Finning International Inc.
TSX : FTT

Finning International Inc.

February 19, 2015 09:00 ET

Finning Reports Q4 and Annual 2014 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Feb. 19, 2015) - Finning International Inc. (TSX:FTT) reported fourth quarter and annual 2014 results today (all monetary amounts are in Canadian dollars unless otherwise stated).

Q4 2014 HIGHLIGHTS

  • Revenues of $1.8 billion were comparable to Q4 2013 as higher revenues in Canada and the UK & Ireland offset lower revenues in South America.
  • Product support revenues grew by 14% to record levels, driven by higher parts sales in all operations.
  • EBIT margin(1)(2) of 7.9% reflected strong profitability in South America.
  • Basic EPS(2) was $0.62 compared to $0.54 in Q4 2013. A positive tax adjustment in Argentina to compensate for the loss of purchasing power due to inflation was $0.05 per share. A lower than expected annual effective tax rate in Argentina was $0.02 per share.
  • Invested capital(1) declined by approximately $230 million from Q3 2014, reflecting lower inventory levels in all operations.
  • Free cash flow(1) of $385 million was driven by strong cash generation in Canada.

2014 ANNUAL HIGHLIGHTS

  • Revenues increased by 2% to $6.9 billion. Product support revenues grew by 8% to a new record, driven by parts sales in Canada.
  • Canada's EBIT increased by 8% driven by higher volumes and cost savings from supply chain and service initiatives.
  • South America maintained profitability year over year despite a significant reduction in revenues.
  • Free cash flow was $483 million, which reduced the net debt to invested capital(1) ratio to 31%.
  • Canada's ROIC(1)(2) increased to 17.1% from 15.9% as a result of capital efficiencies and higher EBIT.

"I am pleased with our results in South America this quarter. Our proactive steps to adjust our cost structure to match lower business activity in South America allowed us to maintain historical profitability levels," said Scott Thomson, President and Chief Executive Officer of Finning International. "While fourth quarter earnings in Canada were not as strong as expected, due in part to lower-margin mining parts in the revenue mix and lower gross profit from rental, we are on the right path and our continued focus on advancing our operational priorities is demonstrating progress. In Canada, we finished the year with annual earnings growth and improved invested capital turnover resulting in an increase in return on invested capital to 17.1% from 15.9% a year ago."

"Our focus on cost and capital management will be integral to managing through the current lower oil price environment in Canada," continued Mr. Thomson. "In order to maintain profitability during soft market conditions, we are taking steps to align our cost base and invested capital to reduced demand, similar to the actions we took in South America a year ago. As part of our efforts to reduce costs in Canada, we will reduce our workforce by about 500 employees - roughly 9% of our Canadian workforce. While this is a difficult decision, it is a necessary step to adjust to expected business levels."

"Our business model has the attractive characteristic of generating significant free cash flow, particularly in a slowing market. Our focus on the operational excellence agenda has contributed to over $1 billion in free cash flow generation in the last 18 months putting our balance sheet in a very healthy position. The strength of our balance sheet gives us significant flexibility in an uncertain market. We are actively evaluating available capital allocation opportunities with the intention of making final decisions in the first half of 2015," concluded Scott Thomson.

