Earnings call transcript: Finning International Q2 2025 results miss forecasts

Finning International Inc. reported its Q2 2025 earnings, revealing a miss on both earnings per share (EPS) and revenue forecasts. The company posted an EPS of $1.01, below the forecasted $1.09, and revenue of $2.61 billion, falling short of the expected $2.72 billion. Following the announcement, Finning’s stock dropped 11.42% to $54.60 in after-hours trading, reflecting investor disappointment. According to InvestingPro data, the stock currently trades at a P/E ratio of 15.31x and appears overvalued based on its Fair Value analysis.

Key Takeaways

• Finning’s EPS and revenue both missed analyst expectations for Q2 2025.
• The company’s stock fell over 11% in after-hours trading.
• Finning reported a record equipment backlog of $3 billion, indicating strong future demand.
• The company is focusing on parts automation and cost optimization to improve efficiency.

Company Performance

Finning International’s Q2 2025 performance showed a slight increase in adjusted EPS compared to the same quarter last year, rising by 5%. However, adjusted EBIT was down by 2% year-over-year. The company maintained a steady revenue of $2.6 billion, comparable to Q2 2024, indicating stable performance despite missing forecasts. The mining sector and data center market continue to drive growth, while restructuring efforts in Canada aim to reduce costs. Notable strengths include a 23-year streak of dividend increases, with a current yield of 1.96%, and a healthy current ratio of 1.6x, demonstrating strong liquidity management.

Financial Highlights

• Revenue: $2.61 billion (flat compared to Q2 2024)
• Earnings per share: $1.01 (up 5% from Q2 2024)
• SG&A margin: 15.5%
• Adjusted return on invested capital: 18.7%

Earnings vs. Forecast

Finning’s Q2 2025 EPS of $1.01 missed the forecast of $1.09, resulting in a negative surprise of 7.34%. Revenue also fell short by 4.04%, as the company reported $2.61 billion compared to the anticipated $2.72 billion. This performance contrasts with the previous quarter’s positive results and indicates challenges in meeting market expectations.

Market Reaction

Following the earnings release, Finning’s stock price declined by 11.42%, closing at $54.60. This drop places the stock closer to its 52-week low of $34.59, reflecting investor concerns over the earnings miss. The market reaction highlights the sensitivity to underperformance against forecasts, especially in a competitive sector.

Outlook & Guidance

Looking ahead, Finning remains cautiously optimistic about market developments in Canada and anticipates growth in the used equipment market. The company aims to enhance capital efficiency and continue its focus on product support growth. Despite the Q2 miss, Finning’s long-term outlook includes steady growth in EPS and revenue, with projections for FY2025 and FY2026 showing incremental increases.

Executive Commentary

CEO Kevin Parks emphasized the company’s focus on efficiency and growth: "We remain relentlessly focused on driving efficiency in our operations." He also noted the significance of the equipment backlog: "Our new equipment backlog grew to $3 billion, the fifth consecutive quarter of backlog growth."

Risks and Challenges

• Margin pressures in South America due to growth investments.
• Potential volatility in the mining sector could impact future revenue.
• Ongoing restructuring efforts may face implementation challenges.
• Supply chain disruptions could affect parts availability and distribution.

Q&A

During the earnings call, analysts inquired about margin pressures in South America, to which management attributed to strategic growth investments. Questions also focused on the composition of the backlog, highlighting the importance of the mining and Power Systems sectors. Management addressed concerns about the normalization of the used equipment market, indicating strategic adjustments to capture growth opportunities.

Full transcript - Finning International Inc. (FTT) Q2 2025:

Conference Operator: Thank you for standing by. This is the conference operator. Welcome to the Finning International Inc. Second Quarter twenty twenty five 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. I would now like to turn the conference over to David Primrose, Executive Vice President and Chief Financial Officer. Please go ahead.

David Primrose, Executive Vice President and Chief Financial Officer, Finning International Inc.: Thank you, operator. Good morning, everyone, and welcome to Finning’s second quarter earnings call. Joining me on today’s call is Kevin Parks, our President and Chief Executive Officer. Following our remarks, we will open the line to questions. This call is being webcast on the Investor Relations section of fitting.com.

We have also provided a set of slides on our website that we will reference. An audio file of this call and the accompanying slides will be archived. Before I turn it over to Kevin, I want to remind everyone that some of the statements provided during this call are forward looking. Please refer to Slides nine and ten 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 our annual information form under key business risks and in our MD and 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. In addition, as previously announced on 06/30/2025, we successfully completed the sales of For Refuel and Comtech. For Refuel and Comtech’s operating results were previously reported as part of our Canadian operations and are now presented as discontinued operations. Unless otherwise noted, this presentation reflects the results of continuing operations. Kevin, over to you.

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Thank you, Dave, and good morning, everyone. Thank you for joining us today. The positive momentum we generated in 2024 and in the 2025 continued with another strong quarter of results. These results reflect the commitment of our team, to disciplined execution of our strategy and the diversity and health of our end markets and regions. I’m excited to have the support of Dave in his new role of Executive Vice President and Chief Financial Officer.

Dave’s thirty six years of operating experience at Finning demonstrates his commitment to our company and our customers. His contribution to our business across most of our functions, including leading two of our regions, makes him a great partner to support me and our dealer principals to drive growth and focus on cost and capital optimization. We are looking forward to the continued progress executing our strategy under Dave’s financial leadership. I would also like to take a moment to thank Greg Palachuk for his leadership as CFO over the past five years and his contribution to Finian for the last eleven years as he moves on to his new endeavor. Consistent with prior quarters, I’ll provide a brief review of key highlights from the execution of our strategy before turning the call over to Dave, who will provide more detail on the results in the quarter.

