Finning International Inc.
TSX : FTT

Finning International Inc.

May 05, 2016 09:00 ET

Finning Reports Q1 2016 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - May 5, 2016) - Finning International Inc. (TSX:FTT) reported first quarter 2016 results(1) today. All monetary amounts are in Canadian dollars unless otherwise stated.

HIGHLIGHTS

  • The Company generated $30 million in free cash flow(2) in Q1/16, compared to $(232) use of cash in Q1/15, and continues to expect 2016 annual free cash flow to be modestly above $300 million.
  • The global workforce was reduced by 435 people year to date in response to difficult market conditions.
  • Strong revenue performance in Canada, up 6% from Q1/15.
  • Canada's SG&A costs(3) declined by 9% from Q1/15, excluding severance and restructuring costs, and Saskatchewan operations.
  • Canada's EBIT margin(2)(3) of 4.0%, excluding severance and restructuring costs, was in line with management's expectations and reflected large equipment deliveries as well as workforce reductions which occurred at the end of Q1; (reported EBIT margin was 3.0%).
  • South America's EBIT margin, excluding severance costs, would have been 8.9%; (reported EBIT margin was 7.3%). South American operations continued to proactively manage costs in response to weakening market conditions.
  • Excluding global severance and restructuring costs, as well as higher than expected loss provisions on certain power system projects in the UK, basic EPS(3) would have been $0.19 per share; (reported basic EPS was $0.09 per share).

"First quarter results were in line with our expectations as we continued to realize permanent cost savings and implement sustainable operating improvements to transform the business for long-term success. Importantly, we began generating positive free cash flow early in the year, demonstrating the resiliency of our business model and our focus on effectively managing working capital," said Scott Thomson, president and CEO.

"Our Canadian operations delivered stronger revenues driven by equipment and parts sales. Margins were lower as expected due to large equipment deliveries and workforce reductions which occurred at the end of the quarter. The transformation initiatives and decisive measures taken throughout 2015 and the beginning of 2016, including workforce and facility optimization, will reduce SG&A by about 20% between 2014 and 2016 and support improved profitability in Canada going forward. Our South American team continued to successfully manage through challenging market conditions by focusing on cost control and maintaining profitability despite lower product support volumes. In the UK and Ireland, our new management team is executing with urgency to return our UK operations to historic profitability levels by the end of the year with a focus on lowering our cost to serve."

"Looking ahead, our resilient business model will support us in generating relatively strong EBITDA(2)(3) and free cash flow again this year. This will preserve the strength of our balance sheet and provide financial flexibility. The continued advancement of our operational excellence agenda is driving increased customer loyalty in each of our regions, and we look forward to building on this positive momentum," concluded Mr. Thomson.

Q1 2016 FINANCIAL SUMMARY

$ millions, except per share amounts Q1 2016 Q1 2015
(restated)(4)
%
change
Revenue 1,494 1,541 (3 )
EBITDA 96 126 (24 )
EBITDA margin 6.4% 8.2%
EBIT(2)(3) 45 75 (41 )
EBIT margin 3.0% 4.9%
Net income 15 53 (72 )
Basic EPS 0.09 0.31 (71 )
Free cash flow 30 (232 )
  • Revenues were down 3%, with lower revenues in South America and the UK & Ireland being partly offset by higher revenues in Canada. New equipment sales decreased by 7%, driven by lower new equipment sales in South America and the UK & Ireland, which were partially mitigated by the deliveries of large equipment fleets in Canada. Order backlog(2) of about $500 million at the end of Q1/16 was unchanged from Q4/15, as the overall demand for new equipment remained weak. Product support revenues decreased by 3%, primarily due to lower service revenues.
  • EBITDA of $96 million, EBIT of $45 million, and EPS of $0.09 per share included the following items that management does not consider indicative of operational and financial trends:
    • Severance and restructuring costs of $17 million or $0.07 per share;
    • Higher than expected provisions on certain power system projects in the UK of $5 million or $0.03 per share.
  • Excluding these items, EBITDA margin would have been 7.9% and EBIT margin would have been 4.5%. The declines in these metrics from Q1/15 were primarily the result of:
    • Lower margins on equipment sales, mostly due to deliveries of large fleets in Canada;
    • Lower rental margins due to challenging market conditions;
    • SG&A benefits from recently announced global workforce reduction not being fully realized.
  • Excluding the items described above, basic EPS would have been $0.19, compared to Q1/15 EPS of $0.33 (excluding severance and restructuring costs of $19 million or $0.08 per share, and tax benefit of $0.06 per share).
  • Free cash flow was $30 million compared to use of cash flow of $(232) million in Q1/15, driven by stronger cash generation in Canada due to higher equipment deliveries and lower inventory spend.
  • The Company's balance sheet remains healthy.
    • Net debt to EBITDA ratio(2) would have been 2.0, excluding significant items(1).
    • Net debt to invested capital ratio(2) was 37.0% at the end of Q1/16.
    • Annualized dividend is being maintained at $0.73 per share.

