investor presentation - toronto, boston, montreal
DESCRIPTION
Finning InternationalTRANSCRIPT
INVESTOR PRESENTATION Scott Thomson, President and CEO
Marcello Marchese, President, Finning South America
Mauk Breukels, VP Investor Relations
Toronto, Boston, Montreal
September 2014
Forward Looking Information
2
This report contains statements about the Company’s business outlook, objectives, plans, strategic priorities and other statements that are not historical facts. A
statement Finning makes is forward-looking when it uses what the Company knows and expects today to make a statement about the future. Forward-looking
statements may include words such as aim, anticipate, assumption, believe, could, expect, goal, guidance, intend, may, objective, outlook, plan, project, seek,
should, strategy, strive, target, and will. Forward-looking statements in this report include, but are not limited to, statements with respect to: expectations with
respect to the economy and associated impact on the Company’s financial results; expected revenue; EBIT margin; ROIC; market share growth; expected results
from service excellence action plans; anticipated asset utilization, inventory turns and parts service levels; the expected target range of the Company’s net debt to
invested capital ratio; and the expected target range of the Company’s dividend payout ratio. All such forward-looking statements are made pursuant to the ‘safe
harbour’ provisions of applicable Canadian securities laws.
Unless otherwise indicated by us, forward-looking statements in this report reflect Finning’s expectations at September 3, 2014. Except as may be required by
Canadian securities laws, Finning does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information,
future events, or otherwise.
Forward-looking statements, by their very nature, are subject to numerous risks and uncertainties and are based on several assumptions which give rise to the
possibility that actual results could differ materially from the expectations expressed in or implied by such forward-looking statements and that Finning’s business
outlook, objectives, plans, strategic priorities and other statements that are not historical facts may not be achieved. As a result, Finning cannot guarantee that any
forward-looking statement will materialize. Factors that could cause actual results or events to differ materially from those expressed in or implied by these forward-
looking statements include: general economic and market conditions; foreign exchange rates; commodity prices; the level of customer confidence and spending,
and the demand for, and prices of, Finning’s products and services; Finning’s dependence on the continued market acceptance o f Caterpillar’s products and
Caterpillar’s timely supply of parts and equipment; Finning’s ability to continue to improve productivity and operational eff iciencies while continuing to maintain
customer service; Finning’s ability to manage cost pressures as growth in revenues occur; Finning’s ability to reduce costs in response to slowing activity levels;
Finning’s ability to attract sufficient skilled labour resources to meet growing product support demand; Finning’s ability to negotiate and renew collective bargaining
agreements with satisfactory terms for Finning’s employees and the Company; the intensity of competitive activity; Finning’s ability to raise the capital needed to
implement its business plan; regulatory initiatives or proceedings, litigation and changes in laws or regulations; stock market volatility; changes in political and
economic environments for operations; the integrity, reliability, availability and benefits from information technology and the data processed by that technology.
Forward-looking statements are provided in this report for the purpose of giving information about management’s current expectat ions and plans and allowing
investors and others to get a better understanding of Finning’s operating environment. However, readers are cautioned that it may not be appropriate to use such
forward-looking statements for any other purpose.
Forward-looking statements made in this report are based on a number of assumptions that Finning believed were reasonable on the day the Company made the
forward-looking statements. Refer in particular to the Outlook section of this MD&A. Some of the assumptions, risks, and other factors which could cause results to
differ materially from those expressed in the forward-looking statements contained in this report are discussed in Section 4 of the Company’s current AIF.
Finning cautions readers that the risks described in the AIF are not the only ones that could impact the Company. Additional risks and uncertainties not currently
known to the Company or that are currently deemed to be immaterial may also have a material adverse effect on Finning’s business, financial condition, or results
of operations.
Except as otherwise indicated, forward-looking statements do not reflect the potential impact of any non-recurring or other unusual items or of any dispositions,
mergers, acquisitions, other business combinations or other transactions that may be announced or that may occur after the date hereof. The financial impact of
these transactions and non-recurring and other unusual items can be complex and depends on the facts particular to each of them. Finning therefore cannot
describe the expected impact in a meaningful way or in the same way Finning presents known risks affecting its business.
