Finning International Inc. (TSX: FTT) (“Finning”, the “Company”,
“we”, “our” or “us”) reported fourth quarter and annual 2022
results today. All monetary amounts are in Canadian dollars unless
otherwise stated.
HIGHLIGHTSAll comparisons are to Q4 and annual
2021 results unless indicated otherwise.
- Q4 2022 EPS (1) was $0.89, up 36%
from Q4 2021, driven by strong revenue growth and operational
execution.
- Q4 2022 revenue of $2.7 billion and
net revenue (2) of $2.4 billion were up 36% and 34%, respectively,
from Q4 2021, reflecting large new equipment volume and strong
product support growth rates. Significant mining deliveries in
Canada and South America drove new equipment sales growth of 52%
compared to Q4 2021.
- Q4 2022 EBIT (1) of $214 million was
up 36% and included $19 million higher LTIP expense compared to Q4
2021. EBIT as a percentage of net revenue (2) was 9.0%, led by
South America at 11.4% and Canada at 11.0%.
- Q4 2022 free cash flow (3) was $332
million. Annual free cash flow was a use of cash of $170 million in
2022 due to investment in working capital to support the delivery
of record equipment backlog and strong product support growth
rates. 2022 year-end net debt to Adjusted EBITDA (1)(2)(4) of 1.6x
was down from 1.8x in Q3 2022.
- For the full year 2022, EPS of $3.25
was up 49% from Adjusted EPS (2)(4) in 2021 on a 23% increase in
net revenue, demonstrating improved earnings capacity and strong
operating leverage.
- 2022 ROIC (1)(2) of 18.7% was up 230
basis points from Adjusted ROIC (2)(4) in 2021.
- Consolidated equipment backlog (2)
was a record $2.5 billion at December 31, 2022. Compared to
December 31, 2021, backlog was up 35%, driven by higher order
intake in mining and power systems.
“We are grateful to our employees for their commitment and
contribution, which helped us finish 2022 safely and deliver record
results. Our strong execution combined with significant strategic
wins across the business in 2022 have provided us with great
momentum into 2023, setting the stage for continued improvement in
our full-cycle earnings capacity.
Looking ahead, we are mindful of the uncertain global business
environment, including slowing rates of growth, and we are
reinforcing our mid-cycle operating cost and capital model. On
balance, we see constructive demand conditions in our diverse end
markets where we expect strength in mining and energy sectors to
more than offset slowing construction markets in the UK and South
America. We are seeing continued momentum at the start of 2023 and
expect growth in the first half of the year, underpinned by our
record equipment backlog, very busy workshops, and growth in
rebuilds driven by the strong execution of our product support
strategy,” said Kevin Parkes, president and CEO.
Q4 2022 FINANCIAL SUMMARY
|
Quarterly Overview |
|
|
% change |
|
($ millions, except per share amounts) |
Q4 2022 |
|
Q4 2021 |
|
fav (unfav) (1) |
|
Revenue |
2,653 |
|
1,949 |
|
36 |
% |
|
Net revenue |
2,368 |
|
1,774 |
|
34 |
% |
|
EBIT |
214 |
|
157 |
|
36 |
% |
|
EBIT as a percentage of net revenue |
9.0 |
% |
8.9 |
% |
|
|
Net income attributable to shareholders of Finning |
136 |
|
104 |
|
30 |
% |
|
EPS |
0.89 |
|
0.66 |
|
36 |
% |
|
Free cash flow |
332 |
|
148 |
|
125 |
% |
|
Q4 2022 EBIT by Operation |
|
|
South |
|
UK & |
|
|
|
Finning |
|
|
|
|
($ millions, except per share amounts) |
Canada |
|
America |
|
Ireland |
|
Other |
|
Total |
|
EPS |
|
|
EBIT / EPS |
128 |
|
96 |
|
16 |
|
(26 |
) |
214 |
|
0.89 |
|
|
EBIT as a percentage of net revenue |
11.0 |
% |
11.4 |
% |
4.4 |
% |
n/m (1) |
|
9.0 |
% |
|
|
|
Q4 2021 EBIT by Operation |
|
|
South |
|
UK & |
|
|
|
Finning |
|
|
|
|
($ millions, except per share amounts) |
Canada |
|
America |
|
Ireland |
|
Other |
|
Total |
|
EPS |
|
|
EBIT / EPS |
92 |
|
59 |
|
12 |
|
(6 |
) |
157 |
|
0.66 |
|
|
EBIT as a percentage of net revenue |
10.1 |
% |
10.1 |
% |
4.3 |
% |
n/m |
|
8.9 |
% |
|
|
|
Key Performance Measures |
|
|
|
($ millions, unless otherwise stated) |
Q4 2022 |
|
Q4 2021 |
|
|
Invested
capital (2) |
4,170 |
|
3,326 |
|
|
Adjusted ROIC |
|
|
|
Consolidated |
18.7 |
% |
16.4 |
% |
|
Canada |
18.7 |
% |
16.9 |
% |
|
South America |
24.5 |
% |
20.3 |
% |
|
UK & Ireland |
17.0 |
% |
14.8 |
% |
|
Invested capital turnover (2) (times) |
2.01 |
|
2.04 |
|
|
Inventory |
2,461 |
|
1,687 |
|
|
Inventory turns (dealership) (2) (times) |
2.61 |
|
3.09 |
|
|
Working capital to net revenue (2) ratio |
27.4 |
% |
22.9 |
% |
|
Net debt to Adjusted EBITDA ratio (times) |
1.6 |
|
1.1 |
|
|
|
|
|
|
|
Q4 2022 HIGHLIGHTS BY OPERATIONAll comparisons
are to Q4 2021 results unless indicated otherwise. All numbers,
except ROIC, are in functional currency: Canada – Canadian dollar;
South America – USD; UK & Ireland – UK pound sterling (GBP).
