Finning International Inc.

Thank you for standing by. This is the conference operator. Welcome to the Finney International Inc. second 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. To join the question queue, you may press star then one on your 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 second quarter earnings call. Joining me today is Kevin Parks, our President and CEO. Following our remarks today, we'll open the line to questions. This call is being webcast on Finning.com. We have also provided a set of slides that we'll reference during our prepared remarks. The slides are posted on the investor relations section of the website. An audio file of this call and accompanying presentation 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 the 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. Kevin, over to you. Thanks, Greg.

Good morning, everyone. Please turn to slide two. We are very pleased with how our teams continue to execute and deliver strong performance. In quarter two, we achieved significant revenue growth in all lines of business, led by a 30% increase in product support revenue and strong deliveries from our record equipment backlog. Importantly, we continue to drive strong operating leverage, grow earnings, and expand our ROIC. We are pleased to see our quarterly earnings per share reach $1 and our adjusted return on invested capital above 20% for the first time. This is a result of our hard work by our employees and the plan we put in place two years ago to drive product support, lower costs, and reinvest to compound our earnings. We are carefully managing our costs, and given our strong product support growth, which is SG&A intensive, and inflationary environment, we've used 17% SG&A over the last 12 months as a very good outcome. And we believe we have opportunities to continue to find ways to make our cost base more flexible. We are simplifying our strategic priorities. Product support, which is the most resilient part of our business and a key driver of earnings, remains top of our list. And we're also focused on growing other aspects of our business in a sustainable way. Two areas where we see attractive opportunities are the growing demand for electric power generation in all of our regions and an increase in our participation in the rental and used equipment market to capture a larger share of the retail market and the subsequent aftermarket opportunities. The other key element of our strategy is building greater resiliency into our operating model and more velocity into our invested capital performance to ensure we deliver reliable performance in all market conditions. We're also challenging ourselves to build stronger engagement and greater empowerment of our people, particularly at the front line, as this is where the customer experience happens and the strategy is executed. We look forward to providing more details on our strategic priorities at our upcoming investor day. Now please turn to slide three. Market activity in our regions remains robust and our outlook is positive. Our order intake is healthy and our equipment backlog for delivery in 2024 continues to grow and now stands at 0.9 billion. We're also seeing broad-based strength in product support with significant levels of demand for service work, including growth in machine rebuilds. We remain diligent in our execution, controlling what we can, and continue to optimize our labor and facility productivity, building capabilities and capacity to capture strong demand and grow our share of aftermarket in a thoughtful way. Our absorption ratio, which is a measure we use to measure the profitability of our product support business in the context of our total cost structure has shown significant and sustained positive trend over the past few years. Compared to 2018, our absorption is up 18 percentage points, reflecting improvements we've made in our cost structure and efficiencies in our operations. Given our continued growth, particularly in sectors with longer lead times for equipment and parts, we are very pleased with free cash flow generation in the quarter, I remain committed to optimizing working capital through the balance of the year, whilst ensuring we can support our customers. We are optimistic about continued momentum and focused on driving strong performance going forward. We are building our equipment backlog for 2024 and expanding our installed base of equipment. We have recently received significant orders from our mining customers, which will be added to our backlog in quarter three. We continue to execute on our product support strategy, Our service work in progress balance is up 20% compared to June 2022. We're also pleased with the business performance of our rental and use departments and target them as key growth areas for the future. Our operations continue to hire technicians and expand our product support capabilities and capacity. We added 145 technicians in the first half of the year, growing our technical workforce by 18% since 2021. We currently employ about 5,300 technicians globally. We're also making targeted investments in our facilities to better serve our customers. In Canada, we have just moved into our new RRR facility in Kamloops with more bays and more workshop warehouse space. We expect to be able to hire as many as 100 technicians to work in the new facility. We also plan to expand our capabilities in Antofagasta, Chile, over the next couple of years to support the strong outlook for increased copper production and growing mining equipment populations. We are excited about the long-term growth opportunities in South America and look forward to demonstrating our strong capabilities in the region when we host our investor day and tour in Antofagasta in September. I will now hand it back to Greg to provide a greater level of detail on our second quarter results.

