Finning International Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 7, 2024

There are 9 speakers on the call.

Operator

for standing by. This is the conference operator. Welcome to the Finning International Inc. 4th Quarter 2023 Investor Call and Webcast. As a reminder, all participants are in listen only mode and the conference is being recorded.

Operator

After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Greg Palaschuk, Executive Vice President and Chief Financial Officer. Please go ahead.

Speaker 1

Thank you, operator. Morning, everyone, and welcome to Finning's 4th Quarter Earnings Call. Joining me on today's call is Kevin Parks, our President and CEO. Following our remarks today, we'll open the line to questions. This call is being webcast on the Investor Relations section of finnming.com.

Speaker 1

We've also provided a set of slides that we'll be referencing during our prepared remarks. Slides are posted on the website. An audio follow of the call and the accompanying presentation will be archived. Before I turn it over to Kevin, I want to remind everyone that some of the statements provided during this call are forward looking. Please refer to Slides 9 and 10 for important disclosures about forward looking information as well as currency and specified financial measures, including non GAAP financial measures.

Speaker 1

Please note that forward looking information is subject to risks, uncertainties and other factors as discussed Our annual information form under key business risks and in our MD and A under Risk Factors and Management and Forward Looking Information disclaimer. Please treat this information with caution as our actual results could differ materially from current expectations. Kevin, over to you.

Speaker 2

Thank you, Greg, and good morning, everyone. Today, I will speak about our 2023 performance, our fresh strategic priorities, which were presented at our Investor Day. Following my remarks, Greg will speak in more detail about our 4th quarter results. Please turn to Slide 2. I am very proud of our team.

Speaker 2

They delivered very strong results and performance in 2023. We achieved excellent growth in product support in all regions and won strategically important business that sets the foundation for sustainable growth in future years. We delivered record earnings per share and further strengthened our earnings capacity. We also made good progress in growing our used rental and PEM assistance businesses. I'm grateful to our employees for their commitment and contribution to a record year.

Speaker 2

We are pleased with 17% growth year over year in product support revenue. We grew in all regions by capturing market share, thoughtfully building our capacity and capabilities and executing with discipline in a challenging environment. We increased our technical workforce by 7% in 2023 to nearly 5,500 technicians globally, support a growing number of product support contracts, strong demand for rebuilds, which were up 14% year over year. We also made targeted investments in our facilities to better serve our customers. In Canada, we opened a new state of the art RRR facility in Kamloops.

Speaker 2

We have also centralized 5 parts warehouses in Edmonton into 1 where we still have opportunity for more efficiencies, automation and velocity. In Chile, we are expanding our capabilities and optimizing our mining services footprint in Antofagasta, relocating the service operation Vale Negra facilities, which some of you visited during our September investor tour. We have strengthened our earnings by reducing our SG and A as a percentage of net revenue to 17.2% in 2023 despite persistent inflationary pressures. Our adjusted earnings per share increased by 20% year over year to an all time high of 3.91 dollars Our 2023 adjusted return on invested capital improved to 20%, led by South America. I would also like to acknowledge our team's resilience and dedication to our customers as we manage through some business challenges in the 4th quarter.

Speaker 2

This is particularly in Argentina, where the change in government led to significant disruption to our business, our employees and their families. Construction product support activity in Canada and the U. K. And Ireland was more challenging than we expected in the Q4. We expect this to recover 2024 as the operating environment improves.

Speaker 2

Whilst we achieved strong profitable growth over the last 2 years, free cash flow generation was challenging as we reinvested in growing our business and managed supply chain challenges to support our customers. To my comments earlier around strategically important wins, In 2023, we delivered 60 ultra class trucks in Canada and Chile and 50 large mining trucks to contractors. We are pleased to end the year with positive free cash flow and a strong balance sheet. The majority of our inventory is high quality and has been committed to our customers. As growth rates moderate, improving our resilience and unlocking invested capital will be critical.

Speaker 2

In 2024, We will be working to increase our invested capital velocity, prioritize our cost and capital resources and improve our free cash flow generation. We are building a culture of resilience through our global organization. This includes an acute focus on inventory management with increased discipline forecasting and stocking, A review of low ROIC activities and investments, which we started to implement in Q4, on greater priority and flexibility of our resources to ensure our cost structure becomes more variable over time. Importantly, improving customer service levels is a priority as we execute these plans. As I stated earlier, we have started to make progress growing our used rental and power systems businesses as we continue to build capabilities in these strategically important areas.

Speaker 2

We achieved record used equipment sales in the Q4, and our Power Systems revenue was up 31% in 2023 compared to 2022, with all regions achieving double digit growth. We are pleased with our rental performance. Our primary focus is on Canada, where 2023 rental revenues were up 7% from 2022. As we look ahead, We continue to build a safe and secure company, which makes it easier for our teams to better serve our customers and empower our employees to drive customer loyalty. Our recent employee experience survey showed that our sustainable employee engagement score has improved since we last conducted this survey in 2021 with encouraging trends across all regions and job roles.

