Finning International Inc.

Thank you for standing by. This is the conference operator. Welcome to the Finning International first quarter 2023 investor call and webcast. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. Analysts who wish to join the question queue may press star then one on their telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Greg Palaszczuk, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, operator.

Good morning, everyone, and welcome to Finning's first quarter earnings call. Joining me today is Kevin Parks, our President and CEO. Following our remarks today, we'll open the line to questions. The 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. An audio file of this call and the accompanying presentations will be archived on our website as well. Before I turn it over to Kevin, 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 the forward-looking information is subject to risks, uncertainties, and other factors as discussed in our annual information form and our key business risks and our MD&A and our 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. Kevin, over to you.

Thank you, Greg, and good morning, everyone. Our teams continue to execute well and deliver strong first quarter results. We achieved 27% growth in product support revenue, took actions to reduce our corporate overhead costs, and continue to expand our operating margins to deliver earnings growth. We are pleased to see our adjusted return on invested capital now approaching 20%. Over the last few months, we've been working with a broad group of leaders on the simplification and prioritization of our strategy. We are placing greater emphasis on the engagement and empowerment of our frontline teams and the regional execution of the company priorities. As we reinvest into our business, we will be intentional in growing our addressable market opportunities. At this moment, we're calling this growth by design, a focus on more resilient segments of our business. Product support remains our primary focus, and we will continue to explore attractive opportunities in used equipment, rental, and the electric power segments. We also continue building full cycle resilience into our operations by driving productivity improvements and making our cost base more flexible and variable. We are also very focused on optimizing our working capital levels while ensuring we can support the long-term growth of the business. Our goal is to grow the business in a sustainable manner and deliver strong performance through all market conditions. Please turn to slide three. As we look forward, we are excited about the momentum we are seeing in our operations. Our teams are focused and activity levels and customer confidence remain strong. We continue to win significant opportunities in all market sectors and expand our equipment population, building our backlog. Our backlog is up substantially from a year ago and grew a further 6% from December 2022. Mining backlog is up significantly compared to a year ago, and we continue to expect to add to our backlog in Q2 this year, including the full Artemis Gold order and additional orders on a framework agreement from South America. While our construction backlog is below Q1 of last year due to HS2 deliveries, our order intake in construction was up 10% from Q4 2022, driven by higher activity and order intake in Canada. Our system sector is showing great strength, with order intake more than double from last year and up 60% from Q4 2022, more than offsetting the reduction in construction backlog and demonstrating the diversity and resilience in our business. We also see continued growth in demand for equipment rebuilds, and we have a growing book of rebuilds in our regions. All of our operations continue to hire technicians and build product support capabilities and capacity to capture market share growth in a disciplined manner. We hired over 70 technicians in the first quarter, following the addition of 660 technicians last year. We're also making targeting investments in our facilities to improve capacity and efficiencies to better serve our customers. For example, in British Columbia, we recently opened our single R or response branch in Camel River in Kelowna. I had the great pleasure of attending the opening ceremony in Kelowna in the facility in April, and I was able to spend time with our employees and customers to reinforce our commitment to the Okanagan region. Very soon we'll be complete and we'll be opening our new Kamloops triple R facility that will better help serve our customers with more work days and more warehouse space. We expect to hire as many as 100 technicians to help meet increasing demand at this branch alone. Also in Alberta, we're completing the expansion of our West Edmonton branch, and productivity and capacity improvements at our OEM remanufacturing facility to address growing customer need. And I just returned from Antofagasta last week in Chile, where we reviewed plans to expand our capacity and capabilities in the region to support the encouraging outlook for increased copper production. We will remain diligent in our execution, optimizing our business to make it more resilient and ensure we have the right people and capabilities to continue capturing market share and improve outcomes for customers. We are optimistic about 2023 and expect continued momentum in our business to be underpinned by our record equipment backlog, the successful execution of our product support growth strategy, including rebuild activity. And we are also pleased with the double digit growth in our rental and use businesses. I look forward to seeing our investors in the coming weeks and providing you a more fulsome update on our strategic priorities at our investor day in September. I'll then hand it back to Greg to provide a greater level of insight into our first quarter results. Thank you and over to you, Greg.

