Finning International Inc. (TSX:FTT) reported first quarter 2014 results today
(all monetary amounts are in Canadian dollars unless otherwise stated).
Q1 2014 HIGHLIGHTS
-- Revenues rose by 7% to $1.7 billion as higher revenues in Canada and the
UK & Ireland more than offset the decline in South America.
-- Product support revenues increased by 9% to record levels driven by
improved demand for parts in Canada, mostly in mining.
-- Earnings before finance costs and income taxes (EBIT)(1) of $111 million
was 5% below Q1 2013, reflecting lower sales volumes in South America
and lower gross profit margins in Canada.
-- Basic earnings per share (EPS) declined to $0.39 from $0.43 in Q1 2013,
reflecting a lower EBIT and a higher effective tax rate.
-- The order backlog(1) of $1.3 billion at the end of Q1 was up by
approximately 45% from $0.9 billion at the end of December 2013, driven
primarily by record order intake in Canada, including an equipment order
for $260 million from an existing oil sands producer for a fleet
expansion.
-- The Company raised its dividend to a level which represents an
annualized dividend increase of 10 cents to 71 cents per share,
reflecting confidence in operating performance and the expectation for
strong free cash flow generation in 2014 and beyond.
"Overall, we generated solid top-line growth and increased our order backlog by
over 45 percent. Strength in Canada and the UK and Ireland offset market
softness in South America," said Scott Thomson, president and chief executive
officer of Finning International. "The market environment in South America is
looking more challenging than we first thought and we expect that to continue
through 2014. However, I am pleased that our team in South America is focused on
what they can control, namely costs and invested capital. Costs were reduced
significantly and profitability was maintained. For the remainder of the year,
the team will be focused on reducing invested capital and costs to match current
demand."
"In Canada, I was pleased with our revenue growth during the quarter but our
profitability was impacted by higher new equipment sales in the revenue mix and
a higher proportion of sales that were lower margin mining machines. While
higher sales activity drove an increase in invested capital and negative free
cash flow, we were still able to modestly improve capital efficiency. For the
remainder of the year, we continue to expect significant free cash flow
generation. We also recognize the importance of improving profitability in our
Canadian operations and our operational excellence agenda is focused on reducing
the cost structure and increasing the profitability margins in this region,"
continued Scott Thomson. "Reflecting the confidence we have in our ability to
improve our operating performance and generate strong free cash flow, I am
pleased to announce that we increased our annualized dividend by 10 cents or
slightly more than 15 percent."
Q1 2014 FINANCIAL SUMMARY
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$ millions, except per share amounts Three months ended Mar 31
2014 2013 % change
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Revenue 1,676 1,560 7
EBIT 111 117 (5)
EBIT margin 6.6% 7.5%
Net income 68 73 (8)
Basic EPS 0.39 0.43 (8)
EBITDA(1) 166 169 (2)
Free cash flow(1) (134) (93) (44)
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-- Revenues rose by 7% from Q1 2013 to $1.7 billion as higher revenues from
Canada and the UK & Ireland more than offset the revenue decline in
South America. Product support revenues grew by 9%, driven by Canada.
New equipment sales increased by 8%, reflecting strong market activity
in Canada and the UK & Ireland. Rental revenues declined by 6% with a
slower start to the year in all operations. Used equipment sales were
down slightly.
-- Gross profit was flat relative to Q1 of last year as gross profit
margin(1) declined to 29.8% from 32.0% in Q1 2013. In South America,
lower gross profit from volume reductions was partially offset by a
shift in revenue mix to a higher proportion of product support. In
Canada, the increase in sales volumes included a higher percentage of
new equipment sales in the revenue mix and a greater proportion of
lower-margin mining equipment sales, which were the main contributors to
a lower gross profit margin. Also negatively impacting gross profit in
all operations were lower revenue and gross profit from rental.
-- Selling, general and administrative (SG&A) expenses were slightly above
Q1 2013. In Canada, volume-related increases, higher provision
adjustments in Q1 2013 and a negative impact from the weaker Canadian
dollar were partly offset by workforce reductions and improvements from
operating efficiencies. In South America and the UK & Ireland, SG&A
expenses were lower in functional currencies.
