Q1 2022 Finning International Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the Sydney International Inc. First quarter 2022, investor call and webcast.
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I would now like to turn the conference over to Amanda Hudson Senior Vice President of Investor Relations and Treasury. Please go ahead.
Thank you operator good.
Good morning, everyone and welcome to today's first quarter earnings call.
Joining me on today's call are Scott Thompson, President and CEO , and Greg Palast, Chuck EVP and CFO .
Following our remarks today, we will open the lines of questions.
Is being webcast I'm, putting dot com.
We've also provided a set of slides that we will reference during our prepared remarks. 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.
Please refer to slides nine and 10 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 discussed in our annual information form under acute business.
And in our MD&A and our risk factors and management and forward looking information disclaimer.
These statements information with caution as our actual results could differ materially from current expectations.
Or do you.
Thank you Amanda and good morning, everyone.
On today's call I'll speak about the first quarter highlights we continue to support our customers as we're ramping up for increased activity for the remainder of the year.
Greg will then provide more details on our strong performance in the first quarter and our outlook for the remainder of the year.
Please turn to slide two.
We are pleased with the strong start to the year first quarter earnings per share was 59 cents, bringing our last 12 months EPS to $2.42.
This performance is a direct result of our disciplined approach to capturing market opportunities and the successful execution of our strategic plan to grow product support reduced crop costs and reinvest free cash flow to compound our earnings.
Our product support revenue was up 16% from Q1 2021 exceeding $1 billion.
We saw strong demand for parts service and rebuilds across all regions and market sectors with construction product support revenue growing at 21% year over year.
All our region has demonstrated strong operating leverage in the first quarter, because we are actively managing inflationary pressures through continued focus on productivity gains.
Consolidated EBIT as a percentage of net revenue was up 180 basis points from adjusted Q1 2021 results.
Improved profitability drove higher return on invested capital with ROIC in South America, exceeding 21% and ROIC in the UK exceeding 15%.
Yeah.
Ongoing constraints on the global supply chain continued in the first quarter.
The teams around the world put in an extraordinary effort to meet our customers' needs by providing various solutions to fill supply gaps.
We have been ramping up our value proposition for construction rebuilt providing used and rental options to customers and building a healthy inventory position to support delivery of our growing backlog.
We are now offering a wide range of rebuild options on most large construction equipment models, providing attractive financing and warranty with caterpillar and leveraging our triple our network capabilities for faster rebuild turnaround and cost efficiencies.
We are also prioritizing the availability of our rental fleet and expanding our used equipment capabilities.
Data from connected machines value added technology solutions, and our strong customer relationships play a critical role in successfully navigating the current tight supply environment.
In addition, we continued to build a healthy inventory of both equipment and parts, which puts us in a great position to meet strong customer demand and deliver on our growing backlog.
Our equipment backlog increased by 70% to $2 1 billion by the end of March driven by strong market conditions, coupled with increasingly times.
Our inventory was up 32% from Q1, 2021, and about 25% or over $400 million from the end of 2021.
Our improved earnings capacity and strong balance sheet provide us with opportunities to reinvest and return capital to shareholders.
During the first quarter, we reinvested $177 million, including the acquisition of hydro clip and $61 million of share repurchases.
We also announced a 5% dividend increase which marks 21 years of consecutive dividend increases.
The hydro acquisition in the U K is closely aligned with our strategy to drive product support growth and is immediately accretive to our EPS.
It allows us to provide our customers with a wider range of complementary products and services that increased equipment uptime and reduce operating costs.
In addition, hydro clip expands our service capabilities across multiple industries and equipment types to both new and existing customers.
We will be leveraging the experience. We gained was successfully integrating and growing our core fuel business, which operates a scalable hub and spoke model similar to hydro Quebec.
There is a great brand reputation and cultural fit with hydro, Quebec and fitting and we welcome the 270 hydrocodone plays to Fannie.
At the end of March we released our fifth annual sustainability report, which provides a detailed discussion of our progress towards reducing our carbon footprint and our success in commitments and other ESG areas.
As we highlighted during our previous earnings calls, we increased our commitment to sustainable operations and raised our absolute GHT emissions reduction target.
