Finning International Inc . (TSX:FTT), the world's largest Caterpillar (NYSE:CAT) dealer, reported its third-quarter earnings on October 25, 2024, revealing a mixed performance across its regional operations. CEO Kevin Parkes and CFO Greg Palaschuk highlighted the company's strong results in South America, stable operations in the U.K. and Ireland, and challenges faced in Canada due to dynamic market conditions.
Despite a 19% drop in adjusted EBIT, primarily due to lower Canadian margins, the company reported a net revenue increase of 4% to $2.5 billion compared to the same quarter in the previous year. A notable $250 million equipment order and a 44% backlog growth in power systems, driven by data center demand, marked significant developments for the company.
Key Takeaways
- Net revenue for Q3 2024 reached $2.5 billion, a 4% increase from Q3 2023.
- Adjusted EBIT fell by 19%, largely due to lower margins in Canada.
- New equipment sales rose 14% in South America and 4% in Canada, with a notable order worth $250 million.
- Free cash flow generated was $346 million for Q3, totaling $746 million over the past year.
- The company's restructuring plan is expected to reduce annual SG&A by approximately $25 million by 2025.
- Despite withdrawing its growth guidance for 2025, Finning remains optimistic about the future, particularly in the copper mining sector in Chile.
Company Outlook
- Finning anticipates ongoing challenges in the Canadian market but remains optimistic due to signs of increased spending and opportunities in mining.
- The company plans to continue improving SG&A as a percentage of revenue, reflecting ongoing efforts to enhance operational efficiency.
Bearish Highlights
- Adjusted EBIT in Canada fell 31%, reflecting lower gross margins.
- The rental equipment market in Canada is experiencing below-normal utilization.
- In the U.K. and Ireland, new equipment sales declined by 3%, and product support growth targets for 2025 have been withdrawn.
- SG&A in South America rose 17% due to costs associated with reentering Argentina's foreign exchange market.
Bullish Highlights
- South America saw a 14% increase in new equipment sales and a 68% surge in used equipment sales.
- The U.K. and Ireland reported a 40 basis point increase in adjusted EBIT as a percentage of net revenue to 6.3%.
- The company is actively hiring in South America to support growth, particularly in Chile.
Misses
- Product support revenue increased by only 2%.
- In Canada, product support revenue declined by 3%, and the company sold approximately $150 million in inventory at low margins to support cash flow.
Q&A Highlights
- Uncertainty around U.S. political developments and their impact on Canadian energy customers was acknowledged, with low energy costs highlighted as crucial for American consumers.
- The company is seeing a shift in backlog composition, with construction now comprising about 20% of the mix due to strong demand in power systems.
- Finning is expected to adopt parts sorting technology advancements from South America in Canada, subject to capital allocation priorities.
Finning International Inc. is navigating a complex market landscape with a focus on operational simplification and cost efficiency. While the Canadian market poses challenges, the company's strong performance in South America and strategic adjustments in the U.K. and Ireland offer a balanced outlook. With substantial free cash flow generation and a clear plan for SG&A reduction, Finning is positioning itself for sustainable growth in the coming years.
InvestingPro Insights
Finning International Inc.'s (FTT) recent earnings report reflects a company navigating through diverse market conditions across its global operations. To complement this analysis, InvestingPro data provides additional context to the company's financial health and market performance.
According to InvestingPro, Finning International has a market capitalization of $3.73 billion USD, positioning it as a significant player in the industrial equipment distribution sector. The company's P/E ratio of 10.85 suggests that it may be undervalued compared to industry peers, which aligns with the company's cautious outlook and recent market challenges, particularly in Canada.
Despite the reported challenges, InvestingPro Tips highlight that Finning has maintained dividend payments for 44 consecutive years and has raised its dividend for 22 consecutive years. This demonstrates the company's commitment to shareholder returns and financial stability, even in the face of market volatility. The current dividend yield stands at 3.0%, which may be attractive to income-focused investors.
The company's revenue growth of 6.63% over the last twelve months, as reported by InvestingPro, supports the 4% net revenue increase mentioned in the earnings report. This growth, coupled with a gross profit margin of 23.61%, indicates that Finning is maintaining its operational efficiency despite the pressures on margins in certain regions.
It's worth noting that InvestingPro Tips also point out that the stock has taken a significant hit over the last week, with a 1-week price total return of -10.09%. This recent volatility may reflect the market's reaction to the mixed earnings report and the company's withdrawal of certain growth targets.
For investors seeking a more comprehensive analysis, InvestingPro offers 9 additional tips for Finning International, providing a deeper dive into the company's financial health and market position.
Full transcript - Finning International Inc (FINGF) Q3 2024:
Operator: Thank you for standing by. This is the conference operator. Welcome to the Finning International Inc. Third Quarter 2024 Investor Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Greg Palaschuk, Executive Vice President and Chief Financial Officer. Please go ahead.
Greg Palaschuk: Thank you, operator. Good morning, everyone, and welcome to Finning's third quarter earnings call. Joining me today is Kevin Parkes, our President and CEO. Following our remarks, we'll open the line to questions. This call is being webcast on the Investor Relations section of finning.com. We've also provided a set of slides on our website that we will reference. An audio file of this call and accompanying slides will be archived. Before I turn it over to Kevin, I want to mind everyone that some of the statements provided today are forward-looking. Please refer to Slides' 9 and 10 for important disclosures about forward-looking information as well as currency and specified financial measures, including non-GAAP financial measures. Please note that forward-looking information is subject to risks, uncertainties and other factors as discussed in annual information form under key business risks and in our MD&A under Risk Factors and Management and forward-looking information disclaimer. Please treat this information with caution as our actual results could differ materially from current expectations. Kevin, over to you.
