VANCOUVER, BRITISH COLUMBIA--(Marketwire - Nov. 8, 2011) - Finning International Inc. (TSX:FTT) -
Q3 2011 HIGHLIGHTS
- Revenue increased by over 10% to $1.3 billion, driven by continued growth in new equipment sales in all operations and record product support revenues in South America and the UK and Ireland in functional currency.
- South America delivered record quarterly EBIT. In the UK and Ireland, EBIT more than tripled over the prior year's quarter.
- As previously disclosed, the five-week strike in British Columbia and the enterprise resource planning (ERP) implementation resulted in lower Canadian revenues, and additional system support costs were incurred, reducing earnings by approximately 25 cents per share in Q3 2011.
- Consolidated EBIT declined by just over 50% to $46 million, and basic EPS was $0.21 compared to $0.37 in Q3 2010 primarily due to the impact of the Canadian ERP implementation.
- Backlog improved to $1.8 billion, reflecting continuing robust demand from mining and heavy construction sectors.
Finning International Inc. reported quarterly revenues of $1.3 billion, a 10% increase over Q3 2010. Earnings before interest and income taxes (EBIT)(1) of $46 million declined by 51% from Q3 2010, and EBIT margin was 3.5% compared to 7.9% in Q3 2010. Basic earnings per share (EPS) was $0.21, down 43% from Q3 2010. As previously disclosed, third quarter results were negatively impacted by the ERP system implementation in Canada in the quarter and the strike in British Columbia, together totaling approximately $0.25 per share.
"Our third quarter results continue to reflect strong market conditions in our core businesses. We posted higher new equipment sales in all operations and achieved outstanding product support revenues in South America and the U.K. and Ireland. Importantly, we demonstrated improved operating leverage in South America, where EBIT reached a new record, and our operations in the U.K. and Ireland more than tripled their EBIT contribution from a year ago," said Mike Waites, president and CEO, Finning International. "The functionality of our ERP system in Canada has improved considerably since go-live, and I am confident the system will deliver the expected operational benefits and support our growth objectives. As we continue to execute on our long-term strategy, I am optimistic about our growth opportunities going into 2012. Discussions continue with Caterpillar regarding the potential acquisition of the Bucyrus distribution business."
The outlook for mining, construction and power systems markets for 2012 and 2013 remains solid, and the strong backlog provides good visibility into 2012 business levels. The Company remains committed to driving profitability improvements in all operations and achieving its 10% EBIT margin target in 2013.
Q3 2011 FINANCIAL SUMMARY
Beginning with Q1 2011, the Company's financial results are reported under IFRS (International Financial Reporting Standards)(2).
| C$ millions, except per share amounts (unaudited) | Three months ended Sep 30 | ||||
| 2011 | 2010 | % change | |||
| Revenue | 1,329 | 1,206 | 10 | ||
| Earnings before interest and income taxes (EBIT)(1) | 46 | 95 | (51 | ) | |
| Net income | 35 | 63 | (44 | ) | |
| Basic EPS | 0.21 | 0.37 | (43 | ) | |
| Earnings before interest, income taxes, depreciation and amortization (EBITDA)(1) | 91 |
132 |
(31 |
) | |
| Free cash flow(1)(3) | (119 | ) | 24 | n/m | |
- Revenues of $1.3 billion were up 10% from Q3 2010, driven by higher new equipment sales in all operations. New equipment sales increased by 21%, supported by continued strength in mining and heavy construction. Record product support revenues in South America and the UK & Ireland in functional currency were offset by lower parts and service revenues in Canada due to the combined negative impact of the ERP system implementation and the B.C. strike. As a result, consolidated product support revenues declined by 1%. Used equipment sales were 1% lower mostly due to lower sales in Canada, and rental revenues were 22% higher, reflecting strong demand.
- Gross profit increased by 2% from Q3 2010. Gross profit margin declined to 27.7% from 30.0% as revenue mix shifted in favour of new equipment sales in all operations. New equipment sales contributed 50% to the total revenue compared to 45% in Q3 2010. Product support comprised 39% of the total revenue compared to 44% in Q3 of last year, primarily due to lower product support revenues in Canada.
