Finning International Inc.

Thank you for standing by. This is the conference operator. Welcome to the Finning International Incorporated first quarter 2025 investor call and webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. Analysts who wish to join the question queue may press star then one on their 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 Palaszczuk, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to Finning's first quarter earnings call. Joining me today is our President and CEO, Kevin Parks. Following the 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 also be archived. Before I turn it over to Kevin, I want to remind everyone that some of the statements provided during this call are forward-looking. Please refer to slides 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 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. In the first quarter, we continued our positive momentum from 2024, and I'm proud of our employees' positive impact and the strong execution. I'd like to start with a review of the first quarter before providing a brief recap of our last 12 months' performance. I will then turn the call over to Greg, who will provide more detail on our results. Please turn to slide two. We started 2025 with another strong quarter of results, growing net revenue by 7% from Q1 2024 to $2.5 billion. The diversity of our business, both in terms of geographic and end market exposure, provides resilience and stability for our earnings which is particularly important given the uncertainty businesses are facing right now. As a reminder, approximately half of our revenues are to revive from outside of Canada. We are really pleased with the continued growth in our backlog, especially considering we delivered another strong quarter of new equipment sales growth at 7%. Backlog grew from year end 2024 by $240 million. Order intake was broad-based and solid in all regions. The orders received in Canada are especially encouraging, providing us with a good level of confidence in our outlook for new equipment for the rest of the year and for product support opportunities for years to come. Order intake in the construction segment was up relative to order intake in Q1 of 2024. The big driver of our backlog increase, however, was related to the mining segment, where we received orders from several customers, including over 20 ultra-class haul trucks, multiple shell walls, and a range of support equipment. The steady growth in our business, coupled with our improved earnings capacity, due to our focus on resiliency, provides a strong foundation for continuing our dividend growth this year, with an increase of 10%, the 24th consecutive annual increase for Finning. Moving to product support. Quarter one product support revenue grew in all regions, reflecting reinvigorated sales efforts in a more constructive environment. In Canada, mining activity improved, and as I spoke about on our last call, we are totally committed to supporting our customers to lower production costs through strong partnerships, planning, and execution. Revenue grew 10% year over year, and was up 9% from Q4 2024, helped by more normal winter conditions. In South America, product support revenues were up 6% in functional currency and continued strong mining activity, where we continued to deliver new trucks, build capacity and capabilities. Indeed, we added over 100 technicians in the region just in this quarter. In the UK and Ireland, product support revenues were up 4% in functional currency, on improved power segment activity levels as a result of many years of population growth. We will continue to maximise product support revenues across all regions. Building on the momentum of 2024, we continue to execute on our full cycle resilience strategy, which, combined with product support growth, strengthens and stabilises our earnings capacity. SG&A's potential net revenue decreased from Q1 2024 by 50 basis points to 16.4%, and we will continue to look for opportunities to build more flexibility into our cost base and invest in sales and service capabilities to drive future growth. We also continued our strong focus on free cash flow, generating $135 million. Execution of our sustainable growth initiatives is progressing strongly, Our power systems backlog is up over 50% from this time last year to over $900 million, with strong data center activity in the UK and South America. In Canada, our power systems backlog is at 18-month highs with strong oil intake from both electric power and oil and gas end markets. It is important to consider our power systems backlog in the context of our overall backlog, driven by our focus on this secular trend. This population has supported power systems product support revenue growth, which was up year over year in Canada and the UK, more than 15%. Revenue in our used equipment segment decreased this quarter, largely due to lumpy mining business. Margins, however, stabilised and in some cases improved to levels above our expectations. Total revenue decreased slightly versus Q1 2024, However, we are encouraged by the improvement in our cat rental store revenue, which was up 15% in Canada, as the leadership and fleet changes we made last year have improved the efficiency and performance of this business in a challenging market. We remain committed to growing this important line of our business. Please turn to slide three. I'd like to spend a few minutes recapping the last 12 months and reiterate some of the progress we've made in executing our strategy. Overall, net revenue has grown 5%, while our equipment backlog is up almost $900 million from this time last year. Importantly, our backlog is diversified and is larger in each of mining, construction, and power. Similarly, product support revenue is up 5% in the last 12 months, relative to the same period the prior year. This includes adding over 400 technicians to meet growing needs of our customers and a larger installed base of equipment. This growth means our earning capacity has improved and has been supported through the continued improvement in SG&A as a percentage of net revenue, which sits at 16.2% over the last 12 months. Our free cash flow has been a significant $1.2 billion, which is particularly pleasing given the growth. Our sustainable growth initiatives have also progressed well, with used equipment revenue of 8%, power systems revenue of 10%, and we will continue to progress these opportunities and allocate resources to these growth initiatives. Before I turn the call back over to Greg, I'd like to briefly discuss some colour, having spent some time in each of our regions recently, and I'm very pleased to see the commitment of our employees to our strategy. In South America, I was able to spend some time with our employees at our expanded Antofagasta facilities, where we have added more than 20 work bays and incremental warehousing capacity and technology to meet the growing product support needs of our customers. I was also able to meet with several customers, many of whom plan for additional equipment investments in the future to meet their growth objectives. The outlook for investment in copper mining from our South American customers remains very positive. In the UK and Ireland, our employees continue to demonstrate their strong commitment to resiliency particularly in the face of more subdued macroeconomic environment. There is some encouragement in certain areas of the market, and our sales focus is driving rebuild activity, new equipment order intake, and backlog growth, the latter of which is up 8% sequentially and 80% versus the same quarter last year. We do still, however, remain overall cautious on the UK and Ireland market, and our execution is thoughtful. With this in mind, our teams continue to look at ways in the UK to generate further efficiencies and optimize the skills of our frontline technicians, including through the use of digital tools to optimize workforce planning and scheduling and work by utilization. We see solid progress on these tools, enabling improved productivity and better visibility to rebuild activity levels. Turning to Canada, I'm pleased to see our employees embracing resiliency initiatives while at the same time growing our business in the face of a more challenging market conditions. We believe demonstrating attention and responsiveness to our customer needs will allow further wins and growth in market share and expand our customer base. Today, the impact of inactive tariffs have had limited impact on our business. We have not seen a major shift in our end market activity levels or our product support or new equipment spending from our customers relative to expectations. There remains opportunity to improve the resilience of our Canadian business, and I'm excited to see what Tim and the team are working on. Overall, we are encouraged with a strong start to the year and remain confident and committed to the execution of our strategy. We are excited about the future as we sharpen our focus and allocate resources to growth opportunities in areas such as product support, addressable market, power generation, and rental. We also plan to invest in future adoption of technology like autonomy and our digital capabilities to enable growth and improve customer outcomes. As you will have seen in our announcement last week, we have reached an agreement to sell 4E fuel for $450 million, and we think this sale is a great outcome for Finning and 4E fuel. For Finning, This sale advances many of our strategic objectives we set out in our 2023 Investor Day and will allow us to simplify our business and focus on growing our core dealerships. From a financial perspective, the transaction will allow us to optimise our invested capital position and lower our SG&A costs, and we expect the transaction and allocation of net proceeds to be accretive to earnings per share. We do extend our gratitude to 4REFUEL President Larry Rado, and all of the 4E Fuel employees and team for their partnership, dedication, and strong performance, and we wish them future success. With that, I'll hand the call back to Greg.

