Finning International Inc.

Thank you for standing by. This is the conference operator. Welcome to the Finning International second quarter 2021 investor 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 Greg Palaszczuk, Executive Vice President and CFO. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Finning's second quarter earnings call. Joining me today is Scott Thompson, President and CEO. Following our remarks today, we'll open 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. The slides are posted on the events and presentation 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. We'll also make several references today to our June investor day, Similarly, those audio files as well as the presentation are available on our website. We're happy to be taking this call today from our Surrey branch campus in the greater Vancouver area. We have closed our corporate head office at Great Northern Way in Vancouver and are transitioning to a hybrid model of working from home and working from our branches. 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 the slides 10 and 11 for important disclosures about forward-looking information, as well as currency and 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 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 will speak about our second quarter highlights, our positive outlook, and how we are executing on the plan that we laid out at our investor day in June. Greg will then provide more details on our regional performance in the second quarter and our progress on reducing SC&A and delivering on our mid-cycle targets. Please turn to slide two. We are pleased with strong execution and results in the second quarter. All of our regions delivered outstanding performance, demonstrating operating leverage in a recovering market. I am very proud of how quickly our teams were able to ramp up and capture market upside while keeping costs low and executing our strategy to drive product support. Market activity began to pick up in mid-February and continued strongly through the second quarter. We have seen a recovery in new equipment demand, which was widespread across all of our regions and was driven by the construction sector. Our new equipment sales were up 47% from Q1 2021, with the UK showing the strongest growth as we started delivering to HS2 customers. Our equipment backlog continued to grow in the second quarter to 1.4 billion by the end of June. Order intake in Canada and South America outpaced deliveries in QT. Based on the recent mining deals with Codelco at the Radomir Tomic and Minister O'Halley's mines, which we announced last quarter, we are pleased to have been selected as the auxiliary equipment supplier for Codelco's Andina mine, which is now included in our backlog. This order is valued at about U.S. $40 million for delivery in the first half of 2022. In addition, we will be providing 27 Caterpillar underground loaders to Codelco's Chico Camada mine Ten of these machines are included in our Q2 backlog. Our backlog in the UK and Ireland remains at near record levels and includes 54 million pounds of equipment orders related to the HS2 project. We have begun to quote for 2022 HS2 orders and believe we are well positioned to continue to capture significantly more than our typical market share of the remaining opportunities for Phase 1 with the assistance of our QVIC platform. In fact, we expect the machine opportunity in 2022 to be at least 50% higher than in 2021. This broad-based backlog build across all regions supports our confidence in the mid-cycle market as we continue to see economic recovery gaining momentum in the second half of 2021 and beyond in all of our territories. An acceleration in demand for equipment has placed an industry-wide constraint on the supply chain. Lead times have extended for some product lines, especially in construction equipment. We are working closely with Caterpillar and our customers to meet their equipment needs, including actively sourcing used equipment and offering equipment rebuilds and rental purchase options. We've also improved our supply chain capabilities, including visibility and planning with Caterpillar. At this time, we do not expect the supply chain challenges to materially impact large project deliveries that are currently in our backlog. Our product support revenue increased in all regions and all market sectors from the first quarter of 2021. Recovery and customer activity was a key driver coupled with our strategy to accelerate product support growth in construction. We are offering more compelling product support solutions including a broader scope of customer value agreements and flexible options for construction rebuilds. In Canada, for example, the number of construction machines we are rebuilding has grown significantly this year, and we continue to see a lot of rebuild opportunities as customers are ramping up project work and lead times on new machines are increasing. Product support revenue in mining is also recovering in both Canada and Chile, and we expect continued improvement in the second half of 2021 and into 2022. We have recently seen a strong uptick in rebuild quotation activity in the oil sands. And in Chile, mining customers are resuming major maintenance work as COVID-19 restrictions are gradually lifted and customers are ramping up production to take advantage of the strong copper price. We are particularly pleased with the strong operating leverage in the second quarter, which demonstrates the progress we've made on our cost structure. Savings from our 2020 cost reduction program and continued productivity initiatives to further reduce fixed costs played a key role in achieving strong profitability in all of our regions. Our SCNA was up just 2% from Q2 2020 on 28% higher revenue. If we compare our results to the second quarter pre-pandemic, Q2 2019, we are confident that we are on the right path to significantly improve the earnings capacity of our business. While our consolidated revenue was still 15% below the pre-pandemic levels in Q2 2019, we were able to exceed Q2 2019 EPS by achieving higher profitability and lowering our finance costs. Our employees should be proud of these strong results. We are also realizing cost and capital benefits from our improved supply chain performance. Our working capital to revenue ratio of 24% was the lowest since 2012, down 430 basis points from Q4 2020. Our inventory turns continue to increase. Compared to the pre-pandemic performance of Q2 2019, our inventory turns are up 20% despite a 15% reduction in revenue. We have been using data and insights from connected machines to order the right inventory at the right time. This has allowed us to get ahead of the present lead time challenges which put us in a good position to deliver equipment to our customers on time and meet our mid-cycle revenue targets. We will continue to become more efficient and agile in how we serve our customers. This will not only improve the customer experience, it will also reduce our cost to serve and drive better working capital performance and stronger free cash flow generation. The market recovery is gaining momentum. As discussed at our investor day, we have seen significant return on capital improvements in all three regions this quarter, as improved market activity that we had projected for the back half of 2021 started to unfold earlier, and we expect to see continued improvement in our return on invested capital going forward. In Q2 2021, our ROIC of 13.3% was up 370 basis points from Q4 2020 to with a significant increase in all regions driven by both improved profitability and higher invested capital turnover. This was a great quarter from an execution standpoint, and our outlook remains positive as the global economy recovers in 2021 and beyond. We have announced a 10% dividend increase, which marks our 20th consecutive year of dividend increases. Looking ahead, we are in an excellent position from a cost, inventory, and capability perspective to capture the next phase of market growth. With the recovery maturing, I'm confident in the earnings potential of our business going forward. Now I will hand it over to Greg.