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spk04: Thank you for standing by. This is the conference operator. Welcome to the Finning International Inc. 3rd Quarter 2022 Investor Call-In 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 Amanda Hobson, Senior Vice President, Investor Relations and Treasury. Please go ahead.
spk03: Thank you, operator. Good morning, everyone, and welcome to Finning's third quarter earnings call. Joining me on today's call are Scott Thompson, President and CEO, for his last call today, Kevin Parks, EVP and COO, who will succeed Scott as president and CEO, and Greg Palaszczuk, our EVP and CFO. Following our remarks today, we will open the line to questions. This call is being webcast on Finning.com. We have also provided a set of slides 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 provided during this call are forward-looking. Please refer to slides 11 and 12 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.
spk11: Thank you, Amanda, and good morning, everyone. It has been an honor to lead the CINE organization over the last nine years. From the beginning, my approach has been to respect Finning's great history and culture, invest in people and technology, and advance sustainability initiatives that will position Finning for long-term success in a rapidly changing world. During the last decade, our global teams have navigated through some challenging times, including volatile business cycles, political and social uncertainty, and the global pandemic. Despite these challenges, we have surpassed our performance records in many important areas, including product support revenue, profitability, and earnings per share. Please turn to slide two. I could not be prouder of our global team's outstanding execution of our strategic priorities. We continue to drive strong growth in our product support business with Q3 product support revenue up 30% year over year to a record $1.2 billion. We have significantly improved our cost structure and are proactively managing inflationary pressures Our Q3 SG&A as a percentage of net revenue was 16.7%, the lowest on record. And we have significantly expanded our earnings capacity, delivering record EPS of $3 over the last four quarters and return on invested capital above 18%, including a record of 23% in South America. Together with Caterpillar, we have built a leadership position in many of the world's most technologically advanced projects and collaborations. Recent examples include the renewal of the entire truck fleet at BHP Escondida with Caterpillar Ultra Class electric drive trucks that establishes a path to progressive implementation of autonomy and zero-emission trucks at the mine. Significant mining deals in Western Canada, including autonomous truck deployment in the oil sands, one of the largest autonomous sites in the world. HS2 equipment packages in the UK, where we captured 40% of the total industry opportunity for phase one of this railway project, and partnering with our oil and gas customers in Western Canada to reduce emissions with CAT dynamic gas blending engines that allow for up to 85% diesel displacement with natural gas and up to 20% hydrogen blend. We have delivered record results in Q3, and I have great confidence in the future success of this world-class team under Kevin's leadership. Please turn to slide three. As we announced in September, Kevin Parks, who is currently EVP and COO, will assume the role of President and CEO on November 16th. Kevin has demonstrated outstanding vision and leadership since joining Finney more than 25 years ago. His strategic thinking, customer-centric mindset, focus on operational excellence, and leadership skills will serve Finney well in the years ahead. Kevin's appointment concluded a thoughtful and comprehensive succession planning process that the board had been engaged in for some time and highlights the strength and depth of Finning's leadership team. We are fortunate to have exceptionally talented and versatile people working for Finning, and we will continue to develop our leaders. Finally, this is my last quarterly call as Finning's CEO, and I wanted to express my sincere gratitude to our shareholders, analysts, and all of you listening to our earnings calls. I've greatly enjoyed our conversations and your thoughtful questions about Finian's business. I will now hand it over to Kevin, who will provide an update on our operational performance and market environment, as well as share his thoughts going forward as he takes over the CEO role.