These variances and ratios for South America and UK & Ireland
exclude the foreign currency translation impact from the CAD
relative to the USD and GBP, respectively, and are therefore,
considered to be specified financial measures. We believe the
variances and ratios in functional currency provide meaningful
information about operational performance of the reporting
segment.
Canada Operations
- Net revenue increased by 28% from
Q4 2021, with higher revenues across all sectors driven by
continued strong market conditions in Western Canada.
- New equipment sales were up 56%,
driven by mining deliveries in the oil sands and higher volumes in
the construction and power systems sectors.
- Product support revenue was up 30%,
reflecting strong demand in all sectors and successful execution of
our product support growth strategy, including the positive impact
of supplier cost passthrough.
- Supply of used equipment remained
tight in Western Canada. Used equipment sales were down 36% from
record levels in Q4 2021 which saw large used equipment deals in
mining and construction sectors.
- EBIT was up 39% and EBIT as a
percentage of net revenue increased by 90 basis points to 11.0%
compared to Q4 2021, driven by improved operating leverage.
SG&A (1) as a percentage of net revenue was down 190 basis
points from Q4 2021.
South America Operations
- Net revenue increased by 34% from
Q4 2021, driven by strong mining activity.
- New equipment sales were up 54%
from Q4 2021 due to higher deliveries to copper producers and large
contractors supporting mining operations in Chile. In addition, we
were able to catch up on some backlog deliveries from Q3 2022 which
were delayed due to supply chain constraints.
- Product support revenue was up 25%,
driven by Chilean mining, with strong overall demand and higher
volumes from new and expanded mining product support contracts, as
well as the benefit of supplier cost passthrough in all market
sectors.
- EBIT increased by 51% and EBIT as a
percentage of net revenue of 11.4% was up 130 basis points compared
to Q4 2021, reflecting strong revenue growth, improved cost
structure and service productivity, as well as the favourable
impact of CLP devaluation.
- South America generated a record
ROIC of 24.5% in 2022, a 420 basis points increase from 2021.
UK & Ireland Operations
- Net revenue was up 38% from Q4
2021, with increased volumes across all lines of business.
- New equipment sales were up 39%,
driven by higher power systems project deliveries, higher HS2
deliveries, and robust demand in the construction sector.
- Product support revenue was up 38%,
reflecting solid activity in all end markets, strong execution of
our product support growth strategy, including the positive impact
of supplier cost passthrough, and the contribution from Hydraquip
(1), which was acquired in March 2022.
- EBIT increased by 40% from Q4 2021
and EBIT as a percentage of net revenue of 4.4% was slightly higher
compared to Q4 2021.
Corporate and Other
- Corporate EBIT loss was $26 million
in Q4 2022 compared to an EBIT loss of $6 million in Q4 2021 mostly
due to higher LTIP expense driven by significant share price
appreciation in Q4 2022 compared to Q4 2021.
- The Board of Directors has approved
a quarterly dividend of $0.236 per share, payable on March 9, 2023,
to shareholders of record on February 23, 2023. This dividend will
be considered an eligible dividend for Canadian income tax
purposes.
MARKET UPDATE AND BUSINESS OUTLOOKThe
discussion of our expectations relating to the market and business
outlook in this section is forward-looking information that is
based upon the assumptions and subject to the material risks
discussed under the heading “Forward-Looking Information Caution”
at the end of this news release. Actual outcomes and results may
vary significantly.
Canada Operations
We expect market activity across Western Canada to remain
healthy, supported by the strength in the mining and energy
sectors.
Constructive commodity prices and improved capital budgets are
expected to drive investment in renewal of aging fleets and product
support opportunities in the oil sands and other mining. We expect
to see growing demand for component remanufacturing, equipment
rebuilds, and autonomy implementation as mining customers are
looking to extend the life of their assets and improve
productivity.
In the construction sector, federal and provincial governments’
infrastructure programs and private sector investments in natural
gas, carbon capture, utilization and storage, and various power
projects are expected to continue driving demand for construction
equipment and product support, rentals, and prime and standby
electric power generation.
In the power systems sector, higher activity levels from energy
customers are driving a notable increase in quoting and order
intake. Our power systems backlog in Canada is at its highest
levels since 2014.
South America Operations
We continue to closely monitor the Chilean constitutional
reform, including the process for approval of the proposal for a
revised mining royalty framework. We are encouraged by the latest
moderated proposal. However, we expect the timing of investment
decisions related to greenfield and new expansion projects to
remain uncertain until the new royalty proposal is approved. Longer
term, we expect Chile will remain an attractive place to invest as
electrification trends drive increasing global demand for
copper.
We expect a strengthening copper price to support positive
mining outlook in Chile in 2023. Mining deliveries are expected to
be driven by our recent wins with BHP and Codelco, as well as
committed medium-term investment in fleet replacements across our
mining customer base. We also expect to see continued strong demand
for mining product support and technology solutions, including
autonomy.
