Finning International Inc.

Thank you for standing by. This is the conference operator. Welcome to the Finning International Inc. Third 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, there will be an opportunity to ask questions. Analysts who wish to join the question queue may press star, then 1 on the telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. I would now like to turn the conference over to Greg Palachuk, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Finning's third quarter earnings call. Joining me today is Kevin Parks, our President and CEO. Following our remarks, we'll 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 accompanying slides will be archived. Before I turn it over to Kevin, I want to remind everyone that some of the statements provided today 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 the 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.

Thank you, Greg, and good morning, everyone. I would first like to thank our employees. We continue to build resilience into our operating model in a more dynamic environment, and the progress we have made to advance our strategy would not be possible without the dedication of all of our teams and their commitment to creating a positive impact for our stakeholders. We are working diligently to simplify our business, build safe and inclusive environments, and empower our people to better serve our customers. Turning to our third quarter results on slide two. Our third quarter results were varied by region and reflect the advantage of our diversified business. Our South American business results continue to be strong. Our UK and Ireland operations remain resilient and our Canadian business performance was impacted by the continued dynamic operating conditions. I was in South America last week and I continue to be encouraged by the very positive customer sentiment in the region driven by mining. We continue to mine blows for growth in the region, and I had the opportunity firsthand to see the progress on our investments to increase our capacity and build stronger capabilities in the Antofagasta region. I also had the opportunity to meet and thank our employees who are supporting our customer growth, many of whom are new and part of our aggressive recruitment and training plans. Activity in the Chilean copper sector remains solid, with strong activity levels from mining customers and contractors. We're seeing customers continue to extend the life of their equipment, as well as other fleets entering major maintenance cycles. This all helps drive product support growth. We're also actively quoting on multiple new equipment tender packages, and we are pleased with the recent $250 million equipment order from a global mining customer in October. At Mine Expo in September, Caterpillar, our partner, unveiled their latest technologies and solutions for the mining industry. We believe these technologies such as dynamic energy transfer or DET build on the success of our electric drive haul trucks and autonomous solutions position us well for future opportunities. In the UK and Ireland, our operations remain resilient in a lower growth environment. We are pleased with the team's execution in a difficult market, having expanded our margin to a solid 6.3% on an adjusted EBIT as a percentage of net revenue basis driven by SG&A reductions. we have seen some green shoots in activity in the construction sector with a pickup of new order activity for next year and power systems activity remains healthy we do remain cautious in the region until we see a more constructive economic outlook we have generated cash consistently throughout the year and the teams continue to focus on building population capabilities and capacity to drive product support executing with discipline and resilience our canadian business continues to be impacted by challenging market conditions We remain committed to executing our product support strategy, and we are growing market share through new and used equipment, which builds population and future product support opportunities. We incurred severance costs this quarter as we continue plans to decentralize and optimize our overhead of our company. We will continue to simplify our operational structure, consolidate functions, and capture efficiencies where possible. We're all focused on driving execution of our strategy, And the leadership transition we announced in September is a positive and well-planned succession. Overall, we are pleased to see revenue growth throughout our business with new use and product support revenues all up in Q3 versus Q3 2023. New equipment revenues in South America were up in all sectors, 14% overall. In Canada, new equipment revenues were up 4% overall with strong deliveries in mining offset by slower construction and power systems revenues. New equipment revenues in the construction segment in the UK and Ireland were up, offset by lower power systems revenues in the quarter. Despite this lower power systems revenue in the UK and Ireland, backlog increased meaningfully due to data center demand. Most pleasing and encouraging for the future is our approximately $90 million building, our backlog relative to Q2 2024, a healthy indicator for our business looking forward. Turning to product support, Our consolidated product support revenue is up 2% year over year. We are seeing strong product support growth in South America from both mining and the oil and gas sectors, and we continue to significantly add technicians in the region to support the growing fleet of mining equipment, with approximately 200 net new technicians added since Q2 of this year. Product support in Canada and the UK are not yet consistently where we would like them to be. In Canada, we have stabilized at a level only slightly below last year, despite the absence of major infrastructure projects and the dynamic mining environment we face. In the UK and Ireland, we are seeing sequential growth each quarter this year, and we see both regions showing signs of improvement as we head into the winter months. Our full cycle resilience continues to improve. We are pleased with another quarter of strong free cash flow as we started the second half of the year. We generated $346 million of free cash flow in the quarter and $746 million of free cash flow over the last 12 months, well in excess of our net income. There is more opportunity for us to drive resilience through the increased velocity in our operations and focus on cost competitiveness. Moving to sustainable growth. Our consolidated use equipment revenues are up 24% year over year. This continues to highlight our success in developing our capabilities and increasing our participation in this market. Our user equipment business in the UK was up nearly 50%. Our South American user equipment business was up nearly 70% relative to Q3 2023, further demonstrating our execution success in this strategic area. In pallet systems, we continue to see strong demand for our products and services. with our power systems backlog of 44% since last quarter from additional wins in the UK and Ireland data centre market as we locked down business well into 2026 and 2027. We continue to see strong demand for power solutions in all regions and expect growth to continue in this sector. We continue to believe the rental sector presents an attractive long-term sustainable growth opportunity for Finning. We've taken a disciplined approach this year given the current market backdrop in construction and taken opportunities to build capability which will drive growth in future years. We're committed to the disciplined execution but building momentum for a strong finish to the year and remain focused on executing our strategy, maximising product support, continuously improving our cost and capital position to drive full cycle resilience and by growing prudently in use, rental and power. all with the objective of improving our road to a sustainably high level moving forward. With that, I'll hand it back to Greg.

