Finning Reports Q1 2014 Results

Marketwired

VANCOUVER, BRITISH COLUMBIA--(Marketwired - May 13, 2014) - Finning International Inc. (FTT.TO) reported first quarter 2014 results today (all monetary amounts are in Canadian dollars unless otherwise stated).

Q1 2014 HIGHLIGHTS

  • Revenues rose by 7% to $1.7 billion as higher revenues in Canada and the UK & Ireland more than offset the decline in South America.
  • Product support revenues increased by 9% to record levels driven by improved demand for parts in Canada, mostly in mining.
  • Earnings before finance costs and income taxes (EBIT)(1) of $111 million was 5% below Q1 2013, reflecting lower sales volumes in South America and lower gross profit margins in Canada.
  • Basic earnings per share (EPS) declined to $0.39 from $0.43 in Q1 2013, reflecting a lower EBIT and a higher effective tax rate.
  • The order backlog(1) of $1.3 billion at the end of Q1 was up by approximately 45% from $0.9 billion at the end of December 2013, driven primarily by record order intake in Canada, including an equipment order for $260 million from an existing oil sands producer for a fleet expansion.
  • The Company raised its dividend to a level which represents an annualized dividend increase of 10 cents to 71 cents per share, reflecting confidence in operating performance and the expectation for strong free cash flow generation in 2014 and beyond.

"Overall, we generated solid top-line growth and increased our order backlog by over 45 percent. Strength in Canada and the UK and Ireland offset market softness in South America," said Scott Thomson, president and chief executive officer of Finning International. "The market environment in South America is looking more challenging than we first thought and we expect that to continue through 2014. However, I am pleased that our team in South America is focused on what they can control, namely costs and invested capital. Costs were reduced significantly and profitability was maintained. For the remainder of the year, the team will be focused on reducing invested capital and costs to match current demand."

"In Canada, I was pleased with our revenue growth during the quarter but our profitability was impacted by higher new equipment sales in the revenue mix and a higher proportion of sales that were lower margin mining machines. While higher sales activity drove an increase in invested capital and negative free cash flow, we were still able to modestly improve capital efficiency. For the remainder of the year, we continue to expect significant free cash flow generation. We also recognize the importance of improving profitability in our Canadian operations and our operational excellence agenda is focused on reducing the cost structure and increasing the profitability margins in this region," continued Scott Thomson. "Reflecting the confidence we have in our ability to improve our operating performance and generate strong free cash flow, I am pleased to announce that we increased our annualized dividend by 10 cents or slightly more than 15 percent."

Q1 2014 FINANCIAL SUMMARY
$ millions, except per share amounts Three months ended Mar 31
2014 2013 % change
Revenue 1,676 1,560 7
EBIT 111 117 (5)
EBIT margin 6.6% 7.5%
Net income 68 73 (8)
Basic EPS 0.39 0.43 (8)
EBITDA(1) 166 169 (2)
Free cash flow(1) (134) (93) (44)
  • Revenues rose by 7% from Q1 2013 to $1.7 billion as higher revenues from Canada and the UK & Ireland more than offset the revenue decline in South America. Product support revenues grew by 9%, driven by Canada. New equipment sales increased by 8%, reflecting strong market activity in Canada and the UK & Ireland. Rental revenues declined by 6% with a slower start to the year in all operations. Used equipment sales were down slightly.
  • Gross profit was flat relative to Q1 of last year as gross profit margin(1) declined to 29.8% from 32.0% in Q1 2013. In South America, lower gross profit from volume reductions was partially offset by a shift in revenue mix to a higher proportion of product support. In Canada, the increase in sales volumes included a higher percentage of new equipment sales in the revenue mix and a greater proportion of lower-margin mining equipment sales, which were the main contributors to a lower gross profit margin. Also negatively impacting gross profit in all operations were lower revenue and gross profit from rental.
  • Selling, general and administrative (SG&A) expenses were slightly above Q1 2013. In Canada, volume-related increases, higher provision adjustments in Q1 2013 and a negative impact from the weaker Canadian dollar were partly offset by workforce reductions and improvements from operating efficiencies. In South America and the UK & Ireland, SG&A expenses were lower in functional currencies.
  • EBIT declined to $111 million from $117 million in Q1 2013 due to lower sales volumes in South America reflecting soft market conditions, and slightly lower EBIT in Canada where higher sales volumes were more than offset by lower gross profit margins. Also contributing to an EBIT decrease was $2 million in lower equity earnings from joint venture and associate. Consolidated EBIT margin of 6.6% was below 7.5% in Q1 2013, driven mainly by the reduced gross profit margin.
  • Net income decreased by 8% to $68 million and basic EPS of $0.39 was 8% below $0.43 in Q1 2013, primarily due to lower EBIT. Provision for income taxes was negatively impacted by taxable foreign exchange gains on U.S. dollar denominated net assets in Argentina from the devaluation of the Argentine peso. As a result, the effective tax rate was 24.8%, up from 23.2% in Q1 2013.
$ millions Q1 2014 Q4 2013
Invested capital 3,414 3,138
Return on invested capital(1) 15.4% 15.7%
  • Invested capital increased by $276 million from Q4 2013, primarily driven by higher working capital in Canada, mostly equipment inventory and account receivable associated with growth in sales volumes. Consolidated parts inventory was similar to Q4 2013 levels despite 7% growth in product support from Q4 2013, reflecting continued focus on supply chain optimization across all operations. A weaker Canadian dollar resulted in approximately $65 million increase in consolidated invested capital compared to Q4 2013. In functional currencies, invested capital declined by about US$2 million in South America and increased by approximately £10 million in the UK & Ireland from Q4 2013. Return on invested capital of 15.4% was slightly below Q4 2013 due lower EBIT and slightly higher invested capital over the last four quarters. However, invested capital turnover of 2.1 times improved slightly from 2.0 times in Q4 2013, driven by Canada.
  • Free cash outflow was $134 million due to higher working capital in Canada and the UK & Ireland in response to strong customer demand.
  • Net debt to invested capital was 42.9% at the end of March 2014, compared to 40.8% at the end of December 2013, and remains within the Company's 35-45% target range.

