Finning International Inc. (FTT) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Finning International 2020 Annual Meeting. My name is Harold Kvisle, and I'm the Board Chair. I would like to call this meeting to order. I am speaking to you from Calgary, Alberta. Joining me from Finning International's head office at Great Northern Way in Vancouver, British Columbia are Scott Thomson, our President and CEO; and Jane Murdoch, our General Counsel and Corporate Secretary. We are all appropriately socially distanced. While this is the second year we've conducted our AGM virtually, it was a critically important option to this year's meeting as we face the challenges of COVID-19 that prevent us from gathering together. Holding a fully virtual meeting is in line with our commitment to ensuring the health and wellbeing of our employees, customers and the communities we serve. I will begin with some introductory matters and outline the order of business of this meeting. And in a minute, I will introduce our Board members. After I make those introductions, we'll move on to the formal part of the meeting where we will discuss and vote on the proposed resolutions included in the management proxy circular. In order to expedite our meeting formalities, either myself, Jane Murdoch or Scott Thomson will move and second the required motions in our capacities as registered shareholders or proxy holders for registered shareholders of Finning. Instructions on how to ask questions and how to vote will appear on your screens. Voting on all matters will be available throughout the meeting until the formal items of business have concluded. Any person who is attending this meeting as a registered shareholder or a duly appointed proxy holder may address the meeting when there is a call to discuss motion before the meeting. Anyone attending as a guest will not be able to address the meeting. If you would like to speak to any motion, please type in your question or comment in the message section once it opens during the discussion period for that motion. After we have completed voting on the business of the meeting, Scott will give a presentation, and we will then receive the result of the votes. We will then conclude the meeting and continue with a question-and-answer session. If you have any general questions not specifically related to the matters that are being put to a vote, we would ask that you hold those questions until the question-and-answer session at the end of this event. We commit to answering all questions either online during the Q&A session or by responding to the questioner directly after the meeting. Any questions on the items of business in the meeting or that are asked during our Q&A session will be read out by me or by Scott or Jane. If we receive more than one question on a similar topic, we'll group those questions together, and we will indicate if we do that. In accordance with the bylaws of the corporation, I will ask our Corporate Secretary, Jane Murdoch, to act as secretary of the meeting. And if there's no objection, I will appoint Evelyn Hsu of Computershare Investor Services, Inc. to act as scrutineer. Is there any objection to that?

Mr. Chair, I confirm there are no objections.

Okay. Thanks, Jane. I will now ask the Corporate Secretary to report on the quorum for this meeting.

Mr. Chair, a quorum is present. According to registrations, there are 144 shareholders present in person or by proxy representing 77.48% of shareholders.

Thank you. As we have a quorum and have received the affidavit of mailing from our registrar and transfer agent, I declare that this meeting is regularly called and properly constituted for the transaction of business. And now to the business of the meeting. First of all, I will introduce the members of our Board of Directors. As noted in our management proxy circular, Marcelo Awad, who has been on our Board since May 2013, has decided to retire. Marcelo has been a valued member and adviser, and I would like to thank him for his service and for his generous agreement to join our Finning South America Advisory Council upon his retirement from this Board. Secondly, I would like to introduce Andrés Kuhlmann, our new Director Nominee. Andrés joined the Finning Board in November 2019. He is the CEO of Transelec, which is the largest power transmission company in Chile, and he brings to Finning over 25 years of experience in senior executive roles in the industrial, electricity and power generation sectors in Chile and Peru. Andrés is based in Santiago, Chile. The remaining Board members who are standing for reelection in addition to myself are Vicki Avril-Groves of Hinsdale, Illinois. Vicki has been a director since 2016 and is one of our designated financial experts. James Carter of Edmonton, Alberta has been a director since 2007 and is the Chair of our Human Resources Committee. Jacynthe Côté of Candiac, Quebec has been a director since 2014 and is the Chair of our Safety, Environment and Social Responsibility Committee. Nicholas Hartery of Limerick in the Republic of Ireland has been a director since 2014 and is Chair of our Corporate Governance Committee. Mary Lou Kelley of Minneapolis, Minnesota has been a Director since 2018. Stu Levenick of Naples, Florida has been a director since 2016 and is Chair of our Audit Committee. Kathleen O'Neill of Toronto, Ontario has been a director since 2007 and is our other designated financial expert. And Chris Patterson of Estero, Florida has been a director since 2010. Edward Seraphim of North Vancouver, BC has been a director since 2019. And of course, Scott Thomson, our President and CEO, has been a director since joining the company in 2013. Our first item of business today is presentation of our financial statements. A copy of the 2019 financial report, which includes Finning's financial statements for the year ended December 31, 2019, and the auditor's report was mailed to our registered shareholders and is also available via notice on access on our corporate website at finning.com. If there is no objection, we will dispense with reading the financial statements and the auditor's report. I'll pause for a moment to allow any questions to be entered. Jane Murdoch, have we received any questions or objections related to the financial statements?