Thank you, Kevin. I'll now turn to slide three. Our Q3 net revenue of $2.5 billion was up 4% from Q3 2023. Adjusted EBIT was down 19%, primarily due to lower margins in Canada. Adjusted EPS was down 13%. Lower EBIT was partially mitigated by lower share count and lower effective tax rate, which I'll provide more details on in a few slides. In the third quarter, results were adjusted for two significant items. We incurred $19 million of severance costs related to headcount reductions and consolidation efforts of non-revenue generating positions, including information technology and supply chain roles, as well as some financial support functions. As we continue to simplify our business, reduce overheads, and build more resilience into our operating model. Our Canadian operations recorded an estimated loss of $14 million for receivables from a mining customer who was placed into receivership. following a landslide at their mine. Prior to the event, the customer had been a consistent and reliable customer. This quarter, we continue to build on our strong free cash flow momentum, generating $346 million, bringing our year-to-date cumulative free cash flow to $466 million. On slide four, we show changes to our net revenue by line of business compared to Q3 2023 and the comparison of our equipment backlog by market sector. New equipment sales were up 7%, driven by strong mining deliveries in Canada and South America. Used equipment sales were up 24%, higher in all regions. Product support revenue was up 2% with solid growth in South America, offset by lower levels in Canada and the UK and Ireland. Rental revenue decreased by 12% due to lower utilization factors across all regions. Our equipment backlog was $2.3 billion at the end of September, up 4% from the end of June, reflecting strong order intake from mining and power systems customers. Equipment movement was moving through our backlog very efficiently and deliveries remain very healthy. We're also pleased to see the proportion of power systems backlog increased to 35% this quarter as we continue to execute our strategy to achieve sustainable growth in the power sector. We continue to see solid order intake with sizable orders received in October. $250 million from a global miner in Chile and $90 million from a mining contractor and uranium miner in Canada. Turning to our EBIT performance on slide five. Gross profit as a percentage of net revenue is down 210 basis points, mostly due to lower margins in our Canadian business. Adjusted EBIT as a percentage of net revenue is 10.9% in South America, 6.3% in the UK and Ireland, and 7.5% in Canada. SG&A as a percentage of net revenue is 16.8%. Excluding the estimated loss on receivables, our SG&A as a percentage of net revenue was 16.2%, demonstrating strong cost control. This marks the sixth consecutive quarter where SG&A as a percentage of net revenue has remained below 17%. Building on this momentum going forward will be a key value driver. We executed a restructuring program in the quarter to lower our cost base in a sustainable way and further reduce our SG&A as a percentage of net revenue. These actions are expected to reduce annual SG&A in 2025 by approximately $25 million. We also continue to simplify our business with a laser focus on core operations. We continue to reduce overhead costs and drive greater productivity. As an example of our progress from the end of 2022 to 2024, we have reduced the number of executives, senior level leaders, and corporate head office employees by over 20%. We also continue to drive forward and advance a number of invested capital improvement plans both operational and financial. For example, we recently signed an agreement with a UK insurance company to optimize our UK defined benefit plan. Upon closing, this will improve our annualized consolidated return on invested capital in the UK and Ireland by approximately 260 basis points and our consolidated ROIC by approximately 30 basis points. Moving to South America results and outlook, which are summarized on slide six. In functional currency, new equipment sales were up 14% from Q3-23, driven by deliveries to mining customers and contractors. Used equipment sales were up 68% year-over-year from strong demand in the construction sector. Product support revenue was up 7% year-over-year, driven by strong demand from mining customers and contractors, as well as oil and gas customers. Adjusted EBIT was down 3% from Q3-20-23. Adjusted EBIT as a percentage of net revenue was down 140 basis points, due to a higher mix of new and used equipment revenue, as well as a higher proportion of mining equipment sales. As well, SG&A was 17% higher, primarily due to 11 million Canadian of cost owing as a result of reentering the official foreign exchange market in Argentina. These costs were largely offset at the net income level by a lower effective income tax rate, primarily driven by unrecognized losses utilized in Argentina. Argentina operations remain profitable in Q3. Our outlook for Chile mining remains strong, underpinned by growing demand for copper and solid