Finning International Inc.

Thank you for standing by. This is the conference operator. Welcome to the Finning International Inc. 4th 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 1 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 Chief Financial Officer. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to Finning's fourth 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'll reference during our prepared remarks. The slides are posted on 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 10 and 11 for important disclosures about forward-looking information, as well as currency and specified financial measures, including 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 our 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 the key drivers of our 2021 performance and share our views on 2022. Greg will then review our financial performance in the fourth quarter and provide more details on our outlook by region and our objectives for the year. Please turn to slide two. We achieved strong results in 2021 driven by successful execution to deliver on our strategic plan and improve our earnings capacity. Market activity has recovered as the year progressed. Across the business, we saw tremendous momentum in capturing product support opportunities and winning major equipment deals. Our 2021 product support revenue was on par with the pre-pandemic levels of 2019, driven by our strategic focus on growing construction rebuilds and customer value agreements, and increased spending on parts and maintenance by mining customers, particularly towards the end of the year. Over the course of 2021, we were awarded multiple deals for mining equipment and product support in Chile, We won a significant share of the HS2 equipment opportunity in the UK, and we received an order for 20 797 ultra-class trucks in the oil sands as customers have increased capital budgets and started making tangible commitments. These deals have been driving growth in our equipment backlog, which is at near record levels as we enter 2022. On the supply side, we expect challenges from a constrained global supply environment to persist in 2022, resulting in longer lead times for equipment and parts in all of our regions and driving strong demand for used equipment, rentals and rebuilds. We have been leveraging our improved forecasting and supply chain capabilities to build a healthy inventory position, increasing our inventory by about $200 million from December 2020. We are also driving rebuilds and resale of used equipment to meet customer needs as supply of new equipment remains tight. We posted annual adjusted earnings per share of $2.18 and adjusted return on invested capital of 16.4%, exceeding our mid-cycle earnings per share and return on capital targets two quarters ahead of schedule, all while our revenue remained below pre-pandemic levels for the year. Our improved inventory management data-driven pricing decisions, and service and supply chain efficiencies enabled us to generate solid gross profit margins in a highly competitive and constrained supply environment. Importantly, we are seeing strong operating leverage from our reduced cost base and ongoing initiatives to increase productivity of our facilities and our people so we can serve our customers in the most efficient way possible. All of our regions delivered outstanding results in 2021, Canada and South America both exited the year with 10.1% EBIT as a percentage of net revenue. Return on capital in South America exceeded 20%. And UK and Ireland posted very strong revenue and EBIT performance throughout the year. Our employees should be proud of these accomplishments. It is their dedication and exceptional execution in serving our customers that have delivered such strong results for our shareholders in a very dynamic environment. Our strong balance sheet provides us with growing capacity for reinvestment and return of capital to shareholders. In 2021, we raised our dividend by 10% and repurchased 5 million shares. We also expanded our forward fuel capabilities to a wider range of renewable and low-carbon fuels. This investment will further build on the success of our forward fuel business, which continues to deliver excellent returns and customer outcomes. Looking ahead, we expect increasing interest from our customers in low and zero carbon technology, including electric drive, electric battery, natural gas and hydrogen blending, and hydrogen fuel cells. In partnership with Caterpillar, we will continue to offer our customers innovative and low carbon solutions to help them reduce emissions and increase productivity. The recent announcement from TEC on partnering with Caterpillar to advance zero emissions mining haul trucks at its BC operations is exciting news for us. Importantly, we are advancing our own sustainability journey, including a transition to energy efficient facilities and low carbon fuel for our vehicle fleets to further reduce our own emissions. In 2021, we were able to build on significant improvements we've made in 2020, despite higher activity levels, and reduce our absolute GHG emissions by approximately 7%. This puts us substantially ahead of schedule on our 2027 carbon reduction commitments. Recognizing the critical importance of these improvements, we are currently reviewing additional initiatives to continue reducing our carbon footprint, and we'll provide an update later this year. We believe that our 2021 performance sets a great foundation for us to capture upcycle opportunities and compound our earnings going forward. We saw the transition from mid-cycle to upcycle market conditions earlier than we had projected. From the start of 2022, we expect to be operating in an upcycle demand environment. We expect ongoing economic growth in our territories and strengthening commodity prices to support a positive market backdrop for our business. We are encouraged by increasing capital budgets, higher commodity production forecasts, and continued public and private investments in infrastructure in our regions. In summary, our team delivered excellent results in 2021, and we are optimistic about the year ahead. I am confident that we have rebuilt our business to deliver significantly improved operating leverage and expand our return on invested capital. We continue to target mid-teens and above earnings per share growth during the sustained up cycle. I will now hand it over to Greg.

