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spk08: Thank you for standing by. This is the conference operator. Welcome to the Finning International Inc. first quarter 2024 investor call and webcast. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. Analysts who wish to join the question queue may press star then 1 on their telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then 0. I would now like to turn the conference over to Greg Palastrup, Executive Vice President and Chief Financial Officer. Please go ahead, sir.
spk09: 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 the Investor Relations section of Finning.com. We've also provided a set of slides that we'll be referencing during our prepared remarks. The slides are posted on our website. An audio file of this call and accompanying presentation will be archived. Before turning it over to Kevin, I want to remind everyone that some of the statements made during this call are forward-looking. Please refer to slide 9 and 10 for important disclosures about forward-looking information, as well as currency and specific financial measures, including non-GAAP financial measures. Please note that forward looking information is subject to risks, uncertainties and other factors as discussed in our annual information form under key business risks and in our MD&A under risk factors and management and forward looking information disclaimer. Please treat this information with caution as our actual results could differ materially from current expectations. Kevin, over to you.
spk07: Thank you Greg and good morning everyone. Today I would like to start by thanking our employees for their commitment to serving our customers winning strategically important deals, diligently building execution momentum of our strategic plan, and delivering a solid quarter. Our people are our greatest competitive advantage, and we are committed to building safe and supportive workplaces. We are working hard to simplify our business and empower our teams to build customer loyalty. Turn into our first quarter results on slide two. My team and I are particularly pleased with our strong new and used equipment performance, that builds population of equipment and engines in our end markets and drives future product support business. We're also encouraged by the substantial backlog and the 700 million of additional backlog since the quarter end. Following a period of record growth and a very strong first quarter in 2023, our product support is slightly down year over year. We consider this a transitionary phase due to some challenging market conditions and specific customer plans. If we look at our product support CAGR over the last two years, we've seen solid growth at 12% CAGR. Greg will provide more details on our product performance in each region. The great progress we are making to grow used equipment and power system sales in all regions drives resilience and helps offset the impact of lower product support in the quarter. Used equipment revenue is at 48% year over year, reflecting our significantly increased participation in a very active used equipment market. We recently launched Fused Equipment Sales Platform, specializing in selling as-is, where-is used equipment globally and targeting mostly non-cap, high-error machines. Our power systems revenue was up 37% year-over-year. We added large orders from data center customers in the UK and Ireland and Chile to our quarter one 2024 backlog and secured significant new power systems orders post quarter one. We're also demonstrating strong cost control with SG&A as a percentage of net revenue down 130 basis points from Q1 2023, which is a critical component of building full cycle resilience while increasing our earnings capacity. Looking ahead, our positive outlook for 2024 is underpinned by robust end markets and strong commodity prices, large customer orders awarded in April, which bolster our backlog, and the continued disciplined execution of our strategic priorities. We are extremely pleased with the important strategic wins in each region in April, including multiple copper mines in Chile, the oil sands in Canada, and data centres in the UK and Ireland. These awards represent over 700 million of new equipment orders for delivery starting in the second half of this year, laying out a solid foundation for future product support opportunities. As previously discussed, with the electrification trends driving strong copper demand, Chile is mobilizing for growth. We are very pleased with the large orders in April, including with Cadelco, whose order was valued at $380 million, where the fleet will be supported under a 10-year maintenance contract, and this is an important strategic win for Finning and Caterpillar. The new agreement covers four Cadelco mines and marks the first time Caterpillar trucks will be deployed at two of those mines. Building equipment population and increasing our proportion of contracted revenue are key to our strategy, and this wing is an excellent example. We're optimistic about the second half of 2024, and we're confident in the direction of our business. We expect product support growth rates to improve in the second half of the year as we continue to book and execute rebuilds, grow contracts, and hire technicians. We remain laser focused on improving our working capital velocity, and unlocking invested capital to drive substantial free cash flow generation going forward, with a number of key initiatives underway in all of our regions. These initiatives include increasing new equipment preparation velocity. We expect the new orders that we've taken to move through our backlog much faster than previously. Increasing inventory performance, on-time informed performance for our customers. Working closely with our customers on planning component exchanges and rebuilds. and optimising lower ROIC activities. We are constantly reviewing the pace of investment in our rental fleet to ensure we are achieving the growth goals and return on investment. Our focus is squarely on executing our strategic plan, which we laid out at our 2023 Investor Day. We are growing our business in a moderating growth environment, demonstrating improved earnings power through driving product support, building full cycle resiliency by unlocking invested capital and delivering sustainable growth in used and power systems. We anticipate the execution of our strategy will have an increasing impact through the year, with improving product support growth rates and substantial free cash flow. We are mobilizing all resources to build momentum, efficiently deliver our newly awarded equipment packages, and execute rebuilds in a capital efficient way. We are pleased to increase our dividend by 10% and also renewed our share repurchase program. The dividend increase is well supported by our improved earnings capacity and demonstrates our strong commitment to returning capital to shareholders. Before I turn it over to Greg, I want to mention that we publish our 2023 sustainability report soon. We are proud of the work we're doing to improve safety, reduce our emissions and support our customers in achieving their decarbonisation goals. We're building a strong and inclusive company, which has a positive impact on the communities in which we operate. I encourage you to take a look at this report when it's available on our website. With that, I'll hand it back to Greg.
