Q3 2024 Finning International Inc Earnings Call
Speaker Change: Thank you for standing by. This is the conference operator. Welcome to the Finning International Inc. third quarter 2024 investor call and webcast.
Speaker Change: As a reminder, all participants are in a listen-only mode and the conference is being recorded.
Speaker Change: After the presentation, there will be an opportunity to ask questions.
Speaker Change: Analysts who wish to join the question queue may press star then 1 on the telephone keypad.
Speaker Change: Thank you, Operator. Good morning, everyone, and welcome to Finning's third quarter earnings call.
Joining me today is Kevin Parkes, our President and CEO.
Speaker Change: Following our remarks, we'll open the line to questions. This call is being webcast on the investor relations section of finning.com.
Speaker Change: We have also provided a set of slides on our website that we will reference. An audio file of this call and accompanying slides will be archived.
Speaker Change: Before I turn it over to Kevin, I want to remind everyone that some of the statements provided today are forward-looking. Please refer to slides 9 and 10 for important disclosures about forward-looking information, as well as currency and specified financial measures, including non-GAAP financial measures.
Speaker Change: Please treat this information with caution as our actual results could differ materially from current expectations. Kevin, over to you.
Thank you, Greg, and good morning, everyone.
I would first like to thank our employees.
Speaker Change: We continue to build resilience into our operating model in a more dynamic environment and the progress we have made to advance our strategy would not be possible without the dedication of all of our teams and their commitment to creating a positive impact for our stakeholders.
Speaker Change: We are working diligently to simplify our business, build safe and inclusive environments, and empower our people to better serve our customers.
Turning to our third quarter results on slide 2.
Speaker Change: Our third quarter results from very by region and reflect the advantage of our diversified business.
Speaker Change: Our South American business results continued to be strong, our UK and Ireland operations remained resilient, and our Canadian business performance was impacted by the continued dynamic operating conditions.
Speaker Change: I was in South America last week and I continue to be encouraged by the very positive customer sentiment in the region driven by mining.
Speaker Change: We continue to mobilise for growth in the region and I had the opportunity firsthand to see the progress on our investments to increase our capacity and build stronger capabilities in the Antofagasta region.
Speaker Change: I also had the opportunity to meet and thank our employees who are supporting our customer growth, many of whom are new and part of our aggressive recruitment and training plans.
Speaker Change: Activity in the Chilean copper sector remains solid, with strong activity levels from mining customers and contractors. We're seeing customers continue to extend the life of their equipment, as well as other fleets entering major maintenance cycles. This all helps drive product support growth.
Speaker Change: We're also actively quoting on multiple new equipment tender packages and we are pleased with the recent 250 million dollar equipment order from a global mining customer in October.
Speaker Change: At Mine Expo in September, Cascola, our partner, unveiled their latest technologies and solutions for the mining industry. We believe these technologies, such as Dynamic Energy Transfer, or DET, build on the success of our electric drive haul trucks and autonomous solutions, positioning us well for future opportunities.
Speaker Change: We are pleased with the team's execution in a difficult market, having expanded our margin to a solid 6.3% on an adjusted EBIT as a percentage of net revenue basis, driven by SG&A reductions.
Speaker Change: While we have seen some green shooting activity in the construction sector, with a pickup of new order activity for next year, and power systems activity remains healthy, we do remain cautious in the region until we see a more constructive economic outlook.
Speaker Change: We have generated cash consistently throughout the year and the teams continue to focus on building population, capabilities and capacity to drive product support, executing with discipline and resilience.
Speaker Change: Our Canadian business continues to be impacted by challenging market conditions.
Speaker Change: We remain committed to executing our product support strategy and we are growing market share through new and used equipment which builds population and future product support opportunities.
Speaker Change: We incurred severance costs this quarter as we continue plans to decentralize and optimize our overhead of our company. We will continue to simplify our operational structure, consolidate functions and capture efficiencies where possible.
Speaker Change: We're all focused on driving execution of our strategy and the leadership transition we announced this September is a positive and well-planned succession.
Speaker Change: Overall we're pleased to see revenue growth throughout our business with new use and product support revenues all up in Q3 versus Q3 2023.
Speaker Change: New equipment revenues in South America were up in all sectors 14% overall.
Speaker Change: In Canada, new equipment revenues were up 4% overall, with strong deliveries in mining offset by slower construction and power systems revenues.
Speaker Change: New equipment revenues in the construction segment in the UK and Ireland were up, offset by lower power systems revenues in the quarter.
Speaker Change: Despite its lower power systems revenue in the UK and Ireland, backlog increased meaningfully due to data centre demand.
