Finning Reports Q1 2013 Results and Increases Dividend

Marketwired

VANCOUVER, BRITISH COLUMBIA--(Marketwired - May 8, 2013) - Finning International Inc. (FTT.TO) -

Q1 2013 HIGHLIGHTS

  • Revenue rose by 8% to $1.6 billion, driven by significantly higher revenue from South America, which more than offset modest revenue reduction in Canada and the UK & Ireland.
  • Product support revenue increased by 13% to record levels reflecting incremental revenue from the expanded mining product line (the former Bucyrus International Inc. business) and solid machine utilization in mining and construction.
  • EBIT grew by 21% to $117 million and consolidated EBIT margin was 7.4% compared to 6.6% in Q1 2012, reflecting higher EBIT margin in Canada.
  • Basic EPS was $0.43; up by 16% from Q1 2012, marking the best first quarter EPS on record.
  • Free cash flow was $93 million use of cash, a significant improvement from $223 million cash usage in the first quarter of 2012.
  • The Company raised its quarterly dividend by 9% to $0.1525 per share, reflecting the expectation for earnings growth and strong free cash flow potential.

Finning International Inc. reported quarterly revenues of $1.6 billion, an 8% increase over Q1 2012. Strong revenue growth in South America more than offset lower revenues from Canada and the UK and Ireland. Product support revenues grew by 13% over Q1 2012, reaching a new record. Quarterly earnings before finance costs and income taxes (EBIT) rose by 21% to $117 million. Quarterly EBIT margin was 7.4% compared to 6.6% in Q1 2012, resulting from improved EBIT margin in Canada. Basic earnings per share (EPS) increased by 16% from Q1 of last year to $0.43. First quarter results included severance costs of approximately $4 million or $0.02 per share, and reflected the adoption of the amendments to International Accounting Standard (IAS) 19, which reduced results by approximately $0.02 per share in both 2013 and 2012.

"Our ability to grow revenues during heightened economic uncertainty clearly demonstrates the benefit of our broad end-market and geographic diversification, as well as our product support capabilities. As expected, slower activity in mining translated into lower order intake. However, our backlog remains solid, and high machine utilization levels are expected to continue driving strong product support revenues in 2013," said Mike Waites, president and CEO of Finning International Inc. "Our priorities for the year ahead remain unchanged. We are executing on operational excellence initiatives with rigour and discipline to achieve sustainable improvements in our operating profitability. Based on our capabilities to generate strong free cash flow and our expectation for earnings growth, we are pleased to increase our quarterly dividend by 9% to 15.25 cents per share."

Consolidated 2013 revenues are expected to be flat to up 10% over 2012, driven by product support revenues which benefit from a full year's contribution from the expanded mining product line. For 2013, earnings are expected to grow at a higher rate than revenue. The Company's net debt to total capital ratio is projected to decline to the 35-45% target range by the end 2013.

The Company aims to improve operating profitability through advancing operational excellence. The Company targets to achieve EBIT margin of 9-10% and ROE exceeding 18%, on a consistent basis. The timing of the achievement of the EBIT margin target will depend on the Company's ability to successfully execute its operational excellence strategy and may also be influenced by market conditions.

Q1 2013 FINANCIAL SUMMARY

C$ millions, except per share amounts (unaudited) Three months ended Mar 31
2013 2012(6) % change
Revenue 1,584 1,472 8
Earnings before finance costs and income taxes (EBIT) 117 97 21
Net income 73 64 14
Basic EPS 0.43 0.37 16
Earnings before finance costs, income taxes, depreciationand amortization (EBITDA)(1)
169

