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

Good afternoon, everyone, and welcome to the Finning International 2022 Annual Meeting. My name is Hal Kvisle, and I am the Board Chair. I would like to call this meeting to order. I am speaking to you today from the Cortes Island Room in the Fairmont Hotel Vancouver in Vancouver, British Columbia. Joining me here are Scott Thomson, our President and CEO; and Jane Murdoch, our General Counsel and Interim Chief Human Resources Officer. This year, we are holding our annual meeting both virtually and in person, taking precautions in compliance with all applicable health authority requirements and the corporation's protocols to ensure the health and safety of the participants and attendees. I will begin with some introductory matters and outline the order of business of this meeting. In a minute, I will introduce our Board members and our 2 new Board nominees. After I make those introductions, we will 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 for this meeting. In order to expedite our meeting formalities, either I, Jane Murdoch or Scott Thomson will move and second the required motions in our capacities as registered shareholders or proxyholders 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, and I will advise you when voting is closing. Any person who is attending this meeting as a registered shareholder or a duly appointed proxyholder, may address the meeting when there is a call to discuss a motion before the meeting. Anyone who is attending this meeting 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 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 results of the votes. We will 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 ask that you hold your questions until the Q&A session. We commit to answering all questions during the question-and-answer session or by responding to the questioner directly after the meeting. Any questions on the items of business in the meeting or those asked during our Q&A session will be read out by me, by Jane or by Elisha McCallum, our Director of Communications. If we receive more than one question on a similar topic, we will group the questions together and we'll indicate if we do that. Now if there is no objection, I will ask our General Counsel and Interim Chief Human Resources Officer, Jane Murdoch, to act as Secretary of this meeting; and Marissa Beintema of Computershare Investor Services Inc. to act as scrutineer. I will now ask the secretary to report on quorum for this meeting.

Mr. Chairman, I'm pleased to report that we have a quorum with 99 shareholders present in person or by proxy, representing 80.13% of the common shares outstanding.

Thank you, Jane. 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. Before proceeding with the business of the meeting, I would like to acknowledge Kathleen O'Neill, who is retiring from our Board of Directors today. Kathleen served as a Director of Finning for 15 years. And over those 15 years, she has been a trusted adviser serving on several committees, including as Audit Committee Chair and financial expert. We are thankful for her stewardship and dedication and wish her the very best. Thank you, Kathleen. Now to the business of the meeting. I will now introduce the members of our Board of Directors who are standing for reelection and our 2 board nominees who are standing for election for the first time. First, let me introduce our new nominees. As noted in our management proxy circular, we are pleased to nominate to our Board this year, Nancy Tower, a Corporate Director, who brings to Finning over 30 years of industry and board experience, including senior executive positions at Emera and its subsidiaries. Nancy was most recently President and CEO of Tampa Electric Company, a subsidiary of Emera. Nancy is based in Calgary, Alberta. We are also pleased to nominate for the first time Manjit Sharma, a Corporate Director, who brings over 30 years of financial and operational expertise to Finning. Manjit most recently served as Chief Financial Officer of WSP Canada. And prior to that, spent 20 years with General Electric Canada, including the role of Chief Financial Officer. Manjit is based in Toronto, Ontario. In addition to Nancy and Manjit, all of our current Board members other than Kathleen O'Neill, are standing for reelection. The Board members standing for reelection, in addition to myself are Vicki Avril-Groves of Cape Coral, Florida. Vicki has been a Director since 2016 and is our designated Audit Committee financial expert. James Carter of Edmonton, Alberta. Jim has been a Director since 2007 and is Chair of our Human Resources Committee. Jacynthe Côté of Candiac, Québec, 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 the Chair of our Governance and Risk Committee. Mary Lou Kelley of South Bend, Indiana has been a Director since 2018. Andres Kuhlmann of Santiego, Chile has been a director since 2019. Stuart Levinick of Naples, Florida has been a director since 2016 and is the Chair of our Audit Committee. Christopher Patterson of Greensboro, North Carolina has been a Director since 2010. Edward Seraphim of North Vancouver, British Columbia has been a Director since 2019; and Scott Thomson, our President and CEO, has been a Director since 2013. Our first item of business today is the presentation of our financial statements. A copy of the 2021 financial report, which includes Finning's financial statements for the year ended December 31, 2021, and the auditor's report is available via notice and access on our corporate website at finning.com and was mailed to shareholders who requested it. If there is no objection, we will dispense with reading the financial statements and auditor's report. We'll pause for a moment to allow for any questions. Jane, have we received any objections or questions related to the financial statements?