Slowing economic growth and higher interest rates are expected
to continue impacting construction activity in Chile in 2023.
In Argentina, activity in construction, oil and gas, and mining
is expected to remain stable. However, high inflation, currency
restrictions, and new import regulations will continue to impact
our business in Argentina as we manage through the challenging
fiscal, regulatory, and currency environments.
UK & Ireland Operations
As equipment deliveries to HS2 have largely been completed, we
expect lower construction new equipment sales in the UK in 2023
compared to 2022. In addition, overall demand for construction
equipment in the UK is expected to decline in 2023 due to slowing
economic growth rates. However, we expect strong demand for product
support to continue, driven by HS2 activity and high machine
utilization rates across broader construction markets.
We expect demand for our power systems business in the UK &
Ireland to remain robust, including in the data centre market. We
have a solid backlog of power systems projects for delivery in
2023, and we are well positioned to capture further
opportunities.
Considerations for 2023
We are mindful of the uncertain global business environment,
including slowing rates of growth, and we are reinforcing our
mid-cycle operating cost and capital model. Overall, we expect
constructive demand conditions in our diverse end markets to be
supported by favourable commodity prices and strong demand from
mining and energy customers.
We are reducing our capital expenditures budget in 2023 with a
higher proportion allocated to reinvestment in rental fleet and
strategic investments in electric drive mining trucks for
demonstration purposes. Our 2023 net capital expenditures and net
rental fleet additions are expected to be in the range of $190
million to $240 million, which represents about 25% reduction from
2022. In 2023, we will be placing a higher priority on debt
repayment and reduction in our net debt to Adjusted EBITDA
ratio.
We are seeing continued momentum at the start of 2023 and expect
growth in the first half of the year compared to the first half of
2022, underpinned by our record equipment backlog, very busy
workshops, and growth in rebuilds driven by the strong execution of
our product support strategy.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
|
|
Three months ended |
|
Years ended |
|
|
December 31 |
|
December 31 |
|
|
|
|
|
|
% change |
|
|
|
|
|
% change |
|
($ millions, except per share amounts) |
2022 |
|
|
2021 |
|
|
fav (unfav) |
|
2022 |
|
|
2021 |
|
|
fav (unfav) |
|
New equipment |
854 |
|
|
562 |
|
|
52 |
% |
|
2,793 |
|
|
2,189 |
|
|
28 |
% |
|
Used
equipment |
91 |
|
|
124 |
|
|
(26 |
)% |
|
352 |
|
|
409 |
|
|
(14 |
)% |
|
Equipment rental |
83 |
|
|
68 |
|
|
22 |
% |
|
297 |
|
|
235 |
|
|
26 |
% |
|
Product
support |
1,295 |
|
|
982 |
|
|
32 |
% |
|
4,606 |
|
|
3,728 |
|
|
24 |
% |
|
Net fuel and other |
45 |
|
|
38 |
|
|
21 |
% |
|
167 |
|
|
135 |
|
|
24 |
% |
|
Net revenue |
2,368 |
|
|
1,774 |
|
|
34 |
% |
|
8,215 |
|
|
6,696 |
|
|
23 |
% |
|
Gross profit |
628 |
|
|
484 |
|
|
30 |
% |
|
2,223 |
|
|
1,801 |
|
|
23 |
% |
|
Gross
profit as a percentage of net revenue (2) |
26.5 |
% |
|
27.3 |
% |
|
|
|
27.1 |
% |
|
26.9 |
% |
|
|
|
SG&A |
(416 |
) |
|
(328 |
) |
|
(27 |
)% |
|
(1,458 |
) |
|
(1,266 |
) |
|
(15 |
)% |
|
SG&A
as a percentage of net revenue (2) |
(17.6 |
)% |
|
(18.5 |
)% |
|
|
|
(17.7 |
)% |
|
(18.9 |
)% |
|
|
|
Equity
earnings of joint ventures |
2 |
|
|
1 |
|
|
|
|
3 |
|
|
2 |
|
|
|
|
Other income |
— |
|
|
— |
|
|
|
|
— |
|
|
15 |
|
|
|
|
EBIT |
214 |
|
|
157 |
|
|
36 |
% |
|
768 |
|
|
552 |
|
|
39 |
% |
|
EBIT as
a percentage of net revenue |
9.0 |
% |
|
8.9 |
% |
|
|
|
9.3 |
% |
|
8.2 |
% |
|
|
|
Adjusted
EBIT (3)(4) |
214 |
|
|
157 |
|
|
36 |
% |
|
768 |
|
|
537 |
|
|
43 |
% |
|
Adjusted EBIT as a percentage of net revenue (2)(4) |
9.0 |
% |
|
8.9 |
% |
|
|
|
9.3 |
% |
|
8.0 |
% |
|
|
|
Net income attributable to shareholders of Finning |
136 |
|
|
104 |
|
|
30 |
% |
|
503 |
|
|
364 |
|
|
38 |
% |
|
EPS |
0.89 |
|
|
0.66 |
|
|
36 |
% |
|
3.25 |
|
|
2.26 |
|
|
44 |
% |
|
Adjusted EPS |
0.89 |
|
|
0.66 |
|
|
36 |
% |
|
3.25 |
|
|
2.18 |
|
|
49 |
% |
|
Free cash flow |
332 |
|
|
148 |
|
|
125 |
% |
|
(170 |
) |
|
300 |
|
|
n/m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To access Finning’s complete Q4 and annual 2022 results, please
visit our website at
https://www.finning.com/en_CA/company/investors.html
Q4 2022 INVESTOR CALLThe Company will hold an
investor call on February 7, 2023 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 FINNINGFinning is the world’s largest
Caterpillar dealer, delivering unrivalled service to customers for
90 years. Headquartered in Surrey, British Columbia, we provide
Caterpillar equipment, parts, services, and performance solutions
in Western Canada, Chile, Argentina, Bolivia, the United Kingdom,
and Ireland.
