Finning Reports Q2 2013 Results

Marketwired

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

Q2 2013 HIGHLIGHTS

  • Revenues of $1.6 billion, a reduction of 8% relative to Q2 2012 due to lower revenues from Canada and the UK & Ireland, partly offset by revenue growth in South America. Second quarter revenues were up 4% compared to Q1 2013 driven by product support revenues.
  • Product support revenues rose by 12% and were higher in all operations, driven largely by the contribution from the expanded mining product line (the former Bucyrus International Inc. business).
  • New equipment sales were 25% below Q2 2012 levels, impacted by slower mining activity across all regions.
  • EBIT increased by 2% to $123 million reflecting higher gross profit from product support. Consolidated EBIT margin improved to 7.6% from 6.8% in Q2 2012 driven by a higher EBIT margin in Canada.
  • Basic EPS was $0.48 compared to $0.46 in Q2 2012 and included a $0.03 per share gain from previously unrecognized tax losses.

Finning International Inc. reported quarterly revenues of $1.6 billion, 8% below Q2 2012. The decline in new equipment sales led to lower total revenues in Canada and the UK & Ireland, which was partly offset by higher revenues in South America. Product support increased in all operations and was up 12% over Q2 2012. Quarterly earnings before finance costs and income taxes (EBIT) rose by 2% to $123 million, primarily due to higher gross profit from product support. Quarterly EBIT margin was 7.6%, up from 6.8% in Q2 2012, reflecting an improvement in operating results in Canada. Basic earnings per share (EPS) increased by 4% to $0.48, which included a tax benefit of approximately $6 million or $0.03 per share related to previously unrecognized tax losses.

"I've spent my first eight weeks at Finning visiting all our regions and meeting with employees, customers and representatives from Caterpillar. Those discussions have reaffirmed my confidence that we have a strong foundation, highly committed employees and the right priorities in place," said Scott Thomson, president and CEO, Finning International. "To deliver on Finning's full potential, my priority will be to accelerate the progress underway to optimize profitability through the business cycle, improve the customer experience and increase market share."

"Finning's second quarter results highlight the challenges ahead of us. Revenues increased relative to the first quarter, but we need to translate that into greater profitability. Although first half revenues are down relative to 2012, we expect strong equipment deliveries and continued growth in product support in the second half of the year that should allow us to modestly increase annual revenues relative to 2012, albeit to the very low end of the previously disclosed 0 to 10% range. I am encouraged that there are significant opportunities to increase profitability, particularly in Canada. However, improvements will take time and I am not expecting Canada's profitability to improve in the second half of 2013 relative to the first half given the pace of operational improvements and higher equipment sales anticipated for the balance of the year. We will see improved free cash flow performance in the second half of the year given a projected decrease in our inventories. As we go through the remainder of the year, we will have a better sense of 2014 activity, but we are encouraged by the order intake in Q2 which was higher in all of our regions relative to Q1, driven primarily by the non-mining market segments," added Mr. Thomson.

Q2 2013 FINANCIAL SUMMARY
C$ millions, except per share amounts (unaudited) Three months ended Jun 30
2013 2012(7) % change
Revenue 1,620 1,764 (8)
Earnings before finance costs and income taxes (EBIT) 123 120 2
EBIT margin 7.6% 6.8%
Net income 83 79 5
Basic EPS 0.48 0.46 4
Earnings before finance costs, income taxes, depreciationand amortization (EBITDA)(1)
176

175

0
Free cash flow(1)(2) 6 (31) 121
  • Revenues declined by 8% from Q2 2012 to $1.6 billion due to lower revenues in Canada and the UK & Ireland. New equipment sales were down 25% compared to Q2 2012 with reduced volumes in all regions, particularly Canada. However, product support revenues rose by 12% driven primarily by the expanded mining product line (former Bucyrus business). Used equipment sales declined by 9%, while rental revenues rose by 2% compared to Q2 2012.
  • Gross profit was 1% higher and gross profit margin increased to 31.7% from 28.9% earned in Q2 2012, reflecting a shift in revenue mix to higher margin product support. Product support contributed 49.5% to total revenue compared to 40.7% in Q2 2012, while new equipment sales accounted for 40.3%, down from 49.6% last year.
  • Selling, general and administrative (SG&A) expenses were comparable to Q2 of last year. The significantly lower system development and implementation costs related to the Enterprise Resource Planning (ERP) system were offset by a full quarter of costs related to the expanded mining product line in all operations and the newly constructed service facility in Fort McKay in Canada. SG&A expenses as a percentage of revenue were 24.2% compared to 22.1% in Q2 2012, due to the lower revenue base.
  • EBIT rose by 2% to $123 million driven by higher gross profit from product support compared to Q2 of last year. Consolidated EBIT margin rose to 7.6% from 6.8% in Q2 2012, primarily due to improved EBIT margin in Canada.
  • Net income increased by 5% to $83 million and basic EPS was $0.48, up from $0.46 in Q2 2012. The second quarter results benefitted from approximately $6 million or $0.03 per share gain related to previously unrecognized tax losses, partially offset by higher finance costs.
  • EBITDA of $176 million was comparable to Q2 2012. Quarterly free cash flow was $6 million, compared to $31 million use of cash in Q2 2012, driven by lower rental and capital expenditures which were partially offset by higher working capital spend.
  • The Company's net debt to total capital ratio(5) was 50.6% at the end of June, similar to the end of March. Free cash flow is expected to continue to improve and the net debt to total capital ratio is projected to be within the 35-45% target range by the end of 2013.
  • Order backlog was $1.1 billion at the end of June, unchanged from the end of March. Order intake improved in all operations compared to the first quarter of 2013, with a larger proportion from non-mining customers. There were no unusual order cancellations in any of the Company's operations in the second quarter.

