Q3 2023 Finning International Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the Sydney International Inc. Third quarter, 2023, investor call and webcast.
Speaker 1: Thank you for standing by. This is the conference operator. Welcome to the Fimming International Inc. 3rd quarter, 2023, Investor Call and Webcast.
Speaker 1: As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. Analysts who wish to join the Question Q may press star then one on their telephone keypad.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation there'll be an opportunity to ask questions analysts who wish to join the question queue.
Then one on their telephone keypad.
Speaker 1: Should you need assistance during the conference call, you may signal an operator by pressing star then zero. I would now like to send the conference over to Greg Palestruck, Executive Vice President and Chief Financial Officer. Please go ahead.
Should you need assistance during the conference call you May signal, an operator by pressing Star then zero.
I would now like to turn the conference over to Greg Palace, Chuck Executive Vice President and Chief Financial Officer. Please go ahead.
Speaker 2: Thank you, operator. Good morning, everyone, and welcome to Finnings 3rd quarter earnings call. Joining me on today's call is Kevin Parks, Park President, and CEO .
Thank you operator, good morning, everyone and welcome to <unk> third quarter earnings call. Joining me on today's call is Kevin parks are president and CEO.
Speaker 2: Following our remarks today, we'll open the line to questions. This call is being webcast on the Investor Relations section of Fening.com.
Following our remarks today, we'll open the lines of questions. This call is being webcast on the Investor Relations section of spinning Dot com.
Speaker 2: You've also provided a set of slides that we'll reference during our prepared remarks. The slides are posted on the
We've also provided a set of slides that we will reference during our prepared remarks.
The slides are posted on our website as well.
Speaker 2: An audio file of this call and the accompanying presentation will be archived. In addition, in September , we hosted our 2023 Investor Day in Antifagasta Chili, which laid out a refreshed strategy and key objectives going forward.
An audio file of this call and the accompanying presentation will be archived.
In addition in September we hosted our 2023 Investor day, and after the gas to Chile, which laid out a refreshed strategy and key objectives going forward.
Speaker 2: On a website you can review our slide presentation as well as the full webcast of our investor day.
On our website you can review our slide presentation as well as the full webcast of our Investor day.
Speaker 2: Before I turn it over to Kevin, I want to remind everyone that some of the statements provided during this call are forward-looking.
Before I turn it over to Kevin I want to remind everyone that some of the statements provided during this call are forward looking.
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 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 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 MDNA under risk factors and management and forward-looking information disclaimer.
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 under risk factors and management and forward looking information disclaimer.
Speaker 2: Please treat this information with caution as our actual results get different materially from current expectations.
Please treat this information with caution as our actual results could differ materially from current expectations Ken.
Kevin over to you.
Thank you Greg good morning, everyone.
Speaker 3: Thank you, Greg, and good morning, everyone. And our recent investor day in Chile, we presented our refreshed, strategic priorities. I'll speak to our quarter through those priorities. And as Greg mentioned, we do have the webcast and the presentation in the investor section of our website. And for those of you that haven't had chances to see and hear the presentation, I'd encourage you to do so. Following my remarks, Greg will provide additional details around after the quarter results.
In our recent Investor day in Chile, we presented our refreshed strategic priorities I'll speak track water through those priorities and as Greg mentioned, we do have a webcast presentation in the Investor section of our website for those of you that haven't had a chance to see and hear the presentation I encourage you to do so.
All of them in my remarks, Brad will provide additional details alright, that's third quarter results.
Please turn to slide two.
Speaker 3: We delivered another strong quarter in Q3 through strong execution.
We delivered another strong quarter in Q3 with strong execution.
Driving our product support business remains a primary strategic objective.
Speaker 3: Driving our product support business remains our primary strategic objective. Product support builds customer loyalty through greater integration with our customers and the performance of their equipment. It is our biggest value driver, the largest opportunity for profitable growth and the most resilient part about business.
Product support builds customer loyalty through greater integration with our customers and the performance of their equipment. It is our biggest value driver the largest opportunity for profitable growth in the most resilient part of our business.
Speaker 3: We are captain, Gratis, share of product support across the full AFFET life cycle.
Yeah.
We are capturing greater share of product support across the full asset life cycle.
Speaker 3: Growing customer value agreements, expanding our rebuild business, and strategically growing our equipment population in our territory.
Growing customer value agreements, expanding our rebuild business and strategically growing our equipment pocket type of population in our territories.
Speaker 3: Optimising our operating model and culture around full cycle resilience is a new explicit strategic object.
Optimizing our operating model and culture around full cycle resilience is a new explicit strategic objectives. This includes building more contracted revenues and costs.
Speaker 3: This includes building more contracted revenues and costs, finding ways to variableize our cost structure and increasing working capital for loss.
And Mike the variable cost structure, and increasing working capital velocity.
Speaker 3: Building greater resilience into our business will provide more security and certainty for our employees.
Building Graco resiliency to our business will provide more security and certainty for our employees.
Speaker 3: Better support for our customers, and more reliable and consistent returns for our investors. Finally, at Feningwood Bill.
Better support for our customers a more reliable and consistent returns for our investors.
Finally, we are building a sustainable growth platform.
Speaker 3: In addition to driving product support, we are excited about growing our addressable market in used equipment, rental and power systems.
In addition to driving product support we are excited about growing our addressable market and used equipment rental and power systems.
Building I used equipment capability is a great way to create increase the installed base and our markets.
Aftermarket opportunities.
Also helping build full cycle resilience.
We plan to grow our rental business and increase our customer base, specifically around retail Christmas.
Speaker 3: We plan to grow our rental business and increase our customer base specifically around retail costs.
We also are also increasing our capabilities in both prime standby power solutions as well as capacity.
Speaker 3: We're also increasing our capabilities in both prime, standby power solutions, as well as capacity power to support the growing demand for electrification.
To support the growing demand for electrification.
Please turn to slide three.