Please turn to Slide two. We continue to build on strong Q1 twenty twenty five results, sequentially growing revenue by 6% from the first quarter to $2,600,000,000 We believe the diversity of our business positions us well for all market conditions and provides resilience and stability for our earnings, particularly in times of market uncertainty. Our new equipment backlog grew to $3,000,000,000 at the June, the fifth consecutive quarter of backlog growth and a new record. We are encouraged by this increase given we delivered nearly $1,000,000,000 of new equipment in the quarter, our highest quarterly delivery amount in the past ten years. This record level of backlog provides confidence for our business and future product support opportunities.

Order intake outpaced deliveries in all regions, particularly pleasing was Canada with orders of more than 80% over the same quarter last year, with strong orders in all segments including construction where orders almost doubled. We also saw strong order activity from several mining customers as well as in the power sector related to gas compression. In South America similarly, we saw strong mining sector order intake complemented by power from both oil and gas and Prime Power segments. In The UK and Ireland, we are seeing improving orders from construction customers and steady Power sector growth activity. Moving to Product Support.

Q2 Product Support revenue grew in all regions, reflecting our efforts in Q1 to reenergize sales efforts in improving market conditions. In Canada, Product Support revenues were up 4% led by mining. Mining product support revenues improved year over year by 103% sequentially from the first quarter. As I’ve spoken about in the last couple of calls, we remain committed to supporting our customers to achieve lower production costs through stronger partnerships, planning and execution. In South America, product support revenues were up 4% in functional currency on strong mining activity.

We again added over 100 technicians in the quarter to help support our customers, including as we ramp up our capabilities to deliver on the new equipment awards we announced in May 2024. In The UK and Ireland, product support revenues were 1% in functional currency on improved power segment activity levels similar to last quarter as we continue to support a growing population of power systems equipment in the region. Maximizing product support remains a key focus for our regions. During the second quarter, we also continued our solid progress on improving the resilience of our business to strengthen our earnings capacity with strong cost and capital control. SG and A margin was 15.5 in the quarter and included a meaningful increase in long term incentive plan expense given the 44% share price appreciation.

We also took further action in Canada to streamline our organization structure with expected annual future savings of over $20,000,000 We remain relentlessly focused on driving efficiency in our operations, while building capabilities, coverage and capacity to drive loyalty and growth. Invested capital turns were approximately 2.3 times this quarter and have steadily improved since the beginning of 2024, demonstrating our focus on improving capital velocity and growing our business. From a sustainable growth perspective, we continue to see strong growth in our Power Systems business and improvement in our rental revenues. Our Power Systems backlog now exceeds $1,000,000,000 reflecting a diversified mix of prime power packages, oil and gas related equipment orders and data center standby packages to be delivered through 2027. Relative to last June, our Power Equipment backlog is up 88%.

Power Systems product support revenues also continues a steady growth trajectory as population builds. Revenue in our Used Equipment segment decreased this quarter, mostly due to large one off packages last year. The used equipment margins have however improved in 2025 as the market inventory levels have normalized. This is generally in line with the expectations we outlined during the third quarter results last year. Rental revenue increased 4% with a 10% increase in Canada relative to Q2 twenty twenty four, including solid activity in heavy rentals despite a more challenging construction market.

Our new rental leadership team are making solid progress as the coverage and fleet changes we made last year are improving utilization levels in each of our rental businesses in Canada. We remain committed to growing this line of business in the long term. Before I turn the call over to Dave, I’d like to provide a few comments from each of our regions. In South America, the team continues to execute well across all countries and across sectors. We continue to see solid activity levels in our mining business with new ultra class truck deliveries and support equipment awards added to our backlog in the quarter.

Customers are actively managing in their equipment fleets, adding new equipment while maximizing the utilization of their existing aging fleets. We expect continued growth for our mining business, albeit not in a linear fashion as mines build specific optimization and growth plans. We are also continuing to focus on rebuilds in the construction sector with mining contract activity levels strong. Our Power Systems business remains active in South America, particularly in oil and gas and in the data center market. In The UK and Ireland, the team continues to operate resiliently in a tough market.

While the construction segment continues to show signs of improvement from a quoting standpoint, equipment utilization levels are still subdued. Our power systems business in The UK and Ireland continues to see strong quoting activity from prime power and data center applications, while at the same time product support revenues in Power are robust. We continue to leverage digital tools as mentioned on the last call to drive productivity improvements as we execute repair and rebuild work. In Canada, the team is focused on capturing growth opportunities in the market, driving product support growth through adding technicians and sales coverage remains a priority. Activity levels in Power Systems have been solid, supported by well servicing and gas compression end market demand.

Construction activities remains on the slower side of our expectations, but we are relentlessly looking for ways to add value to our customers whether through machine rebuilds or targeted component sales. Our mining business continues to perform well and activity levels are robust, despite some weakness in certain commodities. We added over 20 ultra class mining trucks to backlog this quarter and quoting activity remains strong. Overall, we remain optimistic for the 2025 with a strong first half behind us and lots of opportunity in front of us and continued momentum in the execution of our strategy. With that, I’ll hand it back to Dave.

David Primrose, Executive Vice President and Chief Financial Officer, Finning International Inc.: Thank you, Kevin. I’ll now turn to Slide three. Our Q2 revenue of $2,600,000,000 was comparable to Q2 twenty twenty four with solid product support revenue growth offset by lower used equipment sales. Our second quarter earnings were adjusted for severance cost of CAD12 million for headcount reductions related to consolidation efforts and changes to our organizational structure with a focus on non revenue generating positions primarily in Canada. Excluding severance, adjusted EBIT was down 2% from Q2 last year primarily due to higher LTIP expense of CAD16 million or $09 per share relative to Q2 twenty twenty four reflecting a 44% appreciation of our share price during the quarter.