- Selling, general and administrative (SG&A) expenses as a percentage of revenue increased to 23.3% from 21.4% in Q3 2010 primarily as a result of additional costs related to the new ERP system implementation issues in Canada in the quarter. The Company remains committed to driving SG&A expenses as a percentage of revenue down to approximately 20% by 2013.
- EBIT was down by 51% to $46 million, and consolidated EBIT margin was 3.5% compared to 7.9% in Q3 2010. The Company continued to demonstrate improved operating leverage in South America and the U.K. and Ireland, where earnings growth outpaced revenue growth in the quarter. EBIT was at record levels in South America and very strong in the UK and Ireland. Consolidated EBIT reflects lower profitability in Canada, resulting from the ERP system implementation and the strike.
- Net income declined by 44% to $35 million and basic EPS was $0.21 compared to $0.37 in Q3 2010. The negative impact of the ERP system implementation in Canada and the strike in B.C. is estimated at approximately $0.25 per share. Foreign exchange had a negative impact of $0.03 per share compared to Q3 2010.
- EBITDA, which is an indicator of a company's cash operating performance, declined by 31% to $91 million. Quarterly free cash flow was a $119 million use of cash, compared to $24 million generation of cash in Q3 2010. The use of cash in the quarter was driven by higher inventory levels in Canada and South America to support expected deliveries in Q4 and into 2012. Third quarter free cash flow was also negatively impacted by the ERP system implementation with reduced parts sales volumes affecting inventories and collections in Canada. The Company expects to generate positive free cash flow in Q4 2011 with higher scheduled deliveries and related collections as well as moderating inventory additions. Free cash flow is expected to be negative for the full year, reflecting the required level of working capital to meet continued strong demand for equipment and parts. The Company continues to closely manage its working capital to ensure a strong balance sheet.
- The Company's net debt to total capital ratio(6) was 48.7% compared to 45.6% at the end of June 2011 due to a decrease in cash levels to support the higher working capital requirements. With positive free cash flow expected in the fourth quarter, the net debt to total capital ratio is expected to be within the Company's target range by the end of 2011.
- Consolidated backlog increased to $1.8 billion from $1.7 billion at the end of June, as new order intake exceeded deliveries in all operations. There were no unusual order cancellations in any of the Company's operations in Q3 2011.
Q3 2011 HIGHLIGHTS BY OPERATIONS
Canada
- Third quarter revenues were up by 4% from Q3 2010, as a 15% increase in new equipment sales was partly offset by a 10% decline in product support revenues. New equipment sales were robust across all sectors and particularly strong in mining. Product support revenues were negatively impacted by the ERP system implementation issues and the five-week strike in British Columbia.
- Following the launch of its new ERP system in Canada in July, the Company experienced implementation issues affecting parts supply, warehousing and distribution operations. Finning's Canadian operations have since tested and deployed a series of application changes to improve the functionality and reliability of the system to process and distribute parts to customers. With improved functionality in the application, the next phase of work will focus on enhancing user proficiency, business process improvements, and introducing controlled system improvements to achieve greater efficiency over time. The ability to process parts orders has grown considerably since go-live and the Company expects fourth quarter parts activity levels to be substantially improved and approaching near normal volumes.
- SG&A costs increased as a percentage of revenues relative to Q3 2010 primarily due to additional costs related to the new ERP system implementation issues noted above. The Company expects to continue to experience these higher costs in Q4 2011, but at a reduced rate.
- Finning Canada reported a loss before interest and tax of $2 million compared to EBIT of $47 million in Q3 2010, reflecting reduced sales volumes directly related to ERP go-live issues, lower gross profit margins and additional system support costs. As a result, EBIT margin was a negative 0.3%, significantly lower than 8.0% in Q3 2010 and 9.0% achieved in the second quarter of 2011. Despite the setback caused by the ERP start-up challenges, Finning Canada remains committed to achieving its 10% EBIT margin target in 2013.
South America
- Third quarter revenues increased by 14% from Q3 2010, driven by strong new equipment sales and continued growth in product support across all sectors. In functional currency (USD), revenues rose by 21% from Q3 2010, with new equipment sales up 28% and product support climbing 14% to record levels. New equipment sales to the construction industry were particularly robust in the quarter, while the Chilean mining sector continued to drive solid product support growth.
- SG&A costs as a percentage of revenue were marginally higher compared to Q3 2010, reflecting a 12% increase in the workforce to support the growing product support business. The Company continues to manage cost pressures associated with strong business volumes and a tight and competitive labour market.