All regions delivered strong performance in Q3, while managing through some unique challenges.
Speaker 3: Our regions delivered strong performance in Q3 while managing through some unique challenges.
Speaker 3: The Western Canada, Walthars impacted many of the communities in which we operate. The safety of our employees, their families and their communities became our primary objective at times through this summer.
Unless in Canada wildfires impacting many of the communities in which we operate.
A few of our employees their families and their communities became a primary objective at times through this summer.
In South America, the team he's money into a very difficult operating and economic environment in Argentina right.
Speaker 3: In South America, the team is managing through a very difficult operating and economic environment in Argentina related to the presidential election.
The presidential elections.
Speaker 3: I'm really proud of our teams continue to demonstrate their strength and resilience while providing important support for our customers, being great colleagues and important members of their community.
I'm really proud of our teams continue to demonstrate the strength and resilience, while providing important support Frac Christmas being great colleagues unimportant members of their communities.
Speaker 3: We are pleased with our product support growth, strong operating margins and return on invested capital.
We are pleased with our product support growth strong operating margins and return on invested capital.
Speaker 3: Our revenue mix shifted due to the higher proportion of large mining equipment we delivered from our backlog to increase our install base and product support opportunities.
Our revenue mix shifted to the due to a higher proportion of large mining equipment, we delivered from our backlog to install.
To increase our installed base and product support opportunity.
Speaker 3: Our product support revenue is up 13% year-over year growing across all regions.
Product support revenue was up 13% year over year growing across all regions.
Speaker 3: Since Q3 of last year, we've had 370 technicians globally to support an increased number of product support contracts and strong demand for rebuilds.
Since Q3 of last year, we had a 370 technicians globally to support an increased number of products support contracts and strong demand for rebuilds.
Speaker 3: As we highlighted at our Investor Day, we are very focused on improving our invested capital performance to drive heroic hire and build greater resilience into our business.
As we highlighted at our Investor day, we are very focused on improving our invested capital performance to drive ROIC higher build greater resilience into our business.
Speaker 3: Initiatives underway in each of our regions are in place to drive more efficiency in our operations, higher velocity in our invested capital, whilst most importantly increasing our customer service levels.
Initiatives underway in each of our agents are in place to drive more efficiency in our operations higher velocity and our invested capital while most importantly, increasing our customer service levels.
Speaker 3: Key focus areas include automating our warehouse operations, working closer with customers on planning component exchanges and rebuilds, and increasing velocity in our new equipment preparation.
Key focus areas include ultra, making that warehouse operations working closely with customers on planning component exchanges, and rebuilds and increasing velocity and on new equipment preparation.
Speaker 3: Improving supply chain is a positive for our customers, our operations and our business performance and we are pleased with the progress. Our adjusted return on invested capital was 20.2% in Q3, up 190 basis points from a year ago led by South America.
Improving supply Chinese are positive for our customers our operations on our business performance and we are pleased with the progress our adjusted return on invested capital was 22% Q.
Q3 hundred 90 basis points from a year ago led by South America.
Speaker 3: Looking ahead, we are excited about sustainable growth at Filling. We're building capabilities and empowering people, our people, to drive long-term customer loyalty.
Looking ahead, we are excited about sustainable growth at fitting well building capabilities and empowering people.
To drive long term customer loyalty.
Speaker 3: We expect continued momentum in our business to be supported by robust customer activity across our diverse end markets, healthy equipment backlog that stands at 2.3 billion and a strong demand for service.
We expect continued momentum in our business to be supported by robust customer activity across our diverse end markets healthy equipment backlog, which stands at $2 3 billion.
Demand for service.
From a regional standpoint.
Speaker 3: From a regional standpoint, Chile is a premium business and mobilizing for growth. Our Canada business is positioned for steady growth and has the largest addressable market in each of rental, used equipment and power systems. And our UK and Ireland business is resilient, sharing best practices to drive innovation and efficiency across our company.
He is a premium business and mobilizing for growth are kind of the business is positioned for steady growth and has the largest addressable market in each of rental used equipment and power systems.
Are you kind of item business is resilient shari and breath fresh practices to drive innovation and.
Efficiency across our company.
Speaker 3: I will now hand you back to Greg to provide a greater level of detail on our third quarter results.
I will now hand, it back to Greg to provide greater level of detail on our third quarter results.
Yeah.
Speaker 2: Thank you, Kevin. I'll talk about our third quarter performance in more detail, including our regional results, and I'm turning to slide four. Q3 was another strong quarter. Net revenue was $2.4 billion, up 16% from Q3 2022. We saw strong new equipment deliveries and product support volumes in Q3, led by mining.
Thank you, Kevin I will talk about our third quarter performance in more detail, including our regional results.
I'm turning to slide four.
Three was another strong quarter revenue was $2 4 billion up 16% from Q3 2022.
We saw strong new equipment deliveries and product support volumes in Q3 led by mining there.
Speaker 2: We're also pleased with the momentum in our power systems business across all regions underpinned by strong demand and effective project execution.
We're also pleased with the momentum in our power systems business across all regions underpinned by strong demand and effective project execution.
Speaker 2: EPS of $1.07 was up 9% from Q3 2022. Operating margins were solid, and SG&A's percentage of net revenue was below 17% in the quarter.
EPS of $1 seven was up 9% from Q3 2022 operating margins were solid in SG&A as a percentage of net revenue was below 17% in the quarter.
Speaker 2: The proportion of large lower margin mining deliveries in the revenue mix and higher financing costs were the main reasons for EPS to grow at a slower rate than revenue compared to Q3 2022.
The proportion of large lower margin mining deliveries and the revenue mix and higher financing costs were the main reasons for EPS to grow at a slower rate than revenue compared to Q3 2022.
Speaker 2: But Q3 2022 was also a very strong quarter. We're pleased with the steady growth in earnings year over year.
The Q3 2020 was also a very strong quarter and we're pleased with the steady growth in earnings year over year.
