Enerflex Ltd. (EFX) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Enerflex Annual and Special Shareholder Meeting. Please be advised that today's meeting is being recorded. I would now like to hand the meeting over to your speaker today, Stephen Savidant. Thank you. Please go ahead, sir.

Good morning or good afternoon, depending on your time zone. And welcome to the annual and special meeting of the shareholders of Enerflex. My name is Stephen Savidant. I'm a Director and Chair of the Board of Enerflex Ltd, and I will chair the business of today's meeting. We are pleased to host the meeting through this virtual meeting platform, accessible to all our shareholders regardless of their physical location, to participate, submit questions and vote. Each of the other 9 current directors of Enerflex is also present at this meeting. Bob Boswell -- Robert Boswell is joining us from Denver, Colorado in the U.S.; Maureen Cormier Jackson from Calgary, Alberta; Byron Dunn from Dallas, Texas; Stanley Marshall, this is my favorite introduction, from Paradise Newfoundland in Labrador; Kevin Reinhart, Calgary, Alberta; Marc Rossiter, our President and CEO, Calgary, Alberta; Juan Carlos Villegas from Santiago, Chile; Michael Weill from Houston, Texas; and Helen Wesley from Calgary, Alberta. And each of the other 6 executives at Enerflex on the executive management team are also present at this meeting. Sanjay Bishnoi, our Senior Vice President and Chief Financial Officer; Andrew Jack, President of our Canadian Region; Patricia Martinez, President of our Latin America region; Phil Pyle, President of International; Greg Stewart, President of the United States region; and David Izett, Senior Vice President and General Counsel. The meeting will now come to order. Following the formal portion of our meeting today, Marc Rossiter will make some brief remarks on the business of Enerflex. In order to this meeting cover all of the business for which it was convened within a reasonable period of time, we have prearranged with persons attending this morning to move and second certain resolutions. This procedure is not an attempt to discourage participation, but merely a way to expedite proceedings. The chair will accept questions from registered shareholders and proxy holders on each formal resolution. In addition, after the presentation by Mr. Rossiter, there will be a general question-and-answer session. [Operator Instructions] Amanda Kousinioris will act as secretary of the meeting; and Kirsten Dillon, a representative of AST Trust Company Canada, will act as Scrutineer. I have received the declaration from AST Trust Company as to the mailing of the meeting materials to our shareholders on April 8, 2020. Business may be transacted at this meeting if 2 or more persons are present, holding or representing by proxy not less than 10% of the shares entitled to vote at the meeting. The Scrutineer has confirmed that a quorum of shareholders is present at this meeting. I now declare that the meeting is regularly called and properly constituted for the transaction of business. We will conduct each vote by way of ballot. You will receive a message on the Lumi Virtual Interface once the polls are open. Polls will be open for all resolutions at the same time. This will allow you to choose to vote on each resolution immediately or wait until conclusion of discussion on each resolution prior to casting your vote. Once discussion on all items of business has concluded, I will give you a few moments to enter your votes and then declare voting closed on all resolutions. Following the meeting, a news release will be issued announcing the final voting results. We will run through each of the items on the agenda in turn, responding to questions on that item of business, while it is before the meeting. I now declare the ballots open on all resolutions. The first item of business is for shareholders to receive the financial statements of Enerflex for the year ended December 31, 2019, and the auditor's report thereon. The financials were previously distributed to shareholders and posted to our website and on SEDAR. There's also a direct link to Enerflex's 2019 annual report, which contains the 2019 financials on the info screen for this meeting. The next item of business is the election of directors of Enerflex. I will now entertain nominations for 10 positions as directors of Enerflex.

Good morning. My name is Sanjay Bishnoi, Senior Vice President, Chief Financial Officer at Enerflex. I'm a shareholder, and I nominate Robert Boswell, Maureen Cormier Jackson, Byron Dunn, Stanley Marshall, Kevin Reinhart, Marc Rossiter, Stephen Savidant, Juan Carlos Villegas, Michael Weill, and Helen Wesley as Directors of Enerflex to hold office until the next annual election of directors or until their successors are elected or appointed, subject to the provisions of the Canada Business Corporations Act and the bylaws of Enerflex.

My name is Marc Rossiter, President and Chief Executive Officer of Enerflex. I'm a shareholder, and I second the nominations.

Thank you, Marc. As we did not receive any other nominations in compliance with Enerflex's advanced notice bylaw, I declare the nominations closed. We will conduct the election on an individual basis for each director in accordance with our majority voting policy. Is there any question from any registered shareholder or proxy holder?