Speaker Change: Most pleasing and encouraging for the future is our approximately $90 million building and our backlog relative to Q2 2024, a healthy indicator for our business looking forward.
Turning to product support.
Speaker Change: Our consolidated product support revenue is up 2% year-over-year. We're seeing strong product support growth in South America from both mining and the oil and gas sectors and we continue to significantly add technicians in the region to support the growing fleet of mining equipment with approximately 200 net new technicians added since Q2 of this year.
Speaker Change: Product support in Canada and the UK are not yet consistently where we would like them to be.
Speaker Change: In Canada, we have stabilised at a level only slightly below last year, despite the absence of major infrastructure projects and the dynamic mining environment we face.
Speaker Change: In the UK and Ireland we are seeing sequential growth each quarter this year, and we see both regions showing signs of improvement as we head into the winter months.
Speaker Change: Our full cycle resilience continues to improve. We are pleased with another quarter of strong free cash flow as we started the second half of the year.
Speaker Change: We generated $346 million of free cash flow in the quarter and $746 million of free cash flow over the last 12 months, well in excess of our net income.
Speaker Change: There is more opportunity for us to drive resilience through the increased velocity in our operations and focus on cost competitiveness.
Moving to sustainable growth.
Speaker Change: Our Consolidated Use Equipment revenues are up 24% year-over-year. This continues to highlight our success in developing our capabilities and increasing our participation in this market.
Speaker Change: Our User Equipment Business in the UK was up nearly 50% Our South American User Equipment Business up nearly 70% relative to Q3 2023 Further demonstrating our execution success in this strategic area
Speaker Change: In power systems we continue to see strong demand for our products and services with our power systems backlog of 44% since last quarter from additional wins in the UK and Ireland data centre market as we lock down business well into 2026 and 2027.
Speaker Change: We continue to see strong demand for power solutions in all regions and expect growth to continue in this sector.
Speaker Change: We continue to believe the rental sector presents an attractive, long-term, sustainable growth opportunity for Finning. We have taken a disciplined approach this year given the current market backdrop in construction, and taken opportunities to build capability for growth in future years.
Speaker Change: We're committed to disciplined execution but building momentum for a strong finish to the year and remain focused on executing our strategy, maximizing product support, continuously improving our cost and capital position to drive full cycle resilience and by growing prudently in use, rental and power.
With that, I'll hand it back to Greg.
Thank you, Kevin. I'll now turn to slide three.
Greg: Our Q3 net revenue of $2.5 billion was up 4% from Q3 2023.
Greg: Adjusted EBIT was down 19% primarily due to lower margins in Canada.
Greg: Adjusted EPS was down 13%. Lower EBIT was partially mitigated by lower share count and lower effective tax rate, which I'll provide more details on in a few slides.
Greg: In the third quarter, results were readjusted for two significant items. We incurred $19 million of severance costs related to headcount reductions and consolidation efforts of non-revenue generating positions.
Greg: including information technology and supply chain roles, as well as some financial support functions, as we continue to simplify our business, reduce overheads, and build more resilience into our operating model.
Greg: On slide 4, we show changes to our net revenue by line of business compared to Q3 2023 and the comparison of our equipment backlog by market sector.
Greg: New equipment sales were up 7%, driven by strong mining deliveries in Canada and South America.
Youth equipment sales were up 24%, higher in all regions.
Greg: Product support revenue is up 2% with solid growth in South America, offset by lower levels in Canada and the UK and Ireland.
Greg: Rental revenue decreased by 12% due to lower utilization factors across all regions.
Greg: Our equipment backlog was $2.3 billion at the end of September, up 4% from the end of June, reflecting strong order intake from mining and power systems customers.
Greg: Equipment was moving through our backlog very efficiently and deliveries remain very healthy.
Greg: We continue to see solid order intake with sizable orders received in October, $250 million from a global miner in Chile and $90 million from a mining contractor and uranium miner in Canada.
Turning to our EBIT performance on slide 5.
Greg: Gross profit as a percentage of net revenue is down 210 basis points, mostly due to lower margins in our Canadian business. Adjusted EBIT as a percentage of net revenue is 10.9% in South America, 6.3% in the UK and Ireland, and 7.5% in Canada.
Greg: SG&A has a percentage of net revenue of 16.8%, excluding the estimated loss on receivables, our SG&A has a percentage net revenue of 16.2%, demonstrating strong cost control.
Greg: This marks the sixth consecutive quarter where SG&A as a percentage of net revenue has remained below 17%. Building on this momentum going forward will be a key value driver.