Speaker 2: Q3 free cash flow was at break-even. Internet debt to adjust EBITDA was at 1.8 times at the end of September .
Q3 free cash flow was that breakeven internet debt to adjusted EBITDA was one eight times at the end of September.
Speaker 2: On slide five, you can see changes in our net revenue by line of business compared to Q3 2022 and the comparison of our backlog by market sector.
On slide five you can see changes in our net revenue by line of business compared to Q3, 2022, and the comparison of our backlog by market sector.
New equipment sales were up 28%, but by mining deliveries in Canada, and Chile, as well as higher power system sales in all regions.
Speaker 2: New equipment sales were up 28% led by mining deliveries in Canada and Chile as well as higher power system sales in all regions.
Speaker 2: Product support revenue is strong in all regions, up 13% on a consolidated basis.
Product support revenue was strong in all regions up 13% on a consolidated basis.
Our equipment backlog of $2 3 billion down slightly from the end of June equipment backlog in South America grew driven by significant mining orders was offset by lower equipment backlog in Canada due to strong deliveries and lower equipment backlog in the UK and Ireland.
Speaker 2: Our equipment backlog of $2.3 billion is down slightly from the end of June . Equipment backlog in South America grew, driven by significant mining orders, was offset by lower equipment backlog in Canada due to strong deliveries, and lower equipment backlog in the UK and Ireland.
Our quoting activity remains robust in mining and power systems with customers continuing to increase capital expenditures and operating budgets to support fleet investment and production increases.
Speaker 2: Our quoting activity remains robust in mining and power systems, with customers continuing to increase capital expenditures and operating budgets to support fleet investment and production increases.
Speaker 2: Our mining and power systems equipment backlog continues to grow as a proportion representing roughly 45% and 25% respectively of total equipment backlog as of September 30th.
Our mining and power systems equipment backlog continues to grow as a proportion representing roughly 45% and 25% respectively of total equipment backlog as of September 30th.
Speaker 2: We see supply chain improvements as a positive in our Canadian and Chilean construction businesses. We are seeing core market share improve as a result.
We see supply chain improvements as a positive in our Canadian and Chilean construction businesses, we're seeing core market share.
<unk> as a result.
Turning to slide six which shows our EBIT performance gross.
Speaker 2: Turning to slide six, which shows our EBIT performance. Gross profit was up 14% on strong new equipment and product support volumes. As a percentage of net revenue, gross profit was down 30 basis points, primarily due to a higher proportion of large mining deliveries in the revenue mix.
Gross profit was up 14% on strong new equipment and product support volumes as a percentage of net revenue gross profit was down 30 basis points, primarily due to a higher proportion of large mining deliveries and the revenue mix in.
Speaker 2: In the third quarter, we delivered 26 ultra-class trucks, which is highlighted in our investor day, is great for long-term product support growth.
In the third quarter, we delivered 26 ultra class trucks, which as highlighted at our Investor day is great for long term product support growth.
Speaker 2: SG&A has a percentage net revenue of 16.9% up 20 basis points from Q3 2022.
SG&A as a percentage of net revenue was 16, 9% up 20 basis points from Q3 2022.
EBIT was up 12% EBITDA as a percentage of net revenue was a solid 10, 3%.
Speaker 2: EBIT was up 12%, EBIT as a percentage of net revenue is a solid 10.3%.
Speaker 2: Now, moving to our Canadian results and outlook, which are summarized on slide 7.
Now moving to our Canadian results and outlook, which are summarized on slide seven.
Speaker 2: New equipment sales were up 57%, led by mining deliveries to oil sands customers. Product support revenue increased by 10%, led by mining, including higher rebuild activity.
New equipment sales were up 57% led by mining deliveries the oilsands customers product support revenue increased by 10% led by mining, including higher rebuild activity.
Speaker 2: We're also driving strong growth in power systems business in Canada with power systems equipment backlog up significantly from Q3 2022.
We're also driving strong growth in power systems business in Canada with power systems equipment backlog up significantly from Q3 2022.
EBIT was up 10% and EBITDA as a percentage of net revenue was 10, 8% below Q3, 2022 again due to a higher proportion of large mining equipment sales and the revenue mix.
Speaker 2: EBIT was up 10% and EBIT as a percentage of net revenue is 10.8% below Q3 2022, again, due to a higher proportion of large mining equipment sales in the revenue bank.
Speaker 2: Canada's adjusted ROIC increased 170 basis points from Q3 2020, driven by improved invested capital turnover and strong operating margins.
Canada's adjusted ROIC increased 170 basis points from Q3, 2020, driven by improved invested capital tuner turnover and strong operating margins.
Western Canada is well positioned for steady growth going forward, our mining and energy customers are financially healthy increasing investments into their fleets and production.
Speaker 2: Western Canada is well-positioned for steady growth going forward. Our mining and energy customers are financially healthy, increasing investments into their fleets and production.
Speaker 2: for product support is expected to remain strong,
And the oil sands demand for product support is expected to remain strong and we are in active discussions with customers planning for major rebuilds.
Turning to South America on slide eight.
Speaker 2: In functional currency, new equipment sales were up 37 percent, driven by deliveries of large mining equipment in Chile. Product support sales were up 12 percent, also led by strong mining activity.
In functional currency.
Equipment sales were up 37% driven by deliveries of large mining equipment and Chile product sports sales were up 12% also led by strong mining activity.
Speaker 2: EBIT was up 20% and EBIT as a percentage of net revenue is 12.3%, which was comparable to Q3 of 2022.
EBIT was up 20% in EBITDA as a percentage of net revenue was 12, 3%, which was comparable to Q3 of 2022.
Speaker 2: South America generated ROIC of 27.6, up 490 basis points from Q3 2022, our highest ROIC to date, reflecting both improved profitability and invested capital turns.