Kevin Parkes: Thank you, Greg, and good morning, everyone. I would first like to thank our employees. We continue to build resilience into our operating model in a more dynamic environment and the progress we have made to advance our strategy would not be possible without the dedication of all of our teams and their commitment to creating a positive impact for our stakeholders. We are working diligently to simplify our business, build safe and inclusive environments and empower our people to better serve our customers. Turning to our third quarter results on Slide 2. Our third quarter results were varied by region and reflect the advantage of our diversified business. Our South American business results continue to be strong. Our U.K. and Ireland operations remain resilient. And Our Canadian business performance was impacted by the continued dynamic operating conditions. I was in South America last week, and I continue to be encouraged by the very positive customer sentiment in the region driven by mining. We continue to mobilize for growth in the region, and I had the opportunity firsthand to see the progress on our investments to increase our capacity and build stronger capabilities in the Antofagasta (LON:ANTO) region. I also had the opportunity to meet and thank our employees who are supporting our customer growth, many of whom are new and part of our aggressive recruitment and training plans. Activity in the Chilean copper sector remains solid with strong activity levels from mining customers and contractors. We're seeing customers continue to extend the life of their equipment as well as other fleets entering major maintenance cycles. This all helps drive product support growth. We're also actively quoting on multiple new equipment tender packages, and we are pleased with the recent $250 million equipment order from a global mining customer in October. At MINExpo in September, Caterpillar, our partner unveiled their latest technologies and solutions for the mining industry. We believe these technologies such as Dynamic Energy Transfer (NYSE:ET), or DET, build on the success of our electric drive haul trucks and autonomous solutions to position us well for future opportunities. In the U.K. and Ireland, our operations remain resilient in a lower growth environment. We are pleased with the team's execution in a difficult market, having expanded our margin to a solid 6.3% on an adjusted EBIT as a percentage of net revenue basis driven by SG&A reductions. While we have seen some green shoots in activity in the construction sector with a pickup of new order activity for next year, and power systems activity remains healthy, we do remain cautious in the region until we see a more constructive economic outlook. We have generated cash consistently throughout the year and the teams continue to focus on building population, capabilities and capacity to drive product support, executing with discipline and resilience. Our Canadian business continues to be impacted by challenging market conditions. We remain committed to executing our product support strategy, and we are growing market share through new and used equipment, which builds population and future product opportunities. We incurred severance costs this quarter as we continued plans to decentralize and optimize our overhead of our company. We will continue to simplify our operational structure, consolidate functions and capture efficiencies where possible. We are all focused on driving execution of our strategy and the leadership transition we announced in September is a positive and well planned succession. Overall, we are pleased to see revenue growth throughout our business with new, used and product support revenues, all up in Q3 versus Q3 2023. New equipment revenues in South America were up in all sectors, 14% overall. In Canada, new equipment revenues were up 4% overall with strong deliveries in mining, offset by slower construction and power systems revenues. New equipment revenues in the construction segment in the U.K. and Ireland were up, offset by lower power systems revenues in the quarter. Despite this lower power system revenues in the U.K. and Ireland, backlog increased meaningfully due to data center demand. Most pleasing and encouraging for the future is approximately $90 million build in our backlog relative to Q2 2024, a healthy indicator for our business looking forward. Turning to product support. Our consolidated product support revenue is up 2% year-over-year. We are seeing strong product support growth in South America from both mining and the oil and gas sectors, and we continue to significantly add technicians in the region to support the growing fleet of mining equipment with approximately 200 net new technicians added since Q2 of this year. Product support in Canada and the U.K. are not yet consistently where we would like them to be. In Canada, we have stabilized at a level only slightly below last year despite the absence of major infrastructure projects and the dynamic mining environment we face. In the U.K. and Ireland, we have seen sequential growth each quarter this year, and we see both regions showing signs of improvement as we head into the winter months. Our full cycle resilience continues to improve. We are pleased with another quarter of strong free cash flow as we started the second half of the year. We generated $346 million of free cash flow in the quarter and $746 million of free cash flow over the last 12 months, well than excess of our net income. There is more opportunity for us to drive resilience through the increased velocity in our operations and focus on cost competitiveness. Moving to sustainable growth. Our consolidated used equipment revenues were up 24% year-over-year. This continues to highlight our success in developing our capabilities and increasing our participation in this market. Our used equipment business in the U.K. was up nearly 50%. Our South American used equipment business up nearly 70% relative to Q3 2023, further demonstrating our execution success in this strategic area. In power systems, we continue to see strong demand for our products and services with our power systems backlog up 44% since last quarter from additional wins in the U.K. and Ireland data center market as we lock down business well into 2026 and 2027. We continue to see strong demand for power solutions in all regions and expect growth to continue in this sector. We continue to believe the rental sector presents an attractive long-term sustainable growth opportunity for Finning. We've taken a disciplined approach this year given the current backdrop in construction and taking opportunities to build capability, which will drive growth in future years. We are committed to the disciplined execution, building momentum for a strong finish to the year and remain focused on executing our strategy, maximizing product support, continuously improving our cost and capital position to drive full cycle resilience and by growing prudently in used rental and power, all with the objective of improving our road to a sustainably high level moving forward. With that, I'll hand it back to Greg.
