Finning Reports Q3 2014 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Nov. 13, 2014) - Finning International Inc. (TSX:FTT) reported third quarter 2014 results today (all monetary amounts are in Canadian dollars unless otherwise stated).

"Canada delivered a strong quarter, marked by improved profitability and return on invested capital. I am very pleased with the progress we are making on our operational priorities and the pace of transformation in our Canadian operations," said Scott Thomson, President and CEO of Finning International. "At the same time, we are managing through a challenging macro-economic environment in South America, where our results were negatively impacted by lower revenues and a number of one-time charges. We continue to take steps to control costs and invested capital in the region to maintain profitability. In the UK & Ireland, we achieved record new equipment sales in a highly competitive market; however, profitability was below our expectations this quarter due to lower gross profit margins and continued weakness in coal mining," continued Mr. Thomson. "Throughout the organization, we remain focused on what we can control: costs and capital efficiency. Our disciplined management of working capital and improved inventory turns enabled us to generate strong free cash flow for a second consecutive quarter. We are well positioned to accelerate free cash flow generation through the fourth quarter and expect to end 2014 at the bottom of our net debt to invested capital target range."

During the quarter, the Company recorded the expected tax charge resulting from the revaluation of deferred tax balances in Chile due to recently enacted tax changes, and wrote off the previously capitalized enterprise resource planning (ERP) system costs in South America since it does not expect to implement an ERP in South America in the near future. Other significant items negatively impacting reported earnings per share included higher severance costs, costs related to the resolved labour disruption in South America, and an increase in the annual effective tax rate in Argentina.

Q3 2014 HIGHLIGHTS

• Revenues of $1.7 billion declined by 6% as a result of lower new equipment sales in Canada and South America compared to very strong deliveries last year in Canada.
  
  
• Product support revenues grew by 4% to record levels, driven primarily by higher parts sales in Canada.
  
  
• Consolidated EBIT⁽¹⁾⁽²⁾ of $114 million declined by 16% and EBIT margin was 6.8%, primarily due to a $12 million non-cash, non-recurring write-off of ERP costs in South America. EBIT was also negatively impacted by severance costs incurred globally and labour disruption costs in South America that totaled approximately $9 million, which was significantly higher than severance costs of $4 million in the third quarter of 2013.
  
  
  • In Canada, EBIT of $80 million rose by 5%, despite a 10% decline in revenues compared to Q3 2013, which benefited from significant mining deliveries. EBIT margin improved to 9.2%, reflecting continued progress on the supply chain and service profitability initiatives, as well as a shift in revenue mix to product support.
    
    
  • In South America, EBIT of $32 million decreased by 43% on a 14% decline in revenue, and EBIT margin was 6.2%. EBIT was negatively impacted by the $12 million ERP write-off, as well as higher severance costs and costs related to the labour disruption which totaled $5 million this year. Excluding these items, EBIT margin would have been 9.4%.
    
    
• Basic EPS⁽²⁾ was $0.33 per share. Negative impact of Chile tax changes was $0.04 per share. ERP write-off was $0.06 per share. Severance and strike costs totaled $0.04 per share this quarter. Higher effective tax rate in Argentina was $0.03 per share.
  
  
• The Company generated $109 million in free cash flow⁽¹⁾ in Q3 and reflects continued focus on improving working capital⁽¹⁾ efficiencies throughout the organization.
  
  
• Invested capital⁽¹⁾ of $3.3 billion was unchanged compared to Q3 of last year. Invested capital turnover⁽¹⁾, inventory turns⁽¹⁾ and working capital to sales ratio⁽¹⁾ improved from Q3 2013, reflecting progress on improving capital efficiencies in Canada, as well as inventory reduction in South America in response to weak demand. Canada's invested capital turnover improved to 2.15 times in the third quarter of 2014 from 1.95 times in the third quarter of 2013.
  
  
• Canada's return on invested capital (ROIC) improved to 16.8% from 15.9% in Q3 of last year; however, the consolidated ROIC declined to 15.4% from 15.8% in Q3 2013, as a higher ROIC in Canada has been offset by lower ROIC in South America due to reduction in activity levels and the ERP write-off.
  
