Finning International Inc.

Thank you for standing by. This is the conference operator. Welcome to the Flinning International Inc. Second 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 the telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. I would now like to turn the conference over to David Primrose, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Finning's second quarter earnings call. Joining me on today's call is Kevin Parks, our President and Chief Executive Officer. Following our remarks, we will open the line to questions. This call is being webcast on the investor relations section at finning.com. We have also provided a set of slides on our website that we will reference. An audio file of this call and the accompanying slides will be archived. Before I turn it over to Kevin, I want to remind everyone that some of the statements provided during this call are forward-looking. Please refer to slides nine and 10 for important disclosures about forward-looking information, as well as currency and specified financial measures, including non-GAAP financial measures. Please note that forward-looking information is subject to risks, uncertainties and other factors as discussed in our annual information form under key business risks and in 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. In addition, as previously announced on June 30th, 2025, we successfully completed the sales of ForRefuel and Comtek. ForRefuel and Comtek's operating results were previously reported as part of our Canadian operations and are now presented as discontinued operations. Unless otherwise noted, this presentation reflects the results of continuing operations. Kevin, over to you.

Thank you, Dave, and good morning, everyone. Thank you for joining us today. The positive momentum we generated in 2024 and in the first quarter of 2025 continued with another strong quarter of results. These results reflect the commitment of our team to discipline the execution of our strategy and the diversity and health of our end markets and regions. I'm excited to have the support of Dave in his new role of executive vice president and chief financial officer. Dave's 36 years of operating experience at Finning demonstrates his commitment to our company and our customers. His contribution to our business across most of our functions, including leading two of our regions, makes him a great partner to support me and our deal of principles to drive growth and focus on cost and capital optimization. We are looking forward to the continued progress executing our strategy under Dave's financial leadership. I would also like to take a moment to thank Greg Palastruk for his leadership as CFO over the past five years and his contribution to Finning for the last 11 years as he moves on to his new endeavor. Consistent with prior quarters, I'll provide a brief review of key highlights from the execution of our strategy before turning the call over to Dave who will provide more detail on the results in the quarter. Please turn to slide two. We continue to build on strong Q1 2025 results, sequentially growing revenue by 6% from the first quarter to $2.6 billion. We believe the diversity of our business positions us well for all market conditions and provides resilience and stability for our earnings, particularly in times of market uncertainty. Our new equipment backlog grew to 3 billion at the end of June, the fifth consecutive quarter of backlog growth and a new record. We are encouraged by this increase given we delivered nearly $1 billion of new equipment in the quarter and the highest quarterly delivery amount in the past 10 years. This record level of backlog provides confidence for our business and future product support opportunities. Order intake outpaced deliveries in all regions, particularly pleasing was Canada with orders of more than 80% of the same quarter last year with strong orders in all segments, including construction where orders almost doubled. We also saw strong order activity from several mining customers as well as in the power sector related to gas compression. In South America, similarly, we saw strong mining sector order intake complemented by power from both oil and gas and prime power segments. In the UK and Ireland, we are seeing improving orders from construction customers and steady power sector growth activity. Moving to product support. Q2 product support revenue grew in all regions, reflecting our efforts in Q1 to re-energize sales efforts in improving market conditions. In Canada, product support revenues were 4% led by mining. Mining product support revenues improved year over year by 10% and 3% sequentially from the first quarter. As I've spoken about on the last couple of calls, we remain committed to supporting our customers to achieve lower production costs through stronger partnerships, planning and execution. In South America, product support revenues were up 4% in functional currency on