VANCOUVER, British Columbia, Aug. 02, 2022 (GLOBE NEWSWIRE) -- Finning International Inc. (TSX: FTT) (“Finning”, “the Company”, “we”, “our” or “us”) reported second quarter 2022 results today. All monetary amounts are in Canadian dollars unless otherwise stated.
HIGHLIGHTS
All comparisons are to Q2 2021 results unless indicated otherwise.
"We are pleased with our strong execution and performance in the second quarter, which demonstrates our significantly improved earnings capacity. One year on from our June 2021 investor day, we are very proud to have exceeded targets we set out through focused execution of our simple plan to drive product support, reduce costs, and reinvest to compound our EPS. Over the last four quarters we have grown our product support business by 14% compared to the four quarters ended Q2 2021, delivered 17% SG&A this quarter, and reinvested $341 million in strategic acquisitions and share repurchases resulting in EPS of $2.66.
Following our strong EPS growth of 52% in the first half of 2022 compared to Adjusted EPS (2) in the first half of 2021, we expect demand conditions to remain favourable for the remainder of 2022. Underpinned by our large and diverse backlog, continued growth in product support, and disciplined operational execution, we are projecting above mid-teens EPS growth in the second half of 2022 compared to the second half of 2021. While activity levels remain robust, we are closely monitoring leading indicators and the impact of ongoing supply chain, labour, inflation, and interest rate challenges on our customer activity levels. We remain focused on actively managing these risks and are capturing growth opportunities in a very disciplined manner.
Our business model is robust and our strong performance in recent years is a huge credit to the efforts of our great people. From delivering approximately $900 million of free cash flow (3) during a very challenging 2020 to delivering $2.66 EPS over the last four quarters, the full-cycle resilience of our business model and step-change improvement in our execution have been on full display. Sustainable improvements in our operating model efficiency, inventory management practices, and proactive deployment of our digital capabilities make us confident that we will continue to successfully navigate a very dynamic global business environment going forward,” said Scott Thomson, president and CEO of Finning International.
Q2 2022 FINANCIAL SUMMARY
| Quarterly Overview | % change | |||||||||
| ($ millions, except per share amounts) | Q2 2022 | Q2 2021 | fav (unfav) | |||||||
| Revenue | 2,289 | 1,845 | 24 | % | ||||||
| Net revenue | 2,004 | 1,705 | 18 | % | ||||||
| EBIT | 190 | 137 | 39 | % | ||||||
| EBIT as a percentage of net revenue | 9.4 | % | 8.0 | % | ||||||
| EBITDA (1)(2) | 271 | 215 | 27 | % | ||||||
| EBITDA as a percentage of net revenue (2) | 13.5 | % | 12.6 | % | ||||||
| Net income attributable to shareholders of Finning | 126 | 91 | 37 | % | ||||||
| EPS | 0.80 | 0.56 | 43 | % | ||||||
| Free cash flow | (142 | ) | (4 | ) | n/m (1) | |||||
| Q2 2022 EBIT and EBITDA by Operation | South | UK & | Finning | ||||||||||||||
| ($ millions, except per share amounts) | Canada | America | Ireland | Other | Total | EPS | |||||||||||
| EBIT / EPS | 102 | 64 | 23 | 1 | 190 | 0.80 | |||||||||||
| EBIT as a percentage of net revenue | 10.0 | % | 10.1 | % | 6.4 | % | n/m | 9.4 | % | ||||||||
| EBITDA | 149 | 87 | 33 | 2 | 271 | ||||||||||||
| EBITDA as a percentage of net revenue | 14.7 | % | 13.7 | % | 9.3 | % | n/m | 13.5 | % | ||||||||
| Q2 2021 EBIT and EBITDA by Operation | South | UK & | Finning | ||||||||||||||
| ($ millions, except per share amounts) | Canada | America | Ireland | Other | Total | EPS | |||||||||||
| EBIT / EPS | 82 | 51 | 17 | (13 | ) | 137 | 0.56 | ||||||||||
| EBIT as a percentage of net revenue | 9.3 | % | 9.8 | % | 5.3 | % | n/m | 8.0 | % | ||||||||
| EBITDA | 129 | 71 | 27 | (12 | ) | 215 | |||||||||||
| EBITDA as a percentage of net revenue | 14.7 | % | 13.7 | % | 8.5 | % | n/m | 12.6 | % | ||||||||
Q2 2022 INVESTED CAPITAL AND ROIC SUMMARY
All comparisons are to Q4 2021 results unless indicated otherwise.
