Finning International Inc.

Thank you for standing by. This is the conference operator. Welcome to the Finning International Inc. fourth 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 and then one on their telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and then zero. I would now like to turn the conference over to Greg Palaszczuk, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to Finning's fourth 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 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 slide 11 and 12 for important disclosures about forward-looking information, as well as currency and specified financial measures, including non-GAAP financial measures. Please note the forward-looking information is subject to risks, uncertainties, and other factors as discussed in our annual information form under key business risks and in our MD&A under risk factors and management and forward looking information disclaimer. Please treat this information with caution as our actual results could differ materially from current expectations. Kevin, over to you.

Thanks Greg and good morning everyone. I'm pleased to talk to you today about our 2024 performance. Following my remarks, Greg will provide more detail on our fourth quarter results. I would like to express my gratitude to our employees for their commitment to make it a positive impact on one another our company, our customers, and the communities in which we work. Through robust execution of our strategy, we are striving to build a strong, resilient business and a safe and secure workplace where our employees are empowered to build customer loyalty. Please turn to slide two. We are really pleased with the overall growth of our business. The geographic and market diversity of our business was critical to our strong performance in 2024. And this diversity will remain important as we move through 2025. In 2024, we grew net revenues by 6% over 2023 to $10.1 billion, a new milestone for our company by building equipment population and strengthening our product support capabilities and capacity. Our product support revenue alone was $5.5 billion, and it's a record high. and it's approaching the same level as our entire company revenues in 2020. This scale is a direct result of execution of our strategy, and when combined with a simplified, focused organization and operational discipline, this has enabled us to unlock a new level of earnings capacity. Our growth in 2024 was achieved through record high revenues in most lines of business, led by strong new equipment sales up over 10%, as well as used equipment sales up nearly 30%. We also grew our backlog during the year by over $550 million, an accomplishment we're very proud of, which represents the diversity in our geographies and our markets, and our partnership with Caterpillar to win strategically and critically important business. In 2024, we grew product support revenue year over year by 2%. led by a 6% increase in functional currency in South America. Importantly, we're exiting the year with solid momentum in all regions, with Q4 2024 consolidated product support revenues up 6% relative to Q4 2023. In South America, excluding the impact of a weaker Chilean peso to US dollar, product support revenue was up 8% year-over-year in Q4 2024. We continue to build capacity and capabilities to capture opportunities in this growing market, adding nearly 350 net new technicians during the year. In Canada, we saw product support levels stabilised quarter over quarter, reflecting strong activity levels in the power sector, related to oil and gas activity, and higher spending by mining customers, offset by continued slower activity in construction. Product support in the UK and Ireland is showing signs of improvement, exiting Q4 with a year-over-year increase of 5% in functional currency, with solid activity in rebuilds and power systems. We continue to focus on maximising product support revenues across all regions. We are pleased with the progress we are making in building a greater resilience into our business. Our SG&A's abstention of net revenue was 16.3%, a new low level, and this is a result of our continued focus on cost management across our business. We also delivered significant free cash flow in the year of $865 million, while at the same time delivering $3.80 of adjusting earnings per share. The last time we achieved this level of annual free cash flow, our adjusted earnings per share was $1.14. While we have made progress advancing our resilience initiatives, we believe there is more opportunity for us to improve our cost structure and working capital efficiency, and Greg will share an update later regarding our progress to increase invested capital velocity. We are making progress against our strategic priority of sustainable growth. We continue to develop our used equipment capabilities, including launching fused equipment a brand-agnostic online marketplace to expand our presence and participation in this important market. In power systems, we continue to see healthy demand for our services, with power systems revenues up 14% year-over-year, with strong contributions from all regions. Importantly, our power systems backlog was up 70% from the end of 2023 to approximately $860 million, driven by a 150% increase in multi-year data center backlog in the UK. In Canada, we saw healthy activity in power systems in the oil and gas industry that drove a 15% increase in power systems revenues. While in South America, power systems revenues were up more than 30% on strong oil and gas sector activity in Argentina and data center deliveries in Chile. Our rental business was softer than we anticipated, driven by the softer construction activity in Canada. but I want to reiterate we remain committed to growing this important line of business in the long term. Before I turn the call over to Greg, I wanted to just share with you some more information about some visits I've had in the regions this year. Two weeks ago, I was in South America, and each time I visit, I'm more and more impressed by the growing capabilities and the team's commitment to executing the strategy in the region. I had the pleasure of touring our expanding facilities in the Antofagasta region, met with our ever-growing team, and visited some critical and important customers and operations to discuss both execution and growth opportunities. We achieved record net revenues in 2024 in the region, and we delivered backlog and expanded our maintenance and repair contracts. We're optimistic that our mining customers in the region will continue to refresh and expand their fleets in many cases incorporating autonomous and electrification solutions. We are definitely mobilising for growth in the region, as we highlighted in our Investor Day in September 2023, and we are excited for our business in the region in 2025 and beyond. I also visited the UK and Ireland last week, where I met with new members of our leadership team, employees and customers. I had the pleasure of travelling to Ireland on Thursday, where I visited with a customer who's recently awarded us a significant agreement to supply new quarrying equipment to multiple sites both in Ireland and the UK. We then crossed the road to visit a data center site where we are supplying more than 60 megawatts of standby power. We're supporting both of these sites with long-term maintenance contracts. Despite continued soft market conditions and activity levels, We are showing signs of improvement in the region with solid order activity added to the backlog in the quarter. The UK and Ireland team has done a great job in controlling the controllables, managing costs in a lower growth environment and creating more sustainability in our operations. We're excited to promote Gary McGarrel as Managing Director of the UK and Ireland Leadership starting January this year. Gary has more than 25 years experience in the business, and we strongly believe that he will continue to sustainably grow this resilient business. In Canada, we have seen activities modestly improve, particularly in the oil sands. However, we remain cautious given customer discipline and the continued political landscape. We're exiting 2024 with substantially better product support sales and earnings before interest and tax. and we believe the market should improve as we move through 2025. Tim Verwerda has assumed the role of President of our Canadian business, and we are confident he will leverage the excellent work he led in the UK and Ireland to accelerate our strategic execution in our largest dealership. Our focus in 2025 will remain squarely on executing our strategy to maximise product support, drive full cycle resilience, and grow our US rental and power businesses to improve our return on invested capital. With that, I'll hand it back to Greg.

