins?

Jon, the projects in question started off at a certain dollar value and increased by almost fivefold in a very short period of time. And so both us, our engineering and the construction company, were scrambling to stay on schedule as the projects unfolded and really materialized in a way that we had never intended to begin with. And so we continued to accept work and we did a good job. However, as you go through this on a lump sum basis, it's challenging for us to stay ahead of the curve as the work came in waves over the course of 5 different plants.

Is it fair to assume that if you were given another opportunity like that, you might be more selective about taking on all the work to try to prevent some of that? Or is that -- was there something else you think you would do from a risk mitigation perspective?

We came off a very slow year so -- where we had laid off several hundred people in the organization and so it was an anomalous time for the support that we had as well within our company. And so you come off of that time and you accept a dollar value of work, and so yes, you can be more selective, but it came -- it was sort of a perfect storm for us in terms of our own internal resources, the resources that we had subcontracted and then the volume of work in a tight condition about saying yes or no and you risk assess it. Can we do it or can we not? And we made the decision we can do it and we did. And I think that James' point around the project is still very profitable and has been good for the organization, but it's been also tough with respect to the margin erosion about keeping ahead with the customer.

Do you have any remaining U.S. turnkey work in the backlog that would give you heartburn about the embedded margins in that backlog on a go-forward basis other than obviously the Q4 deliveries, which you've already taken a hit in this quarter for?

Not at all.

No, no. In fact, if you look at our realized margin at a consolidated level for the quarter, roughly 16.4%, I mean, if you add back the margin erosions that we incurred in the U.S. and Canada, it would take you back up to just over 19% and that -- at the end of the day, what we had to recognize in terms of cost overruns has been recognized in the quarter. It will not be indicative of future performance going into Q4 and Q1.

Does the backlog include any turnkey construction work? Or is it largely all manufacturing work at this point that's in the backlog?

The balance of revenue in the backlog related to these projects is equipment, commissioning and a very small percentage of remaining work to be done at site.

Yes. Then in the rest of the backlog, there are no other U.S. turnkey jobs in that backlog.

Okay. On the Canadian customer delays, was it just delays on their drilling programs that ultimately pushed things around? And just following Greg's question, we should be thinking about you can see it through the WIP rising, but we should be thinking of all that probably being captured in Q4, not rolling into 2018. Is that fair?

That would be fair, yes. And the delays were driven by design changes to the equipment with -- to hold off on the further manufacturing until they were able to finalize those changes and give us variation orders so that we can move ahead, and that's happened now and that revenue will be recognized in Q4.

Okay. And finally, just on the OOCEP litigation that's obviously ongoing. You incurred $3.2 million in cash legal costs in the quarter. Should we be thinking about that as a high watermark for ongoing legal costs? And can you give any sort of an update how we should be thinking about key milestone dates on a go-forward basis for information we share to the market from here?

Yes, so I would consider that a high watermark. And to put it into perspective, those costs were incurred obviously during the third quarter when the hearing took place and all the remaining evidence and argument and witness testimony was provided. So in terms of major milestones going forward, there's one set of arguments written arguments remaining to be submitted in the first week of December, and then at that point, it's in the tribunal's hands and they will assess all of the evidence and render a decision in 2018. So the 2 remaining milestones are obviously the final argument and a decision from the tribunal in 2018.

Just on the international side. Can you give us a sense of how much of your horsepower is up for contract renewal in the next 12 months? I know you mentioned the number of contracts. Just trying to get a sense of how much of it is actually going to be returned possibly?

Yes, so in -- the horsepower that's up for renewal is in Mexico and it's a handful of contracts. We don't break down the horsepower, but the statement that Blair made in his prepared remarks is the fact that we're very well advanced in renewal and extension discussions with the customer and we expect that, that'll be finalized by the end of the year.

Okay. Can you give a little more color on the $25 million international award that you got just from a timing perspective? How we should be thinking about it from a revenue recognition perspective?

Yes, so revenue recognition on that project will start in 2018. We don't expect it to be a contributor to Q4 2017 revenue.

Okay. Last one just for me. Blair, you made a lot of high-level comments about the Latin American opportunities that you're looking at. Would you expect those to materialize into ongoing bidding activity in, say, the next 3 to 6 months? Or is it more just pointing towards the large size of the prize that remains there over a multiyear horizon?

Yes, I think there are clearly tangible bits in the next 6 months that are going to be prepared and that's of the major part of it. And then I would say that in the mid-term, 2 to 3 years, in areas like Brazil and certainly Argentina, we're looking forward to really seeing those bigger opportunities come to us as well in late 2018 for bid.

And our next question comes from Elias Foscolos with Industrial Alliance.

I just have one question and it's more of a longer-term for the longitudinal question. Focusing on EBIT margin, clearly there was a goal in the past of 10% EBIT margin, no mention of it this quarter and I think it will be not achievable this year, but how do you see that for 2018?

Yes, go ahead.

So for 2018, Elias, we -- obviously, part of that getting to the 10% was to continuously invest and allocate capital to the recurring revenue side of the business, which has a higher-margin profile and that's what's going to help us get closer to that 10% EBIT margin. So at the end of the day, we would have to be making investments now in the rental fleet for it to be a material contributor in 2018. So I don't think we're going to get the 10% EBIT margin in 2018, but I think we will continue a steady progression towards that in 2018.

Okay, that helps a lot. And maybe just a clarification again and I think you've said it a couple of times, but I'll phrase it a little differently. For Canada and the U.S. separately, we can probably look at -- looking at normal absorption rates of backlog into revenue starting in Q1 with -- Q1 '18 with a surge in Q4?

So Q4 would benefit, as we said, from the shift in revenue in Canada and U.S. into Q4, correct. And then in Q1, we would expect the absorption rate of our backlog to mirror what we've been able to do historically. It always depends on the size of the projects and delivery dates. But yes, I think that, that's a fair comment for you to make.

(Operator Instructions) And we do have a follow-up question from Greg Colman with National Bank Financial.

Just a quick one. Gentleman, you quantified the $25 million contract in Argentina. Can we assume that the service contract win in Australia is well below that threshold since you didn't quantify it? Or is it just less certain?

It's below that, and it is certain. It's a contract that's been negotiated and awarded, but it's smaller in terms of its annual revenue than the $25 million overall contract in Vaca Muerta.

Blair, what's kind of your threshold for quantifying contracts on a dollar value?

Well, we don't really have a policy around it. It's -- again, if it kind of talks about the recurring revenue, the reason that we talked about Australia is that it's important and material for the region, but it's less so. We've had a rule here kind of $20 million to $50 million is I would say reasonable.

And I am not showing any further questions at this time. I would now like to turn the call back over to Blair Goertzen for any further remarks.

All right. Thank you, operator. And since there are no further questions, I'd once again like to thank all of you for joining the call this quarter. We look forward to having on our fourth quarter call of 2017 when those results are available in February. Thank you.

Ladies and gentlemen thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.