CONTACT INFORMATIONIlona RojkovaDirector,
Investor Relations Phone: 604-837-8241Email: FinningIR@finning.com
https://www.finning.com
Description of Specified Financial Measures and
Reconciliations
Specified Financial Measures
We believe that certain specified financial measures, including
non-GAAP financial measures, provide users of our Earnings Release
with important information regarding the operational performance
and related trends of our business. The specified financial
measures we use do not have any standardized meaning prescribed by
GAAP and therefore may not be comparable to similar measures
presented by other issuers. Accordingly, specified financial
measures should not be considered as a substitute or alternative
for financial measures determined in accordance with GAAP (GAAP
financial measures). By considering these specified financial
measures in combination with the comparable GAAP financial measures
(where available) we believe that users are provided a better
overall understanding of our business and financial performance
during the relevant period than if they simply considered the GAAP
financial measures alone.
We use KPIs to consistently measure performance against our
priorities across the organization. Some of our KPIs are specified
financial measures.
There may be significant items that we do not consider
indicative of our operational and financial trends, either by
nature or amount. We exclude these items when evaluating our
operating financial performance. These items may not be
non-recurring, but we believe that excluding these significant
items from GAAP financial measures provides a better understanding
of our financial performance when considered in conjunction with
the GAAP financial measures. Financial measures that have been
adjusted to take these significant items into account are referred
to as “Adjusted measures”. Adjusted measures are specified
financial measures and are intended to provide additional
information to readers of the Earnings Release.
Descriptions and components of the specified financial measures
we use in this Earnings Release are set out below. Where
applicable, quantitative reconciliations from certain specified
financial measures to their most directly comparable GAAP financial
measures (specified, defined, or determined under GAAP and used in
our consolidated financial statements) are also set out below.
Adjusted EPS
Adjusted EPS excludes the after-tax per share impact of
significant items that we do not consider to be indicative of
operational and financial trends either by nature or amount to
provide a better overall understanding of our underlying business
performance. The tax impact of each significant item is calculated
by applying the relevant applicable tax rate for the jurisdiction
in which the significant item occurred. The after-tax per share
impact of significant items is calculated by dividing the after-tax
amount of significant items by the weighted average number of
common shares outstanding during the period.
A reconciliation between EPS (the most directly comparable GAAP
financial measure) and Adjusted EPS can be found on page 7 of this
Earnings Release.
Adjusted EBIT and Adjusted EBITDA
Adjusted EBIT and Adjusted EBITDA exclude items that we do not
consider to be indicative of operational and financial trends,
either by nature or amount, to provide a better overall
understanding of our underlying business performance.
Adjusted EBITDA is calculated by adding depreciation and
amortization to Adjusted EBIT.
The most directly comparable GAAP financial measure to Adjusted
EBITDA and Adjusted EBIT is EBIT.
A reconciliation from EBIT to Adjusted EBIT and Adjusted EBITDA
for our consolidated operations is as follows:
|
3 months
ended |
2022 |
|
2021 |
|
|
($
millions) |
Dec 31 |
Sep 30 |
Jun 30 |
Mar 31 |
|
Dec 31 |
Sep 30 |
Jun 30 |
Mar 31 |
|
|
EBIT |
214 |
224 |
190 |
140 |
|
157 |
150 |
137 |
108 |
|
|
Significant
items: |
|
|
|
|
|
|
|
|
|
|
|
CEWS support |
— |
— |
— |
— |
|
— |
— |
— |
(10 |
) |
|
|
Return on Energyst
investment |
— |
— |
— |
— |
|
— |
— |
— |
(5 |
) |
|
Adjusted
EBIT |
214 |
224 |
190 |
140 |
|
157 |
150 |
137 |
93 |
|
|
Depreciation and amortization |
87 |
84 |
81 |
81 |
|
84 |
80 |
78 |
77 |
|
|
Adjusted EBITDA (3)(4) |
301 |
308 |
271 |
221 |
|
241 |
230 |
215 |
170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The impact on provision for income taxes of significant items
was as follows:
|
3 months
ended |
2022 |
|
2021 |
|
($
millions) |
Dec 31 |
Sep 30 |
Jun 30 |
Mar 31 |
|
Dec 31 |
Sep 30 |
Jun 30 |
Mar 31 |
|
Significant
item: |
|
|
|
|
|
|
|
|
|
|
|
CEWS support |
— |
— |
— |
— |
|
— |
— |
— |
2 |
|
Provision for income taxes on significant item |
— |
— |
— |
— |
|
— |
— |
— |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation from EPS to Adjusted EPS for our consolidated
operations is as follows:
|
3 months
ended |
2022 |
|
2021 |
|
|
($) |
Dec 31 |
Sep 30 |
Jun 30 |
Mar 31 |
|
Dec 31 |
Sep 30 |
Jun 30 |
Mar 31 |
|
|
EPS |
0.89 |
0.97 |
0.80 |
0.59 |
|
0.66 |
0.61 |
0.56 |
0.43 |
|
|
Significant
items: |
|
|
|
|
|
|
|
|
|
|
|
CEWS support |
— |
— |
— |
— |
|
— |
— |
— |
(0.05 |
) |
|
|
Return on Energyst
investment |
— |
— |
— |
— |
|
— |
— |
— |
(0.03 |
) |
|
Adjusted EPS (a) |
0.89 |
0.97 |
0.80 |
0.59 |
|
0.66 |
0.61 |
0.56 |
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) The per share impact for each quarter has
been calculated using the weighted average number of common shares
outstanding during the respective quarters; therefore, quarterly
amounts may not add to the annual or year-to-date total.