Q1 2016 INVESTED CAPITAL

Q1 2016 Q4 2015 Q1 2015
Invested capital(2) ($ millions)
Consolidated 3,085 3,240 3,541
Canada 1,685 1,760 1,794
South America (U.S. dollars) 796 811 1,117
UK & Ireland (U.K. pound sterling) 182 157 175
Invested capital turnover(2)(4) (times) 1.82 1.78 2.06
Return on invested capital (ROIC)(2) (%)
Consolidated (4.0) (3.0) 14.1
Canada 5.4 5.5 15.3
South America (14.9) (12.8) 14.4
UK & Ireland (4.5) (1.4) 14.7
  • Excluding the impact of foreign currency translation, invested capital decreased by $55 million from Q4/15, mostly due to lower inventories and a decrease in rental assets in Canada. The Company continues to focus on reducing surplus inventory and tightly managing working capital.
  • Invested capital turnover increased to 1.82 times from 1.78 times in Q4/15 due to higher invested capital turns in Canada and South America.
  • ROIC(3) decreased to negative (4.0)% from (3.0)% in Q4/15 reflecting lower EBIT over the last four quarters in all operations due to the market downturn and the significant items not indicative of operational and financial trends that impacted 2015 and Q1/16 results.

Q1 2016 HIGHLIGHTS BY OPERATION

Canada

  • Revenues rose by 6%, driven by stronger new and used equipment sales, which were up by 11% and 65%, respectively. Higher equipment sales reflected large mining deliveries, including in the oil sands, and core equipment deliveries to the Site C project in British Columbia. Product support revenues were similar to Q1/15. Higher parts sales in mining were offset by lower service revenues across all sectors, as customers continued to in-source some service work and postpone maintenance. Rental markets remained challenging, resulting in a 25% decline in rental revenues.
  • Excluding severance and restructuring costs ($8 million in Q1/16 and $17 million in Q1/15), Q1/16 EBIT would have been $33 million and EBIT margin would have been 4.0%, both below Q1/15 EBIT of $46 million and EBIT margin of 5.7%. This was primarily due to lower gross profit from the sales of large equipment packages mentioned above, as well as lower gross profit from weaker rental revenues.
  • SG&A costs declined from Q1/15 despite higher revenues, and included only partial savings from Q1/16 workforce reductions. Excluding severance and restructuring costs, as well as Saskatchewan operations, SG&A costs were down by 9% from Q1/15. In 2016 compared to 2014, the Canadian workforce will be reduced by approximately 1,300 people or 22%, and the facilities footprint will be reduced by about 600,000 square feet or 20%. Annual SG&A fixed costs savings from these reductions and business transformation initiatives are expected to meaningfully exceed $150 million, which will decrease Canada's SG&A costs by approximately 20% from 2014 levels.
  • Invested capital declined by $75 million from Q4/15, driven by a reduction in equipment inventories, which also contributed to strong cash flow generation in the quarter.

South America

  • Revenues declined by 12% (down 21% in functional currency - U.S. dollars) as a result of continued market weakness across all sectors. New equipment sales decreased by 37% (down 43% in functional currency), reflecting slower mining and construction activity, mostly in Chile. Product support revenues were down 7% (down 15% in functional currency), reflecting reduced mining activity as producers continue to implement cost reductions and delay maintenance.
  • Excluding severance costs ($7 million in Q1/16 and $1 million in Q1/15), Q1/16 EBIT would have been $39 million and EBIT margin would have been 8.9%, both below Q1/15 EBIT of $46 million and EBIT margin of 9.4%. Gross profit margin improved from Q1/15, driven by a higher proportion of product support in the revenue mix (79% vs. 74% in Q1/15) and operational improvement initiatives. However, SG&A cost savings from Q1/16 workforce reductions were not yet fully realized to offset the decline in gross profit from significantly lower volumes. South American operations remain focused on maintaining solid profitability levels during the economic downturn by proactively managing costs, improving operating efficiencies, and capturing product support business.