South America generated ROIC of 27, 6% up 490 basis points from Q3, 2022, our highest ROIC to date, reflecting both improved profitability and invested capital turns.
As reviewed in detail and Antofagasta in September our business in Chile is mobilizing for growth strong outlook for mining supported by growing demand for copper and improved political clarity.
Speaker 2: As reviewed in detail in Antofagasta in September , our business in Chile is mobilizing for growth. A strong outlook for mining supported by growing demand for copper and improved political clarity. We're encouraged by recent government approvals of large-scale brownfield expansions and increasing customer confidence to invest in new projects.
Just by recent government approvals of large scale, brownfield expansions and increasing customer confidence to invest in new projects.
Speaker 2: We continue to see demand for large contractors supporting mining operations in Chile, while infrastructure construction activities expect to remain stable.
We continue to see demand for large contractors supporting mining operations in Chile, while infrastructure construction activity is expected to remain stable.
Speaker 2: Additionally, power systems activity is growing in industrial and data center market.
Additionally, power systems activity is growing and industrial and data center markets.
Speaker 2: In Argentina, we're operating in an environment of high inflation, significant currency restrictions, and import regulations that are impacting our business.
In Argentina, we are operating in an environment of high inflation significant currency restrictions and import regulations that are impacting our business.
Speaker 2: While we are actively managing and mitigating these risks, the significant and prolonged import and currency restrictions put in place during the current election process has increased the risk and likelihood of losses and negative tax impacts in the fourth quarter. Please turn to slide 9 for our results.
Well, we're actively managing and mitigating these risks the significant and prolonged important currency restrictions put in place during the current election process has increased the risk and likelihood of losses and negative tax impact in the fourth quarter.
Please turn to slide nine for our results in the U K and Ireland.
In functional currency net revenue decreased by 17% from Q3 2022, due to lower equipment sales and construction, which was partially offset by higher power systems revenues.
Speaker 2: In functional currency, net revenue decreased by 17% from Q3 2022 due to lower equipment sales and construction, which is partially offset by higher power systems revenue.
Product support revenue was up 6% driven by strong customer activity and equipment utilization and power systems.
Speaker 2: Product support revenue is up 6% driven by strong customer activity and equipment utilization and power.
EBIT as a percentage of net revenue was a solid 45, 9%, reflecting our continuous focus on growing the product support business.
Speaker 2: EBIT as a percentage of net revenue is a solid 5.9%, reflecting our continuous focus on growing the product support business.
Speaker 2: Product support activity in the UK and Ireland is expected to be resilient with steady machine utilization and growing contribution from HydroQuip.
Product support activity in the UK and Ireland is expected to be resilient with steady machine utilization and growing contribution from hydro <unk>.
Speaker 2: As HS2 deliveries are now complete, we continue to expect lower new equipment sales in the UK compared to the record levels of 2022.
They just do deliveries are now complete we continue to expect lower new equipment sales in the U K compared to the record levels of 2022.
Speaker 2: In power systems, we continue to expect strong demand for both primary and backup power generation in the data center and utility applications.
In power systems, we continue to expect strong demand for both primary and backup power generation in the datacenter and utility applications.
Speaker 2: In summary, we're pleased with the Q3 results and continued momentum. Our focus is squarely on executing the refreshed strategy as outlined as an investor day to drive product support, full-cycle resilience, and sustainable growth to the long term. Operator, I'll now turn the call back to you for questions.
In summary, we're pleased with the Q3 results and continued momentum our focus is squarely on executing the refresh strategy as outlined at Investor day to drive product support full cycle resilience and sustainable growth for the long term.
Operator, I'll now turn the call back to you for questions.
Speaker 1: Thank you. We'll now begin the question and answer session. Analysts who wish to join the question queue make press star then one on their telephone keypad. You will hear a tone acknowledging your request. If you are using a speaker phone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two.
Thank you we will now begin the question and answer session.
Who wish to join the question queue make 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.
I would draw your question. Please press Star then two.
Speaker 1: The first question comes from Yuri Link with Canacorn Genuity. Please go ahead.
The first question comes from Yuri Lynk with Canaccord Genuity. Please go ahead.
Good morning, guys.
Great Good morning area.
Speaker 4: Greg, what are you doing? Morning, guys. Greg, can you ring cents for us the potential loss and Argentina that you alluded to?
Greg can you.
Ring fence for us the potential loss in Argentina that you alluded to.
Speaker 2: Yep, sure. So, you know, as we've talked about in previous discussion, so Argentina is a business that's fairly small. You know, we keep it in a box. We've typically focused more on product support. What we've seen is pretty unique circumstance, really.
Yeah sure. So you know as we've talked about.
Previous discussion so Argentina is a business that's a fairly small you know we keep it in a box.
We've typically focused more on product support what we've seen is pretty unique circumstance really.
Speaker 2: through the election process, as they've kept the pay at about 350 pay. So, you know, in the past, historically, if you had kind of two weeks without access to US dollars, that would be unusual. And we're now more at the two months point. So, we just have a higher exposure through that period. So we'll manage through that. And effectively, as we can, the election's on the 19th.
Through the election process as they've kept the peg at about $3 50 peso.
You know in the past historically, if you had kind of two weeks without access to U S dollars that would be unusual and we're now more at the two month point so.
We just have a higher exposure through that period, and so we'll manage through that as effectively as we can the elections on the 19th.
Speaker 2: And so, you know, there could be an impact from that. We'll have to see how it plays out. But ultimately, you know, we'll put Argentina back in a box after that process and probably a tighter box than ever. And so, you know, well, it might be notable in the quarter in the grand scheme of spending, you know, not a huge impact.
And and so you know there could be an impact from that we'll have to see how it plays out.
But ultimately you know, we'll put Argentina back in the box after that process, probably a tighter box than ever and.
So while it might be notable in the quarter in the Grand scheme of things.
Not a huge impact.
Yeah.