A reconciliation from EBIT to Adjusted EBIT for our Canadian
operations is as follows:
|
3 months
ended |
2022 |
|
2021 |
|
|
($
millions) |
Dec 31 |
Sep 30 |
Jun 30 |
Mar 31 |
|
Dec 31 |
Sep 30 |
Jun 30 |
Mar 31 |
|
|
EBIT |
128 |
125 |
102 |
80 |
|
92 |
84 |
82 |
69 |
|
|
Significant
item: |
|
|
|
|
|
|
|
|
|
|
|
CEWS support |
— |
— |
— |
— |
|
— |
— |
— |
(10 |
) |
|
Adjusted EBIT |
128 |
125 |
102 |
80 |
|
92 |
84 |
82 |
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation from EBIT to Adjusted EBIT for our South
American operations is as follows:
|
3 months
ended |
2022 |
|
2021 |
|
($ millions) |
Dec 31 |
Sep 30 |
Jun 30 |
Mar 31 |
|
Dec 31 |
Sep 30 |
Jun 30 |
Mar 31 |
|
Reported and Adjusted EBIT |
96 |
85 |
64 |
65 |
|
59 |
58 |
51 |
41 |
|
|
|
|
|
|
|
|
|
|
|
A reconciliation from EBIT to Adjusted EBIT for our UK &
Ireland operations is as follows:
|
3 months
ended |
2022 |
|
2021 |
|
($
millions) |
Dec 31 |
Sep 30 |
Jun 30 |
Mar 31 |
|
Dec 31 |
Sep 30 |
Jun 30 |
Mar 31 |
|
Reported and Adjusted EBIT |
16 |
21 |
23 |
14 |
|
12 |
17 |
17 |
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation from EBIT to Adjusted EBIT for our Other
operations is as follows:
|
3 months
ended |
2022 |
|
|
2021 |
|
|
($
millions) |
Dec 31 |
|
Sep 30 |
|
Jun 30 |
Mar 31 |
|
|
Dec 31 |
|
Sep 30 |
|
Jun 30 |
|
Mar 31 |
|
|
EBIT |
(26 |
) |
(7 |
) |
1 |
(19 |
) |
|
(6 |
) |
(9 |
) |
(13 |
) |
(9 |
) |
|
Significant
item: |
|
|
|
|
|
|
|
|
|
|
|
Return on Energyst investment |
— |
|
— |
|
— |
— |
|
|
— |
|
— |
|
— |
|
(5 |
) |
|
Adjusted EBIT |
(26 |
) |
(7 |
) |
1 |
(19 |
) |
|
(6 |
) |
(9 |
) |
(13 |
) |
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment Backlog
Equipment backlog is defined as the retail value of new
equipment units ordered by customers for future deliveries. We use
equipment backlog as a measure of projecting future new equipment
deliveries. There is no directly comparable GAAP financial measure
for equipment backlog.
Free Cash Flow
Free cash flow is defined as cash flow provided by or used in
operating activities less net additions to property, plant, and
equipment and intangible assets, as disclosed in our financial
statements. We use free cash flow to assess cash operating
performance, including working capital efficiency. Consistent
positive free cash flow generation enables us to re-invest capital
to grow our business and return capital to shareholders. A
reconciliation from cash flow used in or provided by operating
activities to free cash flow is as follows:
|
3 months
ended |
2022 |
|
|
2021 |
|
|
($
millions) |
Dec 31 |
|
Sep 30 |
|
Jun 30 |
|
Mar 31 |
|
|
Dec 31 |
|
Sep 30 |
|
Jun 30 |
|
Mar 31 |
|
|
Cash flow provided
by (used in) operating |
|
|
|
|
|
|
|
|
|
|
|
activities |
410 |
|
(24 |
) |
(112 |
) |
(273 |
) |
|
193 |
|
212 |
|
8 |
|
12 |
|
|
Additions to
property, plant, and equipment |
|
|
|
|
|
|
|
|
|
|
|
and intangible assets |
(78 |
) |
(33 |
) |
(30 |
) |
(30 |
) |
|
(45 |
) |
(38 |
) |
(17 |
) |
(33 |
) |
|
Proceeds on
disposal of property, plant, and |
|
|
|
|
|
|
|
|
|
|
|
equipment |
— |
|
— |
|
— |
|
— |
|
|
— |
|
2 |
|
5 |
|
1 |
|
|
Free cash flow |
332 |
|
(57 |
) |
(142 |
) |
(303 |
) |
|
148 |
|
176 |
|
(4 |
) |
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Inventory Turns (Dealership)
Inventory turns (dealership) is the number of times our
dealership inventory is sold and replaced over a period. We use
inventory turns (dealership) to measure asset utilization.