Invested capital (2) increased by $750 million from Q4 2021, driven primarily by higher inventory levels.
Inventory increased by $541 million from Q4 2021, reflecting increased parts inventory to support strong product support growth rates and customer service levels, as well as higher new equipment inventory to support the delivery of our large and diverse backlog. As a result, Q2 2022 free cash flow was a use of cash of $142 million compared to a use of cash of $4 million in Q2 2021.
Consolidated ROIC of 17.5% was up 110 basis points from Adjusted ROIC in Q4 2021, driven by improved profitability. ROIC increased to 17.4% in Canada, 22.3% in South America, and 16.2% in the UK & Ireland.
| Key Performance Measures | |||||||
| ($ millions, unless otherwise stated) | Q2 2022 | Q4 2021 | |||||
| Invested capital | |||||||
| Consolidated | 4,076 | 3,326 | |||||
| Canada | 2,319 | 1,876 | |||||
| South America | 1,203 | 1,026 | |||||
| UK & Ireland | 458 | 381 | |||||
| South America (US dollars) | 934 | 809 | |||||
| UK & Ireland (UK pound sterling) | 292 | 222 | |||||
| Adjusted ROIC | |||||||
| Consolidated | 17.5 | % | 16.4 | % | |||
| Canada | 17.4 | % | 16.9 | % | |||
| South America | 22.3 | % | 20.3 | % | |||
| UK & Ireland | 16.2 | % | 14.8 | % | |||
| Invested capital turnover (2) (times) | 2.00 | 2.04 | |||||
| Inventory | 2,228 | 1,687 | |||||
| Inventory turns (dealership) (2) (times) | 2.50 | 3.09 | |||||
| Working capital to net revenue (2) ratio | 25.1 | % | 22.9 | % | |||
| Net debt to Adjusted EBITDA ratio (2)(4) (times) | 1.8 | 1.1 | |||||
Q2 2022 HIGHLIGHTS BY OPERATION
All comparisons are to Q2 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
South America Operations
UK & Ireland Operations
Corporate and Other Developments
MARKET UPDATE AND BUSINESS OUTLOOK
The 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 elevated energy prices, project backlogs, healthy customer balance sheets and high machine utilization to continue supporting a strong demand environment across Western Canada.
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, heavy rentals, and prime and standby electric power generation.
In the mining sector, customer balance sheet health and steady increases in capital budgets are expected to drive product support opportunities, renewals of aging fleets to sustain production levels, and greenfield project developments. We expect growing demand for component remanufacturing and equipment rebuilds as customers are looking to extend the life of their assets, as well as continued focus on productivity improvements through data integration and autonomy implementation.
South America Operations
We continue to closely monitor the constitutional reform process in Chile and the recently proposed tax reform bill, including the proposal for a revised mining royalty framework, which remains under discussion. Until this process is completed, the timing of investment decisions related to greenfield and new expansion projects will remain uncertain.
In the near term, we expect stable mining activity in Chile to continue driving demand for maintenance and replacement of maturing equipment fleets. Quoting activity for partial fleet replacement remains strong across our customer base. Delivery activity remains strong including for Teck’s QB2 mine as they approach first production, as well as Codelco where we have won several truck and support equipment packages. Longer term, we expect Chile will remain an attractive place to invest as electrification trends drive increasing global demand for copper.
Our order intake for construction equipment in Chile has softened, impacted by higher equipment prices, elevated interest rates, and the weakening CLP. However, we expect construction machine utilization to remain strong supporting infrastructure projects.
In Argentina, activity in construction, oil and gas, and mining is expected to remain stable, however, the risk of significant ARS devaluation has increased. We are focused on managing through challenging fiscal, regulatory, and currency environments in Argentina.
UK & Ireland Operations
Deliveries to HS2 customers, investments in other infrastructure projects, and high machine utilization hours are expected to continue driving strong construction equipment sales and product support in the UK.