Great. Thank you, Kevin. I'll turn to slide four. Our Q1 net revenue of $2.5 billion was up 7% from Q1 of 2024, led by strong growth in product support revenue and new equipment sales. Our first quarter earnings were adjusted for a $0.22 impairment loss related to the write-down of assets in ComTech in line with the value of the transaction announced last week. Excluding this, EBIT was up 6% from Q1 2024 on strong volume growth. Adjusted EPS of $0.99 was a record for the first quarter and up 18% from Q1 of 2024, reflecting higher earnings in South America as well as the benefit of our share repurchases. We also continue to generate strong free cash flow in the quarter at $135 million, compares to a use of cash of $210 million in Q1 of last year. This was driven by higher inventory turns, improving invested capital velocity, and reduced working capital to net revenue, which has now declined to 26.5%. Overall, we're pleased to see our momentum exiting 2024 continue into the first quarter and a strong performance, particularly in mining and the power system sector. This coupled with our team's diligence on strategic execution and product support and full cycle resilience made a big difference. I'll now move to slide five. We showed changes in our net revenue by line of business compared to Q1 2024 and the composition of our equipment backlog by market sector. New equipment sales were up 7% driven by strong activity across all market sectors in South America. Used equipment sales were down 27%. In Q1 of 2024, we had large conversions of rental equipment with a purchase option to sales in Canada, which did not repeat this quarter. Product support revenue was up 11%, with consolidated growth rate having some benefits from the weaker Canadian dollar. We saw solid growth across all regions led by Canada and across all market sectors. We're proud of the team's strategy execution as we rebuild momentum. Our equipment backlog reached a new record at $2.8 billion to the end of March, up 45% to the end of March 2024 and 9% from December of 2024. Sequential backlog growth reflected order intake, outpacing delivery in mining and power systems, with multiple large mining equipment wins in Canada. Now turning to EBIT performance on slide six. Gross profit as a percentage of net revenue is down 70 basis points, primarily due to lower product support margins, partially offset by higher proportion of product support in the revenue mix in Canada and the UK. In Canada, lower product support margins were driven by sales mix and cost to fulfill accelerated demand. Meanwhile, we remain very focused on cost control with SG&A as a percentage of net revenue down 50 basis points at 16.4%. We will continue to build on this progress to build a more resilient cost structure and drive earnings capacity higher going forward. Q1 adjusted EBIT as a percentage of net revenue of 10.6% in South America, 8.7% in Canada, and 4.7% in the UK and Ireland. Now moving to South America results and outlook on slide seven. In functional currency, new equipment sales were up 42% from Q1 24, reflecting higher across all market sectors led by construction and mining. Product support revenue was up 6%, driven by strong demand for mining customers in Chile. EBIT was up 13% in functional currency, and EBIT as a percentage of net revenue was down 40 basis points, reflecting a higher proportion of new equipment sales. SG&A was comparable to Q1 of 24, despite a 17% net revenue growth. Our outlook for Chile mining remains strong, underpinned by growing demand for copper and strong copper prices. as well as solid levels of quoting tender and award activity for mining equipment and product support. While activities and outlook remain positive, we also expect a more challenging labor environment, including higher compensation and union agreement payments in upcoming union negotiations. In Chile, we continue to see healthy demand from large contractors supporting mining operations, and we expect infrastructure construction activity to remain steady. And the power system sector activity remains strong in 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 are also positioning ourselves to capture potential growth opportunities in oil and gas and mining sectors and are encouraged by the steps taken by the government to reduce currency restrictions. Turning to Canada on slide 8. New equipment sales were down 14% from Q1 of 24 due to timing of power system deliveries and slower activity in the construction sector. Used equipment sales were down 31%, primarily due to large conversions of rental equipment from the purchase option in Q1 of 24 that were repeated. Rental revenue is comparable to prior year. We would also note we are seeing more evidence of price and utilization normalization this quarter in used and rental, which serves as a supportive backdrop for our commitment to profitably grow these lines of business in the long term. Product support revenue was up 10% with higher spending across mining customers, coupled