Finning International Inc.

Finning International Inc.

November 10, 2009 16:30 ET

Finning Reports Third Quarter Earnings Per Share of $0.13 and Free Cash Flow of $226 Million

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Nov. 10, 2009) - Finning International Inc. (TSX:FTT) -

- As a result of very tough market conditions in Canada and the U.K., diluted earnings were $0.13 per share compared to $0.37 in the third quarter of 2008. South American operations continued to produce strong results.

- Free cash flow of $226 million was $233 million higher than in the third quarter of 2008. Year-to-date, the Company generated $364 million in free cash flow and expects close to $400 million in free cash flow for the full year 2009. Balance sheet strength continues with net debt to capital down to 42% from 46% at June 30, 2009.

- Selling, general and administrative expenses decreased by $55 million or 17% year over year. The Company is proceeding with further cost reductions and is raising its annual SG&A expense reduction target from $150 million to over $200 million.

- Order intake in the quarter improved after a weak first half, driven by large equipment orders for the mining industry, including the oil sands.

Finning International Inc. today reported revenues of $1.1 billion, earnings before interest and income taxes (EBIT) of $41 million and diluted earnings per share (EPS) of $0.13 in the third quarter of 2009. Revenues declined 27% from the same quarter last year as new and used equipment sales and rental revenues were down significantly in all operations.

"It was a tough quarter. Challenging economic conditions affected our business more severely than we had expected," said Mike Waites, president and chief executive officer of Finning International Inc. "We have generally held and, in some cases, increased market share. Our South American operations continued to deliver strong results. However, Canada's revenue declined in all lines of business and the UK Group experienced difficult markets."

"We have acted aggressively with additional cost reductions and efficiency initiatives and our Hewden strategic review is on track. We are committed to generate an additional $50 million of annual cost savings over and above the $150 million of savings committed to date."

"Free cash flow increased to $226 million in Q3, driving additional debt reductions and further improved liquidity. Free cash flow is expected to approach $400 million in 2009. Reflecting our confidence in the future, as well as the Company's strong financial position, we have maintained our dividend at $0.11 per share," added Mr. Waites.

The Company is receiving new orders for large mining equipment. Order intake increased in the third quarter and order cancellations have virtually disappeared. Importantly, the Company believes a significant backlog of product support business is being built.

"While we expect continued uncertainty, notably in the non-mining sectors, our business is strong and strategically well positioned to take full advantage of the recovery as it occurs," concluded Mr. Waites.


C$ in millions, except per
share amounts Three months ended September 30
(unaudited) 2009 2008 % Change
Revenue 1,073 1,463 (27)

EBIT (1) 41 103 (60)

Net income 22 65 (66)

Diluted EPS 0.13 0.37 (65)

Earnings before interest,
income taxes, depreciation and
amortization (EBITDA) (1) 107 188 (43)

Free cash flow (1)(2) 226 (7) -

- Revenues of $1.1 billion were down 27% over the third quarter 2008 due to lower new and used equipment sales and rental revenues in Canada and the U.K. Product support revenues decreased 7% year over year. The mining sector continues to generate strong product support revenues and increased over the prior year in Canada and South America. Slowdown in other sectors negatively impacted demand for equipment parts and service.

- Gross profit decreased $120 million or 28% over the prior year's quarter. Product support accounted for 43% of total revenues compared to 33% in the third quarter last year. The increase in gross profit margin due to the shift in the revenue mix to higher margin product support was offset by lower gross profit margins on all other lines of business. This resulted in slightly lower gross profit margin of 29.1% relative to 29.6% in the same quarter 2008.

- Selling, general and administrative (SG&A) expenses were $55 million (17%) lower than in the third quarter last year, reflecting cost reductions and operating efficiency improvements implemented since the fourth quarter of 2008. The Company has initiated further SG&A expense reduction measures in the quarter and now targets annual cost savings of over $200 million.

- EBIT was $41 million, down 60% compared to the same period in 2008. Consolidated EBIT margin declined to 3.8% compared to 7.1% in the third quarter of 2008 due to lower profitability from the Canadian and UK operations. South America's strong EBIT performance continued in the third quarter.

- Net income decreased 66% to $22 million. Diluted EPS was $0.13, 65% lower than the third quarter 2008 EPS of $0.37. Foreign exchange had a positive impact of $0.04 per share in the third quarter of 2009 compared to the prior year's third quarter.

- EBITDA, which is an indicator of a company's operating performance and generation of operating cash flow, was $107 million in the third quarter of 2009 compared to $188 million in the third quarter of 2008.

- Free cash flow of $226 million was generated, compared to $7 million use of cash in the third quarter of 2008, due to a significant improvement in all operations as management focused on working capital levels, including inventory reductions, improved collection and minimal rental spend. The Company expects to generate close to $400 million of free cash flow in 2009.

