Finning International Inc.

Thank you for standing by. This is the conference operator. Welcome to the Finning International first quarter 2020 conference call and webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. Analysts who wish to join the question queue may press star and send one on their telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Greg Palaszczuk, Executive Vice President and CFO. Please go ahead.

Thank you, operator, and thank you everyone for joining us on today's call. I'm Greg Palaszczuk, EVP and CFO, and I'm joined today by Scott Thompson, President and CEO. Following our remarks today, we'll open up the line to questions. The call is being webcast on Finning.com, and an audio file of the call will be archived for three months on our website. I also encourage everyone to follow Finning on Twitter, LinkedIn, and Facebook, where we have a regular flow of interesting content on products, promotions, customers, and community involvement. Before I turn it over to Scott, I want to remind everyone that some of the statements provided during this call are forward-looking. This forward-looking information is subject to risks, uncertainties, and other factors as discussed in our annual information form under key business risks and forward-looking information in our MD&A under risk factors and management and forward-looking disclaimer. This quarter's MD&A includes important additional detail regarding the potential impacts of COVID-19 and the associated risks. Please treat this information with caution as Finning's actual results could differ materially from current expectations. Scott, over to you.

Thank you, Greg, and good morning, everyone. On today's call, I'm going to comment on our performance in the first quarter, provide an update on how we are navigating the current environment, and discuss our outlook going forward. First, I'd like to thank all Finning employees around the world who are demonstrating great resiliency and adaptability in serving our customers and taking care of one another. I'm very proud of our teams and of what they've achieved in the first quarter. Despite challenging market conditions to start the year and then complications from the COVID outbreak, we delivered strong performance. We kept close to our customers as the crisis developed, and we were able to maintain our operations with only minimal disruptions. The feedback I've received from our customers has been both positive and appreciative of our support and operational performance. Despite the difficulty of the situation, Q1 was one of our best quarters in terms of improved safety and customer feedback. Our total incident frequency rate decreased by 36% and our customer loyalty scores increased by six points in Q1 2020 compared to Q1 2019, both remarkable improvements achieved by our employees. During the quarter, we achieved what we set out to do at the start of the year, despite an increasingly challenging market backdrop. Despite lower revenue, our EBITDA and EPS grew by five and 9% respectively year over year. Our execution in South America is improving as evidenced by strong product support, lower SG&A and profitability recovering. We are benefiting from a reduced cost base in Canada and we delivered higher profitability on lower revenue year over year. Our UK operations were impacted by COVID related disruptions more significantly than other regions in Q1, which exacerbated already low business confidence and activity levels at the start of the year. While we are expecting a challenging Q2, we are encouraged as we look beyond Q2 with a strong position to capture HS2 opportunities and a solid backlog of power projects when project delivery resumes in the second half of 2020. And finally, we're improving our cash profile and reducing financing costs. The organization-wide focus on working capital discipline and inventory reduction led to a strong foundation for free cash flow generation during 2020. We are benefiting from the diversification of our business across geographies and market segments. While our UK operations have been the hardest hit, our customers' copper mining operations in Chile have been less impacted to date. Overall, the resilience of our business model and improved execution amidst low commodity prices, low GDP growth, and COVID disruptions at the end of March delivered earnings of 33 cents per share in the quarter. It is worth highlighting what we're doing to protect the company and all of our stakeholders in a period of unprecedented uncertainty as we continue to adapt to COVID-related headwinds in each of our regions. Our global teams responded very quickly and effectively as the crisis unfolded. We have robust continuity plans in place with our top priority being the health and safety of our employees, customers, and the communities where we operate. We have taken a risk-based approach to assess each of our facilities, and the executive team has been meeting daily to review and reevaluate our actions. Our measures include distancing, team separation, and extensive work from home, as well as elimination of all non-critical travel. We are seeing the benefits of our investments in IT infrastructure, which are now enabling efficient work from home. Employees who can work from home are doing so. In order to align our costs with expected changes in business activity in each region, we started by reducing board and executive compensation, and then worked with salaried and hourly employees, as well as our union partners, to implement pay reductions, reduced work schedules, furlough, and workforce reductions in some areas. For example, in the UK, about 50% of our employees are currently furloughed, and we are leveraging the UK government assistance programs. We also took proactive measures to control working capital investments. As a result, we were able to deliver significantly improved cash flow in Q1 while concurrently strengthening our liquidity position. With the full support of Caterpillar, our global supply chain continues to function well with minimal disruptions to date and global continuity plans in place. Our investments in digital and omni-channel technologies are paying off as adoption is accelerating. We now have 47% of our non-service parts ordered online in Canada, up from 25% in 2017. We set a new record in digital parts dropbox volume in April as the number of new customers more than tripled compared to the prior year. Globally, over 80% of the CAT assets in our territories are connected. This enables us to remotely monitor more equipment and become more sophisticated in ordering inventory. I am pleased to see an increasing level of technology adoption from customers, which is helping our business maintain effective operations as well as increasing the rate of return on investments we've made in recent years. I will now turn to our perspective going forward. The ultimate impact of COVID is difficult to predict as it will depend heavily on the duration of social distancing and quarantine requirements. The timing and pace of macroeconomic and commodity market recovery are also unclear at this time. We expect the impacts of these factors on our second quarter results will be material. Our consolidated net revenue in April was down approximately 15% from average monthly net revenue earned in the first quarter of 2020. In each of our regions, our customers have been reducing capital spending and implementing cost containment measures and business continuity protocols with a range of impacts on activity levels. Since the middle of March, some of our customers have scaled back or in some cases suspended operations to comply with requirements and recommendations of governments and healthcare authorities. We are having ongoing dialogue with our oil sands and mining customers to understand the risk of potential disruptions to our operations. To give you a few examples, in the oil sands, our producer and contractor customers have indicated they may park about 20 to 30% of their truck fleets for a portion of the second quarter. Fortunately, our largest oil sands customers are more dependent on WTI than Western Canadian select prices, so they are less impacted by the current oil price differential than other producers in the region. Near-term declines in activity are expected to be greater in the construction sector where machine utilization hours and product support run rates are down since mid-March, but seem to have recently stabilized. Run rates have been more resilient in the regions of British Columbia, Saskatchewan and Chile, but lower in Alberta, the UK, Ireland, Bolivia and Argentina. Importantly, our mining customers in Chile continue to operate and the vast majority of our equipment continues to be utilized. We will continue to control what we can, match our capital investments and cost base to activity levels and accelerate cost reductions where necessary. And on this note, I'll pass it over to Greg.