145

17
Free cash flow(1)(2) (93 ) (223 ) 58
  • Revenues increased by 8% from Q1 2012 to $1.6 billion, driven by strong revenue growth in South America, which more than offset lower revenues in Canada and the UK & Ireland. New equipment sales were up by 2% as significantly higher new equipment sales in South America outweighed the reduction in sales in Canada and the UK & Ireland compared to Q1 2012. Product support revenues rose by 13% to record levels, with the highest ever revenues in Canada and strong growth in South America. Used equipment sales declined in all operations and were down by 18% compared to Q1 2012, while rental revenues increased by 2%.
  • Gross profit was 12% higher compared to Q1 2012, reflecting a favourable shift in revenue mix to higher margin product support, as well as higher gross profit margins in most lines of business. Consolidated gross profit margin increased to 31.4% from 30.2% in Q1 2012.
  • Selling, general and administrative (SG&A) expenses were higher compared to Q1 of last year as significantly reduced Enterprise Resource Planning (ERP) system related costs in Canada were offset by increased costs related to the expanded mining product line and the new Fort McKay service facility. In addition, the Company incurred approximately $4 million of severance costs associated with the operational excellence initiatives to improve efficiencies and adjust the cost structure to activity levels. SG&A expenses as a percentage of revenue were 24.1% compared to 23.6% in Q1 2012.
  • EBIT increased by 21% to $117 with higher EBIT reported in Canada and South America. Consolidated EBIT margin rose to 7.4% from 6.6% in Q1 2012, reflecting improved EBIT margin in Canada due to a reduction in ERP system related costs, as well as a higher proportion of product support in revenue mix compared to Q1 of last year.
  • Net income rose by 14% to $73 million. Basic EPS of $0.43 was up by 16% from Q1 2012 and was the highest first quarter EPS on record. Q1 2013 results included severance costs of approximately $0.02 per share. In addition, the adoption of the amendments to IAS 19 negatively impacted first quarter results by approximately $0.02 per share in both 2013 and 2012.
  • EBITDA climbed 17% from Q1 2012 to $169 million. Quarterly free cash flow was $93 million use of cash, a significant improvement compared to $223 million cash usage in Q1 2012, primarily due to improvements in working capital, particularly inventory.
  • The Company's net debt to total capital ratio(5) was 51.1% at the end of March compared to 50.0% at the end of December, mostly due to negative free cash flow in the first quarter. The ratio is expected to return to the 35-45% target range by the end of 2013 as a result of expected strong free cash flow in the year, driven primarily by working capital improvements.
  • Order backlog was $1.1 billion at the end of March compared to $1.2 billion at the end of December due to lower order intake during Q1. Customers continued to be cautious and postponed purchasing decisions in light of uncertain economic conditions and improved equipment availability. There were no unusual order cancellations in any of the Company's operations in the first quarter.

Q1 2013 HIGHLIGHTS BY OPERATION

Canada

  • Revenues declined by 3% compared to Q1 2012 impacted most notably by 20% lower new equipment sales, primarily to mining customers. While resource sector customers reduced spending on new equipment in the first quarter, demand for parts and service remained healthy. Product support revenues grew by 12% to record levels, primarily due to our expanded mining product line.
  • Canada's EBIT rose by 46% to $57 million and EBIT margin was 7.5% compared to 5.0% in Q1 2012. The year over year improvement is largely driven by the reduction in ERP system related costs as well as a favourable shift in revenue mix to higher margin product support. Reduced ERP costs were offset by additional expenses related to the expanded mining product line and the new Fort McKay service facility, as well as severance costs associated with the reduction of approximately 280 positions.
  • The Canadian operations remain focused on selling equipment and providing product support to a broad range of industries. In addition, the business is advancing operational excellence initiatives to increase service efficiency, improve working capital performance and reduce costs. In 2013, Finning Canada is expected to deliver improved EBIT margin performance over 2012.

South America

  • Revenues rose by 33% from Q1 2012 (31% in functional currency - USD) driven by strong new equipment sales and product support. In functional currency, new equipment sales were up 45% from Q1 2012, reflecting increased deliveries to mining and construction sectors in Chile. Product support revenues benefitted from our expanded mining product line and were 19% higher compared to Q1 2012.
  • EBIT increased by 19% to $57 million. EBIT margin was 9.0% compared to 10.0% in Q1 2012, primarily reflecting a shift in revenue mix from product support to new equipment sales which resulted in a lower gross profit margin compared to Q1 2012. High machine utilization levels are expected to drive strong product support revenue in South America in 2013.
  • South American operations are focused on capturing equipment opportunities in mining, construction and power systems as well as growing product support with the benefit of the large installed machine population. The business is also driving operational excellence initiatives related to supply chain and cost management.

