Finning International Inc. (TSX: FTT) (“Finning”, “the Company”,
“we”, “our” or “us”) reported third quarter 2020 results today. All
monetary amounts are in Canadian dollars unless otherwise stated.
HIGHLIGHTSAll comparisons are
to Q3 2019 results unless indicated otherwise.
- Q3 2020 EPS(1) of $0.54 represented a 17% increase from Q3
2019. Canada Emergency Wage Subsidy (“CEWS”) in Q3 2020 was $0.17
per share. Q3 2020 Adjusted EPS(2)(3) was $0.37, representing a 25%
decline from Q3 2019 and a $0.31 increase from Q2 2020.
- Q3 2020 revenue of $1.6 billion and net revenue(2) of $1.4
billion were down 21% from Q3 2019, reflecting reduced market
activity in Canada and South America. Compared to Q2 2020, net
revenue was up 8%, driven by a recovering market in the UK &
Ireland and modest market improvements in Canada and South
America.
- Q3 2020 gross profit was 15% lower than in Q3 2019. Gross
profit as a percentage of net revenue of 27.0% in Q3 2020 was 170
basis points higher than Q3 2019, mainly due to a revenue mix shift
to product support revenue.
- SG&A(1) costs decreased by 13%, or $43 million, from Q3
2019 and by 5%, or $16 million, from Q2 2020, reflecting successful
execution of global productivity initiatives and tight cost
control. We are on track to deliver more than $100 million of
annualized cost savings.
- Improved execution and cost actions in South America resulted
in EBIT(1) as a percentage of net revenue(2) of 8.2% in Q3 2020,
the highest since Q2 2018.
- In Canada, a reduced cost structure drove improved
profitability from Q2 2020 in a slow recovery environment.
- UK & Ireland achieved strong Q3 2020 results, underpinned
by recovering product support and continued cost discipline.
- Strong EBITDA(1)(2) to free cash flow(2) conversion(2) resulted
in free cash flow of $316 million in Q3 2020, further strengthening
our financial position. Finance costs of $22 million in Q3 2020
decreased 16% from Q3 2019. As at September 30, 2020, net debt to
Adjusted EBITDA(2)(3) ratio(2)(3) was 1.7, down from 2.5 at
September 30, 2019.
“I am very proud of how our organization has
operated safely, served our customers, and executed on our
strategic priorities in a very dynamic operating environment. Our
strong results in the third quarter are a reflection of how we have
delivered on the commitments we set out at the beginning of the
year to improve execution in South America, lower our cost base in
Canada, position the UK for High Speed Rail 2 opportunities, and
reduce our finance costs,” said Scott Thomson, president and CEO of
Finning International.
“We saw some sequential end market improvements
in Q3 2020, particularly in rental and product support activity as
customers resumed work and machine utilization hours increased. We
expect most of our markets to continue to improve in Q4 2020 and
into 2021 as mining trucks have gone back to work, strengthened
copper prices are supporting recovery and growth in activity, and
government stimulus spending supports large infrastructure
projects. Going forward, we are focused on growing product support
revenue through the market recovery by strengthening relationships
with customers and leveraging technology. Recovering volumes,
combined with our productivity initiatives throughout the
organization, support our mid-cycle target for SG&A as a
percentage of net revenue(2) of 17%. Our overall outlook for the
balance of 2020 and into 2021 remains positive,” concluded Mr.
Thomson.