Thank you, Kevin. I'll talk about our first quarter performance in a little more detail, including our regional results. Turning to slide four, please. Q1 was another great quarter for us and we're pleased with the results. That revenue of $2.1 billion was up 23%, and EPS of $0.89 was up 51% from Q1 2022. We demonstrated continued strong execution of our product support growth strategy and delivered solid operating leverage in all regions. Our consolidated equipment backlog increased from December 31, 2022 on strong order intake, up 15% from the first quarter of last year and 25% from last quarter. Our equipment inventory is healthy. A substantial majority of our inventory is backed by committed customer orders. Product support activity levels remain strong. Our service work in progress, which includes internal service work in progress and unbilled receivables, was up 8% from December 31st, 2022 and up 40% year over year. We also have significantly more and overall larger rebuilds booked today than we did this time last year. Slide 5 shows changes in our net revenue by line of business compared to Q1 2022 and the composition of our equipment backlog by sector. New equipment sales were up 18% led by strong mining deliveries in Canada. Product support revenue is up 27% reflecting our expanded installed equipment base, year-over-year pass-through of higher supplier costs, and execution of our product support growth strategy. Equipment order intake in the first quarter was higher across all regions and market sectors compared to last quarter, led by power systems. Our consolidated power systems backlog is strong and growing, accounting for 25% of our total backlog at the end of March. We expect to deliver substantial majority of our equipment backlog this year. Turning to slide six for details on our EBIT performance. Our gross profit was up 27% and gross profit as a percentage of net revenue increased by 80 basis points from Q1 2022 on strong product support volumes. 16% increase in SG&A reflected higher workforce and variable costs to support revenue growth, as well as the impact of inflationary increases. So the percentage of net revenue SG&A was down 120 basis points compared to Q1 2022. As we continue to simplify our operating model and empower our regional teams, we took a number of actions in the quarter to adjust our organizational structure. These actions had no net impact on EPS. We streamlined our corporate overhead costs by reducing non-revenue generating full-time and contractor roles by over 400 people. This includes a 25% reduction in vice president and above positions globally. As a result, we incurred $18 million or $0.09 per share of severance costs. We expect these fixed cost reductions to help offset inflationary and variable cost increases going forward. We also wound up two foreign subsidiaries to consolidate activities to existing operations where we could optimize our resources. As a result, we reclassified a foreign currency translation gain of $41 million or $0.21 per share. And finally, we recapitalized and repatriated $170 million of profits from South America, which resulted in withholding tax of $19 million or $0.12 per share. Excluding these items, adjusted EBIT was up 54% from Q1 2022 on strong revenue growth and expanded operating margins. Moving to our Canadian results and outlook, which are summarized on slide 7. Net revenue increased by 30% from Q1 2022, with broad-based strength across all lines of business. New equipment sales were up 52%, driven by mining deliveries and stronger activity in the construction and power system sectors. Product support revenue increased by 26%, led by mining, including increased rebuild activity. Canada continued to deliver solid operating leverage, with SG&A as a percentage of net revenue down from Q1 2022, adjusted EBIT as a percentage of net revenue up 220 basis points to 11.3%. Our outlook for Western Canada is positive, supported by healthy order activity and continued strong demand for product support across all sectors. Equipment backlog in Canada was up a further 6% from Q4, as activity levels and order intake from infrastructure and energy customers remain strong. Constructive commodity prices and improved capital budgets are driving investment and renewal of aging fleets and product support opportunities, including growth and demand for component remanufacturing and equipment rebuilds. We're working with our mining customers on rebuild programs and expect strong growth in mining rebuilds in 2023. Turning to South America on slide eight. In functional currency, net revenue increased by 16% from Q1 2022, driven primarily by mining product support. New equipment sales were up 8% due to higher sales and large contractors supporting mining operations and infrastructure construction in Chile. Product support revenue was up 19%, driven by an increased demand for component exchange, equipment overhaul, and fleet maintenance and mining, and higher volumes from new mining product support contracts in Chile. Adjusted EBIT was up 17%. Adjusted EBIT as a percentage of net revenue was 11.5%, up slightly from Q1 2022. We have accelerated productivity initiatives in South America to offset inflationary cost increases, including a reduction in non-revenue generating managerial and administrative positions. In addition, we have reduced contractor positions and increased utilization of our shared service center in Uruguay. Our outlook for Chilean mining remains strong, supported by increase in copper demand and improved political clarity. We're encouraged that the Chilean government is in the final stages of a moderated mining royalty agreement. We're also pleased to see recent approvals for large-scale brownfield expansions that had previously been on hold. We're seeing growing customer confidence for reinvestments into existing fleets, as well as brownfield and greenfield projects, which is translating into an increase in quoting and requests for proposal activity. We also expect continued strong demand for mining product support and technology solutions. About half of our construction business in Chile is related to the mining sector. We continue to see strong demand from large contractors supporting mining operations. We now expect infrastructure construction activity in Chile to remain stable compared to 2022 levels. We continue to win deals in power systems where order activity remains strong. Our backlog in South America was up 7% from Q4 2022 and includes additional orders for large-scale data centers in Chile, one within the quarter. Please turn to slide 9 for results in UK and Ireland. Net revenue was up 5% in functional currency as growth in product support more than offset lower new equipment sales. New equipment sales decreased by 13% due to lower sales in construction, including lower HS2 deliveries compared to last year. Product support revenue was up 36%, driven primarily by increased activity in construction and the full quarter of contribution for HydroCrip, which we acquired in March of last year. Adjusted EBIT as a percentage of net revenue increased by 70 basis points to 5.7%, reflecting a higher proportion of product support in the revenue mix and operating language. Order activity in the construction sector has been resilient to start the year, and demand for equipment remains stable. We expect demand for product support to remain strong, driven by high machine utilization across construction markets and growing contribution from Hydroquip. In power systems, we have a solid backlog of projects for delivery in 2023. We have secured additional orders from data center customers in the first quarter for delivery in 2024. We expect demand in our power systems business in the UK and Ireland, including the data center market, to remain robust. We're also pleased to announce a 6% increase in our quarterly dividend to $0.25 per share, which marks the 22nd consecutive year of dividend growth. We've also renewed our NCIB program to repurchase up to 15 million shares. Under the current NCIB program, we were authorized to purchase up to 8 million shares, of which we purchased 7 million shares, or 4% of our public float. Our balance sheet remains healthy, with net debt to adjusted EBITDA at 1.7 times at the end of March. In summary, we're pleased with a strong start to the year and encouraged to see a further increase in our equipment backlog, service work in progress, and book of rebuilds. We remain focused on disciplined execution of our product support growth strategy and improving full cycle resilience of our business. Looking ahead, we expect continued momentum in our business and are optimistic about 2023. Before I turn it over to the Q&A session, I'd like to remind everyone that we're hosting an investor day in Antofagasta, Chile on September 26th. Investor Day presentations will also be webcast live. Investor tour of our mining operation starts on September 25th and a visit to a mine site is scheduled for September 27th. We hope that you can join us for this event in person. If you haven't received an invitation yet, please reach out to Alona. Her contact information is on our website. 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're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We will pause for a moment as callers join the queue. The first question is from Sherrilyn Radborn from TD Cowan. Please go ahead.