Speaker 2

Our focus in 2024 is on executing our strategic plan, cementing the new earnings power of the business by growing product support, building full cycle resilience by unlocking invested capital and delivering driven by constructive commodity process, improving supply chain and market share opportunities. We are entering 2024 with a healthy equipment backlog our workshops are busy. As we build on our 2023 results, we are confident in progress towards our Investor Day targets. I'll now hand it back to Greg to provide a greater level of detail on our 4th quarter results.

Speaker 1

Great. Thank you, Kevin. I'll talk about our 4th quarter performance now in more details, I'm turning to Slide 3. Our net revenue in Q4 'twenty three was $2,400,000,000 up marginally from 2023. Adjusted EBIT and EPS were up 9% and 7% respectively.

Speaker 1

Our adjusted EPS was $0.96 in Q4 bringing the 2023 adjusted EPS full year total to $3.91 Our 4th quarter results were adjusted for 3 significant items. First, Argentina. While changes being made by the newly elected government have the potential to be positive in the long term, the extreme currency controls in place during the Q4 election process combined with the large subsequent devaluation of the peso resulted in challenging operating conditions, a large foreign exchange loss for Finning and many of our customers. With no material access to U. S.

Speaker 1

Dollars starting in late August, our peso exposure increased significantly. And during this period, economic hedges were not available. In December, the government devalued the official rate from $7,000,000 to $800 per U. S. Dollar, which led to a foreign exchange loss in Q4 of $56,000,000 or $0.37 per share.

Speaker 1

Starting in January 2024, currency access has been reestablished for new imports and economic hedging alternatives are once again available. In early February, we began a series of transactions to reduce our peso balance to 0. The cost of this program is being covered with significant support from our key suppliers. Our exposure and risk of losses are much lower today compared to the Q4 of 2023. We're actively monitoring the new rules and policies of the new government, continue to evolve our operating model to gain a low risk approach in Argentina in 2024.

Speaker 1

The other two adjustments in the quarter related taken to optimize real estate and exit LOA ROIC activity. As part of our Antifagasta master plan we reviewed at Investor Day, sold our Antibagasta Construction branch in Chile for both gross proceeds of $16,000,000 and recorded a gain of $13,000,000 We also recorded a $12,000,000 write off related to the decommissioning of LoRaWIC by operating cost IT systems. Overall, adjusted EPS of $0.96 per share in the quarter demonstrated solid underlying operating margins and earnings capacity, while we managed through several challenges in the quarter. On Slide 4, you can see changes in our net revenue by line of business compared to Q4 2022, composition of our equipment backlog by market sector. New equipment sales were up 22% in Canada, up in all sectors, which is offset by lower new equipment sales in South America and the U.

Speaker 1

K. And Ireland, resulting in an overall decline of 4%. Lower new equipment sales were more than offset by increases in other lines Business particularly in used equipment, which increased by $44,000,000 or 48% year over year to a record level within the quarter. Product support growth was 1%, which was at the lower end of what we were anticipating. I'll review the product support drivers by region on subsequent slides.

Speaker 1

Equipment backlog of $2,000,000,000 was down from September due to strong deliveries of outpacing order intake. Overall equipment backlog remains solid. Canada and UK and Ireland, order intake in the 4th quarter was significantly higher compared to sequentially from Q3 of 2023. The pace of quoting activity remains strong, particularly in mining in Canada and Chile as well as data centers in all regions. Power Systems requests for proposals have been particularly strong and we're actively quoting a number of proposals into 20252026.

Speaker 1

Turning to Slide 5, which shows our adjusted EBIT performance. Gross profit as a percentage of net revenue is comparable to Q4 of 2022. SG and A as a percent of net revenue was 17%, down 60 basis points from Q4 of 2022 due to lower LTIP expense and continued productivity Adjusted EBIT was up 9% year over year. Adjusted EBIT as a percentage of net revenue improved 60 basis points to 9.6%.

Speaker 2

In the

Speaker 1

bottom right corner, you can see the full 2023 adjusted EBIT as a percentage of net revenue by region, which was 10.4% for Canada, 12.1% for South America and 4.9% for the U. K. And Ireland. All significant improvements in the app compared to the average over the last 10 years and a key driver of our improved cranes capacity in ROIC. Moving to our Canadian results and outlook, which are summarized on Slide New equipment sales were up 22% from Q4 2022 with broad based strength across all market sectors.

Speaker 1

Used equipment sales increased 34% year over year driven by strong sales across retail and wholesale channels. Product support revenue was down slightly from Q4 2022 as unseasonably warm weather delayed the start of winter programs, producing equipment utilization and construction in the mining sectors. The completion of several major projects also slowed some construction activities in the near term. Additionally, Q4 2022 product support included revenues related to the autonomy conversion of a 797 fleet in the oil sands, did not repeat in Q4 of 2023. Adjusted EBIT was down 5% from Q4 2022 due to higher proportion new and used equipment sales revenue mix.

Speaker 1

SG and A as a percentage of net revenue is comparable to Q4 twenty nineteen. This February marks the 5th year since our acquisition of Bory Fuel. Bory Fuel has been a strong contributor to growth in Canada, achieving 80% growth in EBITDA since acquisition. In addition, the business has generated strong positive free cash flow every year. Rory Fuel is run by a very passionate and highly engaged management team and group of employees.

