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Finning Reports Q1 2015 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - May 6, 2015) - Finning International Inc. (TSX:FTT) reported first quarter 2015 results today (all monetary amounts are in Canadian dollars unless otherwise stated). Concurrent with this earnings release, the Company announced the agreement to purchase the operating assets of the Caterpillar dealership in Saskatchewan, Canada.

Q1 2015 HIGHLIGHTS

  • Basic EPS(2) was $0.31, which included severance and facility closure costs of $0.08 per share, and a tax benefit from previously unrecognized tax losses of $0.06 per share.
  • In South America, the Company achieved a solid EBIT margin of 9.3%, up from 9.0% in Q1 2014, despite a 21% decrease in revenue in functional currency.
  • In Canada, the Company has swiftly implemented cost reduction measures. As expected, Q1 2015 EBIT margin of 3.7% included significant severance and facility closure costs. Excluding these costs, Canada's EBIT margin of 5.8% was slightly below 6.0% in Q1 2014, while revenues declined by 12%.
  • The Company intends to launch a share repurchase program, subject to regulatory approvals, reflecting the expectation of strong annual free cash flow(1).
  • The Company raised its annualized dividend by 2 cents to 73 cents per share, reflecting the expectation of strong annual free cash flow and sustainable earnings growth over the long-term.

ACQUISITION HIGHLIGHTS

  • Finning will purchase the operating assets of the Caterpillar dealership of Kramer Ltd. and become the Caterpillar dealer in Saskatchewan.
  • The transaction is valued at approximately $230 million, subject to working capital adjustments, and will be funded with cash.
  • The transaction is expected to close in July 2015, subject to customary closing conditions.
  • In 2014, the acquired dealership business generated approximately $275 million in revenue. The acquisition is immediately accretive to 2015 earnings.
  • This acquisition represents a compelling strategic investment for Finning and provides a platform for long-term growth opportunities.

"Our ability to navigate uncertain market conditions during the first quarter of 2015, coupled with the acquisition of the Saskatchewan dealership, demonstrates our agility as we accelerate the execution of our operational excellence agenda and capitalize on this exciting opportunity," said Scott Thomson, president and chief executive officer of Finning International. "During the first quarter, the South American team increased their profitability despite a significant reduction in new equipment revenue. Our Canadian operations have taken decisive actions to reduce their cost structure to lower activity levels, and will take further steps as necessary to align the organization to expected business conditions. I firmly believe that our continued focus on controlling costs and invested capital will enable us to deliver respectable results during a period of slow demand and strengthen the organization to realize its full potential when demand returns."

"We continue to expect strong free cash flow in 2015 as we convert inventory into cash. Our healthy balance sheet gives us significant flexibility to fund the acquisition of the operating assets of the Saskatchewan dealership with cash, increase our dividend, and launch a share repurchase program," continued Scott Thomson.

"This morning, we announced the addition of the Caterpillar dealership in Saskatchewan to our existing territory in Western Canada. This acquisition is a great strategic fit and represents a compelling growth opportunity for our company, employees, customers, and shareholders. We have a lot of respect for the Kramer family legacy and reputation. We will build on their strong heritage by growing the business, providing our customers with a great experience, and contributing to communities in Saskatchewan," concluded Mr. Thomson.

