Finning International Inc.

Finning International Inc.

August 12, 2009 12:49 ET

Finning Announces Second Quarter Results

Strong cash flow and solid expense reductions counter soft market conditions

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Aug. 12, 2009) - Finning International Inc. (TSX:FTT) -

- Free cash flow of $140 million was an improvement of $178 million over the second quarter of 2008. Net debt to capital improved to 46% at the end of the quarter from 49% at March 31, 2009 and available committed credit facilities have increased to approximately $450 million.

- Significant progress in reducing costs with selling, general and administrative expenses down $50 million or 15%, quarter over quarter. On track to achieve annual cost savings of $150 million.

- Revenues were down 24% from the second quarter 2008 affected by a decline in new equipment sales and rentals.

- Diluted earnings per share were $0.28 compared to $0.39 in the same period last year. Lower business volumes and decreased profitability in Canada and the U.K. negatively impacted earnings.

Finning International Inc. today reported revenues of almost $1.2 billion and diluted earnings per share (EPS) of $0.28 in the second quarter of 2009. Revenues declined 24% from the same quarter last year due to significantly lower new equipment sales and rental revenues in all operations, reflecting weak economic conditions. Free cash flow was strong in the second quarter at $140 million, a substantial improvement from negative $38 million free cash flow in the prior year's quarter.

"We have focused our attention on driving improvements in cash flow generation and balance sheet liquidity as well as cost reduction initiatives during these uncertain times," said Mike Waites, Finning's president and chief executive officer. "We are also focusing on improving our consolidated EBIT margin and capitalizing on opportunities, including mining and power systems. Product support revenues and margins remained steady. Our South American operations continue to produce outstanding results. During the quarter, the economy in the U.K. took another step down. The UK dealership has remained profitable, but the Hewden results continue to disappoint. A strategic review is underway at Hewden with a view of assessing alternatives commensurate with our overall goal of maximizing shareholder value."

"We will come out of this recession stronger," continued Mr. Waites. "We made a commitment to improve our free cash flow and reduce our operating costs and we are well on our way to achieving these commitments. Our financial position is very solid. We believe that improving our operating EBIT margin and the strong cash generation capability of our business will set the stage for further growth opportunities in areas that play to our strengths."


C$ in millions, except per share amounts Three months ended June 30
(unaudited) 2009 2008 % Change
Revenue 1,165 1,531 (24)
Earnings before interest and income taxes (1) 60 108 (44)
Net income 48 67 (29)
Diluted earnings per share 0.28 0.39 (28)
Free cash flow (1) (2) 140 (38) 468

- Revenues of $1.2 billion were down 24% over the comparable quarter 2008 due to significantly lower new equipment sales and rental revenues in our Canadian and UK operations.

- Gross profit decreased $90 million or 21% versus the prior year's quarter. The impact of the decline in revenue was somewhat offset by the shift in the revenue mix to higher margin product support. Product support accounted for 40% of total revenues compared to 31% in the second quarter last year. This also resulted in slightly higher gross profit margin of 30.0% relative to 28.7% achieved in the same quarter 2008.

- Selling, general and administrative (SG&A) expenses were lower by almost $50 million or 15% in the second quarter reflecting cost reduction and operating efficiency measures undertaken in the past three quarters.

- EBIT was $60 million, down 44% compared with the same period in 2008. Consolidated EBIT margin declined to 5.2% compared to 7.0% in the second quarter 2008 due to lower profitability from the UK and Canadian operations.

- Net income decreased 29% to $48 million. Diluted EPS was $0.28 per share, 28% lower compared to $0.39 per share in the second quarter 2008. Diluted EPS was positively impacted by $0.13 per share, primarily from the weaker Canadian dollar relative to the US dollar.

- Free cash flow was $140 million generation of cash compared to $38 million use of cash in the second quarter of 2008 primarily due to active management to reduce working capital and net rental spend.

- Second quarter 2009 results included restructuring and severance costs of $10 million (or $0.04 per share) which were offset by a one-time positive tax adjustment of $9 million (or $0.05 per share). Comparatively, second quarter 2008 results included non-recurring costs related to the integration of Collicutt and UK restructuring costs totaling $10 million (or $0.04 per share).



- Second quarter revenues decreased 31% over the same period last year affected primarily by an almost 50% decline in new equipment sales. SG&A costs were lower in the second quarter 2009 as a result of headcount reductions and lower operating costs. The restructuring costs associated with reduced headcount were $5 million. EBIT was $38 million in the second quarter 2009 compared to $73 million in the second quarter 2008. EBIT margin was 6.5%, comparable with the first quarter 2009 EBIT margin of 6.4%, but lower than the EBIT margin of 8.6% achieved in the second quarter 2008.

- The economic downturn in general resulted in lower demand for new equipment in mining, construction, forestry and conventional oil & gas industries. New equipment deliveries to the oil sands declined compared to the record level we experienced in 2008. Product support revenues were 9% lower compared to the second quarter last year due to lower service revenues. Parts revenues and margins remained strong. After adjusting for the discontinued Collicutt fabrication business, revenues from this line of business were flat compared to prior year's quarter.

South America

- Revenues increased by 6% in the second quarter 2009 relative to the same quarter last year. In functional currency (USD), revenues were 8% lower. Product support revenues were up 19% in the second quarter (up 3% in functional currency). This was offset by 5% lower new equipment revenues (down 18% in functional currency). EBIT was $38 million in the second quarter, 6% higher than in the second quarter 2008. In functional currency, EBIT decreased 7% over the prior year. EBIT margin of 10.6% was solid and comparable to the second quarter 2008.

- Lower demand from construction and power systems was partly offset by modest growth in the mining sector. Product support revenues continued to grow driven by the high population of Caterpillar mining equipment in the field and the increasing number of mining maintenance and repair contracts secured over recent years.

