investor presentation - los angeles, san francisco
TRANSCRIPT
INVESTOR PRESENTATION Scott Thomson, President and CEO
Greg Palaschuk, VP Treasurer
Mauk Breukels, VP Investor Relations
June 2014
Forward Looking Information
2
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 June 18-19, 2014. 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 o f Caterpillar’s products and
Caterpillar’s timely supply of parts and equipment; Finning’s ability to continue to improve productivity and operational eff iciencies 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 expectat ions 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.
Monetary amounts are in Canadian dollars and from continuing operations unless noted otherwise
Overview of Finning International
World’s largest Caterpillar dealer serving customers for over 80 years
We sell, rent and provide parts and service for Caterpillar equipment
and engines
Operate in Western Canada, Chile, Argentina, Bolivia, Uruguay, UK
and Ireland
Main industries: mining (oil sands, copper, coal), construction, power
systems (EPG, petroleum, marine) and forestry
~14,700 employees worldwide (~65% technicians/mechanics)
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(1) At May 30, 2014
Vancouver
(head office)
Edmonton
Fort McMurray British Columbia
Yukon
Alberta
The Northwest Territories
Santiago
Antofagasta
Bolivia
Argentina
Chile
Uruguay
Cannock
United Kingdom
Ireland
2013 Financial Statistics Market Statistics(1)
Revenue 6.8B Ticker FTT (TSX)
EBITDA 0.7B Share Price 29.16
FCF 0.4B % 52-Week High 92%
EPS 1.95 ADTV 0.5M
Invested Capital 3.1B Market Cap 5.0B
Net Debt 1.3B Enterprise Value 6.3B
ROE 19.7% S&P/DBRS Rating BBB+/A(low)
ROIC 15.7% Dividend Yield 2.4%
Dividend 10yr CAGR 13.1%
Finning History
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Delivering Unrivalled Service to Customers for Over 80 Years
Compelling Value Proposition
Passionate and committed employees
Right people in the right places to execute on the plan
Best products, best territories
Aligned with Caterpillar, world’s best heavy equipment company
Resource-rich territories with significant organic growth opportunities
Compelling business model
Machine population provides embedded product support growth
Customer diversification across many attractive sectors
Significant opportunity to improve operating performance
Going forward, profit can grow faster than revenue and working capital management
will improve markedly
All priorities linked to improving return on invested capital
Opportunity to optimize and capitalize on historic investments with more disciplined approach
Opportunity to generate positive free cash flow throughout the cycle
Continued commitment to dividend growth
Long-term growth rate of 13%; increased dividend by over 16% in May 2014
5
Broadest Range of Quality Caterpillar Products
6
Over 300 equipment product lines
Market Leader in Most Desirable Regions
7
2013 revenue by region
Powerful, Sustainable Business Model
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Diverse Customer Base
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63% of new equipment deliveries from non-mining
* Agriculture, industrial and government segments
NEW FOCUS
Driving Return on Invested Capital
Operational Priorities
Service Excellence
Drives lowest equipment owning and operating costs
Maximizes equipment uptime and improves customer loyalty
Increases service profitability
Attracts and retains technical talent
Supply Chain
Competitive advantage as a world-class distributor
Efficient supply chain drives customer loyalty
Reduces costs and invested capital
Improves cash generation
Market Leadership
Builds machine population and
drives future product support
Aligns with Caterpillar’s focus
on market share growth
Expands focus to entire product line
Asset Utilization
Optimizes footprint and distribution of activities
Maximizes return on investments made
Improves service delivery
Reduces costs and invested capital
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Market Leadership Target ∆
in 3 Years
Revenue
Opportunity*
Core Equipment Market Share 2-4% 1% share = $35M
Parts Market Share 2-4% 1% share = $45M
Power Systems Revenue (Canada) 10-15% 5% growth = $20M
Service Excellence Target ∆ in 3 Years
Consolidated EBIT $ $40 – 60M
Supply Chain Target ∆
in 3 Years
Working Capital Reduction
Inventory Turns 0.5 – 0.9x 0.1 turn = $50M inventory
* Assumes no industry growth
Service Excellence
Improve labour recovery
Enhance leadership, competencies and technical skills
Improve parts availability by leveraging supply
chain efficiencies
Standardize processes and planning
Improve quoting to reduce bid variances
Implement consistent service delivery model in all branches
Governance, roles and responsibilities - clear accountability