Speaker 1

We're very proud of their strong execution and overall performance. Our outlook for Western Canada is positive. While the completion of major pipelines has slowed some construction activities in the near term, we expect to see increased activity in the energy sector production growth going forward. Our mining and energy customers are expecting to increase spending levels to renew and maintain their fleets. In the oil sands, we anticipate strong demand for product support, including component remanufacturing and rebuilds.

Speaker 1

In Construction and Power Systems, we expect ongoing commitment from governments on infrastructure development as well as growing demand for sustainable power solutions. Turning to South America, I'm on Slide 7. In functional currency, new equipment sales were down 24% for Q2 4 of 2022 due to challenging market conditions in Argentina and lower sales to mining contractors. Product support revenue was up 5% year over year led by mining. Adjusted EBIT was up 6% from Q4 'twenty two.

Speaker 1

Adjusted EBIT as a percentage of net revenue was up 120 basis points to 12.6%, primarily due to a shift in revenue mix to product support. Adjusted ROIC of 27.6 percent was up 3 10 basis points from Q4 of 2022, reflecting both improved profitability and invested capital Our outlook for Chile Mining is strong supported by growing demand for copper, recent government approvals of large scale brownfield expansions, increasing customer confidence to invest in new projects. We continue to see strong demand from large contractors supporting mining operations Chile, while infrastructure construction activity is expected to remain stable. Additionally, power system activity is growing in industrial and data center markets. Lastly, as discussed earlier, we're taking a low risk approach in Argentina in 2024.

Speaker 1

Please turn to Slide 8 for our results in the UK and Ireland. In functional currency, net revenue decreased 10% from Q4 2022, reflecting a slower construction market in the 4th quarter. New equipment sales were down 16% due to the timing of power system project deliveries and lower construction sales. Q4 2022 benefited from higher power system project deliveries and HS2 deliveries. Product support revenue was down 6% from Q4 2022 slower activity in the construction sector.

Speaker 1

With GDP growth below 1% in the second half of twenty twenty three, we're seeing customer restraint and lower activity levels, which we expect to continue in the first half of twenty twenty four. Used equipment revenue was strong, up in the quarter 48%, reflecting our efforts to capture larger share of the used market in the UK. Adjusted EBIT as a percentage of net revenue was 2.7%, Portion of fixed costs in SG and A and lower volumes, persistently high inflation contributed to lower operating leverage. We expect demand for new construction equipment in the UK and Ireland to remain soft. However, we are expecting growing contribution from used equipment and power systems as we continue to execute our strategy.

Speaker 1

In Power Systems, we see strong demand for both primary and backup power generation in data center and utility applications, significant increase in quoting activity for orders in 2025 and 2026. Product support is expected to be resilient. Expect modest growth in 2024 on continued market share gains, rebuilds and CBA penetration. From a free cash flow perspective, we generated $280,000,000 of free cash flow in the 4th quarter, resulting in net debt to adjusted EBITDA of 1.7x to end the year. We expect our free cash flow to follow a normal seasonal pattern in 2024.

Speaker 1

Importantly, we're working to increase our invested capital velocity, The goal to unlock $450,000,000 of capital by 2025. We're pleased with 20% adjusted ROIC achieved in 2023 and we'll keep building our momentum in 2024 in moderating but steady growth environment. Our focus is squarely on executing our strategic priorities, progressing towards targets we outlined at Investor Day. This will drive improved earnings consistency and support our overarching objective to deliver a strong return on invested capital through all market conditions. Operator, I'll now turn the call back to you for questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Jacob Bout of CIBC. Please go ahead.

Speaker 3

Hi, good morning. This is Rahul on for Jacob. Hey. So on the product support side,

Speaker 4

sales were at the low end of your expectations. So would you say that Q4 was just Sort of a one off quarter and

Speaker 3

what are you seeing so far in Q1? And in regards to the delayed start to the winter programs that You mentioned in Canada, does that essentially mean that the work there has been pushed out from Q4 to Q1?

Speaker 2

Yes, sure. So I'll take that. So for sure, there were some challenges in Q4. We don't want to make Excuses, but there are reasons for that. And so in Edmonton, where I live, didn't have any snow in November for the first time in 100 years.

Speaker 2

And what that does is it delays a couple of things. 1 is The start of winter programs because in some contracting applications, you require the ground to freeze because it's so soft up there to be able to move, particularly like moving overburden to start for the new mining areas in the oil sands. Second thing is typically when we see a real cold snap, particularly in the oil sands, we see winterization or some effects The harsh winter on the aged equipment, and both of those things didn't happen. And we didn't really get cold until the middle of December. And straight away, when we got cold, we Both of those things started to come back into action.

Speaker 2

And then so as you think about going into this year, then we had A ridiculously cold snap in the 2nd week of January, which created some more operational challenges, but more normal than what we've seen, but it was just a real peak of activity, which we needed to get through. But of course, we only have Just a certain amount of capacity to be able to do that work. But I would say that moving into January, it's a lot more normal in terms of how we anticipate the activity up in the oil sands. The other thing, as Greg mentioned there, there was some we anticipated some kind of At construction activity disruption in the Q4, because we knew the pipelines and some major projects like the Calgary Ring Road and Site C were going to come to an end. And the transition of that from into new infrastructure projects And then moving from building pipelines to filling them, that's where we're at right now.