Q3 2020 FINANCIAL SUMMARY
Quarterly Overview $ millions, except per share
amounts |
Q3 2020 |
|
Q3 2019 |
|
% change |
|
Revenue |
1,553 |
|
1,959 |
|
(21 |
) |
Net revenue |
1,443 |
|
1,819 |
|
(21 |
) |
EBIT |
138 |
|
129 |
|
6 |
|
EBIT as a percentage of net revenue(2) |
9.6 |
% |
7.1 |
% |
|
EBITDA |
215 |
|
201 |
|
7 |
|
EBITDA as a percentage of net revenue(2) |
14.9 |
% |
11.1 |
% |
|
Net income |
88 |
|
76 |
|
16 |
|
EPS |
0.54 |
|
0.46 |
|
17 |
|
Free cash flow |
316 |
|
165 |
|
91 |
|
Q3 2020 EBIT and EBITDA by Operation $ millions,
except per share amounts |
Canada |
|
South America |
|
UK & Ireland |
|
Corporate & Other |
|
Finning Total |
|
EPS |
|
EBIT / EPSCEWS support |
93(35 |
) |
40- |
|
9- |
|
(4(2 |
)) |
138(37 |
) |
0.54 (0.17 |
) |
Adjusted EBIT(2)(3) / Adjusted EPS |
58 |
|
40 |
|
9 |
|
(6 |
) |
101 |
|
0.37 |
|
Adjusted EBIT as a percentage of net revenue(2)(3) |
8.1 |
% |
8.2 |
% |
4.1 |
% |
- |
|
7.0 |
% |
|
|
Adjusted EBITDA |
106 |
|
59 |
|
18 |
|
(5 |
) |
178 |
|
|
Adjusted EBITDA as a percentage of net revenue(2)(3) |
14.6 |
% |
12.2 |
% |
7.9 |
% |
- |
|
12.3 |
% |
|
|
Q3 2019 EBIT and EBITDA by Operation $ millions,
except per share amounts |
Canada |
|
South America |
|
UK & Ireland |
|
Corporate & Other |
|
Finning Total |
|
EPS |
|
EBIT / EPSSeverance and restructuring costs in ArgentinaTax impact
of devaluation of Argentine peso |
82-- |
|
423- |
|
14-- |
|
(9-- |
) |
1293- |
|
0.460.010.02 |
|
Adjusted EBIT / Adjusted EPS |
82 |
|
45 |
|
14 |
|
(9 |
) |
132 |
|
0.49 |
|
Adjusted EBIT as a percentage of net revenue |
8.5 |
% |
7.8 |
% |
5.1 |
% |
- |
|
7.3 |
% |
|
|
Adjusted EBITDA |
125 |
|
65 |
|
22 |
|
(8 |
) |
204 |
|
|
|
Adjusted EBITDA as a percentage of net revenue |
12.8 |
% |
11.2 |
% |
8.3 |
% |
- |
|
11.2 |
% |
|
|
Invested Capital(2) and ROIC |
Q3 2020 |
|
Q3 2019 |
|
Q4 2019 |
|
Invested capital ($ millions) |
|
|
|
Consolidated |
3,284 |
|
3,907 |
|
3,591 |
|
Canada |
1,921 |
|
2,209 |
|
2,026 |
|
South America (US dollars) |
776 |
|
964 |
|
918 |
|
UK & Ireland (UK pound sterling) |
188 |
|
256 |
|
210 |
|
Invested capital turnover(2) (times) |
1.68 |
|
1.99 |
|
1.92 |
|
Working capital(2) to net revenue
ratio(2) |
29.2 |
% |
26.9 |
% |
27.8 |
% |
Inventory |
1,626 |
|
2,215 |
|
1,990 |
|
Inventory turns (dealership)(2) (times) |
2.30 |
|
2.49 |
|
2.53 |
|
Adjusted ROIC(2)(3) (%) |
|
|
|
Consolidated |
9.3 |
|
12.2 |
|
12.0 |
|
Canada |
10.8 |
|
15.0 |
|
14.4 |
|
South America |
11.3 |
|
9.0 |
|
10.5 |
|
UK & Ireland |
3.9 |
|
14.1 |
|
12.1 |
|
Q3 2020 HIGHLIGHTS BY OPERATION
All comparisons are to Q3 2019 results unless indicated otherwise.
All numbers are in functional currency: Canada – Canadian dollar;
South America – US dollar; UK & Ireland – UK pound sterling
(GBP).
Canada
- Net revenue
decreased by 26% with lower revenue across all sectors and lines of
business, reflecting challenging market conditions related to
COVID-19 and the lower price of oil.
- New equipment sales
were down 51% as customers reduced activity, restricted capital
spending, and implemented cost containment measures. By contrast,
Q3 2019 benefitted from deliveries of large mining equipment
packages.
- Product support
revenue declined by 11% from Q3 2019, however, it increased by 4%
compared to Q2 2020. Oil sands producers’ truck fleet utilization
returned to pre-COVID-19 levels at the end of September,
approximately one month later than expected due to certain
operational challenges at customer sites. In the construction
sector, equipment utilization hours increased, driving improved
demand for parts and service compared to Q2 2020.
- Although rental
revenue was down 24% from Q3 2019, a rebound in rental activity and
utilization led to a 40% increase in rental revenue from Q2
2020.
- Gross profit in Q3
2020 was lower than Q3 2019, mostly driven by lower volumes across
all our lines of business. Gross profit as a percentage of net
revenue increased in Q3 2020 compared to Q3 2019 due to a revenue
mix shift to product support, less large mining equipment in the
sales mix, and improved operating efficiencies.