No, Mr. Chair, we've not received any objections or questions.

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 our auditor. Your Board is recommending the reappointment of Deloitte LLP as Finning's auditor for the fiscal year 2022. Jane, would you please move the motion to a point -- to approve the appointment of Deloitte LLP as Finning's auditor for fiscal 2022 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 for any questions Jane, have we received any questions on this motion?

No, Mr. Chair, we have not received any questions.

As there are no questions, I now call for a vote on the motion before the meeting. All registered shareholders and proxyholders 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 proxyholders for registered shareholders, please record your votes now. This motion requires a simple majority to pass. [Voting]

Thank you. We'll get those results in a few minutes. Our next topic 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 more fully in the management proxy circular for this meeting. The text to the resolution to approve Finning's approach to executive compensation is set out on Page 16 of the management proxy circular and is being projected on the screen. Jane, will you please move the motion to approve this resolution?

Mr. Chair, I so move.

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

No, we've not received any questions.

Thank you. As there are no questions, I would 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. We'll wait a moment. And thank you on to the next item of business. In accordance with Finning's bylaws, the Board of Directors has set the number of directors at 13. Today, we will elect 13 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 13 nominees set out in the management proxy circular, who I introduced to you earlier in this meeting and whose names are currently being projected on the screen. Each of these 13 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 13 nominees as directors. This means that although I will be asking for one motion to elect each of the nominees, registered shareholders and proxyholders will be able to vote for or withhold their votes for each individual director. May I have a motion to elect each of the nominees as directors of the corporation.

Mr. Chair, I so move.

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

No, we have not received any questions.

Okay. As there are no questions, I would 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. [Voting]