Thank you, Scott. I'm going to provide more details on our performance in the first quarter, comment on our actions to manage our invested capital, and discuss our strong and improved liquidity position. Although the revenue profile was more challenging than we were expecting at the beginning of the year, strong execution from our global teams resulted in improved profitability and earnings. Product support revenue growth in South America was a key driver, with product support revenue up 23%, driven by strong execution in Chilean mining operations and resilient demand from Chilean mining customers that continue to operate. SG&A was down in absolute dollars year-over-year and sequentially, reflecting ongoing improvements in productivity. EBIT margin rose to 7.8% and EBIT data 12.4%, ahead of pre-ERP implementation levels and the highest level of profitability in South America since the second quarter of 2018. Canada entered 2020 with a lower cost base. and continued plans for cost to serve improvements. This strong cost focus, along with resilient product support volumes, which are up sequentially from Q4 2019, enabled us to demonstrate improved profitability on lower revenues. EBIT margin was 7.9% and EBITDA was 13.7% for the first quarter. In the UK, low activity levels at the start of the year and COVID disruptions, which impacted the UK earlier than other regions, led to a low level of profitability in the quarter. Lack of mining exposure makes the impact of COVID in the UK more significant. Profitability of our UK operations is more sensitive to equipment and power system project volumes. We also experienced labour recovery reductions in the UK that impacted our SG&A costs prior to increasing the number of employees on furlough. Backlog increased in the first quarter by 100 million, from 700 million to 800 million. mainly driven by order intake in Canada related to the pipeline sector and in the UK related to power systems projects, which adds to their backlog of high-quality projects with delivery expected to ramp up in the second half of 2020. Free cash flow use in the first quarter was modest at $50 million, reflecting strong inventory management from both improved long-term planning as well as a number of swift actions taken in Q1. In line with these themes, the Canadian operations generated positive free cash flow in Q1 2020 with a positive 14 million contribution from four refuel. These strong results were achieved while COVID-19 began to have an impact on our business in Q1 2020. These areas include delayed equipment deliveries, lower part sales and construction, and lower rental utilization in March in all regions. reduced productivity at our component repair facilities and lower labor recovery at our branches due to shift separation and distancing measures, temporary closure of certain facilities in South America, and allowance for doubtful accounts related to an increase in expected customer credit risk. These impacts were partially offset by swift action taken on discretionary costs and the many cost flexibility actions highlighted by Scott earlier. We continue to monitor customer demand closely and may implement further restructuring as appropriate. In addition to the impacts of COVID-19, our customers are dealing with historically low oil prices, and as a result, some headcount reductions will be necessary as we work to scale our operations to match expected and market demand. I will now turn to our invested capital measures. We have acted swiftly and effectively to put in place capital controls for the remainder of the year. We have minimized capital expenditures to mission critical maintenance and IT capital only, and we are limiting rental additions to match dispositions. As a result, we are now targeting 2020 net capital and rental fleet expenditures to be in the 90 to $140 million range, down from the 200 to 250 million range previously targeted. Inventory ordering and working capital management remain key focus areas throughout the organization. Our inventory was reduced by $250 million in Q1 2019, excluding the impact of FX. and we redoubled our efforts to ensure we are matching inventory to demand levels. We started the year with a reduced order book and early readings from connected data indicated a decline in machine hours in March, which informed our decision to further mitigate our inventory position at that time. This includes additional dealer trades, reduced uncommitted inventory orders, and selected order deferrals. As a result of these process improvements and near-term actions, our prime product inventory is in much better position relative to previous downturns. Lastly, I'll comment on our strong and improved liquidity position. We have further improved our liquidity position by securing an additional 500 million committed revolving credit facility. The new facility has a term of two years, can be used for general corporate purposes, and has substantially the same terms and conditions as existing committed global credit facility. This brings our total committed capacity to 1.8 billion. As at March 31st, we had $260 million cash on hand and less than $300 million drawn on our credit facility. We have significant headroom in our financial covenant of 67.5% of net debt to total capital. While our expanded liquidity capacity provides flexibility for a wide range of both stress and opportunity scenarios, our base case and primary objective is to generate strong free cash flow and prioritize capital allocation towards debt repayment, and meeting our dividend commitment. We expect strong free cash flow this year and are targeting approximately 50% EBITDA to free cash flow conversion. The absolute level will depend on the degree and duration of COVID disruptions, the resulting revenue and EBITDA profile for the remainder of the year. As we navigate through the current environment, our focus is on mitigating the near-term impacts while positioning for productivity, profitability, and ROIC improvements in a recovering market. I will now turn the call back to Scott for some summary comments.