Greg Palaschuk: Thank you, Kevin. I'll now turn to Slide 3. Our Q3 net revenue of $2.5 billion was up 4% from Q3 2023. Adjusted EBIT was down 19%, primarily due to lower margins in Canada. Adjusted EPS was down 13%. Lower EBIT was partially mitigated by lower share count and lower effective tax rate, which I'll provide more details on in a few slides. In the third quarter, results where we adjusted for two significant items. We incurred $19 million of severance costs related to headcount reductions and consolidation efforts of non-revenue-generating positions, including information technology and supply chain roles as well as some financial support functions as we continue to simplify our business, reduce overheads and build more resilience into our operating model. Our Canadian operations recorded an estimated loss of $14 million for receivables from a mining customer who has placed into receivership following a landslide at their mine. Prior to the event, the customer had been a consistent and reliable customer. This quarter, we continued to build on our strong free cash flow momentum generating $346 million, bringing our year-to-date cumulative free cash flow to $466 million. On Slide 4, we show changes to our net revenue by line of business compared to Q3 2023 and the comparison of our equipment backlog by market sector. New equipment sales were up 7%, driven by strong mining deliveries in Canada and South America. Used equipment sales were up 24%, higher in all regions. Product support revenue was up 2% with solid growth in South America offset by lower levels in Canada and the U.K. and Ireland. Rental revenue decreased by 12% due to lower utilization factors across all regions. Our equipment backlog was $2.3 billion at the end of September, up 4% from the end of June, reflecting strong order intake for mining and power systems customers. Equipment was moving through our backlog very efficiently and deliveries remained very healthy. We're also pleased to see the proportion of power systems backlog increased to 35% this quarter as we continue to execute our strategy to achieve sustainable growth in the power sector. We continue to see solid order intake with sizable orders received in October, $250 million from a global miner in Chile and $90 million from a mining contractor and uranium miner in Canada. Turning to our EBIT performance on Slide 5. Gross profit as a percentage of net revenue was down 210 basis points, mostly due to lower margins in our Canadian business. Adjusted EBIT as a percentage of net revenue was 10.9% in South America, 6.3% in the U.K. and Ireland and 7.5% in Canada. SG&A as a percentage of net revenue was 16.8%. Excluding the estimated loss on receivables, our SG&A as a percentage of net revenue was 16.2%, demonstrating strong cost control. This marks the 6th consecutive quarter where SG&A as a percentage of net revenue has remained below 17%. Building on this momentum going forward will be a key value driver. We executed a restructuring program in the quarter to lower our cost base in a sustainable way and further reduce our SG&A as a percentage of net revenue. These actions are expected to reduce annual SG&A in 2025 by approximately $25 million. We also continue to simplify our business with a laser focus on core operations. We continue to reduce overhead costs and drive greater productivity. As an example of our progress, from the end of 2022 to 2024, we have reduced the number of executives, senior-level leaders and corporate head office employees by over 20%. We also continue to drive forward and advance a number of invested capital improvement plans, both operational and financial. For example, we recently signed an agreement with a U.K. insurance company to optimize our U.K. defined benefit plan. Upon closing, this will improve our annualized consolidated return on invested capital in the U.K. and Ireland by approximately 260 basis points and our consolidated ROIC by approximately 30 basis points. Moving to South America results and outlook, which are summarized on Slide 6. In functional currency, new equipment sales were up 14% from Q3 '23 driven by deliveries to mining customers and contractors. Used equipment sales were up 68% year-over-year from strong demand in the construction sector. Product support revenue was up 7% year-over-year, driven by strong demand from mining customers and contractors as well as oil and gas customers. Adjusted EBIT was down 3% from Q3 2023. Adjusted EBITDA as a percentage of net revenue was down 140 basis points due to a higher mix of new and used equipment revenue as well as a higher proportion of mining equipment sales. As well, SG&A was 17% higher, primarily due to CAD 11 million of cost owing as a result of reentering the official foreign exchange market in Argentina. These costs were largely offset at the net income level by a lower effective income tax rate, primarily driven by unrecognized losses utilized in Argentina. Argentina operations remained profitable in Q3. Our outlook for Chile mining remains strong, underpinned by growing demand for copper and solid levels of quoting tender and award activity for mining equipment and product support. While activity levels and outlook remain positive, we also expect continued challenging environment to attract and retain qualified labor. In Chile, we continue to see healthy demand from large contractors supporting mining operations, and we expect infrastructure construction activity to remain steady. In the power systems sector, activity remains strong in the industrial and data center markets. In Argentina, while we're seeing near-term pockets of strong activity in oil and gas, along with renewed optimism as the new government programs are helping drive large-scale investment by global miners, we continue to monitor the government's new rules and policies and will take a low-risk approach. Turning to Canada on Slide 7. New equipment sales were up 4% from Q3 2023 driven by mining deliveries. Product support revenue was down 3% from Q3 2023 due to mixed activity levels in the mining sector as large oil sands customers continue to optimize their mine plans and scope of contractor work, which led to deferral of maintenance spending. We're also seeing slower recovery in activity by customers in the construction sector. Adjusted EBIT was down 31% from Q3 2023. Adjusted EBIT as a percentage of net revenue of 7.5% was down 330 basis points with lower gross margins in all lines of business. New equipment sales had a large proportion of mining equipment in the mix, and we expect that to be the case in the fourth quarter as well. Used equipment pricing was lower as we proactively managed our inventory levels considering higher inventories in the used equipment market in general. We're now seeing improved margins on recent trade-ins and sourcing activities. In the quarter, we sold approximately $150 million of inventory at low margin, which supported our very strong free cash flow and prioritization of continued inventory health. The rental equipment market remained challenged as fleet utilization was below what we would be expected in a normalized environment. We also had a lower mix of product support revenue and smaller sized equipment rebuilds in the quarter. Canada's SG&A expense, excluding the estimated loss for receivables was lower by 2%, reflecting solid