Thank you, Kevin. And I'm turning to slide three. Our Q4 net revenue of $2.6 billion was up 7% from Q4 of 23, led by strong growth in new equipment sales and product support revenue. EBIT was down 4% from Q4 of 23, adjusted EBIT to $223 million, primarily due to lower earnings in our Canadian business, partially offset by substantial improvements in the UK and Ireland. EPS of $1.02 was up 7% from Q4 of 23 adjusted EPS to a record level for Q4, reflecting our cost and capital resilience along with the benefit of a lower share count. Overall, we're pleased with the fourth quarter performance marked by healthy customer activity in the mining and power sectors, as well as diligent execution of our strategy across all regions. Our South America team delivered double-digit year-over-year product support growth, revenue growth, Our Canadian team demonstrated strong resilience despite challenging market conditions and achieved sequential EBIT improvement, and our UK and Ireland team more than doubled EBIT compared to Q4 of 23. Pre-cash flow delivery continued in the fourth quarter at nearly $400 million. I'm now turning to slide four. We showed changes in our net revenue by line of business compared to Q4 of 23 and the composition of our equipment backlog by market sector. New equipment sales were up 12% driven by strong mining deliveries in South America and power project activity in the UK and Ireland. Rental revenue was down 14% from reduced fleet size and lower utilization levels. Product support revenue was up 6% with solid growth in South America and the UK and Ireland. Our equipment backlog of 2.6 billion at the end of December was up 27% from the end of 23 and up 14% from the end of September of this year. Sequential backlog build reflected strong order intake from mining and construction customers, while delivers continued to be efficient. Turning to EBIT performance now on slide five. Gross profit as a percentage of net revenue is down 140 basis points, primarily due to higher proportion of lower margin mining equipment deliveries in both South America and Canada. Meanwhile, we remain focused on cost control, with SG&A as a percentage of net revenue down 30 basis points to 16%. We'll continue to build on this momentum to achieve a more resilient cost structure and drive higher earnings capacity going forward. Q4 EBITDA as a percentage of net revenue is 10.9% in South America, 8.1% in Canada, and 5.8% in the UK and Ireland. Moving to our South America results and outlook, which are summarized on slide six. In functional currency, equipment sales were up 29% from Q4 of 23, driven by strong mining deliveries. Product support revenue was up 10%, driven by strong demand for mining and oil and gas customers. EBIT was comparable to Q4 of 23 adjusted EBIT, and EBIT as a percentage of net revenue was down 170 basis points, primarily due to a higher proportion of lower margin mining equipment deliveries, partially offset by lower SG&A as a percentage of revenue. Our Argentina operation remained profitable throughout the year. Our outlook for Chile mining remained strong. underpinned by growing demand for copper and strong copper prices, as well as solid levels of quoting, tender, and award activity in the mining equipment and product support space. While activity levels and outlook remain positive, we continue to expect continued challenging environment attracting and retaining 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, we continue to take a low-risk approach and closely monitor the government's new rules and policies. At the same time, we're also positioning our business to capture potential growth opportunities in oil and gas and the mining sector. I'm now turning to Canada on slide seven. New equipment sales were down 3% from Q4 of 23 with slower activity in the construction sector. Used equipment sales were up 15% with strong growth in mining and power sectors reflecting execution of our strategy. Product support revenue is comparable to Q4 of 23 with higher activities in the power sector related to oil and gas and higher spending by mining customers offset by continued slower activity in the construction space. EBIT was down 17% from Q4 of 23 adjusted EBIT. EBIT as a percentage net revenue is down 160 basis points, primarily driven by a higher proportion of lower margin mining equipment deliveries. As noted last quarter, margin recovery in the used and rental sectors is expected to take several quarters. Thus, these lines of business also contributed to lower margins in Q4. In terms of outlook, we expect continued spending discipline from our large mining customers as they work to achieve operating cost targets. Going forward, based on customer commitments and discussions, we anticipate stable demand for product support. The recent government changes and announcements in Canada and the U.S. create additional uncertainty for our business and our customers regarding tariffs and exchange rate fluctuations. In response to a near-term market environment of slower growth and higher uncertainty, we are focused on