Q2 2013 HIGHLIGHTS BY OPERATION

Canada

  • Revenues decreased by 19% compared to Q2 2012 due to a 43% decline in new equipment sales, which reflected reduced demand for equipment from mining customers, including oil sands operations. Product support revenues rose by 5% driven by an increase of approximately $39 million from the expanded mining product line which was acquired in Q4 2012.
  • Canada's EBIT of $61 million was comparable to last year and included approximately $5 million in additional EBIT from the expanded mining product line. EBIT margin improved to 7.9% from 7.5% in Q1 2013 and 6.4% in Q2 2012. The year over year increase was largely driven by a higher gross profit margin resulting from a significant shift in revenue mix to product support which contributed 51% to total revenue compared to 40% a year ago.
  • While Finning Canada continues to execute its operational excellence strategy to achieve sustainable improvement in EBIT margin performance, it will take time to achieve the full benefits anticipated. The key areas of focus are increasing service efficiency, improving supply chain and managing SG&A costs, while delivering superior customer service to the broad range of industries the Company supports.

South America

  • Revenues increased by 10% from Q2 2012 (up 8% in functional currency - USD), reflecting growth in product support. Product support revenues rose by 21% (up 20% in functional currency) driven primarily by mining, including the expanded mining product line. New equipment sales declined by 3% (down 4% in functional currency) due to lower volumes in the construction sector.
  • EBIT increased by 5% to $59 million. EBIT margin of 9.5% was slightly below 9.8% in Q2 2012 due to late delivery penalties, higher SG&A costs, and about $6 million lower contribution from the expanded mining product line. The increase in SG&A costs was driven primarily by a full quarter of costs for the expanded mining product line and unfavourable adjustments to certain projects.
  • South American operations are focused on capturing equipment opportunities in a softening market environment and growing product support business from the large equipment population in our territories. The business is implementing operational excellence initiatives related to supply chain and cost reduction.

United Kingdom and Ireland

  • Revenues declined by 10% from Q2 2012 (down 8% in functional currency - GBP), reflecting reduced equipment sales. New equipment sales decreased by 14% (down 12% in functional currency) due to slower market activity compared to last year. However, the UK & Ireland operations achieved an 11% growth in product support revenues over Q2 2012 (up 13% in functional currency) driven by higher parts sales.
  • EBIT of $13 million was 7% below Q2 2012, while EBIT margin improved to 5.7% from 5.5% a year ago reflecting higher gross profit margins due to a shift in revenue mix to product support.
  • The UK and Ireland operations remain focused on sustaining solid financial performance in a challenging market by capturing value-added opportunities in Equipment Solutions and Power Systems, growing market share and controlling costs.
Q2 2013 FINANCIAL SUMMARY - SEQUENTIAL REVIEW
C$ millions, except per share amounts (unaudited) Q2/13 Q1/13 % change
Revenue 1,620 1,560 4
Earnings before finance costs and income taxes (EBIT) 123 117 5
EBIT margin 7.6% 7.5%
Net income 83 73 13
Basic EPS 0.48 0.43 12
Earnings before finance costs, income taxes, depreciationand amortization (EBITDA)(1)
176