Monetary amounts are in Canadian dollars and from continuing operations unless noted otherwise
Overview of Finning International
World’s largest Caterpillar dealer serving customers for over 80 years
We sell, rent and provide parts and service for Caterpillar equipment
and engines
Operate in Western Canada, Chile, Argentina, Bolivia, Uruguay, UK
and Ireland
Main industries: mining (oil sands, copper, coal), construction, power
systems (EPG, petroleum, marine) and forestry
~14,600 employees worldwide (~65% technicians/mechanics)
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(1) At August 8, 2014
Vancouver
(head office)
Edmonton
Fort McMurray British Columbia
Yukon
Alberta
The Northwest Territories
Santiago
Antofagasta
Bolivia
Argentina
Chile
Uruguay
Cannock
United Kingdom
Ireland
2013 Financial Statistics Market Statistics(1)
Revenue 6.8B Ticker FTT (TSX)
EBITDA 0.7B Share Price 33.15
FCF 0.4B % 52-Week High 97%
EPS 1.95 ADTV 0.5M
Invested Capital 3.1B Market Cap 5.7B
Net Debt 1.3B Enterprise Value 7.1B
ROE 19.7% S&P/DBRS Rating BBB+/A(low)
ROIC 15.7% Dividend Yield 2.1%
Dividend 10yr CAGR 13.1%
Compelling Value Proposition
Passionate and committed employees
Right people in the right places to execute on the plan
Best products, best territories
Aligned with Caterpillar, world’s best heavy equipment company
Resource-rich territories with significant organic growth opportunities
Compelling business model
Machine population provides embedded product support growth
Customer diversification across many attractive sectors
Significant opportunity to improve operating performance
Going forward, profitability and working capital management will improve markedly
All priorities linked to improving return on invested capital
Opportunity to optimize and capitalize on historic investments with more disciplined approach
Opportunity to generate positive free cash flow throughout the cycle
Continued commitment to dividend growth
Long-term growth rate of 13%; increased dividend by over 16% in May 2014
4
Broadest Range of Quality Caterpillar Products
5
Over 300 equipment product lines
Market Leader in Most Desirable Regions
6
Revenue by region for six months ended Jun 30, 2014
Powerful, Sustainable Business Model
7
Diverse Customer Base
8
67% of new equipment deliveries from non-mining
* Agriculture, industrial and government segments
NEW FOCUS
Driving Return on Invested Capital
Operational Priorities
Service Excellence
Drives lowest equipment owning and operating costs
Maximizes equipment uptime and improves customer loyalty
Increases service profitability
Attracts and retains technical talent
Supply Chain
Competitive advantage as a world-class distributor
Efficient supply chain drives customer loyalty
Reduces costs and invested capital
Improves cash generation
Market Leadership
Builds machine population and
drives future product support
Aligns with Caterpillar’s focus
on market share growth
Expands focus to entire product line
Asset Utilization
Optimizes footprint and distribution of activities
Maximizes return on investments made
Improves service delivery
Reduces costs and invested capital
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Market Leadership Target ∆
in 3 Years
Revenue
Opportunity*
Core Equipment Market Share 2-4% 1% share = $35M
Parts Market Share 2-4% 1% share = $45M
Power Systems Revenue (Canada) 10-15% 5% growth = $20M
Service Excellence Target ∆ in 3 Years
Consolidated EBIT $ $40 – 60M
Supply Chain Target ∆
in 3 Years
Working Capital Reduction
Inventory Turns 0.5 – 0.9x 0.1 turn = $50M inventory
* Assumes no industry growth
Service Excellence
Improve labour recovery
Enhance leadership, competencies and technical skills
Improve parts availability by leveraging supply chain efficiencies
Standardize processes and planning
Improve quoting to reduce bid variances
Implement consistent service delivery model in all branches
Governance, roles and responsibilities - clear accountability
Standard service rates and definitions
Enhance profitability visibility at branch level
Align compensation with customer loyalty and profitability
Progress Update
On target to roll out new service process to all branches in Canada
Sustaining new service model at Phase 1 locations: Mildred Lake, Fort McKay, Price
George, Peace River, Grande Prairie
Started implementation in Phase 2 location, including Calgary and COE in Red Deer
Canada’s service labour recovery rate improved by 2 points since end of 2013
Service improvements in South America offset by softness in equipment sales
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Action Plans and Progress Update