strong mining activity. We again added over 100 technicians in the quarter to help support our customers, including as we ramp up our capabilities to deliver on the new equipment awards we announced in May 2024. In the UK and Ireland, product support revenues were 1% in functional currency on improved power segment activity levels, similar to last quarter as we continue to support a growing population of power systems equipment in the region. Maximizing product support remains a key focus for our regions. During the second quarter, we also continued our solid progress on improving the resilience of our business to strengthen our earnings capacity with strong cost and capital control. SG&A margin was .5% in the quarter and included a meaningful increase in long-term incentive plan expense, given the 44% share price appreciation. We also took further action in Canada to streamline our organisation structure with expected annual future savings of over $20 million. We remain relentlessly focused on driving efficiency in our operations, while building capabilities, coverage and capacity to drive loyalty and growth. Invested capital turns were approximately 2.3 times this quarter and have steadily improved since the beginning of 2024, demonstrating our focus on improving capital velocity and growing our business. From a sustainable growth perspective, we continue to see strong growth in our power systems business and improvement in our rental revenues. Our power systems backlog now exceeds $1 billion, reflecting a diversified mix of prime power packages, oil and gas related equipment orders and data centre standby packages to be delivered through 2027. Relative last June, our power equipment backlog is of 88%. Power systems product support revenues also continues a steady growth trajectory as population builds. Revenue in our used equipment segment decreased this quarter, mostly due to large one-off packages last year. Used equipment margins have however improved in 2025 as the market inventory levels have normalised. This is generally in line with the expectations we outlined during the third quarter results last year. Rental revenue increased 4% with a 10% increase in Canada relative to Q2 2024, including solid activity in heavy rentals despite the more challenging construction market. Our new rental leadership team are making solid progress as the coverage and fleet changes we made last year are improving utilisation levels in each of our rental businesses in Canada. We remain committed to growing this line of business in the long term. Before I turn the call over to Dave, I'd like to provide a few comments from each of our regions. In South America, the team continues to execute well across all countries and across sectors. We continue to see solid activity levels in our mining business with new -for-class truck deliveries and support equipment awards added to our backlog in the quarter. Customers are actively managing in their equipment fleets, adding new equipment while maximising the utilisation of their existing aging fleets. We expect continued growth for our mining business, albeit not in a linear fashion as mines build specific optimisation and growth plans. We will also continue to focus on renewables in the construction sector, with mining contract activity levels strong. Our power systems business remains active in South America, particularly in oil and gas and in the data centre market. In the UK and Ireland, the team continues to operate resiliently in a tough market. While the construction segment continues to show signs of improvement from a quoting standpoint, equipment utilisation levels are still subdued. Our power systems business in the UK and Ireland continues to see strong quoting activity from prime power and data centre applications, while at the same time, product support revenues in power are robust. We continue to leverage digital tools, as mentioned on the last call, to drive productivity improvements as we execute, repair and rebuild work. In Canada, the team is focused on capturing growth opportunities in the market, driving product support growth through adding technicians and sales coverage remains a priority. Activity levels in power systems have been solid, supported by well servicing and gas compression and market demand. Construction activities remains on the slower side of our expectations, but we are relentlessly looking for ways to add value to our customers, whether through machine rebuilds or targeted component sales. Our mining business continues to perform well and activity levels are robust, despite some weakness in certain commodities. We added over 20 auto class mining trucks to backlog this quarter and quoting activity remains strong. Overall, we remain optimistic for the second half of 2025, with the strong first half behind us and lots of opportunity in front of us and continued momentum in the execution of our strategy. With that, I'll hand it back to Dave.