Backlog

  • The order backlog was $1.3 billion at the end of March 2014, up from $0.9 billion at the end of December 2013 and $1.1 billion at the end of March 2013. An increase in backlog reflected record order intake in Canada in Q1, which included a $260 million mining equipment order from an existing oil sands customer for a fleet expansion, as well as strong order intake in the UK & Ireland. In South America, the order intake weakened as a result of slower market activity in mining and construction.

Q1 2014 HIGHLIGHTS BY OPERATION

Canada

  • Revenues were up 18% driven by improved market activity in Western Canada compared to Q1 of last year. New equipment sales rose by 35%, driven primarily by mining. Product support revenues increased by 13% reflecting stronger demand for parts across all sectors, most notably in mining. Rental revenues declined by 5% reflecting softer rental markets compared to Q1 of last year.
  • EBIT of $54 million was down 5%, and EBIT margin declined to 6.0% from 7.5% in Q1 2013. Gross profit was only slightly higher as gross profit margins declined compared to Q1 of last year. The margin reduction is primarily due to a higher percentage of new equipment sales in the revenue mix (38.1% vs. 33.4% in Q1 2013), a higher proportion of lower-margin mining equipment sales and an increase in lower-margin mining and power systems parts sales. Gross profit was also negatively impacted by a decrease in rental gross profit from lower volumes and higher positive equipment cost adjustments in Q1 2013. SG&A expenses were marginally higher as volume-related increases, higher provision adjustments in Q1 2013 and a negative impact of the weaker Canadian dollar were partly offset by cost savings from workforce reductions and service-related operating efficiencies.
  • Invested capital rose by $195 million from the end of December, driven by higher equipment inventory and accounts receivable, reflecting increased sales volumes. Although the invested capital was higher, invested capital turnover improved marginally from Q4 2013.

South America

  • Revenues declined by 10% (down 18% in functional currency - USD) reflecting weaker market conditions in the region compared to Q1 2013. New equipment sales were down 30% in functional currency, mostly as a result of slower mining and construction activity. While mining production levels remained steady in Q1, demand for equipment replacement and additional fleets was impacted by the lower copper price environment. Product support revenue was down 7% in functional currency. This was primarily due to lower service revenues in the mining sector where customers continue to focus on reducing costs. Reduced demand for parts was driven by the construction sector, where equipment utilization levels have declined.
  • EBIT was $50 million compared to $57 million Q1 2013 (down 21% in functional currency) reflecting lower revenues and gross profit. SG&A costs were down 9% in functional currency as a result of lower sales volumes and actions taken to reduce costs, which were partly offset by higher service-related expenses and severance costs. In response to decreased activity levels, the South American operations reduced its workforce by 240 employees from the end of 2013, and by about 330 people from the peak level in the summer of 2013. The Company will continue to reduce costs and invested capital in South America as necessary to align with expected activity levels and maintain profitability. The EBIT margin of 9.0% was slightly below 9.3% a year ago.
  • Invested capital declined by US$2 million in functional currency from Q4 2013, including reduced equipment inventory due to slower demand and improved inventory management. However, the weakening Canadian dollar against the U.S. dollar resulted in a $53 million increase in invested capital in South America compared to Q4 2013.