Mr. Chairman, this is Amanda Kousinioris, the Secretary of the meeting. And I confirm that there are no questions on this item of business.

Thank you, Amanda. The next item of business is the appointment of auditors of Enerflex.

My name is Sanjay Bishnoi. I'm a shareholder, and I move that Ernst & Young LLP Chartered Accountants be appointed auditors of Enerflex until the next annual meeting or until their successor is appointed and that their compensation be fixed by the Board of Directors.

Thanks, Sanjay.

My name is Marc Rossiter. I'm a shareholder, and I second the motion.

Thank you, Marc. Is there any question from any registered shareholder or proxy holder?

No. Mr. Chairman, there are no questions on this item of business.

Thank you, Amanda. The next item of business is a nonbinding vote on our approach to executive compensation.

My name is Sanjay Bishnoi. I'm a shareholder, and I move that the nonbinding advisory resolution concerning Enerflex's approach to executive compensation as set forth in the information circular of Enerflex dated March 9, 2020, be approved.

Thanks, Sanjay.

My name is Marc Rossiter. I'm a shareholder, and I second the motion.

Thank you, Marc. Is there any questions from any registered shareholder or proxy holder?

Mr. Chairman, we do have a question from a shareholder on this item of business. From Jacqueline Jordan, it reads as follows: I am very disappointed in the poor shareholder returns over the past 5 years. The Board has rewarded management with bonuses and inflationary pay increases for performance that has not translated into shareholder returns. How will the Board adjust executive compensation to align the income of executives with that of the owners of the company?

Thank you for the questions, and thank you, Ms. Jordan. Our approach to executive compensation is described in some detail in our information circular, but I might just highlight some of the aspects of that. We take executive compensation very seriously. We -- and use 2 independent, and I'd say well regarded, outside consulting firms to help us with that, Mercer and Hugessen. And we look at our compensation relative to the performance of our executives and relative to how a comparator group of companies, and that's made public in our info circ, is compensated. In 2019, Enerflex had a record year. The results were the best that we have ever achieved. And the results were excellent in every respect. Return on capital employed, earnings before interest and taxes, and I could go on and on. Our executive's compensation is controlled by their performance, but it is also linked to how the shareholders do. So for instance, the options that they have been granted over the years are at this point and because of what's going on in the marketplace with the COVID crisis and with the -- I'll describe it as the arm wrestle between the Saudis and the Russians on the oil markets, they have -- those options have been -- are all underwater, and there is no value. So they've been suffering right along with the shareholders. So I think those would be my comments on that. I don't think you can look at what's going on to share prices today as indicative of a normal world. But we do make sure that our executives are compensated with a good chunk of it that is linked to shareholder returns. My last comment on that, I think, would be that we target the median percentile for our executive compensation. And a number of our executive median percentile being the 50th percentile relative to the comparator companies. And a number of our executives, including Mr. Rossiter, because he's a new CEO, are materially below that P50. So over the next few years, we'll be bringing him up to that, provided the company performs and that he performs. That's my answer to that question. Are there any other questions?

No. Mr. Chairman, there are no further questions on this item of business.

Thank you, Amanda. The next item of business is approving an ordinary resolution to amend Enerflex's amended and restated 2013 option plan to replenish and increase the number of common shares reserved for issuance thereunder, as detailed in the information circular of Enerflex dated March 9, 2020.

My name is Sanjay Bishnoi. I'm a shareholder, and I move that the ordinary resolution to amend Enerflex's option plan as set forth in the information circular of Enerflex dated March 9, 2020, be approved.

Thank you, Sanjay.

My name is Marc Rossiter. I'm a shareholder, and I second the motion.

Thanks, Marc. Is there any question from any registered shareholder or proxy holder?

Mr. Chairman, no, there are no questions on this item of business.

Thank you, Amanda. For those of you that have not voted on all of the resolutions, please do so now as I will shortly close the polls. It is now, according to my clock, 9:44, at least here on the West Coast. Sorry about that. And I will close the polls on all resolutions in 1 minute from now. So there's going to be a minute of silence here, while I allow people to cast their votes. [Voting]

The polls are now closed. And I wonder if we can hear from the Scrutineer. I have received the results of each ballot from the Scrutineer and I declare all resolutions carried. This now concludes the formal items of business to be dealt with at this meeting. As there is no further business, I declare the meeting terminated. I'll now turn the microphone over to Marc Rossiter to give his remarks on the business of Enerflex. Following this presentation, there will be a question-and-answer session. I think it's limited to 15 minutes, but we'll take questions and answers afterwards. Marc, over to you.