Great. Thank you, Kevin. I'll talk about our second quarter performance in more detail, including our regional results. And I'm turning to slide four. We're pleased with another strong quarter. Net revenue of 2.6 billion was up 28% from Q2 2022, with strong revenue growth in Canada and South America. Continued discipline execution of our product support growth strategy, once again, was a key enabler of strong operating leverage and return on invested capital. Our teams in South America and Canada delivered adjusted ROIC above 26% and 20% respectively. EPS was up 24% from Q2 2022 at $1 per share. Strong revenue growth and operating margins were partially offset by higher LTIP and higher financing costs year over year. We generated $31 million of free cash flow in the second quarter compared to a use of $142 in Q2 of last year. Our net debt to adjusted EBITDA was 1.8 times at the end of June. We were pleased with the strong interest in our $350 million bond offering in May. We secured an attractive rate of 4.45% on a five-year basis, and the deal was five times oversubscribed with broad distribution. On slide five, you can see changes in our net revenue by line of business and the composition of our backlog by market sector. Revenues were higher in all lines of business from Q2 2022. Product support was up 30%, strong across all regions. Execution of our rebuild strategy has been a key driver. The total number of rebuilds up 25% compared to Q2 of last year. A 29% increase in new equipment sales was led by mining deliveries in Canada and power system sales in all regions. Our equipment backlog of 2.4 billion remains very healthy. We're pleased with our strong mining deliveries in the corridor that expand our equipment population for the long term. Coating activity and order intake remains strong, and we have already secured additional large mining orders in July. About 60% of our equipment backlog is expected to be delivered in the second half of 23, with the remaining scheduled for 2024. Mining and power systems continue to grow in proportion, representing roughly 40 and 25% of the backlog as of June 30th, respectively. Turning to slide six, which shows our EBIT performance. Gross profit was up 24% on strong product support and new equipment volumes. As a percentage of net revenue, gross profit was down 70 basis points, primarily due to a high proportion of mining deliveries in the revenue mix. EBIT was up 28% as the percentage of net revenue consolidated. EBIT margin was 9.4%, which was comparable to Q2 of last year. Moving to our Canadian results and outlook, which are summarized on slide 7. Net revenue increased 36% from Q2 2022, driven by strong new equipment and product support volumes across all market sectors. New equipment sales were up 84%, led by mining deliveries to oil sand customers. Product support revenue increased 24%, led by mining, including rebuild activity. We're seeing a notable growth in power systems business in Canada, with power systems revenue up 70% from Q2 2022 and backlog up nearly four times. Operating leverage was strong, with SG&A as a percentage of net revenue down significantly from Q2 2022, EBIT as a percentage of net revenue was 9.9%, comparable to Q2 of 2022, again, due to the higher proportion of mining in the new equipment mix. Canada's adjusted ROIC exceeded 20%, up 280 basis points from Q2 2022, driven primarily by profitability improvements. Our outlook for Western Canada is positive, supported by healthy order activity, record equipment backlog, and continued strong demand for product support across all sectors. including component remanufacturing and increased revolt activity. Canada's equipment backlog was up a further 4% from March, reflecting strong order intake, including the addition of the remaining Artemis Gold odor. Now turning to South America on slide 8. In functional currency, net revenue increased 28% from Q2 2022, driven primarily by mining product support. Total product support in South America was up 34%. New equipment sales were up 18%, mostly due to higher sales to large contractors supporting land operations. EBIT was up 53%, and EBIT as a percentage of net revenue was 12.1%, up 200 basis points from Q2 of last year, attributable to strong growth in product support and improved operating leverage. South America generated ROIC of 26.4%, up 410 basis points from Q2 2022, and the highest level achieved to date. The outlook for Chile mining remains strong, supported by growing demand for copper and improved political clarity. We're encouraged by the recent government approval of large-scale brownfield expansions and increasing customer confidence to invest in new projects and expansions. Mining quota activity is robust and we expect to add significant orders to our equipment backlog in the third quarter of this year. We also continue to see strong demand from large contractors supporting mining operations in Chile. While infrastructure construction activity in Chile is expected to remain stable. In Argentina, with the election process beginning in August and likely concluding in November, there is an increased risk of near-term volatility, particularly in the construction market. We continue to actively manage import regulations, high inflation, and challenging fiscal, regulatory, and currency environment in Argentina. Please turn to slide nine for results in the UK and Ireland. In functional currency, net revenue decreased 11% from Q2 of 2022 due to lower new equipment sales and construction. In Q2 of last year, HS2 deliveries drove record equipment sales and EBIT in the UK and Ireland. Product support revenue was up 14% driven by strong customer activity and equipment utilization across all sectors. Music equipment sales more than doubled compared to Q2 of 2022. EBIT as a percentage of net revenue was a solid 5.5%, reflecting our focus on growing the product support business. Construction markets in the UK and Ireland remain stable. demand for equipment has been resilient. The construction order intake was up 60% in Q1 of 2023. We expect continued healthy product support activity. With HS2 deliveries complete, we continue to expect lower new equipment sales in the UK compared to the record levels of 2022. In power systems, we have a solid backlog of projects for delivery in 2023 and 2024. We expect demand in power system markets, including data centers, to remain strong. In summary, we're pleased with Q2 results and the momentum in our business. Customer activity levels are high. Our equipment inventory is healthy with a substantial majority committed customer orders. With improved political clarity in Chile, they are mobilizing for growth. Canada has broad-based strength, and the UK business is resilient. Product support activity continues to be very robust and remain focused on discipline execution of our product support growth strategy in a thoughtful way. As supply constraints moderate, we're working to reduce our safety stock and normalize our inventory levels while supporting strong business volumes. Before I turn it over to Q&A questions, I'd like to remind everyone that we are excited to be hosting our Investor Day on September 26th in Antofagasta, Chile. A video webcast of our Investor Day will also be available on our website. The investor tour of mining operations will include our Component Rebuild Center, Integrated Knowledge Center, Glenmager Workshops, where we're currently delivering one 798 truck per week, and our parts distribution center. In addition, we'll be visiting Cadalco's Minister O'Halley's mine that recently announced the submission of a permit to request an expansion and extension. We'll start the afternoon of September 25th and conclude on September 27th. We have a very strong list of attendees, but do have the ability to add a few more investors. If you are interested in joining in person, we encourage you to register as soon as possible. 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 one 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 Sherilyn Radburn with TD Cowan. Please go ahead.