managing working capital levels and evaluating opportunities to create further sustainable cost efficiency. Specifically, we are excited about the opportunity to further improve our cost structure in Canada, leveraging the structural changes and overhead reduction strategy demonstrated in our UEK operations. Please turn to slide 8 of our results on UK and Ireland. In functional currency, new equipment sales were up 11% compared to Q4 of 23, driven by strong project activity in the power sector. Our UK and Ireland team demonstrated resilient strategic execution this quarter with solid year-over-year product support revenue and EBIT growth. Product support revenue was up 5%, driven by strong capture of rebuild opportunities as well as improved activity in the power sector. EBIT more than doubled from adjusted EBIT in Q4 of 23 with higher new equipment and product support revenue coupled with 8% lower SG&A through execution of structural changes and overhead reductions to our cost base. EBIT as a percentage of net revenue was up 310 basis points from Q4 of 23 adjusted EBIT with improvements in both gross profit and SG&A as a percentage of net revenue. We expect demand for new construction equipment in the UK and Ireland to remain soft in line with low projected GDP growth. We continue to expect a growing contribution from used equipment and power systems and resilient product support as we execute our strategy. Please turn to slide nine for an update on our invested capital progress. It has been a year since our 2023 Investor Day where we laid out our refreshed strategic priorities. We saw execution momentum, particularly exiting 2024 as we diligently carried out our strategic plans. Alongside our milestone achievements in SG&A, free cash flow generation and substantial growth in used equipment and power systems, I'd like to share an update on our progress on our invested capital reduction journey. We're making progress on our focus to improve invested capital position. As an example, 2024 saw our free cash flow exceed net income by nearly $360 million. On the left-hand side, we have listed three major categories of opportunities and action items to improve our invested capital for 2023 Investor Day. Under the exit and optimize category, we have been continuously evaluating lower ROIC activities, and we have significantly reduced our run rate, IT spending, and operating costs. We've also successfully completed the optimization of our UK pension in Q4 2024, and we continue to seek and review further opportunities for improvement. For real estate sales, our South America Master Plan has been proceeding on track. We've completed the planned facility sales and are currently near completion of our new facility in the Antofagasta region that will add incremental capacity. This will strengthen the quality and efficiency of our product support offerings as well as continue to service the expanding and aging equipment population in the region. In Canada, we conducted and reviewed our facilities and proceeded with several land and building sales to optimize our footprint. Moving to the largest dollar opportunity category, increasing work and capital velocity, we're seeing solid progress driven by fundamental operating improvements. Our new equipment preparation velocity has significantly improved, as reflected in an 11% year-over-year new equipment revenue growth in 2024, while at the same time, new equipment inventory levels reduced by 23% in December 24 versus 23 years. We're also pleased with our efficient backlog deliveries throughout the year. In some instances, we started to deliver equipment on awarded deals before it hit backlog. We continue to optimize our service work and progress balance, as well as work on expedited invoicing and improving collections management. We restructured and streamlined our remanufacturing operations in Canada, and we've made considerable progress in improving parts velocity and reducing in-transit times. In Chile, we implemented AutoStore, which is a robotic warehouse automation system that enables lower cost and improves speed and accuracy of fulfilling customer orders. Currently, over 50% of our parts orders in Chile utilize this system. In our Edmonton parts distribution center in Canada, approximately half of the total parts volume to customers flow through our automated vertical lift modules and vertical buffer modules, which also enhance both the efficiency and accuracy of our fulfillment process. Overall, our invested capital at the end of 24 was down $200 million compared to 2023, and our business has grown with a full-year net revenue exceeding $10 billion. We are encouraged by the progress to date on improved capital efficiency, and we're very pleased with the resilient free cash flow performance. However, we still have significant room for continued improvement in invested capital turnover, which will lead us to sustainably higher overall ROIC. We look forward to making continued progress here in 2025. Now we're going to turn the call over to Kevin for some concluding comments.