Q1 2015 FINANCIAL SUMMARY

$ millions, except per share amounts Three months ended Mar 31
2015 2014 % change
Revenue 1,519 1,676 (9 )
EBIT 75 111 (32 )
EBIT margin 5.0 % 6.6 %
Net income 53 68 (22 )
Basic EPS 0.31 0.39 (21 )
EBITDA(1)(2) 126 166 (24 )
Free cash flow (232 ) (134 ) (73 )
  • Revenues of $1.5 billion were down 9% from Q1 2014, with lower revenues in Canada and South America being partly offset by higher revenues from the UK & Ireland. New equipment sales decreased by 20% due to significantly lower mining volumes in South America and softer demand for new equipment in Canada, most notably in mining. Despite product support growth in South America and the UK & Ireland, consolidated product support revenues declined slightly, driven by reduced activity levels in Canada across all sectors, particularly in mining.
  • Gross profit declined by 8%, in line with lower revenues. Gross profit margin(1) was 30.3%, up from 29.8% in Q1 2014, primarily due to a shift in revenue mix to higher margin product support revenues in South America and improved service profitability in Canada. This increase was partially offset by lower gross profit margins in some lines of business compared to Q1 2014, reflecting customer focus on reducing operating costs in a challenging market environment and increased competitive pressures.
  • SG&A of $386 million was comparable to Q1 2014 and included global severance costs of approximately $17 million, associated with global workforce reduction of just under 600 people, as well as facility closure costs in Canada of about $2 million. Since the beginning of the year to date, headcount has been reduced by more than 750 people across the organization.
  • EBIT of $75 million declined from $111 million, and EBIT margin of 5.0% was below 6.6% in Q1 2014. Excluding $19 million of severance and facility closure costs, Q1 2015 EBIT margin would have been 6.2%.
  • Basic EPS declined to $0.31 per share from $0.39 per share in Q1 2014. Severance and facility closure costs discussed above reduced Q1 2015 EPS by approximately $0.08 per share. The effective tax rate was 5.1% compared to 24.8% in Q1 2014, due to a $10 million tax benefit from previously unrecognized tax losses, which resulted in a $0.06 per share positive impact on Q1 2015 EPS.
  • Quarterly free cash flow was a $232 million use of cash compared to a $134 million cash outflow in Q1 2014, reflecting weaker market conditions and higher equipment inventory in Canada. Net debt to invested capital was 36.0% at the end of Q1 2015 compared to 42.9% at Q1 2014.
Q1 2015 Q4 2014 Q1 2014
Invested capital ($ millions) 3,541 3,106 3,414
Invested capital turnover(1) (times) 2.03 2.10 2.06
Return on invested capital(1) (%)
Consolidated 14.1 15.3 15.4
Canada 15.3 17.1 15.7
South America 14.4 14.6 17.0
UK & Ireland 14.7 16.3 16.3
  • Invested capital increased by $435 million from Q4 2014 (up by approximately $300 million excluding the impact of foreign exchange), largely due to higher equipment inventory in Canada, reflecting lower than expected sales in Q1 2015 as a result of soft market conditions. Invested capital turnover declined to 2.03 times from 2.10 times in Q4 2014, mostly due to lower revenues and higher equipment inventory levels in Canada. ROIC decreased to 14.1% from 15.3% in Q4 2014, reflecting severance, facility closure costs, and lower earnings in Q1 2015.
  • Order backlog(1) was $0.9 billion at the end of Q1 2015, down from $1.0 billion at the end of Q4 2014, primarily due to lower order intake in Canada in response to softening market conditions. In South America, order intake and backlog remained very low. In the UK & Ireland, order intake has strengthened in Q1 2015, driving order backlog to record levels.

