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Letter to Shareholders
As this is my last letter to shareholders as Chief Executive Officer of Finning,
it is a special pleasure to report that 2007 was another very successful year.
We posted excellent operating and financial results, and we made significant
advances in our strategic and people initiatives. As well, we provided
shareholders with a total return of 21% including two dividend increases in the
year – a very strong performance considering the downturn in world stock
markets late in 2007.
Our business continued to prosper in 2007 and our financial results once again
reached record levels, with revenues rising 17%, and diluted earnings per share
from continuing operations up 23% after adjusting for non-operating items.
These results are particularly gratifying in light of a much stronger Canadian
dollar in 2007 compared to 2006. I am also very pleased to report that our
return on equity increased to 16.8% in 2007 from 15.8% in the previous year.
75 years of customer service
In January 2008, Finning celebrated its 75th anniversary. Back in 1933, Earl B.
Finning incorporated Finning Tractor & Equipment Co. Ltd. in British
Columbia with six employees and the philosophy "we service what we sell".
Today, Finning International is the world's largest Caterpillar dealer with
$5.7 billion in revenue and 13,000 employees in six countries, on three
continents.
Our 75th anniversary is a proud occasion and an important milestone for Finning,
marking our long track record of success founded on the hard work and
unrivalled customer service provided by thousands of Finning employees over the
decades. We are proud of our achievements and the long-standing relationship we
have built with our customers. This commitment to customer service
differentiates Finning from the others and positions us as a leader in our
industry.
The same dedication to service excellence will also drive our success for the
next 75 years. Our multi-year strategic initiative to accelerate the growth in
parts and service revenue and earnings continues to gather momentum as each of
our operations expands resources to support this line of business. We are on
target to meet our goal of doubling our customer support services business from
2005 levels by the end of 2010. We have excellent market share in providing
parts and service on large mining equipment, and now, a stronger focus on parts
and service to customers operating medium-sized equipment lines is beginning to
pay off.
Strong operating performance
Our Canadian operations had an exceptional year in 2007. Overall economic
conditions in Western Canada were good, and the mining, oil sands and
construction markets were extremely strong. However, our customers in the
forestry and conventional oil and gas markets were challenged. Notwithstanding
the weakness in these market segments, Finning (Canada) delivered record
results in 2007. The outlook for 2008 continues to be solid, and our oil sands
operations are expecting their busiest year ever as they prepare and deliver a
huge amount of new large mining equipment to our oil sands customers.
The South American operations also had a very successful year in 2007 and
experienced record results. All market segments were strong and revenues from
this region rose almost 40% in local currency. Finning South America (FINSA)
also experienced good growth in parts and service revenues driven by a
considerable increase in the Caterpillar mining fleet.
Labour cost inflation is relatively high in this region, especially in
Argentina. As a result, FINSA's EBIT margins were lower in 2007. We are
actively managing these cost pressures by reducing overhead costs and
increasing service pricing to appropriate levels. While this market looks solid
for 2008, we must remain vigilant to ensure costs are managed effectively.
The UK dealership made excellent progress in 2007. Our heavy construction
equipment and power systems divisions had a strong year in new equipment sales.
The outlook for 2008 remains positive with construction activity levels
projected to be similar to 2007, and with good prospects for power systems as
well.
We completed the disposition of Hewden's Tools Hire Division after determining
that this business did not fit our core objectives in the UK market. We now
have a smaller Hewden operation that focuses primarily on construction
equipment rental. With better management information from Hewden's new
information technology system, which we implemented in 2007, we expect better
asset utilization and improved results in 2008.
Overall results from our Power Systems business were also very good. We had very
strong performances in the United Kingdom and South America that more than
offset the impact of a slow natural gas market in Western Canada. We continue
to strive to meet our goal of $1 billion revenue from Power Systems by the end
of 2008. However, given the strengthening Canadian dollar we'll likely need
another year to achieve this goal.
Finning continues to be a leader in safety and our safety statistics in 2007 are
again at excellent levels with lost time incidents at record lows. We have one
of the best safety records in our industry and we strive to do better every
year. Unfortunately,despite our best efforts, a tragedy did occur in February
of 2008. Juan Alvarez lost his life as a result of injuries that he received
while at work in Santiago, Chile. A long-term employee of Finning, Juan Alvarez
will be missed by his family, friends and co-workers. His death is an important
reminder to us all that safety can never be taken for granted and must be our
primary consideration every day.
Attractive shareholder returns
Finning remains focused on creating value for shareholders. In addition to
generating attractive returns from operations, we raised our dividend twice in
2007, and we are moving towards a higher dividend payout ratio range, from
20-25% to 25-30% of net income.
We also initiated a share repurchase program in the third quarter of 2007 and
continued to buy stock into the first quarter of 2008. In total, we have
repurchased approximately 7.3 million common shares at an average price of
$27.52 since we believe this is a conservative valuation for Finning shares.
Our balance sheet remains strong with debt to total capital remaining at about
42% at December 31, 2007, comparable to 2006 levels.
Positive Outlook
Our new equipment order backlog at December 31, 2007 was approximately $1.7
billion, a very high level that provides us with good revenue visibility into
2008 and early 2009. In Western Canada some sectors are going through slower
times, and in South America we have to manage our pricing and costs closely,
but overall, we remain optimistic that 2008 will again produce good results.
As I prepare to leave my role of President and CEO I would like to thank many
people for their support over the years. At the top of this list are Finning
employees - a highly motivated and customer focused team - thank you for your
dedication and hard work. Job demands and the pace of change have been
considerable across our operations, yet Finning employees repeatedly rise to
the challenge and succeed in exceeding our goals.
I'd like to thank our customers as well - without them there would be no
Finning. Many have been loyal Finning/ Caterpillar customers for a long time,
through good times and bad. I appreciate the confidence you have shown in us
and I thank you for your business.
I would also like to thank Caterpillar, our strategic partner, for their
continued support. As I've said many times, the combination of Caterpillar
equipment and Finning service is the winning combination at the heart of our
success.
As well my appreciation goes to the Board of Directors. Three members of our
Board, Jim Dinning, Tim Howden and Jeff Mooney retired in 2007. Their
contributions are greatly valued. In 2007, we welcomed Jim Carter and Kathleen
O'Neill to our Board of Directors.
In 2008, Conrad Pinette will step down as Chairman of the Finning Board. He has
been a member of our Board since 1992 and Chairman since 2000. Over the years
Conrad has been a driving force behind the scenes and has provided tremendous
support in my time as CEO. Fortunately, Conrad will remain on the Board and we
will continue to have the benefit of his counsel.
In March 2008, the Finning Board of Directors appointed Mike Waites as the new
CEO of Finning, effective at the Annual General Meeting. Mike has proven to be
an exceptional leader at Finning and will draw from his extensive senior
executive experience in other industries. He is a well-rounded senior executive
with a strong financial capability and extensive experience in providing senior
leadership and strategic execution. I'm confident he'll do a great job for all
our stakeholders and I wish Mike all the best in his new position.
Once again, the future looks very bright for Finning. We have a proud tradition
of great people providing customers with great solutions and achieving great
results. I am confident that Finning will continue to deliver standout
performance.
Sincerely,
FINNING INTERNATIONAL INC.
Douglas W.G. Whitehead
President & Chief Executive Officer
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