VANCOUVER, British Columbia, Feb. 06, 2023 (GLOBE NEWSWIRE) -- Finning International Inc. (TSX: FTT) (“Finning”, the “Company”, “we”, “our” or “us”) reported fourth quarter and annual 2022 results today. All monetary amounts are in Canadian dollars unless otherwise stated.
HIGHLIGHTS
All comparisons are to Q4 and annual 2021 results unless indicated otherwise.
“We are grateful to our employees for their commitment and contribution, which helped us finish 2022 safely and deliver record results. Our strong execution combined with significant strategic wins across the business in 2022 have provided us with great momentum into 2023, setting the stage for continued improvement in our full-cycle earnings capacity.
Looking ahead, we are mindful of the uncertain global business environment, including slowing rates of growth, and we are reinforcing our mid-cycle operating cost and capital model. On balance, we see constructive demand conditions in our diverse end markets where we expect strength in mining and energy sectors to more than offset slowing construction markets in the UK and South America. We are seeing continued momentum at the start of 2023 and expect growth in the first half of the year, underpinned by our record equipment backlog, very busy workshops, and growth in rebuilds driven by the strong execution of our product support strategy,” said Kevin Parkes, president and CEO.
Q4 2022 FINANCIAL SUMMARY
| Quarterly Overview | % change | ||||||
| ($ millions, except per share amounts) | Q4 2022 | Q4 2021 | fav (unfav) (1) | ||||
| Revenue | 2,653 | 1,949 | 36 | % | |||
| Net revenue | 2,368 | 1,774 | 34 | % | |||
| EBIT | 214 | 157 | 36 | % | |||
| EBIT as a percentage of net revenue | 9.0 | % | 8.9 | % | |||
| Net income attributable to shareholders of Finning | 136 | 104 | 30 | % | |||
| EPS | 0.89 | 0.66 | 36 | % | |||
| Free cash flow | 332 | 148 | 125 | % | |||
| Q4 2022 EBIT by Operation | South | UK & | Finning | ||||||||||
| ($ millions, except per share amounts) | Canada | America | Ireland | Other | Total | EPS | |||||||
| EBIT / EPS | 128 | 96 | 16 | (26 | ) | 214 | 0.89 | ||||||
| EBIT as a percentage of net revenue | 11.0 | % | 11.4 | % | 4.4 | % | n/m (1) | 9.0 | % |
| Q4 2021 EBIT by Operation | South | UK & | Finning | ||||||||||
| ($ millions, except per share amounts) | Canada | America | Ireland | Other | Total | EPS | |||||||
| EBIT / EPS | 92 | 59 | 12 | (6 | ) | 157 | 0.66 | ||||||
| EBIT as a percentage of net revenue | 10.1 | % | 10.1 | % | 4.3 | % | n/m | 8.9 | % |
| Key Performance Measures | |||||
| ($ millions, unless otherwise stated) | Q4 2022 | Q4 2021 | |||
| Invested capital (2) | 4,170 | 3,326 | |||
| Adjusted ROIC | |||||
| Consolidated | 18.7 | % | 16.4 | % | |
| Canada | 18.7 | % | 16.9 | % | |
| South America | 24.5 | % | 20.3 | % | |
| UK & Ireland | 17.0 | % | 14.8 | % | |
| Invested capital turnover (2) (times) | 2.01 | 2.04 | |||
| Inventory | 2,461 | 1,687 | |||
| Inventory turns (dealership) (2) (times) | 2.61 | 3.09 | |||
| Working capital to net revenue (2) ratio | 27.4 | % | 22.9 | % | |
| Net debt to Adjusted EBITDA ratio (times) | 1.6 | 1.1 | |||
Q4 2022 HIGHLIGHTS BY OPERATION
All comparisons are to Q4 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
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 market activity across Western Canada to remain healthy, supported by the strength in the mining and energy sectors.
Constructive commodity prices and improved capital budgets are expected to drive investment in renewal of aging fleets and product support opportunities in the oil sands and other mining. We expect to see growing demand for component remanufacturing, equipment rebuilds, and autonomy implementation as mining customers are looking to extend the life of their assets and improve productivity.
In the construction sector, 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, rentals, and prime and standby electric power generation.
In the power systems sector, higher activity levels from energy customers are driving a notable increase in quoting and order intake. Our power systems backlog in Canada is at its highest levels since 2014.
South America Operations
We continue to closely monitor the Chilean constitutional reform, including the process for approval of the proposal for a revised mining royalty framework. We are encouraged by the latest moderated proposal. However, we expect the timing of investment decisions related to greenfield and new expansion projects to remain uncertain until the new royalty proposal is approved. Longer term, we expect Chile will remain an attractive place to invest as electrification trends drive increasing global demand for copper.