United Kingdom and Ireland

  • Revenues declined by 10% from Q1 2012 reflecting reduced market activity in most sectors compared to last year. New equipment sales decreased by 11% due to lower volumes in Equipment Solutions. Product support revenues were 10% lower as a result of softer demand across most industries.
  • EBIT of $10 million was 17% below Q1 2012, and EBIT margin was 5.4% compared to 5.8% a year ago reflecting lower revenue levels.
  • The UK and Ireland operations are focused on sustaining solid financial performance through a period of weak demand by capitalizing on value-added opportunities in Equipment Solutions and Power Systems, capturing product support opportunities, and executing on operational excellence initiatives.

CORPORATE AND BUSINESS DEVELOPMENTS

Dividend

The Board of Directors has approved a 9% increase in the quarterly dividend to $0.1525 per share from $0.14 per share, payable on June 6, 2013 to shareholders of record on May 23, 2013. This dividend will be considered an eligible dividend for Canadian income tax purposes. In addition, the Company has increased its target dividend payout ratio to 25-35% from 25-30%.

SELECTED CONSOLIDATED FINANCIAL INFORMATION
(C$ millions, except per share amounts)
Three months ended March 31
Revenue 2013 2012(6) % change
New equipment 643.9 631.4 2
Used equipment 60.1 73.4 (18 )
Equipment rental 93.0 91.2 2
Product support 761.3 675.0 13
Other 26.2 0.8 n/m
Total revenue 1,584.5 1,471.8 8
Gross profit 497.9 444.5 12
Gross profit margin(3) 31.4 % 30.2 %
SG&A (382.3 ) (347.2 ) (10 )
SG&A as a percentage of revenue (24.1 )% (23.6 )%
Equity earnings 2.8 1.9
Other income (expenses) (1.3 ) (2.4 )
EBIT 117.1 96.8 21
EBIT margin(4) 7.4 % 6.6 %
Net income 73.4 64.3 14
Basic earnings per share (EPS) 0.43 0.37 16
EBITDA(1) 169.3 144.8 17
Free Cash Flow(1)(2) (93.4 ) (222.7 ) 58
Mar 31, 13 Dec 31, 12
Total assets 5,194.4 5,118.0
Total shareholders' equity 1,623.2 1,566.6
Net debt to total capital ratio(5) 51.1 % 50.0 %
n/m = not meaningful as percentage change is significantly larger or not applicable

To download Finning's complete Q1 2013 results in PDF, please open the following link: http://media3.marketwire.com/docs/FinningQ113results.pdf

To download the CEO and CFO certification letters once they have been filed on SEDAR, please open the following link: http://www.sedar.com/DisplayCompanyDocuments.do?lang=EN&issuerNo=00001068

Q1 2013 RESULTS INVESTOR CALL

Management will hold an investor conference call on Thursday, May 9 at 11:00 am Eastern Time. Dial-in numbers: 1-866-226-1793 (anywhere within Canada and the U.S.) or (416) 340-2218 (for participants dialing from Toronto and overseas).

The call will be webcast live and subsequently archived at www.finning.com. Playback recording will be available at 1-800-408-3053 from 1:00 pm Eastern Time on May 9 until May 15. The pass code to access the playback recording is 4463383 followed by the number sign.

ABOUT FINNING

Finning International Inc. (FTT.TO) is the world's largest Caterpillar equipment dealer delivering unrivalled service to customers for 80 years. Finning sells, rents and services equipment and engines to help customers maximize productivity. Headquartered in Vancouver, B.C., the Company operates in Western Canada, Chile, Argentina, Bolivia, Uruguay, as well as in the United Kingdom and Ireland.

Footnotes

  1. These amounts do not have a standardized meaning under generally accepted accounting principles. For a reconciliation of these amounts to net income and cash flow from operating activities, see the heading "Description of Non-GAAP and Additional GAAP Measures" in the Company's management discussion and analysis that accompanies the first quarter consolidated financial statements.
  2. Free cash flow is defined as cash flow provided by (used in) operating activities less net additions to property, plant and equipment and intangible assets as disclosed in the Company's Consolidated Statements of Cash Flow.
  3. Gross profit margin is defined as gross profit as a percentage of total revenue.
  4. EBIT margin is defined as earnings before finance costs and income taxes as a percentage of total revenue.
  5. Net debt to total capital ratio is calculated as short-term debt and long-term debt, net of cash and cash equivalents (net debt) divided by total capitalization. Total capitalization is defined as the sum of net debt and all components of equity (share capital, contributed surplus, accumulated other comprehensive loss, and retained earnings).
  6. Prior year comparative figures have been restated to reflect the Company's adoption of the amendments to International Accounting Standard (IAS) 19, Employee Benefits, which became effective on January 1, 2013.