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 deliveries in the second half of 2022 and in 2023, and we are well positioned to capture further opportunities in the growing data centre market.
The addition of Hydraquip, which we acquired in March 2022, is expected to contribute to the structural improvement in the UK & Ireland’s profitability going forward.
Well Positioned to Continue Navigating a Dynamic Business Environment
We expect demand conditions to remain favourable for the remainder of 2022. Underpinned by our large and diverse backlog, continued growth in product support, and disciplined operational execution, we are projecting above mid-teens EPS growth in the second half of 2022 compared to the second half of 2021.
While activity levels remain robust, we are closely monitoring leading indicators and the impact of ongoing supply chain, labour, inflation, and interest rate challenges on our customer activity levels. We remain focused on actively managing these risks and are capturing growth opportunities in a very disciplined manner.
As we deliver our large backlog, we expect to generate positive annual free cash flow in 2022, with the amount of free cash flow dependent on supply and delivery schedules.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
| Three months ended June 30 | ||||||||||
| % change | ||||||||||
| ($ millions, except per share amounts) | 2022 | 2021 | fav (unfav) | |||||||
| New equipment | 733 | 593 | 24 | % | ||||||
| Used equipment | 86 | 99 | (14 | )% | ||||||
| Equipment rental | 70 | 54 | 30 | % | ||||||
| Product support | 1,075 | 927 | 16 | % | ||||||
| Net fuel and other | 40 | 32 | 22 | % | ||||||
| Net revenue | 2,004 | 1,705 | 18 | % | ||||||
| Gross profit | 528 | 449 | 18 | % | ||||||
| Gross profit as a percentage of net revenue (2) | 26.3 | % | 26.3 | % | ||||||
| SG&A | (338 | ) | (313 | ) | (8 | )% | ||||
| SG&A as a percentage of net revenue | (16.9 | )% | (18.3 | )% | ||||||
| Equity earnings of joint ventures | — | 1 | ||||||||
| EBIT | 190 | 137 | 39 | % | ||||||
| EBIT as a percentage of net revenue | 9.4 | % | 8.0 | % | ||||||
| Net income attributable to shareholders of Finning | 126 | 91 | 37 | % | ||||||
| Basic EPS | 0.80 | 0.56 | 43 | % | ||||||
| EBITDA | 271 | 215 | 27 | % | ||||||
| EBITDA as a percentage of net revenue | 13.5 | % | 12.6 | % | ||||||
| Free cash flow | (142 | ) | (4 | ) | n/m | |||||
To access Finning's complete Q2 2022 results, please visit our website at https://www.finning.com/en_CA/company/investors.html
Q2 2022 INVESTOR CALL
The Company will hold an investor call on August 3, 2022 at 9:00 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 FINNING
Finning International Inc. (TSX: FTT) is the world’s largest Caterpillar dealer delivering unrivalled service to customers for nearly 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 INFORMATION
Amanda Hobson
Senior Vice President, Investor Relations and Treasury
Phone: 604-331-4865
Email: 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 basic EPS
Adjusted basic 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 basic EPS (the most directly comparable GAAP financial measure) and Adjusted basic EPS can be found on page 8 of this Earnings Release.
EBITDA, Adjusted EBITDA, and Adjusted EBIT
EBITDA is defined as earnings before finance costs, income taxes, depreciation, and amortization. We use EBITDA to assess and evaluate the financial performance of our reportable segments. We believe that EBITDA improves comparability between periods by eliminating the impact of finance costs, income taxes, depreciation, and amortization.
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.
EBITDA is calculated by adding depreciation and amortization to EBIT. Adjusted EBITDA is calculated by adding depreciation and amortization to Adjusted EBIT.
The most directly comparable GAAP financial measure to EBITDA, Adjusted EBITDA, and Adjusted EBIT is EBIT.