Adjusted EPS of 1 point dollars 0 was up 5% from Q2 twenty twenty four EPS, reflecting lower finance costs on a lower average debt level as well as the benefit of our share repurchases. Our adjusted EPS excludes for refuel earnings of $05 per share in the quarter. We are pleased to see continued momentum in our business underpinned by supportive mining and power system activities. At the same time, we continued executing our strategy to maximize product support, build full cycle resilience through diligent cost control and improving invested capital velocity. As Kevin mentioned, SG and A margin remained resilient at 15.5%, invested capital turns reached approximately 2.3 times and we maintained our working capital to sales ratio of 26.4 relatively in line with last quarter and with an improvement from Q2 twenty twenty four of three ten basis points.

Consolidated adjusted return on invested capital and net debt to adjusted EBITDA also held firm from last quarter at eighteen point seven percent and one point six times respectively. Our Q2 free cash flow usage of $164,000,000 reflected higher inventory levels to support increased customer activity. On Slide four, we show changes in our revenue by line of business compared to Q2 twenty twenty four and the composition of our equipment backlog by market sector. New equipment sales were comparable to Q2 twenty twenty four with strong mining deliveries in Canada and South America offset by slower construction sales in Canada and the timing of power projects in The UK and Ireland. Used equipment sales were down 43% as in Q2 twenty twenty four we had large auction sales and one time deals in Canada that did not repeat this quarter.

Product support revenue was up 5% with consolidated growth benefiting from a stronger UK pound And as Kevin mentioned, we saw growth across all regions led by mining in Canada. Our equipment backlog reached an all time high of $3,000,000,000 at the June, which is up 38% from the June and up 6% from the March 2025. We are pleased to continue to see the sustainable growth in our power systems backlog to over $1,000,000,000 now representing 35% of our total backlog which is another testament to our strategy execution focus. Turning to our EBIT performance on Slide five. Gross margin was up 40 basis points primarily driven by a higher proportion of product support revenue in Canada and The UK and Ireland.

SG and A margin was up 50 basis points primarily due to the $16,000,000 in higher LTIP expense in the quarter. We remain focused on simplifying our business and our restructuring efforts this quarter are expected to result in annual SG and A savings of over $20,000,000 Looking ahead, we will continue to seek opportunities to further improve efficiency, reduce overheads and build more resilience into our operating model to drive higher earnings capacity. Q2 adjusted EBIT margin was 10.1 in South America, 9.4% in Canada and 5.2% in The UK and Ireland. Moving to our South American results and outlook, which are summarized on Slide six. In functional currency new equipment sales were up 6% from Q2 twenty twenty four driven by strong mining deliveries in Chile.

Product support revenue was up 4% driven by strong demand from the mining sector coupled with higher rebuild activities in construction. EBIT was up 2% in functional currency and EBIT margin was down 30 basis points due to a higher proportion of lower margin mining equipment sales. Our outlook for Chile mining remains strong underpinned by growing demand for copper and strong copper prices as well as solid levels of quoting, tender and award activity for mining equipment and product support. While activity levels and outlook remain positive, we also expect a more challenging labor environment including higher compensation and union agreement payments in upcoming union negotiations. These negotiations are expected to include cash bonus payments as is customary in that market.

These payments may occur in late twenty twenty five or potentially 2026 and will have an impact on capital expenditures. 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 system sector activity remains strong in the industrial and data center markets. In Argentina, we continue to take a low risk approach and closely monitored the government’s new rules and policies. At the same time, we are also positioning our business to capture potential growth opportunities in the oil and gas and mining sectors and we are encouraged by steps taken by the government to reduce currency restrictions.

Turning to Canada on Slide seven. New equipment sales were down 3% from Q2 twenty twenty four primarily due to slower construction sector activity. Used equipment sales were down 58% primarily due to the large auction sales and one time deals in Q2 twenty twenty four that were not repeated this quarter. Product support revenue was up 4% driven by higher spending from mining customers. Adjusted EBIT margin was up 50 basis points from Q2 twenty twenty four driven by a higher proportion of product support revenue.

We incurred CAD11 million of severance costs in our Canadian business primarily in selected back office and technology roles. In terms of outlook, we are encouraged by the recent Bill C5 legislation and announcements regarding the potential to accelerate resource development and infrastructure project activity, but we remain cautious with respect to the exact timing and magnitude. Meanwhile, we continue to expect ongoing commitments from governments and private sector projects for infrastructure development supporting activity in the construction sector. On the mining side, we expect our mining customers to deploy capital to renew, maintain and rebuild aging fleets. And for power systems, we continue to see healthy demand for reliable and efficient electric power solutions.

And finally, we remain focused on managing costs and working capital levels. Please turn to Slide eight for our results in The UK and Ireland. In functional currency, new equipment sales were down 8% compared to Q2 twenty twenty four due to the timing of power system project deliveries partially offset by higher construction new equipment sales. Product support revenue was up 1% with higher activity levels in the power system sector offset by slower activity in construction. EBIT margin was up 60 basis points reflecting higher proportion of product support in the revenue mix and a continued strong focus on cost control.