- EBIT of $50 million reached a new record and was 20% higher compared to Q3 2010 (in functional currency, EBIT increased by 26%). EBIT margin improved to 9.4% from 9.0% in Q3 2010, driven by record product support revenues and higher or comparable gross profit margins in most lines of business. Finning South America is on track to achieve its EBIT margin target of 10% to 11% in 2013.
United Kingdom and Ireland
- Quarterly revenues were up 23% from Q3 2010, driven by higher new equipment sales in the heavy construction and power systems sectors and record product support revenues in functional currency (GBP). Quarterly revenues increased by 25% in functional currency, with a 40% increase in new equipment sales and an 8% increase in product support.
- EBIT rose to $13 million from $4 million in Q3 2010, and the quarterly EBIT margin improved significantly to 6.8% from 2.6% a year ago. Higher volumes and reduced SG&A costs as a percentage of revenue drove improved profitability in the quarter despite a shift in revenue mix to a higher proportion of new equipment sales, from 50% of total revenue in Q3 2010 to 56% in Q3 2011. The Company expects to continue making solid progress towards achieving a 7% to 8% EBIT margin in the UK and Ireland in 2013.
CORPORATE AND BUSINESS DEVELOPMENTS
Dividend
The Board of Directors approved a quarterly dividend of $0.13 per share; payable on December 9, 2011 to shareholders of record on November 25, 2011.This dividend will be considered an eligible dividend for Canadian income tax purposes.
Leadership Change at Finning Canada
On October 18, the Company announced the appointment of Andy Fraser as president of Finning Canada. Mr. Fraser has held a variety of senior roles across the Company's operations in his career covering over 30 years with Finning. In his most recent role as executive vice president, power systems and global business development for Finning International, he was responsible for growing Finning's power systems capabilities globally and managing the Company's investments in OEM Remanufacturing Company Inc., PipeLine Machinery International and Energyst. Prior to this role, Mr. Fraser was managing director, Finning UK Group where he laid the groundwork for a renewed business strategy, including the successful restructuring of the U.K. operations and the acquisition of the Ireland territory. Mr. Fraser replaces Dave Parker, who stepped down from his role with the Company.
| SELECTED CONSOLIDATED FINANCIAL INFORMATION |
| (from continuing operations unless otherwise stated, C$millions, except per share amounts) |
| Three months ended Sep 30 | Nine months ended Sep 30 | ||||||||||||
| Revenue | 2011 | 2010 | % change | 2011 | 2010 | % change | |||||||
| New equipment | 661.0 | 548.1 | 21 | 1,899.0 | 1,301.3 | 46 | |||||||
| Used equipment | 52.3 | 53.0 | (1 | ) | 174.9 | 198.3 | (12 | ) | |||||
| Equipment rental | 87.9 | 71.8 | 22 | 248.0 | 197.3 | 26 | |||||||
| Product support | 524.8 | 531.2 | (1 | ) | 1,753.0 | 1,534.6 | 14 | ||||||
| Other | 3.1 | 2.1 | 51 | 9.4 | 6.6 | 43 | |||||||
| Total revenue | 1,329.1 | 1,206.2 | 10 | 4,084.3 | 3,238.1 | 26 | |||||||
| Gross profit | 367.9 | 362.2 | 2 | 1,205.2 | 983.8 | 23 | |||||||
| Gross profit margin(4) | 27.7 | % | 30.0 | % | 29.5 | % | 30.4 | % | |||||
| SG&A | (310.2 | ) | (258.7 | ) | (20 | ) | (912.3 | ) | (758.7 | ) | (20 | ) | |
| SG&A as a percentage of revenue | (23.3 | )% | (21.4 | )% | (22.3 | )% | (23.4 | )% | |||||
| Equity earnings | 1.9 | 1.8 | 3.7 | 2.5 | |||||||||
| Other expenses | (13.4 | ) | (10.6 | ) | (25 | ) | (24.2 | ) | (26.1 | ) | 8 | ||
| EBIT(2) | 46.2 | 94.7 | (51 | ) | 272.4 | 201.5 | 35 | ||||||
| EBIT margin(5) | 3.5 | % | 7.9 | % | 6.7 | % | 6.2 | % | |||||
| Income from continuing operations | 35.4 | 63.4 | (44 | ) | 188.8 | 125.6 | 50 | ||||||
| Loss from discontinued operations, net of tax | - | - | - | (125.0 | ) | ||||||||
| Net income (loss) | 35.4 | 63.4 | 188.8 | 0.6 | |||||||||
| Basic earnings (loss) per share (EPS) | |||||||||||||
| from continuing operations | 0.21 | 0.37 | (43 | ) | 1.10 | 0.73 | 51 | ||||||
| from discontinued operations | - | - | - | (0.73 | ) | ||||||||
| Total basic earnings (loss) per share | 0.21 | 0.37 | 1.10 | 0.00 | |||||||||
| EBITDA(2) | 90.5 | 131.8 | (31 | ) | 398.1 | 315.9 | 26 | ||||||
| Free Cash Flow*(2)(3) | (118.6 | ) | 23.7 | n/m | (501.8 | ) | 140.2 | n/m | |||||
| Sep 30, 11 | Dec 31, 10 | ||||||||||||