with strong activity levels in power systems sector, primarily in oil and gas. Adjusted EBIT as a percentage of net revenue was down 20 basis points from Q1 of 24 as a percentage of net revenue, primarily due to lower product support margins due to sales mix and cost to fulfill accelerated demand. In terms of outlook, with the new election results, we expect to focus on infrastructure spending, removing interprovincial trade barriers, and promoting growth in the energy sector. Therefore, we continue to expect ongoing commitments from governments and private sector projects for infrastructure development, supporting activity in the construction sector. On the mining side, we expect our mining customers to deploy capital to renew, maintain, and rebuild aging fleets. For power systems, we continue to see healthy demand for reliable and efficient electric power solutions. Due to higher levels of uncertainty related to tariffs and trade, as well as our resilience strategy, We remain focused on managing working capital levels and evaluating opportunities to create further sustainable cost efficiency. We saw encouraging progress in Q1 as Tim and his team started to execute plans to leverage the UK playbook on optimizing the cost structure and reinvigorating sales efforts in Canada. We look forward to seeing further evidence and resilience in our Canadian business going forward. Please turn to slide 9 for our UK and Ireland results. In functional currency, new equipment was down 10% compared to Q1 of 24 due to timing of power system project deliveries and partially offset by strong sales and execution and deliveries in the construction segment. Product support revenue was up 4%, reflecting strong activity levels in the power system sector. EBIT as a percentage of net revenue was up 20 basis points, reflecting higher proportion of product support in the revenue mix and a reduction in SG&A. 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 growing contribution from used equipment and power systems and resilient product support as we execute our strategy. By the US, Canada, and other countries globally, it has introduced a level of uncertainty, cost, and complexity to operating for many businesses. To date, the direct impact of announced and implemented tariffs to Finning has been limited and largely centered on our Canadian business. The indirect impact through reduced economic activity, changes to inflation, as well as deferred, delayed, or cancelled investment decisions across our customer base remains unknown and difficult to predict. At the moment, we have not seen major shifts in customer purchasing decisions, supply chain environment, or changes in the competitive dynamics in the markets that we serve. Our teams remain cautious and continue to closely monitor the situation while actively engaging in contingency planning and mitigation initiatives. We believe our business is well positioned to remain resilient given the diversity of our end markets, momentum in our product support business, and the strength of our record backlog and momentum in our product support business. Summarized on slide 10 is our sale of forward fuel, and I'll comment on a few details. We reached an agreement to sell forward fuel for up to $450 million. The purchase price subject to customary closing conditions comprises of $330 million of cash, $50 million of notes receivable that will match the term of the buyer's senior credit facility and bear escalating interest, and contingent consideration of up to $20 million based on forage fuel achieving certain financial performance metrics over the next two-year period. Including leases and other indebtedness, this is approximately $50 million. The total implied transaction value is $450 million. Through a combination of proceeds from this transaction, and substantial free cash flow generation over the last six years, 4iFuel has provided a strong return on investment for Finning and our shareholders. We expect the transaction to close in Q3 of this year, and through a combination of share repurchases, debt repayment, and reinvestments to our core dealership, we expect the transaction to be accretive to earnings per share. Overall, we are very pleased with the team's performance in the first quarter. A strong start to 2025 comes at a very important time. the double-digit product support growth and record backlog levels in Q1 being an excellent platform to demonstrate our improved resilience and earnings capacity in 2025. We remain focused on city execution of our strategic plan to maximize product support, continuously improve our cost and capital position to drive full-cycle resilience and grow prudently in used rental and power. 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 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 any keys. To withdraw your question, please press star, then 2. We will pause for a moment as callers join the queue. Our first question today is from Yuri Link with Canaccord Genuity. Please go ahead.