spk09: Thank you, Scott, and good morning, everyone. First, I would like to thank Scott for his leadership, vision, and mentorship. Under his leadership, we have strengthened the capabilities across our organization, building a great foundation for our continued success. I am honored and proud to take on the leadership of Finning, and I look forward to working with our outstanding employees, partnering with Caterpillar to deliver great support to our customers and strong returns for our shareholders. If I can ask you to turn to slide four. We are very pleased with the exceptionally strong performance in the third quarter. Our employees continue to work safely and collaboratively with our customers in a challenging but encouraging environment. We enter the quarter with good inventory levels and we're able to capitalize on continued momentum in our end markets to meet growing customer demands. We are demonstrating consistently strong execution of our strategic plan, proactively managing our supply chain, and improving our earnings capacity. We expect demand conditions to remain healthy across most of our end markets, supported by constructive commodity prices, significant backlog of large projects across all of our regions, and high machine utilization rates. Our customers are making commitments into 2023 and beyond, and we continue to win strategically important business in a tight supply environment. This is resulting in equipment backlog reaching 2.5 billion in September. We expect to deliver the majority of these orders in 2023. We continue to execute our product support growth strategy, which is closely aligned with cash flow. We are very pleased with the growth trajectory and significant momentum we are seeing in our product support business levels. This includes great success in the construction space across all regions. Our outlook for product support remains robust. We have been successful in recruiting technicians while being thoughtful in hiring to build capacity around our RRR network while driving improvements in labor productivity and service quality. While demand conditions remain healthy, we are mindful of the impact of inflation and higher interest rates on our customers, particularly in the construction centers. Despite the high inflationary environment, we are demonstrating operating leverage by reinforcing our mid-cycle operating cost model and capital discipline. This has enabled us to achieve breakthrough earnings and significantly higher return on invested capital, especially in South America. Looking ahead, There are a number of reasons we feel confident we will finish the year strongly and continue that momentum into 2023. Firstly, we've built significantly high quality backlog that supports our new equipment sales throughout next year. Second, our aftermarket execution has been gaining momentum and we have further opportunities to drive aftermarket share gains, especially in construction. In addition, we are taking those learnings from the construction sector and applying them to the mining sector with some early indications of success. Thirdly, supportive commodity prices and improved capital budgets will drive an increased investment in growth for our customers. And we expect that to continue in both Canada and Chile for 2023 and beyond. And finally, as we continue to operate with our mid-cycle discipline to our cost and capital structure, I'm confident we'll just continue to demonstrate improved performance through all stages of the economic cycle. With that, I'll turn it over to Greg.
spk02: Thank you, Kevin. I'll provide more details on our performance in the third quarter and talk about our regional highlights and outlook. Our consolidated third quarter results are summarized on slide five. Net revenue of $2.1 billion was up 20% from Q3 2021, a strong momentum in business activity across all regions, which exceeded our expectations in the quarter. Successful execution of our product support growth strategy, supply chain management, and cost discipline drove record profitability and earnings in the third quarter. EBITDA as a percent of net revenue is 12% in both Canada and South America, and 6% in the UK and Ireland. EPS of 97 cents was up 59% for Q3 of 2021. We have built a strong backlog for next year, driven by mining wins and the notable increase in power systems orders. Slide 6 shows changes in our net revenue by line of business compared to Q3 2021, as well as some details on our equipment backlog. New equipment sales were up 8%, driven by mining deliveries in Canada and construction, deliveries in the UK, including HS2. Demand for rental and used equipment was robust in the third quarter, and rental utilization rates were high, reflecting a continued tight supply environment. Product support revenue was up 30%, driven by strong market activity and execution of our product support growth strategy, including supplier cost pass-throughs. Consolidated equipment backlog was 2.5 billion at September 30th, up 16% from June 30th and 56% from September 30th, 2021. Order intake was up 25% in Q2. Mining orders are now comprised over 40% of the backlog compared to less than 30% a year ago. We're also seeing increased demand for our power systems business in all regions, particularly in Canada, but also of note in Chile, where we were very pleased to receive our first order for new large-scale data center in Chile, the long-term global customer. Please turn to slide seven. We continue to deliver strong year-over-year growth and profitability. Gross profit was up 25% with an increase in gross profit margin driven primarily by higher proportion of product support in the revenue mix. SG&A increased by 13% due to workforce additions and higher variable costs to support revenue growth and service levels. SG&A has a percent of net revenue decreased by 110 basis points to 16.7, our lowest percentage on record, reflecting proactive cost management and productivity gains. We've made significant progress in improving our productivity across people, facilities, and supply chain areas by delivering on plans we set out at our 2021 investor day, including deployment of the RRR model, warehouse and back office consolidation, and procurement spend management. In addition, Successful execution of our cost of sales initiatives also played a key role. So while you may see more clearly the improvements in SG&A through that line item, we've had an equal number of initiatives focused on improving cost of goods sold, and it's helping to drive our strong operating leverage as well. When we look back at our adjusted Q3 2019 results, our Q3 2022 net revenue was about $300 million or 16% higher, mostly due to higher product support, yet our SG&A increased by only $20 million or 6%. despite the highly inflationary environment. This has helped us double our EPS and improve