I would like to conclude our comments today by highlighting the fundamental strengths of our organization. First and foremost, we have great people. Keeping things running or getting things back up and running quickly is literally what we do every day. So when confronted with the types of challenges we have today, we are resilient and respond rapidly for each other and our customers. We have a resilient and proven business model anchored by a strong product support business and diversification by geography, industry and product line that is complemented by a counter-cyclical free cash flow profile that further supports our strong financial and liquidity position, all of which serves us well in a higher risk environment. We entered 2020 on a good trajectory of cost and capital focus, which allowed us to adapt quickly to the sharp downturn in the outlook. We are laser focused on controlling the controllable, and our Q1 results demonstrate improved execution on many fronts. We have taken quick actions to match our capital investments and cost base to activity levels, and we're accelerating cost reductions where necessary. We are benefiting from our investment in technology and advanced digital and omni-channel capabilities. Technology is a great risk mitigator in a crisis. Our strong offering is facilitating accelerated adoption of online services and the extensive asset connectivity in all our regions enables us to be informed on a real-time basis, remotely monitor customer fleets, and add significant insights and value to our customers. Looking forward, our business is very well positioned for the long term. We have many important large infrastructure projects in front of us. The oil sands are world-class producing assets with low operating costs and decades of reserves. Copper mining in Chile is resilient and positioned for long-term growth, and governments around the world stand ready to support shovel-ready construction projects when the recovery phase is ready to begin. We have a very engaged, rejuvenated, and action-oriented leadership team that is executing well today and very excited about fitting in our future. And with that, operator, I'd like to open the call for Q&A.

We will now begin the question and answer session. Analysts who wish to join the question queue may press star then 1 on their telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We will pause for a moment as callers join the queue. Our first question comes from Yuri Link with Canaccord Genuity. Please go ahead.

Good morning, guys. Nice quarter. Scott or Greg, I was wondering if you can just provide a little more detail on the April revenue split that you provided. Does that look similar to what you saw in the first quarter in terms of the product support being kind of two-thirds of that revenue? Just trying to get an idea of what we might see this quarter.

Yeah, so I mean obviously Q1 was a large mix shift to product support, which is a feature of the business. So we do expect going forward that that shift will continue, and particularly on a year-over-year basis.