Hey, good morning.

Good morning, Yuri. Good morning.

Congrats on the quarter. Nice numbers. Big backlog growth in Canada. Just wondering if you can help us with the cadence of that backlog burn in terms of how much of it does in 2025 and if any of it spills into the outer years.

Yeah, we're definitely pleased to have a few wins with a few customers in the quarter and a couple that were pretty strategic actually. So really pleased with that, but it's a really solid cadence. Some are delivering as we speak and some will extend out all the way into the middle of next year.

Okay. And given what we saw with the order intake in Canada and also the good product support, was there an element of catch-up in terms of some deferrals that I think you referenced last year on behalf of some customers? Just any additional color would be helpful.

Yeah. I don't think we mentioned deferrals, Uri. I mean, there's a general sentiment that you know, spending particularly in the oil sands was, you know, the pattern was a little different last year. You know, we're not in control of that. As I've said a number of times, our job is to stay close to customers, understand what their requirements are, help them to meet their objectives and be right by their side as their mine plans develop and their fleet utilization changes. So, you know, for sure 2024, We saw some different situations or different conditions, and I would say that through this course of this winter, it was probably what you class as a more normal season. We can't comment on whether there was catch-up or not. We want to be right there by the side of our customers to support them, and I think that's what you saw in Q1.

Very helpful. Thank you. I'll hop back in the queue.

Thanks, Yuri. The next question is from Devin Dodge with BMO Capital Markets. Please go ahead.

Thanks. Good morning. Good morning, Devin. Look, the balance sheet is in really good shape here. It seems like 2025 should be another year of strong free cash flow, and obviously the sale of four-week fuel will unlock even more capital there. So beyond just returning capital to shareholders, I think Kevin touched on this a little bit in his remarks, but just can you speak to where you see opportunities to invest in the core dealership operations going forward?

Yeah, for sure. Thanks, Sherry. So, I mean, you know, firstly, I mean, it's completely aligned with our strategy. So firstly, it's around product support capabilities. and ultimately inventory to support that. And you can see, you know, despite the, you know, including the free cash flow, I should say, you know, our inventory did go up in the quarter as we support the growth that we're articulating in our outlook. And so, you know, we need cash to be able to invest in that growth and make sure we have the right, you know, inventories and workshop capabilities to support that product support growth. And then you just turn to our sustainable growth initiatives, you know, use, rental, and power. And, you know, we believe that there's opportunity. Our use equipment inventories did come down in the quarter, but there's always opportunities to grow in that space, as there is in power systems capabilities. And then, you know, finally, rental. So whether that's, you know, RPOs, or heavy rents, but particularly cat rental services, which is the cat rental store, we see opportunities to grow profitably in that space too. We'll continue to look at if there are any opportunities or good adjacencies to be able to support that three-prong strategy.

