Q1 2023 Finning International Inc. Earnings Call
In our supply chain continues to improve it doesn't get any worse.
There are still some there are pockets.
Ill close to being fully recovered.
Excavators would be a good example of that.
And there are pockets that are nowhere near back to pre pandemic levels. So we continue to be agile and thoughtful about how we manage through that situation apply in all of our resources, whether it be rebuild of rentals to satisfy the customer demand.
And obviously using our balance sheet and to make sure we're carrying in the appropriate levels of inventory.
Two to ensure that we can support our customers effectively.
Continue the growth in the business and the market share gains. So I would say, we're optimistic for the remainder of the year and around supply chain.
But I will say that we're not yet bucket normalized levels and that's why you're seeing the elevated working capital levels things are just a bit slower to get through the system right now, but we're happy to do that in the spirit of winning additional market share.
Okay. That's all for me thank you.
Thanks Shirley.
The next question is from Jacob bout from CIBC. Please go ahead.
Good morning.
Good morning Jacob.
Another quarter of solid product support growth, maybe you can comment on the sustainability of this growth.
What the growth in installed base looks like in both Canada and South America.
Yeah. Thanks, Jacob I mean, we feel really good about the momentum of where of course thats been targeted effort in partnership with Caf II.
Look to gain back share of the aftermarket I think we've had success there.
<unk> also been supplier cost pass through which year over year was fairly substantial and so we feel good that <unk> got good momentum. There are service work in progress is up our book of rebuilds as strong as we can.
Hey, good continued momentum there and so healthy chunk of it would be price, but again, another double digits would still be volume and so we feel good about that and there is good strong continued momentum and so some of it is that momentum and continued strength in the market and some of it is the actions we've taken to wind back chunks of aftermarket share so feel good about that overall.
Ill point, you towards my remarks earlier today, where.
Adding significant capacity to our program support buys so.
New Kamloops facility, which was designed specifically to bring the work to where the people are for.
For those of you don't know I don't need to Canada is still but Kamloops is a terrific place to live and work into for young families too.
And to rise to raise a family and we've been very pleased with the.
The ability to attract technicians to that region.
So a lot a significant number of buys and warehousing capacity.
And component rebuild capacity for the smaller components that don't go through OEM, but we've also been making considerable investments.
To increase the capacity.
And then like I said last week, who was in Antofagasta with Juan Pablo and we put we're putting together a five year plan to expanding capabilities and the Antofagasta region.
To capture.
The optimistic our optimistic view of the outlook for copper production. So it's not just what's going on right now we're planning for the future in adding capacity because we're we're very confident in the outlook to retain that level of product support business.
Okay.
Maybe just a secondary follow up question here.
How the booking of ancillary parts and service business.
Associated with the new equipment shows evolved over time.
Typically what is what does this look like in a recession and what could be different this time.
If we are heading into a recession here.
The question just around product support volumes.
Yes, I mean, you clarify the question Jacob what do you mean by absolutely right, Paul Sorry, Jacob Yes, the ancillary parts and service business. So if you sell a new piece of equipment.
Yeah.
Are you seeing more parts and service business associated with that new sale than you have historically.
And then how does that change in a recessionary environment or your clients.
Doing more work or have things changed I guess.
Yes, So I think I understand your question Jacob happy to follow up.
If you think about the equipment, we sell right now more than 80% of that equipment in some cases, 90% is now gone with the CVI.
We're spending a lot of time thinking about this as we look forward and we spoke to growth by design or more resilient growth.
I will <unk>, our subscription there a recurring revenue stream and.
They are pretty sticky because to have.
CVI Youll make any decision on who maintains a piece of equipment for certainly for the first three years, but we've got a really strong focus on years four to 10 now for the CVA. So you'll make your own decisions around your own workforce.
In terms of that resource in that too.
To finish or to any dealer to do that so I would suggest that the long term view is that the product support revenue around equipment population is stickier than it's ever been.
So we would be hopeful that would continue as we move forward and of course, if you did see any kind of softening in the market, which will not.
Now.
Some of that capacity that would have been with our customers.
To replace our capacity has gone away.
And so we're not we haven't seen it yet, but I would hope that it's it's.
A lot more resilient.
Probably the U K is a good example of that model.
Does that answer your question Jacob Yes, no thats very helpful. Thank you.
Thank you good thank you.
The next question is from Yuri Lynk from Canaccord Genuity. Please go ahead.
Good morning, guys.
Kevin you sound, a little less cautious.