Thank you, Scott. I'm going to provide more details on our performance in the fourth quarter and our objectives going forward. Our consolidated fourth quarter results and key drivers are summarized on slide three. Net revenue of $1.8 billion was up 14% from Q4 2020, driven by strong market activity across all regions and sectors and our solid execution. Product support revenue recovered to 2019 levels in Q4, with a notable improvement in product support activity and capital spending by our Canadian customers through the quarter. We also saw strong execution of our use and rental strategy, which helped us successfully manage through continued supply constraints and provide equipment solutions to our customers. All our regions delivered improved operating leverage in the fourth quarter, driving EPS up 71% to 66 cents compared to adjusted EPS in Q4 2020. Slide four shows changes in our net revenue by line of business compared to Q4 2020. Product support revenue increased significantly by 12% from Q4 2020 and was higher across all regions and sectors. As highlighted in Investor Day, We have been strategically targeting jointly with Caterpillar outsized growth in our construction aftermarket segment. We've been very successful in executing on this plan. Construction product support revenue is up by over 30% in Q4 2020, driven by improved demand and our strategic focus on growing rebuilds and customer value agreements. An increase in new equipment sales in the quarter was driven by mining deliveries in Chile and strong construction activity in all regions. We posted very strong used equipment sales and rental utilization in the fourth quarter, especially in Canada. Our backlog was $1.9 billion at the end of December, up from $1.6 billion at the end of September. The increase was driven mainly in Canada, including an order for 2797F trucks for an oil sands operator. This order was part of a multi-year agreement focused on enhancing operational efficiency through refresh, maintenance, repair, and rebuild practices. Importantly, these trucks will replace aged competitor equipment and thus be incremental to our business. Given continued constraints in the global supply chain, we expect longer than typical delivery times for some orders in our backlog that were added in the second half of 2021. Turning to slide five. An increase in gross profit from Q4 2020 was driven by higher net revenue, higher rental utilization, and improved equipment margins. Costs composed Cost control was strong with SG&A up just 1% from Q4 2020 on 14% higher net revenue and over 140% year-over-year increase in backlog. SG&A percent of net revenue was 18.5%, down 240 basis points from Q4 2020. Our fixed cost initiatives clearly offset volume-related variable costs as well as some inflationary pressure in the quarter. We have more work to do here. It will take us longer than previously communicated timeframe of Q3 2021 to Q2 2022 to fully average 17% SG&A as a percent of net revenue over the full four-quarter period. This is primarily due to lower than projected new equipment revenues in the second half of 2021, as well as the result of supply constraints. And then higher than projected product support growth rates, which are more SG&A intensive than new equipment. as well as some inflationary headwinds. We remain committed to delivering on our fixed cost reduction initiatives, driving productivity gains, continuing strong operating leverage going forward. Moving to our Canadian results and outlook, which is summarized on slide six. Net revenue increased 19% from Q4 2020, driven by higher year-end spending by our customers. Product support revenue is up a robust 17% from Q4 2020, reflecting strong rebuild activity in construction, and increasing spend across the mining sector. Used equipment sales were up 84%, and rental revenue increased by 22% from Q4 2020, reflecting our strategic focus on rebuilds, resale, RPO conversions, and rental to fulfill customer needs in a tight supply environment. In addition, our heavy rental fleet was highly utilized in British Columbia to support flood mitigation and infrastructure repair work. EBITDA as a percentage of net revenue was up 240 basis points from adjusted EBITDA as a percentage of net revenue in Q4 2020. This was reflecting improved equipment margins, higher rental utilization, and lower SG&A as a percent of net revenue. Adjusted ROIC approached 17%, a significant improvement in profitability, and a 20% increase in invested capital turnover in Q4 2020. Our outlook for the Canadian business is positive, and we continue to manage through supply constraints and closely monitor the impacts of Omicron. Overall, we expect robust market activity in Western Canada in 2022, building through the year, to be supported by GDP growth, strong commodity prices, and increasing capital budgets by our customers. Please turn to slide 