cost containment, however, was not sufficient to provide a material cost offset to the lower gross profits. Thus, our focus moving forward goes from cost containment to cost reductions. We expect continued spending discipline from our large mining customers as they work to achieve operating cost targets in several cases are integrating acquisitions or adjusting to recent divestitures. Customers continue to optimize mine plan, adjust scopes of contractor work and deferred maintenance spending. We expect continued headwinds in the used and rental markets following a period of strong sector activity and limited equipment supply. We see pricing utilization in these markets starting to normalize and expect this to last the next several quarters. Please turn to Slide 8 for our results on the U.K. and Ireland. In functional currency, new equipment sales were down 3% compared to Q3 2023 with slower demand from certain industrial customers. Used equipment sales were up 49% year-over-year, mainly from increased volumes in the construction sector. Product support revenue was down 2% from record levels in Q3 '23, which had very strong activity in the power sector. Compared to Q2 2024, product support revenue were up 3% as we captured more rebuilds and machine hours trended higher. And adjusted EBIT as a percentage of net revenue was up 40 basis points to a solid 6.3% driven by a focus on cost control with SG&A expense down 10% from Q3 2023. We expect demand for new construction equipment in the U.K. and Ireland to remain soft in line with low GDP projections. We continue to expect a growing contribution from used equipment and power systems and resilient product support as we execute our strategy. We'll continue to focus on product support growth as a key value driver going forward. Our growth rates in Canada and the U.K. have remained lower than expected over the last year due to slower infrastructure spending and extended deferral mining equipment maintenance in Canada and lower activity levels in the U.K. and Ireland, given a more challenging growth environment. These rates of growth required in 2025 to fully catch up our 2023 Investor Day product supports targets now exceed our current expectations, and therefore, we're withdrawing our products support growth targets. We will continue to focus on maximizing product support growth in each region as a key value driver going forward as a primary driver to achieving consolidated adjusted ROIC within our 18% to 25% range. To conclude, Q3 was a quarter where we benefited from our diversified business. Free cash flow was robust, our cost control was strong, our ongoing backlog build is solid and our South American results were excellent, and we're taking action to improve our Canadian profitability. Operator, I'll now turn the call back to you for questions.
Operator: [Operator Instructions] The first question today comes from Yuri Lynk with Canaccord Genuity.
Yuri Lynk: I don't know who wants to take this one, but can you clarify your 2025 outlook for product support growth in South America given you pulled the consolidated target, but you did note you expect continued strength in that region?
Kevin Parkes: Yes. So I'll take that, Yuri. So yes, we still expect the product support growth in South America to be strong as we move through the next year -- into next year and into 2026. We're building capacity and capabilities, as I mentioned, that I visited the region last week and saw all those. We've got 22 work bays coming on stream in Antofagasta in the next six months, made some big investments into the PDC. And as I noted in my remarks, we've added 200 technicians in the quarter. All of those things are going to point to continued growth as we move forward. And we're really encouraged by the execution that the team are -- and the way they're performing down there right now.
Yuri Lynk: Understood. But just to clarify, is the north of 8% CAGR target, that's not in play anymore, right?
Kevin Parkes: We're not going to isolate it by region, Yuri. Looking forward, the markets been very dynamic, but product support in South America is very strong and will continue to be very strong as we move forward, very strong.
Yuri Lynk: Understood. Okay. Last question. Just what's been most surprising in the Canadian product support business? And how long do you feel the deferral of maintenance can continue? And what does your backlog or rebuilds look like for 2025?
Kevin Parkes: Yes. So yes, I think you highlighted it there in the question. I think the thing that we're still trying to work through and we've described that environment as dynamic because it's very mixed by different -- even within different mines within different customers. And so some lines are progressing as we'd expect, some not as we expect. So I think -- I wouldn't say it's a surprise. It's just -- it's challenging to see forward at this moment in time. The maintenance and the rebuild activity in the mining sector, that would be the biggest driver of the challenging product support in Canada. I think we expected construction to be slower given the absence of major infrastructure projects, notably the pipelines in Site C. And that really hasn't picked up through the course of this year. And obviously, as we enter the winter season in Canada, we don't envisage that picking up for another quarter or so. Order intake and sentiment is better for next year and in construction generally in all three regions. We kind of expected it to be, but it would have been at the lower end of our construction expectations. So yes, the biggest challenge we've had is trying to pinpoint the opportunity and the execution within the mining in Canada.
Operator: The next question comes from Sabahat Khan with RBC Capital Markets.
Sabahat Khan: Maybe just kind of following up on that last comment and just going at a higher level into Canada. Directionally, when we look at the outlook commentary, it's not materially different from what you've said in the past. I just want to understand, did something change in the -- sort of the sentiment of the customers? Was it just maybe a low investment environment that dragged on? If you can maybe just contextualize the evolution of the Canadian market? What maybe led to some of the margin drag that we saw this quarter? And just maybe provide a perspective on how do you see that evolving kind of into 2025?
Kevin Parkes: Yes. Sure, Sabahat. I'll talk about the -- how we're feeling kind of sequentially in Canada, and then Greg can talk to some of the margin situation there. I mean quarter-over-quarter, I actually feel better about Canada. To Greg's closing remarks there in his update, the reason why we've withdrawn the guidance is because we're not confident yet that we can see the level of growth in 2025, which would put us on the two-year trajectory, so 7% per year in Canada. So that's why we've removed that. Net-net, I feel more positive about Canada actually from previous quarter into this quarter. And yes, we continue to maximize all of the opportunities that are available there. And we are seeing some signs of movements and increased spend in that area. So I guess, net-net, I feel better, but it's a different situation to have to cover off the absence of the growth that we've seen this year over that two-year commitment. Greg, do you want to talk about the margin?