Speaker 3: Yeah, I would just say that as well, you know, that, you know, one of the best ways for Argentina to work through this is develop, to develop the resources in country, which are gathering more and more momentum. And obviously we're a well place to support that resource development, which we believe long-term will help us through this, well, help us through this situation in the short to medium term, but long term is still an exciting thing.
I would just add as well you know that.
One of the best ways for Argentina to work through this is to develop to devote the resources in country, which are gathering more and more momentum.
Obviously, we are well placed to support that ratio development.
Which we believe long term will help us through this will help us through this situation in the short to medium term, but long term so I think so.
All I can opportunity.
Speaker 4: And what about the tax impact, like, what would your effective tax rate be in the fourth quarter?
And what about the tax.
Packed like what would your effective tax rate being in the fourth quarter.
Speaker 2: Yeah, I mean, it will depend on the level of devaluation that occurs post-election. So, our tax pools would be in pesos and so it would be directly correlated with whatever level of devaluation occurs post.
Yeah, I mean, it all will depend on the level of devaluation that occurs post election.
Our tax pools would be in pesos until it would be directly correlated with whatever level of devaluation occurs post.
Speaker 4: Just last quick one for me on SGNA.
Okay.
Just last quick one for me on on SG&A.
Speaker 4: And what I think, you know, it was down quite nicely as a percent of revenue in South America, but not so much in Canada. Can you just speak to the nature of the expenses that you incurred there, particularly around the fixed variable split between the...
Hum.
What are I think it was down quite nicely as a percent of revenue in South America, but not so much in Canada can you just speak to the nature of the expenses that you incurred there, particularly around the fixed variable.
Split between them.
Yeah sure. So I mean, I think the SG&A was down slightly quarter over quarter, but at a bit lower revenue. You know, we're always pleased to keep that below 17% and continue to have that as a key goal.
Speaker 2: Yeah, for sure. So I mean, I think, you know, SGN was down slightly quarter over quarter, but on a bit lower revenue, you know, we're always pleased to keep that below 17% and continue to have that as a key goal. You know, you'd have within the quarter in Canada, you'd have a little bit of non-recoverable time, you do some of the disruption and a couple branch closures for part of the quarter. And then otherwise, you know, just due to the strong performance, you've got some higher, you know, short term incentive numbers within Canada. I guess those would be the two to call out.
You know you'd have with it within the quarter in Canada, you'd have a little bit of non recoverable time due to some of the disruption on a couple of branch closures for part of the quarter and then otherwise just due to the strong performance you've got some higher.
Short term incentive comp numbers within Canada, I guess, it would be the two to call out.
Okay, I'll turn it over thanks guys.
Speaker 5: Thank you very much.
Thank you Rick.
The next question is from Steve Hansen with Raymond James. Please go ahead.
Speaker 1: The next question is from Steve Hansen with Raymond James. Please go ahead.
Speaker 6: Oh yeah, good morning guys, thanks for time. Just a question on product support. The consolidated number was up quite nicely in the period as you highlighted. The Canadian operations did dips sequentially though quarter to quarter. Just curious what's going on in that specific instance. And how would you think about the ramp going forward given the large set of deliveries you've been doing? Just help us through maybe some of the four cadence on that.
Oh, Yeah. Good morning, guys. Thanks for the time.
Just a question on <unk> on product support the consolidated number was up quite nicely in the period as you highlighted the Canadian operation did dip sequentially, though quarter over quarter.
Curious what's going on in that in that specific instance, and how we should think about the ramp.
Going forward given that the alert set of deliveries have been doing just to help us through maybe some of the for cadence on that.
Speaker 3: Yeah sure Steve, so I mean the first thing is when you talk about the dip in I mean it's on really strong comps on the back of quite a favorable price and environment as well. You know we're very optimistic about products of poor growth as we mentioned in our invested in fact. You know since our invested out say that you know our outlook over you know the next
Yes, sure Steve So I mean, the first thing is that when you talk about the really strong comps on the back of that.
Quite a favorable pricing environment as well.
You know, we're very optimistic about part of support growth as we mentioned at our Investor Day in fact.
Since our Investor Day, I would say that you know our outlook over the next period of time of 12 months. He is probably at the top end of that range.
Speaker 3: period of time or 12 months is probably at the top end of that range. But, you know, we did talk about products of full growth, you know, growth levels moderating as we move forward. And, you know, that's what you're seeing right now. We, you know, the levels that we were growing at, you know, we'll moderate over time. And obviously just think about the pricing impacts in the last 12 months.
But we did talk about product support growth.
Growth levels are moderating as we move forward.
And.
What are you seeing right now.
<unk> that we were growing up.
Will moderate overtime.
Obviously, you just think about the pricing impact in the last 12 months.
Speaker 6: Okay, helpful. And then just on the user-clippin side, understand the initiatives are relatively new, but maybe this helps us understand sort of how we should think about that growth as well, because we did see some fairly sizable year with your dips and certainly in the Canadian business, but also in the UK as well. Canada in particular is the mathematical point. How should we think about the growth on the use side there?
Okay helpful and then.
Just on the used equipment side I understand the initiatives are relatively new.
But maybe just help us understand sort of how we should think about that growth as well because we did see some some fairly sizeable year over year dip.
And it's certainly in the Canadian business, but.
But also in the UK as well, Canada in particular, you might focal point, how should we think about the growth on the used side there.
Speaker 3: Yeah, we're happy with the progress we're making in use equipment. We're super excited to bet some of the initiatives. Excuse me that we spoke about an invested day and that will come to life in Q4.
Yes, we're happy with the progress, we're making use of Cleveland, we're super excited by some of the initiatives.
Excuse me that we spoke about at Investor day, and that will come to life in Q4.
Speaker 3: Specifically around Canada, there was an extremely strong watering in Cuba for you. Some pretty unrepeatable use equipment offered deliveries.
Specifically around Canada that was an extremely strong quarter in Q.
Q3 <unk>.