Thanks, Craig. To summarize, 2024 was another strong year for Finning. We have built a stronger and more resilient company. We continue to grow sustainably with improved resilience, including substantial free cash flow of $865 million, which is well in excess of our net income. Our balance sheet is healthy, with a net debt to adjusted EBITDA of 1.5 times, and we continue to return capital to shareholders via share repurchases and dividends. Importantly, we entered the year with strong momentum, including record Q4 earnings of over $1 per share, while concurrently generating Q4 free cash flow of nearly $400 million. We're also building our backlog to a near record $2.6 billion, driven by the diversity in our end markets, with mining up 41% and power systems up 72%. We ended the year with positive product support growth and improved earnings capacity. We believe these solid outcomes are a result of robust strategic execution, our diverse and attractive end markets, and laying the foundation for long-term sustainable growth and positive impact. Operator, I'll now turn the call over to you for questions.

Thank you. We will now begin the question and answer session. Analysts who wish to join the question queue may press star, then 1 on their telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star and then 2. We will pause for a moment as callers join the queue. And your first question today will come from Sabahat Khan with RBC. Please go ahead.

Great. Thanks, and thanks. Good morning. Just, I guess, to the extent you can talk about it, I know you guys don't have official guidance, but just given the puts and takes on the guidance, can you maybe just talk about maybe the margin profile heading into 2026? Part of that's likely going to be driven by mix, but just curious, based on your outlook today, what your expectations are for product support mix and maybe the direction of the margin through this year?

Yeah, we're not adding any extra guidance. I mean, overall, we continue to focus on the strategy, right, which is to grow our product support business to the maximum degree. As we highlighted last quarter, continue to be really optimistic about the growth rates in South America, and Q4 was obviously excellent. UK on the slower growth end in the economy, but really delivered well to end the year and have some good momentum. And in Canada, there's a bit wider range. in the mix, been dependent on some of the customer spending patterns as well as just overall economy. But, you know, product support continues to be the focus, continue to drive resilience, cost, and capital, and then growth focus on used rental and power. So that continues to be the frame. And, you know, overall, we continue to be very optimistic.

And then maybe just looking at Canada specifically, I think you called out amidst this current spending environment, focusing a bit more on costs. You know, how much more runway do you see on that front to take costs out of that geography just to right-size it for your outlook for spending patterns over the next level? Or is it more driving product support or a mix of both? Just on kind of what are the focus areas there and how much from each of those two buckets do you expect?

Yeah, I couldn't quite, what was the second bucket there, Sander, sorry?

Yeah, I guess with that geography likely impacted by lower product support mix as well. I'm just curious as you look ahead, how much contribution do you expect from maybe better mix over the next few years versus cost reduction on the January overhead side?

Yeah, both. Sorry, Sabra, I couldn't quite hear. Yeah, we expect it to come from both. We're encouraged by the sequential improvement in product support in the region. And as you said before, our outlook hasn't changed. We call it slow and steady in Canada. Obviously, it's impacted a lot by the oil sands producers who continue to exhibit discipline in the way that they're running the business, which we encourage and we're endeavouring to support. But we do see some encouragement in that space, particularly as budgets tend to get reset at the start of the year. typically leads to more normalized spending behaviors. And so, you know, we're encouraged by that. You know, I also believe there's a fair degree of self-help in terms of, you know, capturing more market share in Canada and tackling the costs and capital that are required and appropriate to whatever the product support and business level activities are in that region. And, you know, That's why you see, you know, you've seen us move Tim into that region. We believe that he's got a track record of a balance in those two things, as demonstrated by the UK and Ireland results. You know, he's, what, four weeks into the job, but he spent most of Q4 in Canada. And, you know, so we would be encouraged that, you know, there's opportunity to increase product support sales in an improving market, but we would say, as we said last week, We think there's a couple of more quarters of softness in there. There's some self-help in terms of energizing the sales teams and getting out and winning market share. And there's an opportunity to ensure our cost and capital base is appropriate to both support that product support growth and to increase the resiliency in the Canadian business.

And just one last quick one, you know, there's some commentary out in the industry about pricing. I think I've talked about a little bit at the last quarter. How is the pricing environment in each of the three? Has it at least stabilized as you head into 2025 or is it still dynamic for the machines?

I think, I mean, I always say this, right? So the pricing is dynamic as you talk, it's always dynamic, but you know, we, we have to be competitive in the markets that we serve and we believe we are competitive in the markets we serve. You know, we, we, we are a premium, business, but those premiums have to be in the competitive range. I would say that if you look at the backlog build, quarter over quarter, sequentially and year over year, that would suggest we're well positioned for that. We have some externally accredited market share figures, which we would be encouraged about as well. And even in Canada, we're seeing sequential quarter backlog build at more than 20%. Another price-sensitive market, obviously, is the UK. And we saw a sequential improvement in backlog there. In fact, in construction in the UK, the backlog was up around 40%, both year over year and quarter over quarter. So that would suggest that we're well-positioned from a pricing perspective. But we're committed to selling premium services.

Your next question today will come from Steve Hansen with Raymond James. Please go ahead.