levels of quoting tender and award activity for mining equipment and product support. While activity levels and outlook remain positive, we also expect continued challenging environment to attract and retain qualified labor. In Chile, we continue to see healthy demand from large contractors supporting mining operations, and we expect infrastructure construction activity to remain steady. In the power system sector, activity remains strong in the industrial and data center markets. In Argentina, while we're seeing near-term pockets of strong activity in oil and gas, along with renewed optimism as the new government programs are helping drive large-scale investment by global miners, we continue to monitor the government's new rules and policies, and we'll take a low-risk approach. Turning to Canada on slide seven. New equipment sales were up 4% from Q3 2023, driven by mining deliveries. Product support revenue is down 3% from Q3 2023 due to mixed activity levels in the mining sector as large oil sands customers continue to optimize their mine plans and scope of contractor work, which led to deferral of maintenance spending. We're also seeing slower recovery in activity by customers in the construction sector. Adjusted EBIT was down 31% from Q3 2023. Adjusted EBIT as a percentage of net revenue of 7.5% was down 330 basis points, with lower gross margins in all lines of business. New equipment sales had a large proportion of mining equipment in the mix, and we expect that to be the case in the fourth quarter as well. Used equipment pricing was lower as we proactively managed our inventory levels, considering higher inventories in the used equipment market in general. We're now seeing improved margins on recent trade-ins and sourcing activities. In the quarter, we sold approximately 150 million of inventory at low margin, which supported our very strong free cash flow and prioritization of continued inventory health. The rental equipment market remained challenged as fleet utilization was below what we would be expected in a normalized environment. We also had a lower mix of product support revenue and smaller size equipment rebuilds in the quarter. Canada's SG&A expense, excluding the estimated loss for receivables, was lower by 2%, reflecting solid cost containment. However, it was not sufficient to provide a material cost offset to the lower gross profits. Thus, our focus moving forward goes from cost containment to cost reductions. We expect continued spending discipline from our large mining customers as they work to achieve operating cost targets. In several cases, our integrating acquisitions or adjusting to recent divestitures. Customers continue to optimize mine plan, adjust scopes of contractor work, and defer maintenance spending. We expect continued headwinds in the used and rental markets following a period of strong sector activity and limited equipment supply. We see pricing utilization in these markets starting to normalize and expect this to last the next several quarters. Please turn to slide eight for our results on the UK and Ireland. In functional currency, new equipment sales were down 3% compared to Q3 2023, the slower demand from certain industrial customers. Used equipment sales were up 49% year over year, mainly from increased volumes in the construction sector. Product support revenue is down 2% from record levels in Q3-23, which had very strong activity in the power sector. Compared to Q2-2024, product support revenue were up 3% as we captured more rebuilds and machine hours trended higher. Adjusted EBIT as a percentage of net revenue was up 40 basis points to a solid 6.3%, driven by a focus on cost control, with SG&A expense down 10% from Q3-2023. We expect demand for new construction equipment in the UK and Ireland to remain soft in line with low GDP projections. We continue to expect a growing contribution from used equipment and power systems and resilient product support as we execute our strategy. We'll continue to focus on product support growth as a key value driver going forward. However, growth rates in Canada and the UK have remained lower than expected over the last year due to slower infrastructure spending and extended deferral of mining equipment maintenance in Canada. and lower activity levels in the UK and Ireland given more challenging growth environment. These rates of growth required in 2025 to fully catch up our 2023 Investor Day product supports targets now exceed our current expectations and therefore withdrawing our product support growth targets. We will continue to focus on maximizing product support growth in each region as a key value driver going forward, as a primary driver to achieving consolidated adjusted ROIC within our 18 to 25% range. To conclude, Q3 was a quarter where we benefited from our diversified business. Free cash flow was robust. Our cost control was strong. Our ongoing backlog build is solid. And our South American results were excellent. And we're taking action to improve our Canadian profitability. Operator, I'll now turn the call back to you for questions.