7 for our South America results. New equipment sales increased by 68% from Q4 2020 in functional currency. driven by deliveries to Chilean mining customers, including TechQB2 and Cadalco Radomiro Tomic Mines, and improved demand for construction equipment to support mining infrastructure and general construction projects. Product support revenue was up 10% from Q4 2020 in functional currency, with stronger demand across all sectors. Our streamlined cost structure in South America drove improved profitability, as SG&A costs were flat to Q4 2020, while delivering 21% higher net revenue. Even as the percentage of net revenue was up 180 basis points year over year. Revenue per employee in South America in 2021 improved by an impressive 40% compared to five years ago. Heroic in South America was above 20%, exceeding our mid-cycle target. Looking ahead, we continue to closely monitor constitutional reform process in Chile, and expect moderately higher mining royalties going forward. We recognize that the current uncertainty will continue to impact our mining customers' investment decisions in the near term, particularly as they relate to greenfield and new expansion projects. Our long-term outlook for copper mining growth in Chile remains positive. In the near term, we continue to see strong demand for mining product support and fleet replacement, driven by strong commodity prices, low peso, mature equipment population, and customers' focus on improving productivity. by leveraging technology such as autonomy. We remain very well positioned with both Tech and Codelco, who are key drivers to committed medium-term investment and growth in Chilean mine. We're also very encouraged by recent announcements of capital investment in Argentina's lithium and copper projects by large global mining customers, including Rio Tinto and Lundin. Our South America team is actively quoting on opportunities for power and equipment solutions for our global customers operating in Argentina. Turning to the UK and Ireland on slide 8. Net revenue was slightly below Q4 2020 in functional currency due to the timing of power system project deliveries to data center customers. Construction activity, though, was strong, with revenue from construction sector up 26% from Q4 2020, driven by equipment deliveries to HS2 and improved demand for product support. UK and Ireland delivered ROIC of approximately 15% in 2021, reflecting strong revenue recovery, increased EBIT, and significant improvements in capital efficiency. With our backlog at record levels, continued robust construction activity, and demand for power system solutions, our outlook for the UK and Ireland business remains strong. We have captured more than 200 million of equipment orders for HS2 to date. We believe we are well positioned to continue capturing a large share of opportunities for the remainder of HS2 Phase 1. Most Caterpillar machines working on the HS2 project are supported by a range of customer value agreements and our construction customers have the option to benefit from our cubic platform and our construction apps. This gives us good line of sight into product support opportunities in the UK going forward. Slide nine summarizes our expectations and objectives for 2022. We're actively managing inflationary pressures through the continued focus on productivity improvements. We've also taken proactive steps to hire technicians to support our growing service volumes. Over the course of 2021, we added more than 180 technicians to our triple R locations in Canada. And in South America, we hired approximately 450 technicians last year to meet increasing business volumes and new contracts awarded by customers during the year, representing approximately 18% of our technical workforce by the end of the year. As our business environment shifts to upcycle demand, our entire organization remains focused on executing our strategic plan grow product support, reduce costs, and reinvest cash flow to compound earnings. We remain committed to demonstrating strong operating leverage as we continue to target mid-teens and above EPS growth during the sustained up cycle. We'll continue to make strategic investments in our facilities network, rental assets, used equipment business, and digital platform. As a result, we project our 2022 net capital expenditures and rental fleet additions to be in the $240 to $280 million range. We finished the year with net debt to adjust at EBITDA of 1.1 times, which further strengthens our significant capacity to reinvest. We continue to advance our M&A strategy and expect to deploy capital with a near-term focus on complementary businesses in the small to medium-sized range that are aligned with our product support growth strategy to have improved outcomes for our customers and deliver attractive rates of return. Operator, I'll now turn the call back to you for questions.