Okay. All right.

And then just as we look at your SG&A, what proportion of that would you – characterize as having some flex or being variable versus fixed?

Yeah, I mean, obviously we've been on the cost team for quite a while now. So coming into this downturn, we're obviously in a good position. I feel like we've been really proactive. So if you look even at Q1 itself, you know, revenue is down 16%. You know, SG&A is down 5%. And Scott walked through a whole list of flexibility and cost reduction initiatives that we've put in place, ranging from 5% to 20% salary reductions, and obviously work on everything discretionary and a number of flexibility initiatives. So that's what we did in Q1, and we think we can continue to push on reducing SG&A going forward. And so Q1 is instructive, but I think there's more that we can do.

Okay, that's helpful.

I'll turn it over there. Thanks, guys.

Our next question comes from Jacob Boot with CIBC. Please go ahead.

Good morning. Good morning, Jacob. The strong margins that you saw in the first quarter, how much does it result from next versus reducing cost? And then maybe just talk about maintaining these higher margins given everything that's going on right now with COVID.

Yeah, I mean, there was a strong mix shift in the first quarter, and so that was a key feature, but even margins within the mix were quite strong. New equipment was reasonably strong, and it was high-quality product support mix. Last year, we had more subcontractor work as well as some lower-margin mining in the mix, so that helped, and we do think that mix shift and the higher-quality stream, I think, is a feature that we see being able to be maintained.

My next question is, and I know it's early days, but, you know, as you kind of work through this period of the pandemic, you know, some of the lessons that you're learning here, you know, I know Scott talked on this a bit about, you know, connectivity and digital, but, you know, how's it going working from home? You know, what are some of the things you're looking at right now?

Yeah, thanks, Jacob. So first, we reflect on the last three years and the amount of capabilities we've invested in on the digital side and some of the investments we've made on strengthening the foundation. And I think in times like this, it's really demonstrating the importance of that. And so very quickly, we were able to get everybody that could work from home to home. And we did that without any hiccups. And that continues. And I think there's a strong lesson there in terms of, you know, how we work going forward, both from a travel perspective and just a flexibility perspective for our employees. I think that would be one thing. Secondly, on the omni-channel capabilities, I mean, you know, you've been watching for the last three or four years, we've been growing that at a pretty significant rate. But to have now 50% of our our non-service parts revenues and in in canada i think it's 47 that's a that's a big um shift and and i think it's a you know it's a it's a win-win for customers and and fitting it and and and also in the context of omni-channel so you'll have you'll have both opportunities for customers the digital drop boxes it's triple in terms of um what we'd seen just the last year, which we wouldn't have been in a position to do unless we'd made those investments. And then lastly, on the asset connectivity, we've been on that journey for four years, but to see the benefits of asset connectivity right now in terms of looking at trends for inventory ordering, but also providing insights to customers has been hugely important. So I think it's confirming a lot of what we've been doing the last few years and giving us the confidence to even accelerate the digitization of the business, and we'll continue to do that going forward.

How many employees can actually work from home?

Yeah, actually, do you have the percentage, Greg?

That's about a third. A third, yeah.

But that is not limited by our IT capabilities. Our IT capabilities have not been a constraint in this environment. That's limited by the fact that we are an essential service and we're on the front lines. And so the back office can work from home, a lot of the back office, but we've got a lot of field technicians and mechanics who, by necessity, keeping our customers up and running are on the front lines. So that third is, you have to keep that in context.

Thank you. I'll turn it over.

Excellent. Our next question comes from Sherilyn Radborn with TD Securities. Please go ahead.

Thanks very much, and good morning. In terms of some of the social distancing protocols that you've implemented at your own facilities, can you give us a feel for how that's impacting internal productivity? And do you think you can reduce that inefficiency over time as it becomes the new normal, at least for a while, and you find ways to get better at it?

Yeah, that's a great question, Sherilyn, and I think we're all learning through this process. So one, from the work-from-home perspective, I actually think that could provide some benefits from both the cost, flexibility, and amount of real estate that is required. And so that, I think, is a benefit from a productivity perspective. On the other side, definitely taking care of our frontline employees in terms of how we think about shifts, how we think about transportation, how we think about spacing within facilities, I think will take some time to get used to. And, you know, I've been really pleased with how we've adapted very quickly. And I think our health rates are much better than what we're seeing, you know, in our various regions, partly because of how quickly we acted. But no doubt there's going to be a learning stage here where we're going to have to put the health and welfare of our employees ahead of the productivity and make sure we grow into that productivity.