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 today comes from Yuri Link with Canaccord Genuity. Please go ahead.

Good morning, guys.

Morning, Yuri.

Morning. I don't know who wants to take this one, but can you clarify your 2025 outlook for product support growth in South America, given you pulled the consolidated target, but you did note you expect continued strength in that region?

Yeah, so I'll take that, Yuri. So, yeah, we still expect the product support growth in South America to be strong as we move through into next year and into 2026. We're building capacity and capabilities, as I mentioned, that I visited the region last week and saw those. We've got 22 work bays coming on stream in Antofagasta in the next six months. We've made some big investments into the PDC. And as I noted in my remarks, we've added 200 technicians in the quarter. All of those things are going to point to continued growth. as we move forward, and we're really encouraged by the execution that the team are, and the way they're performing down there right now.

Understood, but just to clarify, is the north of 8% CAGR target, that's not in play anymore, right?

We're not going to isolate it by region. You're really looking forward to markets been very dynamic, but product support in South America is very strong and will continue to be very strong as we move forward. Very strong.

Understood. Okay. Last question. What's been most surprising in the Canadian product support business and how long do you feel the the deferral of maintenance can continue and what does your backlog or rebuilds look like for 2025? Thank you.

Yeah, so I think you highlighted it there in the question. I think the thing that we're still trying to work through and we've described that environment as dynamic because it's very mixed by different, even within different mines, within different customers. And so some mines are progressing as we'd expect, some not as we expect. So I think I wouldn't say it's a surprise, it's challenging to see forward at this moment in time. The maintenance and the readables activity in the mining sector, that would be the biggest driver of the challenging product support in Canada. I think we expected construction to be slower, given the absence of major infrastructure projects, notably the pipelines and Site C. that you know that really hasn't picked up through the course of this year and you know obviously as we enter the winter season in canada we don't envisage that picking up for another quarter or so um you know order intake and sentiment is is better for next year in in construction generally in all three regions um we kind of expected it to be but it would have been at the lower end of our construction expectation so yes the the biggest challenge we've had is trying to pinpoint the opportunity and the execution within the mining in Canada. Thanks very much. Thanks, Yuri.

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

Great. Thanks and good morning. Maybe just kind of following up on that last comment and just going a higher level into Canada. You know, the direction when we look at the outlook commentary, it's not materially different from what you've said in the past. I just want to understand, you know, did something change in the sort of the sentiment of the customers? Was it just maybe a low investment environment that dragged on? If you can maybe just contextualize sort of the evolution of the Canadian market, you know, what maybe led to some of the margin drag that we saw this quarter, and just maybe provide perspective on how do you see that evolving kind of into 2025? Thank you.

I'll talk about how we're feeling sequentially in Canada, and then Greg can talk to some of the margin situation there. Quarter over quarter, I actually feel better about Canada. To Greg's closing remarks there in his update, The reason why we've withdrawn the guidance is because we're not confident yet that we can see the level of growth in 2025, which would put us on the two-year trajectory, so 7% per year in Canada. So that's why we've removed that. Net-net, I feel more positive about Canada, actually, from previous quarter into this quarter. And yeah, we continue to maximise all of the opportunities that are available there. And we are seeing some signs of movement and increased spending in that area. So I guess net-net, I feel better. But it's a different situation to have to cover off the absence of the growth that we've seen this year over that two-year commitment. Greg, do you want to talk about the margins?

Yeah, on the margin side, I mean, part of it is us prioritizing free cash flow, and we do have good availability for equipment for next year. And there was some inventory where we wanted to make sure that we moved it within the quarter. We got it into the hands of good customers that are good product support customers, and it was helpful in generating a lot of cash. So that was one of the dynamics. The other was just, I mean, the way the quarter played out, you know, the last couple of years post-COVID, You know, the summer has been slower and then September has been extremely strong. That just didn't play out this year. You know, customers did delay some activities, you know, some probably waiting on some of the lower interest rates to come through on financing. Others on the mining side really pushing through production and the contractors haven't got clarity yet on what the winter plans really look like and 2025 looks like. So not a lot of confidence amongst that group, some real delayed decisions, even through September. Um, September would normally be by far our strongest and it was, it was frankly a little weaker than August. So that's just some of the, how the evolution played out. Um, but we can see line of sight in each category to what was unique within the quarter and the 150 won't replicate. Um, and the others you can see rental started to take up on utilization. As I said, used, um, we're starting to see better margins on the, uh, recent sourcing and trade-in. So that's, that's helpful. And overall product support, you know, we continue to have a larger population and we'll continue to work through that. And we do think there's a lot of machine hours logged that will need maintenance in the future. And we'll have to see when that completely plays through.

Great. Thanks for that. And then maybe just associated with that $150 million of used equipment sales at lower margins, maybe just a thought process there. Was it just sales you were going to undertake anyway, but there was pricing pressure or was it more of a cautionary here, let's move the inventory and focus on cash? Maybe just walk through the pricing environment as well as maybe the thought process behind just the sale of that inventory. Thanks.

Sure. And just to clarify, that's not 150 million of used, that's new and used. So a portion of that would have been RPO conversions with a few incentives. Um, some of it would be new equipment, um, where we saw some aging that we wanted to take action and we could get it into the hands of the right customer. And then a third would be used. So it was balanced across the board. Um, you know, really happy to generate 330 million of free cash flow in the quarter and, uh, continue to expect that strong trend and through the end of the year, but the vast majority of that's coming from Canada and that's just cash we wanted to generate. And, um, we got. some good market share opportunities. We're put at the hands of the right customers and we have good availability for orders next year. So we just wanted to move that through and it's a choice we made during the quarter.

