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Finning Reports Q2 2016 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Aug. 3, 2016) - Finning International Inc. (TSX:FTT) reported second quarter 2016 results today. All monetary amounts are in Canadian dollars unless otherwise stated.

HIGHLIGHTS

  • Canada reported improved profitability. EBIT(1) margin of 4.4% included the unavoidable costs incurred during the shutdown caused by the Alberta wildfires; Adjusted EBIT margin(2)(3) of 6.3% was in line with Q2 2015 and above the previous two quarters.

  • South America delivered strong EBIT margin of 8.8% in a difficult market environment; Adjusted EBIT margin was 9.1%.

  • UK & Ireland is executing its plan to transform its business model, improve operational performance, and lower its cost structure. While Q2 2016 results were negatively impacted by significant severance and restructuring costs related to workforce reductions and steps to optimize the facility footprint, the UK & Ireland operations are expected to return to historic profitability levels by the end of 2016.

  • SG&A(1) costs decreased by 13% from Q2 2015, excluding significant items and the Saskatchewan operation acquired effective July 1, 2015. As a result of decisive actions taken in all regions since 2014, SG&A costs in 2016 are expected to be 20% below 2014 levels, excluding the impact of foreign exchange.

  • Free cash flow(3) was strong at $64 million, bringing year-to-date free cash flow to $94 million, which is a substantial improvement from ($162) million use of cash in the first two quarters of 2015. Management continues to expect free cash flow to be modestly over $300 million in 2016.

  • Reported EPS was $0.03 per share. Adjusted EPS of $0.20 per share excluded severance and restructuring costs of $0.07 per share, primarily in the UK; charges resulting from the strategic repositioning of the UK's power systems business totaling $0.05 per share; and the unavoidable costs related to the Alberta wildfires of $0.05 per share.

"The second quarter results demonstrated the benefit of actions taken to improve our operating performance and reduce costs in our Canadian and South American operations. I am pleased with the improvement in Canada's profitability, particularly considering the impact of the recent wildfires in Northern Alberta. In South America, we continued to execute well in a tough market in Chile, and are encouraged by the opportunities emerging in Argentina," said Scott Thomson, CEO and president of Finning International. "Our results in the UK and Ireland were impacted by severance and restructuring charges, related to workforce reductions and branch closures, as well as the anticipated sale of a non-core business following the conclusion of a strategic review of our power systems division. I am confident that our UK and Ireland business is moving in the right direction and we will restore EBIT margin to historical levels by the end of the year."

"We have now taken action to restructure all three of our regions to align with market conditions, which will reduce our SG&A costs by about 20 percent between 2014 and 2016 excluding the impact of foreign exchange," continued Mr. Thomson. "While we expect the environment to remain challenging, we are now well positioned to improve profitability and generate strong free cash flow this year."

Q2 2016 FINANCIAL SUMMARY

$ millions, except per share amounts Q2 2016 Q2 2015
(restated)(4)
% change
Revenue 1,310 1,680 (22 )
EBITDA 77 157 (50 )
EBITDA margin(3) 6.0 % 9.4 %
EBIT 29 106 (72 )
EBIT margin 2.3 % 6.3 %
Net income 5 62 (92 )
Basic EPS 0.03 0.36 (92 )
Free cash flow 64 70 (8 )

Included in Q2 2016 and Q2 2015 results are the following significant items that management does not consider indicative of operational and financial trends either by nature or amount. These significant items are summarized below and described in more detail on page 3 of the Company's Q2 2016 Management's Discussion and Analysis ("MD&A").

Q2 2016 Significant Items by Operation
$ millions, except per share amounts
Canada South America UK &
Ireland
Finning
Total*
EPS
EBIT / EPS 28 38 (26 ) 29 0.03
Severance and restructuring costs 1 1 11 13 0.07
Impact from Alberta wildfires - unavoidable costs 11 - - 11 0.05
Estimated loss on disputes - UK power systems - - 5 5 0.02
Write-down of net assets - UK expected sale of non-core business - -
5