Okay. My next question is a little more difficult, but we're getting this a lot from investors. With respect to Canada, has there been any change to your view of the company's revenue opportunity over the cycle? in the oil sands specifically and in Western Canada more generally?

The answer is no. I think we're in a particularly difficult time right now with the oil price, where it's been the last month. But on the other hand, we now have four pipelines in construction. Who would have thought two years ago that we have four pipelines in construction? And so I think the crisis from an oil price perspective, has forced industry and the government to really move forward on getting this commodity to tidewater, which I think is helpful to other markets. I think the second thing that I would say is we also recognize we have significant market share opportunity on the aftermarket side. I do think opportunities like this, or opportunities in the aftermarket, this is you know, where we shine in crises like this because of our people and our service capabilities. And I think that will be helpful. And then I guess the third thing is there is going to be pain undoubtedly in Western Canada. But I do think it's probably consolidation around the end customer as opposed to, you know, overall reduced production, if that makes sense, or oil price production. And I think we'll continue to be there for our customers, you know, both large and small, to capture those opportunities. So I don't see – I see this as a short-term blip in terms of the trucks being parked as opposed to anything long-term in nature.

Okay. I appreciate those comments. I'll turn it over.

Our next question comes from Michael Dumais with Scotiabank. Please go ahead.

Hey, good morning, guys. So you identified the April sales were down 15%. That's roughly in line with Q1. And I guess in my perspective, I thought April sales would have been lower given the decline started mid-Q1. You also had an easier comp in Q1 with the ERP issues in South America. So what explains the relative strength? And can April... you know, actually be the low point for Q2, given the economy is reopening in some regions?

Yeah, I mean, you know, April's complete, so we put out the number. Obviously, there's a seasonality typical in this business, and we're obviously not in a normal seasonal cycle. So, we put out the number, you know, 15% is the number that we put out into the market, and I think it's too early. We've seen signs of stability in many pockets. We're in many regions, and so you see different pieces of data. But I think it's too early to say exactly what's the bottom. Obviously, our goal is to put a bunch of sales campaigns in place and go and sell the inventory that we have and control our own destiny. But I think it's too early to call bottoms or sequential growth.

Okay. And just going, so the last time Finning recorded sales of 1.4 billion, if I scroll back in my model, that was Q1 of 2017. The product support business has grown since then, and you've made a number of permanent cost reductions. So I'm assuming that's what explains the higher EBIT margins versus that period. I mean, is there a reason to think that if revenues continue to track at or above your 2017 levels for the remainder of the year, you know, with favorable mix and lower costs that even, you know, margins shouldn't at least exceed those for 2017? Or is the downturn or is this downturn more disruptive on the cost side in your perspective?

Yeah, I think it's a little early to do a full comparison to previous cycles and duration. Obviously, we showed in 15-16 that we can take a lot of costs out of the business. And we think we've got a toolkit today that allows us for improved employee productivity, probably more in a methodical way. So obviously, near term, we're doing everything we can on the cost front. Scott named a list of them. And you have to have a view on what shape the recovery is. I know there's a whole alphabet of letters out there. But if it's longer, we think we've got lots of productivity improvements, similar to what we made in 15-16. If it's shorter, we've got a toolkit around some of the actions that we've done. And we're hopeful that the recovery is earlier rather than later, but we have to be ready for both.

Okay, perfect. Thanks for the answers. Yes.

Our next question comes from Ben Chernyaski with Raymond James. Please go ahead.

Good morning. My questions have been addressed, although I was just hoping that you could maybe elaborate a little more on Michael's question about the cadence of sales decline in April. I'm with him. I don't quite understand how the decline in April when everything shut down was equal to the decline in the entire first quarter when you had January and February in there at normal operations. Can you maybe just address that specifically?

Yeah, sure, Ben. I mean, so we've had multiple regions that have different shape to different months. So, I mean, it was a reasonably slow start to January, and February was strong, and then March does have a mix of the dynamics that we did talk about, but it's typically also a high component change-out season. So you've got mixes depending by sectors. And so it's not a typical January, February, and then a bit of a dip down in March. There's a mix in there. And so that's why we highlighted April versus the average for Q1.

Okay. I'm still a little confused. I mean, March, we're talking year over year, right? So seasonality shouldn't really be, unless the seasons were different, was it warmer or colder? Was weather a factor?

No, I think, hey, Ben and Scott, I think 15% is relative to Q1, right?