Thank you, Kevin. We'll now turn to slide three. Our Q2 revenue of $2.6 billion was comparable to Q2 2024 with solid product support revenue growth offset by lower used equipment sales. Our second quarter earnings were adjusted for severance cost of $12 million for headcount reductions related to consolidation efforts and changes to our organizational structure with a focus on non-revenue generating positions primarily in Canada. Excluding severance, adjusted EBIT was down 2% from Q2 last year, primarily due to higher LTIP expense of $16 million or 9 cents per share relative to Q2 2024, reflecting a 44% appreciation of our share price during the quarter. Adjusted EPS of $1.1 was up 5% from Q2 2024 EPS, reflecting lower finance costs on a lower average debt level, as well as the benefit of our share repurchases. Our adjusted EPS excludes four refuel earnings of 5 cents per share in the quarter. We are pleased to see continued momentum in our business underpinned by supportive mining and power system activities. At the same time, we continued executing our strategy to maximize product support, build full cycle resilience through diligent cost control and improving invested capital velocity. As Kevin mentioned, SG&A margin remained resilient at 15.5%, invested capital turns reached approximately 2.3 times, and we maintained our working capital to sales ratio of .4% relatively in line with last quarter and with an improvement from Q2 24 of 310 basis points. Consolidated adjusted return on invested capital and net debt to adjusted EBITDA also held firm from last quarter at .7% and 1.6 times respectively. Our Q2 free cash flow usage of $164 million reflected higher inventory levels to support increased customer activity. On slide four, we show changes in our revenue by line of business compared to Q2 2024 and the composition of our equipment backlog by market sector. New equipment sales were comparable to Q2 24 with strong mining deliveries in Canada and South America offset by slower construction sales in Canada and the timing of power projects in the UK and Ireland. Used equipment sales were down 43% as in Q2 2024, we had large auction sales and one-time deals in Canada that did not repeat this quarter. Product support revenue was up 5% with consolidated growth benefiting from a stronger UK pound. And as Kevin mentioned, we saw growth across all regions led by mining in Canada. Our equipment backlog reached an all-time high of $3 billion at the end of June, which is up 38% from the end of June last year and up 6% from the end of March, 2025. We are pleased to continue to see the sustainable growth in our power systems backlog to over $1 billion, now representing 35% of our total backlog, which is another testament to our strategy execution focus. Turning to our EBIT performance on slide five, gross margin was up 40 basis points, primarily driven by a higher proportion of product support revenue in Canada and the UK and Ireland. SG&A margin was up 50 basis points, primarily due to the $16 million and higher LTIP expense in the quarter. We remain focused on simplifying our business and our restructuring efforts this quarter are expected to result in annual SG&A savings of over $20 million. Looking ahead, we will continue to seek opportunities to further improve efficiency, reduce overheads, and build more resilience into our operating model to drive higher earnings capacity. Q2 adjusted EBIT margin was .1% in South America, .4% in Canada, and .2% in the UK and Ireland. Moving to our South American results and outlook, which are summarized on slide six. In functional currency, new equipment sales were up 6% from Q2-24, driven by strong mining deliveries in Chile. Product support revenue was up 4%, driven by strong demand from the mining sector, coupled with higher rebuild activities in construction. EBIT was up 2% in functional currency, and EBIT margin was down 30 basis points due to a higher proportion of lower margin mining equipment sales. Our outlet 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 activity levels and outlook remain positive, we also expect a more challenging labor environment, including higher compensation and union agreement payments in upcoming union negotiations. These negotiations are expected to include cash bonus payments as is customary in that market. These payments may occur in late 2025 or potentially 2026, and will have an impact on capital expenditures. 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 are also positioning our business to capture potential growth opportunities in the oil and gas and mining sectors, and we are encouraged by steps taken by the government to reduce currency restrictions. Turning to Canada on slide seven. New equipment sales were down 3% from Q2-24, primarily due to slower construction sector activity. Used equipment sales were down 58%, primarily due to the large auction sales and one-time deals in Q2-2024 that were not repeated this quarter. Product support revenue was up 4%, driven by higher spending from mining customers. Adjusted EBIT margin was up 50 basis points from Q2-24, driven by a higher proportion of product support revenue. We incurred $11 million of severance costs in our Canadian business, primarily in selective back office and technology roles. In terms of outlook, we are encouraged by the recent Bill C-5 legislation and announcements regarding the potential to accelerate resource development and infrastructure project activity, but we remain cautious with respect to the exact timing and magnitude. Meanwhile, 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. And for power systems, we continue to see healthy demand for reliable and efficient electric power solutions. And finally, we remain focused on managing costs and working capital levels. Please turn to slide eight for our results in the UK and Ireland. In functional currency, new equipment sales were down 8% compared to Q2 2024, due to the timing of power system project deliveries partially offset by higher construction new equipment sales. Product support revenue was up 1% with higher activity levels in the power system sector offset by slower activity in construction. EBIT margin was up 60 basis points, reflecting higher proportion of product support in the revenue mix, and a continued strong focus on cost control. As we continue to grow product support business, which is more cost intensive, we remain committed to keeping our SG&A resilient. We expect demand for new construction equipment in the UK and Ireland to remain soft in line with the 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. Before I turn it back to Kevin, I would like to reiterate our goal forward strategic priorities. With the sale of foreign fuel and Comtac now completed, we are sharpening our focus in our core dealership operations to execute our strategy. To maximize product support, it will be our top priority to grow equipment population and market share across all areas of our business to unlock future opportunities. We are also actively seeking to grow our technician base to capitalize on our extensive service network and parts distribution platform. On full cycle resilience, building upon the restructuring actions that we undertook this quarter, we will continue seeking further opportunities for costing capital efficiencies, while at the same time maintaining growth momentum in our business. Meanwhile, we also expect to continue to invest strategically in core dealership to support future sustainable growth in rental, used and power. Overall, we expect our adjusted return on invested capital to improve as a result of the sale of foreign fuel and Comtac and that the reduction of earnings from the sale of those businesses will be offset through a combination of share repurchases under our normal course issuer bid subject to market conditions, debt repayment and core dealership momentum, including SG&A reductions in Canada. The allocation of net cash proceeds from the sales will remain dynamic as we assess investment opportunities in our core operations and refine our future plans. I'll now turn it back to Kevin for some closing remarks.