Q4 2014 FINANCIAL SUMMARY

$ millions, except per share amounts Three months ended Dec 31
2014 2013 % change
Revenue 1,803 1,796 -
EBIT 142 145 (3 )
EBIT margin 7.9 % 8.1 %
Net income 107 93 15
Basic EPS 0.62 0.54 15
EBITDA(1)(2) 194 200 (3 )
Free cash flow 385 365 5
  • Revenue of $1.8 billion was relatively unchanged from Q4 2013. Higher revenues in Canada and the UK & Ireland offset a revenue decline in South America. Product support revenues grew by 14% to record levels, reflecting higher parts sales in all operations. New equipment sales decreased by 11% due to significantly lower volumes in South America.
  • Gross profit of $529 million decreased by 5% and gross profit margin(1) declined to 29.3% from 30.9% despite the shift in revenue mix to product support. This was mostly due to a higher proportion of mining parts in the revenue mix in Canada, which typically return a lower margin, and lower gross profit from rental due to reduced volumes. Also contributing to a decline in gross profit were favourable adjustments in Canada and South America in Q4 2013 that benefitted gross profit margins a year ago.
  • SG&A(2) of $393 million was down by 2%, mostly due to lower SG&A costs in Canada from successful execution of the service excellence and supply chain improvement initiatives.
  • EBIT of $142 million declined by 3%, and EBIT margin of 7.9% was below 8.1% in Q4 2013 primarily due to lower gross profit margins discussed above.
  • Basic EPS was $0.62 compared to $0.54 in Q4 2013. The effective tax rate was 12.1% compared to 25.1%, primarily due to a tax adjustment applied in Q4 2014 in Argentina to compensate for the loss of purchasing power due to inflation, which resulted in a $0.05 positive impact on EPS. In addition, a lower than expected annual effective tax rate in Argentina reduced the Q4 2014 effective tax rate and had a $0.02 positive impact on EPS.
  • Quarterly free cash flow of $385 million was above $365 million in Q4 2013, driven by strong cash generation in Canada. Annual free cash flow of $483 million marked a second consecutive year of strong free cash flow generation and reflected continued progress on improving working capital efficiencies in all operations, as well as lower net rental and capital expenditures.
  • Net debt to invested capital was 31.4% at the end of 2014, a reduction from 39.4% at the end of Q3 2014 and from 40.8% at the end of 2013. Net debt to invested capital ratio is currently at an all-time low and below the Company's target range of 35 to 45%.
Q4 2014 Q3 2014 Q4 2013
Invested capital ($ millions) 3,106 3,340 3,138
Invested capital turnover(1) (times) 2.10 2.09 2.04
Return on invested capital (%)
Consolidated 15.3 15.4 15.7
Canada 17.1 16.8 15.9
South America 14.6 15.8 17.6
UK & Ireland 16.3 15.6 16.4
  • Invested capital declined by about $230 million from Q3 2014 (down by approximately $280 million excluding the impact of foreign exchange), mostly as a result of lower inventory levels in all operations. Compared to Q4 2013, invested capital remained relatively unchanged in Canadian dollars. Excluding the impact of foreign exchange, invested capital decreased by about $150 million compared to Q4 2013 due to a decrease in inventory as well as rental equipment. Invested capital turnover improved to 2.10 from 2.04, driven by higher invested capital turnover in Canada and the UK & Ireland.
  • Canada's return on invested capital increased to 17.1% from 15.9% as a result of improved capital efficiencies together with higher EBIT. Consolidated ROIC was 15.3% compared to 15.7% in 2013 as operational improvements in Canada were offset by significantly reduced business volumes and the write-off of enterprise resource planning (ERP) costs in South America.

Backlog

  • Order backlog(1) was $1.0 billion at the end of 2014, below $1.1 billion at the end of Q3 2014 as deliveries outpaced order intake in the quarter. Order intake softened in Canada, remained low in South America, and continued to be strong in the UK & Ireland. There were no notable cancellations in any of the Company's operations in Q4.

Q4 2014 HIGHLIGHTS BY OPERATION

Canada

  • Revenues were up by 8% driven by higher product support revenues, notably parts sales in mining. New equipment sales increased by 4%, driven by higher volumes in power systems. Rental revenues were 12% lower than last year, mostly due to increased competition in rental markets, as well as very strong demand in Q4 2013.
  • Gross profit declined by 3% from Q4 2013, reflecting lower margins in all lines of business, with the exception of service. The main reasons for lower gross profit margins were a higher proportion of low-margin mining parts in the revenue mix, lower gross profit from rental due to reduced volumes, and positive equipment cost adjustments in Q4 2013 which benefited last year's new equipment margins. SG&A expenses declined by 5% despite an 8% increase in revenues, reflecting continued solid progress on the supply chain and service profitability initiatives. EBIT rose by 6% to $73 million; however, EBIT margin of 7.7% was below 7.9% in Q4 2013, mostly due to lower gross profit margins.
  • Invested capital decreased by about $240 million from Q3 2014 due to lower working capital, including lower parts inventory, and a decrease in rental inventory resulting from higher rental conversions. Invested capital was relatively unchanged compared to the end of last year, while annual revenues grew by 8%. As a result, invested capital turnover rose to 2.19 times from 2.03 times in 2013, reflecting improved management of working capital. ROIC increased to 17.1% from 16.8% in Q3 2014 and from 15.9% in Q4 2013, driven by improved capital efficiencies and higher EBIT.

South America

  • Revenues declined by 12% (down 19% in functional currency - US dollars) as market conditions in the region remained challenging and mining customers continued to focus on maintaining production levels while reducing operating costs. New equipment sales were down by 46% in functional currency, predominantly due to reduced demand from the mining sector. Product support revenues were up 5% in functional currency, driven by higher parts sales in mining, which more than offset lower service revenues.
  • Quarterly EBIT declined by 23% to $59 million (down 29% in functional currency) from a strong EBIT reported in Q4 2013. EBIT margin of 9.8% was solid; however it was below 11.3% in Q4 2013, reflecting lower business volumes and favourable adjustments to certain mining service contracts in Q4 of last year.
  • In 2014, the Company reduced SG&A costs and invested capital in South America to maintain profitability during slow and uncertain market conditions. In the past 18 months, South American operations reduced its workforce by approximately 600 people, or 8%, to about 6,900 employees. As a result, the Company incurred severance costs of approximately $6 million in 2014. Despite higher severance costs, SG&A expenses in 2014 were down by 12% in functional currency, on a 17% decline in revenue. Excluding the ERP write-off, severance costs, and labour disruption costs ($2 million), 2014 EBIT margin would have been 9.8% (reported 2014 EBIT margin was 8.8%).
  • Invested capital was similar to Q3 2014 levels in functional currency. Compared to the end of 2013, invested capital was down by about $150 million in functional currency (down by roughly $40 million in Canadian dollars), driven mostly by lower inventory as a result of the Company's focus on adjusting asset levels in response to slower mining activity. Although inventory turns improved and invested capital decreased year over year, sales volumes declined at a faster rate. As a result, ROIC declined to 14.6% from 17.6% in Q4 2013, impacted by lower EBIT due to significantly reduced volumes, the ERP costs write-off, and higher severance costs.