Okay, good color. Thanks for that. Maybe just sticking with rental, it looked like dollar utilization may have been stronger year over year. Kevin, I think you've mentioned in the past there's more diversity in your rental fleet than maybe some others in the sector, but within your rental operations, which parts of the business are doing really well where you're looking to deploy more growth capital in the near term, and which parts are maybe a bit more challenged and the focus is more on realigning or optimizing the offering?

Yeah, so I think our rental business is a little more complicated. So, you know, this time last year we would have had, excuse me, more RPOs in the heavy equipment and even in the mining space. And, you know, that in the mining space, that's lumpy and it's very much customer specific and, you know, lumpy demand related. In terms of heavy rents, that's a little softer for us right now as we recalibrate the fleet. and reorganize the fleet, and that's directly linked with the lack of major infrastructure projects that we're seeing still. We're optimistic that the new government will start to kick that off, and we stand ready to invest in that heavy rents fleet. It's a good business for us. But in the heavy rent side, that RPO side, in terms of facilitating sales and winning new customers and growing market share, that's something we're absolutely committed to investing in. And then we are really encouraged by our cat rental store, Revenues are up 15% year over year. And whilst it may have been from a low base, that's encouraging. And that's all driven by utilization. And so that's an area that we continue to look at and refine the fleet, make sure it's a complete and market-differentiated service. And there'll be more opportunities to invest in that area.

Okay, excellent. Congrats on the good results. We'll turn it over. Thank you.

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

Yeah, good morning, guys. Thanks for your time. Greg, I think, or Kevin, you both referenced, I think, the more normal weather pattern is helping contribute to the product support growth. If the customer is giving you any sort of indication as to how the balance of the year is going to play out, should you continue to expect to see growth through the balance of 2015?

Steve, it's Kevin here. Part of what we're trying to do with our major customers is sit down with them and plan more effectively so that we can provide better physical availability of their assets and ultimately lower our cost of execution in terms of logistics and supply chain. The precise outlook for that outside of major components is more challenging, but from a major components side, and you've been to our OEM facility a number of times where we rebuild the engine, the visibility there is good, and we would see that remaining encouraging for the rest of the year. In terms of the timings of major rebuilds, that can change with mine plans, and so that's a little more difficult. I would say that as we look forward, we expect that business to grow, in line with the publicly disclosed production growth figures that all of the public oil sands producers have disclosed. And we do believe that more trucks are required to meet those production requirements as the mine plans change and the haul distances get longer. And I think that's what you're seeing in the equipment backlog, Steve. So, I mean, you might not see it immediately, but adding – Adding trucks to the Allsands is a long-term positive encouragement for our company. Hard to predict what's going to happen in the next three months or six months, but we're totally committed to that region, and the backlog supports that.

Okay, that's helpful. Thanks. And just on the cadence of buyback, You've consistently funded the buyback here for a while now through cash flow from operations and free cash flow. You've got this inflow coming in from the four-week fuel deal. Should we expect the cadence of buybacks to change at all going forward, Greg, or should it be more consistent and rateable? How do you think about that? Thanks.

Yeah, I mean, for quite a while now, we've done about 1% per quarter as we just did this last quarter, so we'd expect that in kind of a – you know, that would be the typical pattern. And then, of course, you know, we have the proceeds coming in that we'd expect to put the majority in that direction. So, we just renewed our NCIB and, you know, that gives us about 10% of capacity and we think we've got the capacity to do both.

Very good. That's helpful. Thanks.

The next question is from Sherilyn Radborn with TD Cowan. Please go ahead.

Thanks very much and good morning. I wanted to start with a bigger picture question. Regarding the new federal government in Canada and the potential for renewed nationalism in Canada, if you want to call it that, if you could send a policy wish list that would be supportive of growth in Western Canada, what would be some of the key items on that list?