Thank you, Dave. Before I turn the call back to the operator for Q&A, I'd like to summarize our remarks and underline the strength of our core business, following the sale of foreign fuel, which we're happy to complete ahead of schedule. We are proud of the accomplishments of this quarter as our teams continue the disciplined execution of the key pillars of our strategy. Product support grew in all regions and is up 7% year to date. New equipment sales were strong and we achieved a new record backlog, which positions us well for future opportunities. And we continue to demonstrate cost discipline and increased capital velocity and we are pleased with year over year earnings growth. Operator, I'll now turn the call over to you for questions.

Thank you. Analysts who wish to ask a question, please press star then one on their telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. The first question comes from Devin Dodge with BMO Capital Markets. Please go ahead.

All right, thanks. Good morning. I wanted to start with a question on earnings in the South American division. Last year, I think there was a meaningful drag from currency-related risks in Argentina and with revenues up about 6% this year, I would have expected a bit of a stronger flow through down to operating income. So I'm just trying to get a sense if there was some cost pressures in the business and if there were, was it mostly a one-off or could some of this linger until pricing or operating efficiencies provide an offset?

Yeah, sure. Thanks, Devin. I appreciate the question. Yeah, for sure. As we continue to grow in South America and the business of all of the raw cost pressures in South America, I think they extend beyond filling into the general mining industry. We're still seeing the labor market being very hot. That results in some increased costs of labor. We're currently negotiating with a couple of unions. We're pleased to have closed with two unions so far and we're still negotiating with a couple. And also there's incremental cost of executing the growth down in the region as well. So growth is not linear. Sometimes you have to invest ahead of the growth as well. So at times, we're adding costs into the business to get ahead of that growth and to make sure we can support our customers. So there's some of that in there as well, but generally the other part of it is, we are seeing some pressures from product support margins as we continue to grow the business as well. But overall we're pleased that that business still operates at a margin in excess of 10% and very strong rowing.

Okay, thanks for that. Second question, fairly meaningful buildup of working capital in the quarter. I think year to day is actually a bit higher than last year. I think there's been obviously a big focus amongst the leadership team to kind of streamline invested capital. Just wondering if you could talk about the drivers of that working capital buildup and how we should be thinking about the back half the year in terms of working capital.

Yeah, I think the working capital buildup, I mentioned it on the last call, Devin, that ASWIP was the highest it's been for 10 years. So that's a result of the product support growth and the future business. So a lot of it can be attributed to that and an increased parts inventories. We also have some lumpy inventory around the mining truck deliveries as well. So they're the three main drivers of that. I would say that I would expect working capital to remain at those kinds of levels as we continue on this growth, the current growth trajectory. As you mentioned, we're always looking for ways to streamline that and to close out SWIP jobs earlier to move equipment through the supply chain faster. But I think it's more a function of the growth that we're seeing in the outlook.

Okay, great. Thanks for that. I'll turn it over.

To you, Devin.

The next question comes from UELink with Kenna Cordonuity. Please go ahead.

Good morning. Can you just, Kevin, expand a little bit on construction markets? I think sales activity was weaker, but I thought in your prepared remarks, you mentioned that bookings activity had kind of picked up. So any more detail on what's going on there?

Yeah, to be clear, we're very pleased with the order intake in Canada. I mentioned that the bookings doubled. That's super encouraging for the future. The talk, my comments around softer construction really relate back down to product support for the moment. We've seen a healthy order intake in the UK as well. So we are seeing investment or renewals of fleets in construction. But utilisation levels, which we track, are still at the lower end of the range. If you look at quarrying output, the aggregates output in the UK, it's still at the lower end of the range. So the actual utilisation equipment and therefore the product support that we're achieving in that space remains still a bit subdued. But for sure, the order intake in construction in all three regions actually, but particularly in Canada, is very encouraging. And I would say that we're very happy and we believe that part of that is through growth of market share. And obviously that plays well to product support opportunities in the future. OK.

I just want to switch to the backlog, particularly power systems. It's almost... The power systems backlog has almost doubled versus last year. Of that backlog that you've got now, how much of that is data centres versus prime and standby power?

I would say in the UK and South America, it's nearly all data centres. So you've used Pareto 80%, at least in the data centre market. I think it's a more broader split in Canada to the oil and gas and gas compression. Gas compression sector. But I'd say data centres are the secular demand driver in that backlog number for sure.

And how has quoting activity evolved over the last few months?

Yeah, so we were aware of some narrative around data centres and demand and some pausing. We're not seeing that in our order intake or in the general markets that we're seeing.

Helpful. I'll turn it over. Thank you.

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

Yeah, good morning, guys. Thanks for the time. I just want to follow on Yuri's question just on the power system side. Is it possible just to maybe describe some of the pros and cons that you sort of see as facilitating this large build-up in backlog and order flow? It's all encouraging, of course, but I think you described it as being more cost-intensive. Maybe just give us some other things to think about as we're thinking about the margin profile going forward and how you manage that sort of extended runway.