We expect a strengthening copper price to support positive mining outlook in Chile in 2023. Mining deliveries are expected to be driven by our recent wins with BHP and Codelco, as well as committed medium-term investment in fleet replacements across our mining customer base. We also expect to see continued strong demand for mining product support and technology solutions, including autonomy.
Slowing economic growth and higher interest rates are expected to continue impacting construction activity in Chile in 2023.
In Argentina, activity in construction, oil and gas, and mining is expected to remain stable. However, high inflation, currency restrictions, and new import regulations will continue to impact our business in Argentina as we manage through the challenging fiscal, regulatory, and currency environments.
UK & Ireland Operations
As equipment deliveries to HS2 have largely been completed, we expect lower construction new equipment sales in the UK in 2023 compared to 2022. In addition, overall demand for construction equipment in the UK is expected to decline in 2023 due to slowing economic growth rates. However, we expect strong demand for product support to continue, driven by HS2 activity and high machine utilization rates across broader construction markets.
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 delivery in 2023, and we are well positioned to capture further opportunities.
Considerations for 2023
We are mindful of the uncertain global business environment, including slowing rates of growth, and we are reinforcing our mid-cycle operating cost and capital model. Overall, we expect constructive demand conditions in our diverse end markets to be supported by favourable commodity prices and strong demand from mining and energy customers.
We are reducing our capital expenditures budget in 2023 with a higher proportion allocated to reinvestment in rental fleet and strategic investments in electric drive mining trucks for demonstration purposes. Our 2023 net capital expenditures and net rental fleet additions are expected to be in the range of $190 million to $240 million, which represents about 25% reduction from 2022. In 2023, we will be placing a higher priority on debt repayment and reduction in our net debt to Adjusted EBITDA ratio.
We are seeing continued momentum at the start of 2023 and expect growth in the first half of the year compared to the first half of 2022, underpinned by our record equipment backlog, very busy workshops, and growth in rebuilds driven by the strong execution of our product support strategy.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
| Three months ended | Years ended | |||||||||||||||||
| December 31 | December 31 | |||||||||||||||||
| % change | % change | |||||||||||||||||
| ($ millions, except per share amounts) | 2022 | 2021 | fav (unfav) | 2022 | 2021 | fav (unfav) | ||||||||||||
| New equipment | 854 | 562 | 52 | % | 2,793 | 2,189 | 28 | % | ||||||||||
| Used equipment | 91 | 124 | (26 | )% | 352 | 409 | (14 | )% | ||||||||||
| Equipment rental | 83 | 68 | 22 | % | 297 | 235 | 26 | % | ||||||||||
| Product support | 1,295 | 982 | 32 | % | 4,606 | 3,728 | 24 | % | ||||||||||
| Net fuel and other | 45 | 38 | 21 | % | 167 | 135 | 24 | % | ||||||||||
| Net revenue | 2,368 | 1,774 | 34 | % | 8,215 | 6,696 | 23 | % | ||||||||||
| Gross profit | 628 | 484 | 30 | % | 2,223 | 1,801 | 23 | % | ||||||||||
| Gross profit as a percentage of net revenue (2) | 26.5 | % | 27.3 | % | 27.1 | % | 26.9 | % | ||||||||||
| SG&A | (416 | ) | (328 | ) | (27 | )% | (1,458 | ) | (1,266 | ) | (15 | )% | ||||||
| SG&A as a percentage of net revenue (2) | (17.6 | )% | (18.5 | )% | (17.7 | )% | (18.9 | )% | ||||||||||
| Equity earnings of joint ventures | 2 | 1 | 3 | 2 | ||||||||||||||
| Other income | — | — | — | 15 | ||||||||||||||
| EBIT | 214 | 157 | 36 | % | 768 | 552 | 39 | % | ||||||||||
| EBIT as a percentage of net revenue | 9.0 | % | 8.9 | % | 9.3 | % | 8.2 | % | ||||||||||
| Adjusted EBIT (3)(4) | 214 | 157 | 36 | % | 768 | 537 | 43 | % | ||||||||||
| Adjusted EBIT as a percentage of net revenue (2)(4) | 9.0 | % | 8.9 | % | 9.3 | % | 8.0 | % | ||||||||||
| Net income attributable to shareholders of Finning | 136 | 104 | 30 | % | 503 | 364 | 38 | % | ||||||||||
| EPS | 0.89 | 0.66 | 36 | % | 3.25 | 2.26 | 44 | % | ||||||||||
| Adjusted EPS | 0.89 | 0.66 | 36 | % | 3.25 | 2.18 | 49 | % | ||||||||||
| Free cash flow | 332 | 148 | 125 | % | (170 | ) | 300 | n/m | ||||||||||
To access Finning’s complete Q4 and annual 2022 results, please visit our website at https://www.finning.com/en_CA/company/investors.html
Q4 2022 INVESTOR CALL
The Company will hold an investor call on February 7, 2023 at 10:00 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 is the world’s largest Caterpillar dealer, delivering unrivalled service to customers for 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
Ilona Rojkova
Director, Investor Relations
Phone: 604-837-8241
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 EPS
Adjusted 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 EPS (the most directly comparable GAAP financial measure) and Adjusted EPS can be found on page 7 of this Earnings Release.