- Due to a
significant reduction in revenues in our Canadian operations year
over year, we continued to qualify for CEWS and recognized $35
million of this wage subsidy in Q3 2020, which is included in other
income and excluded from our adjusted earnings. We estimate that we
were able to preserve approximately 500 full-time jobs, including
key technical capabilities and talent, as a result of the CEWS
program. In addition, during Q3 2020 we recalled approximately 50
technicians to support increasing service volumes.
- SG&A costs were
reduced by 9% from Q3 2019 and by 4% from Q2 2020, reflecting the
actions we have taken to improve employee and facility productivity
and our continued tight cost control.
- A reduced cost
structure drove improved profitability from Q2 2020 in a slow
recovery environment. Q3 2020 Adjusted EBIT as a percentage of net
revenue was 8.1%, up 410 basis points compared to Q2 2020, while
net revenue increased by 3%. Q3 2019 EBIT as a percentage of net
revenue was 8.5%.
South America
- Revenue decreased
by 18% from Q3 2019, reflecting difficult market conditions
primarily as a result of COVID-19 impacts.
- New equipment sales
were down 29% due to lower mining deliveries in Chile and reduced
construction activity in Argentina.
- Product support
revenue declined by 16%, impacted by lower demand from Chilean
mining. As the pandemic peaked in the third quarter, copper
production in the country decreased by about 6% year-over-year in
July and August, and operating restrictions in Chilean copper mines
led to a deferral of component exchange and major maintenance work.
Compared to Q2 2020, product support revenue was relatively
flat.
- SG&A costs were down 21% from Q3 2019, driven by
improvements in employee and facility productivity as we are
leveraging one common technology system. We have reduced managerial
and administrative workforce, and consolidated our branch network
in South America. SG&A also benefited from the devaluation of
the CLP relative to the USD. EBIT as a percentage of net revenue
improved to 8.2% compared to Adjusted EBIT as a percentage of net
revenue of 7.8% in Q3 2019, reflecting the benefit of a reduced
cost base.
United Kingdom &
Ireland
- Revenue decreased
by 15% from Q3 2019 primarily due to an 18% decline in new
equipment sales. The construction sector continued to be impacted
by slower market activity following COVID-19 lockdowns and
restrictions. Power systems revenue was slightly below Q3 2019
reflecting the timing of project deliveries in the data centre and
electricity capacity markets. Product support revenue was down 5%
year over year.
- Compared to Q2
2020, revenue was up 46%, underpinned by a recovery in construction
activity following the easing of lockdown measures and the
resumption of large power systems project deliveries. Machine
utilization hours and product support run-rates were approaching
pre-pandemic levels by the end of Q3 2020. Product support revenue
was up 27% compared to Q2 2020.
- The UK &
Ireland team demonstrated great resiliency through the crisis and
achieved a strong Q3 2020 EBIT as a percentage of net revenue of
4.1% (Q3 2019 EBIT as a percentage of net revenue was 5.1%).
SG&A costs decreased by 10% from Q3 2019, reflecting savings
from cost actions and lower variable costs. Approximately 20% of UK
& Ireland employees were on furlough during Q3 2020 compared to
nearly 50% in Q2 2020.
Q3 2020 MARKET UPDATE AND BUSINESS
OUTLOOK
Canada
In the oil sands, production has recovered and
is expected to increase in 2021 compared to 2020. Oil sands
producers’ truck fleet utilization returned to pre-COVID-19 levels
at the end of September, and contractor fleets have begun to
increase utilization and should ramp up further in Q4 2020 and into
2021. We expect product support activity in the oil sands to
improve in Q4 2020 and into 2021, driven by catch up on major
rebuild and maintenance work and an increase in oil production and
non-production mining activities.
The outlook for copper and precious and other
metals has improved, however, coal prices are expected to remain
soft. While restricted capital spending and ongoing cost
containment are impacting demand for new mining equipment, we
expect mining product support activity to improve as customers
increase production output and resume full-scope maintenance
activities.
Our mining customers in Western Canada operate
approximately 620 large and ultra-class Caterpillar off-highway
trucks, of which 6% are autonomous. The average age of this
Caterpillar truck population in Western Canada is about 11 years.
This large and aging fleet is expected to drive opportunities for
future fleet renewals, rebuilds and autonomy conversions, as well
as continued demand for product support.
We are also seeing a notable resumption in
request for proposal activity from Canadian mining customers.