Yeah, it's a good question. I'll make sure I understand it. So, for sure, the secular trend that we're seeing in data centres is a meaningful driver of business growth for filling. And so I think that in terms of the equipment sales, the engine sales, that's a very healthy business. Of course, depending on the application of the power system's deliveries, the product support intensity can be very different. But we've always said that, and we've seen it as a driver in the UK, that data centre maintenance and customer value agreements are a really good source of product support revenue moving forward. And so we know it's a very healthy business and we're very pleased to have gone over a billion dollars of backlog in that segment there. And I think from NetNet, margin, it would be helpful to margins over time. But as you know, in our business, that mix of new equipment sales, so if you do a healthy, like a big delivery of a big project in a quarter, that can change the mix that we've seen in that quarter and it can impact margins in that quarter. The way I'd encourage you to think about power systems is the long-term secular trend, how they're delivered is going to be lumpy and continue to be lumpy. But the underlying population and therefore the product support, the product support revenue stream annuities is kind of a net new or an incremental for our dealership. I'll

just add that, Steve, with the power customers, they're typically the data centre, large global sophisticated customers who do long-term planning and we work very closely with them and that long-term planning is beneficial to them and also to us as we plan our execution of those projects.

So, I mean, in terms of, I don't see any cons to your original question, Steve.

Okay, that's helpful, thanks. Just want to go back to the cost savings efforts that are still underway here in Canada. You described some of the takeout already and the $20 million of savings. Is it possible just to give us a sense for where we sit on that journey, maybe in just inning terms, are we in the fifth inning, sixth inning? Presumably, a lot of the big changes happen up front as you adopt this UK playbook, but I just want to get a sense for whether we'll be seeing additional actions to the balance this year and in. Well, thanks.

Yeah, I mean, it's... We've said this continuously as well and I think you've seen it through our overall SG&A. We'll never stop looking and I've been consistent in this one. We'll never stop looking for cost efficiencies, for sure. When you bring a new president into the company, they are reviewing the business and looking for opportunities with a fresh set of eyes and some different perspective from a different operating region. And so we fully expected that with Tim taking on that role, we would start to see some changes there and we think there's more to go at. It's very difficult to decide which innings we're in right now, save for the fact that we believe there's more to go out there in Canada.

Yeah, I think Steve, I'll just add there is... We see this definitely as a continuous journey and if you look back in time, we've taken our SG&A percent from 20, you know, 1918, we're now in the 15 range. So it's a look at it a bit like safety, it's never finished and we're always going to be looking to improve. And with Tim coming into Canada, again, we just will continue to identify opportunities in all regions.

Appreciate the time. Thanks, Steve.

The next question comes from Sherlyn Radborn with TD Coin. Please go ahead.

Hi, good morning. This is actually Patrick on for Sherlyn. Thanks for taking my questions. The first one is just back on product support margins in South America. So you mentioned a bit of pressure there. I guess with product support up, but new equipment sales also up, does new equipment going up out tie up technicians who could be working on the higher margin product support business? So is that something that could be at play there with the margins or is the drag related to that hiring of technicians? I think you said more than 120 since last quarter.

Yeah, no, we definitely wouldn't say that the delivery of new equipment, we have a very superb process. I think some of you saw it last when we did the invest today and how we deliver equipment from our La Negra facility in Antifagasta. And so, no, there's definitely not a mix of a shift of technicians. A lot of technicians are dedicated to my insights. For me, it's more the, I would describe it as the kind of growing pains, the extra cost from growing pains, training technicians, they're not as productive as they would be. If they were fully trained, moving parts around in new volumes is also more expensive. And so I would say that it's more a function of growing pains. We were very focused on the ROIC and the margin, but then the ROIC that we're delivering in South America, we feel like it's a very strong business. But to the other question around that we just had around cost savings, we'll never stop looking at ways to offset that. We want to be competitive. We have to be competitive. And our business, we want to grow the business and we feel like there's opportunity to grow the business. So there may be some movement around from margins to cost, from margin and looking for cost offsets as we move forward. I think that's healthy. I think most good businesses would look to do that.

Okay, great. Thanks for that. And then I guess on the call, you also mentioned the target component rebuilds being a strategy to accelerate product support business in Canada. I guess is that something, are there learnings and sales practices being levered from the UK Ireland business implemented in Canada? Was this an area you identified as something that needed more focus or was like a playbook brought in?

Yeah, I think it's been a focus for a while. In Canada, we've been pleased to win back a big chunk of component business from a major customer that was being outsourced elsewhere. And so that's driving some growth there. Obviously, the rebuild activity, machine rebuild activity has been strong since the post-pandemic era. As that rebuild opportunity, we talked about before, as you come down the pyramid of size classes of machines, the value proposition for a full machine rebuild gets tested. We're constantly looking at ways to expand the pool of equipment we can rebuild to get it into that kind of cost optimization window. But in cases where we can't, we're using our network to rebuild individual components, engines, transmissions, where a full rebuild doesn't make sense. So I think it's two things. One is constantly looking ways to expand the opportunity for rebuilding equipment and components. Another one is significant incremental wins with large customers.

Great. Thanks, I'll turn call back.

Thank

you.

The next question comes from Christoph Riesen with CIBC. Please go ahead.

