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Finning Reports Q3 2015 Results; Announces Global Workforce Reductions and Facilities Optimization in Western Canada

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Nov. 12, 2015) - Finning International Inc. (TSX:FTT) reported third quarter 2015 results today (all monetary amounts are in Canadian dollars unless otherwise stated).

Q3 2015 HIGHLIGHTS

  • Basic EPS(1) was $0.19, including severance costs of $0.11 per share, loss on a building sublease of $0.03 per share, and Saskatchewan dealership acquisition costs of $0.01 per share.
  • In response to a further decline in market activity, marked by a 27% drop in new equipment sales from Q2 2015, the Company announced an additional workforce reduction of approximately 1,100 people or 8%, bringing the total workforce reduction to approximately 1,900 people or 13% in 2015.
  • To improve efficiencies, reduce costs, and optimize service delivery to customers, the Company announced today that it will exit 11 facilities in Western Canada. Combined with the previously announced closure of 16 facilities, the Company's footprint in Western Canada will be reduced by over 20% by mid to late 2016.
  • Excluding severance, loss on a building sublease, and facility closure costs, Canada's operating profitability or EBIT margin(1)(2) in Q3 2015 improved from the previous two quarters, despite lower revenues. Including the recent workforce reduction of 450 people, the Canadian operations will have reduced their workforce by approximately 1,100 people or 20% in 2015.
  • The recent workforce reduction includes approximately 550 people in South America in response to a significant decline in activity levels from Q2 2015 and in order to maintain historic profitability levels going forward. Since the peak of mid-2013, the South American operations will have reduced their workforce by approximately 1,200 people or 16%.
  • The Company generated $140 million in free cash flow(2), a 28% increase from Q3 2014, driven by Canada, including a positive contribution from the newly acquired Saskatchewan dealership.
  • During Q3, the Company repurchased 2.2 million of its shares for cancellation, bringing the total share repurchases to 3.1 million shares year-to-date for approximately $70 million.

"In line with significant steps already taken to adjust to the economic downturn, we took further decisive actions to reduce costs and implement sustainable operational improvements as market conditions weakened in the third quarter," said Scott Thomson, president and CEO of Finning International. "These steps include reducing the size of our global workforce by 1,900 people since the beginning of the year and 2,500 people since the start of the downturn in mid-2013. We also continued to restructure our Canadian branch network, effectively reducing our facility footprint by over 20% since the beginning of the year, to optimize the utilization of our assets throughout the cycle. While these are difficult decisions, we believe we are taking the right path to adjust our business to market realities and ensure financial strength, while simultaneously positioning Finning to deliver customer service more effectively and efficiently over the long-term."

"These organizational changes, coupled with the operational improvements we are implementing, are driven by our focus on providing value for our customers and our shareholders. In particular, the changes made to our facility footprint are underpinned by our solid commitment to our customers and follow careful consideration of their needs. We believe our resulting facility footprint provides the right support to enhance our customers' experience, meet their evolving requirements, and improve sales and service levels through our larger service centers and extended resident field teams," continued Mr. Thomson.

"Our focus on managing the factors within our control has contributed to preserving a strong balance sheet and allowed us to improve profitability in our Canadian operations on a quarter by quarter basis throughout 2015 despite a very challenging business environment. Being able to achieve these outcomes under current market conditions gives me confidence that we will be well-positioned when demand strengthens. Going forward, we will continue to implement operating improvements which earn our customers' loyalty, and maintain cost and capital discipline as we manage through persistent market uncertainty," concluded Mr. Thomson.