Q1 2015 HIGHLIGHTS BY OPERATION

Canada

  • Revenues declined by 12%, reflecting lower revenues in all lines of business, except used equipment. Product support revenues were down 14%, primarily as a result of lower parts sales across all sectors, particularly in mining, as well as lower service revenues. New equipment sales decreased by 10% due to lower mining volumes compared to Q1 2014, and reduced demand from construction, which was partly offset by higher power systems deliveries. Rental revenues were 26% below Q1 2014, reflecting softening in the short-term rental market and increased competition.
  • Gross profit declined, reflecting lower revenues and lower margins in most lines of business. Difficult market conditions, accompanied by a sharp and rapid depreciation of the Canadian dollar relative to the U.S. dollar, led to increased competition and challenging pricing dynamics. In addition, customer focus on reducing equipment maintenance and repair costs has put pressure on parts margins, most notably in mining. However, gross profit margins in service improved from Q1 2014 as a result of continued progress with the execution of the operational excellence agenda.
  • The Canadian operations took decisive steps in Q1 2015 to align its cost structure with lower activity levels. Since the beginning of the year to date, the Canadian workforce has been reduced by more than 600 employees or over 10%. The workforce reduction in Q1 totalled nearly 550 employees, resulting in severance costs of approximately $15 million. In addition, the Company incurred about $2 million of facility closure costs in Q1 2015. The Canadian operations closed 10 facilities during Q1 2015, and announced the closure of additional 5 facilities expected by the end of Q2 2015. SG&A costs decreased 7%, reflecting lower sales volumes, cost savings from the execution of the operational excellence agenda, and the benefit of greater hedging activity to manage U.S. dollar exposures. These were partially offset by severance and facility closure costs mentioned above. EBIT decreased to $29 million from $54 million in Q1 2014 as a result of lower revenues and gross profit, as well as severance and facility closure costs. EBIT margin of 3.7% was below 6.0% in Q1 2014. Excluding $17 million of severance and facility closure costs, EBIT margin would have been 5.8%. The Company will continue to reduce costs and streamline its branch network as necessary to align with expected activity levels.
  • Invested capital increased by about $320 million from Q4 2014, primarily driven by higher equipment inventory due to lower than expected sales in Q1 2015 and the arrival of equipment ordered before the unexpected drop in demand late in 2014. This increase, combined with lower revenues, resulted in a decline in invested capital turnover to 2.09 times from 2.19 times in Q4 2014. The Canadian operations are focused on reducing inventory levels to match lower demand. ROIC decreased to 15.3% from 17.1% in Q4 2014, reflecting lower earnings and severance and facility closure costs in Q1 2015, combined with slightly higher average invested capital over the last four quarters.

South America

  • Revenues declined by 11% (down 21% in functional currency - US dollars), driven by a 52% reduction in new equipment sales (down 58% in functional currency), mainly due to significantly lower demand from mining. New equipment sales to construction and power systems sectors were also below Q1 2014. Product support revenues were up 16% (3% in functional currency), driven by higher parts sales in mining, as mining customers continue to maintain production levels while focusing on controlling operating costs.
  • EBIT declined by 8% to $45 million (down 19% in functional currency), reflecting lower new equipment sales. EBIT margin of 9.3% was up from to 9.0% in Q1 2014, primarily due to the shift in revenue mix to higher margin product support, as well as cost reduction measures taken in 2014.
  • Invested capital was up by about $70 million compared to Q4 2014. In functional currency, invested capital was down by US$45 million, driven mostly by lower accounts receivable in line with reduced volumes. Invested capital turnover of 1.62 times and ROIC of 14.4% declined slightly from Q4 2014 due to reduced revenues and EBIT.

United Kingdom & Ireland

  • Revenues rose by 6% (up 3% in functional currency - U.K. Pound Sterling). In functional currency, new equipment sales were up slightly, and product support revenues were 5% higher, driven primarily by power systems.
  • EBIT of $7 million was $4 million below Q1 2014. EBIT margin was 3.1% compared to 4.9% a year ago, reflecting a lower gross profit margin due to a low-margin power systems contract, severance costs, and a very competitive market.
  • Invested capital rose by $46 million from Q4 2014 (up £18 million in functional currency), driven by higher new equipment inventory, which is supported by strong order intake in Q1 2015.

CORPORATE AND BUSINESS DEVELOPMENTS

Acquisition of Caterpillar Dealership in Saskatchewan

On May 6, 2015, Finning announced that it has been approved to become the Caterpillar dealer in Saskatchewan in July 2015, subject to customary closing conditions. The Company has reached an agreement to purchase the operating assets of the Caterpillar dealership of Kramer Ltd., for approximately $230 million, subject to working capital adjustments. In 2014, the acquired dealership business generated approximately $275 million in revenue. The acquisition is immediately accretive to Finning's 2015 earnings, and will be funded with cash. After 70 years of service in Saskatchewan, the Kramer family has decided to retire from the equipment dealership business.