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

Thank you, Hal. Good afternoon, and welcome, everyone. It is my pleasure to be hosting our 2022 Annual Meeting from Vancouver. While we are offering an in-person component of our annual meeting this year, the health and safety of our employees, shareholders, community and other stakeholders remain our top priority, and we welcome all who are attending the meeting via our live audio webcast. As we have done in prior years, after we complete the required business of the meeting, we will have time for questions. Questions may be submitted online through the meeting portal or for shareholders or proxyholders here in person, questions may be asked by approaching the microphone. To begin, we would like to take a moment to introduce Finning's corporate officers. Greg Palaschuk, Executive Vice President and Chief Financial Officer; and Kevin Parkes, Executive Vice President and Chief Operating Officer; Dave Cummings, Executive Vice President and Chief Digital Officer; and Jane Murdoch, Executive Vice President, General Counsel and Interim Chief Human Resources Officer; Anna Marks, Senior Vice President, Corporate Controller; and Amanda Hobson, Senior Vice President, Investor Relations and Treasury. David Primrose, Finning Canada President; and Tim Ferwerda, Finning U.K. and Ireland Managing Director. Juan Pablo Amar, Finning South America President; and Alex Zanelatto, Executive Vice President, Global Supply Chain; and Kieran Holm, Executive Vice President, Global Used Equipment. My thanks to the Board and Finning executive team who continue to provide solid leadership and clear direction as we navigate unique challenges and embrace new opportunities together. Before I begin my formal remarks today, I want to remind everyone that some of the information presented may be forward-looking. This forward-looking information reflects our current expectations and is subject to risks, uncertainties and other factors as discussed in our annual information form and in our MD&A. Please treat this information with caution as actual results may differ materially from our current expectations. Today, I would like to touch on our successes in 2021, talk a bit about the first quarter of 2022, share some thoughts on people and safety and close with some comments around our commitment to sustainability and outlook for the balance of the year. Before I speak about our 2021 results, I'd like to share how proud I am of our people and the role they played during the last 2 years navigating the uncertainty of 2020 and then refocusing our efforts to capture the opportunities that came with market recovery in 2021. We know that our people are what set us apart. We are where we are today because of the commitment, tenacity and creativity of every one of our 13,000 employees globally. Today, more than ever, I realize employees have a choice of where they go to work every day. I am grateful they continue to choose to go above and beyond for Finning in service of our customers and our communities. It is because of the commitment by our teams in every region that we achieved exceptional results in 2021, driven by the execution of our strategic plan, which in turn led to improved earnings capacity. We started the year strong and finished with impressive results, thanks in part to winning major equipment deals in Chile through equipment opportunities with HS2 in the U.K. and large wins in the oil sands matched with capturing product support opportunities in all 3 regions. We also continue to advance how we connect with our customers digitally, completing the launch and rollout of CUBIQ, our digital platform that brings equipment performance solutions to our customers and enables the digitization of their interactions with the dealership. This powerful tool helps us help our customers by providing data-driven insights that lower equipment ownership costs, improve efficiency and reduce emissions and idle time optimizing their machine fleet. Turning to our most recent financial performance. We released our Q1 2022 financial results yesterday and are seeing another strong start as our teams remain focused on capturing market opportunities. Our Q1 2022 product support revenue was up significantly across all regions and market sectors compared to Q1 2021. We continue to build a healthy inventory position to support backlog delivery, grow our rebuild business and provide used and rental options to meet our customers' needs as equipment availability remain constrained. We are actively managing inflationary pressures through our continued focus on productivity gains, resulting in improved operating leverage in all regions. Our improved earnings capacity and strong balance sheet provided us with opportunities to reinvest in the business in Q1, including the acquisition of Hydraquip in the U.K., which is aligned with our strategy to drive product support growth. It allows us to provide our customers with a wider range of complementary products and services that increase equipment uptime and reduce operating costs. In addition, Hydraquip expands our service capabilities across multiple industries and equipment types to both new and existing customers. Overall, Q1 was a positive start to the year, and we remain optimistic we will continue to see growth for the balance of 2022 as we keep a close eye on and proactively manage through supply chain challenges, growing labor demand and inflationary pressures. When it comes to our people on the job day to day, we continue to keep safety top of mind in all that we do. While we saw impressive results with a 12% reduction in total injury frequency globally in 2021 compared to 2020, we were devastated by the loss of a colleague and the injury of another in a workplace accident in Canada early in 2021. This event united us in the resolve to understand what happened and reinforce our commitment to tools, training and support. I am pleased to share that through this refocus in Canada and across all our regions globally, there have not been any significant incidents this year. Our goal is to do all that we can to continue that trend and ensure all our employees go home safe every day. We also remain committed to creating a culture and work environment where everyone who works for and with Finning feels safe and valued regardless of gender identity or expression, ethnicity, religion, age, sexual orientation or physical ability. We aim to create