In construction, continued recovery in machine
utilization hours and rental utilization are expected to drive
improved demand for product support and rentals. Large
infrastructure programs are planned in Alberta, British Columbia,
and Saskatchewan. Additional infrastructure stimulus spending
announced by the federal and provincial governments is expected to
provide opportunities for equipment, product support, heavy
rentals, and prime and standby electric power generation in
2021.
While we have seen an increase in order
intake(2) for construction equipment, we expect the pricing
environment to remain highly competitive in the near term due to a
surplus of competitive equipment inventories in Western Canada.
We expect improved profitability in Canada in
2021 even in a modest revenue recovery environment.
South America
In Chilean mining, COVID-19-related operating
restrictions are easing, and customers are beginning to catch up on
component exchange and major maintenance work. We expect mining
product support revenue to recover significantly as we exit 2020
and begin 2021. We are optimistic about mining recovery in Chile in
2021, driven by a strengthened copper price and expected increase
in copper production. Over 570 large and ultra-class Caterpillar
off-highway trucks with an average age of 11 years are currently
operating in Chile’s copper mines and will continue to drive demand
for product support. We are also encouraged by the resumption of
Teck’s QB2 project - the first deployment of autonomous trucks in
Chile - and have started to deliver equipment to QB2 in Q4 2020. We
have also seen a notable increase in request for proposal activity
from mining customers in Chile.
Activity and order intake in construction and
power systems markets in Chile have improved. However, the overall
economic uncertainty related to the government’s social reform
agenda is expected to continue to impact customer confidence and
the pace of economic recovery in Chile.
In Argentina, market activity is expected to
remain at low levels due to a challenging economic environment
following the restructuring of the country’s debt and a slow
re-opening of the economy after COVID-19 lockdowns. To the extent
possible, we are managing our ARS currency exposure and maintaining
a minimal level of investment in our operations. Our focus is on
delivering product support to customers and ensuring our operations
in Argentina remain profitable. The government’s restrictive
monetary policies, combined with capital and import controls, are
expected to limit our growth opportunities in Argentina for the
foreseeable future.
We are well positioned to deliver higher year
over year profitability in Q4 2020 and 2021 in South America.
UK & Ireland
Construction activity in the UK & Ireland
rebounded following the easing of lockdown measures, and machine
utilization hours and product support run-rates were approaching
pre-pandemic levels by the end of Q3 2020. While there have been
some delays and the construction work is now expected to ramp up
slower than initially planned, the HS2 project is expected to begin
to drive improved activity in the general construction equipment
markets starting in 2021. This multi-year mega-project is expected
to require approximately 1,100 units of heavy equipment
representing a total industry-wide direct sales opportunity of
approximately £390 million. We are well positioned to capture new
equipment and product support opportunities, while leveraging our
technology solutions related to earthmoving work for HS2.
In power systems, we expect to continue
benefitting from strong demand in the electric power capacity,
combined heat and power, and data centre markets. A large backlog
of high-quality power systems projects is expected to drive the UK
operation’s revenue in Q4 2020 and into 2021.
Overall economic activity in the UK &
Ireland has been significantly impacted by COVID-19 mitigation
measures, which resulted in declining GDP and high unemployment
rates. Although a second wave of COVID-19 is impacting economic
activity in the UK, and the UK government has just announced a
four-week lockdown, we do not expect to see the same extent of
lockdown measures implemented in the sectors we serve as were
implemented in the second quarter. Brexit, which is scheduled for
December 31, 2020, continues to provide a degree of risk and
uncertainty for economic activity and supply chain logistics in the
UK & Ireland. We have developed an action plan with Caterpillar
to minimize the potential impact on the supply chain during the
Brexit transition.
Cost Actions to Drive Earnings Capacity
in a Recovery
We have accelerated our strategic plans to drive
employee and facility productivity improvements, while maximizing
flexibility and competitiveness to serve customers.
- In Canada, we have taken significant cost actions to address
oil price dislocation and move customer work to locations with
lower operating costs.
- In South America, our previous investment in technology has
enabled us to reduce cost to serve, address labour inflation, and
improve operational execution going forward.
- In the UK & Ireland, we are tightly managing costs through
the recovery period, while building the right technology skill set
to support us in capturing future market opportunities.
The execution of global initiatives announced in
Q2 2020 is on track to deliver more than $100 million of annualized
cost savings. We expect approximately one-third of our workforce to
return when market activity fully recovers. These will be mostly
revenue generating employees in lower cost locations. Our goal is
to reduce SG&A as a percentage of net revenue to about 17% in
mid-cycle.
