Q4 2021 Finning International Inc Earnings Call

Thank you for standing by this is the conference operator, welcome to the Finning International Inc. Fourth quarter 2021, Investor call and webcast. As a reminder, all participants are in listen only mode and the conference is being recorded after.

Speaker 1: for standing by. This is the conference operator. Welcome to the Finning International Inc. Fourth quarter 2021 investor call and web...

After the presentation there'll be an opportunity to ask questions.

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I would now like to turn the conference over to Greg Palace, Chuck Executive Vice President and Chief Financial Officer. Please go ahead.

Speaker 1: I would now like to turn the conference over to Greg Palastrzuk, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you operator, good morning, everyone and welcome to <unk> fourth quarter earnings call.

Turning me today is Scott Thompson, President and CEO .

Speaker 2: Thank you, operator. Good morning, everyone, and welcome to Finning's fourth quarter earnings call. Joining me today is Scott Thompson, president and CEO . Following our remarks today, we'll open the line to questions.

Following our remarks, we'll open the lines for questions. This call is being webcast on spending dot com <unk>.

We've also provided a set of slides that we'll reference during our prepared remarks.

Slides are posted on the Investor Relations section of our website you can also view the slides on our webcast page and.

Speaker 2: We've also provided a set of slides that we'll reference during our prepared remarks.

Speaker 2: The slides are posted on the investor relations section of our website. You can also view the slides on our webcast page.

An audio file of this call and the accompanying presentation will be archived on our website.

Before I turn it over to Scott I want to remind everyone that some of the statements provided during this call are forward looking.

Speaker 2: An audio file of this call and the accompanying presentation will be archived on our website.

Speaker 2: Before I turn it over to Scott, I want to remind everyone that some of the statements provided during this call are forward-looking.

Please refer to slides 10, and 11 for important disclosures about forward looking information as well as currency and specified financial measures, including non-GAAP financial measures.

Speaker 2: Please refer to slides 10 and 11 for important disclosures about forward-looking information, as well as currency and specified financial measures, including non-GAAP financial measures.

Please note that forward looking information is subject to risks uncertainties and other factors as discussed in our annual information form and our key business risks and in our MD&A and our risk factors and management and forward looking information disclaimer.

Speaker 2: Please note that forward-looking information is subject to risks, uncertainties, and other factors as discussed in our annual information form under key business risks and in our MD&A under risk factors and management and forward-looking information.

These street this information with caution as our actual results could differ materially from current expectations.

Speaker 2: Please treat this information with caution, as our actual results could differ materially from current expectations. Scott, over to you.

Over to you.

Thank you, Greg and good morning, everyone.

On today's call I will speak about the key drivers of our 2021 performance and share our views on 2022.

Speaker 2: On today's call, I will speak about the key drivers of our 2021 performance and share our views on 2022.

Greg will then review our financial performance in the fourth quarter and provide more details on our outlook by region and our objectives for the year.

Speaker 2: Greg will then review our financial performance in the fourth quarter and provide more details on our outlook by region and our objectives for the year.

Please turn to slide two.

We achieved strong results in 2021, driven by successful execution to deliver on our strategic plan and improve our earnings capacity.

Speaker 2: We achieved strong results in 2021 driven by successful execution to deliver on our strategic plan and improve our earnings capacity. ondreaming the market activity.

Market activity has recovered as the year progressed across the business, we saw a tremendous momentum in capturing product support opportunities and winning major equipment deals.

Speaker 2: Across the business, we saw tremendous momentum in capturing product support opportunities and winning major equipment deals.

Our 2021 product support revenue was on par with the pre pandemic levels of 2019, driven by our strategic focus on growing construction rebuilds and customer value agreements and increased spending on parts and maintenance by mining customers, particularly towards the end of the year.

Speaker 2: Our 2021 product support revenue was on par with the pre-pandemic levels of 2019, driven by our strategic focus on growing construction rebuilds and customer value agreements, and increased spending on parts and maintenance by mining customers, particularly towards the end of the year.

Over the course of 2021, we were awarded multiple deals for mining equipment and product support in Chile, we want a significant share of the Hs to equipment opportunity in the U K and we received an order for 2797 Ultra class trucks in the oil sands as customers have increased capital budgets and started making tangible commitments.

Speaker 2: Over the course of 2021, we were awarded multiple deals for mining equipment and product support in Chile. We won a significant share of the HS2 equipment opportunity in the UK, and we received an order for 20 797 ultra-class trucks in the oil sands, as customers have increased capital budgets and started making tangible commitments.

These deals have been driving growth in our equipment backlog, which is at near record levels as we enter 2022.

Speaker 2: These deals have been driving growth in our equipment backlog, which is at near record levels as we enter 2022.

On the supply side, we expect challenges from a constrained global supply environment to persist in 2022, resulting in longer lead times for equipment and parts and all of our regions and driving strong demand for used equipment rentals and rebuilds.

Speaker 2: On the supply side, we expect challenges from a constrained global supply environment to persist in 2022, resulting in longer lead times for equipment and parts in all of our regions, and driving strong demand for used equipment, rentals and rebuilds. We have been leveraging our improved forecasting and supply chain capabilities to build a healthy inventory position, increasing our inventory by about $200 million from December 2020.

We have been leveraging our improved forecasting and supply chain capabilities to build a healthy inventory position, increasing our inventory by about $200 million from December 2020.

We're also driving rebuilds and resale of used equipment to meet customer needs a supply of new equipment remains tight.

Speaker 2: We're also driving rebuilds and restale of used equipment to meet customer needs as supply of new equipment remains tight.

We posted annual adjusted earnings per share of $2 18.

And adjusted return on invested capital of 16, 4% exceeding our mid cycle earnings per share and return on capital targets. Two quarters ahead of schedule all while our revenue remained below pre pandemic levels for the year.

Speaker 2: We posted annual adjusted earnings per share of $2.18 and adjusted return on invested capital of 16.4%. Exceeding our mid-cycle earnings per share and return on capital targets two quarters ahead of schedule. All while our revenue remain below pre-pendemic levels for the year.

Our improved inventory management data driven pricing decisions and service and supply chain efficiencies enabled us to generate solid gross profit margins in a highly competitive and constrained supply environment.

Speaker 2: Our improved inventory management, data-driven pricing decisions, and service and supply chain efficiencies, enable us to generate solid gross profit margins in a highly competitive and constrained supply environment.

Importantly, we are seeing strong operating leverage from our reduced cost base and ongoing initiatives to increase productivity of our facilities and our people. So we can serve our customers in the most efficient way possible.

Speaker 2: Importantly, we are seeing strong operating leverage from our reduced cost base and ongoing initiatives to increase productivity of our facilities and our people. So we can serve our customers in the most efficient way possible.

All of our regions delivered outstanding results in 2021, Canada, and South America, both exited the year with 10, 1% EBIT as a percentage of net revenue.

Speaker 2: All of our region's delivered outstanding results in 2021. Canada and South America both exit at the year with 10.1% EBIT as a percentage in that revenue. Return on capital in South America exceeded 20%. And UK and Ireland posted very strong revenue and EBIT performance throughout the year.

Turn on capital in South America exceeded 20%.

In UK, and Ireland posted very strong revenue and EBIT performance throughout the year.

Our employees should be proud of these accomplishments it is their dedication and exceptional execution in serving our customers that has delivered such strong results for our shareholders in a very dynamic environment.

Speaker 2: Our employees should be proud of these accomplishments. It is their dedication and exceptional execution in serving our customers that have delivered such strong results for our shareholders in a very dynamic environment.

Our strong balance sheet provides us with growing capacity for reinvestment and return of capital to shareholders.

Speaker 2: Our strong balance sheet provides us with growing capacity for reinvestment and return a capital to shareholders.

In 2021, we raised our dividend by 10% and repurchased 5 million shares.

We also expanded our forward fuel capabilities to a wider range of renewable and low carbon fuels.

Speaker 2: In 2021, we raised our dividend by 10% and repurchased 5 million shares.

Speaker 2: We also expanded our four fuel capabilities to a wider range of renewable and low carbon fuel.

This investment will further build on the success of our four refuel business, which continues to deliver excellent returns and customer outcomes.

Speaker 2: This investment will further build on the success of our four-refeal business, which continues to deliver excellent returns and customer outcomes.

Looking ahead, we expect increasing interest from our customers in low and zero carbon technology, including electric drive electric battery natural gas and hydrogen blending and hydrogen fuel cells.

Speaker 2: Looking ahead, we expect increasing interest from our customers in low and zero carbon technology, including electric drive, electric battery, natural gas and hydrogen blending, and hydrogen fuel cells.

In partnership with Caterpillar, we will continue to offer our customers innovative and low carbon solutions to help them reduce emissions and increase productivity.

Speaker 2: In partnership with Catepillar, we will continue to offer our customers innovative and low carbon solutions to help them reduce emissions and increase productivity.

The recent announcement from tech on partnering with Caterpillar to advance zero emissions mining haul trucks at its DC operations is exciting news for us.

Speaker 2: The recent announcement from Tech on partnering with Caterpillar to advance zero emissions mining haul trucks that its BC operations is exciting news for us.

Importantly, we are advancing our own sustainability journey, including the transition to energy efficient facilities and low carbon fuel for our vehicle fleets to further reduce our own emissions.