Greg: We executed a restructuring program in the quarter to lower our cost base in a sustainable way and further reduce our SG&A as a percentage of net revenue.
Greg: These actions are expected to reduce annual SG&A in 2025 by approximately $25 million.
Greg: We also continue to drive forward and advance a number of invested capital improvement plans, both operational and financial.
Greg: For example, we recently signed an agreement with a UK insurance company to optimize our UK-defined benefit plan.
Greg: Upon closing this will improve our annualized consolidated return on invested capital in the UK and Ireland by approximately 260 basis points and our consolidated ROIC by approximately 30 basis points
Greg: Moving to South America results and outlook, which are summarized on slide 6.
Greg: In functional currency, new equipment sales were up 14% from Q3'23, driven by deliveries to mining customers and contractors.
Greg: Used equipment sales were up 68% year-over-year from strong demand in the construction sector.
Greg: Product support revenue is up 7% year-over-year driven by strong demand from mining customers and contractors as well as oil and gas customers.
Greg: Adjusted EBIT was down 3% from Q3 2023. Adjusted EBIT as a percentage of net revenue was down 140 basis points due to a higher mix of new and used equipment revenue as well as a higher proportion of mining equipment sales.
Greg: As well, SG&A was 17% higher, primarily due to $11 million Canadian of cost owing as a result of re-entering the official foreign exchange market in Argentina.
Greg: These costs were largely offset at the net income level by a lower effective income tax rate, primarily driven by unrecognized losses utilized in Argentina. Argentina operations remain profitable in Q3.
Greg: Our outlook for Chile mining remains strong, underpinned by growing demand for copper and solid levels of quoting, tender, and award activity for mining equipment and product support.
Greg: While activity levels and outlook remain positive, we also expect a continued challenging environment to attract and retain qualified labor.
Greg: In Chile, we continue to see healthy demand from large contractors supporting mining operations. We expect infrastructure construction activity to remain steady. In the power system sector, activity remains strong in the industrial and data center markets.
Greg: In Argentina, while we're seeing near-term pockets of strong activity in oil and gas, along with renewed optimism as the new government programs are helping drive large-scale investment by global miners, we continue to monitor the government's new rules and policies and will take a low-risk approach.
Turning to Canada on slide 7.
Greg: New equipment sales were up 4% from Q3 2023, driven by mining deliveries.
Greg: Product support revenue is down 3% from Q3 2023 due to mixed activity levels in the mining sector as large oil sands customers continue to optimize their mine plans.
Greg: and scope of contractor work, which led to deferral of maintenance spending. We're also seeing slow recovery in activity by customers in the construction sector.
Greg: Adjusted EBIT was down 31% from Q3 2023. Adjusted EBIT as a percentage of net revenue of 7.5% was down 330 basis points with lower gross margins in all lines of business.
Greg: New equipment sales had a large proportion of mining equipment in the mix, and we expect that to be the case in the fourth quarter as well.
Greg: Used equipment pricing was lower as we proactively managed our inventory levels, considering higher inventories in the used equipment market in general. We're now seeing improved margins on recent trade-ins and sourcing activities.
Greg: In the quarter, we sold approximately $150 million of inventory at low margin, which supported our very strong free cash flow and prioritization of continued inventory health.
Greg: The rental equipment market remained challenged as fleet utilization was below what we would be expected in a normalized environment. We also had a lower mix of product support revenue and smaller size equipment rebuilds in the quarter.
Greg: Canada's SG&A expense, excluding the estimated loss for receivables, was lower by 2%, reflecting solid cost containment. However, it was not sufficient to provide a material cost offset to the lower gross profits. Thus, our focus moving forward goes from cost containment to cost reductions.
Greg: We expect continued spending discipline from our large mining customers as they work to achieve operating cost targets, and in several cases are integrating acquisitions or adjusting to recent divestitures. Customers continue to optimize mine plan, adjust scopes of contractor work, and defer maintenance spending.
Greg: We expect continued headwinds in the used and rental markets following a period of strong sector activity and limited equipment supply. We see pricing utilization in these markets starting to normalize and expect this to last the next several quarters.
Please turn to slide 8 for our results
Greg: In functional currency, new equipment sales were down 3% compared to Q3 2023, with slower demand from certain industrial customers.
Greg: Used equipment sales were up 49% year-over-year, mainly from increased volumes in the construction sector.
Greg: Product support revenue is down 2% from record levels in Q3'23, which had very strong activity in the power sector.
Greg: Compared to Q2 2024, product support revenue were up 3% as we captured more rebuilds and machine hours trended higher.