Oh, you're saying it's down 15% to Q1, not Q2 of last year. Correct. Okay, that's clear. Okay, thank you. That's helpful. I guess while I've got you just on the SG&A, and I apologize if I missed this in the disclosure, but what component of the decline in SG&A, can you quantify what was accounted for through lower stock-based comp?

Yeah, year over year, that was down about $9 million.

$9 million, okay. Okay. Okay, that's all I've got for now. Thanks, guys. Thanks, Ben.

Our next question comes from Ross Giraldi with Bank of America. Please go ahead.

Yeah, thanks, guys. Not to dwell on this 15%, but now I want to make sure I totally understand what you're saying. If you take down 15% in April – and you extrapolated that for the entire second quarter, it would actually imply that you're down like 35 to 40% year on year. I'm not asking you to endorse whether or not 15% will be the reality for all of Q2, but am I thinking about it correctly? Because I thought it was clear as day in the press release that it's down 15% as relative to Q1 and not a year on year comment.

Okay, so you're right if you extrapolated April. with those numbers. I guess I would caution you not to do that or be very thoughtful about doing that given the uncertainty. You know, I think we're all kind of learning day by day on this. I think the good news is in the last week we've seen a little bit of stability, particularly on rental utilization, which has been helpful, and then also back-to-work programs and also the oil price increasing a little bit. what we're trying to do is just be as transparent with you as possible since we had the April results. You'll have to come to your own judgment in terms of where we are in the recovery cycle.

Got it. Thanks, Scott. And just in terms of the parts fleet, it sounds like you think this is just a short-term dynamic, but I guess risk that you could see the spike in parts fleet, cannibalized parts demands, you know, over the next six to 12 months, if it persists longer than you think it will?

Yeah, so I guess two things on that. One is in Chile, it's been very stable, right? And you've seen very little park fleet. And I think that plays a little bit with copper price, peso devaluation, input costs lower. And so that's been a pretty helpful component. On the oil sands, I think it's more related to storage and oil price as opposed to COVID. In fact, I know it's related to oil price and storage. And so your view on the recovery there will be dependent on what your view on oil price and storage is. Our communications with our customers is they've indicated 20% to 30% for a portion of 2Q. And frankly, we're at that 20% number right now. So, again, some guidance that we're trying to give you to be helpful from what we're seeing.

Thanks, Scott.

Yep. Our next question comes from Maxim Sichev with National Bank Financial. Please go ahead.

Hi, good morning. Morning, Max. I was wondering if you don't mind maybe commenting on the rebuild activity as some of the equipment is parked, obviously, in the oil sands or clients are not touching those assets at all.

Yeah, great question. And that's an opportunity that we're really looking at. I mean, obviously, given hopefully the temporary nature of COVID and the potential recovery, It's not a typical shape, and so we are in conversations with our customers to put together a proposition that allows us to rebuild some of this equipment that is being parked, and so we're in ongoing conversations about that opportunity.

Okay, but right now there's nothing kind of in writing or in stone from the clients?

We always have rebuilds ongoing, but the incremental due to parked is pretty recent, and so we're in discussions as we speak.

And the ability to actually perform this work, given all the social distancing requirements and so forth, you still think that you can be able to capture, I mean, assume that you're going to get a go-ahead from the sub-clients?

Yeah, we continue to do rebuilds every day of the year, even through this period.

Our OEM facility has done a great job in terms of distancing, shift management. And so we haven't had any significant issues in that OEM facility. And again, back to management and leadership. They've done a great job there keeping the rebuilds up and running.

Okay, that's helpful. And then, Scott, obviously there's language around HS2 in the MD&A. I was curious in terms of, again, that opportunity, are you getting a sense that you will be successful in that or because it's H2 2020, it's pretty close in terms of the contract announcement and so forth. Maybe any commentary there?

Yeah, so the government announced right after the Prime Minister came out of his isolation that they were going to move forward with HS2. I think that was on April 14th. So that was a big decision from the government. And I think the government is trying to put some infrastructure capital to work to offset, obviously, the slowdown. And so our expectation is this, you know, the contract awards happen relatively soon in the next couple of months. And so we'll have clarity here pretty quickly on how we perform from a market show perspective. We feel really good about what we've been doing. We've put a very, I think, thoughtful proposition forward from a technology and equipment perspective. We've been working on it for three years and we've got great relationships with the customers. So I'm feeling good about it. And I think it should be a second half 2020 opportunity. And so for our UK business, which is obviously... been impacted by the slowdown. I think the potential to start delivering under HS2 and then also power system contracts, which we see a really good backlog accumulated on the power system side. And I think a lot of that is driven by COVID and the need for more storage and data. I think that will really help our UK business in the back half of the year.