Adjusted EBIT and Adjusted EBITDA
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.
Adjusted EBITDA is calculated by adding depreciation and amortization to Adjusted EBIT.
The most directly comparable GAAP financial measure to Adjusted EBITDA and Adjusted EBIT is EBIT.
A reconciliation from EBIT to Adjusted EBIT and Adjusted EBITDA for our consolidated operations is as follows:
| 3 months ended | 2022 | 2021 | |||||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | |||||
| EBIT | 214 | 224 | 190 | 140 | 157 | 150 | 137 | 108 | |||||
| Significant items: | |||||||||||||
| CEWS support | — | — | — | — | — | — | — | (10 | ) | ||||
| Return on Energyst investment | — | — | — | — | — | — | — | (5 | ) | ||||
| Adjusted EBIT | 214 | 224 | 190 | 140 | 157 | 150 | 137 | 93 | |||||
| Depreciation and amortization | 87 | 84 | 81 | 81 | 84 | 80 | 78 | 77 | |||||
| Adjusted EBITDA (3)(4) | 301 | 308 | 271 | 221 | 241 | 230 | 215 | 170 | |||||
The impact on provision for income taxes of significant items was as follows:
| 3 months ended | 2022 | 2021 | |||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | |||
| Significant item: | |||||||||||
| CEWS support | — | — | — | — | — | — | — | 2 | |||
| Provision for income taxes on significant item | — | — | — | — | — | — | — | 2 | |||
A reconciliation from EPS to Adjusted EPS for our consolidated operations is as follows:
| 3 months ended | 2022 | 2021 | |||||||||||
| ($) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | |||||
| EPS | 0.89 | 0.97 | 0.80 | 0.59 | 0.66 | 0.61 | 0.56 | 0.43 | |||||
| Significant items: | |||||||||||||
| CEWS support | — | — | — | — | — | — | — | (0.05 | ) | ||||
| Return on Energyst investment | — | — | — | — | — | — | — | (0.03 | ) | ||||
| Adjusted EPS (a) | 0.89 | 0.97 | 0.80 | 0.59 | 0.66 | 0.61 | 0.56 | 0.35 | |||||
(a) The per share impact for each quarter has been calculated using the weighted average number of common shares outstanding during the respective quarters; therefore, quarterly amounts may not add to the annual or year-to-date total.
A reconciliation from EBIT to Adjusted EBIT for our Canadian operations is as follows:
| 3 months ended | 2022 | 2021 | |||||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | |||||
| EBIT | 128 | 125 | 102 | 80 | 92 | 84 | 82 | 69 | |||||
| Significant item: | |||||||||||||
| CEWS support | — | — | — | — | — | — | — | (10 | ) | ||||
| Adjusted EBIT | 128 | 125 | 102 | 80 | 92 | 84 | 82 | 59 | |||||
A reconciliation from EBIT to Adjusted EBIT for our South American operations is as follows:
| 3 months ended | 2022 | 2021 | ||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | ||
| Reported and Adjusted EBIT | 96 | 85 | 64 | 65 | 59 | 58 | 51 | 41 | ||
A reconciliation from EBIT to Adjusted EBIT for our UK & Ireland operations is as follows:
| 3 months ended | 2022 | 2021 | ||||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | ||||
| Reported and Adjusted EBIT | 16 | 21 | 23 | 14 | 12 | 17 | 17 | 7 | ||||
A reconciliation from EBIT to Adjusted EBIT for our Other operations is as follows:
| 3 months ended | 2022 | 2021 | |||||||||||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | |||||||||||
| EBIT | (26 | ) | (7 | ) | 1 | (19 | ) | (6 | ) | (9 | ) | (13 | ) | (9 | ) | ||||
| Significant item: | |||||||||||||||||||
| Return on Energyst investment | — | — | — | — | — | — | — | (5 | ) | ||||||||||
| Adjusted EBIT | (26 | ) | (7 | ) | 1 | (19 | ) | (6 | ) | (9 | ) | (13 | ) | (14 | ) | ||||
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) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | |||||||||||
| Cash flow provided by (used in) operating | |||||||||||||||||||
| activities | 410 | (24 | ) | (112 | ) | (273 | ) | 193 | 212 | 8 | 12 | ||||||||