Greg Palaschuk: Yes. On the margin side, I mean, part of it is us prioritizing free cash flow. And we do have good availability for equipment for next year, and there was some inventory where we wanted to make sure that we moved it within the quarter. We got into the hands of good customers that are good product support customers, and it was helpful in generating a lot of cash. So that was one of the dynamics. The other was just -- I mean, the way the quarter played out. The last couple of years post COVID, the summer has been slower and then September has been extremely strong. That just didn't play out this year. Customers did delay some activities, some probably waiting on some of the lower interest rates to come through on financing. Others on the mining side, really pushing through production and the contractors haven't got clarity yet on what the winter plans really look like and 2025 looks like. So not a lot of confidence amongst that group, some real delay decisions even through September. September would normally be by far our strongest and it was frankly a little weaker than August. So -- and that's just some of the -- how the evolution played out. But we can see line of sight in each category to what was unique within the quarter and the $150 million won't replicate. And the others, you can see rental started to tick up on utilization. As I said, used, we're starting to see better margins on the recent sourcing and trade-in. So that's helpful. And overall product support, we continue to have a larger population, and we'll continue to work through that. And we do think there's a lot of machine hours logged that will need maintenance in the future, and we'll have to see when that completely plays through.
Sabahat Khan: Great. And then maybe just associated with that $150 million of used equipment sales at lower margins. Maybe just a thought process there, was it just sales you were going to undertake anyway, but there was pricing pressure? Or was it more of a cautionary here, let's move the inventory and focus on cash? Maybe just walk through the pricing environment as well as maybe the thought process behind -- just the sale of that inventory?
Greg Palaschuk: Sure. And just to clarify, that's not $150 million of used, that's new and used. So a portion of that would have been RPO conversions with a few incentives. Some of it would be new equipment where we saw some aging that we wanted to take action, and we could get it into the hands of the right customer, and then 1/3 would be used. So it was balanced across the board. Really happy to generate $330 million of free cash flow in the quarter and continue to expect that strong trend through the end of the year, but the majority of that is coming from Canada, and that's just cash we wanted to generate. And we got some good market share opportunities. We put at the hand to the right customers, and we have good availability for orders next year. So we just wanted to move that through, and it's the choice we made during the quarter.
Kevin Parkes: And I would add to that, Saba, that we're building capabilities in used equipment. And so it's a lot more used equipment sales at a little bit less margin or normalized margin. And those capabilities are helping us to make sure we make the right decisions in that regard. Maybe previously, we wouldn't have been so proactive. There's clearly, as you've seen in the market and seeing with other companies, there's clearly an excess of used equipment in the market right now and prices are normalizing or just below normalized levels. And so to take really proactive and aggressive action there is a function of the new way that Finning is participating in used equipment, but the business is growing too.
Sabahat Khan: Okay. Great. And then just one last quick one. Just on this comment around South America and -- so it's a more challenging environment for attracting and retaining qualified labor. Is that just a comment on excess demand in the copper market and tightness of labor? Just want to understand what's driving that?
Kevin Parkes: Yes. I mean it's a plan -- that's an absolute planned activity. We're adding about nearly 100 new people a year -- sorry, 100 new people a month in South America. It's a very organized and well-executed plan. Our -- people who joined us on the Investor Day last year would have seen our education facilities down there and how we're reaching out much more broadly into a wider base of potential employment pools, and so that's fully planned. I wouldn't describe it as a tightness in labor. It's a planned execution to support the growth that we are all currently experiencing. I think if that's going to continue, I would say that the growth that we're experiencing or the mobilization for growth in South America or particularly in Chile, is probably a little faster than we anticipated this time last year. And so that is causing some strain and intention in terms of making sure we have the right labor -- the labor force and making sure we can train them and they can work safely and competently. But that's all a positive.
Operator: The next question comes from Cherilyn Radbourne with TD Cowen.
Cherilyn Radbourne: I wanted to pick up on the discussion regarding the product support guidance. I think I understand what you're saying completely in that product support is up about 1% year-to-date. And so it would require a pretty massive reacceleration next year to get to 7% as an average for the two years. I guess what I'm curious is what visibility do you have through a reacceleration in product support growth next year by region? If you could just give us some comments, that would be helpful.
Kevin Parkes: Yes, sure. That's a -- yes, you -- your summary of situation is accurate, so thanks for doing that. In terms of visibility, as we look forward, I would say, good visibility in South America and a strong outlook down there, not just in Chile, but in Argentina, mindful of the fact that we're being -- we are taking a cautious approach in Argentina. So I would say good visibility to good growth levels in South America. In Canada, a little bit mixed. I would say, I expect continued softness in construction, especially through the winter months here in Canada. But I do expect some trajectory or momentum build in mining. But the visibility is difficult. That's why we've described it as dynamic a couple of times. And we choose that word really carefully, Cherilyn, because it is very different by different mine sites. But I would say that visibility in Canada is improving and we'd be more encouraging than not. And then in the U.K., because of the propensity of construction activity, I would say, we don't necessarily see -- have great visibility to what that's going to look like as the kind of -- we don't really have a construction season in the U.K. and Ireland, but it does slow down a little in the winter months. Obviously, they have a new government there now. So we expect some announcements about major infrastructure. But I would say that we are pleased with the sequential growth in the U.K. throughout the course of this year, and you're seeing that through -- the impact of that through the margin expansion, coupled with the efficiency and optimization of invested capital. So I would say, limited visibility in the U.K., but some green shoots. Not a lot of visibility in construction right now, but we are very, very focused on execution. Some encouragement in Canada in mining. And I guess, overall, we should say that power -- good visibility to growth in power and product support, but it's obviously a much smaller part of our business. Does that help?