Speaker 2: Importantly, we are advancing our own sustainability journey, including the transition to energy efficient facilities and low carbon fuel for our vehicle fleets to further reduce our own emissions.

In 2021, we're able to build on significant improvements we've made in 2020, despite higher activity levels and reduce our absolute <unk> emissions by approximately 7%.

Speaker 2: In 2021, we're able to build on significant improvements we've made in 2020 despite higher activity levels and reduce our absolute GHG emissions by approximately 7%.

This puts us substantially ahead of schedule on our 2027 carbon reduction commitments.

Speaker 2: This puts us substantially ahead of schedule on our 2027 carbon reduction commitment.

Recognizing the critical importance of these improvements we are currently reviewing additional initiatives to continue reducing our carbon footprint I will provide an update later this year.

Speaker 2: Recognizing the critical importance of these improvements, we are currently reviewing additional initiatives to continue reducing our carbon footprint, and we'll provide an update later this year.

We believe that our 2021 performance that's a great foundation for us to capture up cycle opportunities and compound our earnings going forward.

Speaker 2: We believe that our 2021 performance that's a great foundation for us to capture up-cycle opportunities and compound our earnings going forward.

We saw the transition from mid cycle to up cycle market conditions earlier than we had projected from the start of 2022, we expect to be operating in an up cycle demand environment.

Speaker 2: We saw the transition from mid-cycle to up-cycle market conditions earlier than we had projected. From the start of 2022, we expect to be operating in an up-cycle-demand environment.

We expect ongoing economic growth in our territories and strength in commodity prices to support a positive market backdrop for our business.

Speaker 2: We expect ongoing economic growth in our territories and strengthen commodity prices to support a positive market backdrop for our business.

We are encouraged by increasing capital budgets higher commodity production forecast and continued public and private investments and infrastructure and our regions.

Speaker 2: We are encouraged by increasing capital budgets, higher commodity production forecasts, and continued public and private investments in infrastructure in our region.

In summary, our team delivered excellent results in 2021, and we are optimistic about the year ahead.

Speaker 2: In summary, our team delivered excellent results in 2021 and we are optimistic about the year ahead. I am confident that we have rebuilt our business to deliver significantly improved operating leverage and expand our return on invested capital. We continue to target mid-teens and above earnings per share growth during the sustained upcycle. I will now hand it over to Greg.

I am confident that we have rebuilt our business to deliver significantly improved operating leverage and expand our return on invested capital. We continue to target mid teens and above earnings per share growth during a sustained up cycle.

I will now hand, it over to Greg.

Thank you Scott I'm going to provide more details on our performance in the fourth quarter and our objectives going forward.

Speaker 2: Thank you Scott. I'm going to provide more details in our performance in the fourth quarter and our objective is going forward.

Our consolidated fourth quarter results and key drivers are summarized on slide three.

Net revenue of $1 8 billion was up 14% from Q4 2020, driven by strong market activity across all regions and sectors and our solid execution.

Speaker 2: Our consolidated fourth quarter results in key drivers are summarized on flight.

Speaker 2: That revenue of 1.8 billion without 14% from Q4 2020 driven by strong market activity across all regions and sectors and our solid X.

Product support revenue recover to 2019 levels in Q4 with a notable improvement in product support activity and capital spending by our Canadian customers through the quarter.

Speaker 2: Product support revenue recovered to 2019 levels in Q4 with a notable improvement in product support activity and capital spending by our Canadian customers through the quarter.

We also saw strong execution of our used and rental strategy, which helped US successfully manage through continued supply constraints provide equipment solutions to our customers.

Speaker 2: We also saw strong execution of our use in rental strategy, which helped us successfully manage through continued supply constraints and provide equipment solutions to our customers.

All of our regions delivered improved operating leverage in the fourth quarter, driving EPS up 71% to 66 compared to adjusted EPS in Q4 2020.

Speaker 2: All our regions delivered improved operating leverage in the fourth quarter, driving EPS up 71% to 66 cents compared to adjusted EPS and Q4.

Slide four shows changes in our net revenue by line of business compared to Q4 2020.

Speaker 2: Slide 4 shows changes in our net revenue by line of business compared to Q420.

Our support revenue increased significantly by 12% from Q4, 2020 and was higher across all regions and sectors.

Speaker 2: Product support revenue increased significantly by 12% from Q4 2020. It was hired across all regions in seconds.

As highlighted in Investor day, we have been strategically targeting jointly with caterpillar outsized growth in our construction aftermarket segment.

Speaker 2: As highlighted in investor day, we have been strategically targeting jointly with Caterfiller, outsized growth in our construction after market segment. We've been very successful next.

<unk> been very successful in executing on this plant construction product support revenue was up by over 30% in Q4, 2020, driven by improved demand and our strategic focus on growing rebuilds and customer value agreements.

Speaker 2: Construction product support revenue was up by over 30% in Q4 2020 driven by improved demand and our strategic focus on growing rebuilds and customer value.

An increase in new equipment sales in the quarter was driven by mining deliveries in Chile, and strong construction activity in all regions.

Speaker 2: An increase in new equipment sales in the quarter was driven by mining deliveries in Chile, and strong construction activity in all.

We posted very strong used equipment sales and rental utilization in the fourth quarter, especially in Canada.

Speaker 2: We've posted very strong use of equipment sales and rental utilization in the fourth quarter, especially in Canada.

Our backlog was $1 9 billion at the end of December up from $1 6 billion at the end of September .

Speaker 2: Our backlog was 1.9 billion at the end of December , up from 1.6 billion at the end of September .

The increase was driven mainly in Canada, including an order for 2797 F trucks for an oil sands operator.

Speaker 2: The increase was driven mainly in Canada, putting an order for 27, 9, 7 F trucks for an oil sand evaporator.

This order was part of a multi year agreement focused on enhancing operational efficiency through refresh maintenance repair and rebuild practices. Importantly, these trucks will replace aged competitor equipment and that would be incremental to our business.

Speaker 2: This order was part of a multi-year agreement focused on enhancing operational efficiency through refresh, maintenance, repair, and rebuild practice.

Speaker 2: Importantly, these tracks will replace aged competitor equipment and thus be incremental to our business.

Given continued constraints in the global supply chain, we expect longer than typical delivery times for some orders in our backlog that were added in the second half of 2021.

Speaker 2: Given continued constraints in the global supply chain, we expect longer than typical delivery times for some orders in our backbog that we're added in the second half of 2021.

Turning to slide five.

An increase in gross profit from Q4, 2020 was driven by higher net revenue higher rental utilization and improved equipment margins.

Speaker 2: An increase in gross profit from Q4 2020 was driven by higher net revenue, higher rental utilization, and improved equipment margin.

Cost control cost control was strong with SG&A up just 1% from Q4, 2020, and 14% higher net revenue and over 140% year over year increase in backlog.

Speaker 2: Cost control was strong with SGNAB just 1% from Q4 2020 on 14% higher net revenue and over 140% year-over-year increase in backlog.

SG&A percent of net revenue was 18, 5% down 240 basis points from Q4 2020.

Speaker 2: S-T-N-A percent of net revenue is 18.5 percent down 240 basis points from Q4 2020.

Our fixed cost initiatives, clearly offset volume related variable costs as well as some inflationary pressure in the quarter, we have more work to do here.

Speaker 2: Our fixed cost initiatives clearly offset volume related variable costs as well as some inflationary pressure in the quarter. We have more work to do here.

We will take us longer than previously communicated timeframe of Q3 2021 to Q2 2022 to fully averaged 17% SG&A as a percent of net revenue over the full four quarter period.

Speaker 2: We'll take us longer than previously communicated time frame of Q3 2021 to Q2 2022 to fully average 17% SG name as a percent of that revenue over the full four quarter period.

This was primarily due to lower than projected new equipment revenues in the second half of 2021 as well as a result as a result.

Speaker 2: This is primarily due to lower than projected new equipment revenues in the second half of 2021, as well as the results of supply constraints.

Supply constraints.

And then higher than projected product support growth rates, which are more SG&A intensive to new equipment as well as some inflationary headwinds.

Speaker 2: and that higher than projected product support growth rates, which are more SGNA intensive for new equipment, as well as the...

We remain committed to delivering on our fixed cost reduction initiatives driving productivity gains continuing strong operating leverage going forward.

Speaker 2: We remain committed to delivering on our fixed cost reduction initiatives, driving productivity gains, continuing strong operating leverage going forward.

Moving to our Canadian results and outlook, which is summarized on slide six.

Net revenue increased 19% from Q4 2020, driven by higher year end spending by our customers.

Speaker 2: Moving to our Canadian results and outlook, which is summarized on slide six.

Speaker 2: That revenue increased 19% from Q4 2020, driven by higher year end spending by our customers.

Product support revenue was up a robust 17% from Q4 2020, reflecting strong rebuild activity in construction and increasing spend across the mining sector.

Speaker 2: Product support revenue was up a robust 17% from Q4 2020, reflecting strong rebuild activity and construction, and increasing spend across the mining sector.

Used equipment sales were up 84% and rental revenue increased by 22% from Q4 2020, reflecting our strategic focus on rebuilds resale RTL conversions and rental to fulfill customer needs in a tight supply environment.