Greg: Adjusted EBIT as a percentage of net revenue was up 40 basis points to a solid 6.3 percent driven by a focus on cost control with SG&A expense down 10 percent from Q3 2023.
Greg: We will continue to focus on maximizing product support growth in each region as a key value driver going forward, as a primary driver to achieving consolidated adjusted heroic within our 18 to 25 percent range.
Greg: To conclude, Q3 was a quarter where we benefited from our diversified business. Free cash flow was robust, our cost control was strong, our ongoing backlog build is solid, and our South American results were excellent. And we're taking action to improve our Canadian profitability. Operator, I'll now turn the call back to you for questions.
We will now begin the question and answer session.
Speaker Change: Analysts who wish to join the question queue may press star then 1 on their telephone keypad.
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Speaker Change: The first question today comes from Yuri Link with Canaccord Genuity. Please go ahead.
Good morning, guys.
Morning, Yuri.
Good morning.
Speaker Change: Yeah, so I'll take that, Uri. So yeah, we still expect the product support growth.
in South America to be strong as we move through.
Speaker Change: the next year and into 2026. We're building capacity and capabilities, as I mentioned, that I visited the region last week and saw those. We've got 22 workbays coming on stream in Antofagasta in the next six months.
Speaker Change: made some big investments into the PDC and as I noted in the in my remarks we added 200 technicians in the quarter.
Speaker Change: All of those things are going to point to continued growth as we move forward and we're really encouraged by the execution that the team are putting on and the way they're performing down there right now.
that's not in play anymore, right?
Speaker Change: We're not going to isolate it by region. We're really looking forward. The market's been very dynamic but, you know, product support in South America is very strong and will continue to be very strong as we move forward. Very strong.
Speaker Change: Last question, what's been most surprising in the Canadian product support business and how long do you feel the
Speaker Change: the deferral of maintenance can continue and what does your backlog of rebuilds look like for 2025? Thank you.
Speaker Change: yeah so yeah I think you you highlighted it there in the question I think the thing that's
Speaker Change: You know, I wouldn't say it's a surprise. It's just it's challenging to
Speaker Change: You know, we expected construction to be slower, given the absence of major infrastructure projects, you know, notably the pipelines and Site C.
Speaker Change: And that, you know, that really hasn't picked up through the course of this year and, you know, obviously as we enter the winter season in Canada, we don't envisage that picking up for another quarter or so. You know, order intake and sentiment is better for next year in construction generally, in all three regions.
Speaker Change: We kind of expected it to be, but it would have been at the lower end of our construction expectation. So yes, the biggest challenge we've had is trying to pinpoint the opportunity and the execution within the mining in Canada.
Thanks very much.
and Shiri.
Speaker Change: The next question comes from Sabahat Khan with RBC Capital Markets. Please go ahead.
Sabahat Khan: Great. Thanks and good morning. Maybe just kind of following up on that last comment and just going a higher level into Canada. Directionally when we look at the Outlook commentary, it's not materially different from what you've said in the past. I just want to understand
Sabahat Khan: Did something change in the sentiment of the customers? Was it just maybe a low investment environment that dragged on? If you can maybe just...
Sabahat Khan: contextualize sort of the evolution of the Canadian market, you know, what maybe led to some of the the margin drag that we saw this quarter and just maybe provide perspective on how do you see that evolving kind of into 2025. Thank you.
Speaker Change: I'll talk about how we're feeling kind of sequentially in Canada and then Greg can talk to some of the margin situation there.
Speaker Change: Quarter over quarter, you know, I actually feel better about Canada.
It's Greg's closing remarks there in his update.
Speaker Change: You know, the reason why we've withdrawn the guidance is because, you know, we're not confident yet that we can see the level of growth in 2025, which would put us on the two-year trajectory.
in Canada, so that's why we've removed that.
Speaker Change: and yeah, we continue to maximize all of the opportunities that are available there.
Speaker Change: and we are seeing some signs of movement and increased spend in that area. So, I guess net-net I feel better, but it's a different situation to have to cover off the absence of the growth that we've seen this year over that two-year commitment.
Greg, you want to talk about them all, do you?
Speaker Change: Yeah, on the margin side, I mean, part of it is us prioritizing free cash flow. We do have good availability for equipment for next year, and there was some inventory where we wanted to make sure that we moved it within the quarter.
Speaker Change: We got it into the hands of good customers that are good product support customers, and it was helpful in generating a lot of cash.
Speaker Change: So that was one of the dynamics. The other was just, I mean, the way the quarter played out, you know, the last couple of years post-COVID.
