TO OUR SHAREHOLDERS

Doug Whitehead,
President and C.E.O.

Seeing It Through

Each annual report marks a milestone in a corporation’s life – a chance to pause and reflect on the year’s achievements and challenges – a benchmark from which to move forward.

I’m very pleased to report that Finning continues to be in a strong position as we head into a new year. In 2004 we again achieved record revenues and provided our shareholders with another year of solid returns. We have focused on our customers’ needs, and we’ve seen great promise in efficiency and productivity measures. It’s all part of the plan we have for managing the dramatic growth at Finning, in a way that will allow us to deliver consistent shareholder value in the years ahead. It’s a winning plan and we’re committed to seeing it through.

A World of Opportunity

We’re now in one of the strongest up-cycles in commodity markets in decades. As our customers in mining, forestry, and oil and gas ramp up their businesses in response to higher commodity prices, demand for new equipment increases and we are in an excellent position to meet that demand. Our business is growing with theirs. Commodity prices are expected to remain at attractive levels and our customers should continue to earn excellent returns. This will result in continued opportunity for Finning.

In 2004, our order backlog almost doubled over 2003 and reached a record level of $835 million at December 31st. The potential for growth in Western Canada and South America continues to drive new equipment sales.

Western Canada’s rich and diverse resource base and solid general construction market will ensure that Finning (Canada) remains a strong contributor for us in the coming years.

In South America, high copper and gold prices are driving mine expansions and new mine openings. We’re also expecting general construction to be strong as Chile and Argentina modernize their infrastructure.

In the U.K., we anticipate market conditions to show growth, driven by a healthy economy, a large population base and government investment in infrastructure. Both Finning (UK) and Hewden will benefit from new government spending on highways, railways and airports.

As well, Finning (UK) and Caterpillar are working on a major market initiative with a goal to double unit sales by 2007 and improve Finning profitability.

At Hewden we are undertaking various initiatives to change the business model that will result in significant new market opportunities, as well as reducing costs and making the operations more efficient and responsive to customers.

Opportunities for our Power Systems business are numerous. Power Systems delivers a diverse range of applications and products, from electric power generation and marine operations to gas compression and on-highway truck fleets. The success of this unit is notable and we see considerable opportunity for growth in all of our geographic markets.

All signs point to continuing growth for the major industries we serve. We expect to maintain our market share in all areas – not because we’re resting on past successes, but because we’re constantly working at positioning ourselves to capitalize on growth and performance improvements.

Diversification by Revenue Source

Our goal is to be involved with our customers through the entire equipment life cycle, including sales, parts and service and ultimately re-manufacturing or disposition of the used equipment.

While new equipment sales are important to our top line growth, the margins generated by rentals, parts and service are more attractive. As a result, we’ve been steadily increasing our focus on those higher-margin segments of our business - and we’ve been successful. Parts, service and rental activity contributed 54% of our total revenues and about 78% of our gross profit in 2004.

Our outstanding customer support and service capability adds value to our customers’ operations, ensuring maximum equipment availability while at the same time generating an attractive revenue stream for us.

These very profitable segments of our business provide predictable, recurring revenue and earnings that balance the cycles in other parts of our business. It’s like having an annuity attached to every piece of new and used equipment we sell. As long as we do a good job of servicing our customers, our annuities keep on building.

In 2004, our net investment in rental fleet increased by approximately $128 million – both to assist customers waiting for new equipment, and to increase our customer support infrastructure for guaranteed availability of equipment.

Cost Containment

Impressive “top line” growth aside, it’s the bottom line that matters at the end of the day. So, while we continue to grow our business, we also have a strong focus on cost-control. In 2004, we launched an extensive program designed to save $60 million a year in ongoing costs by 2006. How are we achieving this?

First, we are driving a series of major cost-cutting initiatives at Hewden. Every aspect of that business has been under the microscope and a major change to our business model is underway. With three consecutive quarters of improving results, we’re confident we’ve turned the corner.

Second, we plan to identify and divest non-strategic assets and reduce working capital. We’re targeting more than $200 million of reductions under this initiative.

And third, we have launched a broad range of company-wide cost savings initiatives. In partnership with Caterpillar, we have adopted the “6 Sigma” system of analyzing business processes to find ways of improving efficiencies and to quantify these improvements.

While strong customer demand for our products and services has driven our revenues up, it has also brought some challenges. To support the higher business volumes, we’ve had to increase spending on training and infrastructure. This is unquestionably good news, but it puts pressure on us to control these costs and keep operations as competitive as possible.

Our cost-control initiatives require rigorous analysis and in some cases tough decisions. But I’m confident the result will ensure that top-line growth continues to be translated into bottom-line growth.

A Solid Balance Sheet

In November 2004, we issued new equity as part of a refinancing initiative. The gross proceeds of the offering – $305 million – will strengthen our balance sheet in support of further growth.

Issuing equity isn’t something we do lightly: our last offering was 11 years ago. Since then, we’ve quadrupled our revenues, increased our profits five times over and more than quadrupled our market capitalization.

A strong balance sheet gives us access to capital markets at an attractive price which will allow us to take advantage of growth opportunities when these present themselves. It will also enable us to weather adverse business conditions when these occur again.

Enhanced Customer Focus

Caterpillar is one of the most valued and recognized brands in the world. As Caterpillar’s largest dealer, we operate on three continents with a team of over 12,000 employees. We sell, rent, service, source financing for, and even insure Caterpillar equipment and engines. We take care of just about everything that happens to the machines after they leave Caterpillar’s factory, and we typically stay involved right through the machine’s life.

But all of this isn’t simply about looking after equipment: it’s about looking after customers. Our commitment to service is what sets Finning apart from our competitors. It is a commitment to work with our customers to help them lower their total owning and operating costs over the equipment’s life. This is critical whether our customers operate in the Arctic or the Andes. In industries where every minute of down-time is a lost opportunity, reliability is imperative. At Finning, we’re known for being there when our customers need us.

Safety in Numbers

In addition to increasing value for our shareholders, maintaining a safe and fulfilling work environment for our employees remains a key objective. We set a goal to continually reduce our lost time injuries, and I’m proud to say we are achieving these objectives, even as the number of employees grows with our expanding operations. Safety is a key item on the agenda in every monthly operating meeting. During 2004, we achieved a record 2 million hours without a lost time injury at Finning (Canada). On an overall corporate basis, our lost time injury frequency rate has declined to 0.78 lost time injuries per 200,000 work hours – an outstanding performance.

Strong and Ready for the Future

Over the past five years, we have grown the company dramatically and have delivered attractive returns to our shareholders. Our long-term targets of 15% annual growth in revenue and earnings, 20% return on equity and 30% market share in key markets continue to be lofty targets that we strive to achieve.

I’d like to acknowledge and thank all of our employees for their continued hard work and commitment to excellence. At Finning we pride ourselves on customer service that goes beyond just very good. Our ability to deliver this level of service is a reflection of the quality of the Caterpillar equipment we sell and people who work at Finning. As well, I’d like to thank our Board of Directors for their ongoing support and counsel.

Our commitment to shareholders remains unchanged. We have demonstrated our dedication to protecting shareholder interests, and we consistently rank as one of the best-governed companies in Canada. We have the team in place to continue to deliver strong returns – and we will, as before, see it through.