Q3 2015 FINANCIAL SUMMARY

$ millions, except per share amounts Three months ended Sep 30
2015 2014 % change
Revenue 1,498 1,670 (10 )
EBIT(2) 63 114 (45 )
EBIT margin 4.2 % 6.8 %
Net income 33 57 (42 )
Basic EPS 0.19 0.33 (42 )
EBITDA(1)(2) 125 170 (27 )
Free cash flow 140 109 28
  • Revenues declined by 10% from Q3 2014 to $1.5 billion, driven by 30% lower new equipment sales, down in all operations due to a difficult economic environment and reduced demand for new equipment across all market segments. While consolidated product support revenue was up 3% from Q3 2014, product support was lower in all regions in functional currency, reflecting reduced activity levels.
  • Gross profit margin(2) of 30.7% was relatively unchanged from 30.6% in Q3 2014. By line of business, gross profit margins declined, reflecting customers' continued focus on reducing operating costs and increased competitive pressures, most notably in Canada. These margin pressures were offset by a favourable shift in revenue mix to product support, which contributed 58% to consolidated revenue, up from 50% in Q3 2014.
  • The Company took further steps in Q3 2015 to align its cost structure to lower activity levels, including the announcement of a workforce reduction of about 1,100 employees or 8% from the end of June 2015. As a result, Q3 2015 SG&A included severance costs of $25 million, compared to about $7 million of severance and $2 million of labour disruption costs in Q3 2014. Excluding these costs, SG&A decreased from Q3 2014, reflecting cost savings from operational improvements, headcount reductions, and volume-related decreases, which were partly offset by inflationary and statutory salary increases in South America. Since the end of 2014, and including the recent workforce reduction announcement, the Company will have reduced its global workforce in 2015 by approximately 1,900 people or 13%.
  • EBIT declined to $63 million from $114 million in Q3 2014, primarily due to lower revenues, marked by a significant decline in new equipment sales, and higher severance, which was partly offset by cost savings from targeted SG&A reductions and operational improvements.
    • Q3 2015 EBIT included the following items:
      • Severance costs of $25 million;
      • Loss on a building sublease of $6 million due to centralizing the Canadian head-office operations into one building as part of cost reduction efforts;
      • Costs related to the acquisition of the Saskatchewan dealership of $3 million.

Excluding these items, Q3 2015 EBIT would have been $97 million.

  • In comparison, Q3 2014 EBIT included:
    • Severance costs of $7 million;
    • Labour disruption costs of $2 million;
    • Write-off of the previously capitalized Enterprise Resource Planning (ERP) costs in South America of $12 million.

Excluding these items, Q3 2014 EBIT would have been $135 million.

  • Q3 2015 EBIT margin was 4.2%, down from 6.8% in Q3 2014. Excluding the items mentioned above, Q3 2015 adjusted EBIT margin would have been 6.5%. In comparison, Q3 2014 adjusted EBIT margin would have been 8.1%.
  • Basic EPS of $0.19 was negatively impacted by the following items:
    • Severance costs of $0.11 per share;
    • Loss on a building sublease of $0.03 per share;
    • Saskatchewan dealership acquisition costs of $0.01 per share.

Excluding these items, Q3 2015 EPS would have been $0.34. In comparison, Q3 2014 EPS was negatively impacted by a one-time non-cash write-off of ERP costs in South America ($0.06 per share), a one-time non-cash charge from the revaluation of deferred income tax balances in Chile ($0.04 per share), a higher estimated annual effective tax rate in Argentina ($0.03 per share), and severance and labour disruption costs ($0.04 per share). Excluding these items, Q3 2014 EPS would have been $0.50.

  • Quarterly free cash flow was $140 million compared to $109 million in Q3 2014, driven primarily by a reduction of equipment inventory and lower accounts receivable in Canada, consistent with weaker market conditions, as well as a positive contribution from the Saskatchewan dealership.
  • The Company's balance sheet remains strong with a net debt to invested capital ratio(2) of 38.7% at the end of Q3 2015, higher than the 35.4% at June 30, 2015, principally due to the acquisition of the Saskatchewan dealership.
  • During Q3, the Company repurchased 2.2 million of its shares for cancellation, bringing the total share repurchases to 3.1 million shares year-to-date for approximately $70 million.
Q3 2015 Q2 2015 Q3 2014
Invested capital(2) ($ millions) 3,802 3,536 3,340
Invested capital turnover(2) (times) 1.85 1.97 2.09
Return on invested capital(2) (%)
Consolidated 11.0 12.9 15.4
Canada 10.9 13.9 16.8
South America 13.2 13.6 15.8
UK & Ireland 10.5 13.2 15.6
  • Excluding the impact of foreign currency translation ($115 million) and the acquisition of the Saskatchewan dealership ($240 million purchase price), consolidated invested capital decreased by approximately $70 million from Q2 2015. The Company remains focused on reducing inventory levels, particularly in its Canadian operations, and tightly controlling capital and rental expenditures across all regions.
  • Invested capital turnover declined to 1.85 times from 1.97 times in Q2 2015 as a result of lower revenues due to difficult market conditions and slightly higher average invested capital over the last four quarters. ROIC(1) decreased to 11.0% from 12.9% in Q2 2015, as lower volumes negatively impacted invested capital turnover and, combined with higher severance costs, reduced the EBIT margin.
  • Reflecting weakened market conditions, order backlog(2) was $0.6 billion at the end of Q3 2015, down from $0.7 billion at the end of Q2 2015.