Speaker 2

But we expect things to return to normal and to continue on the path we've been on in Canada, in line with our Investor Day targets.

Speaker 3

Right. Okay. Now that's helpful. So looking ahead, would you say you're still confident in hitting those Investor Day targets of above 7% per year or so?

Speaker 2

Yes, I think it was 6%. But ultimately, Yes, we are. We never said and we don't it's not a linear process and it's certainly not linear quarter by quarter. But we do expect those targets to be in play. We don't believe this is a peak.

Speaker 2

We have room to grow. We have market share opportunities. Our earnings capacity is structurally improved, as I talked about at our Investor Day. We've added 1,000 technicians over 2 years and delivered over 100 ultra class trucks into Chile and Canada. And so there are some structural changes there that structural achievements, which will continue us on the path that we talked about in September.

Operator

Our next question comes from Yuri Lynk of Canaccord Genuity. Please go ahead.

Speaker 4

Good morning, guys. Just on your plan to unlock $450,000,000 of capital, What cadence should we expect to achieve that goal by 2025?

Speaker 1

Yes. Certainly, it's a focus throughout both years and it's a combination. As I highlighted in my comments, I do think it will have normal this year, which means there's some stocking for the spring selling season. Beyond the spring selling season, we think that's when we really make that hard pivot. So as Kevin highlighted, really we're focused on that working capital through the year that builds through the year and straight into 2025.

Speaker 1

So Some of the moderating growth rates that we see and some of the stored up profits in the business, we expect to make particular progress in Q2 and beyond.

Speaker 4

Okay. Second question is just on used equipment, very impressive growth In the quarter, was that related to 1 or 2 large package sales or is that indicative of the new run rate under your current strategy?

Speaker 2

I wouldn't say it's indicative of the run rate, I would say it's indicative of our ambition and what can be achieved. It was across the board in all three regions and it certainly wasn't a function of 1 or 2 sales or activities. Used equipment is about participating differently. It's about asking different questions. And the used equipment, people think about used equipment sales being the most important, actually sourcing It's incredibly critical and we're building capabilities there.

Speaker 2

We brought capabilities in from expertise into the company. And they're educating and training, traveling with and participating with our salespeople and customers and making sure that customers understand we have an appetite to participate in the used equipment business. And the U. K. Is a very unique Island, and we've in terms of products used equipment generation, sales were up 48% in the quarter.

Speaker 2

And it shows you what's possible if you participate more deeply and engage earlier with customers. So I would say that As fuel, we had a real sales push and drive towards the end of the year. But we're optimistic it's probably one of our 3 sustainable growth opportunities that we're focused on and we're optimistic that we can continue to participate more and grow our used equipment business sustainably over time.

Speaker 4

Okay. That's it for me guys. Thanks. Thanks, Yuri.

Operator

Our next question comes from Michael Doumet of Scotiabank. Please go ahead.

Speaker 4

Hey, good morning guys. Greg, you called out the loss in Argentina related to the devaluation of the pay, that's in the financials. Just wondering how large the decline was in the operating profit in that business year on year, that's not really kind of adjusted for and thinking what that looks like for 2024 versus the comps?

Speaker 1

Yes. Within Q4, I mean, obviously, when you make the adjustment, there's some amount of FX that has a cost every quarter. So there's about $3,500,000 of loss that still be within the reported or the adjusted results. From this year perspective, I mean, we're obviously taking a very low risk approach. As we highlighted, we're just in the process finalizing or reducing our peso balance to 0 with support of our suppliers.

Speaker 1

So our go forward exposure much different position. And then of course, we're going to take a cautious approach. The government's making a lot of bold moves. I mean to see that they are working and the access is consistent before we pick the business back up. So we've got kind of a low, medium and high case of activity planned for this year, but all are below last And so it will be definitely be slower for the first half of the year.

Speaker 1

We'll have to see how things are working and how we can work with customers on imports and what method we use. So we'll take a low risk cautious approach and we'll see how much activity we can do in a low risk way. And we'll make sure we have all the checks to make sure the new currency access maintained and the programs the government is putting in place are continue to work and be effective.

Speaker 4

Perfect. And then also just turning to the U. K, I guess, profitability there looked quite sensitive to the lower sales. If I compare to last year, product support was still up, the profit was down. Just wondering if That business needs to undergo any adjustments as it relates to how much fixed versus variable the cost structure is?

Speaker 2

It's weird. I mean, just the U. K. Is super sensitive to any movements in revenue and way more sensitive to Movements in new equipment revenue than the other two regions because of the mix and the contribution. And for sure, we are coming off Record highs in 2022.

Speaker 2

I'm super encouraged and pleased, Michael, that product support mix in the UK has never been higher and absorption continues to improve, which is good for the long term resilience of the business. And we see order intake, some green shoots there, particularly in Q4. And so I think the market was down 3% in the first half year and 16% in the second half year. We see that improving as we go through 2024, 2025, certainly more so in the back in the second half of the year. And as the macro improves going into 'twenty five, which is Our assumption, we see that new equipment sales coming back and contribute more.