-- EBIT declined to $111 million from $117 million in Q1 2013 due to lower
sales volumes in South America reflecting soft market conditions, and
slightly lower EBIT in Canada where higher sales volumes were more than
offset by lower gross profit margins. Also contributing to an EBIT
decrease was $2 million in lower equity earnings from joint venture and
associate. Consolidated EBIT margin of 6.6% was below 7.5% in Q1 2013,
driven mainly by the reduced gross profit margin.
-- Net income decreased by 8% to $68 million and basic EPS of $0.39 was 8%
below $0.43 in Q1 2013, primarily due to lower EBIT. Provision for
income taxes was negatively impacted by taxable foreign exchange gains
on U.S. dollar denominated net assets in Argentina from the devaluation
of the Argentine peso. As a result, the effective tax rate was 24.8%, up
from 23.2% in Q1 2013.
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$ millions Q1 2014 Q4 2013
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Invested capital 3,414 3,138
Return on invested capital(1) 15.4% 15.7%
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-- Invested capital increased by $276 million from Q4 2013, primarily
driven by higher working capital in Canada, mostly equipment inventory
and account receivable associated with growth in sales volumes.
Consolidated parts inventory was similar to Q4 2013 levels despite 7%
growth in product support from Q4 2013, reflecting continued focus on
supply chain optimization across all operations. A weaker Canadian
dollar resulted in approximately $65 million increase in consolidated
invested capital compared to Q4 2013. In functional currencies, invested
capital declined by about US$2 million in South America and increased by
approximately GBP 10 million in the UK & Ireland from Q4 2013. Return on
invested capital of 15.4% was slightly below Q4 2013 due lower EBIT and
slightly higher invested capital over the last four quarters. However,
invested capital turnover of 2.1 times improved slightly from 2.0 times
in Q4 2013, driven by Canada.
-- Free cash outflow was $134 million due to higher working capital in
Canada and the UK & Ireland in response to strong customer demand.
-- Net debt to invested capital was 42.9% at the end of March 2014,
compared to 40.8% at the end of December 2013, and remains within the
Company's 35-45% target range.
Backlog
-- The order backlog was $1.3 billion at the end of March 2014, up from
$0.9 billion at the end of December 2013 and $1.1 billion at the end of
March 2013. An increase in backlog reflected record order intake in
Canada in Q1, which included a $260 million mining equipment order from
an existing oil sands customer for a fleet expansion, as well as strong
order intake in the UK & Ireland. In South America, the order intake
weakened as a result of slower market activity in mining and
construction.
Q1 2014 HIGHLIGHTS BY OPERATION
Canada
-- Revenues were up 18% driven by improved market activity in Western
Canada compared to Q1 of last year. New equipment sales rose by 35%,
driven primarily by mining. Product support revenues increased by 13%
reflecting stronger demand for parts across all sectors, most notably in
mining. Rental revenues declined by 5% reflecting softer rental markets
compared to Q1 of last year.
-- EBIT of $54 million was down 5%, and EBIT margin declined to 6.0% from
7.5% in Q1 2013. Gross profit was only slightly higher as gross profit
margins declined compared to Q1 of last year. The margin reduction is
primarily due to a higher percentage of new equipment sales in the
revenue mix (38.1% vs. 33.4% in Q1 2013), a higher proportion of lower-
margin mining equipment sales and an increase in lower-margin mining and
power systems parts sales. Gross profit was also negatively impacted by
a decrease in rental gross profit from lower volumes and higher positive
equipment cost adjustments in Q1 2013. SG&A expenses were marginally
higher as volume-related increases, higher provision adjustments in Q1
2013 and a negative impact of the weaker Canadian dollar were partly
offset by cost savings from workforce reductions and service-related
operating efficiencies.