Q3 2015 HIGHLIGHTS BY OPERATION

Canada

  • Revenues were down 16%, driven by a 35% decline in new equipment sales due to significantly lower demand from all sectors, particularly for core construction equipment in Alberta. Product support revenues were 3% below Q3 2014, mainly as a result of lower service revenues, as customers continued to postpone maintenance and in-source some service work to reduce operating costs. Rental revenues declined by 15% reflecting the slowdown in the short-term rental market.
  • Compared to Q2 2015, revenues declined by 14%, as a 37% drop in new equipment sales was partly offset by a 5% increase in product support revenues, including a positive contribution from the Saskatchewan dealership.
  • Gross profit margins declined in all lines of business, with the exception of service margins, which increased over last year as a result of the successful implementation of operational improvement initiatives. Difficult market conditions, customers' continued focus on cost reductions, and a weaker Canadian dollar have led to increased competitive pressures. These pressures were offset by the shift in revenue mix to higher-margin product support, which contributed 56% to Canada's revenue compared to 49% in Q3 2014.
  • The Canadian operations announced additional cost reduction measures in response to weaker market conditions, including further rationalization of its workforce and facilities network. Q3 2015 SG&A included severance costs of approximately $12 million compared to $3 million in Q3 2014. Excluding severance, SG&A costs decreased almost 10% from Q3 2014, primarily due to workforce reductions, cost saving initiatives, improved operating efficiencies, and lower variable costs due to reduced sales activity. Since the end of 2014 and including the recent workforce reduction announcement of approximately 450 people, the Canadian operations will have reduced their workforce in 2015 by approximately 1,100 people or 20% to align its cost structure to reduced activity levels.
  • To improve efficiencies, reduce costs, and optimize service delivery to customers, the Company announced that it will exit 11 facilities in Western Canada. The changes to the facility footprint follow a comprehensive review and are designed to support the Company in delivering on its commitment to earn customer loyalty by providing superior sales and service support. Combined with the previously announced closure of 16 facilities, the Company's footprint in Western Canada will be reduced by 600,000 square feet or more than 20% by mid to late 2016. Q3 2015 results include a $6 million loss related to centralizing the Canadian head-office operations into one building as part of cost reduction efforts. In Q4 2015, the Company expects to recognize up to $15 million in restructuring costs associated with the facilities optimization announcement.
  • EBIT decreased to $34 million from $80 million in Q3 2014 reflecting significantly lower revenues and gross profit due to the market downturn, as well as higher severance costs and a loss on a building sublease. Excluding these items, Q3 2015 EBIT would have been $52 million.
  • EBIT margin declined to 4.6% from 9.2% in Q3 2014. Excluding severance costs, and the loss on a building sublease, Q3 2015 EBIT margin was 7.0%. This was a sequential improvement from the adjusted EBIT margin of 6.5% in Q2 2015 (excluding $2 million of severance costs), and the adjusted EBIT margin of 5.8% in Q1 2015 (excluding $17 million of severance and facility closure costs), despite lower revenues which were down 14% from Q2 2015, and down 7% from Q1 2015.
  • Invested capital in Canada increased by about $130 million from Q2 2015 due to the addition of the Saskatchewan dealership ($240 million purchase price). Excluding the acquisition, the decrease in invested capital levels from Q2 2015 was driven by lower accounts receivable and a reduction in equipment inventories. The Canadian operations continue to focus on reducing inventory to align with lower activity levels. Invested capital turnover declined to 1.92 from 2.05 in Q2 2015 due to lower revenues and higher average invested capital.