Thanks very much. Good morning and congratulations on a strong start to the year. Kevin, I wanted to start with the headcount reduction. I was a little surprised that there were still 400 excess positions in the company. So I was hoping you could speak to the supporting analysis and just why you're comfortable that you're not cutting too deep with those redundancies.

Yeah, sure. And thank you for the question, Charlene.

So, I mean, 400 employees, the first thing to say is half of that were contractors. and that we have a lot of contractors in the business as we've been investing in systems and building new capabilities. And so we have very much a focus on optimizing our investments over the last number of years, which have been substantial and very helpful. But we need to optimize those investments now and pause on some of the build and development work. So many of those, more than half of those employees are contractors. In total, that leaves 200, which is less than 1% of our workforce. And that 1%, those 200 people would fall into a couple of categories. For sure, we're looking at how we simplify, decentralize, and de-layer our corporate overhead. And so there has been some work around that area. And then there has also been some work in all three regions to optimize the management layers and spans of controls. I think these are all good activities. You know, you should always look for ways to optimize and find efficiency in your organization. They've been well received across the organization. But we don't see this as something that continues. This was an action under my new leadership to kind of reset the overhead and the management structure. And as we roll the strategy out now, we'll look to optimize that structure further, make sure we've got the right capabilities in the right places. And ultimately, we want to grow. So, you know, we see us potentially adding some of that headcount back in, but at the operating front line level and the revenue generating level rather than the administration or corporate overhead level. Hopefully that helps.

No, that's great color. Thank you. And then for my second question, I was hoping you could give us a sense of how the supply chain is functioning year to date and how that's influencing your planning both for inventory and rental fleet additions.

Yeah, sure. So I would say, you know, supply chain continues to improve.