Hi, thanks for taking my question. Maybe if I can just go back to the previous question on margins in South America. Can you give a bit more color as to maybe what the internal impact is, whether it's technicians maybe not being fully trained versus the external impact of just that operating environment. I'm just curious kind of what's within your control versus what's more of a macro impact?

Yeah, so, you know, as we've said before, and I think if you look into the mining sector, you know, most of the mining sector are looking for ways to improve costs, improve efficiency. If you think about mining growth, oil grades have declined, fleets have aged, there's been a labor challenge across the whole sector. And so all of these things are a perfect storm of growing pains, which we're helping our customers to navigate. And so for sure, we're looking for ways to be more efficient and to help our customers lower their costs. But I would describe most of it as, and where we have that and where we have to become more efficient, then we'll look for the SG&A offsets. I think what you're seeing in South America, as I mentioned, in my previous remarks on the previous question, I would categorize it more so as growing pains, as we strive to add more than a thousand technicians and add new supply chains. You know, we have a dedicated warehouse that we've opened to help us increase the velocity of parts that we're shipping into the mines in the Antifogasta region. That's an incremental cost that we didn't have two years ago. And so I would categorize it more of those growing pains than external pressures. But for sure, we take our responsibilities very seriously and we're very focused on helping our customers reduce their operating costs.

What I'll just add there, Chris, is, again, keep in mind also the equipment shift to mining in South America. So, you know, as we see a shift of mining products poured and a shift of mining equipment, it does put pressure on that. But at the same time, like Kevin said earlier, we're still in that range that we've talked about before for South America. And to the extent there are margin pressures, we're always looking to offset that. To the extent we counter SG&A as well.

Okay, great. Thank you. And then maybe just shifting gears a bit, your outlook for Canada seems modestly more positive than last quarter, just as a result of recent legislations and announcements there. Can you add any colour as to what you're hearing at this point?

Yeah, I would say, you know, we're encouraged by the announcements and the approach of the new government. It's significantly more positive, you know, sentiment or commentary about how they want to build Canada and build Canada strong. So that's a net positive for us. I wouldn't say that... So that's an incremental positive. We feel better about Canada than we did a year ago. You know, also, I think that's given some confidence in the market and you're seeing that in customers willing to commit capital and place orders, particularly in construction. But I think our comments are more positive around Canada are more a function of what we've seen in the business, which is good product support growth, strong equipment sales, very, very significant backlog build in Canada this quarter. And so I comment some more around, you know, what we have seen in the business more so than, you know, being getting too carried away with the initial kind of sentimental commentary from the government.

Thanks, I will jump back in the

queue.

Perfect, thank you.

Thanks, Krista.

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

Great, thanks and good morning. You know, touched a little bit on this across some of the questions, but maybe you can just dig a little bit into your current backlog. And I think in the past, you've made comments around, you know, the backlog during a peak mining cycle would be sort of X percent. One, can you just talk about where you see the mix of the backlog relative to typically when demand is at high levels? And then secondly, you know, as we look at the backlog mix across mining power system and construction, you know, should we just generally assume the power systems part becomes a bigger proportion over the next one, two, three years as maybe growth accelerates relative to the rest of the business? Thanks.

Yeah, sure. Thanks, Sabat. For sure. So, I mean, this is a record backlog level, so it's hard to kind of comment on previous, you know, previous comparisons. You know, the way I would describe it and we have done previously is that, you know, construction is back at more normalized levels. And so, you know, it would be, you know, 20, 20 percent range of backlog. And the remainder, you know, we obviously have been very successful in mining orders over the past little while and they take a longer time to go through the system. So, you know, backlog would be around half of our, sorry, mining would be about half of our backlog right now. And then obviously, we talked about power systems being a billion. That just incrementally keeps growing as part of the proportion of the share of the backlog in every quarter. And to your question, you know, we would see that continuing as we move forward. And part of that, as we've said previously, some of that is due to the growth that we're seeing and, you know, the ability to supply that backlog. And, you know, Caterpillar are building more capacity to help us with the velocity that we can deliver those engines. And some of it, as Dave mentioned just a few minutes ago, is around the data center, the power systems customers tend to plan longer term. They're having to build infrastructure, you know, roadsheds or by service. So they're planning way further ahead than we would typically see in our other segments. So that helps us with backlog. So some of that backlog that's in there, you know, is deliberately going to deliver in 2027 because that's when they want it.