South America

  • Revenues declined by 2% (down 18% in functional currency - U.S. dollars), reflecting weaker market conditions across all sectors. New equipment sales decreased by 34% (down 45% in functional currency), driven by a slowdown in construction activity, lower power systems revenues and a continued weakness in the Chilean mining sector. While product support revenues were 11% higher in Canadian dollars, product support was down 7% in functional currency mostly due to lower parts sales in mining. Mining customers have decreased production levels, parked some equipment, and continued to postpone major repairs and component replacements to reduce operating costs.
  • Compared to Q2 2015, new equipment sales declined by 26% and product support was down 6% in functional currency, reflecting further weakening of market activity across all sectors. As a result, the Company recently announced a workforce reduction of approximately 550 people to right-size its South American operation to lower activity levels. Since the market peak of mid-2013, and including this announcement, the South American operations will have reduced their workforce by approximately 1,200 people or 16% and closed 4 facilities.
  • EBIT of $32 million included severance costs of approximately $10 million. In comparison, Q3 2014 EBIT of $31 million was negatively impacted by the $12 million ERP write-off and $5 million of severance and labour disruption costs. Excluding these items, EBIT declined by 13% from Q3 2014 due to revenues having declined faster than the SG&A cost savings could be realized, as the workforce reductions were announced late in Q3 2015. SG&A in functional currency decreased by 9% from Q3 2014, excluding severance and labour disruption costs.
  • Q3 2015 EBIT margin was 6.4% compared to 6.2% in Q3 2014. Excluding Q3 2015 severance costs and Q3 2014 items mentioned above, EBIT margin decreased to 8.4% from 9.4% in Q3 2014. South American operations are expected to return to historical profitability levels once the cost savings from the recent workforce reduction are fully realized.

United Kingdom & Ireland

  • Revenues decreased by 8% from Q3 2014 (down 18% in functional currency - U.K. Pound Sterling) reflecting softening economic conditions and increased uncertainty in the market. This resulted in lower demand for construction equipment for use in mining, infrastructure, and plant hire, as well as delays in power systems projects, which reduced new equipment sales by 19% (down 28% in functional currency). Product support revenues were up 5%, but declined by 6% in functional currency due to lower parts sales in mining and power systems.
  • EBIT declined to $7 million from $14 million mainly as a result of lower revenues and approximately $3 million higher severance costs. Q3 2015 EBIT margin of 2.7% was below 4.8% in Q3 2014. Excluding severance costs, adjusted EBIT margin was 4.1% and comparable to the EBIT margin of 4.2% in Q2 2015 despite a 9% sequential decline in revenues in functional currency. Since the end of 2014 and including the recent workforce reduction of approximately 100 people, the UK & Ireland operations will have reduced their workforce by almost 200 people or 9% in 2015 and closed 2 facilities.

CORPORATE AND BUSINESS DEVELOPMENTS

Dividend

The Board of Directors has approved a quarterly dividend of $0.1825 per share, payable on December 10, 2015 to shareholders of record on November 26, 2015. This dividend will be considered an eligible dividend for Canadian income tax purposes.

SELECTED CONSOLIDATED FINANCIAL INFORMATION
(C$millions, except per share amounts)
Three months ended Sep 30 Nine months ended Sep 30
Revenue 2015 2014 %
change
2015 2014 %
change
New equipment 468 672 (30 ) 1,658 2,145 (23 )
Used equipment 76 63 21 250 186 34
Equipment rental 85 93 (9 ) 223 267 (16 )
Product support 864 837 3 2,529 2,498 1
Other 5 5 12 19
Total revenue 1,498 1,670 (10 ) 4,672 5,115 (9 )
Gross profit 460 511 (10 ) 1,401 1,533 (9 )
Gross profit margin 30.7 % 30.6 % 30.0 % 30.0 %
SG&A (389 ) (386 ) (0 ) (1,152 ) (1,163 ) 1
SG&A as a percentage of revenue (25.9 )% (23.1 )% (24.7 )% (22.7 )%
Equity earnings of joint venture and associate 1 2 4 6
Other income (expenses) (9 ) (13 ) (9 ) (14 )
EBIT 63 114 (45 ) 244 362 (33 )
EBIT margin 4.2 % 6.8 % 5.2 % 7.1 %
Net income 33 57 (42 ) 148 211 (30 )
Basic EPS 0.19 0.33 (42 ) 0.86 1.23 (30 )
EBITDA 125 170 (27 ) 408 526 (22 )
Free cash flow 140 109 28 (22 ) 98 (122 )
Sep 30, 15 Dec 31, 14
Invested capital 3,802 3,106
Invested capital turnover (times) 1.85 2.10
Net debt to invested capital 38.7 % 31.4 %
Return on invested capital 11.0 % 15.3 %

To download Finning's complete Q3 2015 results in PDF, please open the following link: http://media3.marketwire.com/docs/FinningQ315results.pdf.

Q3 2015 RESULTS INVESTOR CALL

The Company will hold an investor call on November 12 at 9:00 am Eastern Time. Dial-in numbers: 1-800-766-6630 (within Canada and the US) or 416-340-8527 (Toronto area 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 until November 19, 2015. The pass code to access the playback recording is 9483268 followed by the number sign.

