Finning International Inc.

Thank you for standing by. This is the conference operator. Welcome to the Finning International Inc. second quarter 2024 investor call and webcast. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation will be an opportunity to ask questions. Analysts who wish to join the question queue may press star and then one on their telephone keypads. Should you need assistance during the conference call, you may send to an operator by pressing star and zero. At this time, I'd like to turn the floor 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, we will open the line to questions. This call is being webcast on the Investor Relations section of Finning.com. We've also provided a set of slides on our website that we will reference. An audio file of this call and the accompanying slides will be archived. 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 9 and 10 for important disclosures about forward-looking information, as well as currency and specified financial measures, including non-GAAP financial measures. Please note that forward-looking information is subject to risks, uncertainties, and other factors as discussed in our annual information form under key business risks and in the 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, and good morning, everyone. I'd like to start by thanking our employees for their commitment to each other, to our customers, and for their contribution to our strong results. At Finning, we are committed to building a safe and inclusive environment where our teams are empowered to build customer loyalty. We are executing our plan with discipline and focus, simplifying our business and creating a positive impact for our people, customers and communities. Turning to our second quarter results on slide two. We are pleased with our Q2 results. We are growing our business sustainably and building greater resilience into our operating model delivering record EPS and free cash flow for Q2. This reflects the diligent execution of our strategic priorities. We continue to build population in our end markets with strong new and used deliveries in the quarter from our robust backlog, which will drive future product support growth. New equipment sales are up 12% year-to-date, led by Canada with 19% growth. Used equipment revenues are at 57% in the quarter compared to Q2 2023. This is the third consecutive quarter of more than 45% growth as we increase our participation in this important market. Large mining customers are deploying capital to support their long-term plans to sustain production growth. Mining equipment ordered intake was very strong, reflecting significant strategic wins we announced in May. Mining backlog increased 59% from the end of March, and we've already started to deliver equipment from the awarded deals in the quarter. Four ultra-class trucks and a number of support equipment units were delivered before they even hit backlog. I recently spent two weeks in South America with Greg, meeting customers who produce more than 82% of the country's copper, alongside a senior team from Caterpillar. We are encouraged with the constructive tone of the conversations and the acceleration of plans for increased production from brownfield mines. We expect quoting activity to increase in the second half of the year, and our plans to increase capacity and build new capabilities in the region are progressing well. We've added 18 technicians in South America this year, built capacity at our remand center, and fully commissioned our new automated warehouse, which many of you saw at the investor day last September. We are also seeing more constructive discussions in Argentina and positive news from our large mining customers since the government approved the new incentive program for large investments. Construction activity is generally softer than last year. However, we are starting to see customer sentiment improving. In Canada, we delivered two large construction packages in quarter two, and in the UK and Ireland, Sales are in line with prior year despite a material decline in the market opportunity, with market share increasing and our backlog up 15% in Canadian dollars since the end of March. In power systems, demand is strong in our key markets, notably oil and gas and backup power capacity. We're taking orders for large engines into 2026 and quoting business well beyond that point. Turning to product support, as expected, we are operating in a moderating growth environment. Activity and utilization levels are lower than prior year, particularly in construction and also in some mines. Power Systems product support continues to be very robust. This is resulting in lower construction product support, especially in Canada and the UK, where our business is tied to GDP growth and investments in large-scale infrastructure projects. We believe construction activity is bottoming out in these regions, and we expect to see incrementally better machine utilization hours heading into the fall. We're encouraged by our strong pipeline and growing number of construction rebuilds that we now offer to customers at attractive financing terms equivalent to that of new equipment purchases. Construction markets in Western Canada continue to be in a transitionary phase until we see the commissioning of major infrastructure projects. support, fundamentals and outlook remain strong. I will describe the current situation as dynamic and specific to individual mine plans and customers as they drive optimisation and production growth. This includes shifting rebuilding component schedules and in some cases deferring maintenance to maximise fleet availability. We are also preparing against extremely high growth in the same period last year and we expect this to normalise over time and to grow on an annualised basis. We are encouraged by the sequential growth in our product support revenue, which was up 8% from quarter one, 2024. Our quarter two product support CAGR over the last two years was a very solid 14%. We expect product support growth rates to improve in the second half of the year as we continue to add technicians, execute rebuilds, which were up more than 50% in construction in Canada, and increase physical and digital sales coverage. Greg will provide more details on our product product support performance in each region. Our teams are controlling what is in their control, operating thoughtfully and looking for further efficiencies as we continue to build greater resilience into our business model. We see strong evidence of cost control across the organisation. Our ST&A has a percentage of net revenue of 16.2% in quarter two, which is an all-time low, despite costs in Argentina required to execute our low-risk approach. Over the 12 months ended quarter to 2024, SG&A's percentage of net revenue was 16.9%. We are finalising plans to reduce our fixed cost base and further reduce SG&A's percentage of net revenue going forward. Improving working capital velocity remains at the top of our priorities. New equipment orders are moving through our backlog faster and we are working to execute exchange components and rebuild in a more capital efficient way. This supports our efforts to allow working capital, deliver substantial free cash flow, and $330 million was the highest free cash flow we've ever generated in Q2, and we expect to generate substantial free cash flow in the remainder of 2024. I'm pleased with our progress and encouraged we are finding opportunities to lower our fixed costs and improve our capital efficiency as we increase our earnings capacity and strive to achieve consistency in our ROIC performance. We are making progress in our sustainable growth strategy, importantly in used equipment and power systems, which are critical to our resilience. As mentioned, used equipment sales were up 57% year over year. We significantly increased our participation in used equipment markets and are driving strong volumes across retail and wholesale channels. Power systems markets remain very attractive, both in oil and gas and electric power generation. Our per-systems revenue was up 11% year-over-year, including double-digit growth in product support. Our rental business was down in line with softer construction activity and warmer weather conditions. We remain committed to sustainably and profitably growing our rental market share. Optimism in our outlook is gathering momentum, and we are confident we are on track and we are delivering a track record of execution. In Chile, in particular, The copper mining environment is becoming incrementally more positive. During my recent visit to South America, visiting Chile, Argentina, and Bolivia, I was impressed by the strength and engagement of our talent and our people there. We see optimism building in Western Canada energy sector, with new pipeline capacity coming online and the encouraging effort for LNG development. In the UK, the new government have a strong mandate, and we are optimistic this will lead to greater stability, economic growth, and infrastructure development. Our consolidated equipment backlog is substantial at 2.2 billion, indicative of healthy customer activity and order intake in our end markets. We deal with solid results in the first half of 2024, which is a great platform to build on in the second half of the year. With that, I'll hand it back to Greg.