A reconciliation from EBIT to EBITDA, Adjusted EBIT, and Adjusted EBITDA for our consolidated operations is as follows:
| 3 months ended | 2022 | 2021 | 2020 | |||||||||||
| ($ millions) | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | ||||||
| EBIT | 190 | 140 | 157 | 150 | 137 | 108 | 108 | 138 | ||||||
| Depreciation and amortization | 81 | 81 | 84 | 80 | 78 | 77 | 77 | 77 | ||||||
| EBITDA | 271 | 221 | 241 | 230 | 215 | 185 | 185 | 215 | ||||||
| EBIT | 190 | 140 | 157 | 150 | 137 | 108 | 108 | 138 | ||||||
| Significant items: | ||||||||||||||
| CEWS support | — | — | — | — | — | (10 | ) | (14 | ) | (37 | ) | |||
| Return on our investment in Energyst | — | — | — | — | — | (5 | ) | — | — | |||||
| Adjusted EBIT (3)(4) | 190 | 140 | 157 | 150 | 137 | 93 | 94 | 101 | ||||||
| Depreciation and amortization | 81 | 81 | 84 | 80 | 78 | 77 | 77 | 77 | ||||||
| Adjusted EBITDA (3)(4) | 271 | 221 | 241 | 230 | 215 | 170 | 171 | 178 | ||||||
A reconciliation from basic EPS to Adjusted basic EPS for our consolidated operations is as follows:
| 3 months ended | 2022 | 2021 | ||||||
| ($) | Jun 30 | Mar 31 | Jun 30 | Mar 31 | ||||
| Basic EPS | 0.80 | 0.59 | 0.56 | 0.43 | ||||
| Significant items: | ||||||||
| CEWS support | — | — | — | (0.05 | ) | |||
| Return on our investment in Energyst | — | — | — | (0.03 | ) | |||
| Adjusted basic EPS (a) | 0.80 | 0.59 | 0.56 | 0.35 | ||||
| (a) | The per share impact for each quarter has been calculated using the weighted average number of common shares outstanding during the respective quarters; therefore, quarterly amounts may not add to the annual or year-to-date total. |
A reconciliation from EBIT to Adjusted EBIT and Adjusted EBITDA for our Canadian operations is as follows:
| 3 months ended | 2022 | 2021 | 2020 | |||||||||||
| ($ millions) | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | ||||||
| EBIT | 102 | 80 | 92 | 84 | 82 | 69 | 72 | 93 | ||||||
| Significant item: | ||||||||||||||
| CEWS support | — | — | — | — | — | (10 | ) | (13 | ) | (35 | ) | |||
| Adjusted EBIT | 102 | 80 | 92 | 84 | 82 | 59 | 59 | 58 | ||||||
| Depreciation and amortization | 47 | 47 | 50 | 48 | 47 | 46 | 47 | 48 | ||||||
| Adjusted EBITDA | 149 | 127 | 142 | 132 | 129 | 105 | 106 | 106 | ||||||
A reconciliation from EBIT to Adjusted EBIT and Adjusted EBITDA for our South American operations is as follows:
| 3 months ended | 2022 | 2021 | 2020 | |||||||||
| ($ millions) | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | ||||
| Reported and Adjusted EBIT | 64 | 65 | 59 | 58 | 51 | 41 | 41 | 40 | ||||
| Depreciation and amortization | 23 | 23 | 22 | 22 | 20 | 20 | 20 | 19 | ||||
| Adjusted EBITDA | 87 | 88 | 81 | 80 | 71 | 61 | 61 | 59 | ||||
A reconciliation from EBIT to Adjusted EBIT and Adjusted EBITDA for our UK & Ireland operations is as follows:
| 3 months ended | 2022 | 2021 | 2020 | |||||||||
| ($ millions) | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | ||||
| Reported and Adjusted EBIT | 23 | 14 | 12 | 17 | 17 | 7 | 11 | 9 | ||||
| Depreciation and amortization | 10 | 10 | 11 | 10 | 10 | 10 | 9 | 9 | ||||
| Adjusted EBITDA | 33 | 24 | 23 | 27 | 27 | 17 | 20 | 18 | ||||
A reconciliation from EBIT to Adjusted EBIT and Adjusted EBITDA for our Other operations is as follows:
| 3 months ended | 2022 | 2021 | 2020 | ||||||||||||||||
| ($ millions) | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | |||||||||||
| EBIT | 1 | (19 | ) | (6 | ) | (9 | ) | (13 | ) | (9 | ) | (16 | ) | (4 | ) | ||||
| Significant items: | |||||||||||||||||||
| CEWS support | — | — | — | — | — | — | (1 | ) | (2 | ) | |||||||||
| Return on our investment in Energyst | — | — | — | — | — | (5 | ) | — | — | ||||||||||
| Adjusted EBIT | 1 | (19 | ) | (6 | ) | (9 | ) | (13 | ) | (14 | ) | (17 | ) | (6 | ) | ||||
| Depreciation and amortization | 1 | 1 | 1 | — | 1 | 1 | 1 | 1 | |||||||||||
| Adjusted EBITDA | 2 | (18 | ) | (5 | ) | (9 | ) | (12 | ) | (13 | ) | (16 | ) | (5 | ) | ||||
EBITDA to Free Cash Flow Conversion
EBITDA to free cash flow conversion is calculated as free cash flow divided by EBITDA. We use EBITDA to free cash flow conversion to assess our efficiency in turning EBITDA into cash.