Yeah, that is a very good question, Sharon. I think that... You know, as we look forward, I mean, number one policy would be, you know, resource development and, you know, changes to the approach to pipelines. You know, that would be a huge... I just think we need a rethink on that after the last 10 years, and that would be top of the list. I think as... as the administration already talked about, removing inter-provincial trade barriers would be great for all of Canada and to increase trade and economic prosperity. And I think a policy and an approach around energy supply and production and potentially data centre development participating more in that sector would be on the list, as well as a more helpful immigration strategy to support the growing demands of technician base that we have. I could go on, but there's a long list there, but if you think about it in the context of our business, we've got to get the economy moving in the first instance, and then we've got to make sure that we've got the opportunity to build the capabilities to have the productivity gains to have an investment-friendly environment and to have the right people and employees and union strategies to drive our business forward. It's just got to get a lot more friendly.

Right. And then my second question is just, you flagged the potential for labour cost inflation in South America. Just what do you think your ability is to pass that through as you progress through those union negotiations later in the year?

Yeah, so we have a few of our unions coming up in the back half of the year. We've been fortunate that the last round we actually did proactively, so we've had a good 18-month, two-year gap since our last negotiation. But as we see across the industry, across the mining landscape, some higher compensation in deals that are struck, as well as some of the upfront payments increasing. We're being proactive again, and we're going through those discussions, but we do expect higher rates. Those obviously flow through a lot of the contracts, but we need to be mindful that it's, you know, all online with industry benchmarks and standards.

Well, for me, thank you.

Thank you. Once again, any analyst who has a question may press star then 1 on their telephone keypad. The next question is from Maxim Sychev with National Bank Financial. Please go ahead.

Hi, good morning, gentlemen.

Good morning, Max.

Actually, I just wanted to build on Sharon's question around Chile, you know, the labor dynamic. How does it factor in in terms of your SG&A targets, I guess, like over the medium term? How do you think about the potential offsets, et cetera? Thanks.

Sure. So, you know, at the end of the day, we have, you know, labor costs. You know, a lot of the business in South America, you know, at Investor Day, we've highlighted about 70% is contracted. So a lot of those will be back-to-back in the contracts. Of course, there's some business that's non-contracted and some training and other costs that aren't recoverable. So in general, there'll be some inflation. We tend to have a price increase each year that absorbs some of that. But everywhere else, we're absolutely looking for productivity gains. We've had a number of them over the last five years. We look at areas to leverage shared service centers And then just general administration, we continue to march down the cost curve. We also continue to make investments like at our warehouse in Antofagasta that you would have seen the beginnings of. It's now a full auto store operation. Obviously, that continues to drive productivity, and we continue to look to just many more opportunities for that. And so resilience is top of mind for everybody, and we know that there's costs offset. We've been doing it for the last few years, and we'll continue to do so.

Max, in the back end of last year, or the start of this year actually, Dino Moll joined us. He's a 30-year veteran of the mining industry. He joined us. He's a Chilean. I was very fortunate to spend some time with him about three weeks ago. We're very confident that through his expertise and experience, There's tons of process and productivity improvements. I mean, that's where the big gain is. As you mentioned, you know, as labor costs goes up, we need to get up to the levels we see more so in the fully developed world. Then we need to see productivity improvements to match that as well. And you've been down there, Max. There's lots of opportunity there. And we feel like through the mixture of technology investments, and strong expertise directly from the mining segment, we can try and find out some of those opportunities.

Yeah, absolutely. And I guess kind of staying with the geography, like around Argentina, I mean, it feels like it's becoming a little bit more sort of business as usual dynamic. Do you mind providing a bit of an update in terms of where we are? Can you start deploying a bit more equipment there? Just maybe any data points that we should be tracking. Thanks.

Yeah, thanks, Max. So we certainly see a lot of activity right here and now in the oil and gas sector, so that certainly picked up. But as you know, we've taken a low-risk approach because there's been lots of challenges. I would say the government has made a lot of progress, a lot of incentives for businesses to make large-scale investments with structural advantages with a timeline. And so you'll see a lot of the mining projects moving pretty fast to qualify for those criteria. And so we're seeing a lot of activity there. Of course, the deal with the IMF in the last month here was super important, and the resulting removal of a lot of the FX restrictions certainly helps us in terms of speed, and risk in terms of currency has gone down a lot. So that's been super helpful. Of course, there's elections in the fall where we need to make sure that the current administration continues its momentum and support. I think that's the next major milestone. But certainly, whether it's, you know, customs timing or cash flow timing, that's improved a lot and makes it a lot helpful for us to make lower-risk decisions. And so that is all encouraging. But, of course, we want to see the evidence and the replication for more than just six months before we go too far into it. Okay.