Good morning. My sense based on your MD&A and your comments is really that Canada is the area of most strength and that South America is kind of coming up behind that as some of the political issues start to be alleviated Maybe you can just elaborate a little bit more kind of on the quoting pipeline and what you're seeing from customers in terms of brownfield and then greenfield development in that territory.

Yeah, thank you, Charlene. Yeah, so the way we're kind of describing it internally right now is that Canada is very strong and robust across all segments. and across all geographies as well. So you'd be correct to describe it that way. The way we describe South America right now is mobilizing. And as you rightly mentioned, out of the back of the political uncertainty and the mining royalty discussions, what we're seeing now is greater commitment to the region, more certainty in terms of brownfield mining, and some more discussions around greenfields. It would be true to say that the greenfield mines, apart from QB2, which will be fully operational by the end of the year, which is a significant add to production, most of the activity and the conversations we're having right now around brownfield expansion, productivity improvements within existing mines, and I always point to the fact that the recent win we've had with the biggest copper mine in South America, um is uh is a significant actions in south america um so yeah the hence why we're excited to be taking uh or inviting investors uh analysts to our investor day uh in september uh greg was there just a couple of weeks ago i was there six weeks ago um and you can't help but see the mobilization in action uh when you spend a couple of days in the region um so The other thing I would point to, Charlene, is that brownfield is good for filling. It means machines are working harder. It means machines are aging. And in many cases, all grades are still declining. So we're seeing some of the benefits in that in terms of our business performance and our numbers.