No, we've not received any objectives or questions.

Thank you. As there are no objections or questions, we will proceed to the next item of business. The first matter to be voted on today is the approval of the appointment of the auditor. Your Board is recommending the reappointment of Deloitte LLP as Finning's auditor for the fiscal year 2020. Jane, will you please move the motion to appoint -- to approve the appointment of Deloitte LLP as Finning's auditor for fiscal 2020 with their remuneration to be determined by the Board of Directors?

Mr. Chair, I so move.

Thank you, Jane. Scott, would you please second that motion?

Mr. Chair, I second the motion.

Thank you, Scott. We'll pause for a moment to allow any questions to be entered. Jane, have we received any questions on this motion?

No, we've not received any questions.

Okay. Thanks. As there are no questions, I now call for a vote on the motion before the meeting. All registered shareholders and proxy holders for registered shareholders who have already voted and do not wish to change their vote are not required to do anything further. All other registered shareholders and proxy holders, please record your votes now. This motion requires a simple majority to pass. [Voting]

Thank you. We'll now go on to stay on pay (sic) [ say on pay ]. As part of Finning's commitment to strong corporate governance practices, once again, the Board is providing shareholders the opportunity to cast an advisory vote on our approach to executive compensation. The purpose of this advisory vote is to provide our shareholders with an opportunity to indicate their acceptance of the Board's overall approach to executive compensation at Finning, which is described in the proxy circular issued in connection with this meeting. The text for the resolution to approve Finning's approach to executive compensation is set out in Page 14 of the proxy circular and is being projected on the screen. Jane, will you please move onto approve this resolution?

Mr. Chair, I so move.

Thank you, Jane. And in my capacity as a registered shareholder or proxy holder, I second the motion. We'll pause for a moment to allow any questions to be entered. Jane, have we received any questions on this motion?

No, there are no questions.

Thank you. As there are no questions, I now call for a vote on the motion before the meeting. Please record your vote now, remembering that if you have already voted in advance and do not wish to change your vote, no further action is required. This motion requires a simple majority to pass. [Voting]

Thank you. Moving on, in accordance with Finning's bylaws, the Board of Directors has set the number of directors at 12. Today, we will elect 12 directors. In accordance with Finning's advance notice bylaw, advance notice must be provided for anyone to be nominated as a director at this meeting. As no advance notice has been received, the nominees standing for election are the 12 nominees set in the management proxy circular, who I introduced to you earlier in this meeting and whose names are being now projected on the screen. Each of these nominees is nominated for election to hold office until the next annual election of directors or until their successors are appointed. Our majority voting policy requires that we have a ballot vote on the election of each of the 12 nominees as directors. This means that although I will be asking for one motion to elect each of the nominees, registered shareholders and proxy holders will be able to vote for or withhold their votes for each individual director. Jane, will you please move the motion to elect each of the nominees as directors of the corporation?

Mr. Chair, I so move.

Thank you, Jane. In my capacity as a registered shareholder or proxy holder, I second the motion. We'll pause for a moment to allow any questions to be entered. Jane, have we received any questions on this motion?

No, there are no questions.

Thank you. As there are no questions, I will now call for the vote. I also note that this is the last item of business to be voted on. So after this vote, all polls will be closed. Please record your vote now, remembering that if you've already voted in advance and do not wish to change your vote, no further action is required. And I'll just pause for a moment to allow any votes to come in. [Voting]

As all items of business have now been voted on, the polls are now closed. While we are waiting for the results to be tabulated, I would ask Scott Thomson to give his presentation. Scott, over to you.