Our new target of 40% reduction from 20% includes four of fuel and covers the same 10 year timeframe from 2017 to 2027.
We continue to help our customers reduce their environmental footprint by providing low carbon emissions equipment re manufacturing and technology solutions to give you a few recent examples.
We have developed a sustainability dashboard on our cubic platform to allow customers to monitor carbon emissions.
We are seeing an accelerated adoption of alternative fuel engines them all of our oil and gas customers in Western Canada.
At the beginning of 2021, we have sold 72 caterpillar tier four DGB engines, including the orders we have received so far this year.
This dynamic gas blending engines allow customers to substitute up to 85% of diesel fuel with natural gas and are capable of operating with up to 20% hydrogen blend, resulting in significant cost savings and emissions reductions.
Safety is of critical importance to our customers and the latest advances in safety technology are generating a lot of interest in the first quarter. We received an order for 127, Caterpillar DSS or driver safety system units from a large Canadian mining customer.
The DSS technology alerts and operator, when it detects fatigue or distraction by monitoring high closure and head posts.
We saw a significant increase in the DSS unit population in Canada over the last year.
Before I turn it over to Greg I'd like to address the leadership changes we announced at the end of March we are excited to welcome Kevin Parks back in the newly created role of Chief operating Officer.
Kevin will oversee our global operations with a focus on consistent execution across the business as we continue to improve the customer experience in a cost efficient fashion.
David Primrose, who has over 35 years of experience with fitting in numerous senior level operational and corporate roles will lead our Canadian business on a permanent basis.
We have significant growth opportunities ahead of us and the new leadership structure will position us to execute our global growth strategy, even more effectively.
In summary, Q1 was a great start to the year our outlook remains strong and we are targeting above mid teens EPS growth in 2022, I will now hand, it over to Greg.
Thank you Scott I will provide more details on our strong performance in Q1 and provide additional regional commentary and outlook.
Our consolidated first quarter results are summarized on slide three.
Net revenue was $1 7 billion was up 18% from Q1 2021, driven by strong demand conditions across all regions and sectors and excellent execution of our product support growth strategy.
Yes.
We continue to navigate supply constraints and manage inflationary pressure to deliver a very strong first quarter.
EBITDA and EPS were up 30% and 68% respectively from adjusted results in Q1, 2021, and strong operating leverage in all regions.
Our increasing inventory on hand will support delivery of our strong and diverse backlog driving higher revenue and new equipment mix for the remainder of the year.
Slide four shows changes in our net revenue by line of business compared to Q1, 2021, as well as the composition of our equipment backlog.
New equipment sales were up 31% year over year led by construction deliveries in the U K and mining sales in Chile and Canada.
We saw strong demand for rental equipment and high rental utilization in all regions.
We achieved double digit growth in product support revenue in all operations in functional currency compared to Q1 2021, driven by strong customer demand combined with our strategic focus on growing rebuilds and customer value agreements in our construction segment.
Our backlog increased to nearly $2 1 billion by the end of March up from $1 9 billion at the end of December .
We expect constraints in the global supply chain to continue impacting availability of new equipment for most of this year and extend the typical delivery time on some orders in our backlog.
That said with inventory arrivals, increasing we now expect to deliver about 85% of our backlog this year more than half of our backlog is in our construction segment about one third is in mining and 15% is related to our power systems segment.
In both new equipment and product support growth in our construction segment is playing a leading role.
Turning to slide five.
EBITDA as a percentage of net revenue increased by 110 basis points from adjusted Q1 2021 performance.
Higher gross profit was driven by an increase in net revenue stronger rental utilization and improved equipment margins.
SG&A increased by 12% on 18% higher net revenue, reflecting additional technical workforce and higher variable cost to support revenue growth, especially in product support which is more SG&A intensive.
As a percentage of net revenue SG&A was down 120 basis points year over year.
Compared to Q4 2021, our SG&A was elevated mostly due to a $7 3 million higher long term incentive plan.
Expense.
Larry additional warehouse costs in Canada, because we are optimizing our warehouse footprint, we expect to start realizing cost savings from this footprint rationalization by the end of 2022.