-- Invested capital rose by $195 million from the end of December, driven
by higher equipment inventory and accounts receivable, reflecting
increased sales volumes. Although the invested capital was higher,
invested capital turnover improved marginally from Q4 2013.
South America
-- Revenues declined by 10% (down 18% in functional currency - USD)
reflecting weaker market conditions in the region compared to Q1 2013.
New equipment sales were down 30% in functional currency, mostly as a
result of slower mining and construction activity. While mining
production levels remained steady in Q1, demand for equipment
replacement and additional fleets was impacted by the lower copper price
environment. Product support revenue was down 7% in functional currency.
This was primarily due to lower service revenues in the mining sector
where customers continue to focus on reducing costs. Reduced demand for
parts was driven by the construction sector, where equipment utilization
levels have declined.
-- EBIT was $50 million compared to $57 million Q1 2013 (down 21% in
functional currency) reflecting lower revenues and gross profit. SG&A
costs were down 9% in functional currency as a result of lower sales
volumes and actions taken to reduce costs, which were partly offset by
higher service-related expenses and severance costs. In response to
decreased activity levels, the South American operations reduced its
workforce by 240 employees from the end of 2013, and by about 330 people
from the peak level in the summer of 2013. The Company will continue to
reduce costs and invested capital in South America as necessary to align
with expected activity levels and maintain profitability. The EBIT
margin of 9.0% was slightly below 9.3% a year ago.
-- Invested capital declined by US$2 million in functional currency from Q4
2013, including reduced equipment inventory due to slower demand and
improved inventory management. However, the weakening Canadian dollar
against the U.S. dollar resulted in a $53 million increase in invested
capital in South America compared to Q4 2013.
United Kingdom & Ireland
-- Revenues increased by 23% (up 5% in functional currency - GBP) driven by
higher new equipment sales in the construction sector, while product
support business remained stable. In functional currency, new equipment
sales and product support grew by 8% and 1%, respectively, compared to
Q1 of last year.
-- EBIT of $12 million was $2 million higher compared to Q1 2013. In
functional currency, EBIT was down marginally, reflecting a slight
decline in gross profit due to a higher proportion of new equipment
sales in the revenue mix. SG&A costs were lower in functional currency
compared to last year while revenues grew. EBIT margin of 4.9% was below
5.4% a year ago, mainly due to the revenue mix.
-- Invested capital increased by approximately GBP 10 million in functional
currency and $31 million in Canadian dollars compared to Q4 2013,
reflecting higher equipment inventory to meet anticipated demand.
CORPORATE AND BUSINESS DEVELOPMENTS
Dividend
The Board of Directors has approved a $0.025 increase in the quarterly dividend
to $0.1775 per share from $0.1525 per share, payable on June 12, 2014 to
shareholders of record on May 29, 2014. This dividend will be considered an
eligible dividend for Canadian income tax purposes.
Board of Directors nominations
On April 4, Finning announced that Marcelo Awad and Nicholas Hartery had been
nominated to stand for election to the Company's Board of Directors at the
Annual Meeting of Shareholders scheduled to be held on May 13, 2014. Mr. Awad is
an experienced mining industry executive who was previously the president and
chief executive officer of Antofagasta Minerals for over seven of his sixteen
years with the company. Prior to joining Antofagasta Minerals, Mr. Awad spent
eighteen years with Codelco in progressively senior positions in London and
Chile. Mr. Hartery is Chairman of CRH plc, one of the world's leading building
materials companies with operations in 35 countries, where he has been a
non-executive director since 2004. From 2000 to 2008, Mr. Hartery was vice
president of manufacturing and business operations for Dell Inc.'s Europe,
Middle East and Africa operations.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(C$ millions, except per share amounts)
---------------------------------
Three months ended Mar 31
---------------------------------
Revenue 2014 2013 % change
---------------------------------
New equipment 692.8 643.9 8
Used equipment 58.9 60.1 (2)
Equipment rental 87.5 93.0 (6)
Product support 830.2 761.3 9
Other 6.8 1.6
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Total revenue 1,676.2 1,559.9 7
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Gross profit 499.1 498.4 0