For sure. And just in terms of the structure for the HS2 contract, I mean, is a type of situation where either you get kind of 100% of that or nothing, or is it going to be partitioned into multiple slices so we can sort of guesstimate your probability of success?

Yeah, no, it will be partitioned into multiple slices. So there's seven big portions of HS2, and there's probably three that are a lot of equipment associated with it. And then on each of those three, there's a number of contractors and then some subcontractors underneath that. So that's why in a project like this, you literally have been working on it for three years to put ourselves in a good position. And so there's probably not a scenario where you're 100%. There's probably not a scenario where you're zero. You're somewhere in between. And the work that we've done, I think, will position us pretty well for a good outcome.

Right. And then just shifting gears to Chile, Any update in terms of how we should be thinking around deliveries for QB2? Is that being delayed, or what's going to be updated there?

We're a little bit dependent on the customer, and so the customer has suspended operations because of COVID, and I know what you know from a public disclosure perspective, so that's all I can say at the current time.

Okay, fair enough. And last question, just in terms of retention requirements, strategies around technicians, especially in Alberta and Chile. Any comments there, please?

Yeah, I mean, I think that the most challenging and most important thing through this crisis is human capital and you need to maintain your human capital. It's the number one thing that, you know, as a team we're talking about every day. And so, you know, we will be very thoughtful on that front and we'll take advantage of government programs where we can that will help us do that. So for example, in the UK, it's hard to believe, but 50%, 5-0% of our employees are furloughed right now. And that's because the activity levels are so low. And that UK government program is helping us not make more dramatic changes than are necessary. And we're using that government program, but also topping up our employees to a percentage of their salary to help them manage through that. And so that's a place where we've worked with the employee, with the government, with Finning to try and all contribute to keep our human capital in place. And we're doing the same sorts of things with our employees in Canada and Chile around vacation time, around reduced work schedules. around those sorts of things. You know, unfortunately, we're also in the situation, you know, COVID will pass, but we're also in the situation where you have significantly lower oil prices, and those lower oil prices are likely to stay with us for a period of time. And you have, you know, Chile GDP, which has gone down, as we've talked about in prior calls, And so, you know, there will be some headcount reductions we will inevitably have to do in those two regions. But our objective here through COVID is to maintain as much human capital as we can so we come out the other side stronger than when we went in.

Right. And sorry, I don't want to be too granular, but in terms of the furloughs, how should we think about, you know, from a P&L perspective? Is there, you know, like an extra restructuring charge or things like that? Or that GNA basically just disappears from the P&L.

Yeah, essentially the GNA will disappear from the P&L to the extent that you have some support from governments. And, you know, there's various programs via various regions which we're evaluating. I guess my only point, and it's still uncertain in terms of how you, do you qualify and how do you participate? I guess my point in that is if there's opportunities to maintain our human capital, By participating, we think that's the right thing to do, and those are what those programs are for, so we'll take advantage of them.

Okay. Very helpful. That's it. Thank you very much.

Thank you. Our next question comes from Devin Dodge with BMO Capital Markets. Please go ahead.

Thanks. Good morning. I just wanted to come back to the Canadian product support. Look, direct sales through e-commerce, I think you said it was up, almost 50%, obviously encouraging there. I think that shows the power of some of the investments you've been making. But just wondering if you've seen customers shifting to, say, parts only, where otherwise there might have been a service element attached to that.

Good question, Devin. I mean, I don't think we've seen a significant amount of that to date. And we are, back to the point on human capital, You know, we really like having that relationship with the customer where we're providing service and parts because it's a more intimate relationship. Undoubtedly, you know, as our customers become stretched, you know, they have to make difficult decisions as well, and that sometimes impacts our employees, and then we have to react. But in an ideal scenario here, we are providing, you know, the service and the parts, and that just keeps us closer to the customer.

Okay, that makes sense. Okay, maybe a question for Greg. I guess, how are you feeling about your accounts receivable right now? And I'm not sure if I missed this. I apologize if I did. But just have you taken any additional provisions on your bad debt expense? I'm sorry, just the collectability of accounts.