Great. And then my second question. relates to deliveries during the quarter, which were very heavy from a mining perspective in Canada. And so I'm curious how many of those deliveries were incremental to the installed base and how that compares to what you see in the current backlog.

Yeah, you know, I'd say that, you know, we're pleased with the deliveries. You know, they would all be described as incremental. You know, if you look at the amount of tons being moved in the oil sands, you know, that continues to go up. And so those would all be incremental adds. And, yes, you know, with the backlog at the level it is, we're always pleased when it's above $2 billion. We continue to refresh it above $2 billion. And there's lots of additional mining orders, both trucks and ancillary equipment for Canada and South America in the mix.

That's my two. Thank you for the time.

Thanks, Carolyn.

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

Hey, good morning, guys. Good morning. Product support, extremely impressive growth in the quarter. You're coming up on some pretty difficult comps. Just wondering how your forward indicators for product support look in terms of service WIP and backlog of rebuilds versus, say, about six months ago?

Yes, thanks, Yuri. Yeah, so as I mentioned in my remarks there, you know, we are adding capacity. You know, we talked about the addition of the Kamloops facility and some incremental capacity that we're building into Antofagasta. Technicians are up 18% since 2021, and we've added around 150 technicians this year and continue to add them in a thoughtful way. You mentioned there service work in progress, which is up 20%. So that's another good indicator of continued momentum and strength in the product support business. And rebuilds are up double digit as well year over year, I think 25%. And so we continue to see stickiness in terms of the pivot to rebuild, particularly in the smaller, moving down the range into the construction type of equipment. So if we think about branches and bays and technician ads, and then the subsequent building and productivity, which then leads to service work in progress, We're very optimistic about the product support business in the second half of the year.

Okay, that's great. Last one for me. Historically, your clients would generally make a decision between rebuilding an older piece of equipment or buying a new piece of equipment. Just from the numbers, it looks like you're getting both right now. You're getting a lot of rebuilds and you're getting a lot of of new equipment. So what's the market dynamic behind what you're seeing today?

Well, I think, as Kat said on that call, Uri, that there is still some constrained um constrained supply chain that we're that we're working through and we're using our resources of which rental and rebuilds and used equipment are our tools we use to manage through and support our customers and for sure um through those kind of supply constrained environments um you know customers move towards rebuild because it was the best option there um but i'd also like to highlight that during that process and our product support strategy execution. We also repositioned the rebuild. As I mentioned, we're rebuilding much smaller equipment than we ever did in the past. We actually have a rebuild factory now for D6s, which would be one of the products that still has quite a long lead time, which is a staple, a D6 tractor. And so I think we've kind of reimagined rebuilds. I think customers who've had a taste of rebuilds like the solution. But net-net, you know, customers are looking to build capacity. And so they're needing to use both levers and including rental and used as well to be able to meet the demand in the end markets in the current kind of supply situation.

That's fair. Thanks, guys. I'll turn it over.

The next question comes from Jacob out with CIBC. Please go ahead.

Good morning. I'm curious on the feedback you're getting from clients on how they're dealing with pricing. Are you seeing any pushback at this point?

So, I mean, we have to be competitive and I think our order intake and backlog build suggests that we are in the new equipment space and equally, you know, we're seeing growth in rental and used and product support. So, you know, I always point to activity levels as a good indicator of our competitive proposition in the marketplace. And, you know, we're very focused on using all the data we have to analyze, you know, what's acceptable in the marketplace and but equally articulating very clearly where costs have gone up and they need to be absorbed into the broader market. So I would suggest that nobody likes to see price increases and the environment that we just worked through, which is normalizing a little right now, has been an extraordinary environment. But I would say the general market industry, Caterpillar, the dealers and customers have absorbed it. you know, very well into their operations.

So as supply chain availability normalize, you know, it sounds like there will be less rebuilds and we're going to see more pressure on pricing. I mean, how should we think about that? And when do you think things are fully going to normalize as far as availability?