There are pockets that are close to being fully recovered. Excavators would be a good example of that. And there are pockets that are nowhere near back to pre-pandemic levels. So we continue to be agile and thoughtful about how we manage through that situation, applying all of our resources, whether it be rebuild or rentals, to satisfy the customer demand. And obviously using our balance sheet to make sure we're carrying the appropriate levels of inventory to ensure that we can support our customers effectively and continue the growth in the business and the market share gains. So I would say that we're optimistic for the remainder of the year around supply chain. But I would say that we're not yet back at normalized levels. And that's what you see in the elevated working capital levels. Things are just a bit slower to get through the system right now. But we're happy to do that in the spirit of winning additional market share.

Perfect. That's all from me. Thank you.

Thanks, Charlie.

The next question is from Jacob Bout from CIBC. Please go ahead.

Good morning. Martin Anderson- Or take another quarter of us solid product support growth, maybe in comment on you know the sustainability of this growth and and what the growth and installed base looks like in both Canada and South America.

Yeah, thanks, Jacob.

I mean, we feel really good about the momentum. Of course, it's been a targeted effort in partnership with CAAT to look to gain back share of the aftermarket. I think we've had success there. There's also been, you know, supplier cost passed through, which, you know, year over year was fairly substantial. And so we feel good that we've got good momentum there. Our service work in progress is up. Our book of rebuilds is strong. And so we see good continued momentum there. And so a healthy chunk of it would be price, but another double digits would still be volume. And so we feel good about that. And there's good, strong, continued momentum. And so some of it is that momentum and continued strength in the market. And some of it is the actions we've taken to win back chunks of aftermarket share. So feel good about that overall.

And Jacob, I'll point you towards my remarks earlier today. We're adding significant capacity to our product support base. Our new Kamloops facility, which was designed specifically to bring the work to where the people are. For those of you who don't know, I'm new to Canada still, but Kamloops is a terrific place to live and work and for young families to raise a family. We've been very pleased with the ability to attract technicians to that region. um so we'll have a significant number of bays and um warehousing capacity and um and um you know component rebuild capacity for the smaller components that don't go through oem but we've also been making considerable investments um in in oem to increase the capacity um and then like i said last week i was in antifagasta with one pablo and we've got a you know we're putting together a five-year plan to expand capabilities you know in the antifagasta region to capture our optimistic view of the outlook for copper production. So it's not just what's going on right now. We're planning for the future and adding capacity because we're very confident in the outlook to retain that level of product support business.

Okay. Maybe just a secondary follow-up question here. Just how the booking of ancillary parts and service business associated with the new equipment sale has evolved over time. Typically, what does this look like in a recession and what could be different this time if we are heading into a recession here?

The question just around product support volumes?

Maybe you can clarify the question, Jacob. Wait, what do you mean by answer? Let me pause. Sorry, Jacob.

Yeah, the ancillary parts and service business. So if you if you sell a new piece of equipment, you know, are you seeing more parts and service business associated with that new sale than you have historically? And then how does that change in a recessionary environment? Are your clients doing more work or have things changed, I guess?

Yeah, so I think I understand your question, Jacob, but happy to follow up. So, I mean, if you think about the equipment we sell right now, more than 80% of that equipment, in some cases, 90% is now going with the CVA. We spend a lot of time thinking about this as we look forward. And, you know, we spoke to growth by design or more resilient growth. um you know our cvas are our subscription you know they're our recurring revenue stream and um you know they're pretty sticky because to have a cva you're making a decision on who maintains that piece of equipment for you know certainly for the first three years but we've got a really strong focus on years four to ten now for the for the cva so you'll make your own decisions around your own workforce you know you you know in terms of outsourcing that to to Finning or to any dealer to do that. So I would suggest that the long-term view is that the pro-support revenue around equipment population ads is stickier than it's ever been. And so we would be hopeful that that would continue as we move forward. And of course, if you did see any kind of softening in the market, which we're not, right now, you know, some of that capacity that would have been with our customers to kind of replace our capacity has gone away. And so, you know, we haven't seen it yet, but I would hope that it's a lot more resilient. And, you know, probably the UK is a good example of that model. Does that answer your question, Jacob?

Yeah, no, that's very helpful. Thank you.

Thank you. Good. Thank you.

The next question is from Yuri Link from Canaccord Genuity. Please go ahead.

Good morning, guys. Kevin, you sound a little less cautious than you did last quarter, especially on the construction outlook. Apart from the obvious positives of the backlog and service whip and all that. I mean, what's kind of changed here in the last few months, and is that something that's been reflected in your conversations with your customers?