Thank you. 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. Our first question comes from Yuri Link of Canaccord. Please go ahead.

Hey, good morning, guys. Morning, Gary. Congrats on finally punching through $2 in earnings. Having covered the company for a long time, it was nice to see.

Thank you, Gary. Appreciate that.

Yeah. The upcycle that you're referencing for 2022, just want to make sure that we're talking about revenue as well as earnings, just given the supply constraints. constraints. I'm struggling a little bit with how to think about the cadence of the backlog burn. So anything you can, any additional color on revenue expectations would be helpful.

Yeah, sure. So we're certainly seeing upcycle demand and we're working to meet it with the supply side of the equation. I think for the first half of the year, the guidance we've given at Investor Day for the first half of the year still holds. So Given the $3.5 million in the second half of last year, we're looking at kind of the 3.6 to 4.0 for the first half. Probably a little bit more product support and use and a little less new equipment in that balanced mix. And in H2, that's when more of the backlog delivers. So you'd see a bit of a step up depending on the supply equation at that point in time.

Okay. So the caution on the 17%. SG&A target, that's solely due to, not solely due, but mostly due to the revenue shortfall that we saw in the back half of the year. How closely are you monitoring the cost situation there and how challenging is that?

Yeah, I think we're managing it well. We're certainly happy. We've had a lot of fixed cost initiatives in flight. It was a little less new equipment than we're expecting in the second half. and the great momentum and product support. That makes shift just the equation a bit, but we still got the fixed cost initiatives in flight. We'll keep working our way through. And as the new equipment picks back up a little, we'll still be working towards that operating leverage.

Okay. I'll turn it over. Thanks, guys. Thank you.

Our next question comes from Jacob Bout of CIBC. Please go ahead.

Good morning. Good morning, Jacob. I had a question on the backlog. So, you know, nice growth quarter and quarter and year on year. And I know you made the comment that it was driven primarily by Canada, but maybe you could break that down with, you know, a bit more color by region, particularly in South America. You know, do you expect deliveries to slow down in 2022? And then... you know, what you're expecting in the UK?

Yeah, sure. So in terms of South America, we had some large builds last year. So, of course, we've had QB2 in the backlog for quite a while, and it's delivered and continues to deliver the remaining pieces. And then we also have the Caddell corridor that started to deliver in the back half of last year, and there's some more units to go. We haven't completely refreshed Well, order intake continues to be strong. We haven't had orders of that magnitude to replace, so that's more kind of balanced. And then in the UK, it's record backlog, as we highlighted, 1 over 200 million pounds of HS2 orders. So that's solidly in backlog and delivering mixed with data centers. So I think it's fairly balanced there. We'll kind of have to see how the remaining HS2 orders go throughout the year, but I think both are fairly balanced. Yeah, and Canada has certainly seen a nice uptick than last year.

Okay, maybe just a second question here on capital allocation. You know, you're approaching a one times leverage ratio. You know, you gave some guidance as far as CapEx, but, you know, what are the priorities between share buyback and M&A? I know you talked also about small tuck-ins, but You know, how aggressive should we expect you to get on M&A?

Yeah, sure. So I think it will continue to be a balanced approach. You know, look at the dividend, continue to improve. We've been buying back about 1% of our float per quarter. I think that's something we'll continue to review and look to. And from there, yeah, we're working through M&A pipeline. Like I said, it's small to medium size, but there's some interesting opportunities in the product support. growth area, particularly in the kind of 24-7 service operations. So we're looking at those as well, and so I think it's going to be a balanced approach of each of those.

Thank you. Thanks, Jacob.

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

Thanks very much, and good morning. Hello. In terms of the extended lead times that you're seeing on equipment and parts, just hoping you could characterize those versus what the company has seen in prior cycles and talk about how confident you feel about being able to supplement with used rental and rebuild if necessary.

Yeah, and that's exactly what we've been doing, Sherilyn, so I think we'll keep on with that. Some elements feel a little bit like 2018. There's probably a little bit more given some of the COVID risks that you worry about, but it feels kind of similar. So we've managed through that fairly well. We've been managing through the last three quarters really well. As you probably heard on the CAT call, it's going to be another year where it's pretty tough for dealers to get inventory. Customers are pulling hard when it arrives, and the supply chain's working as fast as it can. And so, you know, I think we'll continue doing what we've done. We'll supplement with used. The rental fleet's quite busy. We'll make some additions there. So where we see gaps emerging, we've been filling it really well, and so I think we'll just keep on with that.

And I guess, Sean, Scott said a couple other things to add. I mean, I think we were early in the ordering process here. Based on some of the data, we've talked to you about that a lot. And so we have built inventory, which I think, I think our inventory is up about $200 million. And we've got a lot of that as parts as well, which is helpful because it's important to keep our customers up and running right now. Off time is extremely important to them. So that parts bill will be helpful as well. So I feel I'm doing good about our relative positioning in obviously a constrained environment that we're not immune from.

I guess just given that supply environment and maybe some residual uncertainty in South America, what do you think is the prospect for rebuilds to take hold down there where customers have traditionally bought new and what's the next capacity to accommodate that if you saw that in 2022?