Inventory turns (dealership) is calculated as annualized cost of
sales (excluding cost of sales related to the mobile refuelling
operations) for the last six months divided by average inventory
(excluding fuel inventory), based on an average of the last two
quarters. Cost of sales related to the dealership and inventory
related to the dealership are calculated as follows:
|
3 months
ended |
2022 |
|
|
2021 |
|
|
($ millions) |
Dec 31 |
|
Sep 30 |
|
|
Dec 31 |
|
Sep 30 |
|
|
Cost of sales |
2,025 |
|
1,807 |
|
|
1,465 |
|
1,443 |
|
|
Cost of
sales related to mobile refuelling operations |
(302 |
) |
(293 |
) |
|
(190 |
) |
(170 |
) |
|
Cost of sales related to the dealership (3) |
1,723 |
|
1,514 |
|
|
1,275 |
|
1,273 |
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
($
millions) |
Dec 31 |
|
Sep 30 |
|
|
Dec 31 |
|
Sep 30 |
|
|
Inventory |
2,461 |
|
2,526 |
|
|
1,687 |
|
1,627 |
|
|
Fuel
inventory |
(12 |
) |
(12 |
) |
|
(9 |
) |
(6 |
) |
|
Inventory related to the dealership (3) |
2,449 |
|
2,514 |
|
|
1,678 |
|
1,621 |
|
|
|
|
|
|
|
|
Invested Capital
Invested capital is calculated as net debt plus total equity.
Invested capital is also calculated as total assets less total
liabilities, excluding net debt. Net debt is calculated as
short-term and long-term debt, net of cash and cash equivalents. We
use invested capital as a measure of the total cash investment made
in Finning and each reportable segment. Invested capital is used in
a number of different measurements (ROIC, Adjusted ROIC, invested
capital turnover) to assess financial performance against other
companies and between reportable segments. Invested capital is
calculated as follows:
|
|
2022 |
|
|
2021 |
|
|
($ millions) |
Dec 31 |
|
Sep 30 |
|
Jun 30 |
|
Mar 31 |
|
|
Dec 31 |
|
Sep 30 |
|
Jun 30 |
|
Mar 31 |
|
|
Cash and cash equivalents |
(288 |
) |
(120 |
) |
(170 |
) |
(295 |
) |
|
(502 |
) |
(518 |
) |
(378 |
) |
(469 |
) |
|
Short-term debt |
1,068 |
|
1,087 |
|
992 |
|
804 |
|
|
374 |
|
419 |
|
114 |
|
103 |
|
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
Current |
114 |
|
106 |
|
110 |
|
63 |
|
|
190 |
|
191 |
|
386 |
|
326 |
|
|
Non-current |
815 |
|
836 |
|
807 |
|
909 |
|
|
921 |
|
923 |
|
903 |
|
973 |
|
|
Net debt (3) |
1,709 |
|
1,909 |
|
1,739 |
|
1,481 |
|
|
983 |
|
1,015 |
|
1,025 |
|
933 |
|
|
Total
equity |
2,461 |
|
2,449 |
|
2,337 |
|
2,296 |
|
|
2,343 |
|
2,320 |
|
2,252 |
|
2,244 |
|
|
Invested capital |
4,170 |
|
4,358 |
|
4,076 |
|
3,777 |
|
|
3,326 |
|
3,335 |
|
3,277 |
|
3,177 |
|
|
|
|
|
|
|
|
|
|
|
|
Invested Capital Turnover
We use invested capital turnover to measure capital efficiency.
Invested capital turnover is calculated as net revenue for the last
twelve months divided by average invested capital of the last four
quarters.
Net Debt to Adjusted EBITDA Ratio
This ratio is calculated as net debt divided by Adjusted EBITDA
for the last twelve months. We use this ratio to assess operating
leverage and ability to repay debt. This ratio approximates the
length of time, in years, that it would take us to repay debt, with
net debt and Adjusted EBITDA held constant.
Net Revenue, Gross Profit as a % of Net Revenue,
SG&A as a % of Net Revenue, and EBIT as a % of Net
Revenue
Net revenue is defined as total revenue less the cost of fuel
related to the mobile refuelling operations in our Canadian
operations. As these fuel costs are pass-through in nature for this
business, we view net revenue as more representative than revenue
in assessing the performance of the business because the rack price
for the cost of fuel is fully passed through to the customer and is
not in our control. For our South American and UK & Ireland
operations, net revenue is the same as total revenue.
We use these specified financial measures to assess and evaluate
the financial performance or profitability of our reportable
segments. We may also calculate these financial measures using
Adjusted EBIT to exclude significant items we do not consider to be
indicative of operational and financial trends either by nature or
amount to provide a better overall understanding of our underlying
business performance.