And I would add to that, Sabah, that we're building capabilities in used equipment. And so it's a lot more used equipment sales at a little bit less margin or normalized margin. And, you know, those capabilities are helping us to make sure we make the right decisions in that regard. Maybe previously we wouldn't have been so proactive. There's clearly, as you've seen in the market and seen with other companies, there's clearly an excess of used equipment in the market right now and prices are normalizing or just below normalized levels. And so to take really proactive and aggressive action there is a function of the new way that Finney is participating in used equipment, but the business is growing too.

Okay, great. And then just one last quick one. Just on this comment around South America and just a more challenging environment for attracting and retaining qualified labor, is that just a comment on excess demand in the copper market and tightness of labor? I just want to understand what's driving that. Thank you.

Yes, I mean, that's an absolute planned activity. We're adding about nearly 100 new people a month in South America. It's a very organised and well-executed plan. People who joined us on the Investor Day last year will have seen our education facilities down there and how we're reaching out much more broadly into a wider base of potential employment pools. And so that's fully planned. I wouldn't describe it as a tightness in labor. It's a planned execution to support the growth that we are currently experiencing and think that's going to continue. I would say that the growth that we're experiencing or the mobilization for growth in South America or particularly in Chile is probably a little faster than we anticipated this time last year. And so that is causing some strain and tension in terms of making sure we have the right labour force and making sure we can train them and they can work safely and competently. But that's all a positive.

Thanks. Appreciate it.

Thanks, Simon.

The next question comes from Sherri-Lynn Radborn with TD Callan. Please go ahead.

Sherri-Lynn Radborn Thanks very much and good morning. I wanted to pick up on the discussion regarding the product support guidance. I think I understand what you're saying completely in that product support is up about 1% year to date and so it would require a pretty massive re-acceleration next year to get to 7% as an average for the two years. I guess what I'm curious is what visibility do you have to a re-acceleration in product support growth next year by region? If you could just give us some comments, that would be helpful.

Yeah, sure. Your summary of the situation is accurate, so thank you for doing that. In terms of visibility as we look forward, I would say good visibility in South America and a strong outlook down there, not just in Chile, but in Argentina, mindful of the fact that we are taking a cautious approach in Argentina. So I would say good visibility to good growth levels in South America. In Canada, a little bit mixed. I would say I expect continued softness in construction, especially through the winter months here in Canada. But I do expect some trajectory or momentum build in mining. But the visibility is difficult. That's why we've described it as dynamic a couple of times. And we choose that word really carefully, Sherilyn, because it is very different by different mine sites. But I would say that visibility in Canada is improving and it would be more encouraging than not. And then in the UK, because of the propensity of construction activity, I would say we don't necessarily have great visibility to what that's going to look like. We don't really have a construction seasoning in the UK and Ireland, but it does slow down a little in the winter months. Obviously, they have a new government there now, so we expect some announcements about major infrastructure projects. Um, but I would say that we are pleased with the sequential growth in the UK throughout the course of this year. And you've seen that through the impact of that through, um, the margin expansion coupled with the, you know, the efficiency and optimization of invested capital. So I would say, you know, limited visibility in the UK, but some green shoots, um, you know, not a lot of visibility in construction right now, but we are very, very focused on execution, some encouragement in Canada in mining. And I guess overall, we should say that, you know, power, good visibility to growth in power and product support, but it's obviously a much smaller part of our business. Does that help?

That is really helpful. Thank you. And in terms of the behavior that you're describing in mining in Canada, is that primarily in the oil sands or is that also across things like copper and gold?

I think it's more broader. It's primarily the oil sands in terms of the impact on our Canadian business, but I think there is a kind of what I call a perfect storm happening in mining where miners are looking at the future in terms of their growth and production capacity improvements. They're absorbing that with phase two or extending it. Every mine that we visit now is embarking on a brownfield phase two right now, and so lots of discussion around the best way to execute that expansion. There are some mines that have significant mine plan changes to go through and there's a calibration around where the commodity price stabilises at and operating costs given we've all been through a high inflationary period and that includes labour and products and services. i call that the perfect storm and i think finnan is and with our partner caterpillar we're really well placed to help our customers navigate that um you know but it is it is more it is a broader based discussion than the oil sands but the impact on our business is for canada would be weighted towards the oil sands in terms of that comment okay great and then one last one for me um

I did want to pick up on your comment, Kevin, that you feel better about Canada quarter over quarter. And I wonder if you could just sort of weight that between internal things that you've done, you know, the severance, the inventory reduction versus sort of green shoots that you're seeing in the market.