- Net debt to capital was 42%, a significant improvement from 46% at June 30, 2009 and 49% at December 31, 2008. This is at the lower end of the Company's net debt to capital target range of 40 to 50%. Available committed credit facilities have increased to over $600 million.

- Backlog was $0.5 billion at September 30, 2009, down from $0.6 billion at June 30, 2009 and $1.5 billion at December 31, 2008. New order intake was lower than in the third quarter last year; however, it was 30% higher than in the second quarter of 2009. Order cancellations were minimal in the third quarter of 2009.



- Third quarter revenues decreased 35% over the same period last year primarily due to new equipment sales declining by 50%. Used equipment sales and rental revenues were down by 38% and 31%, respectively. SG&A costs were lower in the third quarter in absolute dollars as a result of headcount reductions, improved efficiencies and lower discretionary expenses. As a percentage of revenue, SG&A costs were higher as expenses did not decline at the same rate as equipment revenues. The Company is proceeding with additional cost reduction measures in Canada to align expense levels with revenues. EBIT was $15 million compared to $64 million in the third quarter of 2008. EBIT margin was 3.0%, lower than the EBIT margin of 8.5% achieved in the third quarter of 2008 due to lower business volumes. Restructuring costs associated with reduced headcount in the quarter were $2 million. The Company expects to incur restructuring and other costs of $5 to $10 million in Canada, primarily in the fourth quarter of 2009.

- Product support revenues were not affected as much as other lines of business and were 13% lower compared to the third quarter last year. Product support in mining was up 17%; however, demand in the construction, forestry, and conventional oil & gas industries was weaker.

- Order intake improved in the third quarter following two slow quarters. Cancellations were negligible and the backlog increased for the first time in four quarters. The Company received orders for large equipment from several mining customers, including oil sands producers.

South America

- During the third quarter, revenues decreased 3% relative to the same quarter last year. Product support revenues remained strong and grew 7% in the quarter. New equipment sales were 14% lower due to continued weakness in the construction and power systems sectors. SG&A costs decreased in absolute dollars and as a percentage of revenue. EBIT was $36 million, 3% below the third quarter 2008 EBIT. EBIT margin of 9.6% was solid and slightly up from the EBIT margin achieved in the third quarter of 2008.

- Good activity in the mining sector was offset by lower demand from construction and power systems. Growth in product support revenues continues to be primarily driven by the considerable number of mining maintenance and repair contracts secured in recent years and the higher number of Caterpillar machines operating in the field. New equipment backlog was lower compared to June 2009 levels due to strong deliveries. Order intake in the quarter was the highest this year driven by an improved outlook for mining investments.

United Kingdom

- The UK Group's revenues declined 36% from the same period last year reflecting challenging market conditions in the U.K. New equipment sales and rental revenues declined 42% and 35%, respectively, compared to the third quarter of 2008. Product support revenues were down 17%. The UK Group incurred an EBIT loss of $2 million in the third quarter, compared to a positive EBIT of $17 million in the third quarter of last year. EBIT loss at Hewden was partly offset by a modestly positive EBIT at the dealership.

- Market conditions in the U.K. remained very soft in the third quarter, mainly due to continued weakness in the construction sector. Product support business was driven by active coal mining and power systems projects. Management has implemented a number of initiatives to reduce costs and dispose of surplus rental fleet in light of the current market conditions. SG&A costs are down 24% quarter over prior year quarter. The strategic review at Hewden is progressing according to plan. Further actions are expected to be taken as needed to respond to market conditions.



The Board of Directors approved the Company's quarterly dividend at $0.11 per common share, payable on December 11, 2009, to shareholders of record on November 27, 2009. This dividend will be considered an eligible dividend for Canadian income tax purposes.

DATE 2009
UNAUDITED (C$ millions, except per share amounts)