Yeah, that's definitely top of mind, something we've been talking to customers quite a bit about. It would be more typical in South America towards the end of first life to send things over to Africa. We're certainly having active conversations with customers about getting a second life similar to the oil sands. And we've actually had our VP of mining from Canada for the last four years move back down to South America and very familiar with that dynamic and the rebuilds we do. So that's something we're pushing and we're seeing some interest from customers.

And then on the capacity side, I mean, you're very familiar with OEM here in in Western Canada, which is obviously a competitive advantage for us here. We have a similar called CRC in Antofagasta. And so the same capabilities in South America that we have in Western Canada from a capability capacity perspective.

Thank you.

Thank you.

Thanks, Carolyn.

Our next question comes from Michael Dumet of Scotiabank. Please go ahead.

Hey, good morning, guys. Good morning. Great quarter. It goes without saying. So product support was particularly strong in Canada. And typically there's a little bit of a slowdown at the end of the year. Productivity wanes during the holidays. It doesn't look like that necessarily happens. So I'm wondering if this kind of unexpected strength is something, you know, you're seeing and expect to continue to see through the first half of 21, despite potential headwinds from Omicron.

Yes, thank you, Michael. I'll take that one. So, one, I guess it wasn't unexpected strength for us. You know, we've been talking a lot about the construction aftermarket opportunity. It's aligned with CAT's initiative to double services growth, and we feel like we've been on this now for, you know, three or four years, starting with connecting machines, customer value agreements, and coming up with great value propositions for our customers. And so when you think about that construction aftermarket, and Greg, correct me if I'm wrong, but I think the 30% growth year over year on the construction side. And so we said at Investor Day, we thought that that was going to grow at outsized rates relative to mining, and that's what's happening. And so as you think about the runway, we've got significant runway because the market share is at a significantly different level than on the mining side. So we're going to expect our mining to product support to continue to grow. And with capital budgets releasing here, I think that's very positive for 2022. But the momentum in our construction aftermarket is really positive and will continue for multiple years.

That's great color, Scott. Thanks. And that 30% growth is obviously very impressive. You know, with South America and the UK and Ireland, revenues essentially back to pre-pandemic levels in Canada and you know, so far lagging. What are the prospects for Canada to now become the largest source of earnings growth in 2022? And I guess given the backdrop, how do you feel about, you know, the region getting back to pre-pandemic levels, you know, in terms of revenues in the short term, I guess, despite supply constraints?

Yeah, and we're optimistic about Canada. There's quite a lot of good things going on between government spend programs, GDP growth, commodity growth, CapEx budget. I think across the energy space, CapEx budgets on average are up 33% this year. Probably a little lighter for some of the miners, but heavier for those drilling wells. That's helpful for us. That's a trend that we haven't seen in quite some time, and that provides a pretty good backdrop. There's lots of spending that goes in and around that. It's also in precious metals and pretty broad-based. Canada certainly feels like it's got quite a bit of momentum headed into this year. And, you know, there can't be any reason why we wouldn't be able to get back to previous levels as that recovers. You know, I think supply throughout the year will build, and we've secured more in backlog now, so that helps underpin a piece as well.

That's great, guys. Thank you. Thanks, Michael.

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

Good morning, guys. Good morning, Ross. And, yeah, Scott, congrats on, you know, getting to the right targets. I know that's return on invested capital and improving return on invested capital has been your goal from the day you joined Finning many years ago. must be very gratifying to finally get there. I had a question on your gross margins. Your gross margin finished 2021 at 26.9%. You've had a positive comp in the fourth quarter for the first time this year. And, you know, back at the prior peak, you did roughly 30% gross margin. So, As we enter this upcycle, as you're calling it, I mean, is that 30% level in play? I mean, is it realistic to see, say, 100 basis points of gross margin expansion, you know, for the next couple of years?

So why don't I take that, Ross? So, one, thanks for the comments on the ROIC. I mean, it's been a journey, as you know, and it's really pleasing to see South America get back to the historical, peaks on a revenue base that's not quite there yet. So thank you for those comments. Your comment on gross margin, so we have seen gross margin expansion. I think it's been driven by a couple things. One is an inventory situation that's been very good relative to other kind of ups and downs in the cycles. And so that we haven't had any, that's helped in terms of the quality of the inventory. I think the second piece, obviously, is what we're doing on, you know, value add for the customer, which has helped. And, you know, Qubic is the example of that. But there's more. The customer value agreements have been very helpful in that regard. And then the third, obviously, is the supply-constrained environment, which is also, you know, takes away some of that pressure. As we look forward, I think there's more opportunity on gross profit margin, to be honest, as our capabilities around pricing and optimization, elasticity improve, as our value-added services, which has been a huge focus over a multi-year period, continue. And we deliver more value to the customers than I think we still have some opportunity on the gross profit margin side.