| Additions to property, plant, and equipment | |||||||||||||||||||
| and intangible assets | (78 | ) | (33 | ) | (30 | ) | (30 | ) | (45 | ) | (38 | ) | (17 | ) | (33 | ) | |||
| Proceeds on disposal of property, plant, and | |||||||||||||||||||
| equipment | — | — | — | — | — | 2 | 5 | 1 | |||||||||||
| Free cash flow | 332 | (57 | ) | (142 | ) | (303 | ) | 148 | 176 | (4 | ) | (20 | ) | ||||||
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) | Dec 31 | Sep 30 | Dec 31 | Sep 30 | ||||||
| Cost of sales | 2,025 | 1,807 | 1,465 | 1,443 | ||||||
| Cost of sales related to mobile refuelling operations | (302 | ) | (293 | ) | (190 | ) | (170 | ) | ||
| Cost of sales related to the dealership (3) | 1,723 | 1,514 | 1,275 | 1,273 | ||||||
| 2022 | 2021 | |||||||||
| ($ millions) | Dec 31 | Sep 30 | Dec 31 | Sep 30 | ||||||
| Inventory | 2,461 | 2,526 | 1,687 | 1,627 | ||||||
| Fuel inventory | (12 | ) | (12 | ) | (9 | ) | (6 | ) | ||
| Inventory related to the dealership (3) | 2,449 | 2,514 | 1,678 | 1,621 | ||||||
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 | |||||||||||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | ||||||||||
| Cash and cash equivalents | (288 | ) | (120 | ) | (170 | ) | (295 | ) | (502 | ) | (518 | ) | (378 | ) | (469 | ) | ||
| Short-term debt | 1,068 | 1,087 | 992 | 804 | 374 | 419 | 114 | 103 | ||||||||||
| Long-term debt | ||||||||||||||||||
| Current | 114 | 106 | 110 | 63 | 190 | 191 | 386 | 326 | ||||||||||
| Non-current | 815 | 836 | 807 | 909 | 921 | 923 | 903 | 973 | ||||||||||
| Net debt (3) | 1,709 | 1,909 | 1,739 | 1,481 | 983 | 1,015 | 1,025 | 933 | ||||||||||
| Total equity | 2,461 | 2,449 | 2,337 | 2,296 | 2,343 | 2,320 | 2,252 | 2,244 | ||||||||||
| Invested capital | 4,170 | 4,358 | 4,076 | 3,777 | 3,326 | 3,335 | 3,277 | 3,177 | ||||||||||
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, 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 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, and EBIT divided by net revenue. Net revenue is calculated as follows:
| 3 months ended | 2022 | 2021 | ||||||||||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | ||||||||||
| Total revenue | 2,653 | 2,384 | 2,289 | 1,953 | 1,949 | 1,904 | 1,845 | 1,596 | ||||||||||
| Cost of fuel | (285 | ) | (277 | ) | (285 | ) | (217 | ) | (175 | ) | (156 | ) | (140 | ) | (127 | ) | ||
| Net revenue | 2,368 | 2,107 | 2,004 | 1,736 | 1,774 | 1,748 | 1,705 | 1,469 | ||||||||||
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 | |||||||||||||||||
| ($ millions) | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | ||||||||||
| Total current assets | 4,781 | 4,652 | 4,098 | 4,030 | 3,619 | 3,620 | 3,416 | 3,319 | ||||||||||
| Cash and cash equivalents | (288 | ) | (120 | ) | (170 | ) | (295 | ) | (502 | ) | (518 | ) | (378 | ) | (469 | ) | ||
| Total current assets in working capital | 4,493 | 4,532 | 3,928 | 3,735 | 3,117 | 3,102 | 3,038 | 2,850 | ||||||||||
| Total current liabilities | 3,401 | 3,196 | 2,789 | 2,647 | 2,155 | 2,156 | 1,942 | 1,817 | ||||||||||
| Short-term debt | (1,068 | ) | (1,087 | ) | (992 | ) | (804 | ) | (374 | ) | (419 | ) | (114 | ) | (103 | ) | ||
| Current portion of long-term debt | (114 | ) | (106 | ) | (110 | ) | (63 | ) | (190 | ) | (191 | ) | (386 | ) | (326 | ) | ||
| Total current liabilities in working capital | 2,219 | 2,003 | 1,687 | 1,780 | 1,591 | 1,546 | 1,442 | 1,388 | ||||||||||
| Working capital (3) | 2,274 | 2,529 | 2,241 | 1,955 | 1,526 | 1,556 | 1,596 | 1,462 | ||||||||||
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); favourable (fav); unfavourable (unfav); not meaningful (n/m); Hydraquip Hose & Hydraulics and Hoses Direct Ltd. (Hydraquip).