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Supply Chain Canada - Reducing Lead Times and Transfer Points
Supply Chain
Focus on inventory management, network optimization and transportation efficiency
Completed 5 branches in 2013
Rolling out to 17 branches in 2014
Parts service levels at or above targets
24 hour service level at above 86%, up 6 points from 2013
72 hour service level at above 95%
Emergency orders at ~27%, down 6 points from 2013 levels
Number of touch points and velocity improved significantly in southernmost branches
with direct shipment from Spokane
Reducing transportation costs despite higher parts volumes
~$1.5 million in annual savings from elimination of redundant truck trips
Rationalizing transportation providers - down 25% from 2013; target 50% reduction
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Canada - Progress Update
Market Leadership
Core equipment market share up materially in all regions since the end of 2013
In Canada, core equipment market share up 5 points from last year
Better sales coverage – higher participation and closing of deals
Restructured incentive schemes motivate sales force
Improved inventory quality
Tier 4 equipment – great quality and attractive fuel efficiency
Growing market share through better execution; margins maintained
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Progress Update
Asset Utilization
Allocating work and assets across facilities
Shovels and Drills moved from its Fort McMurray location into Mildred Lake branch;
vacated building subleased
Power Systems moved from its Fort McMurray shop into local branch; location
vacated
Prince George rental store will be moved to main branch in Q4 2014
Edmonton used equipment, machining and welding moved into Shovels and Drills
location to free bays in West Edmonton branch for customer repairs
Centralizing new equipment preparation at COE in Red Deer
Optimizing service trucks fleet
Eliminated 20% of trucks
Moving trucks from low to high utilization branches
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Canada - Progress Update
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All priorities are linked directly to EBIT or Invested Capital
Priorities Will Drive Improved Return on Invested Capital (ROIC)
2006 2007 2008 2009 2010 2011 2012 2013
ROIC 27.6% 26.8% 15.0% 10.2% 15.3% 16.0% 16.5% 15.7%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2006 2007 2008 2009 2010 2011 2012 2013
EBIT Margin 7.8% 8.3% 6.8% 5.5% 6.3% 6.3% 7.4% 7.7%
Inv. Cap. T/O 3.6x 3.2x 2.2x 1.8x 2.4x 2.5x 2.2x 2.0x
1.0x
2.0x
3.0x
4.0x
5.0%
6.0%
7.0%
8.0%
9.0%
Return on Invested Capital
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Historical Performance
Results were adjusted to exclude discontinued operations
Economic
downturn
Significant Investments:
- Drills & Shovels
- Fort MacKay
Underperforming working capital
ERP implementation
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
42
47
5352
5051 51
48
41
2012 2013 20142011
45%
35%
TARGET
RANGE
Strengthening Balance Sheet
Positive free cash flow through the cycle
Strong cash flow from operations
Improving working capital primarily through
higher inventory turnover
Capital expenditures to remain significantly
below 3-year average
Strong operating cash flow comfortably
supports debt levels and investment grade
ratings
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Target
Range
Net debt to total capital ratio (%) FCF per Share (dollars)
Net debt / EBITDA
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Important component of total
shareholder return
Committed to growing dividend,
consistent with sustainable
earnings growth
Target payout ratio: 25-35%
10 year CAGR ~13%
5 year CAGR ~9%
Current dividend
Quarterly = $0.1775
Annualized = $0.71
Dividend yield ~2.1%(1)
0.20 0.22
0.28
0.36
0.43 0.44 0.47
0.51
0.55
0.5975
0.685
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Annual Dividends
Continued Commitment to Dividend Growth
(1) At August 8, 2014
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Finning International appointments
Gillian Platt, Chief Human Resources Officer
Dave Cummings, Chief Information Officer
Greg Palaschuk, VP Treasurer
Search in progress for new CFO
interim support from Anna Marks, Sr VP Controller
Finning Canada appointments
Chad Hiley, Sr VP Human Resources
John Pollesel, Sr VP Mining
Internal appointments
Branch manager, Grande Prairie, Canada
Branch manager, Sparwood, Canada
Head of power systems, South America
Ongoing focus on employee development and providing internal growth opportunities
Talent Management
FINSA
South America maintaining its EBIT margin despite significantly reduced business