--------------------------- ----------------------------
Three months ended Nine months ended
September 30 September 30
--------------------------- ----------------------------
Revenue 2009 2008 % Change 2009 2008 % Change
--------------------------- ----------------------------
New equipment 416.7 672.7 (38) 1,514.7 2,169.3 (30)
Used equipment 71.9 110.1 (35) 267.4 308.3 (13)
Equipment rental 125.9 187.6 (33) 390.6 540.2 (28)
Product support 456.4 488.8 (7) 1,421.2 1,392.8 2
Other 2.3 4.0 (43) 8.5 14.1 (40)
-------------------------------------------- ----------------------------
Total revenue 1,073.2 1,463.2 (27) 3,602.4 4,424.7 (19)
-------------------------------------------- ----------------------------
Gross profit 312.4 432.7 (28) 1,056.1 1,282.5 (18)
Gross profit
margin (3) 29.1% 29.6% 29.3% 29.0%
Selling, general
& administrative
expenses (267.3) (322.3) 17 (852.1) (961.1) 11
Other income
(expenses) (4.0) (7.0) 43 (27.0) (0.2) -
-------------------------------------------- ----------------------------
EBIT 41.1 103.4 (60) 177.0 321.2 (45)
EBIT margin (4) 3.8% 7.1% 4.9% 7.3%
-------------------------------------------- ----------------------------
Net income 21.7 64.8 (66) 114.5 202.8 (44)
-------------------------------------------- ----------------------------
-------------------------------------------- ----------------------------
Diluted EPS 0.13 0.37 (65) 0.67 1.16 (42)
-------------------------------------------- ----------------------------
-------------------------------------------- ----------------------------

EBITDA 106.8 187.9 (43) 382.6 559.7 (32)
Free cash flow 225.6 (6.9) - 363.5 (128.5) -
-------------------------------------------- ----------------------------
-------------------------------------------- ----------------------------

Sep 30, Dec 31,
2009 2008
Total assets 3,892.4 4,720.4
Total shareholders' equity 1,547.8 1,567.1
Net debt to total capital (5) 42% 49%
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To download Finning's complete third quarter 2009 results in PDF, please open the following link:


Management will hold an investor conference call on Tuesday, November 10 at 5:30 pm Eastern Time. Dial-in numbers:

1-866-223-7781 (anywhere within Canada and the U.S.)

1-416-340-8018 (for participants dialing from Toronto and overseas)

The call will be webcast live and subsequently archived at Playback recording will be available at 1-800-408-3053 from 7:30 pm Eastern Time on November 10 until November 17. The pass code to access the playback recording is 8252734 followed by the number sign.

NEXT QUARTERLY RESULTS - February 23, 2010

Finning International's fourth quarter and annual 2009 results will be released and an investor conference call will be held on February 23, 2010.

About Finning

Finning International Inc. (TSX:FTT) is the world's largest Caterpillar equipment dealer delivering unrivalled service to customers since 1933. Finning sells, rents and services equipment and engines to help customers maximize productivity. Headquartered in Vancouver, B.C., the Company operates in western Canada, Chile, Argentina, Bolivia, Uruguay, and the United Kingdom.


(1) These amounts do not have a standardized meaning under generally accepted accounting principles. For a reconciliation of these amounts to net income and cash flow from operating activities, see the heading "Description of Non-GAAP Measures" in the Company's management discussion and analysis that accompanies the third quarter interim consolidated financial statements.

(2) Free cash flow is defined as cash flow provided by (used in) operating activities less net capital expenditures.

(3) Gross profit margin is defined as gross profit as a percentage of total revenue.

(4) EBIT margin is defined as earnings before interest and income taxes as a percentage of total revenue.

(5) Net debt to total capital ratio is calculated as short-term debt and long-term debt, net of cash and cash equivalents (net debt) divided by total capitalization. Total capitalization is defined as the sum of net debt and all components of equity (share capital, contributed surplus, accumulated other comprehensive loss, and retained earnings).

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 we make is forward-looking when it uses what we know and expect 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, 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; the estimated annualized cost savings and anticipated restructuring charges related to actions taken by the Company in response to the economic downturn; anticipated generation of free cash flow, and its expected use; and expected target range of Debt 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 describe our expectations at November 10, 2009. Except as may be required by Canadian securities laws, we do 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 our expectations expressed in or implied by such forward-looking statements and that our business outlook, objectives, plans, strategic priorities and other statements that are not historical facts may not be achieved. As a result, we 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 our forward-looking statements include: general economic and credit market conditions; foreign exchange rates; commodity prices; the level of customer confidence and spending, and the demand for, and prices of, our products and services; our dependence on the continued market acceptance of Caterpillar's products and Caterpillar's timely supply of parts and equipment; our ability to continue to implement our cost reduction initiatives while continuing to maintain customer service; the intensity of competitive activity; our ability to raise the capital we need to implement our business plan; regulatory initiatives or proceedings, litigation and changes in laws or regulations; stock market volatility; changes in political and economic environments for operations outside Canada. 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 our 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 we believed were reasonable on the day we made the forward-looking statements. Refer in particular to the Market Outlook section of the 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 the Company's 2008 Annual Information Form (AIF) on pages 31-44.

We caution readers that the risks described in the AIF are not the only ones that could impact us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also have a material adverse effect on our business, financial condition, or results of operations.

Except as otherwise indicated by us, 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. We therefore cannot describe the expected impact in a meaningful way or in the same way we present known risks affecting our business.

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