Finning International Inc.
TSX : FTT

Finning International Inc.

November 03, 2016 09:00 ET

Finning reports Q3 2016 results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Nov. 3, 2016) - Finning International Inc. (TSX:FTT) ("Finning" or the "Company") reported third quarter 2016 results today. All monetary amounts are in Canadian dollars unless otherwise stated.

HIGHLIGHTS

  • Significant progress in the UK & Ireland to lower the cost structure and improve capital efficiency resulted in an EBIT(1) margin of 3.8%.

  • Operational improvements and cost reductions enabled Canada to maintain profitability in a difficult economic environment.

  • South America achieved significant improvement in Adjusted ROIC(1)(2)(3) driven by sustained profitability and reduced invested capital.

  • Strong free cash flow(3) of $163 million in Q3 and $257 million year-to-date reflected improved management of working capital.

"The sustainable improvements and cost reductions we have made across our organization contributed to a solid third quarter. I am particularly pleased with our increased profitability in these times of competitive and challenging market conditions. Our ongoing commitment to managing the factors we control is also reflected in our continued focus on safety, optimizing our supply chain, improving service delivery and earning customer loyalty, which is at an all-time high since we began the journey to transform our business and deliver greater customer value," said Scott Thomson, president and CEO of Finning International. "Going forward, we will continue to position Finning to deliver significantly improved results when demand normalizes. We remain focused on managing working capital more effectively and continuously optimizing our supply chain to generate positive free cash flow through the cycle. The substantial free cash flow we are generating this year will further strengthen our balance sheet and provide capital allocation flexibility."

Q3 2016 FINANCIAL SUMMARY

$ millions, except per share amounts Q3 2016 Q3 2015
(restated)(4)
% change
Revenue 1,333 1,517 (12 )
EBIT 73 63 14
EBIT margin 5.4 % 4.2 %
EBITDA(1)(3) 119 125 (5 )
EBITDA margin 8.9 % 8.2 %
Net income 36 33 11
Basic EPS 0.22 0.19 13
Free cash flow 163 140 16
Q3 2016 EBIT and EBITDA by Operation
$ millions, except per share amounts
Canada South
America
UK &
Ireland
Finning
Total*
EBIT 37 40 10 73
EBIT margin 5.9 % 8.7 % 3.8 % 5.4 %
EBITDA 61 55 17 119
EBITDA margin 9.8 % 11.9 % 6.5 % 8.9 %
* Consolidated results include corporate and other operations, mostly corporate head office

Included in Q3 2015 results are the following significant items that management does not consider indicative of operational and financial trends either by nature or amount. These significant items are summarized below and described in more detail on page 3 of the Company's Q3 2016 Management's Discussion and Analysis ("MD&A").

Q3 2015 EBIT and EBITDA by Operation
$ millions, except per share amounts
Canada South
America
UK &
Ireland
Finning
Total*
EPS
EBIT / EPS 34 32 7 63 0.19
Severance costs 11 10 4 25 0.11
Restructuring costs - lease impairment 6 - - 6 0.03
Saskatchewan dealership acquisition costs - - - 3 0.01
Adjusted EBIT(2)(3) / Adjusted EPS(2)(3) 51 42 11 97 0.34
Adjusted EBITDA(2)(3) 85 62 19 159
EBIT margin 4.5 % 6.4 % 2.7 % 4.2 %
Adjusted EBIT margin(2)(3) 6.9 % 8.3 % 4.1 % 6.4 %
Adjusted EBITDA margin(2)(3) 11.5 % 12.1 % 7.2 % 10.5 %
* Consolidated results include corporate and other operations, mostly corporate head office
  • In Q3 2016, revenues were down 12% primarily due to lower product support revenues in Canada and South America, as well as lower new equipment sales in Canada. Product support declined by 13%, driven mostly by lower parts sales in the non-mining sectors in Canada and lower parts and service revenues in South America's mining industry. New equipment sales decreased by 9% due to timing of equipment deliveries in the oil sands, as well as weaker market activity in Alberta and Saskatchewan. This was partly offset by higher new equipment sales in the UK & Ireland and South America. Order backlog(3) of about $0.5 billion at the end of Q3 2016 remained unchanged from Q2 2016.

  • Gross profit declined by 13%, reflecting lower revenues. Gross profit margin of about 28% was relatively unchanged from Q3 2015. The Company continued to face pricing pressures in all markets as customers remained focused on cost reductions in a lower commodity environment.

  • EBIT of $73 million was below Adjusted EBIT in Q3 2015, primarily due to lower EBIT in Canada. In addition, strong share price appreciation in the quarter increased the Company's long-term incentive plan costs by about $7 million compared to Q3 2015.

  • EBITDA and EBIT margins of 8.9% and 5.4%, respectively, were below the Adjusted margins in Q3 2015, but improved from the Adjusted margins sequentially throughout 2016 as the Company began to realize cost savings from operational improvements and restructuring actions taken across all three regions.