Speaker 2

So ultimately, product support is also For SG and A intensive, we added Hydroquip, if you remember, just over a year ago, which changed the SG and A kind of Same work in the UK, they are super focused in there about building their resilience and looking for opportunities in terms of how they run But I don't foresee any kind of structural or fundamental changes to the cost structure there. We're going to Continue the strategy, focus on product support growth, which is good for the long term and the long term resilience and make sure we participate And healthily in new equipment sales, as Greg mentioned and I mentioned a couple of times, we really believe that used equipment can contribute more. And the Power Systems sales or Sales backlog and quoting activity is stretching out now well into 2026, which again forms another really strong foundation for the U. K. Business.

Speaker 2

And so for sure, took the second half of the year, but we don't see any the strategy is still in play. We don't see any need for any Real structural changes, and we're optimistic about both new equipment sales recovering slightly As we go through the year, Power Systems, backlog continuing to build and used equipment making a big contribution.

Speaker 4

Helpful. And I'm going to try to sneak one in, but it does seem like the comps for the first half for Argentina and the U. K. Are going to be a little bit more challenged understanding that those are, smaller part of the overall business. But wondering if there is overall just the first half, can have story for the earnings profile for bidding in 2024 and if there's a little bit more normalization in the first half versus the second

Speaker 2

Yes. I think that would probably I mean, I think mining in both regions is robust. And so we're confident that we can keep lapping those comps in the kind of Investor Day range. Construction is a little difficult and we would definitely see a kind of first half, second half kind of trajectory. So I think that's That's how you should think about it.

Speaker 2

Chile's construction is recovering quicker as their macro improves quicker than the two regions. And like I said, Super encouraged with other intake in Q4, up in all regions in construction quarter over quarter and year over year. So there are some green shoots, Green shoots there, which will be delivered through the course of the first half of the year here. So and then Power is Relatively lumpy, it's project oriented. If you look at the U.

Speaker 2

K. Business, they had a super strong Q4 in 2022. Again, we're not trying to make But there are reasons. And they had a super strong product Power Systems project delivery in Q4, which didn't repeat this year. But I couldn't be happier With the backlog and the quoting pipeline of our products at our Power Systems and Projects business, it's really impressive and it's going to serve us well.

Speaker 2

The real good foundation of base load of revenue across all three regions, particularly in the UK.

Speaker 4

Thanks very much.

Speaker 2

Thanks, Mike. Thanks, Michael.

Operator

Our next question comes from Steve Hansen of Raymond James. Please go ahead.

Speaker 5

Thanks for the time guys. Look, I understand it's lumpy and it's hard to maybe give any guidance or cadence quarterly. But how should we think about '24 outlook in the context of new equipment versus product support. You've defined, I think, Kevin earlier, You tend to still grow in your outlook for 2024. You said you're not at the peak yet, but how should we think about the ultimate contribution from those two sides of the business In 'twenty four, new equipment down slightly, product support up to offset.

Speaker 5

I mean, how do we think about that?

Speaker 1

Yes. I think it's a steady growth environment overall. I mean, we've obviously been more explicit about product support, but we think it's steady growth as well. I mean, I know backlog is down a bit, but $2,000,000,000 is a really good place to begin a year, right? Obviously, a healthy, healthy portion of that is 2024.

Speaker 1

Of course, we'll continue to keep selling. So, I think having a $2,000,000,000 backlog at the beginning of the year is a good indicator. And like had solid order intake in Q4 higher than Q3 in all regions. And so we'll continue to sell and deliver. And obviously, we've got A lot of inventory we need to sell through and not 100 percent of it is committed to customers.

Speaker 1

So, we think it's a steady growth environment. Our resources and focus are going to product support, but new equipment I think fits in the steady growth environment too.

Speaker 2

Yes. And you mentioned, Steve, about the lumpiness. Again, I'm very conscious not to make excuses, but I do think Quarter 4 warrants some explanation. And ultimately, there were 1 or 2 things in the mining businesses in Canada and Chile, which would have dramatically improved product support, certainly made it positive in Canada. We mentioned the autonomy kits, but there was also Some pre buying that, on balance, we typically expect it didn't happen.

Speaker 2

And then just across both Canada and Chile, We're talking about 5 or 6 trucks that could have gone in 22 December that will go in Q1. It did happen. That would have had an impact on our new equipment revenue, particularly in South America. So there are some things that move around, and We're going to work really hard to get better visibility and forecast, those things. But there are operational challenges we face, whether Supply chain challenges that sometimes it's just difficult to identify when some of these bumps are going to reach ports, are they going to drop in?

Speaker 2

But it doesn't change the distracted at our Investor Day and the traction travel for the company.

Speaker 1

Okay, that's very helpful. And just

Speaker 5

to follow-up on your earlier comments, again on the product support side, I think you've just answered a little bit, but just the weather issues In particular, we're queued on one side in Q4. The cold snap that hit early in Q1, is that an impediment in the short as well? Or how do we think about that as we lead in through the 1st part of the year here?