United Kingdom & Ireland

  • Revenues increased by 23% (up 5% in functional currency - GBP) driven by higher new equipment sales in the construction sector, while product support business remained stable. In functional currency, new equipment sales and product support grew by 8% and 1%, respectively, compared to Q1 of last year.
  • EBIT of $12 million was $2 million higher compared to Q1 2013. In functional currency, EBIT was down marginally, reflecting a slight decline in gross profit due to a higher proportion of new equipment sales in the revenue mix. SG&A costs were lower in functional currency compared to last year while revenues grew. EBIT margin of 4.9% was below 5.4% a year ago, mainly due to the revenue mix.
  • Invested capital increased by approximately £10 million in functional currency and $31 million in Canadian dollars compared to Q4 2013, reflecting higher equipment inventory to meet anticipated demand.

CORPORATE AND BUSINESS DEVELOPMENTS

Dividend

The Board of Directors has approved a $0.025 increase in the quarterly dividend to $0.1775 per share from $0.1525 per share, payable on June 12, 2014 to shareholders of record on May 29, 2014. This dividend will be considered an eligible dividend for Canadian income tax purposes.

Board of Directors nominations

On April 4, Finning announced that Marcelo Awad and Nicholas Hartery had been nominated to stand for election to the Company's Board of Directors at the Annual Meeting of Shareholders scheduled to be held on May 13, 2014. Mr. Awad is an experienced mining industry executive who was previously the president and chief executive officer of Antofagasta Minerals for over seven of his sixteen years with the company. Prior to joining Antofagasta Minerals, Mr. Awad spent eighteen years with Codelco in progressively senior positions in London and Chile. Mr. Hartery is Chairman of CRH plc, one of the world's leading building materials companies with operations in 35 countries, where he has been a non-executive director since 2004. From 2000 to 2008, Mr. Hartery was vice president of manufacturing and business operations for Dell Inc.'s Europe, Middle East and Africa operations.

SELECTED CONSOLIDATED FINANCIAL INFORMATION
(C$ millions, except per share amounts)
Three months ended Mar 31
Revenue 2014 2013 % change
New equipment 692.8 643.9 8
Used equipment 58.9 60.1 (2)
Equipment rental 87.5 93.0 (6)
Product support 830.2 761.3 9
Other 6.8 1.6
Total revenue 1,676.2 1,559.9 7
Gross profit 499.1 498.4 0
Gross profit margin 29.8% 32.0%
SG&A (388.2) (382.0) (2)
SG&A as a percentage of revenue (23.2)% (24.5)%
Equity earnings of joint venture and associate 0.7 2.8
Other income (expenses) (0.8) (2.1)
EBIT 110.8 117.1 (5)
EBIT margin 6.6% 7.5%
Net income 67.9 73.4 (8)
Basic EPS 0.39 0.43 (8)
EBITDA 165.7 169.3 (2)
Free Cash Flow (134.2) (93.4) (44)
Mar 31,
14
Dec 31,
13
Total assets 5,353.2 5,057.6
Total shareholders' equity 1,951.0 1,857.8
Net debt to invested capital(1) 42.9% 40.8%
Return on invested capital(1) 15.4% 15.7%

To download Finning's complete Q1 2014 results in PDF, please open the following link: http://media3.marketwire.com/docs/FinningQ114results.pdf

Q1 2014 RESULTS INVESTOR CALL

The Company will hold an investor call on Wednesday, May 14 at 11:00 am Eastern Time. Dial-in numbers: 1-800-766-6630 (anywhere within Canada and the U.S.) or 416-340-8527 (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 14 until May 21. The pass code to access the playback recording is 7182919 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 over 80 years. Finning sells, rents and provides parts and services for 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 financial metrics do not have a standardized meaning under IFRS, which are also referred to herein as generally accepted accounting principles (GAAP), and may not be comparable to similar measures used by other issuers. Management's Discussion and Analysis (MD&A) includes additional information regarding these financial metrics, including definitions, under the heading "Description of Non-GAAP and Additional GAAP Measures".

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; EBIT margin; ROIC; market share growth; expected results from service excellence action plans; anticipated asset utilization, inventory turns and parts service levels; the expected target range of the Company's net debt to invested capital ratio; and the expected target range of the Company's dividend payout ratio. 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 reflect Finning's expectations at May 13, 2014. 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; 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 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, availability and benefits from information technology and the data processed by that technology. 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 this 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 Section 4 of the Company's current AIF.

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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