return on invested capital by 610 basis points from pre-pandemic levels. Slide 8 summarizes our Canadian results and outlook. Net revenue increased by 33% in Q3 2021, with higher revenue across all sectors and lines of business driven by strong market conditions in Western Canada. Product support revenue is up 32% on higher spending in mining, strong demand in construction, and successful execution of our product support growth strategy. New equipment sales were up by 52%, driven primarily by deliveries in the oil sands. EVIT as a percentage of net revenue was 11.7%, up 130 basis points from Q3 of last year, driven by improved operating leverage from productivity initiatives. Our outlook for the Canadian business is positive. Canada's equipment backlog increased by approximately 25% from June 30th, reflecting broad-based strengths in order intake. We expect commodity prices to remain constructive and improved capital budgets to drive investment in renewal of aging fleets and product support opportunities in the mining sector. This quarter's backlog included two significant mining orders for delivery in 2023. In construction and power systems, public and private sector investment in infrastructure and energy should continue to support robust activity. Our order intake was up 25% in construction, and triple in power systems compared to Q2 of 2022. Please turn to slide nine for our results in South America. Net revenue increased by 5% in functional currency from Q3 2021, as growth in product support was partially offset by lower new equipment sales. Product support revenue is up 24% in functional currency, largely driven by strong demand in Chilean mining. After slowing growth in product support revenue in Q2 due to supply constraints, we were able to catch up during Q3. New equipment sales were down 23% in functional currency from Q3 2021. Construction activity has slowed, impacted by higher equipment prices, a weaker Chilean peso, and higher interest rates, prompting some customers to postpone purchase decisions. Lower mining equipment sales compared to Q3 2021 were due to supply constraints, impacting the timing of backlog deliveries, significant deliveries to Chilean mining customers in Q3 of last year. South America's EBIT as a percentage of net revenue was 12.3%, up 310 basis points from Q3 of 2021, driven by the shift in revenue mix to product support, improved cost structure, and the favorable impact in the Chilean pace of devaluation. Going forward, we expect significant mining deliveries in Chile from our recent wins with BHP and Codelco. as well as committed medium-term investments and fleece replacements across mining customer base. We also expect to see continued strong demand for mining product support technology solutions, including autonomy. South America's equipment backlog increased by approximately 25% in functional currency from June 30th, driven by strong order intake in mining, including 798 electric drive trucks for delivery to BHP Escondida in 2023. It's part of the agreement we announced with BHP and Caterpillar in late August. Over the next 10 years, we will replace BHP's entire haul truck fleet at the Escondido Mine, one of the industry's largest fleets, currently comprised of over 160 haul trucks, with new Caterpillar 798 AC electric drive haul trucks. The new electric drive trucks will feature technology that delivers significant improvements in material moving capacity, efficiency, reliability, and safety. The agreements allow BHP to accelerate the implementation of its autonomy plans, by transitioning the fleet to include technology that enables autonomous operation. In addition, the agreement sets forth a path for BHP to meet its decarbonization goals through the progressive implementation of zero-emission trucks. Currently, we have less than 20% of the total BHP order and backlog for 2023 delivery. We will also provide technical support for the new fleet through our integrated knowledge center in Antofagasta. Our long-term outlook for copper mining in Chile remains constructive. We expect Chile will remain an attractive place to invest as electrification trends drive global growth and demand for copper. We continue to monitor the constitutional reform process closely. We are also actively monitoring the process for approval to proposed revised mining royalty framework. We are encouraged by the moderation that was recently announced by the Chilean government. We expect the timing of investment decisions related to greenfield and newfield expansion projects will remain uncertain until the new proposal is finalized and approved. Construction activity in Chile is expected to remain soft due to rising interest rates and the weakening peso. However, mining contractors remain busy. We continue to see significant quoting and order intake activity from this customer segment. I'm now turning to the UK and Ireland on slide 10. New equipment sales were up 19% in functional currency from Q3 2021, driven by HS2 deliveries and strong demand in the construction sector. Product support revenue is up 38% in functional currency, reflecting robust construction machine utilization, as well as the contribution from Hydroquip. We're pleased with EBIT performance in the UK and Ireland. EBIT as a percentage of net revenue is up 60 basis points to 6.2%, reflecting structural profitability improvements and the positive financial impact from the acquisition of Hydroquip. Given softening macroeconomic conditions in the UK, we expect construction activity to moderate in 2023. However, demand for our power systems business in the UK and Ireland is expected to remain robust, especially in the data center market. We will continue delivering equipment to HS2, and we have a strong backlog of power system projects for delivery into 2023. We expect high machine utilization hours and the addition of hydroquip to continue driving solid product support activity in the UK. Our balance sheet remains healthy with net debt to adjusted EBITDA at 1.8 times at the end of September. We generated significant free cash flow in September, expect strong free cash flow in Q4 2022. However, due to potential shifts in supply and delivery schedules, free cash flow may not be positive for the full year. We continue to demonstrate strong execution, expansion of our earnings capacity in the third quarter. We expect significant mining new equipment deliveries in Chile and Canada in the fourth quarter. We have built a high quality backlog for next year. We're closely monitoring leading indicators and proactively managing risks. As we continue to deliver our equipment backlog, execute our product support growth strategy, and operate with cost and capital discipline, we expect to finish the year strongly, continue that momentum into 2023. Operator, I'll now turn the call back to you for questions.
