Finning International Inc.

Thank you for standing by. This is the conference operator. Welcome to the Finning International fourth 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 fourth quarter earnings call. Joining us on today's call 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 presentations page of the investor relations section of our website. You can also view the slides on our webcast page. An audio file of this call and the accompanying presentation will be archived on our website. 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 forum 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 Finning's actual results could differ materially from current expectations. Scott, over to you.

Thank you, Amanda, and good morning, everyone. On today's call, I will share my views on 2020, speak about the execution of our strategic commitments, and outline our views and expectations for 2021. I will start on slide two. As I reflect on 2020, it was a strong year from an execution perspective, particularly in the context of a difficult external environment. Our early investments and long-term strategic approach helped us navigate and have positioned us for success in the upcoming recovery. Our focus on safety and digital capabilities in particular, as well as our capital allocation decisions are paying off and driving improved customer satisfaction and better financial results. Our total injury frequency rate decreased by 35% and our customer loyalty scores increased by 10% compared to 2019. Our focus on sustainability is increasingly evident to all stakeholders and I encourage you to read our fourth annual sustainability report which we will release at the end of March. We have significantly reduced our GHG emissions and are further reducing our environmental footprint with the implementation of our long-term network strategy in Canada and other initiatives, such as efficiency upgrades to our branches, vehicle fleets, and equipment. We will also make material commitments to reduce our GHG emissions further between now and 2027. Our employees should be proud of these accomplishments, which demonstrate continued adaptability and unwavering commitment to providing essential services to our customers. This year required extraordinary determination, effort, support, and flexibility from our employees. I am proud of how we operated in this environment and of the results we've achieved. Our investments in technology over the last five years allowed us to effectively navigate through the pandemic and set the stage for a strong recovery. Our robust IT infrastructure has enabled efficient remote work for all employees who can do their work from home. Machine connectivity has been essential in improving our inventory management and is providing us with a great foundation to grow product support market share. We are closely aligned with Caterpillar's aftermarket growth strategy, which is showing early signs of success. For example, in Canada, our parts market share in construction has grown materially since the end of 2019, driven by an increasing number of customer value agreements, or CVAs, and connected machines. The number of active CVAs in Canada's construction segment grew by 35% in 2020, with great momentum in the back half of the year and into 2021. The revenue we earn on our performance solutions per connected asset grew materially over the last year. Our digitally enabled value-added solutions and services allow our customers to improve their equipment, fleet, and operational performance, and this differentiates us from our competition. A great example is our integrated knowledge centers, which are staffed by experienced equipment experts with domain expertise. Together with the customers, we work to optimize equipment health and operational efficiency. Our mining customers continue to adopt autonomy as they expand their existing operations and plan for new mines. We have started delivering equipment to TEC's QB2 site in Chile to enable autonomous operations. In Western Canada, two autonomous operations, Curl in the oil sands and Highland Valley Copper in BC, continue to ramp up conversions. With only 7% of the ultra-class truck population in Western Canada presently autonomous, it's a great opportunity for both Caterpillar and Finning. Turning to slide three. Despite the many challenges of 2020, we stayed focused on what we can control and delivered on the commitments we set out at the beginning of the year. We have improved our execution in South America against a challenging market backdrop. We exited the year with 8.3% EBIT as a percentage of revenue, reflecting the benefit of a lower cost base from leveraging one common technology platform. I couldn't be more pleased with performance in South America during 2020 as EBITDA increased, profitability increased, return on capital increased, and the team delivered in excess of U.S. $200 million in free cash flow in an environment where revenue was down 15%. In Canada, we have made significant progress to reduce our cost base and improve employee and facility productivity. We are moving customer work to locations with lower operating costs. Our optimized RRR facility network directs the most technically advanced work, such as machine rebuilds, to what we call our distribution diamond, while freeing capacity in repair and response locations. This hub and spoke model is designed to improve customer turnaround and experience drive productivity gains, leverage resources and technology, and reduce our environmental footprint. Canada's 2020 SG&A was down 8% from 2019. And over the last seven years, we've reduced Canada's SG&A by about 20%, and the composition of our workforce has shifted significantly to a higher proportion of revenue-generating employees. We have more work to do to further address our cost to serve in Canada with a focus on leveraging back office efficiencies and driving further supply chain and procurement benefits. In the UK, we secured our first orders for the HS2 project. Our current backlog includes approximately 65 million pounds of initial equipment orders related to HS2, and we are confident there will be significantly more to come throughout 2021 and 2022. Backlog in the UK was up 19% and order intake doubled from Q3. And finally, we've lowered our finance costs and significantly strengthened our balance sheet. Our finance costs were down 40% in Q4 and more than 20% for the full year compared to 2019. Our outlook for 2021 is positive. Please turn to slide four. Our key markets continue to recover. Commodity prices are expected to remain at constructive levels, and many of our customers have announced an increase in capital expenditures. In mining, production levels are expected to grow, driving demand for parts and service on a large and aging equipment population. Government stimulus spending on infrastructure and investments in other large projects in all of our territories underpin our positive revenue outlook for construction. Led by strong recoveries in Chile and the UK, we expect revenue growth in 2021, however, remaining below 2019 levels as the recovery in Canada will be a bit more gradual. In 2021, we expect to benefit from several profitability drivers as we continue to advance our strategic priorities. These drivers include operating leverage in a recovering market, which will improve our profitability and return on invested capital. Product support growth in all regions as we are leveraging our digital capabilities to win customer business. Significant progress towards our mid-cycle target of 17% SG&A. The execution of our global cost initiatives is on track to deliver more than $100 million of annualized cost savings. And effective allocation of capital, redeploying the significant free cash flow we've generated in a balanced way among organic growth, return of capital to shareholders, and high rate of return complementary acquisitions. We have improved our earnings capacity going forward. Assuming an undisrupted market recovery and the successful execution of our profitability drivers, we expect 2021 earnings to exceed adjusted 2019 EPS of $1.65 per share. Our free cash flow generation in 2021 will depend on the pace of recovery. We expect to generate roughly 50% EBITDA to free cash flow conversion through the cycle, in line with the average conversion over the last eight years. We are in the process of increasing our inventory purchasing and will likely be modestly below 50% in 2021. However, we expect to deliver material free cash flow for the full year. Since we started this journey in Q3 of 2013, we have generated roughly $3 billion in free cash flow. With that, we've grown our dividend at an approximate 5% compound annual growth rate and repurchased $250 million of shares at an average price of about $23 per share. We have made two highly successful acquisitions in this timeframe, the Saskatchewan Dealer and For Refuel. Saskatchewan was paid back in full within five years of the acquisition, and For Refuel has generated $50 million in free cash flow in the two years since acquisition, and delivered strong performance in 2020 with EBITDA growth of 14% from 2019. I am extremely proud of what our team has accomplished. We now have all three regions in a strong cost and inventory position, and through 2020 it has been rewarding to see our previous investments paying off. I am convinced we have positioned the business for strong performance in the upcoming recovery phase. We have an engaged and action-oriented leadership team that has been executing well and is excited about our future. And on that note, I'll pass it over to Greg.