  

"Looking ahead, we expect demand for new equipment in South America to remain low through 2015; however, I am encouraged by the fiscal clarity and recent infrastructure announcements in Chile, which provide support for the market. We are expecting the resumption of product support growth in South America in 2015, driven by improved economic activity. In Canada, despite the recent decline in the price of oil and other commodities, we continue to see healthy demand for equipment and product support across most market segments. In the fourth quarter, we expect strong new equipment deliveries and solid demand for product support in Canada. We are monitoring market conditions closely and remain focused on executing on the operational improvement priorities within our control," concluded Scott Thomson.

Q3 2014 FINANCIAL SUMMARY

$ millions, except per share amounts	Three months ended Sep 30
	2014		2013		% change
Revenue	1,670		1,780		(6	)
EBIT	114		136		(16	)
EBIT margin	6.8	%	7.6	%
Net income	57		86		(34	)
Basic EPS	0.33		0.50		(34	)
EBITDA(1)(2)	170		191		(11	)
Free cash flow	109		163		(33	)

• Revenues of $1.7 billion decreased by 6%, driven primarily by a 13% reduction in new equipment sales due to lower volumes in Canada and South America compared to very strong equipment deliveries in Canada in Q3 of last year. Product support revenues grew by 4% to record levels, reflecting higher parts sales in Canada and the UK and Ireland.
  
  
• Gross profit of $511 million was relatively unchanged from Q3 of last year and gross profit margin⁽¹⁾ improved to 30.6% from 28.9% in Q3 2013. The increase in gross profit margin was due to the shift in revenue mix to higher-margin product support, as well as improved gross profit margins in all lines of business, with the exception of rental. Consolidated new equipment sales comprised 40% of total revenue compared to 44% a year ago, while product support contributed 50% to total revenue, up from 45% in Q3 2013.
  
  
• SG&A⁽²⁾ of $386 million was 2% above Q3 2013 levels, reflecting an increase in employee-related costs, including about $7 million of severance costs in all operations compared to $4 million of severance costs in Q3 2013. SG&A also included approximately $2 million of costs incurred due to the resolved labour disruption in South America.
  
  
• EBIT of $114 million declined by 16%, and EBIT margin of 6.8% was below 7.6% in Q3 2013, primarily due to a $12 million non-cash, non-recurring write-off of ERP costs in South America. Q3 2014 EBIT was also negatively impacted by higher severance costs incurred globally and labour disruption costs in South America. Higher EBIT in Canada and the UK and Ireland was offset by lower EBIT in South America due to continued challenging market conditions.
  
  
• Basic EPS of $0.33 per share declined from $0.50 per share in Q3 2013.
  
  
• Q3 2014 EPS was negatively impacted by the following items:
  
  
  • Non-cash, non-recurring charge of $0.04 per share resulting from the expected revaluation of deferred income tax balances in Chile following recent tax reform;
    
    
  • Non-cash, non-recurring write-off of ERP costs in South America of $0.06 per share;
    
    
  • Global severance costs and costs related to the labour disruption in South America totaling approximately $0.04 per share; and
    
    
  • Higher annual effective tax rate in Argentina of $0.03 per share.
    
    
• The effective tax rate was 39.2%, up from 23.4% in Q3 2013, reflecting the tax charges discussed above.
  
  
• Quarterly free cash flow was $109 million compared to $163 million in Q3 2013. Free cash flow for the first three quarters of 2014 was $98 million, which is $22 million higher than the free cash flow generated during the same period of last year, reflecting continued progress on improving working capital efficiencies and lower net rental spend.
  
  
• Net debt to invested capital⁽¹⁾ was 39.4% at the end of September 2014, an improvement from the prior quarter.
  
  

	Q3 2014	Q2 2014	Q3 2013
Invested capital ($ millions)	3,340	3,334	3,342
Invested capital turnover(1)(3) (times)	2.09	2.12	2.03
Return on invested capital(2) (%)	15.4	16.0	15.8

• Invested capital was in line with the prior quarter and with Q3 2013. Invested capital turnover of 2.09, while below the Q2 2014 level, showed an improvement from Q3 of last year, driven primarily by improved invested capital turnover in Canada and the UK & Ireland. Return on invested capital of 15.4% was below Q3 2013. Higher ROIC in Canada from improved capital efficiencies was offset by lower ROIC in South America due to significant reduction in activity levels compared to 2013 and the ERP costs write-off.