Okay, got it. And then I had more of a technology-related question. You know, CAT's, you know, very excited about, you know, their dynamic gas blended engine, and wondering if you could talk about that, you know, a little bit. Can you get that engine for a mining truck, like an ultra-series mining truck, or is it really only available for oil and gas application? And I'm just wondering if your mining customers are looking at the dynamic gas blended engine as a legitimate alternative for reaching their, you know, their 2030 emission objectives?

So, yeah, so the first, the 3500 dual gas blending engine is a great product that CAT has, and I think it is a differentiator. And just for everyone else on the call, it has the ability to displace, 80% of diesel with natural gas and also has the ability to have 20% hydrogen without a re-rate. So, I mean, it's a great product. It's a win-win. It's a win for the emissions. It's a win for costs, et cetera. And we're starting to see a pretty big uptick with our customer base. I think we've talked about some of the demonstrations we've had, and we've got quite a number of those engines in the backlog. And a couple of customers, as the capital budgets have freed up, have indicated a real desire to replace fleets with these engines. So that's point one, you know, great product. great uptick with customers. You know, as you think about your question about mining trucks, I do think, you know, a debate needs to be had on alternative fuels. You know, I don't think it's just a battery or hydrogen solution that is, you know, in the multi-year. I think there is an opportunity for alternative fuels to play a role here to drive down emissions, and CAT's product is capable of doing that. And so, you know, to be frank, not a lot of customers have picked that up yet on the big mining trucks, but some have. You know, if you've noticed that Imperial has talked a little bit about alternative fuels as an example. And I know some of our other mining customers were in that discussion as well. So I think more to come on that, Ross. And I do agree with you. I think there's an opportunity to push that harder in the years to come.

But is it offered now, Scott? Like could you buy a mining truck with a DGB engine in it today?

So there's an actual mine site in Mexico that's fully natural gas run. And so it is technically possible. The question is you have to have, you know, the combination of the application, the customer desire. And a lot of the customers right now are really focused on hydrogen and, you know, battery, which is kind of the path to zero emissions. And one of the things that I think we need to do with our customers is educate them on the possibilities of, you know, reducing emissions in a shorter timeline to, you know, 30 to 40% with the technology that is capable today. And so, yes, it is technically feasible, but there hasn't been a lot of uptake on it yet, which is somewhat surprising to me.

Got it. Thank you very much. Thanks, Ross.

Our next question comes from Brian Fast of Raymond James. Please go ahead.

Yeah, thanks. Good morning. Good morning, Brian. Greg, just on your commentary surrounding inflationary headwinds, could we get some more color on just where you're seeing that?

Sure. Well, as you can tell from CPI, it's fairly broad-based. But certainly in things like energy inputs to fleets, some on insurance, and on labor we'll expect in the future too. Salaried employees, after a couple of years where we haven't had increases, we'll have an increase this spring, whereas hourly we've had a wage increase each way along. So we'll see some additional costs on the labor side. Um, and then just on the procurement initiatives, um, you know, we continue to make progress in a lot of areas and maybe not with some of the savings that we thought a year or two ago. So some of it's broad based, but, um, so I think it's across the board, everybody's seeing pressures, but of course, you know, energy insurance would be a couple of hot spots.

Okay, thanks. And then just in South America, do you sense there's been a shift in tone from customers since the presidential election in Chile, now that we have clarity on that front? Or do you still see some tentativeness given the constitutional reform is still up in the air?

Yeah, Brian, it's got that. So one, I have seen a change in tone, and it's interesting. Certainty is better than uncertainty, right? And so you have a new president. that gets elected by a significant majority. And he obviously comes from left-leaning, but he's actually brought some certainty to the situation. And I think the fact that he has put in place a minister of finance that comes from the central bank that is very well regarded is very good news. And as I said prior, having the Congress, the lower house, have a majority of center-right is great news as well. So yes, I have seen a shift in tone over the last couple months, which is good news. And I think that is driving a lot of optimism for the next couple years. That all being said, there still is uncertainty around the constitutional reform. And I think we're going to see customers hesitate to put big new fleet renewals in place until there's you know, that certainty is resolved. So, you know, step in the right direction, but I think more to come to completely get rid of the uncertainty.