Yeah, good morning, guys. Thanks for the time. Greg, you outlined your capital improvement plan, the progress to date. You know, it looks like you have an extra 200-plus million still to go there. Do you have sort of a timeline on how quickly you think you can get there through the balance of the opportunity?

Yeah, it's going to be a continuous focus throughout the year. You know, we're pleased with the cash flow performance, but in a lot of ways we're just getting started. If you look at sales to working capital or working capital to sales, you know, pleased to get it down to 28.1, which is better than 30, but certainly not back to that kind of 25 level that we've been in the past and want to get back to. So just a lot of running room left and we want to get after as much of that within the calendar year as we can. Of course, there's regular seasonality and, you know, they're selling season to start the year here. But through the rest of the year, similar to this year, we want to put consistent points on the board in Q2, 3, and 4.

Helpful, thanks. Just going back to the Canadian side and product support, not trying to parse words, so I apologize, but I think the commentary in general is fairly balanced or mixed as you described in the MD&A. Kevin, I think you said you would see some improvement through the year in your prepared remarks, but you also suggested there could be a couple more quarters of softness. Can we see positive growth in product support in Canada in 2025? Is that a possibility?

Absolutely. Yeah, we're confident we can grow product support. in Canada in 2025. The sequential improvement points to that. Combine that with a ton of energy from Tim and the team that he's building and really strong support from our partner, Caterpillar. I want to make sure people just continue disciplining the way that customers are spending is a good thing. It drives a sustainable mining business. You know, and, you know, it's our role is to support that and to help our customers be competitive and run really effective operations. As we've said, you know, when we have the turn of a calendar year, you know, we do see some refreshed budgets, some catch up. But I don't see dramatically improving. But we would have a level of optimism around that mining side of the business. The continued softness over the next two quarters really is figuring out how the new construction season starts in Canada. It's always really important to see how that side of the business gets going once the weather improves. And clearly there's a lot going on in the Canadian markets right now. which we're monitoring very, very closely as well. So, you know, but that softness really is more a function of that continued softer activity in construction. I would be a little bit more encouraged about the outlook for mining, but the combination of that and the, you know, renewed energy from Tim and the focus means that, you know, we're pretty confident that we can grow product support in Canada in 2025.

That's a great comment.

Thanks.

Appreciate the time. Your next question today will come from Yuri Link with Canaccord Genuity. Please go ahead.

Good morning, guys. Nice quarter.

Thank you.

Can you talk a little bit about the rental markets in Canada? Still seeing some contraction there, yet you're planning to add more fleet. So just wondering what gives you the visibility to move ahead with that capital plan?

Yeah, sure, Yuri, thanks. I mean, it's important to note that, as we've said a few times, that our rental line of business, as you see in our financials, is more diverse than you'd see in other rental businesses. So we have heavy rents and we have rental purchase options as well. So I would say that we're happy with the way that we're building the plan for rental. As I mentioned on the last call, we've strengthened the team. We've added a new vice president of rental services. Lyle is working hard to, his main priorities that he's working on right now is optimizing the fleet and the returns profile from that fleet. Hence why you need to invest to make sure you're optimizing that fleet regardless of you know, have you seen demand play out? So he's doing that. He's also building sales and operational coverage. And, you know, also developing a compelling, you know, value proposition for what is rental, particularly in Canada. So I would say that, you know, I guess your question is, if you see this, you're still seeing the softness, why are you thinking about investing? Two reasons. We have to reframe and realign and optimize the fleet, and that will take some investment. And the second thing is we believe, regardless of softness in that space, we have incremental and quite substantive market share opportunities to go after. And so that's the reason why you see that level of investment.

Okay. Last one for me, just want to shift to South America. You mentioned oil and gas, increased oil and gas and market activity as a driver in the quarter. I don't recall that in market being cited before. So maybe just a little more detail on assuming it's Argentina, but what you're seeing there and how sustainable that oil and gas activity is. Thanks.

Yeah, sure. So, I mean, oil and gas, the oil and gas opportunity in Argentina has been around for decades. We started to see that development start to develop probably five or six years ago. We actually, you know, we've shared in the past, we've made substantial investments in the New Ken region, which is the Vaca Morta basin. And, you know, we continue to see, be optimistic and see development in that area. And that's only been accelerated significantly given the change of government in Argentina. And so that opportunity continues to gather more and more momentum. And we continue to see that come through product support in Argentina, but also in terms of backlog build, for engines and transmissions to support the development of that oil and gas sector. So, you know, it's a key strategy for the Argentinian government to develop those resources, to become an exporter of those resources in the region, and we're super well-placed to support that work.

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

And your next question today will come from Jonathan Goldman with Scotiabank. Please go ahead.

Hi, good morning, and thanks for taking my questions. Given all the recent headlines around tariffs, have you noticed any change in customer behavior, thinking, or conversations around capital investment due to a higher level of uncertainty?