Yeah. You know, I think, you know, there are some areas that are, I would describe as normalized right now, particularly in the smaller equipment and excavators. In the larger engines and larger mining equipment, they still have longer and extended lead times than we typically would be used to. As the CEO of the company, I wouldn't describe it as the supply chain improving as a negative, either from a less rebuild or a pricing perspective. I see supply chain improving as a huge positive for the organization because we're still working in a relatively constrained environment. And so supply chain improving will allow us to do more business and to continue on the growth trajectory that we're on right now. I'm not naive enough to think that there won't be some normalization in a greater competitive environment as all the supply chains normalize. And we're very focused on making sure that our supply chain normalizes as quickly as everybody else's. And our current business levels and market share would suggest that we're well placed there. So ultimately, I would not see this as a negative. As I mentioned previously, we've reimagined and repositioned rebuilds, and we're finding them to be way more sticky than just an alternative to a constrained piece of new equipment. And so net-net, we see supply chain improvement as a positive for this, for our organization.

And our ability to improve velocity and... And working capital, I think, improves in that environment as well. Big focus area.

Thank you. Thanks, Jacob.

The next question comes from Michael Dumais with Scotiabank. Please go ahead.

Hey, good morning, guys. First off, really good quarter. The question I had was on product support, productivity. Kevin, I think you talked about in the last 18 months, having increased the technician staff by nearly 20%. You've also built several new facilities. Are you seeing any productivity or cost absorption headwinds as a result? I'm just trying to get a sense for whether that's a margin opportunity.

As I mentioned in my remarks, we have a measure called absorption. which measures our cost base through the lens of our product support activity, and that continues to increase. Productivity levels are high. We're adding technicians, optimizing how we do the work. I can't overemphasize the way that we do the work and move machines around to where we move the work to the people now to make sure they're optimized and the bays are optimized and the labor is optimized, and also the work is being done with the highest capability and also freeing up our field response staff and technicians to respond to breakdowns and field scenarios much faster. So, no, I don't think, you know, I think we're seeing continued expansion and increases in our absorption ratio. And as we become more efficient, and we've got more to do there for sure, I think you're on the right lines in terms of that being an opportunity for us.

Okay, really nice. And then maybe just turning to the SG&E. So very good performance overall. SG&E has been, at least to me, a pretty tricky number to nail down quarter on quarter from the modeling standpoint. Obviously, as you spend for growth, and then there's been the restructuring, the variability, and all of that. Maybe, Greg, what are some of the trends we should consider going forward? And I wonder if the Q2 SG&A number is a fair number to consider as a high watermark for 23?

Yeah, certainly, with the share price performance as well as ROEC, which is also linked to LPIP, obviously, that was quite a large number in the quarter. I wouldn't expect that every single quarter. And so that would have put it on the higher side. Also, some of the union activities and agreements would also be in there. So certainly, we're pleased to be at 16.2% for a quarter, 17.3% for an LTM. It will continue to drive to be 17% and see where we can take it next. you know, as we continue to go through. But productivity and SG&A management continues to be the big value driver and important. So, you know, certainly high within the quarter for the reasons I mentioned and definitely a continued focus area.

All right. Thanks, Michael.

The next question comes from Sharif El-Sabahi with Bank of America. Please go ahead.

Hi, good morning. I just wanted to ask a bit on seasonality and operating margin. So historically, you typically see your margin ramp from Q1 to Q3 on a sequential basis and then tail off into Q4. Given this year has the impact of very high new deliveries, while product support revenues are also growing, are you able to give us a sense of what the second half will look like?

Yeah, we're edging our way back towards a little more normal seasonality, which would be Q1 is winter in Canada and some slower times in South America in the summer season. So that tends to be a little slower. Q2, spring selling season and ramp up. It tends to be more activity. And then Q3 is kind of peak rental activity and a really strong quarter. And then Q4 is Seasonally trends down from an activity level, but sometimes you have some interesting year end activities with customers with remaining capex and whatnot. So it can move a little bit. But yeah, typical would be, you know, Q2 strong, Q3, you know, kind of peak rental and a little higher margin. So that would be typical seasonality, which we're edging more towards. That said, we do have a lot of new equipment that we're delivering. As you saw in Q2, you know, being up 84% in Canada is a big number. And we're trying to get that equipment out in customers' hands as quickly as we can. And those are great units to add into the population to start accumulating hours.

