Q2 2024 Finning International Inc Earnings Call
Greg Palaschuk: Yeah, I'll take that. Certainly, as we look back at our Investor Day, I mean, our number one focus coming into Investor Day as of September 23 was just on the working capital opportunity. I'm pleased to see some of that progress in Q2 with the cash coming through in a quarter that typically doesn't have that. But we'll continue to focus on that through the rest of the year and into next year.
Greg Palaschuk: We think we're in the positive cash flow generation side, and there's still a big opportunity to have some growth out there. SG&E, of course, is a big value driver in the business. At that time, with the amount of inflation and some of the procurement conversations, it felt like that was going to be a second step after the working capital phase was complete. And so we are finishing the design for that. We will begin executing parts of it.
Greg Palaschuk: And we just think there's a really good opportunity, particularly for 2025, for the whole team to focus on the next frontier in terms of sales to SG&E. And so that will focus on continued optimization of our corporate area, as well as support functions. And then there's a big opportunity in our Canadian business for our component exchange business, which has kind of been run separately over the years. And I think, given all the good progress we've made as a company in terms of collaboration, that it's time for that to be fully integrated. And there are a lot of efficiencies from both a working capital and a cost perspective. Thank you.
Greg Palaschuk: And then on the Argentina side, as you know, in the first quarter, we partnered with our suppliers to access U.S. dollars through the transactions that you do in Argentina. We decided to do that again in the second quarter just to make sure that we can keep the risk as low as possible. That was not supported by our suppliers to the same degree, and it's something we wanted to do to keep the risk low.
Greg Palaschuk: We don't think that'll be a recurring cost in Q3 and Q4. We're going to re-enter the official market there and get our exposure back to zero through that channel. And so we don't think that will recur, but it's something we wanted to do to just make sure we kept that balance as low as possible while supporting the product support side of the equation in the country.
Kevin Parkes: And to be clear, Yuri, it's not, you know, sorry, it's not a reaction to, it was always in the plan. We prioritized, and Pete Buttigieg.
Kevin Parkes: Can you quantify the Argentina costs that were in SG&A? 13 million.
Yuri Lynk: Okay, I'll turn it over, thanks. Great, thank you, Yuri. Our next question comes from Sherilyn. Radbourne from T.D. Cowan, please go ahead with your question.
Operator: Our next question comes from Sherilyn. Radbourne from T.D. Cowan, please go ahead with your question.
Greg Palaschuk: Yeah, sure. It was it was roughly equal. Part would be mixed. Obviously, we've got higher quality new, new, and used. Volumes relative to or growth rates relative to rental and product support. So there is a mixed shift there, but also within rental and used, as we've been pretty consistent with over the last couple of years. You know, you couldn't expect the same amount used in rental margins from 2022 and 2023 every year. And so those have come in and normalized to an extent.
Greg Palaschuk: And, you know, we're working hard to offset that through SG&A control and further SG&A action. And there's also a mix within the mix as well, Patrick, with the buying and delivery of new equipment as well, so you need to consider that.
Greg Palaschuk: Okay, great. Thank you.
Kevin Parkes: And then I guess, is it possible to quantify how much maintenance activity was deferred in the oil sands in Q2 or H1? That's something that's called out in the earnings. It's hard to quantify actual numbers for individual mine sites. I can tell you that we've got six mines in the oil sands, three providing product support at the kind of levels we were expecting, three didn't. And so the specifics around the individual mine plans and how the mines are operating are around those.
Kevin Parkes: Now that it's in the control of the miners, we need to be ready and make sure we're able to support them as they require the services, but it's hard to quantify that as an absolute number in product support.
Operator: Our next question comes from Jacob Bout from CIBC. Please go ahead with your question. All right.
Jacob Bout: I had a question on backlog. You know, it's difficult to predict, it can be quite lumpy. So up quarter on quarter but down year on year. But if we look at the 700 million plus that you announced in April, it's down from those levels as well. You know, how are you thinking about that, and what's in the hopper right now?