spk09: Thank you, Kevin. I'll talk more about our first quarter performance in detail, turning to slide three. In the first quarter, our net revenue was $2.3 billion, up 9% from Q1 2023, marked by strong growth and new and used equipment sales. Market activity was mixed but solid overall, supported by strong momentum in commodities and growing demand for power solutions in all of our regions. Diligent execution of our strategic priorities, including strong used equipment sales and cost control, helped offset the impact of lower product support revenue in the quarter. EPS was down 5%, primarily reflecting shift in the mix to new and used equipment, as well as lower margins in those segments. We've reduced risk levels in Argentina and are pleased that the business has returned to profitability in Q1, which was earlier than we anticipated. On slide four, we show changes in net revenue by line of business compared to Q1 2023 and the composition of our equipment backlog by market sector. New equipment sales were up 25%, led by Canada and South America, where we continue to see strong demand in mining and power systems. Used equipment sales were up 48%, higher in all regions, reflecting execution of our strategic focus on used and our increased participation in this very active market. Product support revenue is down 1%, with solid growth in South America offset by lower activity in Canada and the UK, primarily due to a transitory phase impacting construction activity that I'll cover in the regional slides. Our equipment backlog was $2 billion at the end of March, maintained from December 31st levels, The new orders totaling over 700 million are not included in the Q1 backlog. With the winds announced today, we expect to see continued trend of increasing proportion of backlog in mining and power systems. Turning to slide five, which shows our EBIT performance. Gross profit as a percentage of net revenue is down 260 basis points from Q1 2023, mostly due to the shift in revenue mix to new and used equipment sales. As expected, with improved availability, we're seeing lower margins in used equipment and rental compared to last year. Our resiliency actions offset half the margin decline in the quarter. SG&A as a percent of net revenue was down 130 basis points from Q1 2023 to 17.7%, demonstrating operating leverage in the higher revenue environment and strong cost control. Moving to our Canadian results and outlook, which are summarized on slide 6. New equipment sales were up 39% from Q1 2023, with broad-based strength across all market sectors and deliveries from backlog. Used equipment sales were up 37% year-over-year, driven by conversion of rental equipment for the purchase option to sales and stronger volumes across retail and wholesale channels. Product support revenue is down 4% year-over-year. We're in a transitory phase in construction, with the wind-up of several large construction projects and winter projects being deferred. Challenging operating conditions also led to reduced equipment utilization hours in most sectors in the first quarter. Despite this, over a two-year period, our product support CAGR in Canada is 10%. In mining, we saw mixed activity by customer, with a number of customers spending significantly more in Q1 and several spending significantly less due to adjustments in their mine plans. Overall, we are confident in product support growth going forward as customers pursue steady growth and some winter works missed this year will need to be caught up in the future. EBIT was down 14% year over year, primarily due to a higher proportion of new and used equipment sales in the revenue mix, as well as some inflationary cost pressures were working hard to continue offsetting. Hori Fuel continued to deliver strong performance, achieving 16% growth in EBIT compared to Q1 2023, and generating positive free cash flow in the first quarter. We're proud of their consistent and strong execution. Our outlook for Western Canada is positive with the Trans Mountain Pipeline beginning operation in May 1st. We're in a new area of steady growth in the energy sector. While the completion of major pipelines has slowed some construction activity in the near term, we expect to see increased activity in the energy sector and production and growth. Turning to South America on slide seven. In functional currency, new equipment sales were up 20% from Q1 2023 on strong mining deliveries in Chile. Product support revenue was up 4% year-over-year, higher in all market sectors, and increased activity in mining and power systems, as well as demand for rebuilds and construction. Part sales were up 7%, partly offset by lower service revenue due to weaker Chilean peso relative to the US dollar compared to Q1 2023. In Chile, service revenues and costs are both in pesos, so the lower year-over-year peso reduces revenue growth, but ultimately the margin percentage is held and profitability is strong. We expect a weaker year-over-year Chilean peso to continue, which will impact service revenue growth rates in 2024, while at the same time supporting lower SG&A. EBITDA was up 3% from adjusted EBITDA in Q1 of 2023, and EBITDA as a percentage of net revenue is strong at 11%, despite a large proportion of low-margin mining equipment sales in the revenue mix. Our outlook for Chile in mining is optimistic, underpinned by growth, growing demand in copper, strength in copper prices, government approvals of large-scale brownfield expansions, and increasing customer confidence to invest in new projects. While the orders received in April are also strong evidence of the trend, we are seeing broad-based increase in quoting and tender activity for mining equipment across customer base, and their growth plans are advancing and with greater confidence. We also continue to see healthy demand for large