Steve, thank you very much. Thank you to all our shareholders that are taking time to participate in our virtual annual general meeting. Enerflex has described our reaction to and the impact of COVID-19 pandemic and the drop in global oil and gas prices extensively in our public disclosures. I don't plan on repeating any of that information today. Rather, I'd like to speak directly to our shareholders about the long-term vision and strategy of Enerflex. Enerflex has served the global natural gas industry for 40 years. Our vision is to build a stable natural gas infrastructure ownership business. Our strategy is to do this in a differentiated manner that leverages our 40-year history of building and servicing compression, gas processing and power generation worldwide. 6 years ago, we started executing on this vision, with the $460 million acquisition of natural gas infrastructure in Latin America and the Middle East. Since then, Enerflex has increased our base of owned natural gas assets tenfold from a net book value of $67 million to $670 million. During this period of investment, we've kept our leverage ratio in a sector low range of 0.17x to 1.99x, thanks to cash generated from our industry-leading engineered system sales and aftermarket service franchises. Since 2011, Enerflex has never had a year of negative free cash flow before growth CapEx. We have delivered an average return on capital employed of over 11%. Let's pause for a moment and really consider those numbers. A tenfold increase in revenue-generating assets, leverage that has never exceeded 2x, consistently free cash flow positive, and a return on capital employed of 11%. Never mind energy investments, how many S&P 500 companies can boast these numbers over that time frame? Enerflex defines operational and financial success with fundamental measures that balance growth, profitability and capital efficiency in order to build shareholder value. Operating margin, pretax earnings and return on capital employed have been our core metrics since 2011. These metrics are just as appropriate in good times as in bad, and they speak directly to long-term value creation that stakeholders claim as all too rare in the energy space. We have no plans to alter these principles as we grow our business. Saying all this, it's clear to management and the Board that the elephant in the room is our share price performance over the last year. Has the share price performance shaken our commitment to our strategy? Not at all. In fact, it's reinforced the need to continue our investments in global natural gas infrastructure that is afforded by being a vertically integrated provider with scale. Making astute investment, however, is not enough onto itself. The same assets given to 2 different management teams can yield greatly varying returns. Enerflex's team must strive to be the best operators of those assets globally, maximizing earnings, profitability and capital efficiency year-after-year through the cycles. I would like to say a few words about global warming in the environment. Current investor frameworks for assessing climate change risk require thorough disclosure of greenhouse gas emission. Enerflex has a goal of producing these disclosures by this time next year. Enerflex currently manages climate risk in all areas of our business and investments. As investors digest these emerging frameworks for climate risk, we would stress that Enerflex's belief is that no meaningful progress on reducing global greenhouse emissions will be achieved with supply side actions or scrutiny alone. Striving for progress is an inherent human characteristic. Progress means different things to different people. But in most of the world, progress is directly linked to an increased demand for energy, most significantly for clean electricity. Coal accounts for 38% of the world's electrical power generation. It is the incumbent in a 3-way race among natural gas, coal and renewables to energize economic development. Natural gas provides a 49% reduction in CO2 emissions per unit of energy compared to coal, and most importantly, it's Enerflex's core business. Enerflex' products and services enabled the people of Oman, for instance, to meet an increasing portion of their demand for energy with natural gas. It displaces crude oil. The same can be said for Brazil, Colombia, Bahrain, and indeed all 17 countries where we operate, including Canada and the United States. Clearly, natural gas will be a global transition fuel for many decades. As the world must put our collective shoulders to the wheel to deal with climate change, natural gas will play a prominent role, but most important, Enerflex employees will have their feet planted firmly on the ground and our shoulders will be placed squarely on that wheel. I will close by thanking our stakeholders, our shareholders, our clients and our employees, many of whom are also shareholders. We believe that long-term value creation is only possible when we can bring the needs of all 3 of those constituents into harmony. Thank you very much for being shareholders, and we would now open it for questions.

Mr. Rossiter, this is Amanda Kousinioris, Secretary of the meeting. I'm not seeing any questions so far.

Okay. Well, Amanda, thank you very much. I believe that closes the meeting. Again, I'd like to thank everybody for participating and all shareholders, employees and clients for being important stakeholders of Enerflex.

Operator, that terminates the meeting, the total meeting. Thank you very much.