Speaker Change: You know, the summer has been slower and then September has been extremely strong. That just didn't play out this year. You know, customers did delay some activities. You know, some probably waiting on some of the lower interest rates to come through on financing.
Speaker Change: others on the mining side really pushing through production and the contractors haven't got clarity yet.
Speaker Change: on what the winter plans really look like and 2025 looks like. So not a lot of confidence amongst that group, some real delayed decisions, even through September. September would normally be by far our strongest, and it was it was frankly a little weaker than August. So.
And that's just some of the evolution played out.
Speaker Change: but we can see one aside in each category to what was unique within the quarter and the 150 won't replicate.
Speaker Change: We're starting to see better margins on the recent sourcing and trade-ins, so that's helpful.
Speaker Change: and overall product support. We do have a larger population and we'll continue to work through that and we do think there's a lot of machine hours logged that will need maintenance in the future and we'll have to see when that completely plays through.
Maybe just a thought process there was it just
Speaker Change: Sales you were going to undertake anyway, but there was pricing pressure or was it more of a cautionary? Hey, let's move the inventory and focus on cash Maybe just walk through the the pricing environment as well as maybe the thought process behind the just a sale of that inventory
Speaker Change: Sure, and just to clarify, that's not 150 million of views, that's new and used, so a portion of that would have been RPO conversions with a few incentives.
Speaker Change: Some of it would be new equipment where we saw some aging that we wanted to take action and we could get it in the hands of the right customer and then a third would be used. So it was balanced across the board.
you know.
Speaker Change: I'm really happy to generate $300 million of free cash flow in the quarter and continue to expect that strong trend in through the end of the year. But the vast majority of that's coming from Canada and that's just cash we wanted to generate.
We got.
Speaker Change: Some good market share opportunities, we put it in the hands of the right customers and we have good availability.
Speaker Change: for orders next year. So we just wanted to move that through and it's a choice we made during the quarter.
Speaker Change: and, you know, those capabilities are helping us to make sure we make the right decisions in that regard. Maybe previously we wouldn't have been so proactive.
Speaker Change: There's clearly, as you've seen in the market and seen with other companies, there's clearly an excess of used equipment in the market right now, and prices are normalizing or just below normalized levels. And so to take really proactive...
Speaker Change: and aggressive action there is a function of the new way that Finnegan is participating in used equipment but the business is growing too.
Speaker Change: Okay, great. And then just one last quick one. Just on this comment around South America and just the more challenging environment for attracting and retaining qualified labor, is that just a comment on...
Speaker Change: excess demand in the copper market and tightness of labor. I just want to understand what's driving that. Thank you.
Speaker Change: you know, nearly a hundred new people a year, sorry, a hundred new people a month.
Thanks, appreciate it.
Speaker Change: The next question comes from Sherry Lynn Radborn with TD Cowan. Please go ahead.
Thanks very much and good morning.
Speaker Change: I wanted to pick up on the discussion regarding the product support guidance. I think I understand what you're saying completely in that product support is up about one percent year to date and so it would require a pretty massive re-acceleration next year to get to seven percent as an average for the two years.
Speaker Change: I guess what I'm curious is, what visibility do you have to a re-acceleration in product support growth next year by region? If you could just give us some comments, that would be helpful.
Yeah, sure.
Speaker Change: Your summary of the situation is accurate, so thank you for doing that.
Speaker Change: in Argentina. So, you know, I would say good visibility to good growth levels in South America. In Canada, a little bit mixed. I would say I expect continued softness in construction, especially through the winter months here in Canada.
Speaker Change: but I would say that you know visibility in Canada is improving and you know we would be it'd be more encouraging than not and then in the UK you know because of the propensity of construction activity I would say you know we don't necessarily see
Speaker Change: We don't really have a construction season in the UK and Ireland, but it does slow down a little in the winter months. Obviously they have a new government there now, so we expect some announcements about major infrastructure projects.
Speaker Change: Not a lot of visibility in construction right now, but we are very, very focused on execution. Some encouragement in Canada in mining.
Speaker Change: And I guess overall, we should say that, you know, power, good visibility to growth in power and product support, but it's obviously a much smaller part of our business. Does that help?
Speaker Change: That is really helpful, thank you. And in terms of the behavior that you're describing in mining in Canada, is that primarily in the oil sands or is that also across things like copper and gold?
Speaker Change: I think it's more broader, it's primarily the oil sands in terms of the impact on our Canadian business. But I think there is a kind of what I call a perfect storm happening in mining where...