Speaker 2: Use equipment sales were up 84% and rental revenue increased by 22% from Q4 2020. Reflecting our strategic books on rebuilds, resale, RPO conversions, and rental to fulfill customer needs in a tight supply environment.

In addition, our heavy rental fleet was highly utilized in British Columbia to support flood mitigation and infrastructure repair work.

Speaker 2: In addition, our heavy rental fleet was highly utilized in British Columbia to support flood mitigation and infrastructure repair work.

EBITDA as a percentage of net revenue was up 240 basis points from adjusted EBITDA as a percentage of net revenue in Q4 2020.

Speaker 2: Even as a percentage of net revenue is up 240 basis points from adjusted EBITDA for the percentage of net revenue in Q420.

Is it reflecting improved equipment margins higher rental utilization lower SG&A as a percent of net revenue.

Speaker 2: So, there's a reflecting improved equipment margins, higher rental utilization, lower SGNN's percent of debt rent.

Adjusted ROIC approached 17% a significant improvement in profitability, a 20% increase in invested capital turnover in Q4 2020.

Speaker 2: Adjusted Roaq approach 17%, significant improvement in profitability, a 20% increase in investment capital turnover in Q4.

Our outlook for the Canadian business is positive and we continue to manage through supply constraints and closely monitor the impacts of Omnipod.

Speaker 2: All right, well, for the Canadian business is positive. And we continue to manage through supply constraints and closely monitor the impacts of Omicron.

Overall, we expect robust market activity in Western Canada in 2022 building through the year to be supported by GDP growth strong commodity prices and increasing capital budgets by our customers.

Speaker 3: Overall, we expect robust market activity in Western Canada in 2022, building through the year to be supported by GDP growth, strong commodity prices, and increasing capital budgets by our customers.

Please turn to slide seven for our South America results.

New equipment sales increased by 68% from Q4 2020 in functional currency driven by deliveries to Chilean mining customers, including <unk> and telco Ramiro tonnage mined.

Speaker 3: New equipment sales increased by 68% from Q4 2020 in functional currency. Termined by deliveries to Chilean mining customers, including tech QV2 and Cadalco Ratamiro Tomach mine.

And improved demand for construction equipment to support mining infrastructure and general construction projects.

Speaker 3: and improved demand for construction equipment to support mining infrastructure and general construction problems.

Product support revenue was up 10% from Q4 2020 in functional currency with stronger demand across all sectors.

Speaker 3: Product support revenue was up 10% from Q4 2020 in functional current seats, stronger demand across all sectors.

Our streamline cost structure in South America drove improved profitability as SG&A costs were flat to Q4, 2020, while delivering 21% higher net revenue.

Speaker 3: Our streamlined cost structure in South America is a proof profitability. The STA costs were flat to U4 2020 while delivering 21% higher net revenue.

But as a percentage of net revenue was up 180 basis points year over year.

Revenue per employee in South America in 2021 improved by an impressive 40% compared to five years ago.

Speaker 3: Even as the percentage of net revenue was up 180 basis 0.0 over year.

Speaker 3: Revenue for Employee in South America in 2021 improved by an impressive 40% compared to five years ago.

ROIC in South America was above 20% exceeding our mid cycle target.

Looking ahead, we continue to closely monitor constitutional reform process in Chile, we expect moderately higher mining royalties going forward.

Speaker 3: Roac and South America was above 20% exceeding our min cycle target.

Speaker 3: Looking ahead, we continue to closely monitor constitutional reform process and Chile and expect moderately higher mining royalties going forward.

We recognize that the current uncertainty will continue to impact our mining customers investment decisions in the near term, particularly as they relate to greenfield and new expansion projects.

Speaker 3: We recognize that the current uncertainty will continue to impact our mining customers' investment decisions in the near term, particularly as they relate to Greenfield and their expansion brought.

Our long term outlook for copper mining growth in Chile remains positive.

In the near term, we continue to see strong demand for mining products support and fleet replacement driven by strong commodity prices low peso mature equipment population of customers focus on improving productivity by leveraging technology such as autonomy.

Speaker 3: Our long-term outlook for copper mining growth until it remains positive. In the near term, we continue to see strong demands for mining product support and fleet replacement to provide strong commodity prices, low pay-so, mature equipment population, and customer focus on improving productivity by leveraging technology such.

We remain very well positioned with both tech and codelco for key drivers to committed medium term investment and growth in Chile.

Speaker 3: We remain very well positioned with both Tekken Cadalco or Key Drivers to committed medium-term investment in growth in Chilean.

We're also very encouraged by recent announcements of capital investment in Argentina, lithium copper projects by large global mining customers, including Rio Tinto and lending.

Speaker 3: We're also very encouraged by recent announcements of capital investment in Argentina's lithium copper projects by large global mining customers, including Rio Tinto and London.

South America team is actively quoting on opportunities for power equipment solutions for our global customers operating in Argentina.

Speaker 3: South America team is actively quoting on opportunities for power equipment solutions for our global customers operating in our GTS.

Turning to the UK and Ireland on slide eight.

Net revenue was slightly below Q4 2020 in functional currency due to the timing of power system project deliveries to data center customers.

Speaker 3: That revenue was slightly below Q4 2020 and functional currency due to the timing of power system project deliveries to data center cup.

Construction activity, though was strong with revenue from construction sector up 26% from Q4 2020, driven by equipment deliveries to Hs to an improved demand for product support.

Speaker 3: Construction activity though was strong with revenue from construction sector of 26% from Q4 2020 to provide equipment deliveries to HS2 and approved demand for products for

UK and Ireland delivered ROIC of approximately 15% in 2021, reflecting strong revenue recovery increased EBIT and significant improvements in capital efficiency.

Speaker 3: UK and Ireland delivered row of approximately 15% in 2021, reflecting strong revenue recovery, increased EBIT and significant improvements in capital.

With our backlog at record levels continued robust construction activity and demand for power system solutions, our outlook for the UK and Ireland business remains strong.

Speaker 3: With our backlog at record levels, continued robust construction activity and demand for power systems solutions, our outlook for the UK and Ireland business remains strong.

We have captured more than 200 million of equipment orders for Hs two to date.

We believe we are well positioned to continue capturing a large share of opportunities for the remainder of HST phase one.

Speaker 3: We have captured more than 200 million of equipment orders for HS2 to date.

Speaker 3: We believe we're a well-positioned to continue capturing a large share of opportunities for the remainder of HSQ phase.

Most caterpillar machines working on the HSV project supported by a range of customer value agreements and our construction customers have the option to benefit from our cubic platform and our construction apps.

Speaker 3: Most caterpillar machines working on the HS2 project are supported by a range of customer value agreements and our construction customers have the option to benefit from our cubic platform and our construction app.

This gives us good line of sight into product support opportunities in the UK going forward.

Slide nine summarizes our expectations and objectives for 2022.

Speaker 3: This gives us good line of sight into product support opportunities in the UK going forward.

We're actively managing inflationary pressures through the continued focus on productivity improvements.

Speaker 3: Flight 9 summarizes our expectations and objectives for 2022.

Also taken proactive steps to hire technicians to support our growing service volumes.

Speaker 3: We're actively managing inflationary pressures through the continued focus on productivity and proof.

Over the course of 2021, we added more than 180 technicians to our triple our locations in Canada and in South America, We hired approximately 450 technicians last year to be an increasing business volumes and new contracts ordered by customers during the year, representing approximately 18% of our technical workforce by the end of the year.

Speaker 3: We've also taken proactive steps to hire technicians to support our growing service volume.

Speaker 3: Over the course of 2021, we added more than 180 technicians to our triple-hour locations in Canada. And it's South America we hired approximately 450 technicians last year to be increasing business volumes and new contracts awarded by customers during the year, representing approximately 18% of our technical workforce by the end of the year.

As our business environment shifts shifts to up cycle demand our entire organization remains focused on executing our strategic plan to grow product support reduce cost and reinvest cash flow to compound earnings.

Speaker 3: As our business environment shifts to a cycle demand, our entire organization remains focused on executing our strategic plan to grow product support, reduce costs, and reinvest cash flow to compound herring.

We remain committed to demonstrating strong operating leverage as we continue to target mid teens and above EPS growth during the sustained up cycle.

Speaker 3: We remain committed to demonstrating strong operating leverage as we continue to target mid teams and above EPS growth during the sustained upcycling.

We will continue to make strategic investments in our facilities network rental assets used equipment business and digital platform. As a result, we project our 2022 net capital expenditures and rental fleet additions to be in the $240 $280 million range.

Speaker 3: We'll continue to make strategic investments in our facilities network, rental assets, use equipment, business, and digital platform. As a result, we project our 2022 net capital expenditures and rental fleet additions to be in the 240 to $288 million ring.

We finished the year with net debt to adjusted EBITDA of one one times, which further strengthens our significant past capacity to reinvest.

Speaker 3: We finished the year with net debt to adjust at EBITDAV 1.1 times, which further strengthens our significant capacity to read best.

We continue to advance our M&A strategy and expect to deploy capital with a near term focus on complementary businesses in the small to medium size range that are aligned with our product support growth strategy drive improved outcomes for our customers and deliver attractive rates of return.