And then you did last quarter.
Especially on the construction outlook.
Apart from the obvious positive of the backlog in service.
All of that I mean.
What's kind of changed here in the last few months and that's.
Is that something that's that's been reflected in your conversations with your customers.
Yeah sure. So I mean, three months is a long time and I appreciate the question here.
All of these debt.
We were a little conservative on the last global.
Looking down in a long run way against very.
Very tough comps given the performance of the business in the second half of last year.
As we work through the last three months conversations with customers outlook supply chain is improving.
Chilean political system collects.
Political situation.
Royalty discussion moving materially in the right direction.
<unk>.
It just made us feel better about the outlook I mean, you guys were very fortunate in that we have a kind of U K.
What is the Canary in the mine if you like.
It gives us a balanced view of what's going on in Europe .
Okay.
The order intake for construction equipment.
I would describe it as stable knockdown, notwithstanding we had a record year last year.
But what I'm, particularly pleased with side of the.
They were little more optimistic about stable construction market in all territories.
Canada is it keeps going from strength to strength, but more particularly pleased with is the power systems growth in all three regions, we're leveraging their expertise in the UK and Canada and South America.
And any kind of declines that we're seeing in the construction or on a year over year declines in.
In backlog I'll be more than offset by additions in power systems in <unk>.
Our systems business is a very secure its more resilient and obviously less less prone to a recession.
And we get good truck part of support business from that.
From a lot of business as well so I think more construction business is all.
I'll be describing the stable versus systems.
With the rest of the business is getting better as well so that makes us feel.
More optimistic about the hull.
Got it makes sense last quick one for me can you quantify the cost savings associated with the actions taken in the quarter.
Yes sure here so.
These are administrative and fairly senior position, so it's a little longer payback than maybe an average restructuring. So it's more kind of nine months payback. So.
Cost level that we outlaid.
We think that it should be within nine months kind of fully paid back and then sustained from there.
Okay. Thanks, guys.
The next question is from Michael <unk> from Scotiabank. Please go ahead.
Hey, good morning, guys.
First question I had was really in line.
Hey try to focus in on the cost structure of the business that you guys are talking.
Being more variable flexible so I'm just wondering if you can give us a sense of how SG&A breaks down.
Variable versus fixed today versus how it has.
Historically and just how we should think about.
Call it the incremental Incrementals and Decrementals is.
I guess going forward as you manage the business to manage growth.
Yes.
It would probably change a little bit by market condition, Michael but if you look at a lot of operating strong operating leverage we've had really for the last two and a half years, you can kind of see quarter by quarter and pretty clearly in the bar charts.
That's a pretty solid gains on the GP side that gets offset about a third by SG&A and so we do see continued momentum and so we think despite some of the inflationary increases we are working on productivity. So we'd like to continue that type of operating leverage.
And you would depend on the shape and the pace of any any slowdown, but see kind of the opposite the other way of course, we take additional actions to offset more but those are they're up opt.
Operating leverage that we see an unexpected.
And all I would add.
We're just changing the mindset here so.
We're trying to make sure that we've got more of our revenue contracted or visible in our cost base and so.
A good example of that would be one we're entering major contract discussions now for procuring goods and services.
All the very best.
<unk> terms and service levels from that supplier, but more importantly, now we want flexibility in the contract such.
Such that we can withstand.
Highs and lows in our business levels without being penalized for higher prices oil per service.
Building flexibility into everything we do is become in a mindset shift finian.
Thanks for the time, thanks, guys.
And then.
Maybe just a simplistic question I guess I'm, sorry about the Q2.
If I look at the years, where you've had.
Quote unquote normal seasonality EBITDA has grown about 10% to 20%.
Q1 into Q2.
Obviously, a strong start to the year, but I was wondering if there was anything that we should consider that might negate what tipped.
Typical seasonality has been to the business.
No I think we have seen from our working capital injection in Q1 that would be kind of a normal type level. So we're seeing fairly normal seasonality you can see the backlog build.
Spring selling and delivery season, so we see continued strong momentum.
Of course, there is inflation year over year, but were working to offset that but otherwise we see as kind of typical seasonality.
Great Alright, guys. Thank you.
Okay.
Thank you Michael.
The next question is from <unk> <unk> from Bank of America. Please go ahead.
Hi, good morning.
Just to start off on.
The order intake and how thats trending into 2024, and maybe what the indicators of those orders look like into into next year.
Yes.
Yes sure.
We're really pleased with our order intake in Q1 so.
