Finning Reports Q2 2014 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Aug. 7, 2014) - Finning International Inc. (TSX:FTT) reported second quarter 2014 results today (all monetary amounts are in Canadian dollars unless otherwise stated).

Q2 2014 HIGHLIGHTS

• Revenues increased by 9% to $1.8 billion. Higher revenues in Canada and the UK & Ireland were driven by strong new equipment sales and more than offset the revenue decline in South America. Product support revenues grew by 4%, driven mostly by higher parts sales in Canada.
• EBIT⁽¹⁾⁽²⁾ increased by 12% to $137 million due to improved EBIT in Canada. EBIT margin⁽¹⁾ was 7.8%, up from 7.6% in Q2 2013, reflecting higher EBIT margin in Canada and South America.
• Basic EPS⁽²⁾ increased by 4% to $0.50, as the increase in EBIT was partly offset by a higher provision for income taxes compared to Q2 2013.
• The Company generated $123 million in free cash flow⁽¹⁾ compared to $7 million in Q2 2013, reflecting strong working capital⁽¹⁾ management across the Company.
• Invested capital declined by $80 million from Q1 2014, despite the $92 million increase in revenues.

"I am pleased with our results for the quarter, particularly our profitability performance in Canada and the ability of our South American team to maintain margins under challenging market conditions. Our strong free cash flow demonstrates we are improving the capital efficiency of the business. While we recognize that sustainable improvements to our operating performance will take time, we are making good progress on the execution of our operational priorities and we are tracking well on our key financial and operating metrics," said Scott Thomson, president and CEO of Finning International. "For the balance of the year, we expect healthy activity levels in Canada and continued challenging market conditions in South America. Across the organization, we will remain focused on what we can control, namely managing costs and improving capital efficiency to increase our return on invested capital."

Q2 2014 FINANCIAL SUMMARY

$ millions, except per share amounts	Three months ended Jun 30
	2014		2013		% change
Revenue	1,768		1,620		9
EBIT	137		123		12
EBIT margin	7.8	%	7.6	%
Net income	86		83		4
Basic EPS	0.50		0.48		4
EBITDA(1)(2)	190		176		8
Free cash flow	123		7

• Revenues rose by 9% from Q2 2013 to $1.8 billion, as higher revenues in Canada and the UK & Ireland more than offset the revenue decline in South America. New equipment sales increased by 20% driven by strong market activity in Canada and the UK & Ireland. Product support revenues grew by 4%, mostly due to higher parts sales in Canada. Rental revenues and used equipment sales declined by 7% and 9% respectively, and were lower in all operations compared to Q2 2013.
• Gross profit was 2% higher, while gross profit margin⁽¹⁾ declined to 29.6% from 31.7% in Q2 2013. The reduction in gross profit margin was primarily due to the shift in revenue mix to lower-margin new equipment sales, particularly in Canada. Consolidated new equipment sales comprised 44% of total revenue compared to 40% a year ago, while the proportion of product support to total revenue declined to 47% from 50% in Q2 2013. In addition, lower revenues and gross profit from rental negatively impacted gross profit in all operations.
• SG&A⁽²⁾ was slightly below Q2 2013, reflecting lower SG&A costs in South America. In Canada, SG&A was only marginally higher despite volume-related increases and severance costs.
• EBIT increased by 12% to $137 million due to significantly higher EBIT in Canada, driven by strong revenues and operating efficiencies, as the Company continued to make progress on its supply chain and service excellence initiatives. EBIT margin improved to 7.8% from 7.6% in Q2 2013, with higher EBIT margin in Canada and South America.
• Net income and basic EPS rose by 4% to $86 million and $0.50 respectively, reflecting growth in EBIT, which was partly offset by a higher provision for income taxes. The effective tax rate was 24.1%, up from 15.8% in Q2 of last year, primarily due to the benefit from previously unrecognized tax losses in Q2 2013, which had a $0.03 positive impact on EPS. The current period effective tax rate continues to be impacted by the devaluation of Argentine peso.
• Free cash flow was $123 million compared to $7 million in Q2 2013, driven by higher EBITDA and lower working capital spend, primarily in South America compared to Q2 of last year.
• Net debt to invested capital⁽¹⁾ was 40.9% at the end of June 2014.

	Q2 2014	Q1 2014
Invested capital ($ millions)	3,334	3,414
Invested capital turnover(1)(3) (times)	2.12	2.06
Return on invested capital (%)	16.0	15.4

• Invested capital decreased by $80 million from Q1 2014, driven largely by reduced equipment and parts inventory levels in South America. Invested capital turnover of 2.12 times improved from 2.06 times in Q1 2014.