Speaker 3: We continue to advance our M&A strategy, and expect to deploy capital, with a near-term focus on complimentary businesses in the small to medium-sized range that are aligned with our product support growth strategy, and improved outcomes for our customers and deliver attractive rates to return. Operator, I'll now turn the call back to you for questions. Thank you. We will now begin the question and answer session. Analysts who wish to join the question queue may press star, then one, on their telephone keypad. You'll hear.

Operator, operator, I will now turn the call back to you for questions.

Thank you we will now begin the question and answer session analysts who wish to join the question queue. You May Press Star then one on their telephone keypad, you'll hear a tone acknowledging your request if.

You are using a speakerphone please pick up your handset before pressing any Keith to withdraw your question. Please press Star then two.

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

Hey, good morning, guys.

Good morning, Eric.

Grandson.

Finally, pushing punching through $2 in earnings having covered the company for a long time it was nice to see.

Speaker 4: You can graph on...

Speaker 4: Finally, punching through $2 and earnings, having covered the company for a long time, it was nice to see.

Thank you I appreciate that.

Yes.

The up cycle that youre referencing for 2022.

Speaker 4: Yeah. Um, the upcycle that that you're referencing for for 2022.

Just wanted to make sure that we're talking about revenue as well as.

As earnings.

Speaker 4: I just want to make sure that we're talking about revenue as well as earnings. Just given that the supply constraints, I'm struggling a little bit with how to think about the cadence of the backlog burn.

Just given the supply constraints constraints I'm struggling a little bit with.

How to think about the cadence of the backlog burn.

Or anything you can any additional color on revenue expectations would be helpful.

Yeah sure. So we're certainly seeing up cycle demand and we're working to meet it.

With the supply side of the equation I think for the first half of the year.

Speaker 3: Yeah, sure. So we're certainly seeing up cycle demand and we're working to meet it with up, you know, with the supply side aid equation. I think for the first half of the year, you know, the guidance we've given at investor day for the first half of the year still holds. So given the three and a half million and the second half of last year, we're looking kind of the three, six to four point out for the first half.

The guidance, we've given at Investor day for the first half of the year still holds so.

Given the $3 5 million in the second half of last year and kind of the three six to four point out for the first half.

Probably a little bit more product support and used in a little less new equipment in that balanced mix and in an H two that's when more of the backlog delivers its.

Speaker 3: Probably a little bit more product support and use in a little less new equipment in that balanced mix. And in H2, that's when more of the back box delivers, so you'd see a bit of a step up depending on the supply equation at that point in time.

EBITDA step up depending on the supply equation at that point in time.

Okay.

So the caution on the 17%.

SG&A targets, that's solely due to too.

That's solely due but mostly due to the revenue.

Speaker 4: GNA target that's that's solely due to that's all you do but mostly due to the to the revenue.

Shortfall that we saw in the back half of the year.

Any how.

How closely are you monitoring the cost situation, there and how challenging is that.

Speaker 4: any how closely are you monitoring the cost situation there.

Yes, I think we're managing it well we are certainly happy we've had a lot of fixed cost initiatives in flight.

Speaker 3: Yeah, I think we're managing it well. We're certainly happy we've had a lot of fixed cost initiatives in flight. It was a little less no equipment than we were expecting in the second half. And the great momentum and product support, that makes shift just the equation a bit. But we still got the fixed cost initiatives in flight. People are working our way through. And you know, as no equipment takes back up a little, we'll still be working towards that operating leverage.

It was a little less new equipment than we're expecting in the second half.

And the great momentum in product support and that mix shift just the equation a bit but we still got the fixed cost initiatives in flight keep working our way through.

As new equipment picks back up a little.

We'll still be working towards that operating leverage.

Okay, I'll turn it over thanks guys.

Thank you.

Our next question comes from Jacob bout of CIBC. Please go ahead.

Speaker 1: Our next question comes from Jacob Bout of CIBC. Please go ahead.

Good morning.

Good morning Jacob.

Question on.

On the backlog.

So nice growth quarter on quarter and year on year, but.

Speaker 5: I had a question on the backlog. So, you know, nice growth quarter and quarter and year on year. But, and I know you made the comments that it was driven primarily by Canada, but maybe you could break that down.

And I know you made the comments that it was driven primarily by Canada, but maybe you could break that down.

A bit more color by region.

Particularly in South America.

Speaker 5: more color by region, particularly in South America. Do you expect deliveries to slow down in 2022, and then what you're expecting in the...

Do you expect to slow down.

In 2022 and then.

What you are expecting in the.

The U K.

Okay.

Yeah sure. So in terms of South America, and we had some large builds last year. So of course about <unk> in the backlog for quite a while and it's delivered continues to deliver the remaining pieces.

Speaker 3: Yeah, sure. So in terms of South America, we had some large builds last year. So of course, if that QB2 in the backlog for quite a while and it's delivered, that continues to deliver the remaining piece.

And we also have the codelco order that started to deliver in the back half of last year and there is some more units ago.

Speaker 3: And then we also have the Cadillac order that started to deliver in the back half of last year and there's some more units to go.

We haven't completely refresh while order intake continues to be strong we haven't that orders of that magnitude to replace so that's more kind of balanced.

Speaker 3: We haven't completely refreshed, well, or it continues to be strong. We haven't had orders of that magnitude to replace. So that's more kind of balance.

And then the you can't record backlogs as we highlighted one over 200 million pounds of Hs to orders. So that's solidly in backlog and delivering mixed with datacenter. So I think it is fairly balanced there, we'll kind of have to see how the remaining.

Speaker 3: And then in the UK's record backlog, as we highlighted, you know, 1 over 200 million pounds of HS2 orders. So that's solidly in backlog and delivering mixed with data center. So I think it's fairly balanced there. We'll kind of have to see how the remaining HS2 orders go throughout the year. But I think both are fairly balanced.

Two orders go.

Throughout the year, but I think both are fairly balanced.

Yeah, and then Canada has certainly seen a nice uptick in than last year.

Speaker 3: Yeah, and Canada has certainly seen a nice uptick and then last

Okay, maybe just a second question here on <unk>.

Capital allocation.

Speaker 5: Okay, maybe just a second question here on capital allocation.

Youre approaching a one times leverage ratio.

You gave some guidance as far as Capex, but.

Speaker 5: You know, you're approaching a one-time leverage ratio, you know, it gives some guidance as far as catbacks, but you know, what are the priorities between share by back and M&A? And I know you talked also about small tuck-ins, but you know, how across them should we expect you to get on M&A?

What are the priorities between share buyback and M&A I know you talked also about small tuck ins, but.

How aggressive should we expect you to get on M&A.

Yeah sure. So I think it will be a continued to be a balanced approach.

Look at the dividend continued to improve we've been buying back about 1% of our flow per quarter. That's something we'll continue to review and look to add.

Speaker 3: Yes, sure. So I think it'll be continued to be a balanced approach. It'll look at the div and then continue to improve. We've been buying back about 1% of our slope.

From there, yes, working through M&A pipeline like I said, its small to medium sized but there are some interesting opportunities in the product support growth area, particularly in that kind of $24 seven service operations. So we're looking at those as well and so I think it's going to be a balanced approach.

Speaker 3: That's up and we'll continue to review and look to.

Speaker 3: And from there, yeah, we're working through M&A pipeline. Like I said, it's small to medium size, but there's some interesting opportunities in the product support growth area, particularly in the kind of 24, 7 service operations. So we're looking at those as well. And so I think it's going to be a balanced approach of each of those.

Of each of those.

Okay. Thank you.

Yeah.

Thanks Jacob.

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

Speaker 1: Our next question comes from Sheryl and Radborne of TD Securities. Please go ahead.

Thanks, very much and good morning.

In terms of good morning extended lead times that you're seeing on equipment in part just hoping you could characterize now versus what the company's Stephen prior cycles.

Speaker 6: In terms of the extended lead times that you're seeing on equipment and parts, just hoping you could characterize those versus what the company has seen in prior cycles. And talk about how confident you feel about being able to supplement with used rental and rebuild this necessary.

And talk about how confident you feel about being able to supplement with rental and rebuilds as necessary.

Yes, that's exactly what we've been doing cherilyn. So I think we will keep on with that.

Some elements feel a little bit like 2018, there's probably a little bit more given.

Speaker 3: Yeah, and that's exactly what we've been doing, Sherylin, so I think we'll keep on with that.

Speaker 3: Some elements feel a little bit like 2018. There's probably a little bit more given, you know, some of the COVID risks that you worry about, but it feels kind of similar. So we've managed to that fairly well. We've managed through the last three quarters really well. As you probably heard on the cat call, it's gonna be another year where it's pretty tough for dealers to get inventory because customers are pulling hard when it arrives and the supply chains are working as fast as it can.

Some of the Covid risks that you worry about but it feels kind of similar so we managed through that fairly well.

Managing through the last three quarters really well.

As you probably heard on the call is going to be another year, where it's pretty tough for dealers to get inventory customers are pulling hard when it arrives in.

And the supply chains are working as fast as it can.

And so.

I think we will continue doing what we've done supplement with used the rental fleets quite busy we'll make some additions there.

Speaker 3: And so, I think we'll continue doing what we've done. We'll supplement with used. The rental fleet's quite busy. We'll make some additions there. So where we see gaps emerging, we've been filling it really well, and so I think we'll just keep on.

So where we see gaps emerging and we've been filling it really well.