Quarter over quarter, but was up 25% of that is the seasonality that Greg just mentioned in our order intake in Q1.
But we're particularly pleased I mean, I'll highlight just a number of times about power systems ordering tight was above 60% and that was quite well spread across the.
Three the three regions.
Yes.
And that's a good indication for Afib Palo systems revenue and order backlog is now stretching into 2024 or so it would be yes.
That's why we're really excited about the diversification that.
It's resilient.
But also it gives us a long runway and more visibility into our into our revenues. So so for sure we'll be confident about taking us into the 2024 period finally mining really in all reality mining.
And in order intake, which.
It was up 10% quarter over quarter.
84% year over year, we continue to see the backlog build in mining and for sure. Those deliveries are stretching into 2024 and as I mentioned in my remarks, we expect that.
<unk> has significant opportunities to the backlog in Q2.
They won't be delivered until well into 2024.
<unk> is more agile.
I said it.
We're optimistic and encouraged by the stability, we're seeing in the construction business is potentially as Greg mentioned in his remarks we.
We've seen particular strength in mining contract and this is the enabling works.
<unk> for increased mining activity. So not only is it a good sign for our construction business. It's also a good sign that.
People are mobilized in South America.
Four increased.
Changes in production, so but contribute construction activity is more agile and so but we do have as I mentioned supply chain. We do have certain models that allow for delivery in 2024.
And so I would say that some of our.
All of our business is stretching well into 2024, we still expect.
Around 80% of this backlog to be delivered this year.
But any added CNBC, which we're confident I have seen in Q2 that.
That'll start stretching into 2024 of them.
Understood and then you mentioned the <unk>.
Scale of quoting RFP requests is up significantly can you frame the scale of that in dollar terms or versus prior years, what it looks like.
Yes, I think I would just classify it as a good momentum, but also just looking a little further out.
We'll start to get clarity around what the mining royalty structure would look like.
You'll start to get quotes for for one or your years further ahead, but it's just a good indicator that theyre starting to wrap their heads around starting to commercialize starting to budget and plan for expansion. So.
Yes, that's a solid pick up despite the increased activity from last year.
But just an encouraging trend, but also tone and I would say yes.
To answer this question a few times about.
The outlook for commodities in the Super cycle, and I would say that we don't we're not planning for.
Not expect and we are hopeful not to see a super cycle, we really would like to see this be a sustained and <unk>.
Well thought through.
Expansion of activities.
I think people resources.
Hello.
Government and Investor license means that they are awesome.
Okay awesome.
Some things that mainly are holding onto the reins a little bit with this.
This commodity.
Cycle, but I think that works really well for us and it helps us to build the business sustainably and.
And support our customers more effectively so.
So it's a longer term view.
Got it thank you so much.
Sorry.
The next question is from Brian <unk> from Raymond James. Please go ahead, yes.
Good morning.
Thanks, Brian .
The last few years.
Likely disrupted the average age of our equipment in the field.
Could you discuss maybe the age of fleet from your point and are you still seeing extended age fleet does that really differ between regions.
Yes. So the average age is 11 to 12 years in Canada 910 in South America.
And for sure equipment is being extended out.
A number of reasons.
Uncertainty in the.
And the outlook in Chile.
And I think this.
The lack of capital to invest a lot out of Christmas healthy balance sheets, but not all being very thoughtful about that capital and get more out of their current investments and so.
Rebuilding equipment, the economics around rebuilding equipment.
It continues to improve.
Taxes, the attention of customers and.
We continue to see that business grow.
People more opt to opt into that that way.
Increasing that fleet production in that fleet capacity.
We see in Chile to a lesser extent.
You see more incremental adds in Chile, but it is it does happen in Chile, and it is growing in Chile, but not to the same extent that it does.
In Canada.
But equally you can see in our mind, so I don't want to.
Leave the impression that miners have not invested in new equipment, you can see in our backlog is $2 7 billion in the backlog and around 40% of that is mine and thats, primarily mining trucks with some ancillary equipment, but it's primarily mining trucks out.
That's the most <unk> delivered into our two territories, probably for nearly 10 years. So.
It's not huge opportunity obviously with <unk>.
We've talked about the <unk> opportunity, but there's lots and lots of incremental items going on in the industry combined with effective rebuilds as well. So all these incremental adds that guidance into the into the mining territory, we're not seeing.
The older assets come out they are being reworked in rebuilding staining tariff, which is fantastic for our business model.
Okay. Thanks.