Yeah, sure. So, I mean, three months is a long time, and I appreciate the question, Urien. I acknowledge that We were a little conservative on the last call, but we were looking down a long runway against very tough comms, given the performance of the business in the second half of last year. As we work through the last three months, conversations with customers, outlook, supply chains improving, Chilean political situation and royalty discussion moving materially in the right direction. You know, it's just made us feel better about the outlook. I mean, the UK's, we're very fortunate in that we have a kind of UK What's the word? Canary in the mine, if you like. It gives an advanced view of what's going on in Europe. And certainly, the order intake for construction equipment, I would describe it as stable, not down, notwithstanding we had a record year last year. But what I'm particularly pleased with outside of the... I would say we're more optimistic about a stable construction market in all territories. And Canada keeps going from strength to strength. But what I'm more particularly pleased with is the power systems growth in all three regions. We're leveraging the expertise in the UK, in Canada and in South America. And, you know, any kind of declines that we're seeing in the construction or any year over year declines in backlog are being more than offset by additions in power systems. And that power systems business is very secure. It's more resilient and obviously less prone to a recessionary impact. And we get good product support business from that line of business as well. So I think, you know, more of the construction businesses are describing the stable versus uncertain. But the rest of the business is getting better as well. So that makes us feel, you know, more optimistic about the whole.

Got it. That makes sense. Last quick one for me. Can you quantify the the cost savings associated with the actions taken in the quarter?

Yep, sure Yuri.

So you know a lot of these are administrative and fairly senior position, so it's a little longer payback than maybe an average restructuring, so it's more kind of nine months payback. So you know at the cost level that we outlaid. We think that it should be within nine months kind of fully paid back and then sustained from there.

Okay, thanks guys.

The next question is from Michael Dumais from Scotiabank. Please go ahead.

Hey, good morning guys. First question I have is really about... I try to focus in on the cost structure of the business that you guys are talking, you know, as being more variable and flexible. So I'm just wondering if you can give us a sense of how SG&A breaks down, you know, variable versus fixed today versus how it has historically and just how we should think about, you know, call it the incrementals and decrementals, I guess, going forward as you manage the business and manage growth.

Yeah, I mean, it would probably change a little bit by market condition, Michael. But if you, you know, you look at the operating strong operating leverage we've had really for the last two and a half years, you can kind of see quarter by quarter pretty clearly in the bar charts. We've had some pretty solid gains on the GP side that gets offset about a third by SG&A. And so we do see continued momentum. And so we think despite some of the inflationary increases, we're working on productivity. So we'd like to continue that type of operating leverage. and you would depend on the shape and the pace of any slowdown, but you'd see kind of the opposite the other way. Of course, we take additional actions to offset more. Those are the rough operating leverage that we see and expect.

And I would add, you know, we're just changing the mindset here. So, you know, we're trying to make sure that we've got more of our revenue contracted or visible than are cost-based. And so a good example of that would be when we're entering major contract discussions now for procuring goods and services, we want the very best commercial terms and service levels from that supplier want flexibility in the contract such that we can withstand, you know, highs and lows in our business levels without being penalized for higher prices or poorer service. So, you know, building flexibility into everything we do is becoming a mindset shift at Finning.

Thanks a ton. Thanks, guys.

And then maybe just a simplistic question, I guess, if I look at You know, if I look at the years where you've had, you know, quote unquote, normal seasonality, EBITDA has grown about 10 to 20 percent from Q1 into Q2. You know, obviously a strong start to the year. But I was wondering if there was anything that we should consider that might negate what, you know, typical seasonality has been for the businesses.

No, I think, you know, we've seen from our working capital injection in Q1, that would be kind of a normal type level. So we're seeing fairly normal seasonality. You can see the backlog build. You know, it's spring selling and delivery season. So we see continued strong momentum. Of course, there's inflation year over year, but we're working to offset that. But otherwise, you know, we see as a kind of typical seasonality.

Great. All right, guys. Thank you. Thank you. Thanks, Michael.

The next question is from Sherif El Sabahi from Bank of America. Please go ahead.

Hi. Good morning. Just to start off, I was wondering about the order intake and how that's trending into 2024 and maybe what the indicators of those orders look like into next year.