No, not yet, Jonathan. I mean, the last two or three weeks has been a period of listening, learning, and Educating for sure, we're also looking at mitigation for if tariffs came in. We were certainly encouraged by the announcement that they were going to be paused for a while to allow for some sensible and helpful dialogue, I think, between the two administrations. Look, as we think about tariffs, you know, from my perspective, and we've done a ton of work on this, but from my perspective, it doesn't change anything. Our strategy is designed to withstand challenges in the market, both in terms of, you know, that resilient part of our business, product support, and driving more resilience into our business. So as it relates to Tim's strategy in the UK, nothing changes. In fact, all this does is serve to provide more urgency to accelerate that strategy. You know, we're also, you know, it's also important to understand that the diversity in our end markets, you know, does shelter us to a certain degree from that, you know, being half our business being outside of the current geographies that are discussing tariffs. And a lot of our earnings growth right now is coming from those other regions. So important to realize that. But long term, we're optimistic and we feel that this discussion and the dialogue that is happening right now will be good for Canada in terms of working on developing resources, building infrastructure, energy. And I think this management team has a track record of managing through challenges and coming out the other side of them stronger as a business with stronger customer relationships and loyalty and more resilient and reliable results. So I guess my answer to the question is yes, of course, as you'd expect, we're doing a ton of work, but we're just focused on our strategy and the execution. And it's designed to withstand challenges like this.

That's really helpful. And I guess my second question may be a little more nearer term. Could you provide any color around how equipment margins are trending now relative to 2019 levels?

All right. So relative to 2019, I mean, obviously you've seen, you know, a mixed shift to product support, which is always helpful, you know, having grown that business to the extent we have since 2019 is super helpful. And then really, a lot of it is SG&A, right? So to hit 16% in Q4 is obviously a good place to be. When you compare that to 2019, which is probably more around that 19% level, that's a good chunk of the earnings capacity that we've gained. And so we're very focused on continuing that and improving upon that. So I'd say on the gross profit side, it would be more mix that's moved towards product support and really grown that business. And then it's the SG&A structural improvements that are really driving to the bottom line, and we look to continue to focus on that, as Kevin highlighted.

I'm not sure whether you said machine margins or new equipment. I mean, we don't disclose that, and I'll just point you back to my previous answer to Sabah, is we have to have competitive premiums. In my 30 years in the company, our new equipment margins, I would say, have been largely stable. Of course, they're different by end market and and type of product, but we have to be well-positioned and competitive, and I think our backlog build reinforces that we are.

Okay, thanks for the call, guys.

Your next question today will come from Chair Lynn Radbourne with TD Cowan. Please go ahead.

Thanks very much, and good morning. So just on the product support side, Caterpillar disclosed earlier that its services revenue sits at US $24 billion on the way to an aspirational target of US $28 billion in 2026. So in light of that, are there things that CAT will be doing in concert with dealers to incent product support growth, including rebuilds in 2025?

100% Sherrilyn. I mean, obviously we saw product support growth levels soften in 2024, probably a little more outside of Chile, a little more than we anticipated. That's only served to re-energize and refocus the whole enterprise, including Caterpillar. Our teams are working daily, closely together. to both re-energize and to look for new ways to improve that growth support trajectory on the way to that really critical $28 billion target. Our dealerships are significant and large in that regard, and we take that responsibility really seriously, and we get the the subsequent support and encouragement from our partner category in terms of making sure that we're playing our role in delivering on that really important target. But I would say that the level of energy and focus around product support growth within the enterprise is as high as it's ever been.

Okay, that's helpful. And then I don't want to jump ahead too much, but can you give some bit of color on the learnings that you think can be taken from the UK and Ireland and be adapted to Canada?

Yeah, sure, Carolyn. I mean, it's not rocket science. Like I said, Tim's in kind of week four. He's just moved into his Edmonton base, which is really important. He's going to be super close to the team there. But he did spend most of Q4 in Canada. I think his priorities have been making a stand on safety. There's opportunities to improve our safety performance in Canada, and there's a lot we can learn from the UK and Ireland in that regard. So it's important we don't walk past that because safety is our most critical responsibility. And then he spent a ton of time meeting with the team. He's already worked on simplifying... and prioritizing your hook structure. He's added three new members to the EC team, all internal recruits, some more of an internal strengthening of the team there. And then the next focus is energizing the sales teams, meeting with customers, making sure we're on the front foot with our customers. And you saw that, the energy that Tim drove to your previous question about energy brought to the table on support growth in the UK and Ireland really started to take hold in the second half of last year. So I think pick that playbook and run with it in Canada. And of course then there is the cost and capital optimisation. As with myself, Canada is a heavier business in that regard and You know, it's a different business for sure. And, you know, so it's not an exact, you know, rinse and repeat opportunity. But there are opportunities to bring fresh perspectives and to challenge everything and to make sure that we're not losing this or taking advantage of this opportunity and the fresh eyes to think and ask the question about how we could run the Canadian business differently. So, yeah. That's how I'd summarize the work that he's got in front of him. It's not an exact playbook, but it's a pretty simple one.

