Finning Reports Q3 2013 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Nov. 14, 2013) - Finning International Inc. (TSX:FTT) -

Q3 2013 HIGHLIGHTS

• Revenues rose by 12% to $1.8 billion. Higher revenues in Canada more than offset relatively flat revenues in South America and the UK and Ireland compared to Q3 2012.
• Product support revenues increased in all operations and were 14% higher on a consolidated basis, partly attributable to approximately $50 million additional contribution from the expanded mining product line (the former Bucyrus business).
• Strong deliveries in Canada drove new equipment sales up 8% and contributed to a lower gross profit margin compared to Q3 of last year. The decline in the gross profit margin in Canada was partly offset by an improved gross profit margin in South America with more product support in the revenue mix relative to Q3 2012.
• EBIT rose by 10% to $136 million, driven primarily by Canada. Consolidated EBIT margin of 7.6% was slightly lower than in Q3 2012, largely due to increased mining new equipment sales.
• Compared to the second quarter of 2013, EBIT increased by 11% as higher EBIT in Canada more than offset a decline in EBIT in South America and the UK and Ireland. Consolidated EBIT margin of 7.6% was comparable to Q2 2013, despite a significant shift in revenue mix to new equipment sales in Canada.
• Basic EPS was $0.50 compared to $0.47 in Q3 2012 and $0.48 in the previous quarter.
• The Company generated $163 million of free cash flow in Q3 2013, driven by stronger cash flow from operations and improved working capital. The Company's net debt to total capital ratio declined to 48% at the end of September from 51% at the end of June.
• The order backlog stands at $1.0 billion, down 7% from the end of June, as very strong equipment deliveries during the quarter exceeded an 11% increase in order intake over Q2 2013.

Finning International Inc. (TSX:FTT) reported quarterly revenues of $1.8 billion, a 12% increase over Q3 2012. Revenues grew in all lines of business: the increase in new equipment sales was driven by Canada, while product support revenues rose across all operations compared to Q3 of last year. Quarterly earnings before finance costs and income taxes (EBIT) grew by 10% to $136 million due to improved EBIT results in Canada and the UK and Ireland. Quarterly EBIT margin was 7.6%, which was comparable to the previous quarter and down slightly from 7.8% in Q3 2012. Basic earnings per share (EPS) increased by 6% to $0.50 relative to Q3 2012.

"In the third quarter, we delivered results that were in line with our expectations as strong equipment deliveries in Canada and increased revenue from product support in all of our regions resulted in an increase in EBIT. Our ability to deliver these results in an uncertain economic environment speaks to the strength of Finning's business model and the resiliency of the product support business. The mining sector, particularly in South America, is under pressure and we are actively managing our cost structure so that it remains in line with expected business levels," said Scott Thomson, president and chief executive officer of Finning International Inc. "I am pleased with our third quarter free cash flow generation and we are on track to achieve approximately a 45% net debt to capital ratio by the end of the year, which is at the high end of our targeted range. Operational excellence remains our top agenda item and I look forward to providing a progress update along with our 2014 outlook at our investor meeting next month."

Q3 2013 FINANCIAL SUMMARY

C$ millions, except per share amounts (unaudited)	Three months ended Sep 30
	2013		2012(7)		% change
Revenue	1,780		1,594		12
Earnings before finance costs and income taxes (EBIT)	136		124		10
EBIT margin	7.6	%	7.8	%
Net income	86		81		6
Basic EPS	0.50		0.47		6
Earnings before finance costs, income taxes, depreciationand amortization (EBITDA)(1)	191		178		7
Free cash flow(1)(2)	163		(29	)

• Revenues rose by 12% from Q3 2012 to $1.8 billion, driven by Canada. Revenues from South America and the UK and Ireland were comparable to Q3 of last year. New equipment sales were up 8% with strong deliveries in Canada compensating for reduced sales volumes in other regions compared to Q3 2012. Product support revenues grew by 14%, including about $50 million in additional contribution from the expanded mining product line, and were higher across all operations. Used equipment sales were very strong in all territories and increased by 45% on a consolidated basis. Rental revenues rose by 8% compared to Q3 2012. An appreciation of the US dollar relative to the Canadian dollar had a positive impact on revenues of approximately $50 million compared to Q3 2012.
• Gross profit increased by 5% from higher revenues, however, gross profit margin declined to 28.9% from 30.7% in Q3 2012 due to a lower gross profit margin in Canada, largely as the result of increased mining new equipment sales. This was partly offset by a higher gross profit margin in South America where the revenue mix was more heavily weighted to product support compared to Q3 2012.
• Selling, general and administrative (SG&A) expenses were 3% above last year due to higher SG&A costs in South America, while SG&A expenses in Canada were flat despite strong revenue growth. As a percentage of revenue, SG&A expenses declined to 21.3% from 23.1% in Q3 of last year.
• EBIT rose by 10% to $136 million, primarily reflecting higher revenues in Canada. Consolidated EBIT margin was 7.6%, similar to the second quarter of 2013 and down slightly from 7.8% achieved in Q3 2012.
• Net income and basic EPS increased by 6% to $86 million and $0.50, respectively, reflecting the higher EBIT described above, partly offset by an increase in the effective tax rate to 23.4% from 18.4% in Q3 2012, primarily due to foreign exchange impacts in Argentina.
• EBITDA was up 7% to $191 million. Quarterly free cash flow was $163 million, compared to $6 million in the previous quarter and $29 million use of cash in Q3 2012, driven by stronger cash flow from operations and improved working capital.
• The Company's net debt to total capital ratio⁽⁵⁾ was 47.8% at the end of September, down from 50.6% at the end of June. The Company expects strong free cash flow in Q4 2013 and the net debt to total capital ratio to decline to approximately 45% by the end of 2013, which is at the high end of the 35-45% target range.
• Order backlog was $1.0 billion at the end of September, down from $1.1 billion at the end of June, mostly due to significant deliveries in Canada in Q3. Order intake improved in Canada and South America compared to the first two quarters of 2013 and continued to be at good levels in the UK and Ireland. The order intake in Q3 was driven by demand from non-mining customers. There were no significant order cancellations in any of the Company's operations in the third quarter.