contractors supporting mining operations in Chile and growing power systems activity in industrial and data center markets. In Argentina, while we see pockets of strong activity, especially in oil and gas sector, we continue to take a low-risk approach in 2024. Please turn to slide 8 for our results in the UK and Ireland. In functional currency, no equipment sales were comparable to Q1 of 2023, The firepower systems deliveries offset by lower volumes and construction due to soft market activity. Used equipment sales nearly doubled year over year as we worked to increase our participation in the used equipment market. Product support volumes were reduced by lower customer activity levels and lower machine utilization hours. EBIT as a percentage of net revenue was down 120 basis points year over year, mostly due to a lower proportion of product support in the revenue mix and continued inflationary cost pressure. We are pleased with sequential improvement in the UK and Ireland and 4.5% EBIT margin given these tough market conditions. We expect demand for new construction equipment in the UK and Ireland to remain soft, reflecting low GDP growth projected in 2024. However, we expect to see growing contribution from used equipment and power systems and resilient product support as we continue to execute on our strategy. We've renewed our normal course issuer bid for repurchase of up to 14 million shares. On our current NCIP, which expires May 12th, we repurchased 7.2 million shares, or 5% of our public flow. Our balance sheet remains healthy, with net debt to adjusted EBITDA at 1.9 times at the end of March, reflecting normal seasonal build of our inventory. We expect substantial free cash flow in 2024 as we sell through our inventory, start delivering new orders with improved cash-to-cash cycles versus prior backlog build, and continue to execute our capital unlock and velocity plan. Operator, I'll now turn the call back to you for questions. Operator, just checking that you're there and we're ready to go to questions.
spk08: Thank you, sir. Pardon me, I was on mute. 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're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. The first question comes from Jacob Bump of CIBC. Please go ahead.
spk01: Good morning. Good morning, Jacob. Let me just talk us through some of the competitive pressures that you're seeing currently. I know with supply chain improving, you know, a number of your competitors have been talking about, you know, competitive or pricing pressures. You know, is this broad-based or is this kind of, you know, more on a smaller horsepower equipment?
spk07: I think we've said this before, Jacob. You know, in my 30 years, we've always worked in the competitive industry. environment, and for sure the pandemic changed the dynamics around that competitive environment due to different performance in supply chain. I think we're in a more normal position now. I think broadly, particularly in terms of construction equipment sales, I think supply chains have recovered, so most companies would have equipment to sell. But I think we would consider that we're competitive We're always looking at acceptable premiums for our products and services. And our early market share in construction equipment that I've seen through the course of the first part of this year would be encouraging. And what I'm hearing from the teams, I was in the UK last week, which is a very competitive marketplace. What I'm hearing is they feel well supported by Capspiller. They feel like I asked our head of sales have you got the tools you need to be competitive in the UK market right now? And the answer is yes. And, you know, we see more support coming from areas like CAD Finance with several, you know, financing programs in place to help, you know, kind of push orders through that are maybe stuck in the decision-making process due to, you know, capital constraints with our customers. But I wouldn't say that we're finding, you know, a dramatic shift in our in the competitive environment. And our margin decrease in this quarter was very much driven by mix.
spk01: And maybe just looking back at the investor day, talking about this full cycle resilience and this focus on earning stability. I know driving product support was a big part of the strategy, but you look over the past two quarters and margins in product support have lagged. As you look at that, is there anything you could have done differently to mitigate either some of these weather-related issues or utilization issues you saw?
spk07: Yeah, I mean, you live and learn all the time, Jacob. And so, for sure, part of resilience is better planning, working more closely with our customers. I do think, as it relates to this particular first quarter, there were some distinct issues operational issues with our customers. General utilization of equipment was down on a broad base across our segments in construction. We had that major project transition, particularly in Western Canada, which I've spoke to a lot of people in the past, we've never seen such a swing in major product activity. And then we have some very specific mining plans and changes to mine plans within our customers. And so we're seeing, you know, perhaps we could have been close to that with our customers to understand a little bit more about that. I actually think the biggest thing we underestimated, if I'm honest, Jacob, is just how strong Q1 2023 was. And I think, you know, we maybe could have managed that or communicated that a little better as we move through. But I feel confident as we move forward that product support growth rate will report a return to that kind of level. And we're getting closer to customers and increasing the number of unique customers we deal with to try and offset some of the lumpiness in our major customers.
