Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Finning International Inc (FINGF, Financial) reported record EPS and free cash flow for Q2 2024, reflecting strong execution of strategic priorities.
- New equipment sales are up 12% year-to-date, with Canada leading at 19% growth.
- Used equipment revenues increased by 57% in Q2 2024 compared to Q2 2023, marking the third consecutive quarter of over 45% growth.
- Mining equipment order intake was very strong, with a 59% increase in mining backlog from the end of March.
- Power systems demand remains robust, particularly in oil and gas and backup power capacity, with orders extending into 2026.
Negative Points
- EBIT was down 5% year-over-year, mainly due to lower margins in used and rental equipment.
- Product support revenue showed only a modest increase of 0.4% compared to a very strong Q2 2023, with declines in Canada and the UK.
- Rental revenue decreased by 10% due to lower utilization and rates compared to last year.
- SG&A costs in Argentina included $13 million related to transactions for accessing US dollars, impacting overall profitability.
- Construction activity remains softer than last year, particularly affecting product support in Canada and the UK.
Q & A Highlights
Q: Just trying to square your comments on construction. That end market did drive new equipment sales in Canada, and you noted rebuild activity was up 50%. But yet you did trim your CapEx for rentals. What exactly are you seeing in that market and is it mostly limited to Canada?
A: The construction market is not limited to Canada. The UK has been soft for a while, but we are seeing some green shoots. In Canada, the construction season has driven some results in Q2, and we are encouraged by the backlog build in the UK. We describe the construction market as bottoming out and showing positive signs. Regarding rental, our decision is linked to building capabilities and not just general construction sentiment. We are committed to rental and building a robust and sustainable rental plan moving forward.
Q: On your plans to reduce SG&A, were these plans already contemplated in your Investor Day targets or are they incremental cuts? Are the costs in Argentina recurring?
A: Our primary focus post-Investor Day was on working capital, and we are pleased with the progress. SG&A is a big value driver, and we are finishing the design and beginning execution of further reductions. The Argentina costs were $13 million and are not expected to recur in Q3 and Q4. We are reentering the official market to keep exposure low.
Q: Could you tell me to what extent mix versus lower margins on equipment and rentals was a factor in the year-over-year decline in gross profit margins?
A: It was roughly equal. There was a mix shift with higher new and used volumes relative to rental and product support. Within rental and used, margins have normalized from the high levels seen in 2022 and 2023. We are working hard to offset this through SG&A control and further actions.
Q: Is it possible to quantify how much maintenance activity was deferred in the oil sands in Q2 or H1?
A: It's hard to quantify an exact number. We have six mines in the oil sands, three of which met our product support expectations and three did not. The deferral of maintenance is specific to individual mine plans and is controlled by the miners.
Q: How are you thinking about backlog, given it can be quite lumpy and is down year-on-year?
A: We are still pleased with the rise in backlog, which is over half a year of sales. Some of the backlog is moving through quicker due to improved supply environments. We are focused on winning market share and delivering to customers quickly to support their production targets.
Q: What is driving the improving product support growth rates in the second half of the year, and are you more confident about second half growth than three months ago?
A: We are more confident about the trajectory. We are encouraged by the two-year CAGR and quarter-over-quarter progress. We are adding technicians, building capacities, and improving distribution capabilities. We are committed to our targets and confident in demonstrating exit rates closer to our Investor Day targets.
Q: In South America, quoting, tendering, and award activity in the mining sector is elevated. Can you frame how that pipeline looks now and if the momentum of order intake can be sustained?
A: The pipeline is strong, with multiple opportunities adding up to significant levels of order intake. We expect to submit substantial quotes before the end of the summer. The general sentiment is positive, with an acceleration of quoting activity.
Q: Margins in South America were impacted by high-margin mining product support contracts last year. Should we expect this to be a headwind in the coming quarters?
A: The impact was unique to the quarter. Last year, there were larger rebuild programs and contracts that came to an end. This did not replicate this year. We feel fine with the overall margins and growth profile going forward.
Q: Can you provide some additional comments regarding customer activity on the ground and if it is accelerating into the back half? Do you think you can exit the year at the 7% target for product support?
A: Activity levels are improving, with machine utilization levels back to normal in Western Canada and improving in the UK. We expect stronger product support activity in the second half and are committed to our targets. We are confident in demonstrating exit rates closer to our Investor Day targets.
Q: How should we think about new equipment deliveries in South America into next year?
A: It's too early to talk about 2025 levels, but we are encouraged by the backlog and quoting activity. We expect momentum into 2025, particularly in mining and power systems. Construction machine sales should be better next year based on current sentiment.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