spk04: Thank you. We 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 two. We will pause for a moment as callers join the queue. The first question comes from Yuri Link with Canaccord Genuity. Please go ahead.
spk00: Thank you, and first I'd like to wish Scott all the best in his new role and congratulate him for a job well done at Finning. I don't know who wants to take this one, but just on product support, very strong in Canada and South America in the quarter. it even increased sequentially, which is not the typical seasonal pattern we see. Is there anything, was any demand pulled forward in the quarter or, you know, is this a, would you view this as a sustainable level to kind of reset our models going forward from here?
spk02: Yeah, Yuri, thanks. It's Greg. Yeah, we're really pleased with the level of product support activity, obviously within the quarter. There was an element of actual, you know, pushback from Q2. So as we highlighted last quarter, you know, there's quite a bit of inventory on boats in Chile. And actually we saw about a 30-day increase or a 30-day improvement in time on ships during the 90 days within the quarter. So that helped have some more inventory arrive and we were able to catch up some of the demand that was in Q2 that we fulfilled in Q3. So that was helpful. And then Canada is a very broad-based industry. demand across each sector. And so it was actually, you know, the theme previously had been construction above mining in terms of growth rates, and they were roughly on parity for the quarter. So we're seeing really good demand coming from the mining sector. And so it's a combination of having supply, which I think we've managed quite well, and seeing some improvements there within the quarter, but also just demand being a little higher than we expected. And you highlight a little more than you'd see in a typical Q3. So pleased with that. So I think some of it's strategy, some of it's supply, but demand just continues to be strong. And of course, we're looking at the leading indicators, but that looks to be the continued trend at the moment.
spk00: Okay, that additional color is helpful. Second question, just given the size of the backlog here, can you help us at all with the cadence of conversion to revenue in 2023? And just confirm, I think I heard that the bulk of it will be delivered soon. next year?
spk02: It's a pretty solid backlog. We're pleased with that. Of course, we're going to be very busy in Q4 delivering as much of it as we can, putting as much through the workshops and in the customers' hands as we can. And then through 2023, it's pretty balanced. Most of the backlog that we added from last quarter was for the second half. BHP would be included in that, but a couple of other Canadian mining orders. So it's pretty balanced. It's mature on the one hand, but most of the ad that you saw between this and the last quarter will be for the second half. So it's as good as backlog as we've obviously ever had, but particularly to start a year. So pretty pleased.
spk09: And Yuri, I'll just add to that, that we are, you know, being very, very disciplined about how we manage that backlog through the system and making sure that we're not adding to peak capacity in terms of technician capability, making sure we're using, you know, contractors as well to help us manage the, the execution of that backlog. So you can expect that, as Greg says, to be a consistent flow through the course of next year.
spk04: The next question comes from Jacob Boat with CIBC. Please go ahead.
spk01: Good morning. Maybe I'll just start off and congratulate Kevin on his new appointment as CEO and best of luck to you and your new endeavors here, Scott. Thank you. Maybe just starting off, you talk about, you know, what your first priorities are in areas of focus.
spk09: Yeah, sure. Thank you for your kind comments there. In my immediate priorities, I mean, succession's a gift, let's say that first, you know, so I feel very blessed and happy to be asked to take on this really important role and thank Scott and the board for their thoughtful succession process. My immediate priorities are to help the organisations through that succession process. It is a gift. We should welcome and to embrace the stability that it gives us, but we'll still need to manage our employees. They'll have lots of questions and concerns. I'm spending a lot of time talking to all stakeholders about the transition and what's on their mind. And then, you know, really, you know, we switched back into execution. So we put a strong Q4 to deliver. We need to make sure we're effectively putting all of our resources in the right way to execute on that backlog delivery, but also to continue to support our customers through, you know, what is a challenging but encouraging environment right now. We need to double down on our aftermarket growth share opportunities, as I mentioned in my remarks. We're extremely happy with the progress we've made in construction equipment. And we're seeing very early signs of some of those initiatives really starting to take hold in the mining sector as well. So it's not just strong mining activity that's driving that. There's a new focus and a new approach there. And then maintaining the mid-cycle operating model, costing capital discipline. We are very pleased with our performance and our results. It would be easy to get carried away with that. And it's tough for our employees at times to manage through this challenging environment, but we should all be happy with the activity levels and find ways to manage through that whilst maintaining that cost and capital discipline through the cycle. And then finally, of course, that will result in free cash flow generation. So very important that we We sell through this inventory in the appropriate way and timing, and we generate our free cash flow as we move through the end of this year and into next year.