Gross profit margin 29.8% 32.0%
SG&A (388.2) (382.0) (2)
SG&A as a percentage of revenue (23.2)% (24.5)%
Equity earnings of joint venture and
associate 0.7 2.8
Other income (expenses) (0.8) (2.1)
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EBIT 110.8 117.1 (5)
EBIT margin 6.6% 7.5%
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Net income 67.9 73.4 (8)
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Basic EPS 0.39 0.43 (8)
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EBITDA 165.7 169.3 (2)
Free Cash Flow (134.2) (93.4) (44)
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Mar 31, Dec 31,
14 13
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Total assets 5,353.2 5,057.6
Total shareholders' equity 1,951.0 1,857.8
Net debt to invested capital(1) 42.9% 40.8%
Return on invested capital(1) 15.4% 15.7%
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To download Finning's complete Q1 2014 results in PDF, please open the following
link: http://media3.marketwire.com/docs/FinningQ114results.pdf
Q1 2014 RESULTS INVESTOR CALL
The Company will hold an investor call on Wednesday, May 14 at 11:00 am Eastern
Time. Dial-in numbers: 1-800-766-6630 (anywhere within Canada and the U.S.) or
416-340-8527 (for participants dialing from Toronto and overseas). The call will
be webcast live and subsequently archived at www.finning.com. Playback recording
will be available at 1-800-408-3053 from 1:00 pm Eastern Time on May 14 until
May 21. The pass code to access the playback recording is 7182919 followed by
the number sign.
ABOUT FINNING
Finning International Inc. (TSX:FTT) is the world's largest Caterpillar
equipment dealer delivering unrivalled service to customers for over 80 years.
Finning sells, rents and provides parts and services for equipment and engines
to help customers maximize productivity. Headquartered in Vancouver, B.C., the
Company operates in Western Canada, Chile, Argentina, Bolivia, Uruguay, as well
as in the United Kingdom and Ireland.
Footnotes
(1) These financial metrics do not have a standardized meaning under IFRS, which
are also referred to herein as generally accepted accounting principles (GAAP),
and may not be comparable to similar measures used by other issuers.
Management's Discussion and Analysis (MD&A) includes additional information
regarding these financial metrics, including definitions, under the heading
"Description of Non-GAAP and Additional GAAP Measures".
Forward-Looking Disclaimer
This report contains statements about the Company's business outlook,
objectives, plans, strategic priorities and other statements that are not
historical facts. A statement Finning makes is forward-looking when it uses what
the Company knows and expects today to make a statement about the future.
Forward-looking statements may include words such as aim, anticipate,
assumption, believe, could, expect, goal, guidance, intend, may, objective,
outlook, plan, project, seek, should, strategy, strive, target, and will.
Forward-looking statements in this report include, but are not limited to,
statements with respect to: expectations with respect to the economy and
associated impact on the Company's financial results; expected revenue; 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 May 13, 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
of Caterpillar's products and Caterpillar's timely supply of parts and
equipment; Finning's ability to continue to improve productivity and operational
efficiencies while continuing to maintain customer service; Finning's ability to
manage cost pressures as growth in revenues occur; Finning's ability to reduce
costs in response to slowing activity levels; Finning's ability to attract
sufficient skilled labour resources to meet growing product support demand;
Finning's ability to negotiate and renew collective bargaining agreements with
satisfactory terms for Finning's employees and the Company; the intensity of
competitive activity; Finning's ability to 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 expectations and plans
and allowing investors and others to get a better understanding of Finning's
operating environment. However, readers are cautioned that it may not be
appropriate to use such forward-looking statements for any other purpose.
Forward-looking statements made in this report are based on a number of
assumptions that Finning believed were reasonable on the day the Company made
the forward-looking statements. Refer in particular to the Outlook section of
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.
FOR FURTHER INFORMATION PLEASE CONTACT:
Finning International Inc.
Mauk Breukels
Vice President, Investor Relations and Corporate Affairs
(604) 331-4934
mauk.breukels@finning.com
www.finning.com
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