Yeah, I think it's probably a balance of a couple of things and then You know, I've balanced both of those things. I think there are some green shoots. Like I said, if you're asking me if I feel better about Canadian product support today versus the last call, yes, I do. Okay. You know, it's hard to quantify and, you know, be precise about that. But I also feel very good about the actions that we're taking in Canada to improve earnings performance. So as you've seen the playbook in the UK play out, I'd say the way I would look at it is if you look at the UK and Ireland trajectory, I would say that Canada's two or three quarters probably behind that. But we know what the playbook is. We know what we have to do. Canada is a bigger player. a bigger ship to turn, but we're confident we can do that. And obviously, as we mentioned in my remarks, you know, we've had a leadership change in Canada and driven by, you know, a retirement of the executive and my executive team. And we really wanted to give Tim the opportunity to get, you know, get into this quickly and early, hopefully have an impact in Q3 with his team, his new team, and build some momentum in Q4 and take that into 2025. So I think it's a little bit of a green shoot, confident in some actions in the playbook, and then leveraging the leadership change.

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

Yeah, good morning, guys. Thanks for the time. Just circling back to the Canadian margin topic, is it possible to attribute or quantify how much of the 330 basis point decline year-over-year was associated with this $150 million moving inventory? Yeah, it would be about a third. About a third, okay. And then the balance of the two issues being mix and rental utilization skewed more towards mix. I presume season rental is not that big.

Yeah, a portion would be volume with product support being down, rental being down. Those are two of the higher margin businesses. So those would be two of the drivers. There's some things on the edges like $4 million down on our PLM joint venture, which has some pause in activity in the U.S. That didn't help either. But yeah, I'd say about a third was within that category. Okay.

Okay, that's helpful. And I think as you described earlier, that's not to repeat the inventory adjustment process. This is largely completed here.

Right, you know, we've got a little bit more in Q4 that we'll continue to work through as we do most Q4s, frankly. But certainly, yeah, not at this scale.

Okay, that's helpful. And then just circling back to the idea of, you know, product support more broadly and your broader targets around this all. Carolyn had asked a question around the momentum Is there specific issues in the oil sands that are allowing these customers to defer so long? We see these record production numbers that the largest producers are pushing out. I presume they're bringing equipment pretty hard to accomplish those tasks. Maybe just walk us through how they're able to defer so easily while they're pushing record numbers and ultimately how long can they defer?

Yeah, so I think, you know, It's a moment right now, Steve. I think for sure the warmer winter last year, I think other companies have talked to that as well. The warmer winter last year was unique, well not unique, but it was abnormal and it helped and it deferred some overburden and some preparation work. We think that will start in this, as we head into this winter. But we're pretty warm here in Alberta right now. But so I think that equipment utilization and productivity and reliability continues to improve. If you take Curl, for example, we had a customer event last night here in Calgary with our board. Speaking to Curl, they're very happy with their autonomous solution that's driving some real productivity benefits. And I think customers, as we're trying to find a way to optimize our business, the mines are always looking to find ways to squeeze more productivity out of the assets they have or even run the mines with even less assets. So as we move forward, we'll understand a little bit more about the deferral of that activity. But we're super focused on making sure when that activity is more prevalent, we're well positioned and well organized to help our customers and execute on that.

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

Good morning. Just wanted to go back to South America, and you talked about good visibility there in 2025. Am I thinking about this correctly, that in 2025, you're going to see robust new equipment growth, and in 2006 is when you really start to see the product support kick in?

Yeah, I mean, I certainly don't want to get into two-year projections, but just from a pure equipment population, the number of trucks that we've delivered, the amount of support equipment we've delivered, even construction, some market share improvements in certain important pockets, that's certainly the trend. And so, you know, I do continue to see it being very strong, driven by population and encouragement in the macro, particularly around copper. I don't think we'll get into talking about 2026 projections just yet, but the direction of travel with the fundamentals is strong.

And what do you need to do to get right size on the parts and service side and the rebuilds in South America? Or do you feel you're there right now?

In terms of right size in terms of growth, Jacob?

Yes, on the product support and the rebuilds and everything else in South America. Yeah, so I mean like that,

As I remarked, I was in the region last week. I went from our CRC. We're spending $20 million in the region to expand our CRC, as we outlined at the Investor Day last September, and that work is well underway. I then moved to the parts distribution center and saw our new auto store, which is massively increasing the productivity of the lines we can pick every day in the warehouse. Super impressive piece of technology. I'll then move to our equipment rebuild and new equipment preparation. We're now preparing between 8 and 9 798s any given day and delivering a truck a week there. And as I mentioned, we're adding 22 bays, a mix of construction, contractor and mining bays in Antofagasta. That workshop should start to be operational in the next three to six months. And then obviously the big number is adding, you know, 100 technicians there or thereabouts a month. You know, I think I described that as a 200 net in Q3. And so all of those things are in service of facilitating that growth and right sizing.

Okay. Maybe my last question here, just as far as some of the restructuring and the staff reduction, I think you heard You say that you reduced it by 20% at this point. Just curious, what's left to do and what are the areas of focus right now?