spk01: Thank you for that. And maybe my second question, just on this large data center project in Chile, I think you said that was the first of its kind. Maybe just talk through how big of an opportunity is this? I know that you have done some of this in the UK, but how big of an opportunity is this both in Canada and South America?
spk02: Yeah, so we're really pleased. I mean, obviously the first data center is always an important one, and it's with a customer we've dealt with for a long time with a great relationship. So we're pleased. And then it is their first as well, but they're looking at multiple phases. So there's been some small-scale data center business the team's worked on, but this is kind of stepping into more of the types of projects that we do in Dublin and London area. So really pleased. It's the first one. It is multi-phase. So it's a bit of a starter kit. We'll have to see where the trends go. But we're really encouraged and pleased to win that sort of business.
spk09: Really important to note there that our UK team that have kind of been the pioneers of this for our business and certainly they've extended their execution beyond the UK geography. They've delivered over 70 projects over the last few years and over a gigawatt of capacity. And they're collaborating really well with people, UK team in Chile, supporting our South American colleagues to execute this really well.
spk01: And is there opportunity in Canada to be doing the same thing?
spk02: Yeah, there's some smaller scale in Canada as well. The climate isn't quite as supportive, but there definitely is activity with the kind of bigger telecom companies. Wouldn't be as high a percent, obviously, as the UK or the potential in Chile. Great.
spk01: Thank you. Thanks, Jacob.
spk04: The next question comes from Michael Dumais with Scotiabank. Please go ahead.
spk12: Hey, good morning, guys. I'm going to follow up on the product support side. Hey, good morning. You know, putting aside maybe the catch-up in South America, what's the confidence level that you can achieve that, you know, that investor day 5% to 9% growth on top of these you know, very strong numbers. And can you give us a sense or maybe some examples of the applied learnings and construction that you're applying to mining?
spk02: Yeah, for sure. So, you know, of course, when we did the investor day in June of 2021, you know, the inflation assumption we'd put in was one to 2%. So we have to adjust for kind of current inflation levels. And obviously price increases have been more double digits this year. So, um that's played a factor but in terms of fundamental volumes um i think we're driving you know above the five to eight percent you know that's still a level that we want to continue to look to to grow the business grow share and and keep compounding so that that's our goal um obviously it's a really supportive market right now um but all of our ambitions are the same i'll just just add michael you know so there's key learnings around uh how you approach rebuild so some miners
spk09: have been early adopters of rebuilds. We've seen a growing trend in that regard. Some of that is supply chain driven. Some of it is thinking about how you manage the energy transition moving forward. But I think the key thing there is appetite and being really hungry for where you're losing. You know, we clearly understand in construction where we're not winning in the aftermarket business. You know, we've always had a really strong market share in mining, but we don't win everything. And so being really, really hungry about winning everything is really important. And then, you know, attaching that, you know, winning those lost areas and driving, you absolute loyalty with our mining customers is critical and making sure we attract all aspects of their product support business by attaching loyalty and incentives around that is a key to that as well.
spk12: That's great, Collin. Thanks. And Greg, just trying to think about your comments on operating with mid-cycle approach on costs and capital. I mean, is that to say that you're managing maybe with a different mix in terms of variable versus fixed with the view of kind of like a medium term, just a little bit of color there for a better understanding.
spk02: Absolutely. So, you know, it is part about having a higher variable cost base. Part of it is being proactive and just keeping an eye out for the next part of the cycle. So as Kevin highlighted, you know, we're using some contractors in places where we would have previously added full-time employees. That would be an example of, of trying to manage the cycle more proactively. But across the business, we're constantly looking for ways that we can variabilize more costs. I think we've been fairly successful on that. It includes some of the compensation incentives and those sorts of things. So the RRR model, I think, is a perfect example. We're trying to put capabilities in the right places to stay busy through the cycle and work through shifts rather than building more facilities to add capacity. And so, you know, in that model, in theory, you'd want to have triple shift at the peak of the market and single shift at the bottom as an example. And so we're really trying to put that in place so that we can be more variable through the cycle. And at this point, we're certainly making sure we manage our growth very responsibly or responsibly watching leading indicators. But we've got a lot of momentum and we're trying to balance those two off.