We're closely monitoring inflationary pressures, including further price increases for our key suppliers in the second quarter and are working with customers to implement those changes we.
We remain committed to delivering fixed cost reduction initiatives productivity gains and strong operating leverage going forward.
The key drivers of our productivity gains include the deployment of our triple our model across all regions supply chain and warehouse optimization.
And procurement initiatives.
Slide six summarizes our Canadian results and outlook.
Market conditions were strong in western Canada in the first quarter net revenue increased by 14% from Q1 'twenty one.
Driven by product support which was up 18%.
You saw increased spending in the mining sector and great execution of our product support growth initiatives in construction.
New equipment sales were up 11% from Q1 2021, largely due to mining deliveries.
Rental revenue was up 54% year over year, reflecting strong customer demand that can be a constrained supply environment.
Compared to softer market conditions, including certain pipeline and construction work stoppages in Q1 2021.
EBIT as a percentage of net revenue was nine 1% up 140 basis points from adjusted EBIT results in Q1, 2021, mostly due to higher equipment and rental margins.
We expect strong commodity prices, a combination of public and private sector spending and increased capital budgets to support a healthy demand environment across all sectors in western Canada in 2022.
Please turn to slide seven for our South America results.
We saw very healthy activity across all market sectors in the first quarter driven by strong copper prices economic growth in each country.
Our new equipment sales were up 32%, while product support revenue increased 14% from Q1 2021 and functional currency.
<unk> products support up 31% from Q1 2021.
SG&A as a percentage of net revenue decreased by 180 basis points from Q1, 2021, due to a streamlined cost structure and improved productivity.
EBIT as a percentage of net revenue was up 280 basis points year over year, driven by strong operating leverage from the improved cost structure combined with higher margins in all lines of business compared to Q1 2021.
In the near term, we expect strong demand for mining products support fleet replacement to be supported by a combination of strong copper price mature equipment population customers focused on leveraging technology to improve productivity.
The political and economic uncertainty in Chile continues to influence customers investment decisions, particularly as it relates to greenfield and expansion mining projects.
Our long term outlook for copper mining in Chile remains positive, including our expectation for a moderate increase in mining royalties going forward. We believe that Chile will remain an attractive place to invest with an abundance of economically advantaged renewable energy resources, which will play a leading role in the energy transition.
Turning to the UK and Ireland on slide eight.
We are pleased with the strong performance in the UK and Ireland in Q1.
Ongoing hs to construction activity, coupled with government investments and other infrastructure projects, our strong core sector and demand for construction equipment product support also.
New equipment sales were up 63% and product support revenue was up 10% from Q1 2021 and functional currency.
EBIT as a percentage of net revenue was up 180 basis points from Q1, 2021% to 5%.
Our outlook for the UK and Ireland business remained strong supported by a significant backlog robust construction activity high margin product support contribution from heidrick with growing demand for our power system solutions.
Our balance sheet remains healthy with net debt to adjusted EBITDA of one six times at the end of March we will continue to make investments to grow our business organically will share buybacks will continue to compete with M&A for capital.
Building on our strong start to 2021, our global team remains focused on capturing market opportunities in a disciplined manner and executing our plan to grow product support reduce costs and reinvest free cash flow to compound earnings.
Underpinned by backlog deliveries growth in product support and strong market activity, we expect higher net revenue and new overall revenue and new equipment mix for the remainder of the year, we're targeting above mid teens EPS growth in 2022.
Operator, I will now turn the call back to you for questions.
Thank you.
We'll now begin the question and answer session analysts who wish to join the question queue. Please press Star then one on your telephone keypad, you'll hear a tone acknowledging your request.
If youre using a speakerphone please pick up your handset before pressing any key.
To withdraw your question. Please press Star then two.
Our first question is from Yuri Lynk with Canaccord Genuity. Please go ahead.
Good morning, guys and nice quarter.
Thank you.
Scott can you talk a little bit about.
The nature of your conversations with your customers when it comes to passing along some of these costs.
Cost pressures.
You are facing.
And.
Are there any competitors that are acting irrationally or is everybody kind of in the same boat when it comes to having to pass this stuff alone.
Yes, Thanks, Larry.