I think we'll just keep on with that and I guess shoreline Scott a couple of other things to add I mean, I think we were early in the ordering process here.

Speaker 2: And I guess, Charlton Scott said a couple other things that. I mean, I think we were early in this, the ordering process here. Based on some of the data, we talked to you about that a lot.

Just on some of the data we've talked to you about that.

And so we have built inventory, which I think differentiates us I think our inventories up about $200 million.

Speaker 2: So we have built inventory, which I think differentiates us. I think our inventory is up about $200 million.

And we've got a lot of that is parts as well, which is helpful. Because it is important to keep our customers up and running right. Now uptime is extremely important to them. So that part's build that will be helpful.

Speaker 2: And we've got a lot of that as parts as well, which is helpful because it's important to keep our customers up and running right now oftentimes, extremely important to them. So that part still will be helpful as well. I feel I'm feeling good about our relative positioning and obviously a constrained environment that we're not immune from.

Well, so I feel I'm feeling good about our relative positioning and obviously a constrained environment that we're not immune from.

Thank you.

Good morning.

Maybe can residual uncertainty in South America, what do you think is the prospect for rebuild could take hold down there when customers have traditionally bought new.

Speaker 6: I guess it's been a supply environment and maybe some residual uncertainty in South America. What do you think is the prospect for rebuild to take hold down there with customers have traditionally thought new? And what's the name's capacity to accommodate that if you saw about in 2022?

And what's the next capacity to accommodate that if you saw that in 2022.

Yes, that's definitely top of mind, something we've been talking to customers quite a bit about.

It would be more typical in South America towards the in the first place to send things over to Africa, certainly having active conversations with customers about getting a second life similar to the oil sands.

Speaker 3: Yeah, that's definitely top of mind something we've been talking to customers quite a bit about. It would be more typical in South America towards then the first life-to-dentings over to Africa. Certainly having active conversations with customers about getting a second life similar to the Wells.

We've actually had our VP of mining from Canada for the last four years move back down to South America, and very familiar with that dynamic and rebuilt as we do so that's something we're pushing and were seeing some interest from customers and then on the capacity side. I mean, you are very familiar with OEM herein.

Speaker 2: We actually had our VP of mining from Canada for the last four years, moved back down to South America, and very familiar with that dynamic and the rebuilds we do. So that's something we're pushing and we're seeing some interest from customers. And then on the capacity side, I mean, you're very familiar with OEM here in Western Canada, which is obviously competitive advantage for us here. We have a similar called CRC in Africa. So the same capabilities in South America that we have in Western Canada from capability.

Western Canada, which is obviously a competitive advantage for us here, we have a similar problem.

CRC and epic Aster and so the same capabilities in South America that we have them in western Canada from a capability and capacity perspective.

Thank you. Thank you. Thank you.

Thanks Carolyn.

Our next question comes from Michael <unk>.

Scotiabank. Please go ahead.

Speaker 7: Thanks, you're on.

Speaker 1: Our next question comes from Michael Tumet of Scotiabank. Please go ahead.

Hey, good morning, guys.

Good morning.

Great quarter.

It goes without saying so product support was particularly strong in Canada, and typically there's a little bit of a slowdown at the end of the year as productivity wanes during the holidays.

Speaker 8: Great quarter, I don't know what I was about saying. So, products support was particularly strong in Canada. And typically there's a little bit of a slowdown at the end of the year, productivity wanes during the holidays. And it doesn't look like that necessarily happens. I'm wondering if this kind of unexpected strength is something you're seeing and expect to continue to see through the first half of 21 despite potential headwinds from Omicron.

It doesn't look like that necessarily happen. So I'm wondering if this kind of unexpected strength is something.

You are seeing and expect to continue to see through the first half of 'twenty, one despite potential headwinds from Amazon.

Yes, Thanks, Michael I'll take that one so one I guess it wasn't unexpected strike for us.

We've been talking a lot about the construction.

Speaker 2: Yes, thank you Michael, I'll take that one. So, so why not, I guess it wasn't unexpected strength for us. You know, we've been talking a lot about the construction after market opportunity. It's aligned with CAD.

Aftermarket opportunity.

It's aligned with Cats initiative to double services growth and we feel like we've been on this now for.

Speaker 2: initiative to double services growth and we feel like we've been on this now for you know three or four years starting with connecting machine.

Three years or four years, starting with connected machines.

Customer value agreements.

And and.

And coming up with great value propositions for our customers.

Speaker 2: customer value agreement and coming up with great value propositions for our customers.

And so when you think about that construction aftermarket.

And Greg Correct me, if I'm wrong, but I think the 30% growth year over year on the construction side and so we said at Investor day, we thought that that was going to grow at outsized rates relative to mining and Thats whats happening.

Speaker 2: And so when you think about that construction after market and great encouragement from the wrong, I think it's a 30% growth year over year on the construction side.

Speaker 2: So we said it investor day, we thought that that was going to grow it outside it's was going to be on its own letting the amount of paid sale

So as you think about the runway we've got significant runway because the market share is at a significantly different level, but on the mining side, So where can I expect our mining product support to continue to grow and with.

Speaker 2: relative to mining and that's what's happening. And so as you think about the runway, it's got significant runway because the market share is that is significantly different level than the mining side. So we're gonna expect our mining. Product support to continue to grow and with capital budgets.

With capital budgets.

Releasing here I think that's very positive for 2022, but the momentum in our construction.

Speaker 2: releasing here. I think that's very positive for 2022, but the momentum in our construction aftermarket is really positive and will continue for multiple years.

Aftermarket is really positive and will continue for multiple years.

That's great color Scott Thanks in that 30% growth is obviously very impressive.

In South America, and the UK and Ireland revenues essentially back to pre pandemic levels.

Speaker 8: That's great color, Scott. Thanks. And that 30% growth is obviously very impressive. With South America and the UK and Ireland revenues essentially back to pre-pandemic levels, in Canada, so far lagging, what are the prospects for Canada to now become the largest source of earnings growth in 2022? And I guess given the backdrop, how do you feel about the region getting back to pre-pandemic levels in terms of revenues in the short term, I guess, despite supply constraints?

Canada, So far Lang lagging what are the prospects for Canada to now become the largest source of earnings growth in 2022.

Given the backdrop, how do you feel about the region getting back to pre pandemic levels in terms of revenues in the short term I guess despite supply constraints.

Yes, we're optimistic about Canada, there as well.

But a lot of good things going on between.

Speaker 2: Yeah, and we're optimistic about Canada. There's quite a lot of good things going on between government spend programs, GDP growth, quantity growth, capex budgets. So, I think across the energy space, capex budgets on average are up 33% this year. Probably a little lighter for some of the miners, but heavier for those drilling wells. So, that's helpful for us, the trend that we haven't seen in quite some time and that provides a pretty good backdrop. Yeah. Drop in.

Government spend programs GDP growth commodity growth Capex budget. So.

I think across the energy space Capex budgets on average were up 33% this year, probably a little lighter for some of the miners, but heavier for the those drilling well so.

That's helpful for us.

The trend that we haven't seen in quite some time and that provides a pretty good backdrop and.

There's lots of spending that goes in and around that.

Also in precious metals and pretty broad based so Canada.

Speaker 2: It's a lot of spending that goes in and around that. But it's also in precious metals and pretty broad paste. So Canada certainly feels like it's cut quite a bit of momentum headed into this year.

Canada, certainly feels like it's got quite a bit of momentum headed into this year.

And then can't see any reason why we wouldn't be able to get back to previous levels as that recovers.

Speaker 2: And then the caffeine reason why we would be able to get back to previous levels at that recovers, I think supply will throw a zero bill. And we've secured more in back-walk now, so that helps under penalties as well.

I think supply will throughout the year.

Third more in backlog now so that helps underpin a piece as well.

That's great guys. Thank you.

Thanks, Michael.

Our next question comes from Ross Gilardi of Bank of America. Please go ahead.

Speaker 1: Our next question comes from Ross Gelardi of Bank of America. Please go ahead.

Good morning, guys.

Good morning Ross.

And yet Scott congrats on getting to the right targets I know I know that return on invested capital and improving return on invested capital has been Europe .

Speaker 4: And yeah, Scott Congrats on getting to the right target. I know that's who we're turning out about the capital and improving. We're turning out about the capital's been your goal from the day you've joined spending many years ago. So...

Your goal from the day, you joined training many years ago. So.

Much must be very gratifying to finally to finally get there.

Speaker 2: much must be very gratifying to finally finally get there.

Gross I had a quick question on your gross margins your gross margin finished 2021 and.

Speaker 8: Your gross, I had a question on your gross margins. Your gross margins finished 2021.

26, 9% you have had a positive comp in the fourth quarter for.

Speaker 8: 26.9% you've had a positive comp in the fourth quarter for the first time there and You know back at the prior peak it did roughly 30% gross margin so as we enter this up cycle as you're calling it I mean is that 30% level in play? I mean is it realistic to see? Stay a hundred basis points across margin expansion, you know for the next couple of years

For the first time.

And.

Back at the prior peak you did roughly 30% gross margin. So as we entered this up cycle as Youre, calling it I mean is that 30% level in play I mean is it.

Realistic to see say 100 basis points of gross margin expansion for the next couple of years.