And just sort of the comment around, you know, your OEM sort of supporting this growth in power systems, can you maybe just talk about the availability of the products that your customers want within power systems, having the right products? Are they getting it on time? Because presumably the data center demand, the OEM is likely seen globally. So just, you know, your ability and confidence in delivering against this elevated demand over the next call at 12 months or so,

thanks. Yeah, so when we take backlog, we book orders with Caterpillar and Build Slots. And, you know, as with any supply chain, they can move around a little bit. But I think in power systems, specifically due to the planning nature, we're confident. And, you know, we've got a track record of delivering power systems projects on time. You know, I guess, you know, we are seeing a tide in that supply chain. That's, as I previously mentioned, you know, that's why Caterpillar are expanding their production capacities at Lafayette. That will come on stream, I believe, you know, next year and into 2027. So that'll further improve our ability to support our customers in this space. So, yeah, we're super confident and we have to be. These projects are very precise and we need to deliver them effectively and on time.

Great. Thanks very much.

Thanks, Albert.

The next question comes from Max Insightjess with National Bank Financial. Please go ahead.

Hi, good morning, gentlemen. I was wondering if it's possible to get a bit of an update on your parts automation initiative in Canada and what do you think we could see, you know, the potential benefits down the road?

Thanks. Yeah, great question, Max. And so, I mean, so that's all signed off. My understanding is that will be implemented in the second half of the year. As we've seen in South America, and, you know, you saw the plan when you came down there in 2023, that new auto store technology demonstrably changes the way that we pick and pack and ship parts. And it reduces the labor intensity, which is important given labor scarcity and labor cost in South America. But labor is a high cost in Canada as well. And so we would see that as one of the key streams for further SG&A reduction in Canada. So if we look at the runway in Canada that we spoke about, you know, we've got Tim's, I would class it as, you know, the fresh eyes looking at the organization and removing any excess that we may have built up over the post-pandemic period. And then there's another section of transformational cost change, which we need to ensure that we remain competitive. And, you know, we put the parts transformation and the auto store into that category. The good thing about it is we have had it in South America for a year now, or over a year. And it's working fantastically well. So we've got a proven track record. We've got people that have used it in South America for a long while. There are other cat dealers and cat distribution centers that use the same technology. And so we'd have a high degree of confidence of execution there and seeing the subsequent cost savings.

Okay, that's good comments. Thank you. And then just wanted to pivot a little bit to the used market. I mean, like, obviously the whole thing is kind of recalibrating, but I'm wondering if you don't mind kind of linking the used product with the fact that Catatouille is talking about sort of normalization of, you know, pricing dynamic on the new side and, I guess, general availability. How do you think, you know, that bucket I used will play out on a global basis? Thank

you. Yeah, so it's a new equipment supply is broadly normal. And so, you know, what that's led to is a bit of an excess in used equipment over the past year, which, you know, obviously, when there's an excess of used equipment, the prices come down and that can impact your current inventory. I think you saw that through the course of last year, especially the second half of last year in Canada, specifically. And, you know, we would say that, you know, that used equipment business is more normal now. The sales are, I would say the demand is a little lighter than normal right now as the market recalibrates, as you suggest, but margins have more than improved, right? So there's an offset to margin, which means that the business is performing well. Our priority and our intention there is to effectively participate more in that market, Max. So, you know, if you're participating more in the used equipment business, you know, when the prices are lighter, you know, it's going to hurt you. When the prices are better, volumes will drop. And we also, you know, you have to roll into there. So, you know, we're really trying to participate more in mining used equipment as we move, participating, moving equipment between our own regions and others. And that can be very lumpy as well.

Sure. And sorry, just to follow up on that, do you have to invest incrementally or you're already have like sort of all the capability process wise and people wise to, as you said, participate more in that vertical?

Our used equipment is something that we do. We just weren't participating enough in it, Max. So we have the capabilities and we've enhanced it with, you know, people coming from the market into our company and, you know, that have been available. So we have more than enough capability to do that. It's a very light business. You know, we have the branches, we have the infrastructure, we have the system. So now there's very little incremental cost.

Okay. That's why it's just good to

participate in it.

Of course, of course. It makes sense. And just one verification in terms of your data center capability, correct me if I'm wrong. In the past, you were saying that you were working with other CAD dealers in outside of your geographies, like in Europe, for example, is that still the case? And is that also part of the reason that why seeing that accelerated growth curve and empower?

Thanks. Not so much in power. And that's just specifically in Europe as we help the other European dealers. We've developed track record of delivering on data centers and, you know, we collaborate with the support of Caterpillar and the local dealers to execute on those programs. We're also, you know, we have the dealership in Northern Ireland where a lot of this equipment is built and packaged. And so that gives us an advantage there as well. But, you know, I wouldn't say that's part of the incremental. That's a big part of incremental growth. I think it's more coming from our domestic market, from our legacy and domestic markets. Okay. That's not a big driver. That's not a big driver. You know, we're the drivers of domestic markets.

Okay. Okay. Thank you.

Cheers, Max.