Okay, fair enough. Thanks for taking my questions. Thanks, Brian.

Once again, if you have a question, please press star, then one. Our next question comes from Maxim Sichev of National Bank Financial. Please go ahead.

Hi, good morning. Morning, Max. Greg, and maybe Scott, if you want to add to this, just kind of building on the whole Chilean dynamic, obviously if some of the clients are, let's say, reluctant to make long-term decisions on new fleets, and you mentioned that potentially we build opportunity in that geography, do you have the capacity to do this internally, or would you have to contemplate adding capacity via you know, either hiring M&A? How should we think about this just in terms of being able to capture that potential opportunity?

So, Max and Scott, I'll start, and then Greg, you add on. So, one, I do think that dynamic is real. And when you have copper prices at this level, you know, production uptime becomes so critical. And so, you know, the product support opportunity has got a lot of momentum behind it. And back to my answer to Sherilyn's question, we have the capabilities and capacity to deal with that. So we have a component rebuild center in Antofagasta, very high-quality center, and it has more capacity to be able to take on this activity. And, frankly, we have some self-help opportunities here to increase the velocity through which we put product through that facility, which will help even more. You know, I'm really encouraged about the outlook for 2022 on the product support side in South America.

Okay, super helpful. And just in terms of the ability to hire technicians in that geography, do you mind maybe just adding a couple of points in terms of sort of the game plan there?

Yeah, so we have hired approximately, I think, 400 technicians. during the year, so that's about, let's say, a little bit more than 15% of our technical workforce. I think we've made some great strides with some of our large customers, particularly on diversity and inclusion agenda, which has been fantastic. We've partnered with BHP and we've been partnering with them the last couple of years to build out that technical workforce, and that's been a huge, huge win for us. And as I said, I think to a lot of you, I think we're employer of choice in South America. You know, we come up high in all of the employee surveys and all of the ratings, and so we've got a great value proposition for employees, and people want to work for us there. So it's been a lot of hiring going on on the back of QB2 and Codelco and the uptick in demand, and that probably will continue throughout 2022. I think what's really encouraging is they've been able to grow that revenue base, though, and do that hiring and keep the SG&A I mean, the SG&A hasn't increased, and so they've been hiring on the technical front, but they're being taken costs out in other areas, which has been really encouraging as well.

Yeah, and, Max, one other dynamical highlight, you know, reviewing us with the team is, you know, the last time we really added a lot of people, 2012, 2013, brought a lot of new people into the company. And so it's now, you know, eight, nine years later, so those people are a lot more senior. And so they've had a really good time promoting internally and then hiring more junior people into the mix. And it's worked really well, and that timing has been really strong.

Okay, super helpful. And just one brief question, if I may, Greg. In terms of non-cash working capital, how should we think about that investment in 2022? And maybe if you can contrast this versus I think it was – $277 million investment in 2021.

Thanks. Yeah, so we'll continue to add working capital to normalize some of the new equipment balance. We've probably got some safety stock in parts right now that we can probably offset. So I think there'll be some net add, but I think equipment turns will probably normalize as we get access to more new equipment. And then parts, I think there's some efficiency opportunities when supply normalizes a bit. So they can kind of offset, but of course in a growing upcycle environment, we think we'd be adding that network and capital.

Okay, makes sense. Thanks for all this information. Thanks, Max.

Our next question comes from Sabat Khan of RBC Capital Markets. Please go ahead.

Great. Thanks very much. Just a question on the 22 commentary. I guess the earlier comments around product support being a bit more of a factor in H1 and then new equipment in H2. Should we expect margins to kind of follow that trajectory with better margins in H1? Or do you think margin will be more like your traditional seasonality?

Yeah, I think it'll be more traditional seasonality, which is, you know, really built into strong Q2 and Q3. But, yeah, more product support in the first half and then new equipment in the second, and there's always a mixed dynamic there. And mining will be a large contributor to the second half, so I think higher volumes but a little bit of a mixed shift there.

Okay, great. And then on the HS2 commentary earlier, it sounds like you've secured about $200 million of the orders. But I guess if you think about the $500 million broader opportunity, how much of that has already been issued and just how much more is still left to, I guess, source by the project owners?

Yeah, there's still about a third left thereabouts, so still a lot to go after.

Okay. And then just one quick one on the UK. I think there was some timing called out for the power systems deliveries. Was that like a material amount and should we expect that to come back maybe in the early part of this year on the revenue side?