So why don't I take that also one thanks for the comments on the ROIC.

It's been a journey as you know and.

Speaker 2: So what do I take that also? One thanks for the comments on the row. I mean, it's been a journey as you know, and it's really pleasing to see South America get back to the historical peaks on a revenue base. Not quite there yet. So thank you for those comments.

It's really pleasing to see South America get back to the historical peaks on on a revenue basis not quite there yet.

Thank you for those comments.

Your comment on gross margin. So we have seen gross margin expansion I think it's been driven by a couple of things one is.

Speaker 2: You're coming on Gross Margin, so we have seen Gross Margin expansion. I think it's been driven by a couple things one is.

And inventory situations thats.

Been very good relative to other kind of ups and downs in the cycles and so that we haven't had any.

Speaker 2: an inventory situation that's been very good relative to other kind of ups and downs in the cycles. And so that we haven't had any, that's helped in terms of the quality of the inventory. I think the second piece obviously is what we're doing on value add for the customer, which has helped. And cubic's the example of that, but there's more of the customer value agreements.

In terms of the quality of the inventory.

The second.

Piece, obviously is what we're doing on value add for the customer which has helped in cubic's. The example of that but theres more of the customer value agreements that have been very helpful. In that regard and then the third obviously is the supply constrained environment, which.

Speaker 2: been very helpful in that regard. And then the third obviously is the supply constrained environment which is...

It is also.

Takes away some of that pressure as we look forward I think there is.

Speaker 2: you know, takes away some of that pressure. You know, as we look forward, I think there's, you know, more opportunity on gross profit margin, to be honest.

More opportunity on gross profit margin to be honest.

As our capabilities around pricing and optimization elasticity improve as our value added services, which has been a huge focus over a multiyear period continue.

Speaker 2: you know, as our capabilities around pricing and optimization, elasticity improve as our value added services, which has been a huge focus over a multi-year period, continue, and we deliver more values of the customers than I think we still have some opportunity on the gross profit margin side.

And we deliver more value to the customers and I think we still have some opportunity on the gross profit margin side.

Okay.

Got it and then.

<unk> had more of a.

Technology related question.

Speaker 8: Okay, got it. And then, had more of a technology related question, you know, cats, you know, very excited about, you know, their dynamic gas blended.

<unk>.

Very excited about.

Theyre dynamic gas blending.

Engine and.

Wondering if you could talk about that.

Little bit.

Speaker 8: engine and wondering if you could talk about that, you know, a little bit. Can you get that engine for a mining truck, like an ultra-series mining truck, or is it really only available for oil and gas applications?

Can you get that engine for a mining truck like and Ultra series mining truck or is it really only available for oil and gas applications.

And I'm just wondering if youre.

Youre mining customers are looking at the dynamic gas blending and Jane is the legitimate alternative for reaching there.

Speaker 8: And I'm just wondering if your mining customers are looking at the dynamic gas blended engine as a legitimate alternative for reaching their, you know, their 23rd.

There are 2030 emission objectives.

So yes, so the first part of the 3500 Bill gas blending engine. It's a great product that cat has and I think it is a differentiator and just for everyone else on the call. It has the ability to displace a 80% of diesel with natural gas and also has the ability to have 20% hydrogen without <unk>.

Speaker 2: So, yes, so this is the first, but it's a 3,500 dill gas bonding engine. It's a great product that Cat has, and I think it is a differentiator. And just for when else, I'm going to call it, has the ability to displace.

Speaker 2: 80% of diesel with natural gas and also has the ability to have 20% hydrogen without a re-rate. So it's a great product that's win-win, it's win-trade emissions, it's win-for-for-cost, etc. And we're starting to see a pretty big uptake with our customer base. I think we've talked about some of the demonstrations we've had and we've got quite a number of those engines in the backlog and a couple of customers as the capital budgets are freed up have indicated that the real desire to replace the engine, FETS.1, you know, great product.

Right so.

A great product that's a win win win for the emissions, it's wind for cost et cetera, and we're starting to see a pretty big uptick with our customer base I think we've talked about some of the demonstrations we've had and we've got quite a number of those engines in the backlog in a couple of customers that the capital budgets are freed up.

Indicated a real desire to replace fleets with these engine. So that's one great product great uptick with customers.

Think about your question about mining trucks I do think there are.

Speaker 2: great uptick with customers. As you think about your question about mining trucks, I do think that a debate needs to be had on alternative fuels. I don't think it's a job.

Debate needs to be had on alternative fuels no I don't think it is just.

Our battery or hydrogen solution that is in the multi year I think there is an opportunity for alternative fuels to play a role here to drive down emissions and cat <unk> product.

Speaker 2: a battery or hydrogen solution that is, you know, in the multi-year. I think there is an opportunity for alternative fuels to play a role here to drive down emissions and cats, products is capable of doing that. And so, you know, to be frank, not a lot of customers have picked that up yet on the big mining trucks, but some have. You know, if you've noticed that Imperial has talked a little bit about alternative fuels.

Is capable of doing that and so.

To be Frank not a lot of customers have picked that up yet on the big mining trucks, but some have.

Notice that imperial has talked a little bit about alternative fuels.

As an example, and I know some of our other mining customers. We're in that discussion as well. So I think more to come on that Ross and I do I do agree with you I think there is an opportunity.

Speaker 2: as an example. And I know some of our other mining customers were in that discussion as well. So I think more to come on that Ross and I do agree with you. I think there's an opportunity to push that harder in the years to come.

To push that harder in the years to come.

But is it offered now Scott could you could you buy a mining truck with the with the DGB engine in it today.

Speaker 8: But is it offered now? Scott, could you buy a mining truck with a DGB engine in it today?

So there is a there's an.

And actual mine site in Mexico, that's fully natural gas.

Speaker 2: So there's an actual mind-site in Mexico that's fully natural gas run. And so it is technically possible. The question is you have to have the combination of the application, the customer desire. And a lot of the customers right now are really focused on hydrogen and battery, which is kind of the path to zero emissions.

Run and so so it is technically possible.

The question is you have to have the combination of the.

The application the customer desire.

A lot of the customers right now are really focused on hydrogen.

Battery, which is kind of the path to zero emissions.

And one of the things that I think we need to deal with our customers is educate them on the possibilities of.

Speaker 2: And one of the things that I think we need to do with our customers is educate them on the possibilities of reducing emissions in a shorter timeline to 30 to 40% with the technology that is capable today. And so yes, it is technically feasible, but there hasn't been a lot of uptake on it yet, which is somewhat surprising to me.

Reducing emissions and a shorter timeline.

30% to 40% with.

With the technology that is capable today and so so yes. It is technically feasible, but there hasnt been a lot of uptake on it yet which is somewhat surprising to me.

Got it thank you very much.

Thanks Ross.

Our next question comes from Brian Fast of Raymond James. Please go ahead.

Speaker 1: Our next question comes from Brian Fast of Raymond James. Please go ahead.

Yes, thanks, good morning.

Good morning, Brian .

Greg just wanted your commentary surrounding inflationary headwinds could we get some more color on just where you are seeing that.

Speaker 9: Greg, just on your commentary surrounding inflationary headwinds, could we get some more color on this where you?

Sure.

As you can tell from CPI, it's fairly broad based.

Certainly in things like energy inputs.

Speaker 2: Sure, as you can tell from CPI, it's fairly broad-based, but certainly in things like energy inputs to fleet some on insurance.

The fleets some on insurance.

On labor, we will expect in the future too.

Salaried employees.

Speaker 2: I am a laborer, we'll expect in the future too. You know, salary employees after a couple of years where we haven't had increases, we'll have an increase this spring, where's our lease of hat, which increase each way along. So we'll see some additional costs on the labor side.

A couple of years, where we haven't had.

Increases will have an increase this spring.

Whereas our Liza pad, which increase each way along so we will see some additional costs on the labor side.

And then just on the procurement initiatives.

Continue to make progress and a lot of areas, maybe not with some of the savings that we had thought a year or two ago. So some of it's broad based but.

Speaker 2: And then just on the procurement initiatives, we continue to make progress in a lot of areas. Maybe with not with some of the savings that we thought a year or two ago. Some of it's broad-based, but.

So I think it's across the board everybody seeing pressures, but of course energy insurance would be a couple of spots.

Speaker 2: So I think it's across the board, everybody seeing pressures, but of course, you know, energy insurance would be a couple of thoughts.

Okay. Thanks, and then just in South America do you sense Theres been a shift in tone from customers since the presidential election in Chile.

Speaker 9: Okay, thanks. And then just in South America, since there's been a shift in tone from customers since the presidential election in Chile, and now that we have clarity on that front, or do you still see some tend to, tend to, if any, given the constitutional review?

We have clarity on that front.

Or do you still see some tension tentativeness given the constitutional reform is still up in the air.

Yes, Brian it's Scott so what I have seen a change in tone in its.

It's interesting certainty is better than uncertainty right and so you have a new president.

Speaker 2: Yeah Brian , let's try that. So when I have seen a change in tone and it's...

That you.

Speaker 2: It's interesting certainty is better than uncertainty. And so you have a new president.

We have selected by <unk>.

Significant.

Speaker 2: that he has been elected by a significant majority and he obviously comes from left-leaning, but he's actually brought some certainty to the situation. And I think the fact that he has put in place a minister of finance that comes from the central bank that is very well regarded is.