Yeah, so the area of focus is highlighted, particularly around IT supply chains and finance functions. But in general, we want to reduce the overheads of the company and non-revenue generators, have as many mechanics as possible and as a percentage of the workforce. So that's going to continue. I do think one of our biggest value drivers over the last five years has been our improvement in SG&A percent and how much that's added to earnings capacity. And we're going to keep working towards that. And so we look at the product support not being at the growth levels we wanted. We want to make up for that in terms of SG&A reductions to offset so that we can keep driving earnings capacity in ROIC. So we're going to keep working on that. That's not going to be, this isn't the last one. We'll keep working to be as efficient as we can. And it goes in phases here. But I can see it every day that we're getting more efficient. And I think our strategy really helps us prioritize our resources and have a clear approach. And that allows us to do things just much more effectively.

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

All right, thanks. Good morning. Look, I just wanted to maybe come back to Canada, look at maybe the rebuild. How does that pipeline look now, and are you expecting that mixed shift towards smaller equipment to continue in the coming quarters?

Yeah, so I think we've had, since the summer here, we've had, particularly in construction in the U.K., And in Canada, we've had a renewed and reinvigorated focus on building that rebuild pipeline. I would suggest that the rebuild pipeline is not at the levels we saw in the major supply constrained moments, but it is significantly higher than the pre-pandemic or the pre-supply chain. Christian, we've always said that we believe that rebuild proposition and execution is materially different than pre-pandemic, and we expect that to be stickier. We have seen a shift to smaller equipment. As you work through your rebuild population, we continue to, so if you think about rebuilding a huge machine, as you come down the value chain, the rebuild economics become more challenging, but the teams are so focused on on improving, on making sure we can hit the rebuild economics. So every time they go again, they bring more smaller equipment into scope in terms of rebuild economics. But that is a factor. And I would suggest that when you're doing that, also the scope or the quality of the rebuild in terms of how comprehensive it is, reduces. So that is a factor as we look forward.

And then on the larger results, I mean, there are ongoing conversations on the larger scale of programs at scales that we're pleased with. The timing is just the question mark.

We have just completed, we are just in the progress. Sorry, Devin, I would just add, sorry that we, you know, we are in the progress of rebuilding and two large mining trucks in Canada for a customer that hasn't rebuilt before as those machines start to enter that window. So it's part of that encouragement. We spoke about it on a couple of the questions here.

Okay, makes sense. Thanks for that. And then maybe wrap up with a question for Greg. We're just wondering how we should be thinking about rental investment in 2025 and just, you know, is it relatively balanced across the various fleets?

Yeah, I mean, the focus has been on capability rebuilds or capabilities within the sector. We've had some good people come in and have a good perspective on some of the fundamentals that we need to make sure we get right. So we're going to keep an eye on the market conditions. We have obviously done some retooling of the fleet and optimization of the fleet. We are starting to see utilization factors move up even unseasonably. So that's a good indication. And so we'll keep an eye on that. But, of course, it's going to be market dependent and the market needs to improve quite a bit here.

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

Hi, good morning. I just wanted to touch on a few other topics. You know, energy customers in Canada, just given recent developments in U.S. politics, How are they thinking about expected tariff exemptions for Canadian oil and gas and how a drive to ramp energy production by U.S. administration may impact them?

Sure. I mean, obviously, it's pretty early to tell and there's lots of discussions around tariffs and where it'll apply or not. Certainly, the Canadian media that looks at it thinks that, you know, low energy costs are pretty important to Americans and that would put production likely excluded from there. So I think that helps the Canadian producers in general. But it's obviously pretty early to tell what exactly those will be and what segments and customers would be impacted.

Understood. And in terms of your backlog shift, construction's about 20% of the mix. That's approximately half of what it typically is. understand that there's been strong power systems demand in weaker construction markets at the moment, but is this a trend you expect to see persisting over the coming few years and what impact, if any, might it have on product support going forward?

Yeah, so I think, so firstly, we're encouraged by the product support, sorry, the backlog build in power across all three regions. And as we said, that, you know, that build is a function somewhat of, you know, And it's not just lead times in power systems. It is extended planning. And so the lead time extension into 2026 is not a function of supply necessarily. It is a function of the customer's planning much further out for data center build. And so that kind of long-term planning means the power systems units are in backlog for longer. And so that's impacting the mix of total backlog, skewing it towards power systems. The availability improvement within construction is also a factor. And so things are moving through there faster. I think we described new equipment sales for construction equipment being up in all three regions. So we're selling it through a lot faster. um and then you know mining as we've always discussed sheriff is lumpy and so it can move from quarter to quarter as we as we deliver the product so you know i i wouldn't you know i would say that construction equipment is um is probably lower as a percentage than we would see typically moving forward and as we go into the selling season here we would see that build as we normally do in the early months of a new year um but certainly the proportion of power systems is probably something that will continue into the next couple of years. Thank you.