a safe space for discussions to reduce bias, discrimination, inequality and inequity. Diversity, equity and inclusion are critical to our success as an organization. It enhances our employee experience. It allows us to recruit the next generation of Finning employees and increases our ability to grow together as an organization. Our employee experience survey results showed us that 89% of our employees feel we're headed in the right direction. This ranked us higher than other comparable high-performing companies. In addition to increasing female representation on our Board today, we have also seen the number of women in leadership roles around the company steadily increase year-over-year and are seeing great progress in our operations as well. Two notable examples. We are working with our mining customers in South America to increase female technician representation, having hired nearly 40 new technicians this year. And in Canada, a full 40% of the newly hired workforce at our new distribution warehouse is female. Additional efforts in 2021 included increased conscious inclusion and building respectful teams training for leaders and adding 6 new employee resource groups globally to support colleagues who identify as 2SLGBTQ+, black, indigenous, those with disabilities, employees from the armed forces and women. I am proud of how our employees have meaningfully embraced inclusion and diversity in their day-to-day lives at Finning. Our commitment to the next generation of employees continues as we supported STEM, an indigenous focused programming in each of our regions. In Canada, we signed on to support the aboriginal futures endowment at the Southern Alberta Institute of Technology and contributed to an expanded Elders program and remote learning opportunities to increase the academic success of indigenous students at the BC Institute of Technology. In South America, we supported the training and certification of more than 1,500 people in STEM-related trades, increasing their potential employability. More than 2/3 of those trainees were women. And in the U.K., our employees volunteered their time through the STEM ambassadors program delivering programs at local schools and colleges. We continue our focus on our overall employee experience with conversations about mental health and well-being now a part of our culture, including resources and support that are available for employees. At the end of March, we released our fifth annual sustainability report, which provides a detailed discussion of our progress, successes and commitments across all areas of ESG. We are proud to share that we reduced our GHG emissions by 6% from 2020, which encouraged us to raise our absolute GHG emissions reduction target. Our new target of a 40% reduction, up from 20% includes 4Refuel and covers the same 10-year period from 2017 to 2027. We continue to help our customers reduce their environmental footprint by providing low-carbon emission equipment, remanufacturing and technology solutions, offering support through a sustainability dashboard on our CUBIQ platform to allow customers to monitor carbon emissions and encouraging accelerated adoption of alternative fuel engines among our oil and gas customers in Western Canada. Dynamic Gas Blending engines allow customers to substitute up to 85% of diesel with natural gas and are capable of operating with up to 20% hydrogen blend resulting in significant cost savings and emissions reduction. In addition, in support of our efforts to be part of the energy transition, we acquired a controlling ownership interest in ComTech through our subsidiary 4Refuel. ComTech is an early-stage developer of alternative energy infrastructure and provider of proprietary mobile fueling solutions for low-carbon fuels, including CNG, RNG and hydrogen. The partnership with ComTech allows us to provide additional service and solutions to our customers, increasing their productivity, reducing operating costs and reducing emissions. In 2021, we worked to expand component remanufacturing into industries beyond mining such as construction by adding components from additional product lines rebuilt through our exchange cycle at OEM. These include components for gas compression engines, well servicing engines and construction and electrical equipment. If you have not yet read our 2021 sustainability report, I encourage you to do so. It is available on our website under Sustainability. Our outlook for the balance of the year is strong. We will continue to make investments in our facilities, rental assets, used equipment business and digital platform as well as advance our growth strategy. Our teams remain focused on capturing market opportunities in a disciplined manner and executing on our plan to grow product support, reduce costs and reinvest free cash flow to compound our earnings. Underpinned by backlog deliveries and growth in product support, we expect higher revenue for the remainder of the year compared to Q1 and are targeting above mid-teens EPS growth in 2022. In closing, I want to thank Finning employees, our customers, shareholders and partners for their support during the past year. Your loyalty and commitment have been key to our success. 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.

Thank you, Scott. We now have the voting results for the appointment of the auditor, advisory vote on executive compensation and the election of the 13 directors. I will ask Jane Murdoch to provide the voting results. Jane?

Mr. Chairman, the scrutineers' report for the appointment of Deloitte LLP as auditor of the corporation and to have the directors fix the auditor's remuneration states, we have 94.2% of eligible votes in favor. For the approval of Finning's approach to executive compensation, we have 93.69% of eligible votes in favor and 6.31% against. And all directors were elected individually, with each director receiving at least 95% 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, all 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 proxyholders of registered shareholders may now ask questions through the virtual platform. Are there any questions on the virtual platform?

Not at this time.

As I see no questions on the virtual platform, I will conclude our question-and-answer session. We appreciate the strong show of support seen today in the voting results, and we wish you and your families and loved ones continued health and safety. Thank you for joining us today.