ABOUT FINNING

Finning International Inc. (TSX:FTT) is the world's largest Caterpillar equipment dealer delivering unrivalled service to customers for over 80 years. Finning sells, rents, and provides parts and services for equipment and engines to help customers maximize productivity. Headquartered in Vancouver, B.C., the Company operates in Western Canada, Chile, Argentina, Bolivia, Uruguay, as well as in the United Kingdom and Ireland.

FOOTNOTES

(1) Earnings Before Finance Costs and Income Taxes (EBIT); Earnings per Share (EPS); Earnings Before Finance Costs, Income Taxes, Depreciation and Amortization (EBITDA); Selling, General & Administrative Expenses (SG&A); Return on Invested Capital (ROIC).
(2) These financial metrics do not have a standardized meaning under International Financial Reporting Standards, and may not be comparable to similar measures used by other issuers. The Company's Management's Discussion and Analysis (MD&A) includes additional information regarding these financial metrics, including definitions, under the heading "Description of Non-GAAP and Additional GAAP Measures".

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; workforce reductions; facility closures; expected revenue; expected free cash flow; EBIT margin; expected range of the effective tax rate; ROIC; market share growth; expected results from service excellence action plans; anticipated asset utilization; inventory turns and parts service levels; the expected target range of the Company's net debt to invested capital ratio; and the expected financial impact from the acquisition of the operating assets of the Caterpillar dealer in Saskatchewan. All such forward-looking statements are made pursuant to the 'safe harbour' provisions of applicable Canadian securities laws.

Unless otherwise indicated by us, forward-looking statements in this report reflect Finning's expectations at November 11, 2015. Except as may be required by Canadian securities laws, Finning does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

Forward-looking statements, by their very nature, are subject to numerous risks and uncertainties and are based on several assumptions which give rise to the possibility that actual results could differ materially from the expectations expressed in or implied by such forward-looking statements and that Finning's business outlook, objectives, plans, strategic priorities and other statements that are not historical facts may not be achieved. As a result, Finning cannot guarantee that any forward-looking statement will materialize. Factors that could cause actual results or events to differ materially from those expressed in or implied by these forward-looking statements include: general economic and market conditions; foreign exchange rates; commodity prices; the level of customer confidence and spending, and the demand for, and prices of, Finning's products and services; Finning's dependence on the continued market acceptance of Caterpillar's products and Caterpillar's timely supply of parts and equipment; Finning's ability to continue to improve productivity and operational efficiencies while continuing to maintain customer service; Finning's ability to manage cost pressures as growth in revenue occurs; Finning's ability to reduce costs in response to slowing activity levels; Finning's ability to attract sufficient skilled labour resources to meet growing product support demand; Finning's ability to negotiate and renew collective bargaining agreements with satisfactory terms for Finning's employees and the Company; the intensity of competitive activity; Finning's ability to raise the capital needed to implement its business plan; regulatory initiatives or proceedings, litigation and changes in laws or regulations; stock market volatility; changes in political and economic environments for operations; the integrity, reliability, availability and benefits from information technology and the data processed by that technology. Forward-looking statements are provided in this report for the purpose of giving information about management's current expectations and plans and allowing investors and others to get a better understanding of Finning's operating environment. However, readers are cautioned that it may not be appropriate to use such forward-looking statements for any other purpose.

Forward-looking statements made in this report are based on a number of assumptions that Finning believed were reasonable on the day the Company made the forward-looking statements. Refer in particular to the Outlook section of this MD&A. Some of the assumptions, risks, and other factors which could cause results to differ materially from those expressed in the forward-looking statements contained in this report are discussed in Section 4 of the Company's current AIF.

Finning cautions readers that the risks described in the AIF are not the only ones that could impact the Company. Additional risks and uncertainties not currently known to the Company or that are currently deemed to be immaterial may also have a material adverse effect on Finning's business, financial condition, or results of operations.

Except as otherwise indicated, forward-looking statements do not reflect the potential impact of any non-recurring or other unusual items or of any dispositions, mergers, acquisitions, other business combinations or other transactions that may be announced or that may occur after the date hereof. The financial impact of these transactions and non-recurring and other unusual items can be complex and depends on the facts particular to each of them. Finning therefore cannot describe the expected impact in a meaningful way or in the same way Finning presents known risks affecting its business.

Finning International Inc.
Mauk Breukels
Vice President, Investor Relations and Corporate Affairs
(604) 331-4934
mauk.breukels@finning.com
www.finning.com

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