  • EPS of $0.22 per share was below Adjusted EPS of $0.34 per share in Q3 2015 due to lower revenues and earnings from Canada and South America, higher long-term incentive plan costs of $0.03 per share driven by strong share price appreciation, and higher effective income tax rate (29% in Q3 2016 vs 19% in Q3 2015). However, Q3 2016 EPS has improved sequentially from Q1 2016 EPS of $0.09 (Adjusted EPS of $0.19) and Q2 2016 EPS of $0.03 (Adjusted EPS of $0.20).

  • Free cash flow was $163 million, with strong cash generated by all operations. Year-to-date free cash flow of $257 million was up significantly from ($22) million use of cash in the same period of 2015, driven mostly by improved management of working capital, including lower equipment inventory purchases.

  • The Company's balance sheet is strong with net debt to Adjusted EBITDA ratio(2)(3) of 2.1 and net debt to invested capital ratio(3) of 35.0% at the end of Q3 2016.

Q3 2016 INVESTED CAPITAL

Q3 2016 Q2 2016 Q4 2015
Invested capital(3)($ millions)
Consolidated 2,917 3,041 3,240
Canada 1,650 1,695 1,760
South America (U.S. dollars) 778 824 811
UK & Ireland (U.K. pound sterling) 148 153 157
Invested capital turnover(3)(4)(times) 1.85 1.78 1.78
Adjusted ROIC (%)
Consolidated 9.2 9.4 10.9
Canada 8.7 9.3 10.6
South America 15.6 14.2 14.0
UK & Ireland 3.4 3.3 9.0
  • Excluding the impact of foreign currency translation, invested capital decreased by about $215 million from Q4 2015. This was driven by continued efforts to reduce surplus inventory and rental assets in Canada to align with market demand, as well as improved management of working capital, including inventory purchases, across the organization.

  • Consolidated Adjusted ROIC of 9.2% declined slightly from Q2 2016 due to lower earnings in Canada. Adjusted ROIC in South America improved significantly driven by steady profitability and lower invested capital.

Q3 2016 HIGHLIGHTS BY OPERATION

Canada

  • Revenues declined by 17%, reflecting difficult market conditions and lower customer activity across all sectors in Western Canada. New equipment sales were down 25% due to timing of equipment deliveries in the oil sands and reduced activity in the power systems and construction markets in Alberta and Saskatchewan. Product support revenues were down 11% driven primarily by lower parts sales in the non-mining sectors. In addition, the component rebuild activity in the oil sands slowed significantly following the wildfires as producers were focused on recovering lost production output and reducing equipment downtime. Excluding the estimated negative impact on revenues from the wildfires, Q3 product support was down by about 8% from Q2 mostly due to lower activity in the oil sands in July and August. In September, mining product support activity returned to normal levels and is expected to remain steady for the balance of the year.

  • EBIT of $37 million was $14 million below Adjusted EBIT in Q3 2015 mostly due to a decrease in gross profit from lower revenues and continued pressure on margins in a very competitive pricing environment. Excluding severance, SG&A costs were down 11% from Q3 2015 reflecting cost savings from improved operating efficiencies and restructuring actions.

  • EBIT margin of 5.9% was below Adjusted EBIT margin of 6.9% in Q3 2015 and 6.3% in Q2 2016. However, excluding the benefit of higher equity earnings from the Pipeline Machinery International in Q2 2016, Q3 2016 profitability was up slightly from Q2 despite a slowdown in product support revenues.

South America

  • Revenues declined by 9% (also down 9% in functional currency - U.S. dollars), mostly due to reduced product support revenues in mining, reflecting a continued low copper price environment. While product support revenues were down 12% in functional currency compared to Q3 2015, they were relatively similar to Q2 and Q1 2016 as product support activity in mining appears to have stabilized at lower levels. New equipment sales were up 3% in functional currency, driven by improved construction activity in Argentina.

  • South American operations maintained solid profitability levels despite a shift in revenue mix from product support to lower margin new equipment sales and continued competitive pricing pressures. EBIT margin was 8.7%, up from Adjusted EBIT margin of 8.3% in Q3 2015, driven by improved operating efficiencies in the service business and tight control of SG&A costs.

  • Q3 Adjusted ROIC improved to 15.6% from 14.0% at the end of 2015 reflecting sustained profitability and reduced invested capital in a weak market environment.

United Kingdom & Ireland

  • Revenues decreased by 5%, but were up 13% in functional currency - U.K. Pound Sterling. Strong new equipment sales (up 26% in functional currency) were driven by higher activity in the general construction sectors as well as improved demand from data centre and capacity markets in power systems. Product support revenues declined by 9% in functional currency, due to lower activity in mining, steel, marine, and oil & gas sectors.