spk01: Thank you.
spk07: Thanks, Jacob.
spk08: The next question comes from Yuri Link of Cannock Regenuity. Please go ahead.
spk00: Hey, good morning, guys.
spk09: Good morning, Eric.
spk00: Just looking at product support, you know, those projects you mentioned rolled off in Canada. The UK is a bit tough. So just wondering if you could put a little more meat on the bone in terms of where you're getting the comfort to call for improving product support growth rates throughout the year.
spk07: Yeah, sure. So a couple of areas. So we're seeing equipment mobilized. We watched the equipment utilization errors and they've improved in April. So kind of bounced back to more normal levels. We also see that through our rental fleet utilization. So in the UK last week, I met with three customers and they all They all were consistent in saying it was a really terrible winter, but their activity levels just in the last three weeks have really started to improve. And so there's some customer sentiment out there and some activity levels around utilization hours and rental fleet utilization that gives us some encouragement that the construction season is starting, albeit a little bit late. So that's point one, so we just feel better. And I'm talking specifically about construction more so than mining and power systems. The second area is execution capability. So to Jacob's question about what could you do differently, I do fully believe that our commitments in our investor day and some of the softness in Q1 has reinvigorated and made us double down and and revisit some of the basics in the plan, things like customer coverage, making sure we've got the right propositions for our customers. So I think there's an execution quality that improves as we move through the course of the year. So we just get better at what we're doing and build on where we're at. And then I think more broadly, as we look into the second half of the year, we still have the view that the The macro improves. The pipeline capacity comes on in Canada, which drives activity around the oil sands. And we're already seeing, as Greg mentioned in his remarks, mobilization of contractors around Chile as well to support the large mining wind. So that would be it. I think we're already seeing things improve coming out of the winter season. I think we're very, very focused on execution. And I think generally the macro improves. starts to help us. Of course, we'll be lapping different comparisons in the second half of the year.
spk00: For sure, that makes sense. Maybe, Kevin, staying with you, just trying to get your temperature here on the overall outlook. Last quarter, you characterized it as steady growth. You've removed that language from the MD&A. You've got these great awards in April. You seem to have better visibility on product support. So just overall, I mean, how are you feeling about, you know, top line growth in 2024 versus, you know, a few months ago when you last updated the market?
spk07: As I just said, I would be more confident than I was working through Q1. Our investor day targets remain, and so we're not moving off those. We believe that those moderated growth rates are still in play over that two-year period. We said on the last call it's not linear, and for sure this Q1 was more transitionary than we thought it was going to be, but we still, the optimism level has improved. Clearly, you know, we're still seeing some restrained behavior and spending behavior. I think that improves as our customers get better line of sight to the utilization of their equipment. And of course, you know, we're really excited about the commitment of capital from our major customers in all three regions, you know, you know, committing to large capital spend, which gives us that broader horizon of better activity levels. So I would say, in general, more optimistic than prior quarter. And, you know, our committed and stated goals from the investor day remain.
spk00: Okay. Thanks for the call, Kevin. I'll turn it over.
spk06: I'll share it.
spk08: The next question comes from Sharif Alsabahi of Bank of America. Please go ahead.
spk11: Hi, good morning. Good morning, Sharif. I just wanted to get a bit more color. You know, looking at order patterns, you obviously have those big orders in April. Typically for the second quarter, would we see orders ramp through the quarter or are they weighted towards April?
spk09: Yeah, so normally in the second quarter we'd have, you know, we're in selling season, so some of the construction will have inventory on hand and sell through, and we expect that to be pretty active this year. But otherwise, the order intake on mining and power tend to be a little lumpier. Of course, we've had a number of wins right in April, but there are more out there that we continue to wait to hear on and continue to quote on. So, of course, we've highlighted $700 million, which is a very large amount for one month, but of course we expect to close more deals And as we highlighted, particularly in South America, kind of year on from the royalty review, copper prices in the mid-fours, we're seeing a lot of customers look at both refresh and expansion of fleet. And so nearly all mines have some form of tender going at the moment. So lots of activity. And so we expect that to continue through the year. And it's a bit lumpy, but certainly we've had some great wins in April. But we expect some more activity elevated, particularly in Chile in May and June.
spk07: I'll just highlight another area. So our backlog in Canada is predominantly construction equipment now, which is encouraging. Order intake for construction equipment in the UK was quarter one versus quarter one was up considerably. And so we are seeing the construction industry starting to move. And so there's a couple of points of encouragement there. But we need to note that as our mining business mobilizes and we continue to grow power systems, those revenue streams are way more lumpy. And so they can be, they can make dramatic changes within a quarter. And so just need to be conscious of that.