spk12: That's great. And lastly, obviously, congratulations, Kevin. And Scott, obviously, well done, and I'll see you around. Thank you.
spk07: Thanks, Michael.
spk04: The next question comes from Sabahat Khan with RBC Capital Markets. Please go ahead.
spk06: Great, thanks. Just wanted some color on the Canadian construction market and what's kind of keeping that going versus the other two. Is it the infrastructure investment being made in Western Canada, or is it more the macro situation in Canada versus the UK or Chile?
spk02: Yeah, so from a Canada perspective, it's pretty broad-based. I mean, you've got two large-scale pipelines headed down the homestretch. You've got a lot of infrastructure projects that were sanctioned at the beginning of COVID that are partially the way through. And then just given how well commodities are performing, each of the governments are kind of in a surprise situation. surplus position with elections coming up in the next couple of years. So looking at another set of infrastructure. So it's pretty broad based. Customers aren't immune to higher interest rates and some of the other pressures, but it's just very solid, including more oil field service activity, which brings in construction for a component as well. So it's just a pretty solid environment.
spk06: And are you finding the other construction customers are maybe in other regions are going more to maybe product support? Are they taking a bit of a pause? Just kind of what sort of their reaction to kind of the current backdrop? Is it just a pause in the equipment? What are you seeing in terms of feedback from them in terms of demand?
spk09: Yeah, I would say, you know, as Greg mentioned in his remarks, you And there's no doubt we're seeing a slowdown in construction activity there, given inflation and the devaluing currency. So, you know, it's a smaller part of our business in Chile, but, you know, there's clearly signs of that occurring. And that isn't a switch to product support. That's just a more broad slowdown in construction activity. In the UK, we've done a lot of work on this. You know, we use the UK as kind of our watchtower, I guess, our forward-looking target. into what's happening in Europe. And I would say that in the second quarter, there was a, I'd call it more of a stuttering and a wait and see kind of environment. Order intake has been better in Q3 than it was in Q2 in the UK. So we saw some decisions being shifted later in the year. Typically, orders would be placed in the first two quarters in the UK. We've seen that shift to the right. a little, but I'm relatively encouraged with the order intake during Q3. I've been personally involved in some of the conversations, and there is still a tight supply environment, which customers have been very mindful of, and a high inflationary environment. So equipment next year will cost more than equipment this year. So customers are thinking about that as they manage through their supply decisions, and they're talking to their own clients about that. You know, I'd say encouraging sentiment from the UK, actually, from a construction perspective, but being very mindful and watching the dynamics there, as I'm sure you will see, they're changing pretty fast.
spk06: Okay, great. And then it sounds like the mining environment is still good in Chile. Have you seen any change in tone, maybe more positive as some of the constitution reform is kind of going on? Are people still waiting for kind of a final decision on that before moving forward with any big investment? Or has, you know, kind of the recent vote against it and some of the other royalty changes, has that made people a bit more optimistic? Are they getting more active with investment? Just what are some of the discussions on the mining front in Chile?
spk02: Yeah, I mean, there's been a pretty steady flow, as you can see, of order intake quarter to quarter, despite some of the uncertainty. But, you know, absolutely, some of the more formal moderation publicly, I think, has encouraged customers. There's still discussions ongoing on the moderation, but I think there's some encouragement there, but the process will take some time still to play out. It's still solid activity levels and good order intake, but for some of the bigger decisions to be made, you kind of have to have that agreement finalized in place and stability agreements negotiated. So that'll continue to take some time, but we're really encouraged with tech QB2 is ramping up to first production and We're getting ready. We're continuing to deliver units to Codelco and getting ready for BHP. So we're pretty busy and pretty pleased with the environment regardless. And that gives us some more encouragement about the next leg.
spk09: The only thing I would add to that, Sabri, is that's the current situation. Longer term, our advice and our customer conversations reinforce that the long-term outlook for copper in Chile is still very robust.
spk06: Great. Thanks very much for that. Thanks, Emma.
spk04: The next question comes from Devin Dodge with BMO Capital Markets. Please go ahead.