Speaker Change: Lots of discussion around the best way to execute that that expansion There are some minds that have significant mind plan
Speaker Change: We've all been through a high inflationary period and that includes labour and products and services. So I call that the perfect storm and I think Finin and our partner Caterpillar are really well placed to help our customers navigate that.
Speaker Change: It is a broader-based discussion than the oil sands, but the impact on our business for Canada would be weighted towards the oil sands in terms of that comment.
Okay, great
Speaker Change: And then one last one for me. I did want to pick up on your comment, Kevin, that you feel better about Canada quarter over quarter. And I wonder if you could just sort of weight that between internal things that you've done, you know, the severance, the inventory reduction, versus sort of green shoots that you're seeing in the market.
Speaker Change: Yeah, I think it's probably a balance of a couple of things and then...
Speaker Change: You know, I've balanced the both of those things. I think they're awesome.
Speaker Change: There are some green shoots, like I said, if you're asking me if I feel better about Canadian...
Speaker Change: but I also feel very good about the actions that we're taking in Canada.
Speaker Change: to improve Ernie's performance. So as you've seen the playbook in the UK play out, I'd say the way I would look at it is if you look at the UK and Ireland trajectory,
Speaker Change: We know what the playbook is, we know what we have to do, Canada is a bigger...
Speaker Change: you know, retirement to the executive and remind my executive team. And we really wanted to give Tim the opportunity to get, you know, get into this quickly and early, hopefully have an impact in Q3 with his team, his new team and build some momentum.
Speaker Change: in Q4 and take that into 2025. So I think it's a little bit of a green shoots, confident in some actions in the playbook and then leveraging the leadership change.
Speaker Change: The next question comes from Steve Hansen with Raymond James. Please go ahead.
Steve Hansen: Just circling back to the Canadian margin topic, is it possible to attribute or quantify how much of the 330 basis point decline year-over-year was associated with this $150 million moving inventory?
Yeah, I would be about a third.
Speaker Change: About a third, okay. And then the balance of the two issues being mixed in rental utilization skewed more towards mixed, I presume season of rental's not that big.
Speaker Change: Yeah, you know, a portion would be volume with product support, you know, being down, rental being down. Those are two of the higher margin businesses.
Speaker Change: So those would be two of the drivers. There's some things on the edges, like $4 million down on our PLM joint venture, which has some positive activity in the U.S. That didn't help either. But yeah, I'd say about a third was within that category.
Speaker Change: Okay, that's helpful. And I think as you described earlier, that's not to repeat the inventory adjustment process. This is largely completed here.
Speaker Change: Right, you know, we've got a little bit more in Q4 that we'll continue to work through as we do in both Q4s, frankly, but certainly not at this scale.
Okay, that's helpful. And then just circling back to...
the idea of
Speaker Change: you know, product support more broadly and your broader targets around this all. Sherilyn asked a question around the momentum. Is there specific issues in the OS SANS that are allowing...
Speaker Change: these customers to defer so long and we see these record production numbers that the largest producers are pushing out. I presume they're burning equipment pretty hard to accomplish those tasks. Maybe just walk us through how they're able to defer so easily while they're pushing record numbers and ultimately how long can they defer?
Yeah, so I think, you know,
It's a
It's where I
a moment right now, Steve.
Speaker Change: was unique, well not unique, but it was abnormal and it helped, and it deferred some overburden and some preparation work. We think that will start as we head into this winter, but we're pretty warm here in Alberta.
Speaker Change: right now. But, you know, so I think that, you know.
Speaker Change: Equipment utilization and productivity and reliability continues to improve if you take curl for example You know, we had a customer event last night here in Calgary with our board and speaking to curl They're you know, very happy with their autonomous solution that's driving some real
Speaker Change: As we move forward, we'll understand a little bit more about.
Good morning.
Speaker Change: Am I thinking about this correctly that, you know, 25, you know, you're going to see robust new equipment growth in 2006 is when you really start to see the product support kick in?
Speaker Change: Yeah, I mean, I certainly don't want to get into two year projections, but just from a pure equipment population, the number of trucks that we've delivered, the amount of support equipment we've delivered.
Speaker Change: I don't think we'll get into talking about 2026 projections just yet, but the direction of travel with the fundamentals is strong.
Speaker Change: And what do you need to do to get right size on the parts and service side and the rebuilds in South America?
or do you feel you're there right now?
in terms of
Right-sized in terms of growth, Jacob.
Speaker Change: Yes, on the product support and the rebuilds and everything else.
Thank you for your time.