  • EBIT of $10 million and EBIT margin of 3.8% were slightly below Adjusted EBIT and Adjusted EBIT margin in Q3 2015, reflecting a shift in revenue mix from product support to new equipment sales and lower product support margins. UK & Ireland began to realize cost savings from restructuring initiatives, resulting in reduced fixed SG&A costs, and is returning to historic profitability levels. Q3 EBIT margin showed significant improvement from the last three quarters, reflecting successful execution of the turnaround plan. Management remains on track to transform the UK's business model and deliver a sustainable improvement in operating performance.

CORPORATE AND BUSINESS DEVELOPMENTS

Dividend

The Board of Directors has approved a quarterly dividend of $0.1825 per share, payable on December 1, 2016 to shareholders of record on November 17, 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 Sep 30 Nine months ended Sep 30
2016 2015
(restated)(4)
% change 2016 2015
(restated)(4)
% change
New equipment 427 468 (9 ) 1,319 1,659 (21 )
Used equipment 72 77 (6 ) 271 250 9
Equipment rental 61 85 (29 ) 170 224 (24 )
Product support 770 883 (13 ) 2,366 2,593 (9 )
Other 3 4 nm 11 12 nm
Total revenue 1,333 1,517 (12 ) 4,137 4,738 (13 )
Gross profit 369 422 (13 ) 1,093 1,271 (14 )
Gross profit margin 27.7 % 27.9 % 26.4 % 26.8 %
SG&A (295 ) (351 ) 16 (947 ) (1,022 ) 7
SG&A as a percentage of revenue (22.2 )% (23.2 )% (22.9 )% (21.6 )%
Equity earnings (loss) of joint venture and associate (1 ) 1 6 4
Other expenses 0 (9 ) (5 ) (9 )
EBIT 73 63 14 147 244 (40 )
EBIT margin 5.4 % 4.2 % 3.5 % 5.2 %
Adjusted EBIT 73 97 (26 ) 203 303 (33 )
Adjusted EBIT margin 5.4 % 6.4 % 4.9 % 6.4 %
Net income 36 33 11 56 148 (62 )
Basic EPS 0.22 0.19 13 0.33 0.86 (61 )
Adjusted basic EPS 0.22 0.34 (36 ) 0.60 1.07 (44 )
EBITDA 119 125 (5 ) 292 408 (28 )
EBITDA margin 8.9 % 8.2 % 7.1 % 8.6 %
Adjusted EBITDA 119 159 (26 ) 348 467 (26 )
Adjusted EBITDA margin 8.9 % 10.5 % 8.4 % 9.9 %
Free cash flow 163 140 16 257 (22 ) nm
Sep 30, 2016 Dec 31, 2015
Invested capital 2,917 3,240
Invested capital turnover (times) 1.85 1.78
Net debt to invested capital 35.0 % 36.7 %
ROIC (6.6 )% (3.0 )%
Adjusted ROIC 9.2 % 10.9 %
nm -% change not meaningful

To download Finning's complete Q3 2016 results in PDF, please open the following link: http://media3.marketwire.com/docs/FinningQ316results.pdf

Q3 2016 INVESTOR CALL

The Company will hold an investor call on November 3 at 11:00 am Eastern Time. Dial-in numbers: 1-800-319-4610 (Canada and US), 1-416-915-3239 (Toronto area), 1-604-638-5340 (international). The call will be webcast live and subsequently archived at www.finning.com. Playback recording will be available at 1-855-669-9658 (access code 0826) until November 10, 2016.

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) 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).
(2) Certain 2016 and 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 summarized on page 2 of this news release and described on page 3 of the Company's Q3 2016 MD&A, and the financial metrics that have been adjusted to take these items into account are referred to as "adjusted" metrics.
(3) These financial metrics, referred to as "non-GAAP financial measures" do not have a standardized meaning under International Financial Reporting Standards (IFRS), which are also referred to herein as Generally Accepted Accounting Principles (GAAP), and therefore may not be comparable to similar measures presented by other issuers. For additional information regarding these financial metrics, including definitions and reconciliations from each of these non-GAAP financial measures to their most directly comparable measure under GAAP, see the heading "Description of Non-GAAP Financial Measures and Reconciliations" in the Company's Q3 2016 MD&A. Management believes that providing certain non-GAAP financial measures provides users of the Company's consolidated financial statements with important information regarding the operational performance and related trends of the Company's business. By considering these measures in combination with the comparable IFRS measures set out in this MD&A, management believes that users are provided a better overall understanding of the Company's business and its financial performance during the relevant period than if they simply considered the IFRS measures alone.
(4) As previously disclosed, management has voluntarily changed 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 and as previously disclosed, management has 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: delivery of improved results when demand normalizes; free cash flow; order backlog; results of operational improvements and restructuring actions; product support activity for the balance of the year; product support activity in mining in South America; cost savings from restructuring initiatives in the UK and Ireland operations; and transformation of the business model in the UK and Ireland operations to deliver a sustainable improvement in operating performance. 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 2, 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 its 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 and availability of, 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. 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 of this report. 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.

Contact Information