Thank you, Hal. Good afternoon, and welcome, everyone. It is my pleasure to be hosting our 2020 Annual Meeting fully virtually to allow for all of you to join us given social and physical distancing requirements in these uncertain times. You may have noted that we've taken a more streamlined approach to our meeting this year, improving our efficiency without sacrificing the required business of the meeting and allowing ample time for questions and answers to be submitted online through the meeting portal after the formal meeting concludes. I would encourage all of you to stay connected for that. To begin, I'd like to take a moment to introduce Finning's corporate officers, all of whom have joined this meeting virtually today: Greg Palaschuk, Executive Vice President and Chief Financial Officer, who many of you are aware, stepped into this role after the retirement of Steve Nielsen, our outgoing CFO; Chad Hiley, Chief Human Resources Officer; Dave Cummings, Chief Digital Officer; Jane Murdoch, General Counsel and Corporate Secretary; Anna Marks, Senior Vice President, Corporate Controller; Amanda Hobson, Senior Vice President, Investor Relations and Treasury; Kevin Parkes, Finning Canada President; David Primrose, Finning U.K. and Ireland Managing Director; and Juan Pablo Amar, Finning South America President. My thanks to the Board and Finning executive team who collectively offer the company invaluable business experience, clear direction and sage advice, which is of such value now more than ever as we face uncertainty and new challenges together. Before I begin my formal remarks today, I want to remind everyone that some of the information being presented may be forward-looking. This forward-looking information reflects management's current expectations and is subject to risks, uncertainties and other factors as discussed in our annual information form under Key Business Risks and Forward-looking Information and in our MD&A under Risk Factors and Management and Forward-looking Disclaimer. Please treat this information with caution as actual results may differ materially from our current expectations. Except as required by law, Finning does not undertake any obligation to update or revise any forward-looking information. There are 3 specific areas of focus that I want to talk about today. First, I want to discuss how Finning is managing through the COVID-19 crisis to ensure the health and safety of our employees, customers, suppliers and the communities we serve. I will then touch on our Q1 results, where despite the difficulties we're collectively facing, we achieved what we set out to do at the start of the year as we saw one of our best quarters in terms of improved safety and customer feedback. And finally, I will speak about our 2019 sustainability report, a document, I know that all of us at Finning are very proud of that outlines the progress we've made in our efforts to build and power a better world. There is no question we're facing a great deal of uncertainty as it relates to COVID-19, not only as a company, but collectively as a society, which is one of the reasons I am so proud to recognize the efforts of the collective Finning team as we continue to serve our customers and keep our employees safe. From our field technicians and mechanics to our finance and IT teams and everyone in between and whether they are working at a branch or from home, every single employee has shown resilience and commitment to continuing to ensure the reliable service and support Finning is known for around the world. For that, I am truly grateful. To manage through this pandemic, we took decisive measures to protect the interest of all our stakeholders and further strengthen our financial position as we face ever-changing market dynamics and volatility in commodity prices. This included having to make some difficult choices for everyone at Finning, including the Board, executive and of all of our employees globally related to pay reductions, reduced work schedules and furlough of employees, which is allowing us to manage our costs in line with reduced business volumes. It also meant working with suppliers and partners to manage expectations and costs while preserving valued relationships and protecting supply chains. Our goal is and will continue to be to maximize our flexibility and preserve our critical talent, capabilities and access to materials and parts through the disruption. In each of our regions, our customers have been reducing capital spending and implementing cost-containment measures and business continuity protocols with a range of impacts on activity levels. This will impact revenues moving forward. We are doing our very best to work collaboratively with our customers to provide solutions that anticipate and meet their needs. We remain committed to their success both in the near and long term. The ultimate impact of COVID-19 will be difficult to predict as it will depend heavily on the duration of social distancing and quarantine requirements. What we do know is that despite all of this volatility and change, Finning has a resilient business model and our continued focus on improving execution, financial flexibility and cost and capital discipline will serve us well in the current environment and position us for opportunities that lie ahead. We released our Q1 financial results yesterday. And although our revenue profile was more challenging than we were expecting at the beginning of the year, we are pleased with the strong execution from our global teams, which offset some of the market pressures we experienced. We entered 2020 on a good trajectory of cost and capital focus, which allowed us to adapt quickly to the sharp turn in the outlook and reinforce our focus on controlling the controllable. In addition, the quality of our organization and business model have enabled us to further improve our financial flexibility and liquidity. Specifically, in South America, product support revenue was up 23% driven by a recovery of parts volume. SG&A was down in absolute dollars and profitability improved. Our current profitability in Chile is ahead of pre-ERP implementation levels. In fact, this is the highest level of profitability in Chile since the second quarter of 2018. In Canada, we started 2020 with a lower cost base, which enabled us to demonstrate improved profitability on lower revenues. In the U.K. and Ireland, low activity levels at the start of the year and COVID-19 disruptions, which impacted the U.K. and Ireland earlier than other regions, led to a low level of profitability in the quarter. Profitability of our European business is more sensitive to equipment and power system project volumes. We also experienced reduced labor recovery in the U.K. that impacted our SG&A costs prior to increasing the number of employees on furlough. The team moved quickly to address the sharp downturn in volumes with approximately 50% of our U.K. and Ireland employees now on the government furlough program. Undoubtedly, COVID had an impact on our business in Q1, but it was limited given the restrictions and slowdown that didn't start in earnest until mid-March. As we sit here in May, it is clear that our Q2 results will be impacted on a much more material fashion. As we start to see reopening plans and recovery in all regions, our goal is to ensure the continued health and safety of our employees, customers and communities we serve through a thoughtful return-to-work program that matches business volumes and costs. We believe a measured approach that recognizes the reality of market conditions and customer needs will help us make the right choices that will translate into profitability and return on capital improvements over the longer term in a recovering market. We were proud to release our annual sustainability report in March this year, profiling all our successes and commitments and reporting on our progress on several metrics we believe are important to Finning and our shareholders. It also demonstrates how our employees live our values every day and continue to positively challenge what is possible to achieve as we continue our sustainability journey. We have set the bar high on many of our commitments and goals, and we see positive progress each and every year. We were proud to achieve a reduction on our significant injury frequency by 44% over 2018, showing that our commitment to keeping safety top of mind in all that we do is working. I am pleased to say we ended Q1 2020 with no significant incidents, which is a first since I've been the CEO of Finning. Our aim to reduce our environmental footprint by focusing on energy efficiency, emission reductions, finding ways to reuse and recycle our waste streams and being vigilant about the impacts our facilities have on land and water also showed great progress with a 4% reduction in our overall GHG emissions year-over-year and the diversion of more than 10,000 tons of metal from landfills, thanks to component remanufacturing increases at our OEM facility. We continue to make excellent progress on innovation and technology for the benefit of our customers, partnering with Caterpillar to safely and efficiently operate 21 autonomous machines at mining sites in Canada and South America as well as our launch of our online customer platform, myfinning.com, to support our customers in planning for equipment downtime and predict delivery times, which also helps us optimize our inventory. And of course, we continued our efforts in all regions to engage the workforce of the future through not only financial support of, but direct mentoring by our own employees, of students interested in STEM studies and careers. Our commitments resulted in touch points with nearly 200,000 youth globally in 2019. If you've not yet read the 2019 report, I encourage you to do so. It is available on our website under Sustainability. Looking ahead, there are many factors that will continue to impact finning as we navigate the balance of the year. The timing and pace of macroeconomic and commodity market recovery from the effects of both COVID-19 and low commodity prices are unclear. We will continue to control what we can and match our capital investments and cost base to activity levels and accelerate cost reductions where necessary. In the near term, our top priorities remain the safety of our employees and supporting our customers to deliver essential services to the communities in which they operate. In closing, I want to thank all Finning employees, our shareholders and our partners for their support during the past year and as we move through the challenges of 2020 during COVID-19 and whatever lies beyond. The Finning executive team are aligned and motivated in our commitment to continue our work together on this journey. Now I'll turn the meeting back over to Hal to provide the results of our shareholder votes, conclude our formal meeting and open our question-and-answer period.