Cherilyn Radbourne: That is really helpful. And in terms of the behavior that you're describing in mining in Canada, is that primarily in the oil sands? Or is that also across things like copper and gold?
Kevin Parkes: I think it's more broader -- it's primarily the oil sands in terms of the impact on our Canadian business, Cherilyn, but I think there is a kind of what I call a perfect storm happening in mining where miners are looking at the future in terms of the growth and production capacity improvements. They're absorbing that with kind of phase two or extended -- I mean every mine that we visit now has -- is embarking on a brownfield phase two right now. So lots of discussion around the best way to execute that expansion. There are some mines that have significant mine plan changes to go through. And there's a calibration around where the commodity price stabilizes and operating costs, given we've all been through a high inflationary period, and that includes labor and products and services. So I call that the perfect storm. And I think Finning -- and with our partner, Caterpillar, we're really well placed to help our customers navigate that. But it is a broader-based discussion than the oil sands, but the impact on our business for Canada would be weighted towards the oil sands in terms of that comment.
Cherilyn Radbourne: Okay. Great. And then one last one for me. I did want to pick up on your comment, Kevin, that you feel better about Canada quarter-over-quarter. And I wonder if you could just sort of weight that between internal things that you've done, the severance, the inventory reduction versus sort of green shoots that you're seeing in the market?
Kevin Parkes: Yes. I think it's probably a balance of a couple of things and then a balance of both of those things. I think there are some green shoots, like I said. If you're asking me if I feel better about Canadian product support today versus the last call? Yes, I do, okay? It's hard to quantify and be precise about that. But I also feel very good about the actions that we're taking in Canada to improve earnings performance. So as you've seen the playbook in the U.K. play out, I'd say, the way I would look at it is if you look at the U.K. and Ireland trajectory, I would say that Canada's two or three quarters probably behind that. But we know what the playbook is. We know what we have to do, kind of, there is a bigger ship to turn, but we're confident we can do that. And obviously, as we mentioned in my remarks, we've had a leadership change in Canada driven by retirement of the executive and my executive team. And we really wanted to give Tim the opportunity to get into this quickly and early. Hopefully, have an impact in Q3 with his team, his new team and build some momentum in Q4 and take that into 2025. So I think it's a little bit of green shoots, confident in some actions in the playbook and then leveraging the leadership change.
Operator: The next question comes from Steve Hansen with Raymond (NS:RYMD) James.
Steve Hansen: Just circling back to the Canadian margin topic. Is it possible to attribute or quantify how much of the 330 basis point decline year-over-year was associated with this $150 million move in inventory?
Greg Palaschuk: Yes, it would be about 1/3.
Steve Hansen: About 1/3, okay. And then the balance of the two issues being mix and rental utilization skewed more towards mix, I presume -- rental is not that big?
Greg Palaschuk: Yes. Portion would be volume with product support being down, rental being down. Those are two of the higher-margin businesses. So those would be two of the drivers. There are some things on the edges like $4 million down on our PLM joint venture, which has some pause in activity in the U.S. So it didn't help either. But yes, I'd say about 1/3 in that category.
Steve Hansen: Okay. That's helpful. And I think as you described earlier, that's not to repeat the inventory adjustment process is largely completed here?
Greg Palaschuk: Right. We've got a little bit more in Q4 that we'll continue to work through as we do both Q4s, frankly, but certainly add up the scale.
Steve Hansen: Okay. That's helpful. And then just circling back to the idea of product support more broadly and your broader targets around this all. Cherilyn had asked a question around the momentum. Is there specific issues in the oil sands that are allowing these customers to defer so long? We see these record production numbers that the largest producers are pushing out. I presume they're bringing equipment pretty hard to accomplish those assets. I just maybe just walk us through how they're able to defer so easily, while we're pushing record numbers and ultimately, how much -- how long can they deferral?
Kevin Parkes: Yes. It's -- so I think it's -- we're in a moment right now, Steve. I think for sure, the warmer winter last year, I think the other companies have talked to that as well. The warmer winter last year was unique, not unique, but it was abnormal and it helped, and it deferred some overburden and some preparation work. We think that will start in this -- as we head into the winter. But we're pretty warm here in Alberta right now. But -- so I think that equipment utilization and productivity and reliability continues to improve. If you take Kearl, for example, we had a customer event last night here in Calgary with our Board and speaking to Kearl that very happy with our autonomous solution that's driving some real productivity benefits. And I think customers, as we're trying to find a way to optimize our business, the mines are always looking to find ways to squeeze more productivity at the assets they have or even run the mines with even less assets. So as we move forward, we'll understand a little bit more about the deferral of that activity. But we're super focused on making sure when that activity is more prevalent. We're well positioned and well organized to help our customers and execute on that.
Operator: The next question comes from Jacob Bout with CIBC (TSX:CM).
Jacob Bout: Just wanted to go back to South America, and you talked about good visibility there in 2025. Am I thinking about this correctly that in '25, you're going to see robust new equipment growth in [2026] is when you really start to see the product support kick in?
Greg Palaschuk: Yes. I mean I certainly don't want to get into two-year projections, but just from a pure equipment population, the number of trucks that we've delivered, the amount of support equipment we've delivered, even construction, some market share improvements in certain important pockets, that's certainly the trend. And so I do -- we do continue to see it being very strong, driven by population and encouragement in the macro, particularly around copper. I think we'll get into talking about 2026 projections just yet, but the direction of travel with the fundamentals is strong.
Jacob Bout: And what do you need to do to get rightsized on the parts and service side and the rebuilds in South America? Or do you feel you're there right now?
Kevin Parkes: In terms of rightsized in terms of growth, Jacob?