Speaker Change: As I remarked, I was in the region last week, I went from RCRC.
Speaker Change: We're spending $20 million in the region to expand our CSA as we outlined at the Investor Day last September and that work is well underway. I then moved to the Parts Distribution Centre and saw our new auto store which is massively increasing the productivity of the lines we can pick every day in the warehouse.
Speaker Change: and then obviously the big number is adding, you know, 100 technicians there or thereabouts.
Speaker Change: Okay, maybe my last question here just as far as some of the restructuring and the staff reduction I think you heard
Speaker Change: You say that you reduced it by 20% at this point. Just curious, you know, what's left to do and what are the areas of focus right now?
Thank you.
Speaker Change: Yeah, so the area of focus is highlighted, you know, particularly around IT supply chains and finance functions. But in general, you know, we want to reduce the overheads of the company and non-revenue generators.
Speaker Change: you know, have as many mechanics as possible and as a percentage of the workforce. So that's going to continue.
Speaker Change: I think our strategy really helps us prioritize our resources and have a clear approach and that allows us to do things just much more effectively.
Speaker Change: The next question comes from Devin Dodge with CMO Capital Markets. Please go ahead.
Devin Dodge: Alright, thanks. Good morning. Look, I just wanted to maybe come back to Canada and look at the rebuild. How does that pipeline look now and are you expecting that mixed shift towards smaller equipment to continue in the coming quarters?
Speaker Change: but it is significantly higher than the pre-pandemic or the pre-supply chain. Christian, we've always said that we believe that rebuild proposition and execution is
Speaker Change: is materially different than pre-pandemic and we expect that to be stickier. We have seen some a shift to smaller equipment as you work through your rebuild population.
Speaker Change: on improving, on making sure we can hit the rebuild economic so every time they go again, they you know, they bring more, smaller equipment into scope in terms of rebuild.
Greg Palaschuk, CFO Alphabet and Google
Greg Palaschuk
Speaker Change: And then on the larger results, I mean, there are there are ongoing conversations on the larger scale of programs That scales that we're pleased with the timing is just the question mark
Speaker Change: We are in the progress of rebuilding two large mining trucks in Canada for a customer that hasn't rebuilt before, as those machines start to enter that window, so it's part of that encouragement we spoke about on a couple of the questions here.
Speaker Change: Okay, makes sense. Thanks for that. And then maybe wrap up with a question for Greg. I'm just wondering how we should be thinking about rental investment in 2025 and just, you know, is it relatively balanced across the across the various fleets?
Speaker Change: Yeah, I mean, the focus has been on capability rebuilds or capabilities within the sector. We've had some good people come in and have a good perspective on
Speaker Change: some of the fundamentals that we need to make sure we get right. So we're going to keep an eye on the market conditions.
Speaker Change: You know, we have obviously done some retooling of the fleet and optimization of the fleet.
Speaker Change: We are starting to see utilization factors move up even unseasonably, so that's a good indication and so we'll keep an eye on that, but of course it's going to be market dependent and the market needs to improve quite a bit here.
Speaker Change: The next question comes from Sharif El-Sabahi with Bank of America. Please go ahead.
Hi, good morning.
I just wanted to touch on a few other topics.
Speaker Change: Energy customers in Canada, just given recent developments in U.S. politics, how are they thinking about expected tariff exemptions for Canadian oil and gas and how a drive to ramp energy production by U.S. administration may impact them?
Speaker Change: put production likely excluded from there. So, I think that helps the Canadian producers in general. But it's obviously pretty early to tell what exactly those will be and what segments and customers would be impacted.
Speaker Change: Understood. And in terms of your backlog shift, construction is about 20% of the mix. That's approximately half of what it typically is. I understand that there's been strong power systems demand and weaker construction markets at the moment, but is this a trend you expect to see persisting over the coming few years and what impact, if any, might it have on product support going forward?
Speaker Change: Yes, I think, so firstly we're encouraged by the product support, sorry, the backlog build in power across all three.
Speaker Change: a function of supply necessarily. It is a function of the customer's planning much further out for data center build.
Speaker Change: and so that that kind of long-term planning means that the power systems units are in backlog for longer and so that's that's impacting the mix of total.
Speaker Change: backlog, you know, skewing it towards power systems. You know, the availability improvement within construction is also a factor and so things are moving through there faster. I think, you know, we described new equipment sales for construction equipment being up in all three regions so we're selling it through a lot faster.
Speaker Change: and then you know mining as we've always discussed Sharif is lumpy and so it can move from quarter to quarter as we as we deliver the product so you know I wouldn't you know I would say that construction equipment
Speaker Change: is probably lower as a percentage than we would see typically moving forward and as we go into the selling season here.