The next question comes from Maxime Descroix with National Bank. Please go ahead.

Hi, good morning, gentlemen. Hey, Max. Kevin, maybe a first question for you, if I may. Kind of as we think about sort of longer-term trajectory for SG&A's percentage of revenue, I'm wondering if your thought process has evolved, you know, potentially on the topic on a going-forward basis. Thanks.

Sorry, Max. Can you just repeat that? Was that for me? Sorry, Max. Can you just repeat the question?

Yeah, yeah. Just in terms of SG&A as a percentage of revenue, obviously you're already at 17%, and I'm just, you know, wondering... How are you thinking about, let's call it, flat-ish revenue generation and the operating leverage that can be driven through this line item? Thanks.

Yeah, so we still feel like we've got another crown contest. G&A, I think we get a lot of questions about when will it be done? It'll never be done. I mean, we're continually striving to optimize our business. We're decentralizing and simplifying all the time, we have to reconsider lots of aspects of our business to make sure that we remain competitive in the marketplace. We don't control the whole market, and so we have to make sure that we control our controllable and that we can operate effectively. I think the UK playbook is a good example of that. As I would say, with the leadership change in Canada and fresh eyes, I would expect that Tim will be able to think about some new opportunities there and help us. It is our biggest business, and so it has the most material effect on our overall SG&O as a percentage of sales. And so I would say that we would continue to see a downward trend there.

Okay, that's good to hear. And just one quick follow-up on parts. I remember when we went to Chile, there's some projects you're working on I mean, if some of that stuff would be applied to, to Canada or there's something that maybe structural prevents you from implementing the same, um, so kind of parts, uh, sorting technology and, and things like that.

Yeah. I mean, just quite simply, um, actually was the availability of the technology. I mean, so we, you know, we've, uh, our new Edmonton West warehouse, um, is, uh, is a huge advancement on what we've had previously. And, uh, But we had a certain technology available to us when we executed on that, given the timings and moving out of our previous distribution centre. And then the technology that we've deployed in South America is now available in Canada. So the team will continue to look at how they... The team presented a business case to me less than three weeks ago about bringing that technology to our Edmonton distribution centre in Alberta. And given how successful the implementation has been in Antofagasta, I would think it's highly likely that we'd move forward with that, obviously subject to capital allocation priorities when we review our renewal operating plan over the next few weeks.

Okay, that's great. And then just a couple of quick ones for Greg, if I may. So in terms of if we're thinking about, again, kind of like Flourish Revenue as a base case, Can we expect additional freeing up of working capital on a prospective basis, or that's kind of as good as it gets?

Yeah, absolutely. So our investor day plan is what we're executing, and we are prioritizing our working capital and some of the lower activities. We're really pleased that free cash flow year-to-date is above net income, and we want to see that continue to drive forward here. We highlighted a $450 million of unlock at Investor Day. And as you highlighted regularly, free cash flow is best when the market flows down a bit. Of course, we're seeing that now. And so we're looking to have free cash flow $450 million above net income over the next couple of years. And we're making good progress on that, having over $300 million for each of the last two quarters. And we aim to finish the year strong. So we'll keep working our way through that, generate a lot of cash. and make some good capital allocation choices from there.

Okay, excellent. And then just on your last point, capital allocation. So like on NCID, do you mind just reminding us, like in terms of the triggers that you guys are kind of using there, like how much discretion do you have? Was it basically kind of like an automatic program and, you know, the machine is going to buy below a certain level? Yeah, just any call there, thanks.

Sure. I mean, from an NCIB perspective, we have a business plan. We look at the discounted cash flow. We have a view on value. And we want to make sure that our leverage is in check. But as we're generating cash, we're allocating towards share buybacks. And we've been really consistent about that for a number of years. And we plan to continue doing that. So I wouldn't look too much into timing. We're looking to be consistent there. And as we have more cash, we're looking to do more. And that's going to be the continued trend.

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

Oh, hey guys. Sorry. I was just curious on the buyback as well. It sounds like it's going to be fairly rateable going forward. Thank Greg. Is that the takeaway? Sorry.

Yeah. I mean, we'll keep evaluating the business plan through budget season. We'll keep looking at where the share price ultimately lands, but yeah, we do plan to unlock more capital and we do continue to see it as a a good value, so it's a trend that you should expect to continue.

That's great. And just on the SMA cuts really quickly, how much of that should we expect to see in the fourth quarter? It sounds like this has been a fairly recent process. Will that start to show in the fourth quarter, I presume?

Yeah, it was over half done in Q3, and it'll be fully complete within Q4. You've got to take half the run rate for a quarter. Yeah, thanks.

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

Okay, thank you, operator. This concludes our call, and thank you for participating, and I hope everyone has a safe day.

This brings an end to today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.