That's helpful. That's my cue. Thank you.

Your next question today will come from Christa Friesen with CIBC. Please go ahead.

Hi. Thanks for taking my question. If I can just follow up on Argentina. So it seems like things are slowly starting to improve there. Has Finning adjusted, maybe not necessarily how you're thinking about it, but any incremental investments in Argentina are still taking a bit of a slower approach there?

Yeah, I mean, certainly from a foreign exchange perspective, we're keeping our risk extremely low and we'll continue to take proactive steps to make sure that that risk is in check. But the business opportunities are improving. There's midterm elections this year that will provide the full mandate and give even more visibility. So we'll keep an eye on that. We'll keep our risk low. But yeah, oil and gas, as we talked about earlier, or mining, there's a lot of even public Canadian companies talking about some pretty significant large investments. And so some of our recent investor slides, we've highlighted a couple of investments we've made in terms of on the mining side. and on the vacuum motor shale side. So a little bit of physical footprint improvement. I'm certainly happy that we preserved our capacity through the last couple of years, even through the volatility. So we'll take a low risk approach, but as we've highlighted before, we think the option value of that business continues to go up and certainly some larger scale opportunities that continue to grow and mature and become more serious. So some encouragement there, we'll balance the risk reward, but definitely net encouragement.

We're really proud of the team in South America and particularly Argentina and how they've managed the last 18 months. We talk about that option value and they've made sure that we still retain that whilst positioning ourselves for thoughtful growth. We talked about the vacum motor and the oil and gas and beyond that there's mining and copper opportunities. We're well-placed to take advantage of those opportunities, but the team are running a really disciplined and thoughtful business down there, and I've got a record of saying how much we appreciate that.

Great, thanks. And then just the last one from me, obviously a pretty strong performance in the UK and Ireland this quarter. Do you view that as sustainable as we look out through 2025? Thank you.

Yeah, and so, you know, it's important to note that the product support mix has shifted in the UK. It's still not at the level of the other two dealerships, but as per our strategy, you know, when your product support mix as a proportion of total sales continues to increase, so does your absorption. And so that is a great enabler for sustained earnings performance. It's a dynamic and market and we have to retain that agility and the discipline of execution and cost management because the market can move around very quickly over there. But as I said, if I think about the UK business now and I think about the product support mix, the mix of long-term data center opportunity, as I mentioned previously, UK backlog, year over year for multi-year data centres is up more than 150%. That's multi-year, it goes out a couple of years. As I said in my remarks, I had the pleasure of visiting some big cement works and then crossing the road and going to a huge data centre build that we're working on. That represents a different Finning UK and Ireland business and a different path forward for that business. Quite remarkable. I never thought I'd see a day when I went to a cement works and crossed the road and went to see a huge data center build. And that just plays to the diversity of our business now and how well the teams have done to position themselves in these growth markets.

And your next question today will come from Devin Dodge with BMO Capital Markets. Please go ahead.

Yeah, thanks. Good morning. I wanted to start with a comment that we've seen in the outlook for South America for the last while, specifically around a more competitive labor market for qualified technicians. I'm just wondering if you can give us a sense for how retention and wage inflation has been tracking there, and just can you remind us how easily these cost pressures can be passed through to your customers on some of those long-term contracts?

Yeah, sure. So I think I'm pretty consistent in this regard. Acquiring and retaining skilled technicians has been a constant challenge and opportunity for the 30 years that I've been around. The work that we're doing in South America takes that to a whole new level. As I said in my remarks, Devon, I was at a big mine site two weeks ago, and you need to get a bit of a medical check before you go in there. I bumped into three new women that have joined our company from outside of the industry to help us with that support and that growth. I'm really pleased with how the team are approaching that recruitment drive, looking outside of traditional pools, ensuring we have the right We're, you know, looking into the right gender diversity, which is a big opportunity for us. And so it really is, I mean, you know, it's a really innovative and structured approach we're applying in South America. You know, retention is challenging. It's an enterprise, right? I guess the word people use, it's an ecosystem of technicians. And, you know, we understand that, you know, Technicians move around and you know part of our role is to strengthen the overall technician base, you know And so we're always mindful of turnover rates But I would say they're at normal or acceptable levels and then finally on costs and Negotiations we are going to be negotiating with some really important unions this year across the company, but particularly in Chile and When I was there two weeks ago, it was a big part of the discussion, not just meeting with technicians, ensuring that they're happy and that they're pleased to be part of our company, but also meeting with the team who are going to be negotiating with the unions to make sure we've got a solid plan. I was really pleased by the level of productivity there, and we're going to try and get ahead of that to avoid any kind of compressed timelines or... hard stops. And, you know, as a company, you know, we're committed to, you know, to fair and balanced agreements for the long time success of our people and our company. And in terms of the ability to pass it through in Chile, definitely we have that opportunity that we pass through It doesn't mean that we don't negotiate carefully. We're very thoughtful about the value proposition that our labour, the important part of labour plays in that value proposition, but we do have the ability to pass that through, particularly in the Chilean mining contracts. Hopefully that helps, Devin.