Backlog

• The order backlog was $1.1 billion at the end of September 2014, unchanged from the end of June 2014, as the deliveries were in line with order intake in the quarter. Order intake continued to be at good levels in Canada and the UK & Ireland, but remained very soft in South America, reflecting reduced mining activity in the region.

Q3 2014 HIGHLIGHTS BY OPERATION

Canada

• Revenues were down 10% from the strong Q3 of last year. New equipment sales declined by 23% compared to Q3 2013, which saw significant mining deliveries and near record unit sales. Product support revenues grew by 5%, driven mostly by higher parts sales in power systems.
  
  
• Gross profit margin was higher relative to Q3 2013 due to a shift in revenue mix to product support (49% vs. 42% in Q3 2013) and higher margins in all lines of business, with the exception of rental. SG&A expenses were slightly above last year, mostly as a result of higher employee-related costs, including severance costs associated with operational improvement initiatives. EBIT rose by 5% to $80 million and EBIT margin improved to 9.2% from 7.9% in Q3 2013, reflecting a favourable shift in revenue mix and continued progress on the supply chain and service profitability initiatives.
  
  
• Invested capital decreased by $42 million from the end of June, mainly due to lower inventory. While invested capital turnover of 2.15 times was below 2.20 times in Q2 2014 due to lower sales, it increased from 1.95 times a year ago, mostly as a result of improved inventory management. ROIC increased to 16.8% from 15.9% in Q3 2013, driven primarily by an increase in EBIT for the last twelve months, as well as lower average invested capital.
  
  

South America

• Revenues declined by 14% (down 18% in functional currency - USD) due to reduced market activity in the region compared to Q3 of last year. New equipment sales were down 33% in functional currency, reflecting decreased demand, predominantly in mining. Product support revenue declined by 5% in functional currency, impacted by lower service revenues in mining as customers continued to minimize operating costs. Parts sales were similar to last year.
  
  
• EBIT declined by 43% to $32 million (down 45% in functional currency) and EBIT margin was 6.2%, down from 9.4% a year ago, reflecting reduction in revenues and a number of significant one-time charges. EBIT in Q3 of this year was negatively impacted by the $12 million ERP write-off, as well as higher severance costs and costs related to the labour disruption which totaled $5 million this year. Excluding these items, EBIT margin would have been 9.4%.
  
  
• The Company continued to reduce SG&A costs and invested capital in South America to maintain profitability under challenging and uncertain market conditions. SG&A expenses were down by 11% in functional currency compared to Q3 of last year, despite higher severance costs and strike costs. The Company reduced its workforce in South America by 560 people since September 2013, including approximately 100 people in October 2014, bringing total workforce down by 7% to about 6,900 employees.
  
  
• Invested capital was down by US$36 million from Q2 2014, driven primarily by lower equipment inventory, reflecting continued focus on inventory management in light of the uncertain market environment. However, the weakening Canadian dollar relative to the US dollar resulted in a reported $24 million increase in invested capital in South America. Despite improved inventory turns and overall decrease in invested capital from Q3 of last year, ROIC declined to 15.8% from 17.9% due to volume-driven reduction in earnings and the ERP costs write-off.
  
  

United Kingdom & Ireland

• Revenues rose by 29% (up 15% in functional currency - GBP), and were driven by a 29% increase in new equipment sales in functional currency due to higher demand for new machines from plant hire and power systems sectors. Product support revenue was up by 3% in functional currency, with higher parts sales compared to Q3 2013.
  
  
• EBIT was up by $2 million to $14 million (up slightly in functional currency). A significant shift in revenue mix to new equipment sales (64% vs. 57% in Q3 2013) and lower margins in all lines of business compared to last year resulted in reduced gross profit margins. In addition, persistent weakness in the coal mining sector in the UK continued to negatively impact profitability. As a result, EBIT margin declined to 4.8% from 5.3% a year ago, despite flat SG&A costs in functional currency relative to Q3 2013.
  