Majority and and he obviously comes from left leaning but he has actually brought some uncertainty of the situation and I think the fact that he has put in place.

The Minister of finance that comes from the Central Bank that is very well regarded as very.

The good news and as I said prior having the Congress.

A lower house have a majority of central right is great news as well so.

Speaker 2: very good news and I've said prior having the Congress the lower house have a majority of center writers is great news as well so so yes I have seen a shift in tone over the last couple months which is good news and I think that is

So, yes, I have seen a shift in tone over the last couple of months, which is good news and I think that is driving.

Driving a lot of optimism for the next couple of years that all being said, there's still uncertainty around the constitutional reform and I think we're going to see customers hesitate to put big New fleet renewals in place until there's that certainty is as a result, so step in the right direction, but I think more to come.

Speaker 2: you know, driving a lot of optimism for the next couple of years. That all being said, you know, there still is uncertainty around the constitutional reform. And I think we're going to see customers hesitate to, you know, put big new fleet renewals in place until there's, you know, that certainty is, is, is, is resolved. So, you know, step in the right direction, but I think more to come to completely get rid of the uncertainty.

To completely get rid of the uncertainty.

Okay fair enough. Thanks for taking my questions.

Thanks, Brian .

Once again, if you have a question. Please press Star then one.

Our next question comes from Maxim <unk> of National Bank Financial. Please go ahead.

Speaker 1: Once again, if you have a question, please press star then one. Our next question comes from Maxson Sitchev of National Bank Financial. Please go ahead.

Hi, good morning.

Okay.

Morning Max.

Greg and maybe Scott if you want to add to this just kind of building on the whole Chilean dynamic.

Speaker 8: Greg and maybe Scott, if you need to add to this, just kind of building on the whole Chilean dynamic. Obviously, if some of the clients are, let's say we're reluctant to make long-term decisions on new fleets, and you mentioned that, potentially, we build opportunity in that geography. Do you have the capacity to do this internally or would you have to contemplate adding capacity of your capacity via...

Obviously, if some of the clients are let's say reluctant to make long term decisions on new fleets and you mentioned that potentially we built opportunity in that geography.

Do you have the capacity to do this internally or would you have to.

Contemplate adding capacity.

Either hiring M&A, how should we think about this just in terms of being able to capture all potential opportunities.

Speaker 8: you know either hiring M&A, how should we think about this just in terms of being able to capture that potential?

So some asset Scott I'll start and then Greg you add on so one I do think that dynamic is Israel and when you have copper prices at this level.

Speaker 2: So, to Max and Scott, I'll start and then Greg you add on. So, one, I do think that dynamic is real. And when you have copper prices at this level, production up time becomes so critical. And so, the product support opportunity is got a lot of momentum behind it. And back to my answer to Cheryl and question, we have the capabilities and capacity to deal with that. So, we have a component rebuild center in that Agatha.

Production uptime become so critical and so the <unk>.

<unk> support opportunity.

It has got a lot of momentum behind it and back to my answer to Sharon's question on we have the capabilities and capacity to deal with that so we have a <unk>.

<unk> rebuilt senator naphtha gas that very high quality.

Center.

And it has more capacity to be able to take on this activity and we have and frankly, we have some self help opportunities here to increase the velocity through which we put.

Speaker 2: very high quality center. And it has more capacity to be able to take on this activity. And frankly, we have some self-help opportunities here to increase the velocity through which we put product through that facility, which will help even more. So.

Product through that facility, which will help even more so.

I'm really encouraged about the outlook for 2022 on the on the product support side in South America.

Speaker 2: You know, I'm really encouraged about the outlet for 2022 on the product support side in Southern America.

Okay Super helpful and just in terms of the ability to hire technicians in that geography do you mind, maybe just adding a couple of points in terms of.

Speaker 8: Super helpful. And just in terms of the ability to hire technicians in that geography, do you mind me just adding a couple of points in terms of sort of the game plan there?

Sort of the game plan there.

Yes, so we have hired.

Approximately I think 400 technicians.

Speaker 2: Yes, so we have hired approximately, I think, 400 technicians.

During the year. So that's about let's say a little bit more than 15% of our technical workforce I think we've made some great strides with some of our large customers.

Speaker 2: during the years, so that's about, and let's say a little bit more than 15% of our technical workforce.

Particularly on diversity and inclusion agenda, which has been fantastic we've partnered with BHP.

Speaker 2: I think we've made some great strides with some of our large customers, particularly on diversity and inclusion in JEDDA, which has been fantastic. We've partnered with the HP and we've been partnering with them the last couple of years to build out that technical workforce and that's been a huge, huge win for us.

And we've been partnering with in the last couple of years, two to build out that technical workforce and thats been a huge huge win for us.

And as I said I think a lot of you I think we are employer of choice in South America.

Speaker 2: And as I said, I think to a lot of you, I think we're employer of choice in South America. We come up to pie in all of the employee surveys and all of the ratings. And so you've got a great value proposition for employees.

Come up high and all of the employee surveys and all of the ratings and so we've got a great value proposition for our employees.

And people want to work for US there. So it's been a lot of hiring going on on the back of <unk> and codelco.

Speaker 2: and people want to work for us there. So it's been a lot of hiring going on on the back of KB2 and Kadelco and the uptick in demand and that probably will continue throughout 2022. I think what's really encouraging is they've been able to grow that revenue based though and do that hiring and keep the SGNA consistent. I mean, the SGNA hasn't increased and so they've been hiring on the technical front but they've taken cost to another areas which has been really encouraging as well.

And the and the uptick in demand and that probably will continue throughout 2022, I think what's really encouraging that they've been able to grow that base revenue base, though and do that hiring and keep the SG&A.

Systems right I mean, the SG&A hasnt increased and so they've been hiring on the technical front, but the take we've been taking cost out in other areas, which has been really encouraging as well.

Yeah, and Matt one other dynamic I'll highlight reviewed reviewing with the team is.

The last time, we really added a lot of people 2012 2013.

Speaker 2: Yeah, and Max, one other dynamic I'll highlight, you know, reviewing us with the team is, you know, the last time we really added a lot of people 2012, 2013, brought a lot of new people into the company and so it's now eight, nine years later and so those people are a lot.

He brought a lot of new people into the company and so now eight nine years later and so those people are a lot more senior and so they've had a really good time promoting internally and then hiring more junior people into the mix and it's worked really well in that timing has been really strong.

Speaker 2: And so they've had a really good time promoting internally and then hiring more junior people into the mix and it's worked really well and that time...

Okay Super helpful and just one brief question if I may Greg in terms of noncash working capital.

Speaker 8: Super helpful and just one brief question if I may. Greg, in terms of non-cash working capital, how should we think about that investment in 2022? Maybe if you can contrast this versus, I think it was 277 million investments in 2021.

Should we think about that investment in 2022, maybe if you can contrast versus I think it was $277 million investment in 2021. Thanks.

Yes, so we will continue to add.

Working capital to normalize some of the new equipment balance, we probably got some up some safety stock and parts right now that we can probably offset so I think there'll be some net add but I think.

Speaker 2: Yeah, so we'll continue to add working capital to normalize some of the new equipment balance. We've probably got some of some safety stock in the entire straight now that we can probably offset. So I think we'll be some net add, but I think equipment turns will probably normalize as we get access to more new. And then parts, I think there's some efficiency opportunities when supply normalizes a bit, so they can kind of offset. So of course, in a growing, psycho environment, we think we'd be adding that, that working capital.

Equipment turns will probably normalize as we get access to more new.

In parts I think there's some efficiency opportunities when when supply normalizes a bit so they can kind of offset of course in a growing upcycle environment, we think we'd be adding net net working capital.

Okay makes sense, thanks, a lot thats it for me.

Okay. Thanks.

Our next question comes from <unk> Khan of RBC capital markets. Please go ahead.

Speaker 10: Back.

Speaker 1: Our next question comes from Sabat Khan of RBC Capital Markets. Please go ahead.

Okay, great. Thanks, very much just a question on the 22 commentary I guess earlier comments around product support being a bit more of a factor in H, one and the new equipment in <unk> should we expect margins to kind of follow that trajectory with better margins and H, one or do you think the margin will be more like your traditional seasonality.

Speaker 11: Great, thanks very much. Just a question on the 22 commentary. I guess the earlier comments around product support being a bit more of a factor in H1 and then you could, man, in H2, should we expect margins to kind of follow that trajectory with better margins in H1, or do you think margin will be more like your traditional seasonality?

Yes, I think it will be more traditional seasonality wenches really builds into strong Q2 and Q3.

Speaker 2: Yeah, I think it'll be more traditional seasonality, which is really built into strong Q2 and Q3. But yeah, more product support in the first half and then equipment in the second. And there's always a mixed dynamic there. And mining will be a large contributor to the second half. So I think higher volumes, but a little bit of a mix.

And and but yet more product support in the first half and then new equipment in the second and Theres always a mixed dynamic there.

And mining will be a large contributor to the second half so I think higher volumes, but the mix shift there.

Okay, Great and then on DHS to commentary earlier, it sounds like you've secured about 200 million of the orders, but I guess, if you think about the 500 million broader opportunity how much of that has already been issued and just how much more is still left to I guess source from by the project owners.