United Kingdom & Ireland

  • Revenues decreased by 15% (down 19% in functional currency - U.K. Pound Sterling) due to reduced market activity, particularly in coal, steel and oil & gas sectors. As a result, new equipment sales and product support revenues were down 25% and 10%, respectively, in functional currency.
  • UK's EBIT results were negatively impacted by severance costs of $2 million and higher than expected provisions on certain power system projects of $5 million. Following a detailed review of power system contracts and projects in Q1, management recorded certain adjustments that reduced the profitability of those contracts by $5 million. Excluding these items, EBIT would have been $3 million and EBIT margin would have been 1.5%; (reported EBIT margin was (1.9)%). The decrease from Q1/15 EBIT margin of 3.4% (excluding severance) was mostly driven by higher SG&A levels on declining revenues in the Company's key markets. Management is focused on reducing the UK's cost structure to align with lower business volumes, improving project execution in power systems, and increasing asset velocity through facility and supply chain optimization. The Company is committed to returning the UK & Ireland operations to historic profitability levels.

CORPORATE AND BUSINESS DEVELOPMENTS

Dividend

The Board of Directors has approved a quarterly dividend of $0.1825 per share, payable on June 2, 2016 to shareholders of record on May 19, 2016. This dividend will be considered an eligible dividend for Canadian income tax purposes.

SELECTED CONSOLIDATED FINANCIAL INFORMATION

$ millions, except per share amounts Three months ended Mar 31
Revenue 2016 2015
(restated)(4)
%
change
New equipment 515 552 (7 )
Used equipment 98 67 45
Equipment rental 56 71 (21 )
Product support 821 847 (3 )
Other 4 4
Total revenue 1,494 1,541 (3 )
Gross profit 381 414 (8 )
Gross profit margin 25.5% 26.9%
SG&A (337 ) (340 ) 1
SG&A as a percentage of revenue (22.5)% (22.1)%
Equity earnings of joint venture and associate 1 1
EBIT 45 75 (41 )
EBIT margin 3.0% 4.9%
Net income 15 53 (72 )
Basic EPS 0.09 0.31 (71 )
EBITDA 96 126 (24 )
EBITDA margin 6.4% 8.2%
Free cash flow 30 (232 )
Mar 31,
2016
Dec 31,
2015
Invested capital 3,085 3,240
Invested capital turnover (times) 1.82 1.78
Net debt to invested capital 37.0% 36.7%
Return on invested capital (4.0)% (3.0)%

To download Finning's complete Q1 2016 results in PDF, please open the following link: http://media3.marketwire.com/docs/FinningQ116results.pdf

Q1 2016 RESULTS INVESTOR CALL

The Company will hold an investor call on May 5 at 11:00 am Eastern Time. Dial-in numbers: 1-800-319-4610 (within Canada and the US) or 1-416-915-3239 (Toronto area and overseas). The call will be webcast live and subsequently archived at www.finning.com. Playback recording will be available at 1-855-669-9658 until May 12, 2016. The pass code to access the playback recording is 00372.

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, the United Kingdom and Ireland.

FOOTNOTES

(1) Certain Q1 2016 and annual 2015 financial metrics were impacted by significant items management does not consider indicative of operational and financial trends either by nature or amount; these significant items are described on page 19 of the Company's Q1 2016 Management's Discussion and Analysis.

(2) These financial metrics do not have a standardized meaning under International Financial Reporting Standards, 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 Measures".

(3) 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).

(4) Management determined that it would be appropriate to voluntarily change its presentation of certain expenses to provide reliable and more relevant information to users of the financial statements and better align with industry comparable companies. In addition, management concluded that certain cost recoveries are better reflected as revenues. Certain line items have been restated in the comparative 2015 periods but the impact of restatement is not significant. For more information on the impact to financial statements, please refer to note 1 of the Company's interim condensed consolidated financial statements.

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; workforce reductions; distribution network and goodwill impairment charges; facility closures; expected revenue; expected free cash flow; EBIT margin; expected profitability levels; expected range of the effective tax rate; 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 financial impact from acquisitions. 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 May 4, 2016. 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 products and 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 revenue occurs; Finning's ability to reduce costs in response to slowing activity levels; Finning's ability to attract sufficient skilled labour resources as market conditions, business strategy or technologies change; 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 and in the annual MD&A for the financial risks.

Finning cautions readers that the risks described in the MD&A and 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.

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