Yeah, sure. So we're really pleased with our order intake in Q1. So quarter over quarter, it was up 25%. Now there's the seasonality, as Greg just mentioned, in our order intake in Q1, but we're particularly pleased. I mean, you know, I've highlighted this a number of times, our power systems order intake was up over 60%, and that was quite well spread across the three regions. And that's a good indication, Sharif, that that power systems revenue and all the backlog is now stretching into 2024. So that's why we're really excited about the diversification that power brings. It's resilient, but also it gives us a long-run way and more visibility into our revenues. So for sure, we'll be confident of that taking us into the 2024 period. Same with mining, really. In all reality, mining... mining order intake, which, you know, was up 10% quarter over quarter, but, you know, like 84% year over year, you know, we continue to see the backlog build in mining and, you know, for sure those deliveries are stretching into 2024 now. So I mentioned in my remarks, we expect to have a couple of significant opportunities to the backlog in Q2, and they won't be delivered until well into 2024. Construction is more agile. Like I said, we're optimistic and encouraged by the stability we're seeing in the construction businesses. Potentially, as Greg mentioned in his remarks, we're seeing particular strength in mining contracting. This is the enabling works. and mobilization for increased mining activity so not only is it a good sign for our construction business it's also a good sign that um you know people are mobilizing south america for for increased opportunities in production. So, but, you know, construction activity is more agile. And so, but we do have, I mentioned supply chain, we do have certain models that are now for delivery in 2024. And so I would say that, you know, some of our, you know, some of our businesses stretching well into 2024, we still expect you know, around 80% of this backlog to be delivered this year. But any ads that we see, which we're confident of seeing in Q2, that'll start stretching to 2024 then.

Understood. And then you mentioned the scale of quoting RFP requests is up significantly. Can you frame the scale of that in dollar terms or versus prior years, what it looks like?

Yeah, I think I just classified as good momentum, but, you know, also just looking a little further out, you know, as people start to get clarity around what the mining royalty structure would look like, um, you know, start to get quotes for, for, you know, one or four or year years further ahead. Uh, but it's just a good indicator that they're starting to wrap their heads around, starting to commercialize, starting to budget and plan for expansion. So, um, you know, it's a solid pickup despite the increased activity from last year. but just an encouraging trend, but also tone.

Yeah, and I would say that I've answered this question a few times about, you know, the outlook for commodities and the super cycle. And I would say that, you know, we're not planning for, we don't expect, and we're hopeful not to see a super cycle. We really would like to see this be a sustained and well thought through expansion of activities. You know, I think, you know, people, resources, you know, Government investor license means that there are some things that mean you're holding on to the reins a little bit with this commodity cycle. But I think that works really well for us and it helps us to build the business sustainably and support our customers more effectively. So I think it's a longer term view.

Got it. Thank you so much.

The next question is from Brian Fast from Raymond James. Please go ahead.

Good morning. The last few years likely disrupted the average age of equipment in the field. Could you discuss maybe the age of fleet from your point and are you still seeing extended age of fleet, and does that really differ between regions?

Yeah, so the average age is 11, 12 years in Canada, 9, 10 in South America. And for sure, equipment is being extended out. A number of reasons is uncertainty in the the outlook in in chile um and you know i think there's you know a lack of capital to invest i mean a lot of our customers healthy balance sheets but not are being very thoughtful about their capital and how they get more out of their current investments and so rebuilding equipment the economics around rebuilding equipment um it continues to improve and catches the attention of customers and um you know we continue to see that business grow and people more opt into that way of, you know, increasing their fleet production and their fleet capacity. You know, we see in Chile to a lesser extent, you know, we see more incremental ads in Chile, but it does happen in Chile and it is growing in Chile, but not to the same extent that it does in Canada. You know, but equally, you know, you can see in our mind, so I don't want to leave the impression that miners are not investing in new equipment. You can see in our backlog, there's 2.7 billion in the backlog, and around 40% of that is mining. That's primarily mining trucks, just some ancillary equipment, but it's primarily mining trucks. So that's the most mining trucks we'll have delivered into our two territories. probably for nearly 10 years. So it's not a huge opportunity. Obviously, we've talked about the BHPS Candida opportunity, but there's lots and lots of incremental ads going on in the industry, combined with effective rebuilds as well. So all these incremental ads that are going into the mining territory, we're not seeing the older assets come out. They're being reworked and rebuilt and staying in territory, which is fantastic for our business model.

Okay, thanks, and that might answer part of the next question here, but you mentioned gaining your portion of market share on the product support side. Maybe could you discuss how that differs regionally and maybe where there's opportunity for further improvements?