Pretty repeatable used equipment deliveries in Q3 last year related to the you know the ability to get new product and so we were very creative to get product in the hands of our customers in Q3.
Speaker 3: In Q3 last year, related to the ability to get new product. And so we're very creative to get product in the hands of our customers in Q3 last year. So that's the biggest comparison. There's no data that the user equipment market is.
Last year. So that's the biggest day comparison, there is no doubt about the used equipment market is softening.
Speaker 3: So that would be an additional factor, but the biggest issue in Canada was the comparisons. And the softest, softness issue would be the same narrative for the UK.
So that would be an additional factor, but the bigger issue. The biggest issue in Canada was there was the comparisons and the software softness issue would be the same.
The same narrative for the U K.
Okay well. Thank you appreciate that.
Okay.
Speaker 1: The next question is from Jacob Belt with CIBC. Please go ahead.
The next question is from Jacob bout with CIBC. Please go ahead.
Speaker 4: I had a question on backlog looking for a bit more granularity. Maybe we'll just start specifically with Canada. You know, obviously strong deliveries in the quarter, but...
I had a question on backlog looking for a bit more granularity.
Maybe we'll just start specifically with Canada, you know, obviously strong deliveries in the quarter, but.
Do you expect a re low going into the fourth quarter and 2024 and are you seeing any weakness at all in Canada.
Speaker 7: Do you expect a reload going into the fourth quarter in 2024? Are you seeing any weakness at all in Canada? I know some of your competitors are cold.
I know some of your competitors are calling up and construction markets.
Yes, so that's the first thing.
Speaker 3: So the first thing to say, I don't think that backlog is the best measure of forward looking activity.
I think the backlog is the best measure of forward looking activity.
Speaker 3: I know some of some of the people spoke to this over the past few weeks, but obviously there are things in backlog over the last two years that wouldn't typically go into backlog under a normal free supply or a better supply environment. So there's definitely an impact in construction. The
I know some of for some other people spoke to this over the past few weeks, but obviously there are things in backlog over the last two years that wouldn't typically go into backlog.
Normal for a supply or a better supply environment and so there's definitely an impact in construction because construction is where.
The.
Speaker 3: that the supply has improved more so than in the larger engines and larger mining equipment.
The data supply has improved more so than in the larger the larger engines and larger mining equipment.
Speaker 3: And so, we're very optimistic about the order in tank levels and the activity levels we see. It's hard to say whether backdoor will continue to build because obviously I just described the improvement supply chain.
And so.
You know we are very optimistic about.
The order entry levels and the activity levels.
Hard to say, whether the backlog will continue to build because obviously you just described the improving supply chain.
Speaker 3: you know, provides more fluidity in the, in the, in the saddles that I've looked, but we're happy with the growth of the, the outlook in Canada as you realize the construction.
<unk> provides more fluidity in our in our sales outlook.
Happy with that.
The growth in.
In Canada as it relates to construction.
Speaker 3: and we're really happy with the market share gains that we're seeing there. So, you know, I would not describe our construction equipment market in Canada as softening.
And we're really happy with the market share gains that we're that we're seeing that so.
I would not describe our construction equipment market in Canada are suffering.
Okay, and then how about the UK and Ireland.
Yeah.
Speaker 3: Yeah, so the UK and Ireland is softer than the market is reducing there for sure. And that's on the back of the comparisons with the HS2 deliveries last year. So that is more challenging. Again, we've seen more recently good ordering tape levels as some of the larger rental companies look forward into next year and start their reload.
Yeah, So the UK and Ireland.
Is softer the marquee is reducing.
That for sure and that's on the back of.
The comparisons are to the hydrus to deliveries last year. So.
That is more challenging again.
We've seen good.
More recently, good ordering tight levels as some of the larger rental companies.
We look forward into next year and start that reload.
Speaker 3: Relouding their fleets, opening orders into Reloud their fleets. I've been pretty encouraged.
Reloading that fleets are putting orders into rollout of the fleets have been pretty encouraged but recently about the order entry levels, but theres no doubt that there is a.
Speaker 3: recently about the ordering table levels but there's no doubt that there is a little softening in the UK as it relates to construction equipment. You know, that is compounded as well by the supply chain is improving faster in the UK as well because of the mix of products they sell there. So one of the most improved supply chains around excavators which would be a much greater mix of the UK sales compared to Canada or South America. So I think the combination of the slowing market and
A little softening in the UK as it relates to construction equipment.
He is competitive as well by the supply chain using premium faster in the UK as well because of the mix of products. They sell that so one of the one of the most improved supply change that right and excavators, which would be a greater mix of the UK sales compared to Canada or South America. So.
The combination of this lovely market.
Improved supply.
Speaker 3: improve supply, means that we're carrying a little team which is stuck there, but it's healthy, young and the team are working through it and we're optimistic with the recent performance.
It means that we're carrying.
A little too much talk that but.
I'd say, it's healthy children.
Team are working through it and we're optimistic.
With the recent performance.
Speaker 7: And then how much pressure I'm facing is as a result of the improving supply chain.
And then how much pressure on pricing pricing user as a result of the improving supply chain.
Yeah.
Speaker 3: You know, we have to be competitive margins, as you can see in Q3, remain strong. And we're very focused on being competitive in our marketplace. We've been selling acceptable premiums for forever. And we continue to do that.
We have to be competitive.
So you can see in Q3.
Remained strong and we're very focused on being competitive in that marketplace, we've been selling acceptable premiums for forever.
We continue to do that.
Speaker 3: And so, you know, we're growing share in Canada and Chile. And so I think the team are well versed and well, they have strong capabilities and they'll be able to sell the premiums and the value proposition that we have. So we don't see that pressure.
And so we will we're growing share.
In.
Canada, and Chile, and so I think the team of well well done and well they have strong capabilities need to be able to sell them.
The premiums.
The value proposition that we have so.
We don't see that pressure.