Yeah, in Q1, we did take $4 million for allowance for debt-full accounts. Obviously, it's something we're working on every day. We've mobilized the organization to make sure that we're doing everything we can on that front. It is a risk at the end of the day. It's something that I think we're monitoring very closely. There's a lot of government programs and a lot of bank support for medium and small-sized customers that we think will help as we go forward, but it's something that we have to monitor every day. Q1 cash collections were good. April was good. We just have to stay on top of it. Okay.

And maybe just one last one. Just on four-wheel fuel, can you just remind us, is fuel delivered on a spot basis? I'm just not sure if there's a delay for that pass or a decline in diesel cost to your customers.

Yeah. I mean, it's a day-to-day operation. There's no inventory. There's no commodity exposure. It's buy and sell on the same day.

It's interesting, though, and you look at the four-wheel fuel, I think the first quarter, 2020 was the best first quarter forward refuel has ever had. Free cash flow generation, which Greg highlighted, was $14 million, and that built on a very strong 2019. And we've had a pretty significant, two or three significant revenue cross-sell opportunities with forward refuel and thinning in the first quarter. most notably in Fort St. John with IDL Projects, a great construction civil works company that is a good customer of ours, and they've started to use the forward fuel service. And so this investment and collaboration between forward fuel and Finney, I couldn't be more pleased with.

That's good color. Thank you.

Once again, if you have a question, please press star, then one. Our next question comes from Sherilyn Redbourne with TD Securities. Please go ahead.

Hi, just a couple of follow-ups from me with respect to Chile. I assume that you're on a path down there back to historical levels of profitability. Just wonder if you could give some commentary on you know, how much of that will depend on the macro versus sort of internal initiatives. We had a robust discussion on the call about some of the e-commerce and the digital drop boxes and how they're helping Canada. How well do initiatives like that translate down to South America?

Sure. Thanks, Sherilyn. So a couple of things. One, this quarter, And the Finza team, and I want to call them out because I know a lot of them are listening. It was just a great quarter for the team. And after 18 months of trying to get that business up and running, I couldn't be more pleased with that quarter. When you look at product support growth, when you look at SG&A costs, and when you look at profitability, and that profitability in Chile was the highest since second quarter 2018. and so we're on the right path, and Juan Pablo's got the right focus on costs and working capital, and I'm confident we're going to continue to see improvements there. Now, it's a challenging time, right? So you've got the mining operations, which are continuing to run, and I think will continue to run because the government is very supportive of the copper mines there, and you've got a copper price that Although a little bit lower than historical with the input costs and the devaluation of the currency, it's still a very strong economic proposition to the customer. So I feel like those mines will continue to run. But there are some headwinds. So Argentina is essentially shut down. Bolivia is shut down. And Chile construction market is weaker because of what's going on there. And so they're not immune from COVID. I think the good news is Chile's probably been the best country in South America to deal with this. President Piñera has been very aggressive in terms of isolation, in terms of making sure people stay at home, and therefore the spread in Chile is a much different scenario than in Ecuador, in Peru, or what will likely be the case in Mexico. So I am very optimistic about Chile being able to navigate through this and help the overall company. Again, one of the great things about diversification is when you have different pieces of your business at different stages. But they're not immune from this. And I do think coming out of this, you'll still be in a lower GDP growth environment than where we thought two years ago. And that's because of the social unrest and the need to continue to address some of those income inequality issues. And so the need to address our cost base is still there. And we'll continue to get after that cost. Last year, reducing costs significantly. This year, good progress on SG&A and Juan Pablo and the team are going to have to continue that through the rest of 2020 and into 2021.

And just on the government's need to improve the social safety net in Chile, what are you hearing in terms of what levers the government may pull in order to finance that?

Yeah, so they've taken, well, one, the balance sheet of Chile is in pretty good shape. So that is, I think, a positive. That being said, they've actually put quite a bit of fiscal stimulus into the economy on the back of COVID to keep that economy running. And ultimately, infrastructure and construction will benefit from that. But I do think they're going to have to, coming through this, also think about And they have been, by the way, they have been the health care reform and the labor reform and the pension reform. And that will cost some money as well from from from the government. And so, you know, I don't think the full chapter has been written on that, Sherilyn. I think everyone's focused on on COVID right now and responding to that. But as you get through that, there will be the income inequality issues and the fiscal resource issues. fiscal levers, I think, will be the places that the government goes to address some of those things.

Great. That's all from me. Thank you.

This concludes the question and answer session. I would like to turn the conference back over to Mr. Palaszczuk for any closing remarks.

Thank you, Operator. This concludes our call, and thank you, everyone, for joining us today, and please stay safe.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.