(2) See “Description of Specified Financial Measures and Reconciliations” on page 6 of this Earnings Release.
(3) These are non-GAAP financial measures. See “Description of Specified Financial Measures and Reconciliations” on page 6 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 7 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: all information in the section entitled “Market Update and Business Outlook”, including for our Canada operations: our expectation of healthy market activity across Western Canada (based on assumptions of continued strength in the mining and energy sectors, continued constructive commodity prices, improved customer capital budgets, mining customers’ continued interest in extending the life of their assets and improving productivity, and government infrastructure programs and private sector investments in natural gas, carbon capture, utilization and storage, and various power projects), including renewal of aging fleets, product support opportunities in the oil sands and other mining, and growing demand for component remanufacturing, equipment rebuilds and autonomy implementation; demand for construction equipment and product support, rentals, and prime and standby electric power generation; for our South America operations: our positive outlook for mining in Chile in 2023 and belief that Chile will remain an attractive place to invest (based on assumptions of a strengthening copper price, that the timing of investment decisions related to greenfield and new expansion projects will remain uncertain until the new mining royalty proposal is approved, and that the electrification trend will continue and will drive increasing global demand for copper); our expectations for mining deliveries in Chile and continued strong demand for mining product support and technology solutions, including autonomy (based on assumptions that deliveries will be driven by our recent wins with BHP and Codelco and committed medium-term investment in fleet replacements across our mining customer base); that slowing economic growth and higher interest rates will continue impacting construction activity in Chile in 2023; and that in Argentina, activity in construction, oil and gas, and mining are expected to remain stable but high inflation, currency restrictions and new import regulations will continue to impact our business (assumes our ability to manage through the challenging fiscal, regulatory, and currency environments); for our UK & Ireland operations: our expectation of lower construction new equipment sales in 2023 and that overall demand for construction equipment in the UK will decline in 2023 (based on assumptions of slowing economic growth rates), but continued strong demand for product support (driven by HS2 activity and the assumption of continued high machine utilization rates across broader construction markets); and that demand for our power systems business will remain robust, including in the data centre market, that we have a strong backlog of power systems projects for delivery in 2023, and that we are well positioned to capture further opportunities; and for 2023 overall: there is an uncertain global business environment, including slowing rates of growth, and we are reinforcing our mid-cycle operating cost and capital model, but we expect demand conditions in our diverse end markets will be constructive, and strength in mining and energy sectors to more than offset slowing construction markets in the UK and South America (based on assumptions of continued favourable commodity prices and strong demand from mining and energy customers); our plan to reduce our capital expenditures budget in 2023 and allocate a higher proportion to reinvestment in rental fleet and strategic investments in electric drive mining trucks for demonstration purposes; that our 2023 net capital expenditures and net rental fleet additions will be in the range of $190 million to $240 million; that we will be placing a higher priority on debt repayment and reduction in our net debt to Adjusted EBITDA ratio; and that we are seeing continued momentum at the start of 2023 and expect growth in the first half of the year compared to the first half of 2022 (based on our record equipment backlog, busy workshops and growth in rebuilds driven by the strong execution of our product support growth strategy); our expectation for continued improvement in our full-cycle earnings capacity (based on assumptions of momentum into 2023 from strong execution and significant strategic wins across the business in 2022); 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 specific factors noted above; the impact and duration of, and our ability to respond to and manage, high inflation, increasing interest rates, supply chain challenges, and the impacts of the Russia-Ukraine war; 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 as growth in revenue occurs; 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; business disruption resulting from business process change, systems change and organizational change; regulatory initiatives or proceedings, litigation and changes in laws or regulations, including with respect to environmental protection and/or energy transition; 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. 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 volatile commodity prices, high inflation, increasing interest rates, supply chain challenges and the impacts of the Russia-Ukraine war, and successfully execute our economic condition and business cyclicality mitigation strategies, including preparing for future waves (if any) of COVID-19; an undisrupted market recovery, for example, undisrupted by further 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 support and demand for renewable energy will continue to grow; 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. 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. 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.