Kevin Parkes: We're still pleased with the rise in backlog. If you look at it as a percentage of the total backlog that was cut in Manchester, that's still pretty encouraging. For sure, you can see it through our new equipment line. We had a sell-through in Canada, which is normal for the spring-summer season.
Kevin Parkes: That's what we took in backlog, and then we're selling through some of the lumpier power systems projects as well. But our backlog still stands at well over half a year's sales. There's a good mix across different industries.
Kevin Parkes: So mining adds very much to the very encouraging. We did mention that some of those mines, when we were in South America in June, there were already machines being built on site ready for delivery in the same quarter. And so things are moving through the backlog a little bit quicker. And so I think it's important that we calibrate the backlog figure with the reality of the new supply environment and our drive to move things through the backlog quicker.
Kevin Parkes: And so that backlog level is still incredibly encouraging. As I said, it's more than half a year's sales booked already. And in some cases, as I also mentioned, that backlog is extending out with power system projects well beyond the end of next year. And so we feel it's a really solid foundation from which to build. But we need to normalize against the kind of backlog levels that we saw when supply was constrained.
Kevin Parkes: And to round up the second part of your question, both South America and the oil sands, there are lots of conversations going on that in the second half of the year, and particularly towards the end of the year, lots of brownfields in South America and fleet refresh in Canada.
Kevin Parkes: That's helpful. And then just on the improving product support growth rates in the second half of the year, I'm assuming that part of that is just, you know, your larger installed base. What else is driving that? And are you more confident about second half growth than you were, say, three months ago?
Kevin Parkes: So definitely more confident than we were three months ago on the trajectory and of course we're lapping some more favourable comparisons so you know we're still very happy with the two-year CAGR this you know lapping Q1 and Q2 last year was always going to be difficult but we're pleased with the progress and it's actually particularly quarter over quarter that's very encouraging and look the team is our number one priority you know we talk about this and pretty much invested capital and the rate of free cash flow from that invested capital velocity but we talk about product support constantly it's the number one priority it's our biggest priority as you mentioned you know we're I think we've added 70 ultra-class trucks in the last four quarters into our two regions. New sales are healthy so on the population side we're encouraged in that regard. What else?
Operator: We're building capacity, so I mentioned we've added 80 technicians in South America, 12 over 100 if you take the other two regions. We're building capacity at our OEM operation in Edmonton here, and metadistribution capabilities, meaning we can service our customers faster, get past them quicker, which hopefully will have a greater growth tailwind too. Continuing to build capabilities, and I need to mention that in my remarks as well, CBAs and condition monitoring are also helping us to stay closer to our customers. Thank you all for joining us today, and we hope that the slightly easier comparisons will get us to a place where it's closer to our research targets.
Devin Dodge: Our next question comes from Devin Dodge from BMO Capital Markets. Please go ahead with your question.
Kevin Parkes: All right. Thank you. Good morning, guys. Devon?
Kevin Parkes: In South America, maybe just picking up on an earlier question, but as I mentioned that quoting, tendering, and award activity in the mining sector was elevated, are you able to frame how that pipeline looks now in terms of size or the maturity of opportunities? And, and if the momentum of order intake that we've seen the last, you know, say six to 12 months can be sustained?
Kevin Parkes: I mean, it's hard to say, you know, kind of the, um, Devin, the timing and the decisions and the capital approval are very lumpy. I would say that, incrementally, we've just won two very big pieces of business in South America with the BHP Award and the Fidelco Award. There's nothing of that size that we're working on right now, but there are multiple opportunities which would add up to a similar level of order intake, if not a little bit more. That's not saying we win them all; we've been very aggressive.