Our overall outlook for the balance of 2020 and
into 2021 remains positive. We expect to generate higher earnings
on a modestly lower revenue base in Q4 2020 compared to Q4 2019.
Given economic uncertainties in all our regions, we expect 2021
revenue to be below 2019.
We expect to achieve an EBITDA to FCF conversion
of approximately 100% in 2020. While we continue to expect positive
free cash flow in Q4 2020, we are planning for revenue recovery and
are increasing inventory purchasing in Q4 2020.
CORPORATE AND BUSINESS
DEVELOPMENTS
Dividend
The Board of Directors has approved a quarterly
dividend of $0.205 per share, payable on December 3, 2020 to
shareholders of record on November 19, 2020. This dividend will be
considered an eligible dividend for Canadian income tax
purposes.
SELECTED CONSOLIDATED FINANCIAL
INFORMATION
$
millions, except per share amounts |
Three months ended September 30 |
Nine months ended September 30 |
|
2020 |
|
2019 |
|
% changefav (unfav) |
|
2020 |
|
2019 |
|
% changefav (unfav) |
|
New equipment |
435 |
|
689 |
|
(37 |
) |
1,171 |
2,127 |
|
(45 |
) |
Used equipment |
83 |
|
75 |
|
10 |
|
215 |
262 |
|
(18 |
) |
Equipment rental |
53 |
|
71 |
|
(26 |
) |
147 |
191 |
|
(23 |
) |
Product support |
842 |
|
952 |
|
(12 |
) |
2,596 |
2,871 |
|
(10 |
) |
Net fuel and other |
30 |
|
32 |
|
|
88 |
82 |
|
|
Net revenue |
1,443 |
|
1,819 |
|
(21 |
) |
4,217 |
|
5,533 |
|
(24 |
) |
Gross
profit |
390 |
|
459 |
|
(15 |
) |
1,152 |
|
1,371 |
|
(16 |
) |
Gross
profit as a percentage of net revenue(2) |
27.0 |
% |
25.3 |
% |
|
27.3 |
% |
24.8 |
% |
|
SG&A |
(290 |
) |
(333 |
) |
13 |
|
(921 |
) |
(1,026 |
) |
10 |
|
SG&A
as a percentage of net revenue |
(20.1 |
)% |
(18.3 |
)% |
|
(21.8 |
)% |
(18.5 |
)% |
|
Equity
earnings of joint ventures |
1 |
|
3 |
|
|
3 |
|
12 |
|
|
Other
income |
37 |
|
- |
|
|
101 |
|
- |
|
|
Other
expenses |
- |
|
- |
|
|
(51 |
) |
(29 |
) |
|
EBIT |
138 |
|
129 |
|
6 |
|
284 |
|
328 |
|
(14 |
) |
EBIT as
a percentage of net revenue |
9.6 |
% |
7.1 |
% |
|
6.7 |
% |
5.9 |
% |
|
Adjusted
EBIT |
101 |
|
132 |
|
(24 |
) |
234 |
|
360 |
|
(35 |
) |
Adjusted
EBIT as a percentage of net revenue |
7.0 |
% |
7.3 |
% |
|
5.6 |
% |
6.5 |
% |
|
Net income |
88 |
|
76 |
|
16 |
|
160 |
|
192 |
|
(17 |
) |
Basic
EPS |
0.54 |
|
0.46 |
|
17 |
|
0.99 |
|
1.17 |
|
(16 |
) |
Adjusted EPS |
0.37 |
|
0.49 |
|
(25 |
) |
0.76 |
|
1.34 |
|
(43 |
) |
EBITDA |
215 |
|
201 |
|
7 |
|
515 |
|
548 |
|
(6 |
) |
EBITDA
as a percentage of net revenue |
14.9 |
% |
11.1 |
% |
|
12.2 |
% |
9.9 |
% |
|
Adjusted
EBITDA |
178 |
|
204 |
|
(13 |
) |
465 |
|
580 |
|
(20 |
) |
Adjusted
EBITDA as a percentage of net revenue |
12.3 |
% |
11.2 |
% |
|
11.0 |
% |
10.5 |
% |
|
Free cash flow |
316 |
|
165 |
|
91 |
|
578 |
|
(344 |
) |
n/m |
|
|
Sept 30, 2020 |
|
Dec 31, 2019 |
|
|
|
|
Invested
capital |
3,284 |
|
3,591 |
|
|
|
|
Invested
capital turnover (times) |
1.68 |
|
1.92 |
|
|
|
|
Net debt
to Adjusted EBITDA ratio |
1.7 |
|
2.0 |
|
|
|
|
ROIC |
10.7 |
% |
11.2 |
% |
|
|
|
Adjusted ROIC |
9.3 |
% |
12.0 |
% |
|
|
|
n/m – not meaningful
To access Finning's complete Q3 2020 results in
PDF, please visit our website at
https://www.finning.com/en_CA/company/investors.html
Q3 2020 INVESTOR CALLThe
Company will hold an investor call on November 4, 2020 at 10:00 am
Eastern Time. Dial-in numbers: 1-800-319-4610 (Canada and US),
1-416-915-3239 (Toronto area), 1-604-638-5340 (international). The
investor call will be webcast live and archived for three months.