So one I think it's an industry wide issue around.
Around inflation and if you think about spending in particular.
I look at the first quarter, we had increasing costs.
Through the business.
Did take price action.
And the order intake continued to increase.
Do you think about the second quarter the cost increases are going to continue.
And we are engaging with our customers on increasing price I think it will take some time to have those conversations but given the value proposition given the end market environment and given the importance of availability.
Optimistic we'll be able to pass that on.
Without significant demand erosion.
Those conversations are ongoing obviously in some cases more difficult than others.
But given the environment I think everyone's kind of in this place. So it's not it's not extending our caterpillar specific issue, it's an industry wide issue and I don't think theres any difference between.
Any of the major suppliers in my view.
Yeah, no that makes sense.
Second and last one for Greg.
Can you quantify the.
Warehousing costs that were in SG&A and provide an update on on when you feel we might get to the 17% target. Thank you.
Yeah. Thanks, Jerry.
So we're not putting an exact quantification on the number we are consolidating four warehouses into one so we are ramping up people.
And there are some duplicate costs during the quarter.
And so those costs are a bit of a drag in Q1, but ultimately it's a project. We're really excited about Tom I was just there on Thursday actually.
The level of automation, we put in that warehouse is really impressive.
And we think it'll be a real big net benefit when it comes through the business cases, very solid so its a great investment to make.
We feel good about it but we're just carrying some extra cost at the minute in terms of the push towards 17% as we highlighted we do think that there is a step up in revenue here going forward. We've got a lot of inventory that's landed.
We'll move that through.
To continue to see good operating leverage and so I think we'll see start to see some meaningful progress towards that number.
For the quarters remaining of the year.
Thanks very much.
Sure.
The next question is from Jacob bout with CIBC. Please go ahead.
Good morning.
I have some questions here around supply chain inventory position and free cash flow.
So a nice build of inventory during the quarter, how comfortable are you with the current inventory levels.
As you think about meeting demand reflected in your current backlog and our supply chain issues shown any improvement at all.
Yes. Thanks so.
Supply chain, obviously continues to be an industry wide challenge I think we've put ourselves in a good position.
Proactively over the last 18 months to make sure we're in a good spot day between our ordering.
Patterns and how we use data to help with that but also just the timing of our backlog and when we built some of the large orders.
And such that a lot of that is arriving now.
So we feel like that's in a good position, we're busy working on that equipment through the workshop and getting it in customers' hands and so we do think it will be a solid cash to cash from time that inventory.
Inventory arrives till we get it in customers' hands and so.
Of course, there continues to be challenges, there's been challenges for the last several quarters.
There are certain pockets of improvement, but certain pockets of challenge, we do think it's going to be with us.
Through the year, but ultimately we feel like we're in a good spot with some really good dynamic tension between new used and results through that period, we'll continue to invest across that chain.
Get equipment and parts in customers' hands.
And then as you think about EBITDA and free cash flow conversion.
Heavy capital investments in the quarter, maybe comment on your expectations for the remainder of the year into 2023 as far as free cash flow conversion.
Yeah.
Yes, so certainly that would this as kind of a more of a norm normal earlier built we're in spring selling season now.
The substantial majority of the inventory that arrived as for backlog so that will work its way.
Through quickly.
That said, we are seeing strong growth.
We'll continue to invest to make sure we've got the inventory we need and so through this up cycle period, there can be lower conversion ratios.
But certainly we will work it through the system and really focus on turning it through quickly.
Thank you.
Jacob.
The next question is from Michael <unk> with Scotiabank. Please go ahead.
Hey, good morning, guys nice quarter.
My first question is on product support.
Now in the last three quarters double digit youre far exceeding that 8% that I think you called out of the mid cycle.
Canada in particular looked quite impressive I'm, just thinking about the sustainability of that growth as we consider share gains in construction and mining span and presumably some price inflation in.
Whether you can sustain double digit growth for the balance of 2022, given the tougher comps.
Yeah. Thanks, Michael from Investor Day last June we're certainly seeing some good solid momentum.
Higher pricing levels, but the majority is fundamental volume improvements I think in mining we've seen starting in Q4, a real increase in our customers' willingness to spend and prioritizing effective maintenance and that's going really well, but also on the construction side I mean, there is some real fundamental improvements in terms of.