Speaker 2

I don't think it's an impediment. I think it was What I'm trying to describe there is an incredible cold snap where it impacted a lot of machines very quickly. And clearly, which you would say is a really good thing and we need to get those machines, those trucks up and running as quickly as we can for our customers. But there is a finite capacity in terms of workshop based technicians and parts supply to be able to do that. So the amount of vehicles that were impacted by the by the minus 50 temperatures was probably more than we would see in a typical cold snap.

Speaker 2

And so I don't expect to see a few there's a peak of activity for sure, but we need to work through that during the course of the months in the quarter. I would say the oil sands is more of a I've noticed in a normal state now.

Speaker 1

That's helpful. Appreciate the color. Thanks guys.

Operator

Our next question comes from Cherilyn Radbourne of TD Cowen. Please go ahead.

Speaker 4

Good morning. Thank you guys for taking my question. This is Pat Sullivan on the line for Cherilyn. Can you speak to the high level of inventory at year end and the extent to which it is related to scheduled 2024 delivers?

Speaker 1

Yes, sure. I can talk to that. So, yes, certainly inventory being on the elevated side, there's some progress in the quarter being down Quarter over quarter, a lot of as Kevin highlighted a substantial majority of that is committed. We're working our way through system, we're delivering quite a few continue to look quite a few trucks, which are large blocks and a huge focus through the year to bring that inventory back in line with more historical levels. So being at close to that 29% working capital to sales level, we certainly want to bring that back down Got it in the Investor Day back into the mid-20s.

Speaker 1

And new equipment would be a big piece of that. Parts velocity is improving. We'd like it faster. The whole teams are working around the world on improving that, normalizing that. So definitely a huge focus for the year and That will be a big generator of unlocking that working capital and highlighted earlier in Q2 and beyond.

Speaker 2

Okay. Thank you for that.

Speaker 4

And then I guess to what extent would you attribute the moderation in your year end backlog to supply chain normalization versus a change in the level of order and quoting activity?

Speaker 2

I think it's 2 things, Pat. 1 is It's definitely a supply chain normalization element. So we now have stock that we can sell off the fence, which hasn't been the case We're a couple of years here and that obviously that generates backlog, which you would declare as to be unusual. There's also the lumpiness The portion of our backlog, which is power systems and mining mix now, which is just lumpier. So if you The biggest example of that would be in South America where we have large opportunities large adds to the backlog and then periods where we don't add to the backlog for maybe 1 quarter.

Speaker 2

Again, encouraged, We have the Escondido opportunity that we've talked about where we add to that backlog as the program delivery program progresses, and we're still optimistic of more activity in the oil sands as Their publicly disclosed capital spend figures are set to increase this year. So We're not concerned at all about backlog, and we're still really pleased to see it at a healthy level.

Speaker 4

Okay, great. Thank you very much.

Speaker 2

Thank you.

Operator

Our next comes from David Raso of Evercore ISI. Please go ahead.

Speaker 6

Hi, good morning. Thank you for taking questions. I was curious about pricing for 2024. How are you thinking about pricing? And I assume there's a bit of a difference geographically and machines versus engines.

Speaker 6

Any way you can help us with pricing that you expect to be shipping out of the backlog And maybe even more importantly, kind of new orders, how should we think about pricing on a year over year basis? And of course, any color you can provide us on incentives being provided from any of your OEM suppliers would be helpful. Thank you.

Speaker 2

Sure, David. So we are entering a normal supply chain environment and therefore more normal pricing environment. And so in my 30 years, I would suggest that the environment we're in right now is typical to what I would have experienced when I was selling equipment or being a sales manager. We are really pleased with Our market share gains on GCI, which is super critical for our product support growth in the future. So GCI being our kind of Top 14 models that we calculate to have the best product support opportunity outside of mining and Really encouraged with Pins market share in Canada and Chile towards the end of last Yes.

Speaker 2

So teams are doing a great job there. So that would suggest that we are competitive and that we're getting the right propositions in the place in support with our OEM partner. And we've always had

Speaker 1

to be competitive. We need

Speaker 2

to be mindful, as you mentioned there, David, of mix. So typically, mining equipment margins tend to be a little lower. When we look at the mix as we've delivered in the quarter, it's important to double click on that and understand what's going on there. But that business is so We're very, very focused on winning that. So I would suggest that we're Entering a normal pricing environment.

Speaker 2

The one exception I would say to that, David, is probably used equipment, which has been so elevated for a number of years now. And so Typically, we'd see used equipment slightly higher than new equipment margins, and that's still the case, and we would see that playing out in the future.

Speaker 6

So can I take that answer to mean do you believe your retail pricing will be able to stay flat to up for the year? I just want to make sure the normalization is a normalization and how you usually think of growth in pricing or do prices have to moderate a bit given the high levels we're coming from?

Speaker 1

Yes. No, on a new equipment basis, it obviously didn't move as much as the used side. And so in 2022, there were some outsized increases both on equipment and price. And I think we're now back into kind of normal low single digit type increases.

Speaker 6

That's helpful. Thank you. And just a quick follow-up on mining. I'm just trying to be thoughtful about mix for 2024 and what you plan to ship. For the oil sands, I thought there was a decent opportunity this year to replace some of the 797s that are aging.