As we continue to grow product support business which is more cost intensive we remain committed to keeping our SG and A resilient. We expect demand for new construction equipment in The UK and Ireland to remain soft in line with the low projected GDP growth. We continue to expect a growing contribution from used equipment and power systems and resilient product support as we execute our strategy. Before I turn it back to Kevin, I would like to reiterate our go forward strategic priorities. With the sale of foreign refuel and Comtech now completed, we are sharpening our focus in our core dealership operations to execute our strategy.

To maximize product support, it will be our top priority to grow equipment population and market share across all areas of our business to unlock future opportunities. We are also actively seeking to grow our technician base to capitalize on our extensive service network and parts distribution platform. On full cycle resilience building upon the restructuring actions that we undertook this quarter, we will continue seeking further opportunities for cost and capital efficiencies while at the same time maintaining growth momentum in our business. Meanwhile, we also expect to continue to invest strategically in core dealership to support future sustainable growth in rental, used and power. Overall, we expect our adjusted return on invested capital to improve as a result of the sale of Fora Refuel and Comtech and that the reduction of earnings from the sale of those businesses will be offset through a combination of share repurchases under our normal course issuer bid subject to market conditions, debt repayment and core dealership momentum including SG and A reductions in Canada.

The allocation of net cash proceeds from the sales will remain dynamic as we assess investment opportunities in our core operations and refine our future plans. I’ll now turn it back to Kevin for some closing remarks.

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Thank you, Dave. Before I turn the call back to the operator for Q and A, I would like to summarize our remarks and underline the strength of our core business, following the sale of Forrey Fuel, which we’re happy to complete ahead of schedule. We are proud of the accomplishments of this quarter as our teams continue the disciplined execution of the key pillars of our strategy. Product support grew in all regions and is up 7% year to date. New equipment sales were strong and we achieved a new record backlog, which positions us well for future opportunities.

And we continue to demonstrate cost discipline and increased capital velocity, and we are pleased with year over year earnings growth. Operator, I’ll now turn the call over to you for questions.

Conference Operator: Thank Please go ahead.

Devin, Analyst: All right. Thanks. Good morning. I wanted to start with a question on earnings in the South American division. Last year, I think there was a meaningful drag from currency related risks in Argentina.

And with revenues up about 6% this year, I would have expected a bit of a stronger flow through down to operating income. So I’m just trying to get a sense if there were some cost pressures in the business? And if there were, was it mostly a one off? Or could some of this linger until pricing or operating efficiencies provide an offset?

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Yes. Sure. Thanks, Devin. I appreciate the question. Yes, for sure, as we continue to grow in South America and the business evolve, there are cost pressures in South America.

I think they extend beyond Finian into the general mining industry. We’re seeing we’re still seeing labor the labor market being very hot. That results in some increased costs of labor. We’re currently negotiating with a couple of units. We’re pleased to have closed with two unions so far and we’re still negotiating with a couple.

And also, there’s an incremental cost of executing the growth down in the region as well. So, growth is not linear. Sometimes you have to invest ahead of the growth as well. So, at times, we’re adding cost into the business to get ahead of that growth and to make sure we can support our customers. So, there’s some of that in there as well.

But generally, the other part of it is, we are seeing some pressures from product support margins as we continue to grow the business as well. But overall, we’re pleased that that business still operates at a margin in excess of 10% and very strong ROIC.

Devin, Analyst: Okay. Okay. Thanks for that. Second question, fairly meaningful buildup of working capital in the quarter. I think year to date is actually a bit higher than last year.

I think there’s been obviously a big focus amongst the leadership team to kind of streamline invested capital. Just wondering if you could talk about the drivers of that working capital buildup and how we should be thinking about the back half of the year in terms of working capital?

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Yes. I think the working capital build, as I mentioned on the last call, Devin, ASPIP was the highest it’s been for ten years. So that’s a result of the product support growth and the future business. So a lot of it is can be attributed to that and increased parts inventories. We also have some lumpy inventory around the mining truck deliveries as well.

So they’re the three main drivers of that. I would say that I would expect working capital to remain at those kind of levels as we continue on this growth, the current growth trajectory. As you mentioned, we’re always looking for ways to streamline that and to close, like close out and sweep jobs earlier to move equipment through the supply chain faster. But I think it’s more a function of the growth that we’re seeing in the outlook.

Devin, Analyst: Okay, great. Thanks for that. I’ll turn it over.

Conference Operator: Our next question comes from Yuri Lynk with Canaccord Genuity. Please go ahead.

Yuri Lynk, Analyst, Canaccord Genuity: Good morning. Can you just, Kevin, expand a little bit on the construction markets? I think sales activity was weaker, but I thought in your prepared remarks, you mentioned that bookings activity had kind of picked up. So any more detail on what’s going on there?

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Yes. To be clear, we’re very pleased with the order intake in Canada. I mentioned that the bookings doubled. That’s super encouraging for the future. The talking my comments around softer construction really relate back down to product support for the moment.

We’re still we’re seeing a healthy order intake in The U. K. As well. So, we are seeing investment or renewals of fleets in construction, but utilization levels which we track are still at the lower end of the range. If you look at like quarrying output, the aggregates output in The UK, it’s still at the lower end of the range.

So the actual utilization equipment and therefore the product support that we’re achieving in that space remains still a bit subdued. But for sure, the order intake in construction in all three regions actually, but particularly in Canada is very encouraging. And I would say that we’re very happy and we believe that part of that is through growth of market share. And obviously that plays well to product support opportunities in the future.

Yuri Lynk, Analyst, Canaccord Genuity: Okay. Just want to switch to the backlog, particularly Power Systems. It’s almost the power systems cycle has almost doubled versus last year. Of that backlog that you’ve got now, how much of that is data centers versus prime and standby power?