Thank you. Thank you.

The next question comes from Devin Dodge with BMO Capital Markets. Please go ahead.

All right. Thanks. Good morning. Demand for power systems continues to be really strong for Finning. You know, we've heard this from others as well. Also heard that lead times for some of those equipment is really stretched out. Just wondering if you could talk about the sustainability of those demand drivers for power systems and if there's optimism that CAT can add capacity to keep up with that demand.

Yeah, sure, Devon. Thanks for the question. So, yeah, you're correct. I mean, we're really happy with the demand in our power systems business, and it's across the board. I mean, the UK was always a big part of the business, and they were first out of the blocks here. But the business levels that we're seeing in the other two regions are really encouraging right now. Power systems account for about 25% of our backlog right now, which has never been that high in the past, and it continues to build. Some of that build is because of the extended lead times, for sure. But the order intake and the activity levels are very strong. I was talking to the leader of our Canadian power systems business just last week, and the outlook for our Canadian power systems is going to be a record all-time year. And we see that sustaining, and we'll talk about that in greater detail at our investor day. But just to give you a few sound bites, I mean, we look at our power systems business in three kind of broad segments or sub-segments. The first is the growth in data and data centers and the demand for the processing of data. And we have a very good proposition and a track record of market share in terms of supporting the backup power for data centers. And so that continues to grow, and the demand for data is only going one way. The second area that we focus on is power resilience, and as the world shifts to more renewables, obviously it also requires more resilience as the renewables are not as reliable as traditional forms of power generation. And we fit in a really good space there, and we have some relatively long-term contracts providing power resilience and supporting the grid. A good example of that would be in the Yukon. And then the final area is prime power. And so as transition costs keep going up, as energy costs keep increasing, more and more larger facilities are looking at how do they become more power independent and take control of their power requirements. And that's what we call prime power. And so lots of opportunities to to provide larger facilities with a full, comprehensive power generation solution. And not only that, they also have the ability to then use power management software to sell back into the grid and offset some of their investments. So those are the three broad segments. We see all three segments have runway. It's kind of hard to identify the total addressable market because it's so new, but the outlook is extremely positive.

Okay, okay. That's a really good rundown. Thanks for that. Maybe there's a question for Greg. We've seen Finning be really active in its buyback program in Q2, and this seemed like it continued into July. So just wondering, with the stock moving higher over the last few months, do you expect capital allocation to become a bit more balanced between stock repurchases and some of your other priorities on a go-forward basis?

Yeah, it's something where, you know, capital allocation, we'll touch a bit more on the framework at Investor Day, but spoiler alert, it's very similar. So we want to grow the dividend on a steady basis. We want to invest organically in the business, which we've got a lot of. And obviously, you know, that started to turn to free cash, and we were pretty optimistic on that outlook going forward, given the accumulation of profits we've had over the last couple of years. And so we've got capital to allocate and deploy, and we continue to see share buybacks as a very good way to do that. full seven times EBITDA and 12 times earnings is attractive. And at the end of the day, when we look externally, we can't find businesses as attractive as ours with the dynamics that we've talked about today between Canada, Chile, and the UK. That's that attractive. So we continue to see it as attractive and we continue to be consistent on that and kind of think of that as, you know, 1% per quarter minimum and then look at the amount of cash that we generate and make choices from there.

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

Thanks, Evan.

The next question comes from Steve Hansen with Raymond James. Please go ahead.

Yeah, good morning, guys. Thanks for the time. Labour cost inflation has been a headline issue across the entire continent of late. There's been some pretty hefty demands being thrust forth. Could you perhaps give us an update as to where you stand from a labour standpoint and and any recent negotiations or increases that you might've faced or that you're planning on.