volumes
Significant reductions to workforce since mid-2013
Reached equitable agreement with shovels and drills employees – may have
one off cost of a couple of million dollars in Q3
Reduced invested capital by ~ US$190M from last year
Tax reform in Chile expected to be enacted during H2
Monitoring status of proposals
Will evaluate impact on financial results and effective tax rate going forward
once changes are substantively enacted
Argentina – continues to be problematic
Devaluation of the Argentine peso has increased our effective tax rate
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Responding well to challenging market conditions
FINSA
Business conditions expected to remain challenging
Mining
Mines are increasing production
New equipment sales expected to be soft; product support activity stable
Codelco will invest US$4B for 2014-18 - should also drive large contractor
activity
Government infrastructure projects US$28B over the next 7 years – expect some
order activity next year
Energy opportunities:
Argentina – shale gas (elections in 2015)
Chile – renewables
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Outlook
Key Takeaways
Finning has a great business model with resource rich territories; general economic
trends support continued growth
Focus on what we can control: costs, working capital and capital investment
Significant increase in invested capital has offset profitability improvements over last
three years
Opportunity to materially increase Return on Invested Capital over time
Improved profitability, primarily in Canada
Working capital management
Improved capital discipline
Operational priorities linked to improving Return on Invested Capital; team aligned and
executing
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APPENDIX
Oil Sands
25
Benefitting from ongoing projected growth
Source: CAPP (Canadian Association of Petroleum Producers)
Western Canada LNG
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Seizing new business opportunities
Projects proposed to transport gas from Western
Canada to Asia1 Investment
LNG Canada (Shell, Korea Gas, Mitsubishi, PetroChina) +28B
Pacific NorthWest (Petronas, Sinopec, Japex, Indian Oil) +20B
Kitimat LNG (Chevron & Apache) +11B
1Source: Finning Estimates
Copper in Chile
27
Participating in long-term growth
Source: Wood Mackenzie
“The UK economy showed clear signs of
recovery during 2013 and we expect this to
continue in 2014-15. All major industry
sectors and regions are now showing
positive growth trends.” PwC; July 2014
“We anticipate that the UK's economic
recovery will continue to broaden,
benefiting the public finances.” S&P
upgraded its outlook on the U.K.'s triple-A
credit rating from negative to stable. S&P; June 13, 2014
“UK economy settling into above-trend
growth.” OECD; May 13, 2014
“We expect to see marked improvements in
British business investment and
productivity.” Britain's top business lobby
upgraded its economic growth forecasts for
2014 and 2015. CBI; May 11, 2014
Reasons for Optimism in the U.K.
28
UK Real GDP (% Change)
Source: Economist Intelligence Unit; Jul 14, 2014
-5.2
1.71.1
0.1
1.7
3.12.5
-6.0
-4.0
-2.0
0.0
2.0
4.0
2009 2010 2011 2012 2013 2014F 2015F
Q2 2014 Results
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Earnings
C$ millions Q2 2014 Q2 2013 % change
Revenue 1,768 1,620 9
Gross profit 523 513 2
GP margin 29.6% 31.7%
SG&A (388) (392) 1
SG&A as % of revenue (22.0)% (24.2)%
Equity earnings 3 4
Other income (expenses) (1) (3)
EBITDA 190 176 8
EBIT 137 125 12
EBIT margin 7.8% 7.6%
Net income 86 83 4
Basic EPS 0.50 0.48 4
Improved profitability in Canada
South America maintained EBIT margin despite significantly reduced business volumes
Solid quarter; more work to be done on operational priorities
Q2 2014 Results
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Invested Capital
Q2 2014 Q1 2014 Q4 2013 Q3 2013 Q2 2013
Inventory ($ millions) 1,835 1,945 1,756 1,904 1,978
Inventory turns (times) 2.56 2.61 2.74 2.44 2.23
Invested capital(1) ($ millions) 3,334 3,414 3,138 3,342 3,443
Invested capital turnover (times) 2.12 2.06 2.04 2.03 2.01
Free cash flow ($ millions) 123 (134) 365 163 7
Working capital to sales ratio (%) 25.5 26.3 26.5 26.7 26.7
Return on invested capital (%) 16.0 15.4 15.7 15.8 15.8
Net debt to invested capital (%) 40.9 42.9 40.8 47.8 50.6
Good progress on capital efficiency initiatives
Improved invested capital turnover driven by Canada and UK & Ireland
Strong free cash flow in Q2/14 driven by South America
Net debt to invested capital ratio comfortably within target range
(1) Calculated at end of period