Jacob Bout: Yes, on the product support and the rebuilds and everything else in South America?
Kevin Parkes: Yes. So I mean as I remarked, I was in the region last week, I went from our CRC. We're spending $20 million in the region to expand our CSA as we outlined at the Investor Day last September, and that work is well underway. I then move to the parts distribution centers and saw our new auto store, which is massively increasing the productivity of the lines. We can pick every day in the warehouse, super-impressive piece of technology. I then move to our equipment rebuild and new equipment preparation. We're now prepping -- we're now preparing between eight and nine -- [798s] any given day and delivering a truck a week there. And as I mentioned, we're adding 22 base, mix of construction, contractor and mining buys in Antofagasta. That workshop should start to be operationally in the next three to six months. And then obviously, the big number is adding 100 technicians there or thereabouts a month. I think I described that as a $200 million net in Q3. And so all those things are in service of facilitating that growth and rightsizing.
Jacob Bout: Okay. Maybe my last question here, just as far as some of the restructuring and the staff reduction, I think you heard you say that you reduced it by 20% at this point. Just curious what's left to do? And what are the areas of focus right now?
Greg Palaschuk: Yes. So the area of focus is highlighted, particularly around IT supply chain and finance functions. But in general, we want to reduce the overheads of the Company and non-revenue generators, have as many mechanics as possible and -- as a percentage of the workforce. So that's going to continue. I do think one of our biggest value drivers over the last five years has been our improvement in SG&A percent and how much that's added to earnings capacity, and we're going to keep working towards that. And so we look at the product support not being at the growth levels we wanted. We want to make up for that in terms of SG&A reductions to offset so that we can keep driving earnings capacity in ROIC. So we're going to keep working on that. That's not going to be -- this isn't the last one. We'll keep working to be as efficient as we can and it goes in phases here. But I can see it every day that we're getting more efficient and I think our strategy really helps us prioritize our resources and have a clear approach and that allows us to do things much more effectively.
Operator: The next question comes from Devin Dodge with BMO Capital Markets.
Devin Dodge: Look, I just wanted to maybe come back to Canada. Look at the rebuilds. Just how does that pipeline look now? And are you expecting that mix shift towards smaller equipment to continue in the coming quarters?
Kevin Parkes: Yes. So I think we've had -- since the summer here, we've had in -- particularly in construction in the U.K. and in Canada, we've had a renewed and reinvigorated focus on building that rebuild pipeline. I would suggest that it's -- the rebuild pipeline is not at the levels we saw in the major supply constrained moments, but it is significantly higher than the pre-pandemic or pre-supply chain cushion. We've always said that we believe that rebuild proposition and execution is materially different than pre-pandemic, and we expect that to be stickier. We have seen some shift to smaller equipment. As you work through your rebuild population, we continue to -- so if you think about rebuilding a huge machine, as you come down the value chain, the rebuild economics become more challenging, but the teams are so focused on improving on it, making sure we can hit the rebuild economics. So every time they go again, they bring more smaller equipment into scope in terms of rebuild economics. But that is a factor. And I would suggest that when you're doing that, also the scope or the quality of the rebuild in terms of the -- how comprehensive it is reduces. So that is a factor as we look forward.
Greg Palaschuk: And then on the larger rebuilds, I mean, there are ongoing conversations on the larger scale of programs at scales that we're pleased with. The timing is just the question mark.
Kevin Parkes: We had just completed the largest in the -- sorry, Devin. I would just add, sorry, that we are in the progress of rebuilding two new -- two large mining trucks in Canada for a customer that hasn't rebuilt before as those machines start to enter that window. So it's part of that encouragement, we spoke about it on a couple of other questions here.
Devin Dodge: Okay. Makes sense. And then maybe to wrap up with a question for Greg. Just wondering how we should be thinking about rental and investment in 2025? And just is it relatively balanced across the various fleets?
Greg Palaschuk: Yes. I mean, the focus has been on capability rebuilds or capabilities within the sector. We've had some good people come in and have a good perspective on some of the fundamentals that we need to make sure we get right. So we're going to keep an eye on the market conditions. We have obviously done some retooling of the fleet and optimization of the fleet. We are starting to see utilization factors move up even unseasonably, so that's a good indication. And so we'll keep an eye on that. But of course, it's going to be market dependent and the market needs to improve quite a bit here.
Operator: The next question comes from Sherif El-Sabbahy with Bank of America (NYSE:BAC).
Sherif El-Sabbahy: Just wanted to touch on a few other topics. Energy customers in Canada, just given recent developments in U.S. politics, how are they thinking about expected tariff exemptions for Canadian oil and gas? And how would drive to ramp energy production by U.S. administration may impact them?
Greg Palaschuk: Sure. I mean, obviously, it's pretty early to tell, and there's lots of discussions around tariffs and where it will apply or not. Certainly, the Canadian media that looks at it thinks that low energy costs are pretty important to Americans, and that would put production likely excluded from there. So I think that helps the Canadian producers in general. But it's obviously pretty early to tell to what exactly those will be and what segments and customers would be impacted.
Sherif El-Sabbahy: Understood. And in terms of your backlog shift, construction is about 20% of the mix. That's approximately half of what it typically is. Understand that there's been strong power systems demand and weaker construction markets at the moment, but is this a trend you expect to see persisting over the coming few years? And what impact, if any, might it have on product support going forward?