Yeah, sure. For sure. I want to, you know, go out there and for that and say that our, our labor negotiation teams and our operation teams have done a spectacular job over the last period of time negotiating with our, our labor agreements in all three regions. And, you know, I'm pleased to say that, you know, we've, successfully completed all the union negotiations that are ready to be renewed at this moment in time. And in fact, we've got ahead of some of the agreements in South America. And then just this week, we signed off on the UK and Ireland agreement. So extremely challenging environment with the spike of inflation, as you mentioned, Steve. But I think the team has took a balanced and fair approach And that's evidenced by the fact that we've managed to reach agreement with all of our unions and still managed to absorb those, what I call fair and balanced, but high labour agreements and into our current operating performance and our financial performance. So absolutely fantastic job by the team.

Okay, very helpful. Thank you. And just as a follow-up, You described some very strong progress earlier on the product support strategy, recent capacity expansions, and even filling the labor gap with technician hiring. Can you just give us a sense for how long of a runway you think that gives you before you need to reinvest again or contemplate further expansions in that strategy? I guess just as you look at the broader installed base backlog, et cetera, like how long does it give you with the recent investments?

Yeah, and that's some of the work that we're doing right now. I mean, Socatical have been public, Steve, about their intention to double services by 2026. That means we've got, you know, two and a half years left of that runway, and that includes a double-digit product support growth for dealers within that broader strategy. So, you know, right now and through our investor day in September, you know, we hope to be able to articulate a clear plan for continued product support growth through that period. hence why we're adding the capacity in a thoughtful way you know we're also very mindful um that we want to make sure that we retain our staff and we provide job security and certainty so we're not chasing every every opportunity in every dialogue we're having very robust conversations with customers and trying to use this opportunity to really integrate and build stronger partnerships with our customers, particularly from a labor perspective. But the answer to your question is that we see continued growth rate in product support for the next two to three years, and we'll hopefully add capacity to meet those demands.

I'd maybe just add that the way we're adding capacity is different than the past, right? When we open up a new Kamloops with extra capacity, it's taking capacity from four other branches and scaling up very efficiently. As we build a warehouse in Edmonton, it's four warehouses into one with automation within the warehouse. And so the way we're adding capacity, I think, is more efficient than ever. It's not kind of just add 20% everywhere. And as we'll highlight it in investor day as well, we're adding capacity in the Antofagasta region because we can see clear growth there. And we'll kind of walk through that as we're there.

Yeah, and just finally, Steve, from me, so the way I think about it is that we still have some potential ahead of us right now. And some of that is market share. Some of it is constrained opportunity. We still have opportunity to build the population. And you've seen that through the mining trucks. But we have opportunities to build Population and rental and use are good examples of that. And then the growth in power that I just articulated on the previous question there, that provides another level of installed base that is critical to our continued product support growth.

That's a great call, guys. Thanks. Thanks, Steve.

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

Great. Thanks, and good morning. You provided some color on Chile and some of the mining activity and talked about some orders. I was wondering if you could maybe dig into the type of orders that you're referring to. I know earlier you had mentioned some of the activity in Chile was a bit slow as the political situation settled out, but it sounds like there are some orders coming through. If you can just talk about the nature of those orders. Are the larger global miners starting to move on some of their plans? Just want to get an understanding of the activity levels and where it's coming from.

Yeah, sure. So as we think about Chile, you know, we talked about a large framework opportunity this time last year or September time last year, and that continues to be executed. And we look forward to demonstrating how we're executing that in Antofagasta in September. And, you know, we've got the continued execution of support for QB2, which is the biggest kind of greenfield opportunity that's going to come into production in at the end of the year. Aside from that, there's strong activity levels in mining contractors. That's this kind of mobilization, enablement kind of description we use for Chile right now. For sure, there's been a kind of a delayed or a kind of pause whilst the political certainty was managed through and the mining royalty was negotiated and agreed. But since then, you know, two things are kind of happening. I think activity around Greenfield is increasing in terms of discussions. And, you know, there's a big discussion. It's moving from a kind of economic discussion into a kind of permitting and ESG discussion now. And I'm quite very confident that will move through. And you're seeing that through some of the, you know, the M&A activity and the kind of big miners that are making investments and commitments into the region. And the other thing is just in the meantime, the expansion and the productivity improvements within the brownfield sites where productivity, they're looking for every opportunity to increase productivity within the scope of mines that they have today. And we're helping them with that, with new trucks, with rebuilt trucks, with data and site expertise through our IKC operation, which again, we'll demonstrate in September. So I would describe it as, like you said, mobilizing and enabling, but strong and solid activity in brownfield and encouraging sentiment in terms of greenfield activity.