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: I would say in The UK and South America, it’s nearly all data centers. So if you use Pareto, 80% at least in the data center market. I think it’s a more broader split in Canada with to the oil and gas and gas compression sector. So but I’d say data centers are the secular demand driver in that backlog number for sure.

Yuri Lynk, Analyst, Canaccord Genuity: And how has quoting activity evolved over the last few months?

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Yes. So we were aware of some narrative around data centers and demand and some pausing. We’re not seeing that in our order intake or in the general markets that we’re seeing.

Yuri Lynk, Analyst, Canaccord Genuity: Okay. Helpful. I’ll turn it over. Thank you.

Conference Operator: The next question comes from Steve Hansen with Raymond James. Please go ahead.

Steve Hansen, Analyst, Raymond James: Yes. Good morning, guys. Thanks for the time. Just want to follow on Yuri’s question just on the Power Systems side. Is it possible just to maybe describe some of the pros and cons that you see is facilitating this large buildup in backlog and order flow?

It’s all encouraging, of course, but I think you described it as being more cost intensive. Maybe just give us some other things to think about as we’re thinking about the margin profile going forward and how you manage that sort of extended runway?

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Yes. No, it’s a good question. I’ll make sure I understand it. So, for sure, the secular trend that we’re seeing in data centers is a meaningful driver of business growth for filling. And so, I think that in terms of the equipment sales or the engine sales, that’s a very healthy business.

Of course, depending on the application of the power systems deliveries, the product support intensity can differ can be very different. But we’ve always said that and we’ve seen it as a driver in The UK that data center maintenance and customer value agreements are a really good source of product support revenue moving forward. And so, we think it’s we know it’s a very healthy business and we’re very pleased to have gone over $1,000,000,000 of backlog in segment now. And I think from net net, margin, it would be helpful to margins over time. But as you know in our business, that mix of new equipment sales, so if you do a healthy or like a big delivery of a big project in a quarter, that can change the mix that we’re seeing that quarter and it can impact margins in that quarter.

The way I’d encourage you to think about Power Systems is the long term secular trend, how they’re delivered and is going to be lumpy and continue to be lumpy. But the underlying population and therefore product support revenue stream annuities is kind of a net new or an incremental for our dealership.

David Primrose, Executive Vice President and Chief Financial Officer, Finning International Inc.: I’ll just add to that, Steve, with the power of customers, they’re typically the large the data center large global sophisticated customers who do long term planning and we work very closely with them and that long term planning is beneficial to them and also to us as we plan our execution of those projects.

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: So I mean, in terms of I don’t see any cons to your original question, Steve.

Steve Hansen, Analyst, Raymond James: Okay. That’s helpful. Thanks. Just want to go back to the cost savings efforts that are still underway here in Canada. You described some of the takeout already and the $20,000,000 of savings.

Is it possible just to give us a sense for where we sit on that journey, maybe in just inning terms? Are we in the fifth inning, sixth inning? Presumably, a lot of the big changes happen upfront as you adopt this UK playbook, but I just want to get a sense for whether we’ll be seeing additional actions for the balance of this year and then as well? Thanks.

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Yes. I mean, it’s we’ve said this continuously as well. I you’ve seen it through our overall SG and A. We’ll never stop looking and I’ve been consistent in this a lot. We’ll never stop looking for cost efficiencies for sure.

When you bring a new President into the company, they are reviewing the business and looking for opportunities with a fresh set of eyes and some different perspective from a different operating region. And so we fully expected that with Tim taking on that role, we would start to see some changes there. And we think there’s more to go at. It’s very difficult to decide which innings we’re in right now, save for the fact that we believe there’s more to go out there in Canada.

David Primrose, Executive Vice President and Chief Financial Officer, Finning International Inc.: Think, Steve, I’ll just add there is, we see this definitely as a continuous journey. And if you look back in time, we’ve taken our SG and A percent from 2019, 2018, we’re now in the 15 range. So it’s a look at it a bit like safety, where it’s never finished and we’re always going to be looking to improve. And that with Tim coming into Canada, again, we just we’ll continue to identify opportunities in all regions.

Steve Hansen, Analyst, Raymond James: Appreciate the time.

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Thanks, Steve.

Conference Operator: The next question comes from Cherilyn Radbourne with TD Cowen. Please go ahead.

Patrick, Analyst, TD Cowen: Hi, good morning. This is actually Patrick on for Cherilyn. Thanks for taking my questions. The first one is just back on product support margins in South America. So you mentioned a bit of pressure there.

I guess with product support up, but new equipment sales also up, does new equipment going up out tie up technicians who could be working on the higher margin product support business? So is that something that could be at play there with the margins? Or is the drag related to that hiring of technicians? I think you said more than 120 since last quarter.

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Yeah. No, we definitely wouldn’t say that the delivery of new equipment. We have a very super process. I think some of you saw it last when we did the Investor Day and how we deliver equipment in from our La Negra facility in Antifagasta. And so, there’s definitely not a mix of shift of technicians.

A lot of technicians are dedicated to mine sites. For me, it’s more the I would describe it as the kind of growing pains, the extra cost from growing pains, training technicians, they’re not as productive as they would be if they’re fully trained, Moving parts around in new volumes is also more expensive. And so I would say that it’s more a function of growing pains. We’re very focused on the ROIC and the margin, but then the ROIC that we’re delivering in South America, we feel like it’s a very strong business. But to the other question around that we just had around cost savings, we’ll never stop looking at ways to offset that.

We want to be competitive. We have to be competitive. And our business and we want to grow the business and we feel like there’s opportunity to grow the business. So, there may be some movement around from margins to cost from margin and looking for cost offsets as we move forward. I think that’s healthy.