The next question comes from Jonathan Goldman with Kosher Bank. Please go ahead.

Hi. Good morning, team. Thanks for taking my questions. Maybe just to start off, we spoke a lot about growth on this call and you're investing for that. That's encouraging. But how much visibility do you have on that growth when you're making the plans and you're investing? How many quarters or years out are you thinking or do you have visibility on?

Yeah, I think, well, so I think if you look at it by sector, you know, in terms of mining, you know, that growth is steady in Canada. You know, we have good visibility to the mining, the oil sands producers, you know, that's, you know, steady 2 to 3% growth. So you're looking to add technicians and, you know, there's not a huge amount of additional capital needed in that space. You know, we look to increase efficiency of the facilities we have to support customers there. There may be a little bit of incremental capacity, but not significant. South America, the plan has been significant. And I would say that we've just finished phase one of that with the developments we've had in what we call the Antifogasta master plan, which we outlined at the invest today. So the bays are open, the auto stores in. Right now, we're just, I would say, in the process of stepping back from that a little bit and looking at what the longer term sector trend and commodity trend is for copper mining. We're talking to our customers about their plans and their mine plans. So I would say that copper is taking a breath right now, but it doesn't take away from the long term trend and the long term opportunity in copper. So I would say that, you know, we're currently calibrating and looking out to the second half of the decade now in terms of what additional capital we need to support to support the growth of copper production in that region. So I would expect more more to come on that. The UK, you know, is really growth is low and so visibility is not very good. So at the moment, it's more about maintenance capex there and what we're doing to improve our facilities to improve efficiency. So I'd say the only other, I mean, the growth in power systems, you know, again, is that's just secular. So we continue to look at the capabilities we have to support that business.

And Kevin, you touched on this on the UK. Is there any incremental positives there from the new budget that was passed and maybe stimulus money that may flow in the second half or maybe more fulsome in 2026?

No, John, not at the moment. We're not, I mean, government, I've learned over time not to listen to governments. To watch what they do. And so, you know, obviously there's some encouragement in terms of equipment delivery. Some of our customers are closer to the actual contracts and the execution of those contracts. So there's some encouragement to be heard from that. But, you know, I've learned a long time ago not to not to run our business based on what the governments do. They say sorry, but what they do. I'll

plead the fifth on that one. And then maybe just one more for me on the backlog build. Really nice build and other record. But based on the activity levels you've seen today, maybe the conversations you're having with customers, do you have a sense there's continued momentum there on the new equipment side or is there a risk we're approaching peak of the backlog build?

Yeah, it's hard to say. You know, we don't like to talk about peak because we're growing our business. We're certainly not a peak in power systems as we've for the reasons we've previous articulated on this call. So we continue to try and grow market share there. They're planning further out. So, you know, whilst the backlog, you know, what you're seeing in power systems deliveries and we will see more deliveries in the second half of the year than we did in the first half of the year. So you'll see timing of big deliveries happening and new orders coming in. So it could be lumpy over time. And the same for, you know, same for mining. There's a lot of quoting activity going on in South America right now. And we've taken orders from all three oil sands producers in the quarter, hence the Canadian backlog. And, you know, we'll see that continuing. So, you know, currently we work on delivering in mining a truck a week between South America and Canada. And that's encouraging. And we've got further opportunities ahead of us. But most importantly, it's a good indicator for the health of those end markets and the product support opportunities in the future.

Definitely. Thanks for the call. I'll get back in queue.

Thanks,

Jonathan.

We have a follow up question from Steve Hansen with Raymond James. Please go ahead.

Yeah, thanks guys. I don't want to run along. Just I just want I know it's only been two quarters, but is it fair to say that product support growth, the pressures that we saw in product support growth in the oil sands that you endured through, I guess, late 23 and most of 24 are largely now behind us. I know there's been different elements to that line item in the sense that construction was also pressured, but I just in the oil sands, specifically the behaviors you've described over the past year and a half or so, is that are we passed that now into one more regular cadence or rhythm?

Yeah, I think from a component perspective, our OEM, you know, OEM remanufacturing facility, I would say, you know, yes, and we're working with our customers to, you know, to optimize component change out, you know, in terms of machine rebuilds, that will always be lumpy on the local mine and their, you know, their plans and what they're doing. And so and then of course, you know, the summer months tend to be slower for us in the oil sands with the with the with the soft underfoot conditions. So, you know, what we're saying about mining, Steve, is that it remains dynamic based on individual mine plans and activities. And, you know, we don't expect it to be linear quarter after quarter after quarter, but we do expect to grow every year. Very good. Thank you.

This concludes the question and answer session. I would like to turn the conference back over to Mr. Primrose for any closing remarks. Please go ahead.

This concludes our call today. Thank you for your participation and please have a safe day.

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