Sorry, Brian, did you say how we view market share and product support in the different regions?

Yeah, yeah.

I didn't quite get the question. Okay, so broadly, we don't say this, but broadly, our market share for the aftermarket opportunity in mining is considerably higher than it is in construction. But construction is the biggest area of opportunity and growth. So a lot of the growth that you're seeing in our product support growth is coming from the construction sector, where we've got the biggest runway or what we call lost opportunity. um and then power system is a mix really you know so on the uh on the oil and gas side it would be up there with mining in terms of you know i'll call it dominant market share opportunity in the aftermarket um in oil and gas for example in the power system segment and then you know in the in the electric power generation segment it would be very high as well but you know obviously less um you know less products for that depending on whether it's power or prime power if it's prime power it's up there with mining and oil and gas and if it's if it's um just standby power then the product support opportunity is less but we reflect that in our in the way that we sell the prime product um you know we are we do the comparison between um you know what's the aftermarket opportunity when we're when we're making those proposals so i would say that the runway is the longest and best in construction, and particularly as you come down the product size and customer range. So we've got an absolute focus now on what we call the more retail segments, which is customers that own less than 20 machines, and that's where the team are doubling down to make sure we sustain this level of product support growth in construction that you've seen over the last two or three years.

Okay, that's a great color. That's it for me. Thanks. Thanks, Brian.

The next question is from Sabahat Khan from RBC Capital Markets. Please go ahead.

Great. Thanks, and good morning. You provided a bunch of color on kind of the mining outlook, and I'm just curious, if you kind of look closer at that market, you know, the demand that you're seeing, the fact that it's sustained even with the macro backdrop where it is, you know, is it just your customers are, you know, investing for that long-demand outlook or the long-demand visibility for copper? Is it the political situation settling a little bit? And are they taking a long-term view, or what is sort of their decision-making criteria at this point, given all the moving pieces?

Yes, thanks, Sabah.

I mean, in all reality, when we look at our mining, our conversations with our customers, there's very almost no macro discussion in those discussions i mean the miners the product the commodity price is strong the demand outlook is good um and so you know we're not uh it's kind of um thoughtful incremental production rises you know i've spoke to lots of customers and you can see there you know the public company's result nobody's talking about managing through a macro situation in the commodity sector right now, which we've spoke to for the last couple of calls here on providing filling with some shelter that other companies may not have. So I wouldn't say they're investing beyond the macro. I would say that they're not necessarily seeing the effects of that macro and the strong commodity price and the healthy balance sheets means that they're very focused on productivity and output right now.

Great.

And then just kind of looking, you know, in terms of your capital allocation strategy at this point, obviously, I think you doubled the size of the NCIB relative to the before. Can you maybe just walk us through how you're thinking about capital allocation at this point? Thanks.

Yeah, thanks, Abbott. So we're happy to increase the dividend again on a steady basis this year, so 22 years in a row. And so we feel good about that. We'll continue to make that an area of focus. um we are you know focused on generating cash at this point you know seasonally in q1 you'll consume a bit of cash and then we go through selling season here and pivot to positive and so we'll have to see how the full shape of the year goes but you know there's we expect to have you know considerable cash to to allocate and so highlighted last quarter we will prioritize um reducing leverage through the fullness of the year but we expect to have additional capital to deploy and We think the NCID is a good way to do that, so that will be an area of focus, but always share price-dependent.

Just one last quick one. This is just a hypothesis, but if you think about the tight supply environment and the way it's impacting the dealers, and you talked about your market share in the aftermarket repair business, does this tight supply environment favor dealers such as yourself that might be better able to secure cap parts? and maybe get more of the aftermarket business, and that's something that could be maybe a sustainable benefit here. Do you find that it's something that will continue to help, or is that not a factor here at this point?

You know, I think, you know, we've had a good, you know, supply chain's been challenging for the last 18 months. You know, we've definitely made sure we had enough resources around us to smooth that out. You know, on a relative basis, I think we've performed well. I think customers who have found alternatives over the years, you know, the supply chains might not have held up as well through that period. So, we feel good that we provide good service levels despite the challenges, and I think we've won some loyalty through that period. And so we feel good about that, and we think some of that will be sticky over the long term as people appreciate the kind of full-cycle capabilities we bring.

Great. Thanks very much. Thanks, Heather.