And I think most businesses would most good businesses would look to do that.

Patrick, Analyst, TD Cowen: Okay, great. Thanks for that. And then I guess on the call, you also mentioned the target component rebuilds being a strategy to accelerate product support business in Canada. I guess is that something are there learnings and sales practices being levered from The UK Ireland business implemented in Canada? Was this just an area you identified as something that needed more focus or was like a playbook brought in?

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Yes. I think it’s no, it’s been a focus for a while. We in Canada, we’ve been pleased to win back a big chunk of component business from a major customer that was being outsourced elsewhere. And so that’s driving some growth there. We see obviously the rebuilds, we’ve been rebuild activity, machine rebuild activity has been strong since the post pandemic era.

As that rebuild opportunity, we talked about before, as you come down the pyramid of size classes of machines, the value proposition for a full machine rebuild gets tested. We’re constantly looking at ways to expand the pool of equipment we can rebuild to get it into that kind of that cost optimization window. But in cases where we can’t, we’re using our network to rebuild individual components, engines, transmissions, where a full rebuild doesn’t make sense. So, I think it’s two things. One is constantly looking ways to expand the opportunity for rebuilding equipment and components.

Another one is significant incremental wins with large customers.

Patrick, Analyst, TD Cowen: Great. Thanks. I’ll turn the call back.

Steve Hansen, Analyst, Raymond James: Thank you.

Conference Operator: The next question comes from Krista Friesen with CIBC. Please go ahead.

Krista Friesen, Analyst, CIBC: Thanks for taking my question. Maybe if I can just go back to the previous question on margins in South America. Can you give a bit more color as to maybe what the internal impact is, whether it’s technicians maybe not being fully trained versus the external impact of just that operating environment? I’m just curious kind of what’s within your control versus what’s more of a macro impact?

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Yes. So, as we’ve said before, and I think if you look into the mining sector, most of the mining sector are looking for ways to improve costs, improve efficiency. If you think about mining growth, ore grades have declined, fleets have aged. There’s been a labor challenge across the whole sector. And so all of these things are a perfect storm of growing pains, which we’re helping our customers to navigate.

And so for sure, we’re looking for ways to be more efficient and to help our customers lower their costs. But I would describe most of it as and where we have that and where we have to become more efficient, then we’ll look for the SG and A offsets. I think what you’re seeing in South America, as I mentioned in my previous remarks to on the previous question, I would categorize it more so as growing pains as we strive to add more than 1,000 technicians and add new supply chains. We have a dedicated warehouse that we’ve opened to help us increase the velocity of parts that we’re shipping into the mines in the Antifagasta region. That’s an incremental cost that we didn’t have two years ago.

And so, I would categorize it more of those growing pains than external pressures. But for sure, we take our responsibilities very seriously and we’re very focused on helping our customers reduce their operating costs.

David Primrose, Executive Vice President and Chief Financial Officer, Finning International Inc.: What I’ll just add there Chris is, again keep in mind that also the equipment shift to mining in South America. So, we see a shift of mining product support and a shift to mining equipment, does put pressure on that. But at the same time, Kevin said earlier, we’re in that still in that range that we’ve talked about before for South America. And to the extent there are margin pressures, we’re always looking to offset that to the extent we counter SG and A as well.

Krista Friesen, Analyst, CIBC: Okay, great. Thank you. And then maybe just shifting gears a bit. Your outlook for Canada seems modestly more positive than last quarter just as a result of recent legislations and announcements there. Can you add any color as to what you’re hearing at this point?

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Yes. I would say, we’re encouraged by the announcements and the approach of the new government. It’s significantly more positive sentiment or commentary about how they want to build Canada and build Canada strong. So that’s a net positive for us. I wouldn’t say that so that’s an incremental positive.

We feel better about Canada than we did a year ago. Also, think that’s given some confidence in the market and you’re seeing that in customers willing to commit capital and place orders, particularly in construction. But I think our comments around more positive around Canada are more a function of what we’re seeing in the business, which is good product support growth, strong equipment sales, very, very significant backlog build in Canada this quarter. And so, comments are more around what we have seen in the business more so than being getting too carried away with the initial kind of sentiment or commentary from the government.

Krista Friesen, Analyst, CIBC: Maria. I’ll jump back in the queue. Perfect. Thank you. Thanks, Kristin.

Conference Operator: The next question comes from Shabbat Khan with RBC Capital Markets. Please go ahead.

Trevor, Analyst, RBC Capital Markets: Great. Thanks and good morning. Touched a little bit on this across some of the questions, but maybe if you can just dig a little bit into your current backlog. And I think in the past you’ve made comments around the backlog during the peak mining cycle would be sort of X percent. One, can you maybe just talk about where you see the mix of backlog relative to typically when demand is at high levels?

And then secondly, as we look at the backlog mix across mining, power system and construction, should we just generally assume the power systems part becomes a bigger proportion over the next one, two, three years as maybe growth accelerates relative to the rest of the business? Thanks.

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Yes, sure. Thanks, Trevor. For sure. So I mean, this is a record backlog level, so it’s hard to kind of comment on previous comparisons. The way I would describe it and we have done previously is that our construction is back at more normalized levels.

And so it would be in the 20%, 20% range of backlog. And the remainder, we obviously have been very successful in mining orders over the past little while and they take a longer time to go through the system. So, backlog would be around half of our sorry, mining would be about half of our backlog right now. And then, obviously, we talked about Power Systems being $1,000,000,000 That just incrementally keeps growing as part of the proportion of the share of the backlog in every quarter. And to your question, we would see that continuing as we move forward.