spk11: Of course. And, you know, I realize there's a bit of a digestion with some of these larger project completions in construction, but looking ahead, do you see a project pipeline to fill the gaps as we head into 25?
spk09: Yes, you definitely see some more projects coming through, you know, with the Highway 1 expansion in British Columbia. But we do expect more private sector ramp up over the next couple of years versus some of the public works of the last couple of years. And so, you know, the activity that goes in and around the LNG upstream development, as well as some oil capacity now in Alberta for that to grow, you'll see some effects around road clearing, well pad construction, gas plant and gathering lines. So, We expect to see more of that over the next couple of years, particularly if you start to see natural gas tick back up a bit more.
spk07: And I think power systems, again, it gives us – that's probably the most visible segment we have. And so we're seeing visibility well into next year and even beyond in power systems projects, particularly in the U.K., but also Chile. And so that gives us some confidence that the revenues are robust in that segment.
spk11: Thank you. And just looking specifically at the mining winds, are you seeing a share shift towards cap products take place with these orders coming in, or is it more broad-based strength across mining?
spk07: No, definitely market share shift. I think following a period of where our market share in Chile particularly was probably not where we wanted it to be, in the previous cycle. We've talked about this previously around the electric drive truck and how that was essential to winning South America. I think we have a great electric drive truck now. We clearly know that with BHP Escondido last year, we went from two-thirds to full cat sight. We believe the Codelco win that we're announcing today We want a high proportion of the available equipment there for the biggest opportunity in Chile as well. So I would say that the team in South America are doing an absolutely amazing job using the tools they have, the product they have, partnering with Caterpillar to make sure we have the appetite and the solutions to serve our customers. But without a shadow of a doubt, it's market share.
spk11: Thank you. And just lastly, there's been some large M&A in the mining space that's been announced. Is that holding back capital spend at all? And historically, has that typically held back CapEx in the space?
spk07: I mean, of course, there'll be some decisions that are considered when there's bigger M&A. I don't think there's anything other than the Glencore tech that would impact us directly right now. Other things are on the kind of are on the burner plate. Again, we've met with Glencore locally here in Canada, and the initial conversations suggest that they run a very decentralized model and that we're looking forward to working with them locally in the Elk Valley for sure. So no, I don't specifically think that it's impacting us today. But sure, if some of this big M&A happens, there'll be a period of consolidation and review around fleets and performance and even individual assets. But what we're seeing is that even where assets change hands, they're typically being picked up and in some cases run more locally and we're enjoying some good success. A good example of that is just the coal business in northern British Columbia where we've got some customers that are picking up and running with assets that... We're owned by larger miners in the past and they're doing it very well.
spk11: Thank you. I'll pass it on.
spk08: The next question comes from Michael Dumit of Scotiabank. Please go ahead.
spk02: Hey, good morning, guys. Morning, Michael. I was wondering if you could maybe isolate the impact from the completion of the major projects to product support in Canada. And also, you know, you talked about improved product support growth in the second half. Wondering how we should think about the Q2 bridge to that.
spk09: Sure. Well, on the Canada side, you know, obviously being 4% down, a portion of that's due to construction as well as some of the lower utilization hours. So I'd say that the decline part would be there because on the mining side, As I highlighted, there's a couple of customers that were up quite significantly over a year. There's a couple that were reworking mine plants that were down significantly and therefore were kind of flat. So from a construction perspective, I'd say the decline portion was pretty direct drive.
spk07: And I would just add, Michael, that within the construction phase, we can very much point to the decline. It's less than 10 customers. And that's what I mentioned in my early answer around What could we learn differently? And I think we're very focused on increasing the number of unique customers we deal with to try and manage some of the lumpiness in our revenues. But we know a vast majority of the decline in Canada was less than 10 customers and we can name them and we can attribute them to those projects.
spk02: Okay, perfect. And then just in terms of the Q2 bridge, because I'm looking at my model here and it's a pretty tough comp as well. So just thinking about that quarter versus maybe expectations in the second half.
spk07: I think that we'd see the kind of product support runway continuing into Q2. You know, a potential to improve slightly because of the activity levels in construction and some of the optimism around copper. But, you know, I think if we look at product support growth rates, as I mentioned in my remarks, if you look back over two years to this point, we're 12% CAGR. And, you know, that's double... broadly double our investor day targets. And so we think it's probably better, you know, we feel quite confident that when we get to the end of the year and run right into next year, we'll be able to demonstrate that investor day target trajectory.