Yeah, there's quite a bit of backlog. Most of it is pure timing. Some of it was customers having some delays in their timelines. And so it did move into the first half, but pretty evenly through the year. Yeah, that was certainly slower on a year-over-year comparison, but still lots of backlog.

Great. Thanks very much. Thanks, Eva.

Our next question comes from Devin Dodge of BMO Capital Markets. Please go ahead.

Thanks. Good morning, guys. Just wanted to pick up on that earlier thread on Chile. You've touched on some of this already, but There have been some early announcements coming out of the Constitutional Assembly that could be quite negative for the mining industry if they were enacted, which is an important caveat. But is this just a case of some radical ideas coming out of the subcommittees, and should we be discounting them? I just wanted to get your kind of boots-on-the-ground perspective.

Yeah, so you're probably – there was some – commentary out of the Environment Committee, which you're probably referring to. And I think the thing to keep in mind, Devin, is that for that to become anywhere near to being part of the charter for the constitutional referendum later in 2022, you need two-thirds of the full assembly to be in support of that. So, you know, I don't think anyone is putting any real attention, honestly, to to what just came out of the Environment Committee, I guess, point one. I think point two, I think what to watch, because there are real issues there, is the mining royalty and tax review, which my expectation is it's going to be, you know, resolved in the first half of this year. And I continue to believe that it's going to be, you know, a moderate increase. You know, right now the government take through royalties and taxes around, you know, 36%, 37%, 38%. And I suspect that goes up to, you know, 43%, 44%, 45%. And to me, you know, getting that behind us helps on that certainty issue, right? And so that's the thing to watch if I were you. You know, to date, really good news, I think, coming out of Chile. When you see the, you know, the lower house being center-right, which makes it, you know, hard to have really polarized things come through the political environment. And then second, having the finance minister come from the central bank I think is really good news as well. So all in all, I think we're in a much better shape than three months ago, but still a little bit of uncertainty that we have to navigate through until we see big new capital commitments in my mind.

Okay, that's good color. Thanks for that. My second question is, look, you've been asked this in various forms before, but it does come up occasionally. But in prior up cycles, we've seen some of that hard-fought cost discipline that was achieved during the downturn kind of fade away and some expenses start to creep back into the business. What sort of things would you point to that give you confidence that the operational improvements that you've shown in 2021 are more sustainable?

Yeah, so one, I think you have to take it in a longer context of kind of the seven right here journey we've been on. And when you look at the cost reductions and the way we've transformed this business, it's to the tune of 20% to 25% of the cost base. And that has been through a restructuring of the business, primarily. And then you look at what we're doing from a RRR perspective, which is making sure the right work gets done in the right facilities with the right technical workforce. that's a game changer. When you think about the e-commerce going from 10% of parts delivered to 40 to 50% of parts delivered, that's a game changer. When you think of the initiatives to move support functions closer to the branch, which is great from a cultural perspective, great from an understanding the business perspective, but also really important from a cost perspective, that's a game changer. You know, I feel really good about the structural things that we've done to increase our competitiveness, which is helping on the market share side as well. And undoubtedly, you know, we're facing some inflationary headwinds for sure, which Greg referenced, and that will be a little bit of a headwind. But the offset to that is I think there's a lot more structural changes, fixed-cost structural changes to go after. And I look at our supply chain business as an example. Our supply chain delivery and our supply chain business. But we have three warehouses right now in Edmonton, and we're gonna move that into one in 2022. You think about the cost associated with that, it's pretty significant. When you think about running our component rebuild capabilities, on not only a high quality, but also focus on low-cost delivery. I think that's a big contributor as we go forward as well. So there are inflationary headwinds, but there are also significant opportunities for us to continue to take out fixed costs. And I think this whole team recognizes the importance of that SG&A initiative. That SG&A initiative allows us to not only be extremely competitive with our customers and capture more market share, it also allows us to generate free cash flow, allows us to reinvest in the business and increase the earnings capacity of the business. And my whole team is aligned around that objective. So we'll navigate through it like we've navigated through the last seven years, and we're going to come up the other side of this, getting to that 17% target. And then ultimately, I think there's more to go after that, to tell you the truth.

Okay, that was a really good call. Thanks for that. And congrats on the results, not just in Q4, but really for all of last year. Well done.

Thanks, Devin.

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

Great. Thanks, operator. That concludes today's call. Thanks, everyone, for joining and have a safe day.

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