Great. And then just one on the new BC facility that Greg mentioned earlier. I guess how should we think about the ramp up? Is there, like you mentioned, taking some work away from some of the other facilities? Should we think about any sort of SG&A drag as that facility gets to full capacity? Just want to think about how we should model for that addition, if it's material at all.

Yeah, I wouldn't think it would be material enough to model, but, you know, it's just a good example of the efficiency at which we add capacity. So, I mean, all of the costs we would have been, you know, we've been building the branch for two years. We're just at cutover now, so maybe there's some minor duplicate costs. But at the end of the day, you know, by the end of the year, it'll be, you know, fully up and running and fully transitioned over and more efficient matting adding incremental work. So it's just an example of how you use the hub-and-spoke model and provide great leverage points at places where you have deep labor pools and can attract labor. So it's more of an example than something to necessarily model, but again, just a point around efficiency as we scale.

Great. Thanks so much for the call.

Thank you, Son.

Once again, Any analyst who has a question may press star then 1 on their telephone keypad. The next question comes from Maxon Sitcho with National Bank Financial. Please go ahead.

Hi, good morning, gentlemen. Good morning, Max. I had a follow-up question in terms of the product support. I mean, when we look at kind of, you know, historically, we had a much slower sort of pace of growth in PS over the years, and then we're sort of seeing this inflection. And obviously, there was a lot of changes that have been done internally over the last couple of years. But I'm just wondering if there's any risk to, you know, pulling forward some of the demand that, you know, we had like a lot of disruptions over the last couple of years. Just because, again, like when we look to the prior cycle, you know, new sales kind of like up 15%. and, you know, product support is a proximity. And obviously, I understand, you know, the whole install-based dynamic, and I don't think anybody wants to sort of like imagination where that can go, but I'm just wondering if you can maybe provide some sort of high-level comments in terms of, you know, how you see the product support dynamic and sort of the reasons for the growth. Thanks.

Yeah, sure, Max. And so, as I mentioned previously, you know, along with Caterpillar, we have a very clear strategy to double services, you know, to $28 billion by 2026. And, of course, that's done through the dealers, and we're a big part of that. We're a big part of Caterpillar's business. So Finian needs to deliver on their fair share of that growth, and I'm pleased to say that we've done that for a number of years now, coming out of the back of the pandemic. And we continue to do that, and we're really – really pleased with the product support levels that we saw in Q2. And we're very focused on sustaining the growth trajectory in product support. And for sure, that growth trajectory will moderate over time as the available market shrinks. And obviously, we've had the tailwinds of some pricing inflation as well. But we're very focused on growing our product support business. Peak is not a word that we use. Product support peak is not a word we use in Finning right now. We're very committed to continued growth, and we'll articulate that in the investor day. And so that's why we're adding capacity. That's why we've got this record backlog that we continue to – I mean, we're really happy. Our backlog's been over $2 billion for more than a year now. And we continue to have strong equipment deliveries, as Greg mentioned, which of that is incremental, which is fantastic. And we continue to add to the backlog. You know, it's a little lumpy because of the nature of the mining opportunity and the extended lead times in some of the products. But it all plays to the fact that we're growing the installed base. We're winning market share. We're adding capabilities and capacity. And so we're not really looking back at the prior cycles because the business is so much different than it was in the past, and the installed base is very different too. Okay.

Super helpful. Thank you so much.

Pleasure, Max. Thanks.

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

Great. Thank you, operator. That concludes our call for today. Thanks for your participation and have a safe day.

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