Q3 2013 HIGHLIGHTS BY OPERATION

Canada

• Canada achieved very strong revenues in Q3, up 25% from a year ago, driven by equipment sales and contribution from the expanded mining product line which was acquired in Q4 2012. New equipment sales rose by 35% reflecting significant mining deliveries in the quarter, including $18 million from the expanded mining product line, as well as increased sales in construction and forestry. While cost containment measures by commodity producers in the oil sands have negatively impacted the product support business in the mining sector, product support revenues were up 17%, largely due to the $46 million contribution from the expanded mining product line.
• The gross profit margin declined, reflecting a high proportion of lower margin mining equipment in the sales mix. SG&A costs decreased marginally, despite higher revenues, as a result of supply chain efficiencies and operating improvements at the OEM Remanufacturing facility. EBIT increased by 29% to $76 million, driven by significantly higher revenues and $7 million of additional EBIT from the expanded mining product line, acquired in the fourth quarter of 2012. EBIT margin improved to 7.9% from 7.7% in Q3 2012, and was similar to the second quarter of 2013.
• Finning Canada has significant opportunities to improve performance and will remain focused on executing on its operational excellence agenda, which includes: gaining market share in non-mining segments, optimizing supply chain, increasing service profitability and improving asset utilization. .

South America

• Revenues declined slightly, by under 1%, but were down 5% in functional currency (USD) due to lower new equipment sales compared to Q3 2012. New equipment sales decreased by 20% in functional currency, reflecting slower construction activity in Chile and Argentina, as well as reduced mining deliveries. While copper prices have remained healthy and production levels held steady, increased focus on cost containment has resulted in slower pace of equipment replacement and fleet additions for brownfield projects. Product support revenues grew by 7% in functional currency driven by mining. Cost reductions by mining customers have resulted in a slower pace of growth in product support, including the expanded mining product line. However, the parts business for the expanded mining product line showed significant sequential improvement through 2013.
• In Argentina, the Company continued to be restricted with respect to the importation of equipment and parts. The Company has adjusted its cost structure in Argentina to align with lower revenue levels and mitigate the financial impact of the restrictions.
• EBIT of $56 million was 3% below Q3 2012 and was down 8% in functional currency due to approximately $5 million lower EBIT from the expanded mining product line, as well as higher SG&A costs, which were primarily the result of charges on a specific power systems contract and costs associated with a workforce reduction. As a result, the EBIT margin declined to 9.4% from 9.6% a year ago.
• South American operations are well positioned to capture equipment and product support opportunities. As demand from mining and construction has slowed in the region, the business is focused on controlling costs and implementing supply chain improvement initiatives.

United Kingdom and Ireland

• Revenues were similar to Q3 2012 level (down 3% in functional currency - GBP), as lower new equipment sales and rental revenues were mostly offset by growth in product support and used equipment sales compared to last year. New equipment sales decreased by 10% in functional currency due to slow economic conditions and reduced market activity in mining compared to last year. Product support revenues rose by 3% driven by higher service revenues across multiple sectors.
• EBIT was up by 17% to $12 million (up 14% in functional currency) and EBIT margin improved to 5.3% from 4.6% a year ago, reflecting lower depreciation expense and a higher gross profit margin partly due to more product support in the revenue mix compared to Q3 of last year.
• The UK and Ireland operations continue to successfully capture value-added opportunities in Equipment Solutions and Power Systems during challenging market conditions. The operations remain focused on controlling costs and improving efficiencies to achieve solid financial performance and maintain excellent customer loyalty scores.

CORPORATE AND BUSINESS DEVELOPMENTS

Dividend

The Board of Directors has approved a quarterly dividend of $0.1525 per share, payable on December 12, 2013 to shareholders of record on November 28, 2013. This dividend will be considered an eligible dividend for Canadian income tax purposes.