spk02: Perfect. Very clear, Kevin. And then just maybe moving to gross margins. Look, those were lower in Q1. And I think, Greg, you talked about lower views in rental. But from what I can tell, equipment and products for margins were firm year on year. So just wondering if you can maybe just clarify that for us. And then, you know, as it relates to, you know, passing price, retaining price cost spreads for the balance of the year, what are your thoughts?
spk09: Yeah, so on margin, you know, it's proportion and mix with, as you said, lower margins in rental and used, which, as we've said many times before, we don't expect the margins the last two years. We would average those into the future. So those have come down to more kind of normalized levels. So that would be really the margin mix story within the quarter. Yeah, and going forward, you know, I think we are in more normalized rental and used margins, maybe a bit better in rental given some of the pickup that Kevin talked about as we get into the spring here. But on new and product support, we feel fine. I mean, a large proportion of what's going through is is mining equipment and data centers, and those margins don't move as much. There wasn't a big windfall and there isn't a normalization going on, so we feel solid that new and product support are in the same zip code and rental and used are more normalized.
spk02: Perfect. I'll pass the line. Thank you, guys.
spk09: Thank you, Michael.
spk08: The next question comes from Steve Hansen of Raymond James. Please go ahead.
spk05: Yeah, I got it. Thanks for that. Greg, just following up on the rental market commentary, understanding margins have normalized here. Does that change any of the capital spending plans that you aligned at the investor day? I think 15 sites was talked about in terms of build out in Western Canada, just by memory, but just any plans on the capital deployment there?
spk09: Yeah, certainly. I mean, when we look at the market, some of the utilization factors are data across the industry. And we, of course, look at our fleet and see what our utilization levels are and want to manage those appropriately. So certainly we continue to have that as a priority area. We'll continue to deploy capital at a reasonable rate, probably down somewhat from a few months ago where we were thinking, just to make sure our utilization factors or profitability are in the zone that we want. So it's kind of more of a steady growth year as opposed to what we were thinking a few months ago might have been a higher level.
spk07: but that's something we'll continue to monitor the market and evaluate yeah and we so we're i'm encouraged that the the um original cost on rent is back to where it was last year after a slower start a kind of clunky winter that's pretty encouraging given the lack of products the lack of major projects that we've spoke to previously but we did make them some investments last year so and we The lack of major projects has adjusted our sentiment for this rental season, so we'll just make the adjustments and make sure we're well positioned to meet our growth targets, but we're not overcommitted.
spk05: That's helpful, thanks. And just to follow on the UK margin side, again, down year-over-year, but a nice sequential uptick, is this the new range that we should be thinking about here? I'm trying to understand the sustainability of that pattern on this latest print.
spk09: Yep, it's a bit of a tough market out there, as we said, in the low GDP environment. It's a bit of a grind in construction, but power's got quite a bit of momentum. So good to see this sequential improvement. As Kevin said, you know, being there recently, there's some improved sentiment, but, you know, it's still a bit of a slog through the year. So I'd look for some sequential improvement, but not huge moves.
spk07: I think that I'd be surprised if the second half of the year wasn't way more constructive than the first half. And obviously we started to see the real... real slowdown back into the summer last year. So a lot of optimism about the UK. I had a great week there last week with employees and customers. And of course, they're running into an election. Had a great few hours on the HS2 project. It's absolutely amazing to see that come to fruition after so many years. And that work is well underway. We won't deliver any more product to that, but that's That continues to work. So, you know, very encouraging week last week in the U.K.
spk05: That's great, guys. Appreciate it a lot. Let's turn it over. Thanks, Steve.
spk08: The next question comes from Devin Dodge of BMO Capital Markets. Please go ahead.
spk10: Yeah, thanks. Good morning, guys. Hey, Devin. Technician at Counter Canada. Look, I think it's a bit higher here for your product support. was a bit lower. Just wondering if you have a sense for the drag this had on margins and earnings in the quarter, or were you able to pull some levers to kind of neutralize that impact?
spk07: Yes, I mean, definitely had a drag in the quarter. Product support is a huge value created for us. As I said in my remarks, we were really pleased that the additional new equipment, and particularly used in Canada, which was up considerably, helped mitigate that. We see that as We always felt the use would play an important role in building resilience into the company, and that has played through in this quarter, which is very encouraging. But for sure, the product support trajectory has been a drag, and we'll probably see that more normalising. As Greg mentioned previously, we don't expect use to continue at that trajectory, and we expect product support to sequentially improve. So, but nice to be talking about offsets and levers in Canada, being able to deliver that earnings performance.
spk10: Okay, makes sense. And then the notebook mentioned a broad-based increase in quoting, tendering, and award activity in Chile for mining equipment. Is there any way to scale that or provide a framework for how that sales funnel looks now versus whether it's 12, 24 months ago?