Okay. Thank you.
Speaker 1: Our next question is from Sheryl and Rodborn with TV Cohen. Please go ahead.
Our next question is from Cherilyn Radbourne with TD Colin Please go ahead.
Thank you very much and good morning.
We've seen a couple of months.
Speaker 1: We've seen a couple of strong equity income pickups in Canada from pipeline machinery. So I was hoping you could give us a bit of color on how that business is performing and what kind of forward visibility it has.
On the equity income pick up in Canada from pipeline machinery. So I was hoping you could give us a bit of color on how that is performing and what kind of forward visibility at hound.
Okay.
Speaker 2: sure yeah no we've seen a nice pickup and there are certainly some difficult years in there where a lot of their activity from the u.s. actually shifted up to Canada. But as you
Sure Yeah, I know, we've seen a nice pick up I mean, there is certainly some difficult years and there were a lot of their activity from the U S actually shifted up to Canada.
As you can see the activity in the U S has picked up quite strongly.
Speaker 2: and see the activity in the US is picked up quite strongly and you've seen some M&A activities start to happen and some more activity levels. So some of that gear will shift down to the US but that business was really picked up and we expect that to continue into next.
And you've seen some M&A activity start to happen in some more activity level. So some of that gear will shift down to the U S. But it's.
That business has really picked up and we expect that to continue into next year.
Speaker 1: And then in terms of the CAPEX increase that was telegraphed in the press release, can you help us understand how much of that is related to the rental fleet and strategic mining truck investments and how much just relates to the timing of plan facility disposal.
And then in terms of the Capex increase and it was telegraphed in the press release can you help us understand how much of that is related to the rental fleet and strategic mining truck investment and how much just related to the timing as planned facility disposal.
Oh sure Yeah. So I mean, obviously through the year that the growth that we've seen has been.
Speaker 2: Sure, yeah, so I mean obviously through the year, the growth that we've seen has been.
Speaker 2: has been healthy as the years progressed, but also as we highlighted investor day, some strategic areas of focus, including rental.
It has been healthy as the year's progressed, but also as we highlighted at Investor day, some strategic areas of focus including rental so some of it would've been higher rental investment, but also a fewer disposals than we planned at the beginning of the year and we've got some good value assets in that fleet that we'd like to keep running for longer.
Speaker 2: So some of it would have been higher rental investment, but also fewer disposals than we planned at the beginning of the year. And we've got some good value assets in that fleet that we'd like to keep running for longer. As well as some deferred, we won deferred real estate sale. It'll move into next year.
As well as some deferred one deferred real estate sale it will move into next year.
Speaker 2: as well as some investments in mining truck fleet some to support contract product support contracts we've won. Also some to just demonstrate the new capabilities with potential conquest customers. So, I'd say that's roughly about a third, a third, a third. Okay, very helpful.
There's some investments in mining truck fleet some to support contract product support contracts. We've won but also some business demonstrates the new capabilities with potential conquest customers. So.
Yeah, I would say that's roughly about a third a third a third.
Okay very helpful. Thanks for the time.
Thanks Carolyn.
Speaker 1: Our next question is from Devon Dodge with BMO Capital Markets. Please go ahead.
Our next question is from Devin Dodge with BMO capital markets. Please go ahead.
Alright. Thanks, good morning, So a lot of my questions have been answered, but just one for me.
Speaker 8: All right, thanks. Good morning. So a lot of my questions about Ampter, but just one for me, probably for Greg, but there's a pretty sizable increase in working capital in a quarter. How should we be thinking about working capital in Q4 and that outlook for a full year free cash?
Probably for Greg, but there was a pretty sizable increase in working capital in the quarter, how should we be thinking about working capital in Q4 and that our outlook for full year free cash flow.
Oh.
Speaker 2: Sure, yeah, so throughout the business and we've got quite a bit of growth across the complex, we've got a lot of backlog that's getting closer to the library here through the end of the year and to the start of next year. And so you've got that, which is at an elevated level, also service work and progress, very healthy.
Sure Yes.
Throughout the business and we've got quite a bit of growth across the complex. We've got a lot of backlog that's getting closer to delivery here through the end of the year and into the start of next year and so you've got that and which is at an elevated level multiple service work in progress very healthy.
Speaker 2: healthy accounts receivable also. So you've got the working capital use there. But normal seasonality, we would expect strong free cash flow in the fourth quarter. And then as we highlighted it investor day, we recognize that there's work to do to increase investment capital turns in velocity. And we've got
The accounts receivable also up so you've got.
The working capital use there, but normal seasonality.
Yeah, we would expect.
Free cash flow in the fourth quarter and then as we highlighted at Investor day, we recognize that there's work to do to increase our invested capital turns and velocity and we've got plans in place in each of the regions and those teams are working away and mobilizing to make that a big priority in 'twenty four 'twenty 'twenty, four and 'twenty 'twenty five as discussed at Investor.
Speaker 2: plans in place in each of the regions and those teams are working away and mobilizing to make that a big priority in 2024 and 2025 as discussed and invest.
Yeah.
Okay, and just a quick follow up when we think about 2024 do you think is it reasonable to assume that you guys could get to that 50% free cash flow conversion you've talked about previously.
Speaker 8: Okay, when we think about 2024, do you think is it reasonable to assume that you guys could get to like that 50% free cash look conversion you've talked about previously?
So I think it will depend on the growth trajectory of course at a more steady growth environment.
Speaker 2: So I think it'll depend on the growth trajectory. Of course, it has to more steady growth environment. That would be the target. We'll see how it ultimately plays out in terms of end markets. As we've highlighted in yesterday, we see mobilization in Chile, steady growth in Canada and resilience in the UK. So that's overall a pretty steady market. And you know those are the sorts of markets where, if that conversion makes good sense, but we'll have to ultimately see how that plays out.
That would be the target.
We will see how it ultimately plays out in terms of end markets.