And part of that, as we’ve said previously, some of that is due to the growth that we’re seeing and the ability to supply that backlog and Caterpillar building more capacity to help us with the velocity that we can deliver those engines. And some of it, as Dave mentioned just a few minutes ago, is around the data center companies and the power systems customers tend to plan longer term. They’re having to build infrastructure, road sheds or by service. So, they’re planning way further ahead than we would typically see in our other segments. That helps us with backlog.

So, some of that backlog that’s in there is deliberately going to deliver in 2027 because that’s when they want it.

Trevor, Analyst, RBC Capital Markets: And then just for the comment around your OEM sort of supporting this growth in Power Systems. Can you maybe just talk about the availability of the products that your customers want within Power Systems, having the right products? Are they getting it on time? Because presumably the data center demand the OEM is likely seeing globally. So just your ability and confidence in delivering against this elevated demand over the next call it twelve months or so?

Thanks.

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Yes. So when we take backlog, we book orders with Caterpillar and build slots. And as with any supply chain, that can move around a little bit. But I think in Power Systems specifically due to the planning nature, we’re confident and we’ve got a track record of delivering Power Systems projects on time. I guess, are seeing a tightening of our supply chain.

That’s as I previously mentioned, that’s why Caterpillar are expanding their production capacities at Lafayette. That will come on stream, I believe, next year and into 2027. So that will further improve our ability to support our customers in this space. So yes, we’re super confident and we have to be These projects are very precise and we need to deliver them effectively and on time.

Patrick, Analyst, TD Cowen: Great. Thanks very much.

Maxim Sytchev, Analyst, National Bank Financial: Thanks, Robert.

Conference Operator: The next question comes from Maxim Sytchev with National Bank Financial. Please go ahead.

Maxim Sytchev, Analyst, National Bank Financial: Hi, good morning gentlemen. Hi. I was wondering if it’s possible to get a bit of an update on your parts automation initiative in Canada. And when do you think we could see the potential benefits down the road? Thanks.

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Yes. Great question, Max. And so I mean, so that’s all signed off. My understanding is that will be implemented in the second half of the year. As we’ve seen in South America, and you saw the plan when you came down there in 2023.

That new auto store technology demonstrably changes the way that we pick and pack and ship parts and it reduces the labor intensity, which is important given the labor scarcity and labor cost in South America. But labor is at high cost in Canada as well. And so we would see that as one of the key streams for further SG and A reduction in Canada. So if we look at the runway in Canada that we spoke about, we’ve got Tim’s, I would classify it as the fresh eyes looking at the organization and removing any excess that we may have built up over the post pandemic period. And then there’s another section of transformational cost change, which we need to ensure that we remain competitive.

And we put the parts transformation in the auto store into that category. The good thing about it is we have had it in South America for a year now or over a year and it’s working fantastically well. So, we’ve got a proven track record. We’ve got people that have used it in South America for a long while. There are other cat dealers and cat distribution centers that use the same technology.

And so we have a high degree of confidence of execution there and seeing the subsequent cost savings.

Maxim Sytchev, Analyst, National Bank Financial: Okay. That’s great comments. Thank you. And then just wanted to pivot a little bit to the used market. I mean like obviously, the whole thing is kind of recalibrating.

But I’m wondering if you don’t mind kind of linking the used product with the fact that Catapult is talking about sort of normalization of pricing dynamic on the new side and I guess general availability. How do you think that bucket I. E. Used will play out on a going forward basis? Thank you.

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Yes. So it’s a new equipment supply is broadly normal. And so what that’s led to is a bit of an excess in used equipment over the past year, which obviously, when there’s an excess of used equipment, prices come down and that could impact your current inventory. And I think you saw that through the course of last year, especially the second half of last year in Canada specifically. We would say that used equipment business is more normal now.

The sales are, I would say, the demand is a little lighter than normal right now as market recalibrates, as you suggest, but margins have more than improved, right? So there’s an offset to margin, which means that the business is performing well. Priority and our intention there is effectively participate more in that market, Max. And if you’re participating more in the used equipment business, when the prices are lighter, it’s going to hurt you. When the prices are better, volumes will drop.

And we also you have to roll into that. So we’re really trying to participate more in mining used equipment as we move participate in moving equipment between our own regions and others, and that can be very lumpy as well.

Maxim Sytchev, Analyst, National Bank Financial: Sure. And sorry, just to follow-up on that, do you have to invest incrementally or you already have like sort of all the capability process wise and people wise to, as you said, participate more in that vertical?

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Used equipment is something that we do. We just participating enough in it, Max. So we have the capabilities and we’ve enhanced it with, you know, people coming from the market into our company and, you know, that have been available. So we have more than enough capability to do that. It’s a very light business.

We have the branches, we have the infrastructure, we have the systems. So now there’s very little incremental cost. That’s why it’s just good to participate in it.

Maxim Sytchev, Analyst, National Bank Financial: Of course, of course. It makes sense. And just one clarification. In terms of your data center capability, correct me if I’m wrong. In the past, you were saying that you were working with other cat dealers in outside of your geographies, like in Europe, for example.

Is that still the case? And is that also part of the reason that we’re seeing that accelerated growth curve in Empower? Thanks.

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Not so much Empower, and that’s just specifically in Europe as we help the other European dealers. We’ve developed a track record of delivering on data centers and we collaborate with the support of Caterpillar and the local dealers to execute on those programs. We’re also we have the dealership in Northern Ireland where a lot of this equipment is built and packaged. And so that gives us an advantage there as well. But I wouldn’t say that’s part of the incremental that’s a big part of the incremental growth.