Once again, any analyst who has a question may press star, then 1 on their telephone keypad. The next question is from Maxim Sychev from National Bank Financial. Please go ahead.

Hi. Good morning, gentlemen. I think in the beginning of the call, you were talking about capacity expansion and specifically in Latin. I was wondering if you don't mind maybe quantifying sort of the envelope of spending firstly, and then secondly, what does it mean in terms of both, I guess, absolute revenue generation, but perhaps your ability to maybe do bottleneck and do more product support in that geography. Just me, any thoughts on that subject? Thanks.

Yeah, sure. So, you know, some of this is what we want to share at our investor day. And that's why we're encouraging investors to come spend some time with us so we can We're very proud of our capabilities, our capacity, and our people in the region. And I think seeing that firsthand is the best way of understanding the level of investment and professionalism we have in the region. In terms of the level of investment required to achieve the kind of expansion that I spoke to. Actually, you know, we have some opportunities, you know, like in Canada, Greg and I put together with the team here, we put together a long-term network strategy in Canada. And, you know, the Kamloops, Kelowna, Campbell River, we've opened five branches in the last two years. And we had some opportunities because of the end of our long lease. arrangements so we put together a very broad plan and there's some ins and outs in that you know some capital inflows and some capital outflows but we're you know we're very happy with how that works and it's really coming to its conclusion now and I think you're seeing that in the product support growth that you're seeing in Canada it's enabled us to capture way more product support same applies in South America so we've got some facilities that are less used and some opportunities to find efficiencies in some areas of South America, and then reinvest that money back into the Antofagasta region, which is ultimately the big engine room of the South America or Chilean operations. We've also made some investments in Mendoza, in Northern Argentina, to capture opportunities that are such as Filo, You know, in that area. So it's not at the expense of other branches. It really is, you know, realigning that network to support the market that we see today. I mean, the team in Chile have a great program they're working on called, you know, Future Proof. and competitive today. And that's part of this work to make sure that we've got the right facilities we need today, but we're investing in the facilities for the future. In terms of quantifying the kind of product support that will give us in South America, we're hopeful to see competitive growth year after year. And we've already made commitments at our past investor day of high single-digit product support growth moving forward. And, you know, our view and our outlook of that hasn't changed. And so, you know, the network and the investments are to support that level of growth to the next level. Yeah, 100%.

And then actually, maybe if you don't mind, if we stay in the same geography, you know, some discussions around, you know, more government involvement on the lithium side of things. Just curious, what are you thinking in terms of you know, potential opportunity in this, you know, market, whether that's, you know, more positive or more negative from your perspective, given all these discussion points. Thanks.

Yeah.

Yeah, so it's early days, Max, and this is pretty fresh news. And, you know, so the first thing I would say is lithium is a net incremental business for us, right? So that's a good thing. um the general sentiment when i was down there last week with the team and we met with a couple of customers as well um in this area and is that you know um government support for government involvement in the expansion of the lithium um opportunities in chile is is um is actually a net positive because it means that the projects will get the go ahead and they'll get the investment and they want to be part of the lithium future in Chile and they see that as a big value driver for them. You know, I think a lot of people would say, oh, government involvement in industry is not ideal. But they have, you know, they kind of have experience with Codelco. And so the general sentiment I got last week was, you know, well, at least these projects will get going and we'll participate more. So hopefully that helps give you a bit of color from last week.

Yeah, okay. No, that's super helpful. Thank you. And maybe just one last one from Greg, if it's possible, in terms of how we should be thinking about non-cash working capital as the year progresses? And maybe can you provide a bit of a range or some thoughts on that front?

Sure. I mean, it will be dependent on some of the backlog build. We do have quite a few quotes outstanding that could straddle year end. But overall, obviously, we've been quite profitable for the last two years and cash has been a net investment. At some point, these growth rates will slow a little bit, and the cash flow will come through. So we do think this is more typical seasonality, as I talked about earlier. So we did inject capital in Q1. That'll pivot sometime in Q3 or middle of the year to positive, and we expect to be fairly strongly pre-cash flow positive in the back half of the year, and that'll give us some good positive choices to make on capital allocation. That's great. But as we've said before, we think we convert 50% of EBITDA over a full cycle. Obviously, we're continuing to see some pretty solid growth. In the fullness of time, we expect to deliver that cash.

Okay, that's great. Thanks. Thanks, Max.

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

Great, thank you. This concludes our call today. Thanks for your participation and have a safe day.

Thank you.

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