Finning International Inc.

Thank you, Operator. Good morning, everyone, and welcome to Finning's second quarter earnings call. Joining me on today's call are Scott Thompson, President and CEO, Kevin Parks, CP and COO, and Greg Palaszczuk, EVP and CFO. Following our remarks today, we will open the line for questions. The call is being webbed on Finning.com. We have also provided a slide that we will 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 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. Scott, over to you.

Thank you, Amanda, and good morning, everyone. On today's call, I will provide some introductory comments. Kevin will then detail important improvements we have made to our value proposition and operating model, which have enabled us to exceed our investor day commitments. After that, Greg will provide more details on our performance in the second quarter, including regional commentary and outlook. Please turn to slide two. We are pleased with our strong performance in the second quarter. Globally, our teams continue to deliver outstanding results in a very dynamic environment. Through consistent execution of our simple plan to drive product support, reduce costs, and reinvest to compound our earnings, we have made sustainable improvements to many important areas of our business and significantly improved our earnings capacity. Delivering on the commitments we set out at our investor day last year, we've accelerated product support growth, We have reduced our cost base to become more efficient and agile in serving our customers. We have reinvested in our business to compound our earnings. From delivering approximately $900 million of free cash flow during a very challenging 2020 to delivering $2.66 of EPS over the last four quarters, the full cycle resiliency of our business model and successful execution of our strategy has been on full display. There are a number of key building blocks to this success. First and foremost, safety remains a top priority and a key area where we continue to make significant progress. We reduced our total injury frequency a further 11% from Q2 2021. We are driving strong product support growth rates and improving our customer value proposition in close alignment with Caterpillar's aftermarket growth strategy. We reduced our cost structure through sustainable productivity gains and effective inflation management. In addition, improvements in our inventory management practices and advanced digital capabilities have helped us to capture growth opportunities and service our customers more efficiently. As a result, we've realized a significant improvement in our operating leverage and achieved a fundamental step up in profitability. These enhancements to our customer value proposition and operational improvements have significantly elevated our return on capital performance across all of our regions. Redeployment of capital through accretive M&A and share repurchases have also helped drive strong EPS growth. While we are monitoring financial market volatility, we are encouraged by increasing capital deployment by our mining customers, where our quoting activity continues to grow in both Canada and Chile. During the second quarter, we were pleased to secure two important long-term contracts, including an agreement with Artemis Gold to deliver mining fleets to their Blackwater Gold project a greenfield development in British Columbia with a pathway to fleet decarbonization with Caterpillar, and a contract with Codelco to deliver the first fleet of Caterpillar electric drive trucks to their ministro Halley's copper mine. Our customers continue to be busy. We expect that project backlogs, healthy customer balance sheets, and high machine utilization rates will continue to support strong demand for equipment, parts, and maintenance. Following our strong EPS growth of 52% in the first half of 2022 compared to adjusted EPS in the first half of 2021, we expect demand conditions to remain favorable for the remainder of 2022. Underpinned by our large and diverse backlog, continued growth in product support, and disciplined operational execution, we are projecting above mid-teens EPS growth in the second half of 2022 compared to the second half of 2021. We also expect to generate positive annual free cash flow in 2022 with the amount of free cash flow dependent on supply and delivery schedules. While activity levels remain robust, we are closely monitoring leading indicators and the impact of ongoing supply chain, labor, inflation, and interest rate challenges on our customer activity levels. We remain focused on actively managing these risks and are capturing growth opportunities in a disciplined manner. sustainable improvements we have made to our business have improved our earnings capacity through all stages of the economic cycle which gives us confidence in our ability to continue successfully navigating a dynamic global business environment i'd like to invite kevin to provide a bit more color on how these structural improvements to our business model have helped us to exceed the targets we set out at our investor day last year thank you scott and good morning everyone

I'm happy to be joining the call today to provide an update on our operational improvements. If I can ask you to turn to slide three, which shows our execution against investor day commitments we set in June 2021. Our net revenue of $7.3 billion over the last four quarters was at the midpoint range, and our product support performance was offset by constrained availability of new equipment. Our product support revenue grew by 14% over this period, considerably exceeding our goal. In addition to strong demand for parts and service across all sectors, we have significantly improved our value proposition for construction customers. We are now offering a wide range of customer value agreements and rebuilds for most construction equipment models, providing attractive financing and warranty with the support of Caterpillar and leveraging our RRR network capabilities for faster turnaround and cost efficiencies. As a result, our construction product support revenue was up 24% over the period. While price increases had a more positive impact on our product support revenue growth than we had assumed a year ago, we are pleased with our aftermarket share gains and improving volumes, which drove the majority of our outperformance. We continue to make progress on improving our cost structure. Our SG&A as a percentage of net revenue over the last four quarters was 18.3%, This was above our top mostly due to stronger product support revenue, which is more SG&A intensive, lower new equipment sales than expected, and more inflationary pressure than we expected a year ago. Despite these challenges, SG&A Q2 2022 was 16.9%, driven by higher new equipment deliveries compared to the previous three quarters, ongoing productivity improvements, and proactive inflation management.