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) | Jun 30 | Jun 30 | |||||
| Cash flow (used in) provided by operating activities | (112 | ) | 8 | ||||
| Additions to property, plant, and equipment and intangible assets | (30 | ) | (17 | ) | |||
| Proceeds on disposal of property, plant, and equipment | — | 5 | |||||
| Free cash flow | (142 | ) | (4 | ) | |||
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) | Jun 30 | Mar 31 | Jun 30 | Mar 31 | ||||||
| Cost of sales | 1,761 | 1,463 | 1,396 | 1,189 | ||||||
| Cost of sales related to mobile refuelling operations | (300 | ) | (231 | ) | (153 | ) | (140 | ) | ||
| Cost of sales related to the dealership | 1,461 | 1,232 | 1,243 | 1,049 | ||||||
| 2022 | 2021 | |||||||||
| ($ millions) | Jun 30 | Mar 31 | Jun 30 | Mar 31 | ||||||
| Inventory | 2,228 | 2,101 | 1,643 | 1,593 | ||||||
| Fuel inventory | (13 | ) | (11 | ) | (3 | ) | (3 | ) | ||
| Inventory related to the dealership | 2,215 | 2,090 | 1,640 | 1,590 | ||||||
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 | 2020 | |||||||||||||||||
| ($ millions) | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | |||||||||||
| Cash and cash equivalents | (170 | ) | (295 | ) | (502 | ) | (518 | ) | (378 | ) | (469 | ) | (539 | ) | (453 | ) | |||
| Short-term debt | 992 | 804 | 374 | 419 | 114 | 103 | 92 | 217 | |||||||||||
| Current portion of long-term debt | 110 | 63 | 190 | 191 | 386 | 326 | 201 | 200 | |||||||||||
| Non-current portion of long-term debt | 807 | 909 | 921 | 923 | 903 | 973 | 1,107 | 1,136 | |||||||||||
| Net debt | 1,739 | 1,481 | 983 | 1,015 | 1,025 | 933 | 861 | 1,100 | |||||||||||
| Total equity | 2,337 | 2,296 | 2,343 | 2,320 | 2,252 | 2,244 | 2,206 | 2,184 | |||||||||||
| Invested capital | 4,076 | 3,777 | 3,326 | 3,335 | 3,277 | 3,177 | 3,067 | 3,284 | |||||||||||
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, EBITDA 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 EBITDA and 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, EBITDA divided by net revenue, and EBIT divided by net revenue. Net revenue is calculated as follows:
| 3 months ended | 2022 | 2021 | 2020 | ||||||||||||||||
| ($ millions) | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | |||||||||||
| Total revenue | 2,289 | 1,953 | 1,949 | 1,904 | 1,845 | 1,596 | 1,666 | 1,553 | |||||||||||
| Cost of fuel | (285 | ) | (217 | ) | (175 | ) | (156 | ) | (140 | ) | (127 | ) | (115 | ) | (110 | ) | |||
| Net revenue | 2,004 | 1,736 | 1,774 | 1,748 | 1,705 | 1,469 | 1,551 | 1,443 | |||||||||||
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 | 2020 | |||||||||||||||||
| ($ millions) | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | |||||||||||
| Total current assets | 4,098 | 4,030 | 3,619 | 3,620 | 3,416 | 3,319 | 3,214 | 3,261 | |||||||||||
| Cash and cash equivalents | (170 | ) | (295 | ) | (502 | ) | (518 | ) | (378 | ) | (469 | ) | (539 | ) | (453 | ) | |||
| Total current assets in working capital | 3,928 | 3,735 | 3,117 | 3,102 | 3,038 | 2,850 | 2,675 | 2,808 | |||||||||||
| Total current liabilities | 2,789 | 2,647 | 2,155 | 2,156 | 1,942 | 1,817 | 1,623 | 1,717 | |||||||||||
| Short-term debt | (992 | ) | (804 | ) | (374 | ) | (419 | ) | (114 | ) | (103 | ) | (92 | ) | (217 | ) | |||
| Current portion of long-term debt | (110 | ) | (63 | ) | (190 | ) | (191 | ) | (386 | ) | (326 | ) | (201 | ) | (200 | ) | |||
| Total current liabilities in working capital | 1,687 | 1,780 | 1,591 | 1,546 | 1,442 | 1,388 | 1,330 | 1,300 | |||||||||||
| Working capital | 2,241 | 1,955 | 1,526 | 1,556 | 1,596 | 1,462 | 1,345 | 1,508 | |||||||||||
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); not meaningful (n/m). | |
| (2) | See “Description of Specified Financial Measures and Reconciliations” on page 7 of this Earnings Release. | |