United Kingdom

- The UK Group's revenues for the second quarter declined 36% from the same period last year and in local currency, revenues were down 29%. In local currency, new equipment sales and rental revenues declined 43% and 33% respectively compared to the second quarter 2008. Product support revenues were down 15% in local currency. The UK Group incurred an EBIT loss of $9 million in the second quarter, compared with EBIT of $17 million in the second quarter last year. The results were due to significantly lower new equipment sales and rental revenues resulting in an EBIT loss at Hewden that was partly offset by positive EBIT at the UK dealership.

- Market conditions in the U.K. weakened further in the second quarter negatively affecting the UK construction sector, which is a significant business sector to which we provide equipment and services. We continue to see growth opportunities for our product support business in the U.K., particularly in coal mining and with 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. A strategic review is underway at Hewden with a view of assessing alternatives commensurate with our overall goal of maximizing shareholder value.



The Board of Directors approved the company's quarterly dividend at $0.11 per common share, payable on September 11, 2009, to shareholders of record on August 28, 2009. This dividend will be considered an eligible dividend for Canadian income tax purposes.


Challenging economic conditions continue to impact Finning's business. Previous expectations for 2009 revenue levels, established late in 2008 as part of the company's budgeting process will likely not be achieved. As a result, the Company is withdrawing the revenue guidance previously provided. Given the current market uncertainty, Finning will not be providing revised guidance on expected revenue levels for 2009. Customer order intake levels for new equipment sales are lower than in recent years and while quoting activity has increased in several market segments, it is difficult to predict future business levels. Finning's global backlog was $0.6 billion at the end of the second quarter, lower than the March 2009 level of $0.9 billion and the December 2008 level of $1.5 billion.

Demand for product support is expected to continue at satisfactory levels due to the large population of Caterpillar equipment operating in our territories. In the non-mining sectors, equipment utilization levels are down and some customers are deferring equipment maintenance or selectively performing their own routine maintenance.

In western Canada, the mining industry, including the oil sands, remains active and existing production fleets of heavy trucks and support equipment continue to operate at good levels. There is significant quoting activity in the oil sands sector and it is reasonable to anticipate this will lead to future sales. The heavy construction market remains reasonably active and incremental business resulting from government infrastructure spending is expected in the future. Equipment demand for the general construction, forestry, and conventional oil and gas industries remains soft and it now appears that weaker equipment demand in these sectors will continue through 2009.

Demand for equipment in South America is not being impacted as negatively as in the other regions. Revenues in the second half of the year are expected to moderate from the levels achieved during the first half of 2009, which benefitted from a strong backlog of mining equipment. In mining, product support revenues are expected to remain solid. At current copper prices, the Chilean mining industry is anticipated to remain healthy and mining expansions are expected to proceed in due course, as some Chilean copper producers have recently indicated they may re-start their evaluations of projects which had been postponed at the onset of the recession. Construction and power systems markets in Chile and Argentina are lower than the record levels of recent quarters.

Market conditions in the U.K. have taken a further downturn which has significantly impacted business levels at the Hewden rental operation and to a lesser extent at the UK dealership. Demand for equipment and product support for power systems and coal mining continues at reasonable levels. The availability of inexpensive rental equipment in the marketplace is reducing demand for new equipment for projects. General construction continues to be weak and is not expected to recover soon. While business levels are lower, the dealership continues to generate modest profits. Regarding Hewden, rental utilization rates and pricing are negatively affected resulting in lower rental revenues and higher operating losses than previously anticipated. The weak market conditions are expected to continue well into 2010. As a result of the further downturn and weaker outlook for the UK rental segment, management is undertaking a strategic review at Hewden with a view of assessing alternatives commensurate with our overall goal of maximizing shareholder value.

In light of potential softness in the market, management continues to review the company's cost structure in all regions. Finning's financial condition remains strong and is expected to improve further as strong cash generation is used to reduce debt levels. Available committed credit facilities have increased to approximately $450 million.

UNAUDITED (C$ millions, except per share amounts)

Three months ended June 30
2009 2008 % Change
New equipment 465.7 770.5 (40)
Used equipment 103.0 104.0 (1)
Equipment rental 124.5 176.1 (29)
Product support 468.5 476.2 (2)
Other 3.2 4.5 (29)
Total revenue 1,164.9 1,531.3 (24)
Gross profit 349.8 440.2 (21)
Gross profit margin (3) 30.0% 28.7%
Selling, general & administrative
expenses (274.9) (324.1) 15
Other income (expenses) (14.6) (8.1) (80)
Earnings before interest and income taxes
(EBIT) 60.3 108.0 (44)
EBIT margin (4) 5.2% 7.0%
Net income 47.8 67.2 (29)
Diluted earnings per share (diluted EPS) 0.28 0.39 (28)
Free cash flow 139.7 (38.2) 466

Jun 30, 2009 Dec 31, 2008
Total assets 4,357.3 4,720.4
Total shareholders' equity 1,621.6 1,567.1
Net debt to total capital (5) 46% 49%

To download Finning's complete second quarter 2009 results in PDF, please open the following link:


Management will hold an investor conference call on Wednesday, August 12 at 3:00 pm eastern time. Dial-in numbers: 1-866-898-9626 (anywhere within Canada and the U.S.)

(416) 340-2216 (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 5:00 pm eastern time on August 12 until August 19. The pass code to access the playback recording is 1465846 followed by the number sign.


Finning International's third quarter results for 2009 will be released and an investor conference call will be held on November 10, 2009.

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 second quarter interim consolidated financial statements.

(2) Free cash flow is defined as cash 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 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 August 12, 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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