  
• Invested capital increased by £20 million from Q2 2014 (up $35 million in Canadian dollars) due to higher accounts receivable, reflecting an increase in sales volumes over Q2 2014.
  
  

CORPORATE AND BUSINESS DEVELOPMENTS

Dividend

The Board of Directors has approved a quarterly dividend of $0.1775 per share, payable on December 11, 2014 to shareholders of record on November 27, 2014. This dividend will be considered an eligible dividend for Canadian income tax purposes.

Board of Directors Appointment

On September 9, 2014, Finning announced the appointment of Jacynthe Côté to the company's Board of Directors. Ms. Côté was president and chief executive officer of Rio Tinto Alcan from 2009 until June 2014 and served in an advisory role until her retirement on September 1, 2014. Prior to that, Ms. Côté was president and chief executive officer of Rio Tinto Alcan's Primary Metal business group where she was responsible for all primary metal facilities and power generation installations worldwide. She was previously president and chief executive officer of Alcan's Bauxite & Alumina business unit. Ms. Côté originally joined Alcan Inc. in 1988 and over the course of her 26-year career with Alcan she held senior management roles in business planning, human resources, environment, and health and safety in Quebec and England.

SELECTED CONSOLIDATED FINANCIAL INFORMATION

(C$millions, except per share amounts)

		Three months ended Sep 30						Nine months ended Sep 30
Revenue		2014		2013		% change		2014		2013		% change
	New equipment	672.1		777.0		(13	)	2,145.4		2,073.9		3
	Used equipment	63.0		91.3		(31	)	185.8		221.2		(16	)
	Equipment rental	92.8		103.8		(11	)	266.6		289.7		(8	)
	Product support	837.2		805.7		4		2,498.4		2,369.4		5
	Other	5.3		2.4				18.4		6.0
Total revenue		1,670.4		1,780.2		(6	)	5,114.6		4,960.2		3
Gross profit		511.1		514.3		(1	)	1,533.1		1,526.2		0
Gross profit margin		30.6	%	28.9	%			30.0	%	30.8	%
SG&A		(386.3	)	(378.9	)	(2	)	(1,162.8	)	(1,152.8	)	(1	)
SG&A as a percentage of revenue		(23.1	)%	(21.3	)%			(22.7	)%	(23.3	)%
Equity earnings of joint venture and associate		1.9		2.6				5.7		9.0
Other expenses		(12.5	)	(2.4	)			(13.8	)	(7.2	)
EBIT		114.2		135.6		(16	)	362.2		375.2		(3	)
EBIT margin		6.8	%	7.6	%			7.1	%	7.6	%
Net income		56.8		86.2		(34	)	211.1		242.3		(13	)
Basic EPS		0.33		0.50		(34	)	1.23		1.41		(13	)
EBITDA		170.3		190.7		(11	)	526.1		536.2		(2	)
Free cash flow		109.3		162.6				97.9		75.8
								Sep 30, 14				Dec 31, 13
Invested capital								3,340.2				3,138.1
Invested capital turnover (times)								2.09				2.04
Net debt to invested capital								39.4	%			40.8	%
Return on invested capital								15.4	%			15.7	%

To download Finning's complete Q3 2014 results in PDF, please open the following link: http://media3.marketwire.com/docs/finnQ3.pdf

Q3 2014 RESULTS INVESTOR CALL

The Company will hold an investor call on Thursday, November 13 at 11:00 am Eastern Time. Dial-in numbers: 1-800-766-6630 (anywhere within Canada and the U.S.) or 416-340-8527 (for participants dialing from Toronto 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 from 1:00 pm Eastern Time on November 13 until November 20. The pass code to access the playback recording is 6787278 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 IFRS, 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).
   
   
3. Invested capital turnover is calculated as total revenue for the last twelve months divided by invested capital, based on an average of the last four quarters.
   
   

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; 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 target range of the Company's dividend payout ratio. 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 12, 2014. 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.