Finning Canada and Alberta Union reach memorandum of agreement for new collective agreement

On November 7, the Company announced that Finning Canada and the International Association of Machinists and Aerospace Workers - Local Lodge 99 (IAMAW) representing Finning's hourly employees in Alberta and the Northwest Territories reached a memorandum of agreement on a new three-year collective agreement. The agreement is subject to a ratification vote by the union membership, which is expected to be concluded in approximately one month. The union bargaining committee is recommending that its members accept the agreement. The previous collective agreement, governing 2,100 hourly Finning workers in Alberta and the Northwest Territories, expired on April 30, 2013.

Finning South America Announces Significant Contract with Codelco

On November 12, Finning announced that its South American operation was awarded a contract valued at US$190 million with Codelco, Chile's state owned copper mining company. Under this contract, Finning will supply 10 Caterpillar 797F trucks to Codelco's Ministro Hales mine in Calama, Chile. Finning will begin delivering this equipment in 2013. In addition, Finning has been awarded a ten-year maintenance services contract for the trucks.

SELECTED CONSOLIDATED FINANCIAL INFORMATION
(C$ millions, except per share amounts)
		Three months ended Sep 30			Nine months ended Sep 30
Revenue		2013	2012(7)	% change	2013	2012(7)	% change
	New equipment	777.0	722.9	8	2,073.9	2,229.5	(7)
	Used equipment	91.3	63.0	45	221.2	213.5	4
	Equipment rental	103.8	96.0	8	289.7	278.5	4
	Product support	805.7	709.6	14	2,369.4	2,103.4	13
	Other	2.4	2.2	3	6.0	5.1	16
Total revenue		1,780.2	1,593.7	12	4,960.2	4,830.0	3
Gross profit		514.3	489.9	5	1,526.2	1,443.6	6
Gross profit margin(3)		28.9%	30.7%		30.8%	29.9%
SG&A		(378.9)	(368.5)	(3)	(1,152.8)	(1,106.4)	(4)
SG&A as a percentage of revenue		(21.3)%	(23.1)%		(23.3)%	(22.9)%
Equity earnings		2.6	2.3		9.0	7.6
Other income (expenses)		(2.4)	0.1		(7.2)	(4.0)
EBIT		135.6	123.8	10	375.2	340.8	10
EBIT margin(4)		7.6%	7.8%		7.6%	7.1%
Net income		86.2	81.2	6	242.3	224.2	8
Basic earnings per share (EPS)		0.50	0.47	6	1.41	1.30	8
EBITDA(1)		190.7	177.7	7	536.2	498.0	8
Free Cash Flow(1)(2)		162.6	(28.8)		75.8	(282.2)
					Sep 30, 13	Dec 31, 12
Total assets					5,138.6	5,118.0
Total shareholders' equity					1,746.0	1,566.6
Net debt to total capital(1)(5)					47.8%	50.0%
Return on equity(1)(6)					21.2%	22.8%

To download Finning's complete Q3 2013 results in PDF, please open the following link: http://media3.marketwire.com/docs/FinningQ313results.pdf

Q3 2013 RESULTS INVESTOR CALL

The Company will hold an investor conference call on Thursday, November 14 at 11:00 am Eastern Time. Dial-in numbers: 1-866-226-1793 (anywhere within Canada and the U.S.) or 416-340-2218 (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 November 14 until November 21. The pass code to access the playback recording is 4463383 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 80 years. Finning sells, rents and services 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 amounts do not have a standardized meaning under generally accepted accounting principles. For a reconciliation of these amounts to net income and cash flow from operating activities, see the heading "Description of Non-GAAP and Additional GAAP Measures" in the Company's management discussion and analysis that accompanies the third quarter consolidated financial statements.

⁽²⁾ Free cash flow is defined as cash flow provided by (used in) operating activities less net additions to property, plant and equipment and intangible assets as disclosed in the Company's Consolidated Statements of Cash Flow.

⁽³⁾ Gross profit margin is defined as gross profit as a percentage of total revenue.

⁽⁴⁾ EBIT margin is defined as earnings before finance costs and income taxes as a percentage of total revenue.

⁽⁵⁾ Net debt to total capital ratio is calculated as short-term debt and long-term debt, net of cash and cash equivalents (net debt) divided by total capitalization. Total capitalization is defined as the sum of net debt and all components of equity (share capital, contributed surplus, accumulated other comprehensive loss, and retained earnings).

⁽⁶⁾ Return on equity is calculated as net income divided by the weighted average of shareholders' equity, both for the last twelve month period.

⁽⁷⁾ Prior year comparative figures have been restated to reflect the Company's adoption of the amendments to International Accounting Standard (IAS) 19, Employee Benefits, which became effective on January 1, 2013.

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 and SG&A levels and EBIT margin growth; anticipated generation of free cash flow and its expected use; the impact of new and revised IFRS that have been issued but are not yet effective; and the expected target range of the Company's Debt 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 describe Finning's expectations at November 13, 2013. 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; risks associated with the conduct of business in foreign jurisdictions; 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 realize expected benefits of acquisitions; 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 the 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 the Company's current Annual Information Form (AIF) in Section 4.

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.