Kevin Parkes: Yes. So I think -- so firstly, we're encouraged by the product support -- sorry, the backlog build in power across all three regions. And as we said, that build is a function somewhat of -- it's not just lead times in power systems. It is extended planning. And so it's not -- the lead time extension is into 2026 is not a function of supply necessarily. It is a function of the customers planning much further out for data center build. And so that kind of long-term planning means the power systems units are in backlog for longer and so that's impacting the mix of total backlog skewing towards power systems. The availability improvement within construction is also a factor. And so things are moving through there faster. I think we described new equipment sales for construction equipment being up in all three regions. So we're selling it through a lot faster. And then mining, as we've always discussed, Sherif, is lumpy. So it can move from quarter-to-quarter as we deliver the product. So I would say that construction equipment is probably lower as a percentage than we would see typically moving forward. And as we go into the selling season here, we would see that build as we normally do in the early months of a new year. But certainly, the proportion of power systems is probably something that will continue into the next couple of years.
Operator: The next question comes from Maxim (NASDAQ:MXIM) Sytchev with National Bank.
Maxim Sytchev: And then maybe a first question for you, if I may. As we think about longer-term trajectory for SG&A as a percentage of revenue, I'm wondering if your thought process has evolved potentially on the topic on a go-forward basis?
Greg Palaschuk: Sorry, Max, can you just repeat that? Was that for me? Sorry, Max, can you just repeat the question?
Maxim Sytchev: Yes. Yes. Just in terms of the SG&A as a percentage of revenue, obviously, you're already at 17%, and I'm just wondering how are you thinking about, like, let's call it, flattish revenue generation and the operating leverage that can be driven through this line item.
Kevin Parkes: Yes. So we still feel like we've got another crank on SG&A. I think we get a lot questions about when will it be done? It will never be done. I mean we're continually striving to optimize our business. We're decentralizing and simplifying all the time. We have to reconsider lots of aspects of our business to make sure that we remain competitive in the marketplace. We don't control the whole market. And so we have to make sure that we control our controllable and that we can operate effectively. And I think the U.K. playbook is a good example of that. And as I would say that with the leadership change in Canada and fresh eyes, I would expect that Tim will be able to think about some new opportunities there and help us. It is our biggest business and so it has the most serial effect on our overall SG&A as a percentage of sales. And so I would say that we would continue to see a downward trend there.
Maxim Sytchev: Okay. Okay. That's good to hear. And just one quick follow-up on parts. I remember when we went to Chile, there are some projects you're working on. I mean, is some of that stuff would be applied to Canada? Or there's something that maybe structural prevents you from implementing the same -- parts sorting technology and things like that?
Kevin Parkes: Yes. I mean, just quite simply, Maxim, is the availability of the technology. I mean, so we've -- our new Edmonton warehouse is a huge advancement than what we've had previously. And -- but we had a certain technology available to us when we executed on that given the time and moving out of our previous distribution center. And then the technology that we've deployed in South America is now available in Canada. So the team will continue to look at how they -- the team presented the business case to me less than three weeks ago about bringing that technology to our Edmonton distribution center in Alberta. And given how successful the implementation has been in Antofagasta, I would think it's highly likely that we move forward with that, obviously, subject to capital allocation priorities when we review our renewal operating plan over the next few weeks.
Maxim Sytchev: Okay. Okay. That's great. And then just a couple of quick ones for Greg, if I may. So in terms of -- if we're thinking about, again, kind of like flattish revenue as a base case, can we expect additional freeing up of working capital on a prospective basis? Or that's kind of as good as it gets?
Greg Palaschuk: Yes, absolutely. So our Investor Day plan is what we're executing, and we are prioritizing our working capital and some of the lower ROIC activities. We're really pleased that free cash flow year-to-date is above net income, and we want to see that continue to drive forward here. We highlighted a $450 million of unlock at Investor Day. And we -- as you highlighted regularly, free cash flow is best when the market slows down a bit, and of course, we're seeing that now. And so we're looking to have free cash flow of $450 million above net income over the next couple of years. And we're making good progress on that having over $300 million for each of the last two quarters, and we aim to finish the year strong. So we'll keep working our way through that, get a lot of cash and make some good capital allocation choices from there.
Maxim Sytchev: Okay. Excellent. And then just on your last point, capital allocation. So like on NCIB, do you mind just reminding us like in terms of the triggers that you guys are kind of using there, like how much discretion do you have, was basically kind of an automatic program and the mission is going to buy below a certain level? Yes, just any color there.
Greg Palaschuk: Sure. I mean from NCIB perspective, we have a business plan. We look at the discounted cash flow. We have a view on value. And we want to make sure that our leverage is in check. But as we're generating cash, we were allocating towards share buybacks, and we've been really consistent about that for a number of years, and we plan to continue doing that. So I wouldn't look too much into timing. We're looking to be consistent there. And as we have more cash, we're looking to do more. And that's going to be the continued trend.
Operator: The next question comes from Steve Hansen with Raymond James.
Steve Hansen: Guys. Sorry, I was just curious on the buyback as well. It sounds like it's going to be fairly ratable going forward, then, Greg, is that the takeaway? Sorry.
Greg Palaschuk: Yes. I mean we'll keep evaluating the business plan through budget season. We'll keep looking at where the share price ultimately lands. But yes, we do plan to unlock more capital, and we continue to see it as a value. So it's a trend that you should expect to continue.
Steve Hansen: That's great. And just on the SG&A really quickly. How much of that should we expect to see in the fourth quarter? It sounds like this has been a fairly recent process. Will that start to show in the fourth quarter, I presume?
Greg Palaschuk: Yes, it was over half done in Q3, and it will be fully complete within Q4. You kind of take that as the run rate for a quarter.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Greg Palaschuk for closing remarks.
Greg Palaschuk: Okay. Thank you, operator. This concludes our call. And thank you for participating, and I hope everyone has a safe day.
Operator: This brings an end to today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.
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