Might answer part of the next question here, but you mentioned gaining your portion of market share on the product support side, maybe could you discuss how that differs regionally and maybe where there is opportunity for further improvement.
Sorry, Brian did you say.
<unk>.
How we view market share in products or in the different regions.
I didn't quite get the question, Okay. So I would say yes.
I mean broadly we don't excited yes broadly our.
Market share for the aftermarket opportunity in mining is considerably higher than it is in construction.
But construction is the biggest area of opportunity and growth. So a lot of the growth that you're seeing in our produce oil growth is coming from the construction sector.
Well, we've got the biggest wound while what we call lost opportunity.
And then how the system is it makes really so on the oil and gas side. It will build that with mining in terms of I'll call. It a dominant market share opportunity in the aftermarket.
In oil and gas for example in the power systems segment and then.
In the electric power generation segment, it would be very high as well, but obviously less.
Less parts for that depending on whether it's pattern or prime power of its firepower that with mining and oil and gas.
If it's if it's just standby power than the product support opportunities less but we reflect that in our in the way that we sell the prime product.
We do the comparison between.
What's the aftermarket opportunity when we're when we're making those proposals so outside of that runway.
And as long as the best in construction and particularly as you come down the product size and customer right. So we've got that.
On an absolute focus now on what we call <unk>.
The more retail segments, which is crystal down less than 20 machines.
And that's where the team of doubling down to make sure. We sustain this level of product support growth in construction that <unk> seen over the last two or three years.
Okay. That's great color that's it for me thanks.
Thanks, Brian .
The next question is from Saba Hot Khan from RBC capital markets. Please go ahead.
Great Thanks, and good morning.
Bunch of color on kind of the mining outlook and I'm. Just curious if you kind of look closer at that market. The demand that youre seeing the fact that sustained even with the macro backdrop, where it is.
Just your customers are.
Investing for that long demand outlook with long demand.
Visibility for copper is at the political situations settling a little bit.
Are they taking a long term view of what is sort of their decision making criteria at this point given all the moving pieces.
Yes.
I mean.
All right, let's say when we look at our mine in our conversations with our customers very well.
Almost no macro description and those discussions I mean, the mine is the bottom of the commodity price is strong the demand outlook is good.
And so we're not it's kind of thoughtful incremental production rises.
To lots of customers and you can see that.
The company's results Nobody's talking about.
Managing through a macro situation in the commodity sector right now, which we spoke to for the last couple of calls here.
Providing feeding with some shelter.
But where the companies might not have.
So I wouldn't size or invest in beyond the macro I would say that they are not necessarily seeing the effects of that macro and the strong commodity price and the healthy.
The sheets means that they're they're very focused on.
Productivity and I would put Brian .
Great and then just kind of looking.
In terms of your capital allocation strategy at this point obviously.
I think you double the size of the <unk> relative to before can you maybe just walk us through how you're thinking about capital allocation at this point. Thanks.
Yeah. Thanks, David So happy to increase the dividend again on a steady basis. This year. So 22 years neuro and so we feel good about that we'll continue to make that an area of focus.
We are focused on generating cash at this point you know seasonally in Q1, you will consume cash and then we go through selling season here and pivot to positive and so we'll have to see how the full shape of the year goes but.
We expect to have considerable cash to allocate and you highlighted last quarter, we will prioritize.
Reducing leverage through the fullness of the year, but we expect to have additional capital to deploy in.
Thanks, again steady is a good way to do that and.
So that will be an area of focus but also the share price.
Okay and then just one last quick one this is just a hypothesis, but if you think about the tight supply environment and the way it's impacting the dealers and you talk about your market share in the aftermarket repair business.
Does this tight supply environment favor dealers like such as yourself that might be better able to secure cap parts and maybe get more of the aftermarket business and thats something that could be maybe a.
A sustainable benefit here do you find that it's something that will continue to help or is that not a factor at this point.
Okay.
I think we've had a good.
Supply chain has been challenging for the last 18 months, we've definitely made sure we had enough resources around us to smooth that out on a relative basis. I think we performed well I think customers who have found alternatives over the years the supply chains might not have held up as well through that period. So we feel good that we provide good service levels. Despite the challenges.
And I think we've learned some some loyalty through that period and so we feel good about that and we think we think some of that will be sticky over the long term as people appreciate the kind of full cycle capabilities.
Great. Thanks very much.
Thanks, Kevin.
Once again any analysts to ask a question May Press Star then one on your telephone keypad.
The next question is from Maxim <unk> from National Bank Financial. Please go ahead.