5

0.03
Adjusted EBIT / Adjusted EPS 40 39 (5 ) 63 0.20
Adjusted EBITDA 65 54 3 111
EBIT margin 4.4 % 8.8 % (10.5 )% 2.3 %
Adjusted EBIT margin 6.3 % 9.1 % (1.9 )% 4.9 %
Adjusted EBITDA margin 10.3 % 12.5 % 1.2 % 8.5 %
Q2 2015 Significant Items by Operation
$ millions, except per share amounts
Canada South America UK &
Ireland
Finning
Total*
EPS
EBIT / EPS 52 52 12 106 0.36
Severance costs 3 3 - 6 0.03
Statutory tax rate change in Alberta - - - - 0.01
Adjusted EBIT / Adjusted EPS 55 55 12 112 0.40
Adjusted EBITDA 81 74 18 163
EBIT margin 6.1 % 9.4 % 4.2 % 6.3 %
Adjusted EBIT margin 6.3 % 10.0 % 4.3 % 6.6 %
Adjusted EBITDA margin 9.3 % 13.6 % 6.7 % 9.7 %
* Consolidated results include corporate and other operations, mostly corporate head office
  • Revenues were down 22%, with lower revenues from all operations. New equipment sales decreased by 41%, driven mostly by lower sales in Canada (Q2 2015 included significant mining deliveries) and South America due to challenging market conditions and reduced industry activity. Order backlog(3) of about $500 million at the end of Q2 2016 remained unchanged from Q1 2016 and Q4 2015, reflecting continued weakness in most markets. Product support declined by 10%, primarily as a result of reduced demand from the mining industry in South America, and lower parts and service volumes in the Canadian oil sands due to the Alberta wildfires.

  • Gross profit declined by 21%, in line with revenues. Lower margins on new equipment, parts, and rental, mostly from competitive pricing pressures, were offset by a shift in the revenue mix to product support. As a result, gross profit margin was maintained at around 26%.

  • The decrease in Adjusted EBIT from Q2 2015 was driven by significantly lower revenues in Canada and South America due to reduced industry activity, particularly in new equipment sales; increased competitive pricing pressures in all operations; and an Adjusted EBIT loss in the UK & Ireland where the Company's recent actions to lower the cost to serve customers are yet to be fully realized.

  • While Adjusted EBITDA in Canada and South America declined by 19% and 27%, respectively, substantially lower EBITDA performance in the UK & Ireland weighed on consolidated results. Adjusted EBITDA was down 32% from Q2 2015, significantly less than Adjusted EBIT (down 43%) and Adjusted EPS (down 50%) due to the fixed nature of depreciation and finance costs.

  • Free cash flow was $64 million compared to $70 million in Q2 2015, as lower earnings were offset by lower supplier payments and rental investment reflecting reduced activity levels. All operations generated positive free cash flow in Q2 2016. Year-to-date free cash flow of $94 million was a significant improvement from ($162) million use of cash in the first two quarters of 2015, driven mostly by higher free cash flow in Canada. The Company's balance sheet remains strong. Net debt to Adjusted EBITDA ratio(2)(3) was 2.2, and net debt to invested capital ratio(3) was 37.9% at the end of Q2 2016.

Q2 2016 INVESTED CAPITAL

Q2 2016 Q1 2016 Q4 2015
Invested capital(3)($ millions)
Consolidated 3,041 3,085 3,240
Canada 1,695 1,685 1,760
South America (U.S. dollars) 824 796 811
UK & Ireland (U.K. pound sterling) 153 182 157
Invested capital turnover(3)(4)(times) 1.78 1.82 1.78
Adjusted ROIC(1)(2)(3)(%)
Consolidated 9.4 10.4 10.9
Canada 9.3 10.1 10.6
South America 14.2 14.5 14.0
UK & Ireland 3.3 7.4 9.0
  • Excluding the impact of foreign currency translation, invested capital decreased by about $85 million from Q4 2015. This was primarily driven by lower equipment inventories and rental assets in Canada, reflecting the Company's ongoing efforts to reduce surplus inventories and dispose of underutilized rental fleet. Canada's new equipment inventories were down by about $110 million from the end of 2015. All operations continue to focus on improving supply chain efficiencies.

  • Adjusted ROIC declined to 9.4% mostly due to lower earnings in all operations, reflecting of continued challenges in the marketplace.

Q2 2016 HIGHLIGHTS BY OPERATION

Canada

  • Revenues declined by 27% mostly as a result of lower new equipment sales across all sectors and the impact of the Alberta wildfires on product support volumes in the oil sands. New equipment sales were down 54% reflecting large mining deliveries in Q2 2015 and lower industry activity in Q2 2016, primarily in the oil & gas markets. Product support revenues were down 7% primarily due to the interruption in oil sands activity during the Alberta wildfires, partly offset by stronger demand for parts in the oil sands in April and June as well as a contribution from the Saskatchewan dealership. Compared to Q1 2016, the Company saw improved product support activity in the construction sector and believes that product support revenues would have been higher if the oil sands operations had not been interrupted by the fires. Rental revenues declined by 27% impacted by lower rental utilization and competitive pricing in a weak market.