Great. Thank you, Scott. We now have the voting results for the appointment of the auditor, the advisory vote on executive compensation and the election of the 12 directors. I will ask our Corporate Secretary, Jane Murdoch, to provide the voting results.

Mr. Chair, the scrutineer reports that for the appointment of Deloitte LLP as auditor of the corporation for the ensuing year, we have 99.45% of eligible votes in favor and 0.55% against. For the approval of Finning's approach to executive compensation, we have 80.14% of eligible votes in favor and 19.86% against. And all directors were elected individually with each director receiving at least 91.88% of eligible votes in favor.

Thank you, Jane. I declare the resolutions carried by the required simple majority, and I confirm that all of the nominees for election as directors of the corporation received more votes for their election than votes withheld, and, therefore, the nominees are declared elected as directors. There being no further business, this concludes the formal portion of our meeting, and I now declare the annual meeting concluded. I will now open the floor for questions from shareholders. Registered shareholders and proxy holders of registered shareholders may now ask questions through the virtual platform. If you have any questions for either myself or Scott Thomson, please post them now. Well, that concludes our question-and-answer session. There were no questions posted. To all of our shareholders, we appreciate your patience in accommodating our decision to honor your well-being by conducting a fully virtual meeting. As we continue to navigate this uncertainty together, we wish you and your families and loved one's continued health and safety as we look ahead to brighter days. Thank you for joining us today.