Kevin Parkes: I would say that in visiting six customers in Santiago for three days and two mine sites, there's a definite acceleration of what can be achieved given the current constraints of machine supply, labor supply, and approvals for brownfields. And I think we've moved from inquiry to very definite quoting activity. We expect to submit a number of quotes before the end of the summer here for substantial pieces of business. So, you know, what's this space for? But the general sentiment is, you know, go faster. And what's possible in terms of machine supply and execution? So,
Kevin Parkes: And then I just highlight them. If you go to each of some of the producers, you know, investor presentations all will have some form of update on brownfield sanctions or intentions. If you look at Anglo or Capstone or, you know, Freeport, they've all given up recent updates. So have a look, and they're all maturing their brownfield plans, whether they're sanctioning them or having that on the horizon.
Devin Dodge: Okay, good color. Thank you.
Kevin Parkes: And then maybe sticking in South America, just margins in the quarter. It seemed like one of the main drivers I thought that was called out in the MD&A was for that moderating margin was some high margin mining product support contracts that benefited last year. Can you just provide some more specifics behind that and if we should be expecting this to be a headwind in the coming quarter?
Kevin Parkes: No, I think that was pretty unique to the quarter. I mean, this time last year, there were quite a few, you know, larger rebuild programs that were coming to a conclusion to refresh, particularly one mine, but also just a couple of contracts that, you know, came to the end of their life, and there was a bit of a washout in that process. So, you know, that that was a year ago. That didn't happen this year. And so that's a factor, but we feel fine with the overall margins and product support and the growth profile going forward.
Devin Dodge: Okay, that makes sense. I'll turn it over to you. Thank you.
Operator: Our next question comes from Steve Hansen from William & James. Please go ahead with your question.
Steven Hansen: Thanks for your time. As a follow-up to one of the earlier questions, Kevin, you described all the strategies that you're deploying to help grow the product support business. I'm hoping you can provide some additional comments regarding the customer activity you're seeing on the ground and if that's actually accelerating here into the back half, and ultimately, whether you think you can exit the year at the 7% target that you've outlined for the category.
Kevin Parkes: That's true. So thanks for watching. We're very committed to our targets, Steve, and like I said, you know, I listed off things we're doing. We work tirelessly every day to get better product support, to win more business, and to execute it more effectively, and we're not wavering from that, and we remain committed to those targets, and we're confident that we can demonstrate exit rates closer to the investor day targets than we are today.
Steven Hansen: Okay, that's helpful. Thank you.
Kevin Parkes: And maybe just to follow up on South America and just think about the duration of this new equipment cycle. You've described a record backlog there. It sounds like quoting activities are accelerating to the second half. How do we think about new equipment deliveries into next year? I mean, you've got some tough comps to face, but we actually see growth in new equipment deliveries next year. What do you think about that?
Kevin Parkes: Yeah, it's too early to talk about 2025. We just aren't encouraged with the backlog. Obviously, a lot of that build is coming through this year, and some of it stretches into next year.
Kevin Parkes: There's, like you highlighted, good quoting activity that would benefit in 2025. Part of the dynamics there, some of those are customers that are competitive customers. And so they're big opportunities. There's a bit different profile than the kind of Cadellcos and BHPs where we've been the incumbent and are growing our share. These are breakthroughs, so we'll have to see how those play out. Of course, we're working aggressively to win in that area.
Kevin Parkes: Yeah, there's good momentum across not just mining power systems in particular, but so we do think there's momentum into 2025, but it's too early to call, you know, levels at this point.
Kevin Parkes: Yeah, I think so. So it's really important to look at it by the mining businesses. And I'm Steve.
Kevin Parkes: So to forecast quarterly by quarterly annual growth, we're just very focused on winning market share and delivering it to our customers as quickly as possible, so we can support them in growing their production targets, and we can have an opportunity to grow our product support business. You know, power system deliveries, I would expect those to continue to increase year over year. And, you know, the current sentiment in construction would suggest that next year's construction machine sales should be better than this year.
Operator: Our next question comes from Maxim Sytchev from National Bank Financial. Please go ahead with your question.