Standard service rates and definitions
Enhance profitability visibility at branch level
Align compensation with customer loyalty and profitability
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Canada - Action Plans
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Supply Chain Canada - Reducing Lead Times and Transfer Points
Asset Utilization
Optimize allocation of work across facilities
Current mining facilities underutilized
Ensure more disciplined capital allocation going forward
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Canada - Action Plans
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All priorities are linked directly to EBIT or Invested Capital
Priorities Will Drive Improved Return on Invested Capital (ROIC)
2006 2007 2008 2009 2010 2011 2012 2013
ROIC 27.6% 26.8% 15.0% 10.2% 15.3% 16.0% 16.5% 15.7%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2006 2007 2008 2009 2010 2011 2012 2013
EBIT Margin 7.8% 8.3% 6.8% 5.5% 6.3% 6.3% 7.4% 7.7%
Inv. Cap. T/O 3.6x 3.2x 2.2x 1.8x 2.4x 2.5x 2.2x 2.0x
1.0x
2.0x
3.0x
4.0x
5.0%
6.0%
7.0%
8.0%
9.0%
Return on Invested Capital
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Historical Performance
Results were adjusted to exclude discontinued operations
Economic
downturn
Significant Investments:
- Drills & Shovels
- Fort MacKay
Underperforming working capital
ERP implementation
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
42
47
5352
5051 51
48
41
2012 2013 20142011
45%
35%
TARGET
RANGE
Strengthening Balance Sheet
Positive free cash flow through the cycle
Strong cash flow from operations
Improving working capital primarily through
higher inventory turnover
Capital expenditures to remain significantly
below 3-year average
Strong operating cash flow comfortably
supports debt levels and investment grade
ratings
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Target
Range
Net debt to total capital ratio (%) FCF per Share (dollars)
Net debt / EBITDA
18
Important component of total
shareholder return
Committed to growing dividend,
consistent with sustainable
earnings growth
Target payout ratio: 25-35%
10 year CAGR ~13%
5 year CAGR ~9%
Current dividend
Quarterly = $0.1775
Annualized = $0.71
Dividend yield ~2.4%*
0.20 0.22
0.28
0.36
0.43 0.44 0.47
0.51
0.55
0.5975
0.685
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Annual Dividends
Continued Commitment to Dividend Growth
* At May 30, 2014
GROWTH OPPORTUNITIES
Oil Sands
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Benefitting from ongoing projected growth
Source: CAPP (Canadian Association of Petroleum Producers)
Western Canada LNG
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Seizing new business opportunities
Projects proposed to transport gas from Western
Canada to Asia1 Investment
LNG Canada (Shell, Korea Gas, Mitsubishi, PetroChina) +28B
Pacific NorthWest (Petronas, Sinopec, Japex, Indian Oil) +20B
Kitimat LNG (Chevron & Apache) +11B
1Source: Finning Estimates
Copper in Chile
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Participating in long-term growth
Source: Wood Mackenzie
Reasons for Optimism in the U.K.
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UK Real GDP (% Change)
Source: Economist Intelligence Unit
-5.2
1.71.1
0.1
1.7
3.12.5
-6.0
-4.0
-2.0
0.0
2.0
4.0
2009 2010 2011 2012 2013 2014F 2015F
“We anticipate that the U.K.'s economic
recovery will continue to broaden, benefiting
the public finances.” S&P upgraded its
outlook on the U.K.'s triple-A credit rating
from negative to stable.
S&P; June 13, 2014
“UK economy settling into above-trend
growth.”
OECD; May 13, 2014
“We expect to see marked improvements in
British business investment and
productivity.” Britain's top business lobby
upgraded its economic growth forecasts for
2014 and 2015. The Confederation of
British Industry (CBI) predicted Britain's
economy will grow 3.0 percent in 2014,
raising its forecast from 2.6 percent
previously. It also upped its outlook for the
next year to show growth of 2.7 percent,
compared with 2.5 percent earlier.
CBI; May 11, 2014
Key Takeaways
Finning has a great business model with resource rich territories; general economic
trends support continued growth
Focus on what we can control: costs, working capital and capital investment
Significant increase in invested capital has offset profitability improvements over last
three years
Opportunity to materially increase Return on Invested Capital over time
Improved profitability, primarily in Canada
Working capital management
Improved capital discipline
Operational priorities linked to improving Return on Invested Capital; team aligned and
executing
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INVESTOR PRESENTATION Scott Thomson, President and CEO
Greg Palaschuk, VP Treasurer
Mauk Breukels, VP Investor Relations
June 2014