The most directly comparable GAAP financial measure to net
revenue is total revenue. The ratios are calculated, respectively,
as gross profit divided by net revenue, SG&A divided by net
revenue, and EBIT divided by net revenue. Net revenue is calculated
as follows:
|
3 months
ended |
2022 |
|
|
2021 |
|
|
($ millions) |
Dec 31 |
|
Sep 30 |
|
Jun 30 |
|
Mar 31 |
|
|
Dec 31 |
|
Sep 30 |
|
Jun 30 |
|
Mar 31 |
|
|
Total revenue |
2,653 |
|
2,384 |
|
2,289 |
|
1,953 |
|
|
1,949 |
|
1,904 |
|
1,845 |
|
1,596 |
|
|
Cost of
fuel |
(285 |
) |
(277 |
) |
(285 |
) |
(217 |
) |
|
(175 |
) |
(156 |
) |
(140 |
) |
(127 |
) |
|
Net revenue |
2,368 |
|
2,107 |
|
2,004 |
|
1,736 |
|
|
1,774 |
|
1,748 |
|
1,705 |
|
1,469 |
|
|
|
|
|
|
|
|
|
|
|
|
ROIC and Adjusted ROIC
ROIC is defined as EBIT for the last twelve months divided by
average invested capital of the last four quarters, expressed as a
percentage.
We view ROIC as a useful measure for capital allocation
decisions that drive profitable growth and attractive returns to
shareholders. We also calculate Adjusted ROIC using Adjusted EBIT
to exclude significant items that we do not consider to be
indicative of operational and financial trends either by nature or
amount to provide a better overall understanding of our underlying
business performance.
Working Capital & Working Capital to Net Revenue
Ratio
Working capital is defined as total current assets (excluding
cash and cash equivalents) less total current liabilities
(excluding short-term debt and current portion of long-term debt).
We view working capital as a measure for assessing overall
liquidity.
The working capital to net revenue ratio is calculated as
average working capital of the last four quarters, divided by net
revenue for the last twelve months. We use this KPI to assess the
efficiency in our use of working capital to generate net
revenue.
Working capital is calculated as follows:
|
|
2022 |
|
|
2021 |
|
|
($ millions) |
Dec 31 |
|
Sep 30 |
|
Jun 30 |
|
Mar 31 |
|
|
Dec 31 |
|
Sep 30 |
|
Jun 30 |
|
Mar 31 |
|
|
Total current assets |
4,781 |
|
4,652 |
|
4,098 |
|
4,030 |
|
|
3,619 |
|
3,620 |
|
3,416 |
|
3,319 |
|
|
Cash
and cash equivalents |
(288 |
) |
(120 |
) |
(170 |
) |
(295 |
) |
|
(502 |
) |
(518 |
) |
(378 |
) |
(469 |
) |
|
Total current assets in working capital |
4,493 |
|
4,532 |
|
3,928 |
|
3,735 |
|
|
3,117 |
|
3,102 |
|
3,038 |
|
2,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
3,401 |
|
3,196 |
|
2,789 |
|
2,647 |
|
|
2,155 |
|
2,156 |
|
1,942 |
|
1,817 |
|
|
Short-term debt |
(1,068 |
) |
(1,087 |
) |
(992 |
) |
(804 |
) |
|
(374 |
) |
(419 |
) |
(114 |
) |
(103 |
) |
|
Current
portion of long-term debt |
(114 |
) |
(106 |
) |
(110 |
) |
(63 |
) |
|
(190 |
) |
(191 |
) |
(386 |
) |
(326 |
) |
|
Total current liabilities in working capital |
2,219 |
|
2,003 |
|
1,687 |
|
1,780 |
|
|
1,591 |
|
1,546 |
|
1,442 |
|
1,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital (3) |
2,274 |
|
2,529 |
|
2,241 |
|
1,955 |
|
|
1,526 |
|
1,556 |
|
1,596 |
|
1,462 |
|
|
|
|
|
|
|
|
|
|
|
|
FOOTNOTES
(1) 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); favourable (fav);
unfavourable (unfav); not meaningful (n/m); Hydraquip Hose &
Hydraulics and Hoses Direct Ltd. (Hydraquip).
(2) See “Description of Specified Financial
Measures and Reconciliations” on page 6 of this Earnings
Release.
(3) These are non-GAAP financial measures. See
“Description of Specified Financial Measures and Reconciliations”
on page 6 of this Earnings Release.
(4) Certain financial measures 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 starting on page 7 of this Earnings
Release. The financial measures that have been adjusted to take
these items into account are referred to as “Adjusted
measures”.
Forward-Looking Information Disclaimer
This news release contains information that is forward-looking.