The webcast and accompanying presentation can be accessed at
https://www.finning.com/en_CA/company/investors.html.
ABOUT FINNING Finning
International Inc. (TSX: FTT) is the world’s largest Caterpillar
equipment dealer delivering unrivalled service to customers for
over 87 years. Finning sells, rents, and provides parts and service
for equipment and engines to help customers maximize productivity.
Headquartered in Vancouver, B.C., the Company operates in Western
Canada, Chile, Argentina, Bolivia, the United Kingdom and
Ireland.
CONTACT INFORMATIONAmanda
HobsonSenior Vice President, Investor Relations and Treasury Phone:
604-331-4865Email: amanda.hobson@finning.com
https://www.finning.com
FOOTNOTES
- Earnings Before Finance Costs and
Income Taxes (EBIT); Basic Earnings per Share (EPS); Earnings
Before Finance Costs, Income Taxes, Depreciation and Amortization
(EBITDA); Selling, General & Administrative Expenses
(SG&A); Return on Invested Capital (ROIC).
- These financial metrics, referred
to as “non-GAAP financial measures”, do not have a standardized
meaning under International Financial Reporting Standards (IFRS),
which are also referred to herein as Generally Accepted Accounting
Principles (GAAP), and therefore may not be comparable to similar
measures presented by other issuers. For additional information
regarding these financial metrics, including definitions and
reconciliations from each of these non-GAAP financial measures to
their most directly comparable measure under GAAP, where available,
see the heading “Description of Non-GAAP Financial Measures and
Reconciliations” in the Company’s Q2 2020 management discussion and
analysis (MD&A). Management believes that providing certain
non-GAAP financial measures provides users of the Company’s
MD&A and consolidated financial statements with important
information regarding the operational performance and related
trends of the Company's business. By considering these measures in
combination with the comparable IFRS financial measures (where
available) set out in the MD&A, management believes that users
are provided a better overall understanding of the Company's
business and its financial performance during the relevant period
than if they simply considered the IFRS financial measures
alone.
- Certain 2020 and 2019 financial
metrics were impacted by significant items management does not
consider indicative of operational and financial trends either by
nature or amount; these significant items are described on pages 5,
11 and 33-34 of the MD&A. The financial metrics that have been
adjusted to take into account these items are referred to as
“Adjusted” metrics.