Forward-Looking Disclaimer

This report contains statements about the Company's business outlook, objectives, plans, strategic priorities and other statements that are not historical facts. A statement Finning makes is forward-looking when it uses what the Company knows and expects today to make a statement about the future. Forward-looking statements may include words such as aim, anticipate, assumption, believe, could, expect, goal, guidance, intend, may, objective, outlook, plan, project, seek, should, strategy, strive, target, and will. Forward-looking statements in this report include, but are not limited to, statements with respect to: expectations with respect to the economy and associated impact on the Company's financial results; expected revenue and SG&A levels and EBIT growth; anticipated generation of free cash flow (including projected net capital and rental expenditures), and its expected use; anticipated defined benefit plan contributions; the expected target range of the Company's Debt Ratio; the impact of new and revised IFRS that have been issued but are not yet effective. All such forward-looking statements are made pursuant to the 'safe harbour' provisions of applicable Canadian securities laws.

Unless otherwise indicated by us, forward-looking statements in this report describe Finning's expectations at May 8, 2013. Except as may be required by Canadian securities laws, Finning does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

Forward-looking statements, by their very nature, are subject to numerous risks and uncertainties and are based on several assumptions which give rise to the possibility that actual results could differ materially from the expectations expressed in or implied by such forward-looking statements and that Finning's business outlook, objectives, plans, strategic priorities and other statements that are not historical facts may not be achieved. As a result, Finning cannot guarantee that any forward-looking statement will materialize. Factors that could cause actual results or events to differ materially from those expressed in or implied by these forward-looking statements include: general economic and market conditions; risks associated with the conduct of business in foreign jurisdictions; foreign exchange rates; commodity prices; the level of customer confidence and spending, and the demand for, and prices of, Finning's products and services; Finning's dependence on the continued market acceptance of Caterpillar's products and Caterpillar's timely supply of parts and equipment; Finning's ability to continue to improve productivity and operational efficiencies while continuing to maintain customer service; Finning's ability to manage cost pressures as growth in revenues occur; Finning's ability to reduce costs in response to slowing activity levels; Finning's ability to attract sufficient skilled labour resources to meet growing product support demand; Finning's ability to negotiate and renew collective bargaining agreements with satisfactory terms for Finning's employees and the Company; the intensity of competitive activity; Finning's ability to realize expected benefits of acquisitions; Finning's ability to raise the capital needed to implement its business plan; regulatory initiatives or proceedings, litigation and changes in laws or regulations; stock market volatility; changes in political and economic environments for operations; the integrity, reliability, and availability of information technology and the data processed by that technology; expected operational benefits from the new ERP system. Forward-looking statements are provided in this report for the purpose of giving information about management's current expectations and plans and allowing investors and others to get a better understanding of Finning's operating environment. However, readers are cautioned that it may not be appropriate to use such forward-looking statements for any other purpose.

Forward-looking statements made in this report are based on a number of assumptions that Finning believed were reasonable on the day the Company made the forward-looking statements. Refer in particular to the Outlook section of the MD&A. Some of the assumptions, risks, and other factors which could cause results to differ materially from those expressed in the forward-looking statements contained in this report are discussed in the Company's current Annual Information Form (AIF) in Section 4.

Finning cautions readers that the risks described in the AIF are not the only ones that could impact the Company. Additional risks and uncertainties not currently known to the Company or that are currently deemed to be immaterial may also have a material adverse effect on Finning's business, financial condition, or results of operations.

Except as otherwise indicated, forward-looking statements do not reflect the potential impact of any non-recurring or other unusual items or of any dispositions, mergers, acquisitions, other business combinations or other transactions that may be announced or that may occur after the date hereof. The financial impact of these transactions and non-recurring and other unusual items can be complex and depends on the facts particular to each of them. Finning therefore cannot describe the expected impact in a meaningful way or in the same way Finning presents known risks affecting its business.

Contact:
Finning International Inc.
Mauk Breukels
Vice President, Investor Relations and Corporate Affairs
(604) 331-4934
mauk.breukels@finning.com
www.finning.com

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