spk08: Thanks. Good morning. I wanted to come back to one of the earlier questions from Yuri, but just trying to see if you can give us or help us understand where you saw the most outperformance in Q3 versus your prior guidance. I think everyone on the call here appreciates that you're looking to guide conservatively, but when your results surpass the updated guidance by such a wide margin and so soon after you provided it, I'm just not sure if you get full credit. So, any thoughts there?
spk02: Yeah, sure. So, I mean, it was a solid quarter. We saw supply a bit better than we thought. Demand in each region was higher than we thought. There were some mid-year price increases that went through the system, and there was still continued very strong demand, which we thought there might be a little bit of softening given that. And then it's all three regions at the same time, and some of the upsides we captured within the quarter. And I guess when you do all those things at the same time and keep costs in check, it works well in this business model. That's the strategy. Sell lots of parts, keep costs low, and reinvest. compound, and all of that came together in the quarter. I would say there's probably a little bit of FX help uniquely in each region, a little bit. So when you get all those things together, it drops to the bottom line, and we're pleased with the quarter.
spk08: Yeah, okay. Thanks, Seth. Good color. Okay. Second question. ROIC in South America, look, is at the very top end of the range that was outlined at the investor day. Look, it's a bit of a first-class problem here, but is the range too low, or should we expect ROIC to maybe moderate a little bit going forward?
spk02: That business has got good momentum. They're doing all the building blocks really well, again, driving product support, keeping costs well in check. And so it's done a great job. We continue to see that outlook positive, and we can still see room for improvement.
spk09: I would say that the lever there really, Devin, is around investing capital, working capital sales. That's the major focus. And some of that is the kind of challenges that we see in the supply chain environment. So remember, the bulk of our parts are shipping from Miami down to South America. And there's been some specific challenges, which Greg mentioned, have improved in Q2, which helped. But we still think there's a crank there on IC turns. And, you know, some of that is related to the fact that we inventory it up and support our customers. Some of it is just the unique challenges around the geography, which need to have our best minds, our best supply chain capabilities working on that, which they are. And I think there's a prize there. So I would say it certainly is a peak from my perspective.
spk08: Got it. Okay. So just before I turn it over, I just wanted to say good luck to both Scott and yourself, Kevin, on the new roles. Thanks. Appreciate that, Devin.
spk04: The next question comes from Brian Fast with Raymond James. Please go ahead.
spk05: Yeah, thanks. Good morning. First off, Kevin, congrats on the new role. Scott, all the best going forward. Thanks, Brian. And just on... Product support, obviously we're seeing continued strength here. Could you provide some color maybe on rebuilds and how that has trended of late? And I guess, are you seeing a shift in how customers view rebuilds, particularly in South America?
spk09: Yeah, so for sure, we've had a completely different approach to rebuilds in the last two years. coming out of the pandemic, as we've deployed the product support strategy across all three regions, I think we've already surpassed the annual rebuild total for last year, which was up considerably on the year before. I think the economics, and we've repositioned the economics around rebuilds to be more compelling. We've increased the capacity and the turnaround capacity of our ability to perform rebuilds, which is you know, encouraged customers to look at them differently. And then if you overlay that, the tight supply chain environment, that's also been a tailwind, I guess, in terms of driving rebuilds. We've certainly seen that in South America, particularly from a construction equipment perspective in South America, less so from a mining rebuild perspective. You know, the mining rebuild situation is different in Canada than it is in South America. But we do see a lot of uncivil product rebuilds in South America, but less so around the major trucks. The general direction of travel is on refresh, as you've seen by the backlog and the deliveries of mining equipment in South America. Some of that relates to their visibility to the pace of the energy transition. So electrification will happen sooner for sure. I'm not sure when, but it will happen sooner in South America. So that's a part of the thought process for the miners in South America.
spk05: Thanks. That's good colour. And nice to see SG&E trending below 17% of revenue. Could you just talk a bit about the warehouse consolidation in Western Canada? And are we now seeing the full benefits in results?
spk09: We're not seeing the warehouse consolidation is transformational and the direction of travel and the goal is compelling. I would suggest that we always knew this was going to be difficult as we consolidated five warehouses in Edmonton into one. That is going well. I would suggest it's a quarter or maybe two behind where we would like it to be. But we've seen gradual improvements throughout the summer and into the fall here. So we're confident we're on the right track. But more work to do. So I wouldn't suggest for a minute we're seeing the full benefits of that right now. In fact, we're still seeing some pressures in that space. But like I say, we have to just keep looking at the continued improvement and customers and employees tell me that they're seeing improvements and we're all in it together in terms of delivering this transformation, which will be huge for Canada.