FORWARD-LOOKING INFORMATION
CAUTION
This news release contains information about our
business outlook, objectives, plans, strategic priorities and other
information that is not historical fact. Information we provide is
forward-looking when we use what we know and expect today to give
information about the future. Forward-looking information may
include terminology such as aim, anticipate, assumption, believe,
could, expect, goal, guidance, intend, may, objective, outlook,
plan, project, seek, should, strategy, strive, target, and will,
and variations of such terminology. Forward-looking information in
this news release includes, but is not limited to, the following:
we are on track to deliver more than $100 million of annualized
cost savings; the position of the UK business for High Speed Rail 2
opportunities; most of our markets will continue to improve in Q4
2020 and into 2021; our focus on growing product support revenue
through the market recovery by strengthening relationships with
customers and leveraging technology; our mid-cycle target for
SG&A as a percentage of net revenue of 17%; our positive
overall outlook for the balance of 2020 and into 2021; regarding
our outlook for our Canadian operations: oil sands production is
expected to increase in 2021 compared to 2020, oil sands
contractors are expected to ramp up machine utilization further in
Q4 2020 and into 2021 and product support activity in the oil sands
is expected to improve in Q4 2020 and into 2021 driven by catch up
on major rebuild and maintenance work and an increase in oil
production and non-production mining activities; the improved
outlook for copper and precious and other metals; coal prices will
remain soft; expected improvement in mining product support
activity as customers increase production output and resume
full-scope maintenance activities; the large and aging large and
ultra-class Caterpillar off-highway truck population in Western
Canada is expected to drive opportunities for future fleet
renewals, rebuilds and autonomy conversions, as well as continued
demand for product support; resumption in request for proposal
activity from Canadian mining customers; in construction, expected
continued recovery in machine utilization hours and rental
utilization is expected to drive improved demand for product
support and rentals, large infrastructure programs are planned in
Alberta, British Columbia and Saskatchewan, infrastructure stimulus
spending announced by the federal and provincial governments is
expected to provide opportunities for equipment, product support,
heavy rentals, and prime and standby electric power generation in
2021 and the pricing environment is expected to remain highly
competitive in the near term due to a surplus of competitive
equipment inventories in Western Canada; and our expectation of
improved profitability in Canada in 2021 even in a modest revenue
recovery environment; regarding our outlook for our South American
operations: we expect mining product support revenue in Chile to
recover significantly as we exit 2020 and begin 2021 and are
optimistic about mining recovery in Chile in 2021, driven by a
strengthened copper price and expected increase in copper
production; the large and aging large and ultra-class Caterpillar
off-highway truck population operating in Chile’s copper mines will
continue to drive demand for product support; an increase in mining
and mining contractor request for proposal activity in Chile;
overall economic uncertainty related to the government’s social
reform agenda is expected to continue to impact customer confidence
and the pace of economic recovery in Chile; in Argentina, market
activity is expected to remain at low levels due to a challenging
economic environment; management of our ARS currency exposure to
the extent possible; maintenance of a minimal level of investment
in our operations; our focus on delivering product support and
ensuring our operations in Argentina remain profitable; and
expected limited growth opportunities in Argentina for the
foreseeable future due to the government’s restrictive monetary
policies and capital and import controls; and that we are well
positioned to deliver year over year profitability in Q4 2020 and
2021 in South America; regarding our outlook for our UK and Ireland
operations: HS2 is expected to ramp up slower than initially
planned and begin to drive improved activity in the general
construction equipment markets starting in 2021 and, over the life
of this multi-year mega-project, require approximately 1,100 units
of heavy equipment representing a total industry-wide direct sales
opportunity of approximately £390 million and we are
well-positioned to capture new equipment and products support
opportunities while leveraging our technology solutions related to
earthmoving work for HS2; we expect to continue benefitting from
strong demand in the electric power capacity, combined heat and
power, and data centre markets and a large backlog of high-quality
power systems projects is expected to drive the UK operation’s
revenue in Q4 2020 and into 2021; in a second wave of COVID-19, we
do not expect to see the same extent of lockdown measures
implemented in the sectors we serve in the UK and Ireland as were
implemented in the second quarter; and the continuing degree of
risk and uncertainty from Brexit for economic activity and supply
chain logistics in the UK and Ireland and our action plan with
Caterpillar to minimize the potential impact on the supply chain
during the Brexit transition; and our outlook related to our cost
actions to drive earnings capacity in a recovery: that while we are
on track to deliver more than $100 million of annualized cost
savings, we expect that approximately one-third of our workforce
will return when market activity fully recovers, which will be
mostly revenue generating employees in lower cost locations; our
goal to reduce SG&A as a percentage of net revenue to about 17%
in mid-cycle; our expectation to generate higher earnings on a
modestly lower revenue base in Q4 2020 compared to Q4 2019; our
expectation that, given economic uncertainties in all our regions,
our 2021 revenue will be below 2019; our expectation to achieve an
EBITDA to FCF conversion of approximately 100% in 2020; while we
expect positive free cash flow in Q4 2020, we are planning for
revenue recovery and increasing inventory purchasing in Q4 2020;
and the Canadian income tax treatment of the quarterly dividend.
All such forward-looking statements are made pursuant to the ‘safe
harbour’ provisions of applicable Canadian securities laws.
Unless we indicate otherwise, forward-looking
information in this news release reflects our expectations at the
date in this news release. Except as may be required by Canadian
securities laws, we do not undertake any obligation to update or
revise any forward-looking information, whether as a result of new
information, future events, or otherwise.