I think it’s more coming from our domestic from our legacy and domestic markets. That’s not a big driver. That’s not a big driver. We are the drivers of our domestic markets.

Devin, Analyst: Okay. Thank you.

Conference Operator: The next question comes from Jonathan Goldman with Scotiabank. Please go ahead.

David Primrose, Executive Vice President and Chief Financial Officer, Finning International Inc.0: Hi, good morning team and thanks for taking my questions. Maybe just to start off, we spoke a lot about growth on this call and you’re investing for that and that’s encouraging. But how much visibility do you have on that growth? When you’re making the plans and you’re investing, how many quarters or years out are you thinking or do you have visibility on?

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Yes. Think well, so I think if you look at it by sector, in terms of mining, that growth is steady in Canada. We have good visibility to the mining, the oil sands producers. And that’s steady two to 3% growth. So you’re looking to add technicians and there’s not a huge amount of additional capital needed in that space.

We look to increase efficiency of the facilities we have to support customers there. There may be a little bit of incremental capacity, but not significant. South America, the plan has been significant. And I would say that we’ve just finished Phase one of that with the developments we’ve had in what we call the Antifa Gaster Master Plan, which we outlined at the Investor Day. So, the bays are open, the auto stores in.

And right now, we’re just, I would say, in the process of stepping back from that a little bit and looking at what the longer term secular trend and commodity trend is for copper mining. We’re talking to our customers about their plans and their mine plans. So, I would say that copper is taking a breath right now, but it doesn’t take away from the long term trend and the long term opportunity in copper. So, I would say that we’re currently calibrating and looking out to the second half of the decade now in terms of what additional capital we need to support the growth of copper production in that region. So I would expect more to come on that.

The UK is really growth is low and so and visibility is not very good. So, at the moment, it’s more about maintenance CapEx there and what we’re doing to improve our facilities to improve efficiency. So, I’d say the only other I mean, the growth in Power Systems, again, that’s just secular. So, we continue to look at the capabilities we have to support that business.

David Primrose, Executive Vice President and Chief Financial Officer, Finning International Inc.0: And Kevin, you touched on this on The UK. Is there any incremental positives there from the new budget that was passed and maybe stimulus money that may flow in the second half or maybe more fulsome in 2026?

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: No, John, not at the moment. We’re not I mean, government I’ve learned over time not to listen to governments, but to watch what they do. And so, obviously, there’s some encouragement in terms of equipment deliveries. Some of our customers are closer to the actual contracts and the execution of those contracts. So, there’s some encouragement to be heard from that.

But, I’ve learned a long time ago not to run our business based on what the governments do sorry, what they do.

David Primrose, Executive Vice President and Chief Financial Officer, Finning International Inc.0: I’ll plead the fifth on that one. And then maybe just one more for me. On the backlog build, really nice build, another record. But based on the activity levels you’re seeing today and maybe the conversations you’re having with customers, do you have a sense there’s continued momentum there on the new equipment side? Or is there a risk we’re approaching peak of the backlog build?

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: Yes. It’s hard to say. We don’t like to talk about peak because we’re growing our business. We’re certainly not a peak in Power Systems as we for the reasons we’ve previously articulated on this call. So, we continue to try and grow market share there.

They’re planning further out. So, whilst the backlog what you’re seeing in Power Systems deliveries and we’ll see more deliveries in the second half of the year than we did in the first half of the year. So, you’ll see timing of big deliveries happening and new orders coming in. So it could be lumpy over time. And the same for mining, there’s a lot of quoting activity going on in South America right now.

And we’ve taken orders from all three oil sands producers in the quarter, hence the Canadian backlog. And we’ll see that continuing. So, currently, we work on delivering and mining a truck a week between South America and Canada and that’s encouraging. And we’ve got further opportunities ahead of us. But most importantly, it’s a good indicator for the health of those end markets and the product support opportunities in the future.

David Primrose, Executive Vice President and Chief Financial Officer, Finning International Inc.0: Definitely. Thanks for the color. I’ll get back in queue.

Krista Friesen, Analyst, CIBC: Thanks Jonathan.

Conference Operator: We have a follow-up question from Steve Hansen with Raymond James. Please go ahead.

Steve Hansen, Analyst, Raymond James: Yes. Thanks, guys. Know we’re not long. I just want I know it’s only been two quarters, but is it fair to say that product support growth, the pressures that we saw in product support growth in UL Sands that you endured through, I guess, late twenty twenty three and most of 2024 are largely now behind us? I know there’s been different elements to that line item in the sense that construction was also pressured.

I just in the oil sands specifically, the behaviors you’ve described over the past year and a half or so, is that are we past that now into a more regular cadence or rhythm?

Kevin Parks, President and Chief Executive Officer, Finning International Inc.: I think from a component perspective, our OEM remanufacturing facility, would say, yes, and we’re working with our customers to optimize component change out. In terms of machine rebuilds, that will always be lumpy and based on the local mine and their plans and what they’re doing. And so and then, of course, the summer months tend to be slower for us in the oil sands with the soft underfoot conditions. So, what we’re saying about mining, Steve, is that it remains dynamic based on individual mine plans and activities. And we don’t expect it to be linear quarter after quarter after quarter, but we do expect to grow every

Steve Hansen, Analyst, Raymond James: year. Very good. Thank you.

Conference Operator: This concludes the question and answer session. I would like turn the conference back over to Mr. Primrose for any closing remarks. Please go ahead.

David Primrose, Executive Vice President and Chief Financial Officer, Finning International Inc.: This concludes our call today. Thank you for your participation and please have a safe day.

Conference Operator: This brings to a close today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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