Backlog

• The order backlog was $1.1 billion at the end of June 2014, down from $1.3 billion at the end of March 2014, as strong deliveries outpaced order intake in the quarter, mostly in Canada. However, the current backlog is comparable to the levels of June 2013. Order intake in Canada and the UK & Ireland was solid by historical standards. In South America, order intake remained soft, reflecting slower mining activity in the region.

Q2 2014 HIGHLIGHTS BY OPERATION

Canada

• Revenues were up 21% as market activity was strong across most segments in Western Canada. New equipment sales rose by 55%, driven primarily by mining deliveries, and were also higher in construction and power systems. Product support revenues increased by 6%, reflecting higher parts sales in all sectors, most notably in mining.
• Gross profit margin declined compared to Q2 2013 due to a significant shift in revenue mix to new equipment sales (44% vs. 34% in Q2 2013) and a higher proportion of mining equipment and parts in the sales mix which typically return a lower margin. SG&A expenses increased modestly despite strong revenue growth. EBIT rose by 26% to $77 million and EBIT margin improved to 8.3% from 7.9% in Q2 2013, reflecting higher revenues and progress with the execution of operational improvement initiatives.
• Invested capital increased by about $75 million from the end of March primarily due to lower accounts payable and higher investment in rental equipment. Inventory levels remained comparable to Q1 2014 with higher revenues, reflecting progress on the implementation of supply chain initiatives and strong equipment deliveries in Q2. Invested capital turnover improved to 2.20 times from 2.11 times in Q1 2014 and 2.03 times in Q4 2013.

South America

• Revenues declined by 10% (down 15% in functional currency - USD), and were lower in all lines of business, impacted by softer market activity compared to Q2 2013. New equipment sales were down 27% in functional currency as a result of reduced demand for equipment, predominantly from mining, but also from the construction sector. Product support revenue was down by 6% in functional currency, impacted primarily by lower service revenues in mining as customers continued to focus on cost reductions.
• EBIT declined by $3 million to $57 million (down 11% in functional currency) reflecting lower revenues and gross profit. SG&A costs were down as a result of lower sales volumes and the actions taken to reduce operating costs. In response to slower activity levels, the South American operations made further reductions to its workforce in the second quarter. Compared to the end of 2013, the number of employees in South America is down by about 5% to under 7,000 people. The Company continues to monitor market conditions in South America closely to ensure that its cost structure and invested capital are aligned with expected activity levels to maintain profitability. Q2 EBIT margin was 10.0%, up from 9.5% a year ago due to lower SG&A costs.
• Invested capital was down by about US$110 million from Q1 2014, driven by reduced equipment and parts inventory in response to slower demand.

United Kingdom & Ireland

• Revenues rose by 21% (up 3% in functional currency - GBP) driven by new equipment sales, which were up 11% in functional currency reflecting improved demand from the construction and plant hire sectors. Product support revenues declined by 9% in functional currency, impacted primarily by softer demand from coal mining and power systems.
• EBIT was $14 million compared to $13 million in Q2 2013. In functional currency, EBIT was down by £0.6 million, reflecting a slight decline in gross profit due to a higher proportion of new equipment sales in the revenue mix (64% vs. 59% in Q2 2013). SG&A costs were similar to last year in functional currency despite modest increase in revenues. EBIT margin was 5.1% compared to 5.7% a year ago, primarily due to the lower contribution from product support to the total revenue.
• Invested capital increased by £8 million from Q1 2014, in line with higher equipment inventory to meet improved demand for new machines.

CORPORATE AND BUSINESS DEVELOPMENTS

Dividend

The Board of Directors has approved a quarterly dividend of $0.1775 per share, payable on September 4, 2014 to shareholders of record on August 21, 2014. This dividend will be considered an eligible dividend for Canadian income tax purposes.