Forward-looking information, by its very nature,
is subject to numerous risks and uncertainties and is based on a
number of assumptions. This gives rise to the possibility that
actual results could differ materially from the expectations
expressed in or implied by such forward-looking information and
that our business outlook, objectives, plans, strategic priorities
and other information that is not historical fact may not be
achieved. As a result, we cannot guarantee that any forward-looking
information will materialize. Factors that could cause actual
results or events to differ materially from those expressed in or
implied by this forward-looking information include: the impact and
duration of the COVID-19 pandemic and measures taken by governments
and businesses in response; general economic and market conditions
and economic and market conditions in the regions where we operate;
foreign exchange rates; commodity prices; the impact of changes in
the UK’s trade relationship with the European Union as a result of
Brexit; the level of customer confidence and spending, and the
demand for, and prices of, our products and services; our ability
to maintain our relationship with Caterpillar; our dependence on
the continued market acceptance of our products, including
Caterpillar products, and the timely supply of parts and equipment;
our ability to continue to sustainably reduce costs and improve
productivity and operational efficiencies while continuing to
maintain customer service; our ability to manage cost pressures as
growth in revenue occurs; our ability to negotiate satisfactory
purchase or investment terms and prices, obtain necessary
regulatory or other approvals, and secure financing on attractive
terms or at all; our ability to manage our growth strategy
effectively; our ability to effectively price and manage long-term
product support contracts with our customers; our ability to reduce
costs in response to slowing activity levels; our ability to drive
continuous cost efficiency in a recovering market; our ability to
attract sufficient skilled labour resources as market conditions,
business strategy or technologies change; our ability to negotiate
and renew collective bargaining agreements with satisfactory terms
for our employees and us; the intensity of competitive activity;
our ability to raise the capital needed to implement our business
plan; regulatory initiatives or proceedings, litigation and changes
in laws or regulations; stock market volatility; changes in
political and economic environments in the regions where we carry
on business; our ability to respond to climate change-related
risks; the occurrence of natural disasters, pandemic outbreaks,
geo-political events, acts of terrorism, social unrest or similar
disruptions; fluctuations in defined benefit pension plan
contributions and related pension expenses; the availability of
insurance at commercially reasonable rates and whether the amount
of insurance coverage will be adequate to cover all liability or
loss that we incur; the potential of warranty claims being greater
than we anticipate; the integrity, reliability and availability of,
and benefits from, information technology and the data processed by
that technology; and our ability to protect our business from
cybersecurity threats or incidents. Forward-looking information is
provided in this news release for the purpose of giving information
about management’s current expectations and plans and allowing
investors and others to get a better understanding of our operating
environment. However, readers are cautioned that it may not be
appropriate to use such forward-looking information for any other
purpose.
Forward-looking information made in this news
release is based on a number of assumptions that we believed were
reasonable on the day the information was given, including but not
limited to (i) that we will be able to successfully manage our
business through the current challenging times involving the
effects of the COVID-19 response and volatile commodity prices;
(ii) that our cost actions to drive earnings capacity in a
recovery, including the lower cost base in Canada, improved
operational execution in South America, and tight management of
costs in the UK and Ireland, can be sustained, including that we
will be able to manage the return of our workforce in lower cost
jurisdictions/regions as planned; (iii) that our action plan to
minimize the impact of Brexit will be successful; (iv) that general
economic and market conditions will improve; (v) that the level of
customer confidence and spending, and the demand for, and prices
of, our products and services will be maintained; (vi) our ability
to successfully execute our plans and intentions; (vii) our ability
to attract and retain skilled staff; (viii) market competition will
remain at similar levels; (ix) the products and technology offered
by our competitors will be as expected; and (x) that our current
good relationships with Caterpillar, our customers and our
suppliers, service providers and other third parties will be
maintained. 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 news release are
discussed in Section 4 of the our current AIF, in the annual
MD&A for the financial risks, and in the most recent quarterly
MD&A for updated risks related to the COVID-19 pandemic.
We caution readers that the risks described in
the AIF and in the annual and most recent quarterly MD&A are
not the only ones that could impact the Company. We cannot
accurately predict the full impact that COVID-19 will have on our
business, results of operations, financial condition or the demand
for our services, due in part to the uncertainties relating to the
ultimate geographic spread of the virus, the severity of the
disease, the duration of the outbreak, the steps our customers and
suppliers may take in current circumstances, including slowing or
halting operations, the duration of travel and quarantine
restrictions imposed by governments of affected countries and other
steps that may be taken by such governments to respond to the
pandemic. Additional risks and uncertainties not currently known to
us or that are currently deemed to be immaterial may also have a
material adverse effect on our business, financial condition, or
results of operation.
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