Information is forward-looking when we use what we know and expect
today to give information about the future. All forward-looking
information in this news release is subject to this disclaimer
including the assumptions and material risk factors referred to
below. Forward-looking information in this news release includes,
but is not limited to, the following: all information in the
section entitled “Market Update and Business Outlook”, including
for our Canada operations: our expectation of healthy market
activity across Western Canada (based on assumptions of continued
strength in the mining and energy sectors, continued constructive
commodity prices, improved customer capital budgets, mining
customers’ continued interest in extending the life of their assets
and improving productivity, and government infrastructure programs
and private sector investments in natural gas, carbon capture,
utilization and storage, and various power projects), including
renewal of aging fleets, product support opportunities in the oil
sands and other mining, and growing demand for component
remanufacturing, equipment rebuilds and autonomy implementation;
demand for construction equipment and product support, rentals, and
prime and standby electric power generation; for our South America
operations: our positive outlook for mining in Chile in 2023 and
belief that Chile will remain an attractive place to invest (based
on assumptions of a strengthening copper price, that the timing of
investment decisions related to greenfield and new expansion
projects will remain uncertain until the new mining royalty
proposal is approved, and that the electrification trend will
continue and will drive increasing global demand for copper); our
expectations for mining deliveries in Chile and continued strong
demand for mining product support and technology solutions,
including autonomy (based on assumptions that deliveries will be
driven by our recent wins with BHP and Codelco and committed
medium-term investment in fleet replacements across our mining
customer base); that slowing economic growth and higher interest
rates will continue impacting construction activity in Chile in
2023; and that in Argentina, activity in construction, oil and gas,
and mining are expected to remain stable but high inflation,
currency restrictions and new import regulations will continue to
impact our business (assumes our ability to manage through the
challenging fiscal, regulatory, and currency environments); for our
UK & Ireland operations: our expectation of lower construction
new equipment sales in 2023 and that overall demand for
construction equipment in the UK will decline in 2023 (based on
assumptions of slowing economic growth rates), but continued strong
demand for product support (driven by HS2 activity and the
assumption of continued high machine utilization rates across
broader construction markets); and that demand for our power
systems business will remain robust, including in the data centre
market, that we have a strong backlog of power systems projects for
delivery in 2023, and that we are well positioned to capture
further opportunities; and for 2023 overall: there is an uncertain
global business environment, including slowing rates of growth, and
we are reinforcing our mid-cycle operating cost and capital model,
but we expect demand conditions in our diverse end markets will be
constructive, and strength in mining and energy sectors to more
than offset slowing construction markets in the UK and South
America (based on assumptions of continued favourable commodity
prices and strong demand from mining and energy customers); our
plan to reduce our capital expenditures budget in 2023 and allocate
a higher proportion to reinvestment in rental fleet and strategic
investments in electric drive mining trucks for demonstration
purposes; that our 2023 net capital expenditures and net rental
fleet additions will be in the range of $190 million to $240
million; that we will be placing a higher priority on debt
repayment and reduction in our net debt to Adjusted EBITDA ratio;
and that we are seeing continued momentum at the start of 2023 and
expect growth in the first half of the year compared to the first
half of 2022 (based on our record equipment backlog, busy workshops
and growth in rebuilds driven by the strong execution of our
product support growth strategy); our expectation for continued
improvement in our full-cycle earnings capacity (based on
assumptions of momentum into 2023 from strong execution and
significant strategic wins across the business in 2022); and the
Canadian income tax treatment of the quarterly dividend. All such
forward-looking information is provided 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 of 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 specific factors noted
above; the impact and duration of, and our ability to respond to
and manage, high inflation, increasing interest rates, supply chain
challenges, and the impacts of the Russia-Ukraine war; general
economic and market conditions, including increasing inflationary
cost pressure, and economic and market conditions in the regions
where we operate; the outcome of Chile’s constitutional reform
process and proposed tax reform bill, including the proposal for a
revised mining royalty framework; foreign exchange rates; commodity
prices; 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 effectively integrate and
realize expected synergies from businesses that we acquire; 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 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 maintain a safe and healthy
work environment across all regions; our ability to raise the
capital needed to implement our business plan; business disruption
resulting from business process change, systems change and
organizational change; regulatory initiatives or proceedings,
litigation and changes in laws or regulations, including with
respect to environmental protection and/or energy transition; 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; 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; our ability to protect our
business from cybersecurity threats or incidents. Forward-looking
information is provided in this news release to give information
about our current expectations and plans and allow 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 provided 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:
the specific assumptions stated above; that we will be able to
successfully manage our business through the current challenging
times involving volatile commodity prices, high inflation,
increasing interest rates, supply chain challenges and the impacts
of the Russia-Ukraine war, and successfully execute our economic
condition and business cyclicality mitigation strategies, including
preparing for future waves (if any) of COVID-19; an undisrupted
market recovery, for example, undisrupted by further COVID-19
impacts, commodity price volatility or social unrest; the
successful execution of our profitability drivers; that our cost
actions to drive earnings capacity in a recovery can be sustained;
that commodity prices will remain at constructive levels; that our
customers will not curtail their activities; that general economic
and market conditions will continue to be strong; that the level of
customer confidence and spending, and the demand for, and prices
of, our products and services will be maintained; that support and
demand for renewable energy will continue to grow; that present
supply chain and inflationary challenges will not materially impact
large project deliveries in our backlog; our ability to
successfully execute our plans and intentions; our ability to
attract and retain skilled staff; market competition will remain at
similar levels; the products and technology offered by our
competitors will be as expected; that identified opportunities for
growth will result in revenue; that we have sufficient liquidity to
meet operational needs; consistent and stable legislation in the
various countries in which we operate; no disruptive changes in the
technology environment and that our current good relationships with
Caterpillar, our customers and our suppliers, service providers and
other third parties will be maintained; sustainment of strengthened
oil prices and the Alberta government will not re-impose production
curtailments; quoting activity for requests for proposals for
equipment and product support is reflective of opportunities; and
strong recoveries in our regions, particularly in Chile and the UK.
Some of the assumptions, risks, and other factors, which could
cause results to differ materially from those expressed in the
forward-looking information contained in this news release, are
discussed in our current AIF and in our annual and most recent
quarterly MD&A for the financial risks. We caution readers that
the risks described in the annual and most recent quarterly
MD&A and in the AIF are not the only ones that could impact us.
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.
Except as otherwise indicated, forward-looking information does
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 of this news release. 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. We therefore cannot describe the expected impact in a
meaningful way or in the same way we present known risks affecting
our business.
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