Maxim Sytchev: Most questions have been asked already, but just a couple of quick ones. I was wondering, Greg, if you would mind providing a bit of color on rental cutbacks, including dispositions, if you have a bit more of a specific range that we should be thinking about for 2024?
Greg Palaschuk: Yeah, you know, we don't break it down to that level. I mean, we brought the range down, as you can see, year to date, we've been pretty low on the net rental CapEx; we do have some load in the back half of the year to get ready for next year. So we do see that at a lower level overall, in line with the CapEx change, but we're not breaking it down by cap.
Maxim Sytchev: Okay, but I guess these positions can just kind of, you know, straight line them. A lot of the dispositions are in the first half of the year.
Kevin Parkes: It's important to remember the mix of our rental business, Max's is slightly different, remember, and so we would have a much higher proportion of peri-rents and para-rents than many others. And so, given the pipelines finishing, there was a, you know, a kind of higher level of dispositions in the first half of the year.
Maxim Sytchev: Right, right. Okay, thank you. And then the last question I had just in terms of the power business and the ability to leverage your kind of, you know, UK success in other geographies. I was wondering if there's, you know, any update on that strategy and its thickness. Thank you.
Kevin Parkes: I'm from Strength4Strength, Max. I'm super encouraged. I had a meeting last week with our Canadian Power Systems team. I'm super encouraged by the outlook there and the progress we're making. We expect to, you know, we've got some good projects we're working on in Western Canada, which we'll hopefully be adding to the backlog in the second half of the year here. UK, you know; we're at our board meeting this week. I think we have six approvals to talk about this today.
Kevin Parkes: And so that business continues to be very robust. And then in Chile, you know, I'd say we're, to a certain degree, very happy and optimistic just at the pace of growth. It's from a small base in Chile, but the team in Chile, who are again being supported by our UK business.
Kevin Parkes: So, you know, I think our power system has been sort of 11% year over year in the quarter. That's a trend, and we see that continuing. We think we've got enough road-based activity across the three regions to continue that, despite it being lumpy projects in some cases. One area of weakness, particularly in the UK, is around that industrial sector, which is supplying into that softer construction market. So that's one thing that's dragging us along.
Kevin Parkes: And then, obviously, in the quarter, UK revenue was down a little because of lumpiness in terms of our product support. However, cross-country collaboration is strong, the optimism is strong, and we continue to be really encouraged about the Paris system as well.
Maxim Sytchev: Okay, excellent. That's it for me. Thank you so much. Thanks, folks.
Operator: Once again, if you would like to ask a question, please press star and one. Our next question comes from Sherif Al Sabahat from Bank of America. Please go ahead with your question. Hi, good morning.
Operator: Just wanted to add that we've seen some.
Sherif Abdul: I just wanted to add that we've seen some significant moves in the current market. Are you seeing other OEMs or dealers becoming more aggressive?
Kevin Parkes: driven in part by the currency is something we have to be competitive in our local market, Sherif. That's our modus operandi. We have to give our team the tools to be competitive. We do have an external data source in terms of market share for new equipment, and we are growing market share in all three regions, specifically in the large construction area. We're holding a strong position in mining, winning in the market, and winning in persistence, as I've previously spoken about.
Kevin Parkes: I think this is more a function of, we have to be competitive; we have to work with our partners to make sure we've got the right propositions for the marketplace. For example, I was up in Prince George last week for a couple of days. We have a definition called parts-focused market share. I would say in that northern BC area, we're one in two machines we're selling right now as a category.
Operator: And ladies and gentlemen, and with no additional questions, I'd like to turn the floor back over to Greg Palaschuk for any closing comments.
Greg Palaschuk: Great. Thanks, operator. That concludes our call. Thank you for your participation and I hope you have a safe day. Thank you.
Operator: And ladies and gentlemen, that will conclude today's conference call. We do thank you for joining us. You may now disconnect your lines.