169

4
Free cash flow(1)(2) 6 (93) 107
  • Revenues increased by 4% to $1.6 billion, with higher revenues in all operations compared to the first quarter, which is historically a seasonal low for revenues.
    • New equipment sales rose by just over 1%. Higher sales in Canada and UK and Ireland were partly offset by lower volumes in South America, where mining activity has slowed compared to the first three months of the year.
    • Product support revenues were up 5% driven primarily by South America. In Canada, product support revenues were unchanged from the first quarter, despite softness in the mining sector.
  • Gross profit increased by 3% driven by higher revenues. Gross profit margin of 31.7% was comparable to the first quarter as revenue mix remained largely unchanged, with product support contributing 49.5% to total revenue compared to 48.8% in the prior quarter.
  • Selling, general and administrative (SG&A) expenses were 3% above the preceding quarter. SG&A expenses as a percentage of revenue were 24.2%, comparable to 24.5% in the first quarter.
  • EBIT rose by 5% to $123 million and was up in all operations, particularly in Canada. EBIT margin also improved in all regions relative to the preceding quarter. The Canadian improvement was driven by the operating efficiencies implemented at the OEM Remanufacturing facility. Consolidated EBIT margin was 7.6% compared 7.5% in Q1 2013.
  • Net income increased by 13% to $83 million and basic EPS was $0.48, up from $0.43 in the first quarter. The second quarter results included a tax benefit of $6 million or $0.03 per share related to previously unrecognized tax losses, partially offset by higher finance costs.
  • EBITDA of $176 million was up 4%. The free cash flow was $6 million, compared to $93 million use of cash in the first quarter, driven by lower capital expenditures and lower working capital spend.

CORPORATE AND BUSINESS DEVELOPMENTS

Dividend

The Board of Directors has approved a quarterly dividend of $0.1525 per share, payable on September 5, 2013 to shareholders of record on August 22, 2013. This dividend will be considered an eligible dividend for Canadian income tax purposes.

Board of Directors Membership Changes

On June 17, 2013, Mr. Scott Thomson was appointed to Finning's Board of Directors. Mr. Thomson joined Finning as president and CEO effective the same date. Scott Thomson also serves as a director of Interfor (International Forest Products Limited).

During the second quarter, for personal reasons, Mr. Bruce Turner announced his resignation from the Board of Directors. The Board thanks Mr. Turner for his valued contributions to the Board.

Financing Activities

In May 2013, the Company refinanced its 5.625% £70 million Eurobond, due May 30, 2013 with an issuance of unsecured senior notes of £70 million in the U.S. private placement market. The 3.40% Senior Notes are due May 22, 2023.

In July 2013, the Company exercised its right to early redeem its 5.16% $250 million Medium Term Notes (MTN) due September 3, 2013. The redemption was financed with an issuance on July 3, 2013 of $200 million principal amount of unsecured 3.232% MTN due July 3, 2020 and commercial paper drawn on the Company's global operating credit facility.

SELECTED CONSOLIDATED FINANCIAL INFORMATION
(C$ millions, except per share amounts)
Three months
ended Jun 30
Six months
ended Jun 30
Revenue 2013 2012(7) %
change
2013 2012(7) %
change
New equipment 652.9 875.2 (25) 1,296.9 1,506.6 (14)
Used equipment 69.9 77.1 (9) 129.9 150.5 (14)
Equipment rental 92.8 91.3 2 185.9 182.5 2
Product support 802.5 718.8 12 1,563.8 1,393.8 12
Other 2.0 2.1 (4) 3.6 2.9 26
Total revenue 1,620.1 1,764.5 (8) 3,180.1 3,236.3 (2)
Gross profit 513.4 509.2 1 1,011.8 953.7 6
Gross profit margin(3) 31.7% 28.9% 31.8% 29.5%
SG&A (391.9) (390.6) (0) (773.8) (737.8) (5)
SG&A as a percentage of revenue (24.2)% (22.1)% (24.3)% (22.8)%
Equity earnings 3.6 3.4 6.3 5.3
Other income (expenses) (2.6) (1.7) (4.7) (4.1)
EBIT 122.5 120.3 2 239.6 217.1 10
EBIT margin(4) 7.6% 6.8% 7.5% 6.7%
Net income 82.7 78.7 5 156.1 143.0 9
Basic earnings per share (EPS) 0.48 0.46 4 0.91 0.83 10
EBITDA(1) 176.2 175.5 0 345.5 320.3 8
Free Cash Flow(1)(2) 6.6 (30.7) 121 (86.9) (253.4) 66
Jun 30,
13
Dec 31,
12
Total assets 5,301.6 5,118.0
Total shareholders' equity 1,701.0 1,566.6
Net debt to total capital(1)(5) 50.6% 50.0%
Return on equity(1)(6) 21.8% 22.8%

To download Finning's complete Q2 2013 results in PDF, please open the following link: http://media3.marketwire.com/docs/FinningQ213results.pdf

Q2 2013 RESULTS INVESTOR CALL

The Company will hold an investor conference call on Thursday, August 8 at 9:00 am Eastern Time. Dial-in numbers: 1-866-225-0198 (anywhere within Canada and the U.S.) or 416-340-8061 (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 11:00 am Eastern Time on August 8 until August 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 second 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. Return on equity is calculated as net income divided by the weighted average of shareholders' equity, both for the last twelve month period.
  7. 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 margin growth; anticipated generation of free cash flow and its expected use; and the expected target range of the Company's Debt 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 describe Finning's expectations at August 7, 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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