That was excellent, Collier. Thank you for that. Second question, just wondering if you could speak to the mix of rebuilds that you saw in Q4 and if it continued to be tilted more towards smaller machines and just wondering how that pipeline for rebuilds looks currently in Canada and South America.

Yeah, so I'd be encouraged by the trajectory and that rebuild business, I think we've said a number of times now, is a structural change in our company. And despite, you know, in some areas, softer product support revenue, I would point to the fact that, you know, the amount is either rebuilt or contracted through a maintenance contract is strengthened even through, you know, even if the number is overall softer, as we saw in Canada. So I'd be happy that that revenue base is a higher quality. You know, as one of the previous questions, you know, in terms of energising, driving product support, you know, Rebuild is the go-to place. And so not only because it's high quality work, you know, we've got a growing workforce that needs to be kept busy. And we want to make sure that we're fully utilising our facilities. So in all three regions, actually, I'd be very encouraged by the trajectory in Rebuild. For sure, the product range is coming down and the scope is probably... because the scope will generally narrow as you come down in the size of product range. That's the economics and how it works. You have to do a lot more rebuilds to achieve the same goal, but I still think it's number one of our product support growth opportunities.

Thanks for that. Good color. I'll turn it over.

And your next question today will come from Maxim Sychev with National Bank Financial. Please go ahead. Good morning.

Maybe the first question for Kevin, if I may, there was some discussion around potentially accelerating 18 kind of large projects in BC. And I mean, some of them you actually worked on in the past. I'm wondering, you know, how quickly do you think you could see any potential impact from this, or is it more sort of a 2026 dynamic?

Yeah, I saw that match yesterday. I mean, so to my previous point around tariffs, you know, I think that, you know, one of the encouraging things that's come out of the discussions over the last two or three weeks is a recognition that Canada can do more to help itself, which we would agree with. And we think that, you know, The discussions that are happening around, there's lots of different opinions here, but the discussion around Canada helping itself and strengthening it and taking, you know, and optimising the opportunities that it has within its own borders, there's no disagreement on that. And so that's really encouraging. There has been in the past. It hasn't always been aligned. To see that long list of projects over the last couple of days is a good example of that. BC really look into how they can take their destiny into their own hands and accelerate some of these projects. Now, in terms of how quickly, I couldn't answer that, Max. I'm sure that this is an incentive to reduce administration and red tape to get some of these projects moving faster. And for sure, our business model would mean that we would be confident that we can build our capabilities and have the inventory to be able to support a rapid execution of these projects. I guess the biggest limiting factor to Devon's previous question would be skilled labor, but the advancements of technology now mean that that helps in that regard. I wouldn't know how quickly they will get executed. I'd be happy that we could support an accelerated execution, and I'm very happy that Canada's looking to its own destiny and looking to control its own destiny by getting some of these critical projects moving faster. Okay.

It's encouraging to see the list that includes copper projects, gold projects, more LNG, and to have that supported by government and more upstream oil and gas. I mean, that's Those are all helpful things, for sure.

Yeah, for sure. And I guess none of these things are as part of your official outlook. Is that fair to say?

No, none of it. Definitely not in backlog. And in terms of outlook, they would go a long way to supporting particularly the construction softness or an improvement in activity in construction, but also some more encouragement and confidence in energy production, too.

Right. Yeah, fair enough. And then quick question for Greg, if I may, in terms of thinking about sort of leverage, what do you think is the optimal level where you're comfortable being at? I mean, like, is it, does it make sense to, you know, come down even more or where you are is sort of the optimal level? Thanks.

Yeah, I mean, I think we're consistent around this. I mean, you know, full cycle, mid-cycle, two times net debt, EBITDA, you know, we're comfortable to run the business and supports our credit rating. You know, we've been pleased to generate a lot of cash and have good capital allocation choices to make. Being down to one and a half times feels pretty good, particularly in a market where it has some uncertainty. So staying at that level is It feels pretty good, but do we have the ability to go back up to two if we need to or see an opportunity? Sure. But as we highlighted earlier, we still think we have a lot of ability to generate free cash and make some good positive choices. And as always, it will be a balance between returning capital to shareholders, managing the debt, and investing in organic projects. So the good news is cash has been excellent, and we look to continue on that path.

Okay. Excellent. That's it for me. Thank you.

Thanks, Matt.

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

Thanks, Operator. Thanks, everyone, for joining today's call. I appreciate your time, and I hope everyone has a safe day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines and have a pleasant day.