spk05: Okay, I appreciate the color. That's it for me.
spk04: Once again, any analyst who has a question may press star, then one on their telephone keypad. The next question comes from Maxim Sitchov with National Bank Financial. Please go ahead.
spk07: Hi there, Monique. Scott, obviously, all the best, and Kevin, welcome. I had a quick question in terms of if it would be possible to quantify the construction headwind that we could see in maybe 2023. I don't know if you can maybe talk about kind of directionality or percentages, maybe sort of any color there.
spk02: Yeah, it's a situation, Max, where the machine utilization hours are still very high. Some of the order intake, as Kevin just went through, a bit of a different seasonal pattern, but there's still a good cadence to order intake. So I wouldn't say we could give a percentage of how much off it would be. But ultimately, I think you wouldn't see as much growth in the new equipment side next year, but you're probably in a position with the backlog and then mining where that's more than made up for. in the mining space.
spk09: Yeah, and just be mindful, Max, that there's been some really heavy deliveries in HS2 in the UK, which won't repeat. But if I look at our top five customers in the UK, I would suggest that their order intake or their current demand profile is not dissimilar to what it was this year.
spk07: Okay, that's helpful. Thank you. And then in terms of, I've had a question in terms of the pricing dynamic. I mean, you said that you still push through kind of mid-year increases. I'm curious if there's any pushback from, you know, clients, especially as, you know, yen depreciated, you know, recently. So just wondering about the competitive dynamic there. Thanks.
spk09: No, I mean, so I think we had a really thoughtful approach to price increases and, you know, We were well prepared. We had good data around us and we moved quickly to pass through our supplier price increases and the impact of inflation on other aspects of our business. I would say that to a large extent, customers have been understanding of that. We've seen similar moves from a competitive perspective in the marketplace. I wouldn't suggest that we've seen an alternative approach because of the revaluation at all. I think that we're still in a very inflationary environment across all of our markets and people appreciate that. And as long as you do it transparently and responsibly. And the reality of every conversation Max ends with, okay, so we accept prices are increasing, but how do we become more efficient? How do we get more bang for our buck? And that's where we focus our teams on. Your price might go from 100 to 110. But how do you spend less? And that's super critical for the long-term success of all of our customers.
spk07: Right. Okay. And then one last question, just in terms of kind of thinking a bit more about the midterm directionality. I mean, like what needs to happen? Obviously, I think investors are very pleased with $3 EPS kind of on the LTM basis. Like, do you mind maybe discussing a little bit puts and takes to kind of, you know, push it to, to the next level or like, I mean, what needs to happen from like maybe a revenue perspective or macro, just, just maybe some, some thoughts on this front. Thank you.
spk02: Yeah. So overall, I mean, we were really encouraged by the pace and momentum as we highlighted, we think we'll have a really strong finish to the year, strong start to the year. We built a, already started to build a good backlog for the second half, most of which, you know, the orders within this last quarter were for the second half of next year. We're pleased with that dynamic. There will be mid-year price increases that are for the full year next year. And as long as we continue to have strong momentum in terms of commodity prices and customers with With increasing capital budgets, we think we continue to add momentum. We're pleased over the last four quarters to get above the $3 level, and we think we'll continue to add to that as the market stays supportive.
spk09: Max, I would just add to that that we see our market expanding as we move into the energy transition, and Caterpillar have spoken to that as well. We're very well-placed to help customers through The energy transition, whether it be new equipment or power generation. But most importantly, we have market share opportunities across so many aspects of our business that we continue to pursue and have very focused strategies around pursuing that, whether that be in the new equipment population. or in the aftermarket space. And we are seeing this trend and this greater uptake in rebuilds, particularly in the construction space. So we expect that to continue as we move forward. So we're certainly committed to our product support strategy and the growth trajectory that we've previously highlighted. And we see that continuing. And I guess the last thing is just the mid-cycle cost and capital discipline. We appreciate for our employees it's tough right now, but we're working hard with them to deploy all of our resources to make sure we deliver for our customers, but we build a sustainable business model because nobody wants to talk about the downside or the drop and we've committed to our employees that that's the case.
spk07: Okay, that's super helpful. Thank you so much. Thanks, Max.
spk04: This concludes the question and answer session. I would like to turn the conference back over to Amanda Hobson for any closing remarks. This concludes our call. Thank you for your participation and have a safe day. This concludes the conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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