spk09: Yeah, I would just say it's matured. As we highlighted yesterday, I mean, most fleets are quite aged in Chile, so people have been evaluating decisions for quite some time. So it's gone more from the budgetary quote to competitive quotes to people making decisions and awards. I mean, even the awards that we've recently got, you know, there were some delays in getting those and decision-making. That still takes some time. We're just seeing it more mature and more serious, and nearly every mine is looking at some form of, of refresh for expansion, whether that's dealing with ore grades or some of the brownfields announced. So it's a pretty broad base, but it's matured also.
spk07: Yeah, I would say, you know, I think we'll be in a better position to answer that question on the next call. I mean, I think, you know, obviously, even before the orders that we announced that came in after the quarter end, order intake for mining in South America was up 48%. And, you know, as these orders... percolate through the system and miners start to calibrate that to supply chain and lead times, I think these orders will probably have miners think more about thinking ahead and where they're placing their capital and their capital program. And so I would imagine that we'll see more of those tenders and a clearer pipeline looking forward over the next few weeks here because there definitely has been a mobilization shift in the last quarter.
spk10: Okay. Good call. Thanks for that. I'll turn it over. Thanks, Kevin.
spk08: The next question comes from Sabah Khan of RBC Capital Markets. Please go ahead.
spk06: Great. Thanks, and good morning. I guess maybe just a bigger picture question on product support. Obviously, there was a you know, there was a bit of a push into product support during the lower equipment availability that threw off sort of the natural cyclicality of that business. I guess, presumably, the product support mix maybe improves here after a bit of uptick in equipment sales in the first half of this year. Maybe, can you share some perspective on how you view the product support trajectory over the next, you know, six, 12 months and where you think we are in that sort of longer-term trajectory of product support based on the macro? Thanks.
spk07: Yes, sure. So I think I mentioned this previously. We expect the trajectory to remain at the lower end of or just off our investor day targets in Canada specifically. And order intake remains strong on new equipment including power systems. And we have, you know, I don't want to walk past the fact that we are announcing that it's are strategically important winning the oil sands on this call as well. So, you know, I think that product support mix might move, you know, three or 400 basis points up and down, but we expect all of the, all of the lines of business to be growing as we, as we look forward. So we're very confident that if you, you know, that if we look back as we turn the year and we run right at the run rate into next year, that we'll be on those investor tape investor day, um, targets and, you know, I would suggest that the activity we've seen in the last three, four weeks here, just general activity, um, particularly in Canada would support a more improved outlook, um, specifically in Canada, but also to a certain degree in the UK and, um, you know, Chile is doing fine.
spk06: Great. And then there was a bit of discussion earlier sort of around pricing and inflation. You know, The expectations for the market had was pricing could generally be lower this year, but I guess given where inflation is at, can you just talk us through how your discussions with customers are going? Are you sort of managing to a certain margin? Maybe just how you're thinking about that, given where demand seems to be in a good place. So how are you sort of managing that inflation and cost situation?
spk07: Yes, I think we've said previously that we see pricing returning to a more normalized level now. And pricing and margin are different things. And we work with our partner really closely to make sure we have the right value proposition to win share. As I said previously, I'd be very encouraged by the public or the publicly accredited market share data that we have around us in our businesses. So we'd be happy with the start that we've had. Expect a competitive reaction. Expect a more normalised market. competitive environment there, but I also know that we have got the strongest partner in Caterpillar. We're very committed to growing our business. And as I said previously, I traveled for a day with the head of sales in the UK last week, and I asked, in the most competitive environment we have, and asked him if he'd got the tools to be successful this year. And the answer was yes. and um you know to a certain degree you know i was thinking about you know if there's any incremental we could uh you know incremental business we could win this year versus um you know having a negative impact of the competitive environment so we love a competitive environment it's what we've done for years we can be very creative cat finance are an amazing partner in that regard and so um you know this You know, I describe when I walk around with salespeople right now, this is normal, right? This is normal. What we experienced in the past was not normal. This is normal, and we have to roll our sleeves up and get out there, participate in as much business as we can and be as creative as we can. And I think we have the sales team to do that.
spk06: Great. Thanks very much for the call.
spk08: The next question comes from Sherilyn Radbourne of TD Cohen. Please go ahead.
spk03: Thanks very much, and good morning. Many of my questions have been asked, but in terms of the strength in used equipment sales that you saw in the quarter, is most of that equipment staying in territory? And just strategically, would you give up something on price or margin on a used sale to ensure that it does stay in territory?