  • Gross profit margin was higher driven by a revenue shift to product support and improved service margins, partly offset by lower new equipment and rental margins from increased competitive pricing pressures.

  • Excluding the Saskatchewan operation and significant items, year-to-date SG&A costs were down by 13% from the same period of last year. The Canadian operations remain on track to achieve over $150 million in annual fixed cost savings by the end of 2016 and reduce annual fixed SG&A costs by over 20% from 2014 levels.

  • The unavoidable operating costs during the evacuation of about 800 employees and a 6-week interruption of business in the Fort McMurray area are estimated at $11 million. Management anticipates the negative impacts on profits from the business interruption may be partially offset by expected rebuild activity in the Fort McMurray area during the next 18 to 24 months, as well as possible insurance recoveries.

  • Adjusted EBITDA margin of 10.3% was higher than 9.3% in Q2 2015 and improved from the last two quarters. Adjusted EBIT margin was 6.3%, similar to Q2 2015 despite a 27% decline in revenues, and above Q1 2016 Adjusted EBIT margin of 4.0%.

South America

  • Revenues declined by 20% (down 24% in functional currency - U.S. dollars), indicative of continued weak market conditions across all sectors as copper prices remained suppressed. New equipment sales decreased by 44% (down 47% in functional currency), driven by a slowdown in construction, energy, and mining activity. Product support revenues were down 12% (down 16% in functional currency), as some mining equipment remained parked and copper producers continued to delay maintenance and component replacements to achieve cost reductions. However, compared to Q1 2016, product support was up 4% in functional currency.

  • Adjusted EBIT margin was 9.1%, compared to 10.0% in Q2 2015. South American operations delivered solid profitability with a continued focus on managing costs, improving operating efficiencies, and capturing product support business by providing innovative solutions to customers in a very difficult market environment.

United Kingdom & Ireland

  • Revenues decreased 9% (down 8% in functional currency - U.K. Pound Sterling) due to reduced activity in the Company's key markets, mostly coal, steel, and oil & gas sectors. New equipment sales and product support revenues were down 10% and 13%, respectively, in functional currency.

  • Adjusted EBIT results were negatively impacted by lower revenues and margins due to increased competitive pricing pressures, as well as asset provisions and adjustments reflective of an uncertain market environment. In addition, the benefit of SG&A cost savings from workforce reductions, facility closures, and other restructuring initiatives have not yet been realized. As a result, adjusted EBIT margin was a negative (1.9)%, compared to 4.3% in Q2 2015.

  • UK & Ireland continued to execute its plan to sustainably lower the cost to serve customers by transforming its business model, optimizing its facility footprint, increasing supply chain velocity, and improving the performance of the power systems business.

    • In Q2 2016, the Company reduced its UK workforce and facilities footprint, resulting in severance and restructuring costs of $11 million.
    • Following a strategic review of the UK's operations, management recorded a $5 million write-down of net assets and other costs related to the anticipated sale of a non-core business in the power systems division.
    • In addition, management recorded a $5 million estimated loss on two disputed power systems projects.

The Company expects the UK & Ireland operations to return to historic profitability levels by the end of 2016.

CORPORATE AND BUSINESS DEVELOPMENTS

Dividend

The Board of Directors has approved a quarterly dividend of $0.1825 per share, payable on September 1, 2016 to shareholders of record on August 18, 2016. This dividend will be considered an eligible dividend for Canadian income tax purposes.