| (3) | These are non-GAAP financial measures. See “Description of Specified Financial Measures and Reconciliations” on page 7 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 8 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: our belief that we will continue to successfully navigate the dynamic global business environment; our expectation to generate positive annual free cash flow in 2022 (assumes no disruptions to our ability to deliver our backlog); our expectation for demand conditions to remain favourable for the remainder of 2022; and our projections of above mid-teens EPS growth in the second half of 2022 compared to the second half of 2021 (assumes continued strong commodity prices, public and private sector investment, economic forecasts, delivery of our backlog, continued growth in product support, disciplined operational execution, inventory management and deployment of our digital capabilities, and that we and our customers can successfully navigate supply chain, labour, inflation, and interest rate challenges); all information in the section entitled “Market Update and Business Outlook” regarding our expectations for our Canada operations (based on assumptions of elevated energy prices, project backlogs, healthy customer balance sheets and increases in capital budgets, high machine utilization, government infrastructure programs and private sector investments in natural gas, carbon capture, utilization and storage, and power projects, and a continued focus on productivity improvements, component remanufacturing and rebuilds), our expectations for our South America operations (based on assumptions related to Chile of continued stable mining activity driving demand for maintenance and replacement of maturing equipment fleets, expectations that construction machine utilization will remain strong supporting infrastructure projects, and electrification trends driving increased global demand for copper in the longer term; and assumptions related to Argentina of activity in construction, oil and gas, and mining remaining stable and our ability to manage fiscal, regulatory, and currency environments), our expectations for our UK & Ireland operations (based on assumptions of continued HS2 deliveries and investments in other infrastructure projects, projections of continued growth in the data centre market and our ability to capture opportunities in that market, and our ability to successfully integrate Hydraquip into our business and realize the expected synergies from the acquisition); 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 impact and duration of the COVID-19 pandemic and measures taken by governments, customers and suppliers in response; 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; 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; regulatory initiatives or proceedings, litigation and changes in laws or regulations; 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; the actual impact of the COVID-19 pandemic; and, with respect to our normal course issuer bid, our share price from time to time and our decisions about use of capital. 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 the effects of the COVID-19 response, stretched supply chains, competitive talent markets, inflationary pressures and changing commodity prices, and successfully implement our COVID-19 risk management plans; an undisrupted market recovery, for example, undisrupted by 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 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, including for updated risks related to the COVID-19 pandemic.
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. We cannot accurately predict the full impact that COVID-19 will have on our business, results of operations, financial condition or the demand for our services, due in part to the uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak, the steps our customers and suppliers may take in current circumstances, including slowing or halting operations, the duration of travel and quarantine restrictions imposed by governments and other steps that may be taken by governments to respond to the pandemic. 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.