Speaker 6

And

Speaker 4

I wasn't sure if

Speaker 6

I heard that in the prepared remarks or the slides. I didn't see any mention of that. I know you mentioned the rebuilds are strong, I thought there was maybe a strong new opportunity this year. And then somewhat related down in South America, How is Cat doing providing you the strength that you're seeing in the electric drive trucks? How are they doing ramping up production of the 798 as well as any comments on the 794 would be helpful.

Speaker 6

Thank you.

Speaker 2

Yes. So Our Escondido program is ahead of schedule and going really well. You saw that David when we were We'll go down there. So we're a little bit ahead of schedule there and really happy with the progress. And likewise, I would suggest, hopefully, times are Completely manageable and we're working with our customers.

Speaker 2

I was with a big customer day before yesterday and we've been very transparent looking at mining plans, looking at expansion plans and working very, really hard with Caterpillar. They're very in tune with that. They're part of those discussions. And so they're modeling that into their supply chain. And so building a pipeline, I guess, in terms of the number of trucks they're building.

Speaker 2

So we feel that we're certainly not encumbered from a supply chain or a lead time perspective in that regard. And to your first question there, for sure, we expect to add trucks to the oil sands this year. We still the Oil Sands is still working in a very restrained fashion and very thoughtful around their capital allocation, whether it goes to their plant mobile equipment. And so we're working through that and trying to think of some innovative ways to support them. But we added 30 odd trucks to the oil sands last year, and we think we're going to continue to add trucks this year.

Speaker 6

Okay. So no real change in your view on oil Sands new trucks to be delivered this year. Is that correct?

Speaker 2

That's correct.

Operator

Our next question comes from sauhat Khan Of RBC Capital Markets. Please go ahead.

Speaker 7

Great. Thanks and good morning. I brought a bit of color, I guess, on South America. We're just seeing some headlines around kind of political environment there being a bit volatile kind of through Chile and a little bit through Argentina. Just wondering, As you think about your larger customers there, once the royalty was set and some visibility, I guess increasing visibility to the constitution, Are they pretty comfortable making longer term plans at this point or how are they thinking about that?

Speaker 7

I know there's a bit of a pause before some of the dust settled on those two issues, but just curious How those CapEx plans are kind of getting put in place now? They're back on track.

Speaker 2

Yes, I would say that we continue to be encouraged in Chile, Saba. There's been a number of brownfield expansions announced In the last year, QB2 is going to ramp up significantly this year. And so that's additional capacity coming on. So I would describe the environment in Chile as constructive and the royalty and political stability A stable which supports investment. Clearly, a slightly higher copper price would push that along a little bit more.

Speaker 2

But The current dynamics are constructed to continued investment. And so yes, that's Chile. In Argentina, that's a difficult one, Tyns. So right now, I mean, there are a lot of International companies and a lot of our mining opportunities, as we've discussed previously. And I know there was a delegation there in Argentina a couple of weeks ago from Canada We met with the new President.

Speaker 2

And so that's the option value we see in Argentina. But we've been really thoughtful about our relationship with those International Mining Companies making sure we have balanced approach and balanced approach around risk, so it doesn't all fall on fill in. And so I'd say that the outlook for mining and resource development in Argentina is net positive to where it was middle of last year given the change of government, but lots and lots of hurdles to jump as we go through that process. But So pretty stable and confident in Chile.

Speaker 7

Great. Thanks. And then maybe just on the CapEx side, Maybe more for Greg. If you could just walk us through what some of the maybe the larger buckets are, how big of a mix rental fleet is as part of that CapEx and sort of how we should think about that in terms of cadence for the rest of this year, how that will flow through? Thanks.

Speaker 1

Sure. So slightly up year over year, as has been the theme for the last couple of years, More focused on rental as a proportion over, say, past a little bit more IT in the balance. And so that's the general profile. As we walk through at Investor Day, we'll be doing some facilities We're build out in the Antifagasta region. We sold the branch first, so it's self funded.

Speaker 1

We'll spend that money within start spending that money within the year. A bit more on facilities in South America, a rental focus and capacity expansion and automation of some warehouses that we We'll continue in Canada, but also as we walk through South America.

Speaker 7

Okay, great. And then I guess Just broadly, I'm assuming similar kind of capital allocation strategy based on this CapEx number in terms of buybacks, etcetera, just if there's any change on that as we head into 2024?

Speaker 1

No change. Look to continue growing the dividend. Look to buyback about 1% of the float quarter. And We expect to unlock working capital and generate more cash and pay down debt. And obviously, interest rates are high.

Speaker 1

And so that will make some impact in the second half of the year as generating cash. So that continues to be the plan.

Speaker 7

Great. Thank you.

Speaker 2

Thanks,

Operator

Our next question comes from Maxim Sytchev of National Bank Financial. Please go ahead.

Speaker 8

Hi, good morning, gentlemen.

Speaker 1

Hey, Matt.

Speaker 8

Kevin, I was wondering if you don't mind maybe commenting On kind of the success of your wholesale channel initiative on the used front line of things, first if you don't mind. Thanks.