Speaker Change: but certainly the proportion of power systems is probably something that will continue into the into the next couple of years.
Speaker Change: The next question comes from Maxim Dekla with National Bank. Please go ahead.
All right, good morning gentlemen.
Hey, Max.
Speaker Change: Kevin, maybe first question for you, if I may. Kind of as we think about sort of the longer-term trajectory of J&A's percentage of revenue, I'm wondering if your thought process has evolved, you know, potentially on the topic on a going-forward basis. Thanks.
Greg Maxson.
Speaker Change: Can you just repeat that? Was that for me? Sorry, Max. Can you just repeat the question? Yeah, yeah, just in terms of the SG&A as a percentage of revenue Yeah, obviously you're already at 17% and I'm just, you know, wondering you know, how are you thinking about like, let's call it, you know, flat-ish revenue generation and and you know, the operating leverage that can be driven through this line item. Thanks
to optimize our business, we're decentralizing and simplifying.
Speaker Change: all the time. You know, we have to consider, you know, we have to reconsider lots of aspects of our business, you know, to make sure that we remain competitive.
Speaker Change: in the marketplace and that's a, you know, we don't control.
Speaker Change: you know the whole market and so we have to make sure that we control our controllable and that we can you know operate effectively and I think the UK playbook is a good example of that and you know as I would say that you know with the leadership change in Canada and the fresh eyes
Speaker Change: I would expect that Tim will be able to think about some new opportunities there and help us. It is our biggest business and so it has the most material effect on our overall SG&A as a percentage of sales.
Speaker Change: Okay, well then that was good to hear. And just one quick follow-up on Parkes...
Speaker Change: I remember when we went to Chile, you know, like there's some projects you're working on. I mean, if some of that stuff could be applied to Canada or there's something that maybe structurally prevents you from implementing the same sort of parts, sorting technology and things like that.
Speaker Change: Yeah, I mean, just quite simply, Max, it was the availability of the technology. I mean, so we, you know, our new Edmonton Warehouse is a huge advancement on what we've had previously.
Speaker Change: But we had a certain technology available to us when we executed on that, given the timings and moving out of our previous distribution center.
Speaker Change: And then, you know, the technology that we've deployed in South America is now available in Canada. So the team will continue to look at how they... The team presented a business case to me less than three weeks ago about bringing that technology to our Edmonton Distribution Centre in Alberta.
Speaker Change: and given how successful the implementation has been in Antofagasta, I would think it's highly likely that we'd move forward with that, obviously subject to capital allocation priorities when we review our renewal operating plan over the next few weeks.
Speaker Change: Okay, that's great. Then just a couple of quick ones for Greg, if I may. So in terms of, if we're thinking about, again, kind of like flattish revenue as a base case, can we expect additional freeing up of working capital on a prospective basis, or that's kind of as good as it gets?
Speaker Change: Yeah, absolutely. So, you know, our investor day plan is what we're executing and we are prioritizing our working capital and some of the low-req activities.
Speaker Change: We're really pleased that free cash flow year-to-date is above net income and we want to see that continue to drive forward here.
Speaker Change: Pre-cash flow is best when the market flows down a bit or of course we're seeing that now and so
We're looking to have, you know,
Greg Palaschuk
Speaker Change: We want to make sure that our leverage is in check, but as we're generating cash, we're allocating towards share buybacks and we've been really consistent about that for
Speaker Change: a number of years and we plan to continue doing that, so I wouldn't...
Speaker Change: The next question comes from Steve Hansen with Raymond James. Please go ahead.
Steve Hansen: Okay guys, sorry, I was just curious on the buyback as well. It sounds like it's going to be fairly rateable going forward. Greg, is that the takeaway? Sorry.
Speaker Change: Yeah, I mean we'll keep evaluating the business plan through budget season. We'll keep looking at where the share price ultimately lands, but yeah, we do plan to unlock more capital and we do continue to see it as a good value, so it's a trend that you should expect to continue.
Speaker Change: That's great. And just on the SG&A cuts really quickly, how much of that should we expect to see in the fourth quarter? It sounds like this has been a fairly recent process. Will that start to show in the fourth quarter, I presume?
Speaker Change: Yeah, it was over half done in Q3 and it'll be fully complete within Q4.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Greg Palaschuk for closing remarks.
Greg Palaschuk: Okay, thank you operator. This concludes our call and thank you for participating and I hope everyone has a safe day.
Greg Palaschuk: This brings an end to today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.