Leadership Changes

• On June 13, 2014, Finning announced that Dave Smith, executive vice president and chief financial officer, was leaving the Company, effective June 30, 2014. Finning has retained an external search firm to identify a new CFO. In the interim, Anna Marks, senior vice president, corporate controller, has assumed responsibility for the company's tax and internal audit functions in addition to overseeing financial reporting. Greg Palaschuk, who recently joined Finning as vice president, treasurer, retains responsibility for treasury, investor relations and business performance, planning and analysis. Both Anna and Greg report directly to Scott Thomson, president and chief executive officer.
• To strengthen Finning's ability to attract, retain and develop talent, the Company made two key appointments to its human resources organization:
  • Gillian Platt joined Finning International as chief human resources officer on July 7, 2014. Gillian brings extensive senior leadership experience spanning a variety of industries, geographies and roles to this position. She has held a number of leadership positions in human resources, corporate affairs, strategy and corporate development, including executive vice president of human resources, North America at Aviva, a multinational insurance company. Gillian holds a Bachelor of Arts Degree and a Masters of Education from the University of Toronto.
  • Effective September 1, 2014, Chad Hiley will join Finning Canada as senior vice president, human resources. Most recently, Chad served as vice president, organizational effectiveness with Barrick Gold, and previously held the position of vice president, human resources at Barrick. His educational background includes a Master's Degree in accounting and Bachelor of Arts degree from the University of Waterloo. He also has earned his chartered accountancy designation.
• Effective October 1, 2014, David Primrose will move from his current position as executive vice president, mining to executive vice president, core industries operations for Finning Canada. David's appointment to this role will support the Company in capitalizing on opportunities in the construction and forestry sectors, heavy rental, used equipment and The Cat Rental Store. Since joining the company in 1988, David has held a variety of senior leadership roles in the Company's Canadian and UK operations as well as the corporate office.
• John Pollesel was named senior vice president, mining, Finning Canada. John will join Finning on October 1, 2014 and will be accountable for leading the Canadian operations' mining division. John is a proven senior leader with extensive executive experience in the mining industry, including vice president and chief financial officer for Compania Minera Antamina in Peru and chief operating officer for Vale Canada. John holds a Masters of Business Administration from Laurentian University and has achieved fellowship status with both the Society of Management Accountants and Chartered Professional Accountants of Ontario.

SITECH Acquisition in the UK and Ireland

On July 4, 2014, the Company's UK & Ireland operations acquired 100% of the shares of Reaction One Limited (UK) and Alveton Limited (Ireland). With this acquisition, the newly formed company, named SITECH, will sell and service Trimble's heavy and highway machine control and monitoring products in all of its dealership territories (rights in the Company's Canadian and South American dealership operations were acquired in 2011). Trimble is Caterpillar's global technologies joint venture partner in construction and other industries. Cash consideration of £7.6 million ($13.9 million) was paid at the time of acquisition, which may be subject to customary closing adjustments. Further contingent consideration with a possible range of £nil - £3.5 million may be paid after acquisition, contingent upon the profitability of the acquired business over the next three years.

SELECTED CONSOLIDATED FINANCIAL INFORMATION

(C$ millions, except per share amounts)

			Three months ended Jun 30						Six months ended Jun 30
Revenue			2014		2013		% change		2014		2013		% change
	New equipment		780.5		652.9		20		1,473.2		1,296.9		14
	Used equipment		63.9		69.9		(9	)	122.8		129.9		(6	)
	Equipment rental		86.3		92.8		(7	)	173.9		185.9		(6	)
	Product support		831.0		802.5		4		1,661.2		1,563.8		6
	Other		6.3		2.0				13.1		3.6
		Total revenue	1,768.0		1,620.1		9		3,444.2		3,180.1		8
Gross profit			523.0		513.4		2		1,022.0		1,011.8		1
Gross profit margin			29.6	%	31.7	%			29.7	%	31.8	%
SG&A			(388.4	)	(391.9	)	1		(776.5	)	(773.8	)	(0	)
SG&A as a percentage of revenue			(22.0	)%	(24.2	)%			(22.5	)%	(24.3	)%
Equity earnings of joint venture and associate			3.1		3.6				3.8		6.3
Other income (expenses)			(0.5	)	(2.6	)			(1.3	)	(4.7	)
EBIT			137.2		122.5		12		248.0		239.6		3
EBIT margin			7.8	%	7.6	%			7.2	%	7.5	%
Net income			86.4		82.7		4		154.3		156.1		(1	)
Basic EPS			0.50		0.48		4		0.90		0.91		(1	)
EBITDA			190.1		176.2		8		355.8		345.5		3
Free cash flow			122.7		6.6				(11.4	)	(86.9	)
									Jun 30, 14		Dec 31, 13
Invested capital									3,333.6		3,138.1
Invested capital turnover (times)									2.12		2.04
Net debt to invested capital									40.9	%	40.8	%
Return on invested capital									16.0	%	15.7	%

To download Finning's complete Q2 2014 results in PDF, please open the following link: http://media3.marketwire.com/docs/FinningQ214results.pdf.

Q2 2014 RESULTS INVESTOR CALL

The Company will hold an investor call on Thursday, Aug 7 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 Aug 7 until Aug 14. The pass code to access the playback recording is 6933503 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. The Company's 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".
(2)	Earnings Before Finance Costs and Income Taxes (EBIT); 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).
(3)	Invested capital turnover is calculated as total revenue for the last twelve months divided by invested capital, based on an average of the last four quarters.

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 August 7, 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.