Hi, good morning, gentlemen.
Hey, Matt.
I think in the beginning of the call.
Talking about capacity expansion specifically in.
In Latam I was wondering if you don't mind maybe.
Quantifying quantifying sort of the envelope spending firstly and then secondly, what does it mean in terms of both I guess absolute revenue generation, but perhaps your ability to meet the debottleneck and do more product support in that geography, just just maybe any thoughts on that.
Thanks.
Yes sure.
So this is some of this is what we want to share.
At our Investor day, and that's why we're encouraging.
Investors to come spend some time with us so we can.
We're very proud of our capabilities and capacity.
And our people.
In the region and I think Youre seeing that firsthand is the best way of.
Of understanding the level of investment.
Professionalism, we have in the region.
In terms of the level of investment required to achieve that.
Expansion of our spoke too actually we have some opportunities in <unk>.
In Canada, we Gregg and I put together with the team here, we put together a long term network strategy in Canada.
And the common loops Cologne.
Campbell River.
We've opened.
Five branches in the last two years.
We have some opportunities.
Our low base right. So we put together a very broad plan.
And there are some lanes and I haven't seen that some capital.
Inflows on some capital outflows, but we're very happy with how that works and it's really coming to its conclusion, there and I think youre seeing that in.
In the product support growth that Youre seeing.
In Canada, it's in.
And able to capture why more product support same applies in South America. So we've got some facilities that are less used.
And some opportunities too.
Find efficiencies and in some areas of South America, and then reinvest that money back into the Antofagasta region, which is.
Ultimately the big engine room of all.
Of the South America with Chilean operations. We've also made some investments in Mendoza and northern Argentina to capture.
Opportunities that our CLO.
In that area.
It's not at the expense of other promising really is realigning our network.
To support the market, we see today.
Making sure they have a great.
<unk>.
Great program to work on coal future proof.
And competitive today and Thats part of this work to make sure that we've got the right facilities, we need today, but we are investing in the facilities for the future in terms of quantifying.
The final product support that will give us in South America, we're hopeful to see comparative growth year after year.
And we've already made commitments.
At our past Investor day of high single digit product support growth moving forward.
Our our view and our outlook of that Hasnt changed and so.
The network and the investments also support that level of growth to the next level.
Yes, 100% and then actually maybe if you don't mind if we.
In the same geography.
Discussions around.
More government involvement on the lithium side of things just curious what are you thinking in terms of.
Potential opportunity in this.
Market whether thats.
More positive.
One negative from your perspective.
Given all these discussion points. Thanks.
Yes, I'd say, it's early days Maxine pretty fresh news.
So the first thing I would say that lithium is a net incremental business floral side. So that's a good thing.
The general sentiment when I was down there last week with the team and we met with a couple of customers as well in this area and is that.
Government support for government involvement in the expansion of the lithium.
Opportunities in Chile.
It's actually a net positive because it means that the projects will get the go ahead and get the investment and now they want to be part of the lithium future.
Julia and they see that as a.
A big value driver for them.
I think a lot of people inside of government involvement.
In an industry is not ideal.
But they have they kind of have experienced with codelco.
So the general sentiment I got last week.
Well at least these projects will get going and we'll participate more so hopefully that helps give you better color from last week.
Okay No. That's super helpful. Thank you and then maybe just one last one for Greg if it's possible in terms of how we should be thinking about noncash working capital.
As the year progresses, and maybe can you provide a bit of a range or.
Some thoughts on that front.
Sure.
Be dependent on some of.
The backlog build we do have quite a few quotes outstanding that could straddle year end.
But overall, obviously, we've been quite profitable for the last two years and the cash has been a net investment.
At some point these growth rates will slow a little bit in the cash flow will come through so we do think this is more typical seasonality as I talked about earlier. So we did inject capital in Q1 that will pivot sometime in Q3, our middle of the year to positive and we expect to be.
Fairly strongly free cash flow positive in the back half of the year and that will give us some good positive choices to make on capital allocation.
Okay, that's great.
As we've said before we think we converted 50% of EBITDA over a full cycle.
We're continuing to see some pretty solid growth.
But in the fullness of time, we expect to deliver that cash.
Okay, that's great. Thanks.
Thanks, Matt.
This concludes the question and answer session I would like to turn the conference back over to Gregg <unk> for any closing remarks.
Great. Thank you. This concludes our call today, thanks for your participation and have a safe day.
Thank you.
This concludes today's call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Okay.
Yes.
Okay.