Our rebuilt proposition across a wider range of models, providing very compelling financing and warranty associated.
Associated with those rebuilds and so I think there's a good chunk there that's.
Market share gains in a really good value proposition to customers and so.
We think that Theres still good momentum.
Sales funnel is really strong.
So we're really pleased with the progress and expect that to continue.
Yes, Alex good no doubt.
And then a question on the other operating costs.
It came in at $18 million for the quarter I think that's a multi year high I think you flagged some consulting costs related to energy transition strategy can you speak about maybe the go forward amount in terms of cost and providing maybe some of the elements to the energy transition strategy, if there's anything incremental there.
Yeah, No I think there are some elements in this quarter of that.
We are typical of the run rate. So I think that would come down in the fullness of time.
And there was some FX and then other costs within there that can go up and down but from an energy transition perspective, it's something that we're spending time on working through.
Fuel and Comtech strategy, but more broadly just seeing a lot of opportunities, particularly in South America around the energy transition what customers would like to do in terms of renewable energy sourcing and the potential of them is ultimately a net exporter. So.
Yeah, that's something that we spend a lot of time on.
And as well I'll just add that there is out there in that category, but you know the stock being up 18%.
Q1 also adds too so.
<unk> quarter, we would expect to see that be a lower number.
Perfect. Thanks.
Thanks, Michael.
The next question is from Brian <unk> with Raymond James. Please go ahead.
Yeah. Thanks, Good morning, just.
Looking to get more color on the hydro acquisition and maybe if this is a model that you could envision expanding into into other regions.
Yeah, absolutely is the business that we really like it really helps customers on their uptime. For example, if somebody's got a down excavator with a hose issue from call to fix can be two to three hours.
And customers really value that and help with uptime and they do a really good job in dense areas like the U K.
The first move will be to make sure that we've got the best possible proposition in network within the U K I think theres very immediate opportunities within Ireland, where they are today, but we are.
Ultimately you could see a fit longer term for some of the more densely populated areas in Canada as well as South America.
Okay. Thanks, and then you provided some numbers around the adoption of the dual gas money and engines.
Could you just frame this in the context of your expectations and then maybe some of the early feedback on how it is meeting customer needs.
Yeah, absolutely I mean, this is a product that we've offered for a while certainly we didn't see a lot of capital spending for a number of years on the oilfield service side. There was a shift from tier two to tier four engines as well as some real capital constraints, but certainly as that sector ramped back up and we're certainly seeing signs of strength with $8 gas.
Over $100 oil certainly theres, some more spending in activity going on and so from from two years ago or even from Investor day that ramp backup has been higher than we thought.
At that time, but certainly it makes sense given the environment and it's a great product and we had a demo in Calgary last fall.
It's an engine that and Ralph diesel and then while working switch to natural gas and hydrogen without losing power load. So it's a great product cats heavily differentiated and.
We're glad to see more orders in that space.
Thanks, that's it for me.
Great. Thanks, Brian .
Once again any analyst who has a question you May press Star then one on your telephone keypad.
Our next question is from Michael Cho with National Bank Financial. Please go ahead.
Hi, good morning.
Great. Thanks.
I just had a question in terms of.
The ability to do rebuilds and specifically in Canada.
We're hearing some people on the ground.
Labor availability is quite tight I'm, just curious to hear what you are using.
Thanks.
Yes, absolutely there is definitely a competitive market for talent, there's lots of growth across the industry.
We think we've got a great employee base a lot of long tenured employees and loyalty. There. So I think we've got a good solid base. The work we've done over the last few years to get the right people and the right branches for the most leverage and adjusting our shift patterns has certainly helped us be more productive through this cycle and getting more cost on and some of them.
Lower cost jurisdictions.
That said, we would certainly like to be growing our technician count. We're certainly working on that targeting that and it's certainly competitive to get top people.
So we are spending more time on the apprentice program and thinking long term and we're really happy through 2020 in 2021 to keep that program going and have still have 25, our practices going through and we'll continue to build up that program. So definitely a tight market.
