Finning International Inc.

Thank you for standing by. This is the conference operator. Welcome to the Finning International third 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 then 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 Amanda Hobson, Senior Vice President, Investor Relations and Treasury. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to Finning's third quarter earnings call. Joining us today are Scott Thompson, President and CEO, and Greg Palaszczuk, EVP and CFO. Following our remarks today, we will open up the line to questions. This call is being webcast on finning.com. We've also provided a set of slides that we will reference during our prepared remarks. These slides are posted on the events and presentation page of our investor relations section of our website. An audio file of this call and the presentation will be archived on our website as well. Before I turn it over to Scott, I want to remind everyone that some of the statements provided during this call are forward-looking. Please refer to slides 12 and 13 for important disclosures about forward-looking information as well as non-GAAP financial measures. Please note that forward-looking information is subject to risks, uncertainties, and other factors as discussed in our annual information form under key business risks and in our MD&A under risk factors and management and forward-looking information disclaimer. Please treat this information with caution, as fitting actual results could differ materially from current expectations. Scott, over to you.

Thank you, Amanda, and good morning, everyone. On today's call, I'm going to comment on our Q3 results, provide an update on how we are executing our strategy, and outline our objectives going forward. I am on slide two. I am pleased with our results this quarter. We continue to maintain an excellent safety record, and our customer loyalty score has improved by 16% year over year. This performance speaks to the engagement of our people and the trust customers put in our business during these uncertain times. I want to thank our employees for their adaptability, perseverance, and unwavering commitment to supporting each other and our customers, often under trying circumstances. Our revenue was down 21% year over year. Customer activity remained significantly below 2019 levels in most of our end markets, mainly as a result of pandemic-related impacts and a lower price of oil. When we compare to Q2, we saw modest improvements in market activity, particularly in product support and rental, as customers resumed work and put their equipment back in service. Our net revenue is up 8% sequentially from the second quarter, driven by a recovery in the UK and Ireland, and slowly improving market conditions in Canada and South America. The timing of economic recovery in each of our regions has been correlated with improvements in COVID infection rates. The execution of global cost initiatives is on track, which is evident in significant SG&A reduction. A lower cost base is driving improved profitability in a recovery. Significantly higher EBITDA compared to Q2 and reduced finance costs raised our EPS to 54 cents. I will now turn to slide three, which summarizes our strategic journey. Improving return on invested capital in all of our regions remains our key focus area in the upcoming recovery phase. There are three components to this. First, accelerating product support revenue through strengthening relationships with customers and leveraging technology. Second, improving competitiveness of our business with a laser focus on driving down our cost base. And third, consistently delivering solid free cash flow, which allows us to return capital to shareholders and invest in opportunities that improve the earnings capacity of our business against the backdrop of cyclical end markets. Our teams have done a good job advancing these priorities by staying focused on controlling what we can in a difficult and uncertain environment. On the cost side, we've accelerated our strategic plans to drive employee and facility productivity improvements. In South America, our previous investment in technology has enabled us to reduce the cost to serve, address labor inflation, and improve operational execution going forward. In Canada, we have taken significant cost actions to address oil price dislocation and move customer work to locations with lower operating costs. In the UK and Ireland, we are tightly managing costs through the recovery period while building the right technology skill set to support us in capturing future market opportunities. Our latest actions complement the extensive work we have done over the last few years to lower our costs to serve. I'm confident that we have successfully positioned the company for year-over-year earnings growth in Q4, even in a revenue environment that is expected to be lower than in 2019. From a capital management perspective, our results highlight the structural improvements that have been made in our inventory management practices since the last market dislocation in 2015-16. Connected assets allow us to monitor machine utilization trends as a leading indicator of customer activity. We have also embedded stronger operational discipline around inventory ordering. Significant free cash flow generation this year is a direct result of strong management of working capital and reflects the strength of our business model. We are 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 have made in recent years. In addition to enabling more robust inventory management, machine connectivity provides us with a solid foundation to grow product support market share in non-mining sectors. Our e-commerce journey from 10% of non-service parts online in 2016 to 45% in 2020 continues today as we are supporting customers in converting to our online platform. We will remain an omni-channel business with parts ordering available at physical branch locations and through our call centers. Our performance solutions, which are value-added technology and productivity services for customers to improve their performance, are critical in positioning us to capture new equipment and product support opportunities, such as HS2. Integrated knowledge centers supporting our mining customers in Chile and Canada are great examples of how these solutions are strengthening our customer relationships. We are seeing an accelerated adoption of autonomy by our mining customers, including a wide-scale deployment of autonomy in South America at Tech's QB2 site. In Western Canada, only 6% of the Caterpillar Ultra Class truck fleet is autonomous, which presents significant potential for future autonomy conversions. Finally, strong EBITDA to free cash flow conversion has allowed us to reduce our leverage and finance costs and improve our financial position. Before turning it over to Greg for the regional analysis, I will highlight the key drivers of our Q3 consolidated results, which are shown on slides four and five. While all regions experienced a decline in new equipment sales from Q3 2019, nearly three-quarters of the $254 million reduction was in Canada, mostly due to challenging market conditions in Alberta. Product support revenue was more resilient as the year-over-year decline slowed considerably compared to the last quarter. The $110 million reduction from Q3 2019 was split equally between Canada and South America. If we compare our total revenue to Q2, the increase of $108 million was mostly driven by a strong recovery in the UK and Ireland. While we saw notable improvement in product support and rental activity in Canada, market conditions remain challenging and the pace of recovery in most sectors in Western Canada is slow. South America was the last of our regions to be impacted by the first wave of COVID, with the peak of infections occurring at the start of Q3. As a result, Q3 was a soft quarter from a revenue perspective. While we are seeing an improvement in quoting activity in the construction sector, where our order intake was up from Q2, customers' capital budgets remain constrained, and this is reflected in our backlog. However, we have seen a notable increase and resumption of request for proposal activities from mining customers in both Canada and South America. Turning to slide five, I'm pleased with our EBITDA performance in Q3. Successful execution of cost actions and a higher proportion of product support in the revenue mix allowed us to improve profitability despite a significant reduction in volume from last year. Our SG&A costs decreased by 13% from Q3 2019 to $290 million. Some of these costs will come back as market activity fully recovers, but will be in lower cost locations. Our goal is to reduce SG&A as a percentage of revenue to about 17% when the market returns to mid-cycle activity levels. In 2019, when our revenue was about $7.3 billion, we finished the year at 19% SG&A. I will now pass it over to Greg.