We highlighted at Investor day, we see mobilization and Chile steady growth in Canada and resilience in the U K.
That's overall, a pretty pretty steady market and you know those are the sorts of markets where is that conversion mix makes good sense, but left ultimately see how that plays out.
Okay. Thanks, I'll turn it over.
Thanks, Kevin.
Speaker 1: Once again, if you have a question, please press star then one.
Once again, if you have a question. Please press Star then one.
Speaker 1: The next question is from Michael Dumey with Scotiabank. Please go ahead.
The next question is from Michael <unk> with Scotia Bank. Please go ahead.
Speaker 9: I hate going to go. The first question I guess just um
Hi, good morning, guys.
The first question I guess just you.
Speaker 9: following up on some of the discussion with Jacob and Devon just on inventories. You know, you've invested about 1.2 billion in inventory since the beginning of 2022. And I understand that you and a cost of risen and demand is also strong, but just trying to get a sense given, you know, supply chains are easing how far you are from, you know, where you think inventory should be to support this level of sales.
Following up on some of the discussion with Jacob and Devin just on inventories.
Invested about $1 2 billion.
In inventory since the beginning of 2022 and I understand that your unit costs have risen and.
Demand is also strong, but just trying to get a sense. Given you know supply chains are easing how far you are from where you think inventories should be to support this level of sales.
Yeah, So I mean as it is.
Speaker 3: Yeah, so I mean, as we discussed the investor day, Michael, we put a pretty explicit
The Investor day.
Michael we've put a pretty explicit.
Speaker 3: the capital target out there, of which a good proportion of that will come from inventory optimised.
Invested capital target out of that.
If which you know a good proportion of that will come from inventory.
Inventory optimization.
Speaker 3: You know, and you know, we improved our investing capital terms in the quarter, but you know, the growth was still growing at a healthier rate than we've described in the long term, we're looking at our investor day. So there's no doubt that we would see inventory levels optimising. We see that already happening in construction equipment.
And we improved our invested capital turns in the quarter, but the growth.
We're still growing at a healthier rate than we've described to the long term and looking at our Investor day. So.
There is no doubt that we would say inventory levels optimizing wished.
We see that already happening in.
In construction equipment.
Speaker 3: But our power systems businesses are 50% year-over-year. It's another key part of our strategic
But our power systems business is up 50% year.
Year over year.
Another key part of our strategic plan.
Speaker 3: There's some long lead time and long light and large engines in that and of course the mining
Some long lead time.
Got it.
A lot in large engines and that of course the mining.
Speaker 3: The mining equipment is very lumpy in terms of how it comes to us and how we get out to customers And it's not as fluid as we would have experienced in the past and certainly not as fluid as we we aim to be in the future and so You know, I think there's it's a big part of a strategic objective and you can expect us to focus a lot on that as we move forward and
The mining equipment to use very lumpy in terms of how it comes to us and how do we get out to customers and it's not as fluid as we would have experienced in the past and certainly not as fluid as we we aim to be in the future and so you know.
I think this is a big part of our strategic objective and you think you can expect us to focus a lot of that as we move forward.
And improve the velocity of that withstanding that we're more concerned with the velocity.
Speaker 3: and improve the velocity that was seen in that. But we're more concerned with the velocity.
Speaker 3: and then we are at the absolute level because the absolute level supports the growth that we're seeing in the company.
And we all with your absolute level because the absolute level supports the growth that we're seeing in the company.
That's helpful. Thanks, Kevin and then you know with the exception of Argentina, I mean I.
Speaker 2: helpful thanks Kevin and then you know with the exception of Argentina. I mean I read your commentary on the regional outlook as largely unchanged. I'm just curious you know given how interest rates have moved up in the last few months you know whether your visibility into 2024 is better or worse than your visibility into 2023 this point last year just just trying to get a sense for that please.
I read your commentary on the regional outlook is largely.
Unchanged I'm, just curious you know given how interest rates.
Have moved.
Up in the last few months you know whether your visibility into 2024 is better or worse than your visibility into 2023 at this point last year, just just trying to get a sense for that please.
Speaker 3: Downsay is definitely my, I would say, our visibility into next year right now in all regions and I would say, you know, if you think about the main.
Yes, I would say is definitely Michael I would say.
Visibility to into next year right now.
In all regions and I would say.
If you think about the mine.
Speaker 3: sector that's impacted by the higher interest rates with the construction equipment.
Sector that's.
Impacted by the higher interest rates would be construction equipment.
Speaker 3: And I feel better about construction equipment than I did even in the summer.
I feel better about construction equipment than I did even in the summer.
Speaker 3: It's normalising, it's compadstive, but as a fact, we deliver them.
It's normalizing its competitive but as I said, we delivered more large construction equipment in September in South American and we have a hot by some considerable distance.
Speaker 3: large construction equipment in September inside of the American that we ever had by some considerable distance and play ad. And so the teams are absolutely focused on winning market share regardless of the condition. market share levels offer us an opportunity regardless of the market conditions. So I would say we're optimistic and as we think about the investor date commentary.
And so the teams are absolutely focused on.
Winning market share regardless of the condition on market share levels offer us an opportunity.
Regardless.
All of the.
The market conditions, and so I would say, we're we're optimistic and as we think about the investor day commentary, particularly.
Speaker 3: particularly in Canada, our expectations or outlook would be at the top end of that range for 2024.
Particularly in Canada.
Our expectations our outlook will be at the top end of that range for 2020.
Perfect. Thank you.
Okay.
This concludes our question and answer session I'd 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'd like to turn the conference back over to Greg Palisock for any closing remarks.
Yeah.
Great. Thank you operator. This concludes our question and answer session I would like to well and thank you everybody for participating and I Hope you have a safe day.
Speaker 2: Great, thank you operator. This concludes our question and answer session. I'd like to, well, and thank you everybody for participating and I hope you have a safe day.
Sure.
Speaker 1: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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