spk07: Yes and yes. So our best data suggests that it's an 80-20 scenario, Sherilyn, so 80% is staying within the territory. And for sure, as we would do in, we have this term in the company now, which is kind of product support bias. So we have a very strong bias towards equipment that would generate, which generates population, which builds population, which generates product support activities for us. And so we would have a very creative view on that type of equipment and where his second life is and how we ensure that his second life is within a territory that provides a spot of support opportunities. I think if I told you that walking around Edmonton site three weeks ago, seeing machines with UK customers' logos on, taken off, and you can still see the UK logo customers, was an extremely important moment for me. You know, I've been asking the teams, obviously working in the UK and Canada for many years, to align our approach in those two markets. We're very lucky to participate in a very active used equipment market in the UK. And so our first priority is to make sure that stays in the territory. If that territory is in a different location, continent, but it's in the Finning Territory, we're working hard to make that happen in the first instance. Where we're not, then we would look to participate actively in that deal and partner with our other cat dealers in North America to make sure that that opportunity stays within the family.
spk03: Okay. That's good color. And then in terms of the inventory level, obviously pretty elevated. I assume that bringing that down is a priority for the rest of the year. Is there any way you can kind of give us some guideposts on what you're looking for in terms of free cash flow for the year?
spk09: Yeah, absolutely a big priority for us. Obviously we've got some more equipment came in for the selling season. We do think the backlog build that we're talking about today moves through the system much faster on a cash-to-cash cycle than the last backlog build over the last couple of years. So we do think we'll convert that at a faster pace. As we highlighted, a lot of these orders will start delivering pretty early in Q3. We have moderated some of our orders given the improved availability on certain product lines, and we continue to work on all the items we listed in our investor day around warehouse automation and velocity, and continue to work on some of those low ROIC activities. So we think all of those contribute, and so we highlighted $450 million of capital unlock and that continues to be the plan, and we think you'll see more and more of those catalysts here in the second half of the year.
spk03: That's my cue. Thank you for the time.
spk08: Thanks, Charlotte. Once again, if you have a question, please press star then 1. The next question comes from Maxim Sitcher of National Bank Financial. Please go ahead.
spk04: Hi, good morning, gentlemen.
spk05: Hey, Max.
spk04: I just have a couple of very quick ones. In terms of when we look at the oil sands, sort of customer behavior, because on the one hand, obviously, as you mentioned, WTI, good spot, and take a look at path that is improving. Is there anything structural from the client behavior which is sort of different from how they behave sort of previously, or it's really just sort of a tactical intermittent dynamic that was solved over the last couple of quarters? Thanks.
spk07: I'd say the latter, Max. I think there's some, as you can probably read, there are some specific plans in place. I think the oil sands is moving to a transitionary phase as well. There's a lot of talk of expansion and mine development. There's pivots between mines slowing down and mines ramping up. And so I would suggest that it's not structural. And we remain optimistic about the long-term fundamentals, particularly given... WTI and the incremental pipeline capacity, so it really is more a function of the mine plans today and the specifics today, and everything points to a more constructive and consistent outlook in the oil sands.
spk04: Okay, that was great, thank you. And then lastly, just going back on used, obviously there is strong performance, and I'm just wondering in terms of What have you changed when it comes to, you know, go market strategy, you know, processes, people, maybe, you know, some of that stuff, if you can provide any call there. Thanks.
spk07: All of those things, Max. So it starts with people and talent. And so we have dedicated leadership that wake up every morning and think about used. And they have a team that wake up every morning, think about used and act on used, you know, and work with all the regions to participate more effectively in that market. its process, as you mentioned there. So the team are absolutely committed to simple, agile processes, which wouldn't typically, you know, which would have an opportunity in the rest of the dealership to work, to improve and to work on. So they come from a different DNA and a different space. It's a close relative, but it's a different DNA and we're empowering them and giving them space to do what they need to do, to participate in a very active used equipment market. We see that moderating because I think there's a sense that coming out of the pandemic and supply chain improving, there was maybe a little bit of overshoot in terms of customers buying equipment. And we see that kind of calibration happening right now. And we're just really happy to be participating in that more than we have done in the past. But used equipment looks and feels all very different than it did 12, 18 months ago at FinIn. And as I mentioned in my remarks, we've even launched an independent used equipment platform or marketplace called Fused Equipment that's helping us to participate in the non-CAT side of the business as well. So that's important as well to have those capabilities. So looks and feels very different. Been really excited by the trajectory over the last couple of quarters. building this for the previous six quarters before that. And hopefully, you know, we've got really strong hopes that we can build a sustainable business there that can contribute more to Finit.
spk04: Very helpful. Thank you so much.
spk07: Thanks, Max.
spk08: This concludes the question and answer session. I would like to turn the conference back over to Greg Palaszczuk for any closing remarks.
spk09: Great. Thank you. That concludes our call. Thanks for everyone for participating, and I hope you have a safe day.
spk08: This brings to an end today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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