Speaker 2

Yes. So we're building a number of new channels in used equipment. So in the quarter, we launched a marketplace, our online continuous live billion environment, which you've seen which we've had before and you see in other places and so it's a pretty common channel and it's a channel that Finnish should have. And we're really pleased. The most encouraging thing we've seen in that MAX is the net new customers that We're finding through that channel, highly very high proportion of customer interactions to that channel are customers we don't know and that's on new to fit in.

Speaker 2

So that's really good. Obviously, the team are also working on retail, Retail, really partnering and traveling and supporting our sales our sales force on growing that channel as well. We're touching a lot of the customers every day, and that's not only just selling, that's also as well. And then the wholesale channel is really encouraging. We're building capabilities there.

Speaker 2

We've always had a really good base of capabilities there. I think with the new leadership we have there, it's really empowering and unleashing the potential we have. In wholesale, Wholesalers come to Finan. They always have done. I've worked in used equipment for a lot of years.

Speaker 2

We don't have typical defining wholesale People come in and work with Finan, it's about how you manage the balance and the mix between the different channels and making sure that our primary focus He's on the he's on end use population, particularly in our own territories. So but I would say on all three primary channels, We're making good progress. And I think we had a really strong end to the year. As I said to previous question, I wouldn't expect That level of growth to continue year over year, but I do expect the business to continue to build as regards to 2024 and 2025, particularly as used equipment becomes more fluid in the industry.

Speaker 8

Yes. Is it fair to say that this would be kind of high margin business kind of sit in between or maybe even above product support or how should we think about that?

Speaker 2

I wouldn't say used equipment is a good product support. I think it's a massive contract. Our primary reason for being in used equipment is to drive product support, Strive population. We know that where we sell to an end user, the propensity of our was achieving a strong product relationship and service contract is way higher than in the aftermarket where somebody else sells the equipment. But I wouldn't suggest that used equipment is a I wouldn't suggest that used equipment Is that product support kind of profitability levels, but certainly it's an enhancement I think or an increase to new equipment levels, but more importantly, it's a fantastic way to build population, To win new market share and to build resilience in our organization so that we can we've got the capabilities to move stock as and when we need to as the cycles move around.

Speaker 8

Yes. Okay. That's right. And in terms of the product support, I mean, you still think that sort of that 7% CAGR that you telegraphed during the Investor Day, I mean, this is still visible based on what you're observing right now from a client perspective, right, especially in 2024?

Speaker 2

Yes. I think I already said that, Max, to your previous question. I think it's 6%. But ultimately, I don't think it's a straight line and not a straight line quarter by quarter. I'd be encouraged by what we've seen since the middle of December.

Speaker 2

But certainly, as we mentioned before, November were difficult months for us. But there's no way we're coming off those targets that we presented in September. But We don't given the softness that we're seeing in construction, it's maybe not a linear process a linear line over 2 years. And certainly, we all assume that the macro is going to be is going to improve as we move through the year and into next year. So that will help us there, but we're not nothing to suggest we're coming off those targets at all.

Speaker 8

Yes. And I guess, I mean, how should we think about sort of the age of equipment in the field? Should it not be A tailwind as well for the business on a prospective basis or how do you think about it?

Speaker 2

Yes, Of course, I mean, the equipment continues to age, but then adding we've added 100 ultra class trucks over 2 years. They're new, right? So they don't consume the same product support Intensity that they'll start to hit components now. So we'll get a tailwind from that. So the way I would look at it, Max, is we've added 1,000 technicians over 2 years.

Speaker 2

We've added over 2 years. We've added workshop capacity, and we've now plans to lay any technicians off. So those technicians are going to work and they're going to continue to work. Now the technician adds will continue to have slowed year over year and they'll slow again going into these ships. We want to be really thoughtful provide security for our employees, but we are adding capacity, and we measure every day how productive that work

Speaker 8

Makes sense. And then just one quick one for Greg, I guess. In terms of sort of capital allocation, I realize that you mentioned sort of the NCIB, but In terms of like it feels that the buybacks have been more sort of programmatic in nature. And I'm just Trying to think about sort of to make sure that NCIB is not value dilutive because I think you bought back stock around $38 On the LTE and N basis, just again maybe your thought process between want to kind of really lean into it, Just maybe any comments there. Thanks.

Speaker 1

Sure. I mean, it's pretty simple process. We build a business plan, we run a DCF off that business plan and make capital allocation decisions off of it. So we're happy to be consistent on that. But if there's bigger opportunities and particularly as we unlock more capital here, we'll look at that more, but it's run off the DCF value and then we look at the price on the screen.

Speaker 1

We'd like to be consistent on it, but if there's a bigger gap over time or and when we're successful in unlocking capital, we can look at higher levels of that equation works at that time.

Speaker 8

Okay. Understood. Thank you so much. That's it for me.

Operator

This concludes the question and answer session. I would like to turn the conference back over to Greg Palaszczuk for any closing remarks.

Speaker 1

Great. Thank you, operator. That concludes our call for today. I'd like to thank you for your participation and hope everyone has a safe day.

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Earnings Conference Call
Finning International Q4 2023
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