Speaker 11: And then on the HS2 commentary earlier, it sounds like you've secured about 200 million of the orders. But I guess if you think about the 500 million broader opportunity, how much of that has already been issued and how much more is still left to, I guess, source from by the project?

Yes, there is still about a third left thereabouts, so still lots to go after.

Speaker 2: Yeah, they still got a third left there about, so still want to do that.

Okay, and then just one quick one on the UK I think there was some timing called out for the power systems deliveries was that a material amount and should we expect that to come back maybe in the early part of this year on the revenue side.

Speaker 11: And then just one quick one on the UK, I think there was some timing called out for the power systems deliveries. Was that a material amount and should expect that to come back maybe in the early part of this year on the rugby side?

Yes, there's quite a bit in backlog most of it is pure timing some of it was customers having some delays in their timelines and so did move in to the first half, but pretty evenly through the year.

Speaker 2: Yeah, there's quite a bit of backlog. Most of it is pure timing. Some of it was customers having some delays in their timeline. And so it did move into the first half, but pretty evenly through the year. Yeah, that was certainly slower on a year over your comparison, but still lots of backlog.

Yeah that was certainly slower on a year over year comparison, but lots in backlog.

Great. Thanks very much.

Thanks, Kevin.

Our next question comes from Devin Dodge of BMO capital markets. Please go ahead.

Speaker 1: Our next question comes from Devon Dodge of BMO Capital Markets. Please go ahead. Thanks. Good morning, guys. Just wanted to pick up on that earlier thread.

Good morning, guys.

Just wanted to pick up on that earlier thread.

On Chile, you've touched on some of this already but.

There have been some early announcements coming out of the constitutional Assembly.

Could be.

Quite negative for the mining industry. If they were enacted which is an important caveat. But is this is this just a case of some radical ideas coming out of the subcommittees and should we be discounted them just wanted to get your kind of boots on the ground perspective.

Yes so.

<unk>.

There was some some commentary out of the environment Committee, what you're probably referring to and I think the thing to keep in mind, Kevin is that for that to become any.

Speaker 3: Yeah, so you're probably, you know, there was some, some commentary out of the environment committee, which you're probably referring to. And I think you can keep in mind, Devon, is that for that to become any where near to being part of the charter for the constitutional referendum later in 2022, you need two thirds of the full assembly. Okay.

We're near to being part of the charter for the constitutional referendum later in 2022, you need two thirds of the full assembly.

To be in support of that.

So I.

I don't think anyone is.

Okay, putting any.

Speaker 3: So I don't think anyone is...

Real attention honestly too.

Speaker 3: putting any real attention, honestly, to...

What just came out of the environment Committee I guess 0.1, I think point to I think what to watch.

There are real issues there.

Speaker 3: So what just came out of the environment committee, I guess point one, I think point two, what I think what to watch, because there are real issues there is the mining royalty and tax review, which my expectation is it's going to be resolved in the first half of this year. And I continue to believe that it's going to be a moderate increase.

As the mining royalty and tax review, which my expectation is it's going to be.

Resolved in the first half of this year and I continue to believe that it's going to be a moderate increase.

Right now the government take through royalties and <unk>.

<unk> is around 36738% that I suspect that goes up to.

Speaker 2: Right now the government takes through royalties and taxes around 36, 37, 38% and I suspect that goes up to...

$43, 44% to 45%.

<unk>.

To me getting that behind us helps on that certainty issue right and so that's the thing to watch if I if I were you.

Speaker 3: you know 43, 44 or 45% and to me, you know, getting that behind has helped on that certainty issue, right? And so that's the thing to watch if I-

To date really good news I think coming out of Chile, when you see the.

Speaker 3: You know, to date, really good news. I think coming out of Chelly when you see the...

The lower house being center right.

Which makes it hard to have really polarized things come through that.

Speaker 2: you know that the lower house being center right, which makes it, you know, hard to have really polarized things come through that.

The political environment, and then second having.

The finance Minister come from the Central Bank I think is really good news as well so all in all I think we're in a.

Speaker 3: that the political environment, and then second having the finance minister come from the Central Bank, I think is really good news as well. So all in all, I think we're in a much better shape than three months ago, but still a little bit of uncertainty that we not have to navigate through until we see big new capital commitment in my mind. Okay. That's a good color. Thanks for that. Second question.

<unk> better shape than three months ago, but still a little bit of uncertainty that we have to navigate through until we see big new capital commitments in my mind.

Okay. That's good color thanks for that.

Second question is look you even ask this in various forms.

Before but.

Does come up occasionally.

But in prior up cycles, we've seen some of that hard fought cost discipline that was achieved during the downturn kind of fade away in some expenses start to creep back into the business.

What sort of things would you point to that give you confidence that the operational progress that you've shown in 2021 are more sustainable.

Yes. So one I think you have to take it in a longer context of kind of the seven or eight year journey, we've been on and when you look at the the cost reductions.

Speaker 3: Yes, so one, I think you have to take it in a longer context of kind of the seven right year journey we've been on. And when you look at the cost reductions and the way we've transformed this business, you know, it's to the tune of 20 to 25%.

And the way we've transformed this business.

It's to the tune of 20% to 25%.

The cost base and that has been through a restructuring of the business.

Speaker 4: of the cost base and that has been through a restructuring of the business.

Primarily alright, and then you look at what we're doing from a triple our perspective, which is making sure that the right work gets done in the right facilities with the.

Speaker 3: and it primarily, right? And then you look at what we're doing from a triple R perspective, which is making sure the right work gets done in the right facilities with the right technical workforce.

<unk> technical workforce.

It's a game changer, when you think about the e-commerce going from.

10% of parts delivered 240% to 50% of parts delivery. That's a game changer when you think of the.

Speaker 3: That's a game changer. When you think about the e-commerce going from...

Speaker 3: 10% of parts delivered to 40 to 50% of parts delivered, that's a game changer. When you think of the initiatives to move support functions closer to the branch, which is great from a cultural perspective, great from a understanding of business perspective, but also really important from a cost perspective, that's a game changer. So I feel really good about the structural things that we've done to increase our competitiveness.

The initiatives to move support functions closer to the branch.

Which is great from a cultural perspective, great from an understanding of the business perspective, but also really important from a cost perspective that's.

That's a game changer so.

I feel really good about the structural things that we've done to increase our competitiveness.

And which is helping on the market share side as well.

And undoubtedly we're facing some inflationary.

Speaker 2: which is helping on the market share side as well.

Speaker 3: And undoubtedly, we're facing some inflationary headwinds, for sure, which Greg referenced. That will be a little bit of a headwind, but the offset is I think there's a lot more structural changes, fixed cost, structural changes to go after. I look at our supply chain business as an example. Our supply chain delivery and our supply chain business. We have three warehouses right now in Edmonton, and we're going to move that into one in 2022.

Headwinds for sure, which Greg referenced in and that will be a little bit of a headwind, but the offset to that is I think theres a lot more structural changes fixed cost structural changes to go after and I look at our supply chain business. As an example, right near our supply chain delivering our project business, but we have three warehouses right now in Edmonton.

And we're going to move that into one and 2022 or do you think about the cost associated with that is pretty significant when you think about running R.

Speaker 3: You think about the cost associated with that. It's pretty significant. When you think about running our component and rebuild capabilities.

Our component rebuilds.

Abilities.

On not only a high quality, but also focus on low cost delivery I think thats a.

Speaker 3: on not only at high quality, but also focus on low cost delivery. I think that's a big contributor as we go forward as well. So there are inflationary headwinds, but there are also significant opportunities for us to continue to take out six costs. And I think this whole team recognizes the importance of that.

Big contributor as we go forward as well so there are inflationary headwinds, but there are also significant opportunities for us too.

Continue to take out fixed costs and I think this whole team recognizes the importance of that SG&A.

Initiative that SG&A initiative allows us to not only be extremely competitive with our customers and capture more market share. It also allows us to generate.

Speaker 3: initiative. That SGNA initiative allows us to not only be extremely competitive with our customers and capture more market share, it also allows us to generate a pre-catchable allows us to reinvest in the business and increase the earnings capacity of the business. There's that full, all my whole team has wind around that objective. We'll navigate through it. We've navigated through the last seven years and we're going to come up with the other side of this, getting to that 17% target and then ultimately I think there's more to go after that to tell you this roof.

Free cash flow allows us to reinvest in the business and increase the earnings capacity of the business and there is therefore my whole team is aligned around that objective. So we will navigate through it like we've navigated through the last seven years, and we're going to come out the other side of this.

Getting to that 17% target and then ultimately I think there's more to go after that cellular stress.

Okay.

Really good color thanks for that and congrats on the results not just in Q4, but really for all the all of last year well done.

Speaker 12: and congrats on the results. I just...

Thanks, Kevin.

Yes.

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

Speaker 1: This concludes the question and answer session. I would like to turn the conference back over to Greg Palestuk for any closing remarks.

Great. Thanks, operator that concludes today's call. Thanks, everyone for joining and have a safe day.

Speaker 2: Great thanks operator. That concludes today's call. Thanks everyone for joining and have a safe day.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

Speaker 1: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day. Thank you for participating.

Yes.

Yes.

Okay.

Yes.

Yes.

Yes.