United Kingdom & Ireland

  • Revenues rose by 7% (up slightly in functional currency - U.K. Pound Sterling). New equipment sales were up 10% (up 4% in functional currency) and product support revenues were 12% higher (up 6% in functional currency), driven primarily by power systems projects. The revenue growth in power systems was partly offset by reduced demand for used equipment in favour of new equipment purchases.
  • EBIT of $11 million was $3 million higher than in Q4 2013, which was impacted by a $5 million write-off of ERP costs. EBIT margin was 4.3% compared to 3.3% a year ago, reflecting the ERP write-off in Q4 2013, as well as a highly competitive market environment.
  • Invested capital decreased by about £30 million from Q3 2014 (down $60 million in Canadian dollars), driven by lower inventory. Compared to the end of 2013, invested capital increased marginally (up by roughly $20 million in Canadian dollars); however, invested capital turnover improved to 3.43 times from 3.37. ROIC of 16.3% was slightly below 2013.

CORPORATE AND BUSINESS DEVELOPMENTS

Dividend

The Board of Directors has approved a quarterly dividend of $0.1775 per share, payable on March 19, 2015 to shareholders of record on March 5, 2015. This dividend will be considered an eligible dividend for Canadian income tax purposes.

SELECTED CONSOLIDATED FINANCIAL INFORMATION
(C$ millions, except per share amounts)
Three months ended Dec 31 Twelve months ended Dec 31
Revenue 2014 2013 % change 2014 2013 % change
New equipment 740 835 (11 ) 2,885 2,908 (1 )
Used equipment 85 82 4 271 303 (11 )
Equipment rental 91 102 (11 ) 358 392 (9 )
Product support 882 774 14 3,381 3,144 8
Other 5 3 23 9
Total revenue 1,803 1,796 0 6,918 6,756 2
Gross profit 529 554 (5 ) 2,062 2,080 (1 )
Gross profit margin 29.3 % 30.9 % 29.8 % 30.8 %
SG&A (393 ) (403 ) 2 (1,556 ) (1,555 ) (0 )
SG&A as a percentage of revenue (21.8 )% (22.4 )% (22.5 )% (23.0 )%
Equity earnings of joint venture and associate 6 0 12 9
Other expenses (0 ) (6 ) (14 ) (13 )
EBIT 142 145 (3 ) 504 521 (3 )
EBIT margin 7.9 % 8.1 % 7.3 % 7.7 %
Net income 107 93 15 318 335 (5 )
Basic EPS 0.62 0.54 15 1.85 1.95 (5 )
EBITDA 194 200 (3 ) 720 737 (2 )
Free cash flow 385 365 5 483 441 10
Dec 31, 14 Dec 31, 13
Invested capital 3,106 3,138
Invested capital turnover (times) 2.10 2.04
Net debt to invested capital 31.4 % 40.8 %
Return on invested capital 15.3 % 15.7 %

To download Finning's complete Q4 and Annual 2014 results in PDF, please open the following link: http://media3.marketwire.com/docs/FinningQ414results.pdf

Q4 AND ANNUAL 2014 RESULTS INVESTOR CALL

The Company will hold an investor call on Thursday, February 19 at 11:00 am Eastern Time. Dial-in numbers: 1-800-766-6630 (anywhere within Canada and the U.S.) or 416-340-8527 (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 February 19 until February 26. The pass code to access the playback recording is 7536453 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 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, Uruguay, as well as in the United Kingdom and Ireland.

FOOTNOTES

(1) These financial metrics do not have a standardized meaning under IFRS, which are also referred to herein as generally accepted accounting principles (GAAP), 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 and Additional GAAP Measures".

(2) 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).

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; expected revenue; EBIT margin; 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 target range of the Company's dividend payout 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 reflect Finning's expectations at February 18, 2015. 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 Caterpillar's products and Caterpillar's 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 revenues occur; Finning's ability to reduce costs in response to slowing activity levels; Finning's ability to attract sufficient skilled labour resources to meet growing product support demand; 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.

Finning cautions readers that the risks described in 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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