Okay, super helpful. Thanks so much.

Thanks, Michael. The next question is from Jonathan Goldman with Scotiabank. Please go ahead.

Hi, good morning, team. Thanks for taking my questions. Maybe just one on the UK, the SG&A down 5% year-on-year. I mean, sales are down 2%, but product support up nicely. Are there any initiatives going on in that region, or how should we think about expense levels for the balance of the year?

Yeah, I think that, you know, what you're seeing there, Jonathan, is the impact of the work that Tim and the team did towards the end of the second quarter last year. Obviously, as we've said before, 2024, well, the end of 2023 and 2024, we saw a softening in the UK business. And it's so important that we retain our agility and ability to flex our cost base, you know, to continue to, in a resilient way. And so, you know, I think that, you know, those cost saving initiatives really started to take hold. you know, in the third quarter last year. And so you're seeing the impacts of that work that's carried through the end of the year, and it's against the comp of the higher cost base at the start in the Q1 last year. You know, good examples of that, and, you know, it plays through to some of the work that Tim's doing in Canada right now. I mean, it starts... We are a people business, and it starts with organisational effectiveness and design, you know, de-layering, and combining roles. Tim is very passionate about having no more than two layers from his direct reports to the front of the house. And so everything I'm saying now you can read through into some of the initiatives that Tim is working on in Canada too. So organization design spans and layers. There's also within the organization design, there's some things that we've challenged ourselves and stopped doing. things that we've determined don't support the strategy to the level that we require. There's an organization design piece, then there's an operational execution and discipline piece. A lot of that comes in terms of the cost of execution. Really simple examples of that would be costs of emergency expediting parts and people and overtime to execute the business. as well as looking for opportunities for automation, as we've talked about in Chile there in answer to Max's question about labour costs increasing. So lots of automation activities. I also mentioned in my remarks we've launched a program called Case and Workforce Management, which is really helping us to manage a customer experience in terms of a repair from start to finish, It helps with the administration of that work. It helps with expediting the invoicing of that work at the end, and it helps us with productivity improvements so we can make sure we've got a longer-term plan for our technicians moving out. And then, ultimately, there's the good old stuff as well. When you're in an uncertain environment, which we were in the UK and we are in Canada to a certain degree, there's the discretionary spend. You know, it's just the tightening of the belt. It's the, you know, prioritizing travel, prioritizing where we spend money, being really effective in terms of how you run the business. So there's a couple of examples and, you know, you can expect that to flow through into the work that Tim's doing in Canada also.

That's a great call. Very fulsome. I appreciate that. And maybe I guess in the same vein then, Kevin, or Greg, whoever wants to take this, the working cap was, Pretty amazing, you know, nominal draw, you know, in a seasonally quarter that takes a lot of investment. I mean, how much of that can we read into the initiatives you've done and are ongoing to unlock invested capital versus maybe some other dynamics that are going on in the quarter?

Sure, yeah. No, I think it's just the accumulation of a number of initiatives. And, you know, from Investor Day, you know, some are just pure unlocks, right? Some have been real estate sales. Some have been pension reorganizations. Some it's just been improvement of supply chain while we've invested in automation and looking to make the turns go faster. So I wouldn't say it's something that happened exactly in Q1, but it's the building up and the execution of the plan, which is why we looked over the last 12 months in the recap. Because $1.2 billion over 12 months is what we're trying to do. If you're looking at the $4.50 of invested capital unlocked from Investor Day, getting our sales working capital back down to $3. pre-COVID levels. You know, it's all triangulates and it's all the accumulation of literally dozens of projects and investments. And Q1 just happened to be lining up of a few stars, which we're pleased with. But I think what's different is we're also growing at the same time. We invested in inventory within the quarter, the backlog grew, and we generated the cash. So that's what's most pleasing, but that's what we're trying to do.

Yeah, and just coming back, I'll just add one thing to that. Greg mentioned the inventory is going, so that working capital release is coming from the right areas because we're growing and producing free cash flow. And one of the data points I'll share with you, our service work in progress, is up 8% over the previous peak, which was March 2020. If I look back two years to March 2023, that was the highest service work in progress balance we had for the last two years, and today service work in progress is 8% higher than that. So that bodes well for some of the other questions that we've had around continuation of that activity level.

No, it's great work and definitely showing up in the results. Thanks for taking my questions.

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

Great. Thank you, Operator, and thanks for everyone for joining today, and I hope you have a very safe day.

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