Like the nuts and bolts of what we did around Triple R. Theres certainly help us maximize through this period and.
We still think we've got capacity.
For growth from a facilities perspective.
Certainly, adding and retaining and motivating our employees will be key for the continued growth here.
Okay. That's helpful and just in terms of you Havent increased shifts in the facilities or can you share any information there.
Yeah, absolutely so in our in our distribution diamond between Calgary Regina.
Edmonton in Kamloops, we've got the continuous shift over the last couple of years.
Adjusted shift patterns.
At week on week off shifts for a second shift. So we've certainly added capacity through that piece of the network for the strategy and obviously continue to be at mine sites around the clock. So.
That's part of the Triple our strategy and we've been building those nuts and bolts.
And the network approach over the last few years and Thats, certainly, helping us as we grow at an outsized level here.
Okay makes sense and then just one last one if you don't mind in terms of Chile.
The rebuild opportunity there just curious if there was any update on that strategy.
Absolutely. So I think as I mentioned last call our SVP of mining from Canada for the last four years moved back to Chile, a year ago, and so he's very familiar with our rebuilt strategy in the oil sands and you've been talking to customers about that and Theres definitely a lot of interest in and in some early wins, but.
The scale that we see in the oil sands I think that takes some time, but there could be a really good match here with some people.
Looking to get one more life out of their current equipment.
So I would say there is a massive uptick to date, but certainly a lot of interest in some early success.
Okay very helpful. Thank you so much.
Okay.
The next question is from <unk> Khan from RBC capital markets. Please go ahead.
Okay, great. Thanks, and good morning, just I guess a longer term question, particularly on the mining side I guess over the last year or two or last year, there's been a bit of a step function change or in the outlook kind of copper and some of these green metals I guess as you talk to your customers do you see the potential for some of these new mine developments or just use bigger.
<unk> to take hold regardless of what happens to the price over the next 12 to 24 months or do you think you know.
Customers are going to wait for an outlook or are we going to go ahead with these projects. If the price remains supportive just want to understand if this sort of you know with new demand from kind of a green economy changes that.
Outlook for your customers, whether it's Chile or anybody in Western Canada.
Yeah, Hey, it's Scott.
So what.
I think most of our customers are pretty constructive on the commodity price.
In the case of Chile, it's copper and that plays into the energy transition when you think about.
Chilean how well it's placed from a copper perspective, there are a lot of our big global mining customers are really constructive on Chile, I think the one thing that's holding it back right now is the political uncertainty around the constitutional process and.
And to me, that's kind of more important than the price issue.
I think we will get through that in the next six months that I think process is coming to a head in September .
I sense is a lot of the radical proposals that sometimes I read about it in the press are not going to be included in that that referendum.
And my sense also especially in population.
They are changing a little bit better views on.
That overall process. So I am hopeful that rationality will prevail on that constitutional process. So that will I think open the gates too.
Customers, taking a more constructive view on new mine development now that all being said Theres a lot of activity as you see from our results in Chile, even with that uncertainty. So when you think about <unk>. When you think about codelco. When you think about BHP and Escondida I mean, theres a lot of activity ongoing but I do think it will help significantly when we get through that political uncertainty.
Okay. Thanks, and then just I guess, one on the kind of cash for working capital side. It looks it looks like you've got a hold of a bunch of inventory this quarter and what should we expect on kind of the investment whether it's working capital or where that capital might be deployed for the rest of the year. It looks like you've renewed during therapy as well.
That's on that at this point in the cycle.
Yeah, I think you'll just see continued a balanced approach.
As you saw we grow the dividend for 21 consecutive year. This year, we're proud of that.
And continue to look at M&A, we like acquisitions like Hydro clip and we'll continue to look for similar kind of premium businesses that help our customers drive uptime.
Will compete with share repurchases.
But I think it's a balanced approach.
Great. Thank you.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Amanda Hoffman for any closing remarks.
Thank you operator.
Before concluding our call I'd like to remind everyone that our annual meeting shareholders will be held today at five P. M Eastern time.
To join the meeting online is available on the Investor section.
The relations section of our website.
This concludes our call. Thank you. Thanks for your participation and have a great day.
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