SELECTED CONSOLIDATED FINANCIAL INFORMATION

$ millions, except per share amounts Three months ended June 30 Six months ended June 30
2016 2015
(restated)(4)
% change 2016 2015
(restated)(4)
% change
New equipment 377 639 (41 ) 892 1,191 (25 )
Used equipment 101 106 (4 ) 199 173 15
Equipment rental 53 68 (22 ) 109 139 (22 )
Product support 775 863 (10 ) 1,596 1,710 (7 )
Other 4 4 - 8 8 -
Total revenue 1,310 1,680 (22 ) 2,804 3,221 (13 )
Gross profit 343 435 (21 ) 724 849 (15 )
Gross profit margin 26.2 % 25.9 % 25.8 % 26.3 %
SG&A (315 ) (331 ) 5 (652 ) (671 ) 3
SG&A as a percentage of revenue (24.1 )% (19.7 )% (23.3 )% (20.8 )%
Equity earnings of joint venture and associate 6 2 7 3
Other expenses (5 ) - (5 ) -
EBIT 29 106 (72 ) 74 181 (59 )
EBIT margin 2.3 % 6.3 % 2.7 % 5.6 %
Adjusted EBIT 63 112 (43 ) 130 206 (36 )
Adjusted EBIT margin 4.9 % 6.6 % 4.7 % 6.4 %
Net income 5 62 (92 ) 20 115 (83 )
Basic EPS 0.03 0.36 (92 ) 0.12 0.66 (82 )
Adjusted basic EPS 0.20 0.40 (50 ) 0.39 0.72 (47 )
EBITDA 77 157 (50 ) 173 283 (39 )
EBITDA margin 6.0 % 9.4 % 6.2 % 8.8 %
Adjusted EBITDA(2)(3) 111 163 (32 ) 229 308 (26 )
Adjusted EBITDA margin(2)(3) 8.5 % 9.7 % 8.2 % 9.6 %
Free cash flow 64 70 (8 ) 94 (162 ) 158
June 30, 2016 Dec 31, 2015
Invested capital 3,041 3,240
Invested capital turnover (times) 1.78 1.78
Net debt to invested capital 37.9 % 36.7 %
ROIC(3) (6.4 )% (3.0 )%
Adjusted ROIC 9.4 % 10.9 %

To download Finning's complete Q2 2016 results in PDF, please open the following link: http://media3.marketwire.com/docs/FinningQ22016results.pdf

Q2 2016 RESULTS INVESTOR CALL

The Company will hold an investor call on August 3 at 8:00 am Eastern Time. Dial-in numbers: 1-800-319-4610 (within Canada and the US) or 1-416-915-3239 (Toronto area and overseas). The call will be webcast live and subsequently archived at www.finning.com. Playback recording will be available at 1-855-669-9658 until August 10, 2016. The pass code to access the playback recording is 00624.

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, 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) Certain second quarter 2016 and 2015 financial metrics were impacted by significant items management does not consider indicative of operational and financial trends either by nature or amount; these significant items are summarized on page 2 of this news release and described on page 3 of the Company's Q2 2016 MD&A, and the financial metrics that have been adjusted to take these items into account are referred to as "adjusted" metrics.
(3) Management believes that providing certain non-GAAP financial measures provides users of the Company's consolidated financial statements with important information regarding the operational performance and related trends of the Company's business. By considering these measures in combination with the comparable IFRS measures set out in this MD&A, management believes that users are provided a better overall understanding of the Company's business and its financial performance during the relevant period than if they simply considered the IFRS measures alone. These financial metrics, referred to as "non-GAAP financial measures" do not have a standardized meaning under International Financial Reporting Standards (IFRS), which are also referred to herein as Generally Accepted Accounting Principles (GAAP), and therefore may not be comparable to similar measures presented by other issuers. For additional information regarding these financial metrics, including definitions and reconciliations from each of these non-GAAP financial measures to their most directly comparable measure under GAAP, see the heading "Description of Non-GAAP Financial Measures and Reconciliations" in the Company's Q2 2016 MD&A.
(4) Management has voluntarily changed its presentation of certain expenses to provide reliable and more relevant information to users of the financial statements and better align with industry comparable companies. In addition, management concluded that certain cost recoveries are better reflected as revenues. Certain line items have been restated in the comparative 2015 periods but the impact of restatement is not significant. For more information on the impact to financial statements, please refer to note 1 of the Company's interim condensed consolidated financial statements.

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; distribution network and goodwill impairment; facility closures; expected revenue; expected free cash flow; EBIT margin; expected profitability levels; expected range of the effective tax rate; ROIC; market share growth; expected results from service excellence action plans; expected results from cost reductions and transformation initiatives; anticipated asset utilization; inventory turns and parts service levels; the expected target range of the Company's net debt to invested capital ratio; estimated loss on disputes regarding two power system projects in the UK, anticipated sale of non-core business in the U.K.; and the expected financial impact from the Alberta wildfires. All such forward-looking statements are made pursuant to the 'safe harbour' provisions of applicable Canadian securities laws.

Unless otherwise indicated by us, forward-looking statements in this report reflect Finning's expectations at August 2, 2016. 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 products and 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 as market conditions, business strategy or technologies change; 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 for forward-looking statements. 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 and in the annual MD&A for the financial risks.

Finning cautions readers that the risks described in the MD&A and 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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