This transaction represents a compelling strategic investment for Finning given the highly complementary market segments and customer bases of the Kramer and Finning organizations. The acquisition expands Finning's Western Canada operations into a contiguous territory, and provides a platform for long-term growth opportunities and diversification into new markets. Kramer's well-established customer relationships and understanding of the local market, combined with Finning's product support infrastructure and capabilities along the Alberta and Saskatchewan border, are expected to drive growth and enhance value for customers.

As part of a broader repositioning of the Caterpillar dealership network, Finning expects to transition out of Uruguay, which generates approximately US$30 million in annual revenue. The Company will provide further updates as they become available. During this transition period, Finning will continue as Caterpillar's dealer in Uruguay until a new one is selected that will ensure continuity of unmatched support for customers.

Dividend

The Board of Directors has approved a 2.8% increase in the quarterly dividend to $0.1825 per share from $0.1775 per share, payable on June 4, 2015 to shareholders of record on May 21, 2015. This dividend will be considered an eligible dividend for Canadian income tax purposes.

CFO appointment

On March 30, 2015, Finning appointed Steven M. Nielsen as the Company's executive vice president and chief financial officer. Mr. Nielsen brings to Finning extensive executive leadership experience in finance and operations roles across diverse industries. As chief financial officer for Univar, a global distributor of chemicals with over $10 billion in revenue, Mr. Nielsen played an instrumental role in leading the organization to higher growth and spearheading the company's efforts to improve working capital performance. Prior to Univar, Mr. Nielsen gained significant executive experience in various senior roles at Sprint Nextel Corporation, a U.S. telecommunications company with over $35 billion in revenue. Mr. Nielsen is a Chartered Global Management Accountant (CGMA) and member of the American Institute of Certified Public Accountants (AICPA) and holds a Bachelor of Arts degree.

SELECTED CONSOLIDATED FINANCIAL INFORMATION
(C$ millions, except per share amounts)
Three months ended Mar 31
Revenue 2015 2014 % change
New equipment 551 693 (20 )
Used equipment 67 59 14
Equipment rental 71 87 (19 )
Product support 826 830 (1 )
Other 4 7
Total revenue 1,519 1,676 (9 )
Gross profit 460 499 (8 )
Gross profit margin 30.3 % 29.8 %
SG&A (386 ) (388 ) 1
SG&A as a percentage of revenue (25.4 )% (23.2 )%
Equity earnings of joint venture and associate 1 1
Other expenses 0 (1 )
EBIT 75 111 (32 )
EBIT margin 5.0 % 6.6 %
Net income 53 68 (22 )
Basic EPS 0.31 0.39 (21 )
EBITDA 126 166 (24 )
Free cash flow (232 ) (134 ) (73 )
Mar 31, 15 Dec 31, 14
Invested capital 3,541 3,106
Invested capital turnover (times) 2.03 2.10
Net debt to invested capital 36.0 % 31.4 %
Return on invested capital 14.1 % 15.3 %

To download Finning's complete Q1 2015 results in PDF, please open the following link: http://media3.marketwire.com/docs/FinningQ115results.pdf

Q1 2015 RESULTS INVESTOR CALL

The Company will hold an investor call on Wednesday, May 6 at 11:00 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 May 13, 2015. The pass code to access the playback recording is 2002822 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) These financial metrics do not have a standardized meaning under International Financial Reporting Standards, which are also referred to herein as generally accepted accounting principles (GAAP), 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".

(2) 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).

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; expected free cash flow; EBIT margin; 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 timing and financial impact from the proposed acquisition of the operating assets of the Caterpillar dealership 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 May 6, 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 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 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