| Total assets | 4,086.8 | 3,429.7 | |||||||||||
| Total shareholders' equity | 1,316.0 | 1,203.0 | |||||||||||
| Net debt to total capital(6) | 48.7 | % | 35.3 | % | |||||||||
| * Free cash flow from Hewden Stuart Limited has been included in the figures for periods prior to its sale. |
To download Finning's complete Q3 2011 results in PDF, please open the following link: http://media3.marketwire.com/docs/FinningQ311results.pdf
To download the CEO and CFO certification letters once they have been filed on SEDAR, please open the following link: http://www.sedar.com/DisplayCompanyDocuments.do?lang=EN&issuerNo=00001068
Q3 2011 RESULTS INVESTOR CALL
Management will hold an investor conference call on Tuesday, November 8 at 11:00 am Eastern Time. Dial-in numbers: 1-866-223-7781 (anywhere within Canada and the U.S.) or (416) 340-8018 (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 8 until November 15. The pass code to access the playback recording is 1052651 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 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, as well as in the United Kingdom and Ireland.
Footnotes
| (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 consolidated financial statements. |
| (2) | Beginning in 2011, the Company's results are now being prepared in accordance with International Financial Reporting Standards ("IFRS"). Finning's accounting policies have changed and the presentation, financial statement captions and terminology used in this news release and the accompanying unaudited financial statements differ from that used in all previously issued financial statements and quarterly and annual reports. The new policies have been consistently applied to all of the years presented in this news release and all prior period information has been restated or reclassified for comparative purposes unless otherwise noted. Further details on the conversion to IFRS are provided in the management's discussion and analysis section of this news release and in the notes to Finning's unaudited consolidated financial statements as at and for the quarter ended September 30, 2011. |
| (3) | Free cash flow is defined as cash flow provided by (used in) operating activities less net property, plant and equipment expenditures. |
| (4) | Gross profit margin is defined as gross profit as a percentage of total revenue. |
| (5) | EBIT margin is defined as earnings before interest and income taxes as a percentage of total revenue. |
| (6) | 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, 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 and SG&A levels and EBIT growth; anticipated generation of free cash flow (including projected net capital and rental expenditures), and its expected use; anticipated defined benefit plan contributions; the expected target range of Debt Ratio; the expected quantitative impact on the 2010 consolidated statements of financial position and statements of income and comprehensive income of the Company's transition to IFRS effective January 1, 2010; and the impact on new and revised IFRS that have been issued but are not yet effective. 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 8, 2011. 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 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 improve productivity and operational efficiencies while continuing to maintain customer service; our ability to manage cost pressures as growth in revenues occur; our ability to attract sufficient skilled labour resources to meet growing product support demand; our ability to negotiate and renew collective bargaining agreements with satisfactory terms for our employees and the Company; 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; the integrity, reliability, and availability of information technology and the data processed by that technology; operational benefits from the new ERP system; new or amended IFRS or interpretations that become effective prior to the inclusion of the Company's financial statement of position in its first annual audited IFRS financial statements. 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 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 current Annual Information Form (AIF) in Section 4.
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.
Contact Information:
Mauk Breukels
Vice President, Investor Relations and Corporate Affairs
(604) 331-4934
mauk.breukels@finning.com
www.finning.com