Up next, Finning International. We've got Kevin Parkes in the back of the room there. So CEO.
Hey.
Used to be COO, and before that, managed the U.K. business. Kevin, welcome.
Thank you.
How you doing?
Well, yeah.
Good, good to see you, too. Make sure that's off.
Oh.
Well, nice and comfy. I guess as you fill up your cup, glass of water, I will ask the first question. So great Q3. You know, I think Finning has put up several good quarters. But last quarter, you know, there was a little bit of a hiccup with Argentina, so I wanted to start there so we can move on. But, you know, it was a negative surprise, and a lot of investors trying to size up what the potential impact could be, short term, but also longer term is... I think Greg kind of talked about boxing in the business appropriately.
Yeah. Sure, so, you know, thank you, everybody, for attending the session. We've worked hard over the last number of quarters to execute really well and effectively. We've been managing Argentina through the whole of that process, and the team have developed a really strong playbook for how to manage in Argentina. You know, you're constantly wrestling with FX, taxation changes, access to dollars. You know, and so, you know, we're really proud of the way that the team are running the business down there. And I'll come back to it, but, you know, long term, you know, rightly or wrongly, I still remain optimistic about the future in Argentina. You know, I guess, you know, I wouldn't kind of call it a surprise in Q3.
I think, you know, what didn't impact our results in Q3-
Mm-hmm.
But, you know, we don't like surprises, and we're building strong credibility at Finning now, so we felt it responsible and incumbent on us to talk about the current challenges we're facing in Q4 as a result of the ongoing elections. And, you know, the subsequent devaluation that everybody has seen.
Mm-hmm.
You know, we operate in Argentina. Everybody could see the devaluation that happened. So we felt it incumbent on us to talk about it and message it to the street, to our investors. So we, you know, we're. It's not seen as too much of a negative surprise in Q4. There will be an impact in Q4, undoubtedly. You know, the gap between the devaluation and the official rate is as large as it's ever been, and there's all sorts of taxation changes going on. You know, we can't quantify that right now, because we don't know.
Mm-hmm.
The runoff is on the nineteenth. You know, and it's still very split. It's very hard to understand polls these days. I read yesterday that the right-wing candidate was edging ahead again. But the process itself has been very challenging, and we'll manage through it. It's a small part of our business. It may have an outsized impact in Q4, but then we move on. We move on with optimism, and what Greg means by putting it in a box is, we have it in a box, and, you know, it. We're gonna put it in an even smaller box, which means, a relentless focus on things that we're really good at and that have international investment and that have long-term prospects, which is, energy and mining.
You know, so the Vaca Muerta development is well underway. It's a very busy part of the business for us. The new pipeline will be constructed, which takes Argentina from being a net importer to a net exporter of gas. And there are as many copper and lithium projects in at a more advanced stage, as we talked about in our Investor Day, in Argentina than there are in Chile right now. You know, if you just read through the level of international investment in Argentina through this quarter-
Mm-hmm
... when everybody could see the challenges, I think people are looking beyond this immediate. And the two best ways for Argentina to put itself on a better path are agriculture and energy, and resources-
Mm-hmm
... you know, copper and lithium. So we play. That's where we support, that's where we do most of our work, and so that's how we think about it. But, it'll be a, you know, tighter, more deliberate scope of work, I guess, in Argentina moving forward.
Okay, very good coverage of that topic. Maybe if we zoom out the lens a little bit and talk about the wider macro. You know, I think you've used a specific word for each of the regions in which you operate in-
Yeah
... and it doesn't sound like that's changed at all, but just, you know, what you're seeing at a macro level. I understand, yeah, your Investor Day just a couple of months ago, so I don't imagine a ton's changed, but-
Nope
... um.
Yeah, so I mean, you know, I'm trying to simplify things at the company here. You know, we don't mean to sound too clever with some of the branding we put around it, but it helps us communicate externally and internally. So the way we described the company at the Investor Day a few weeks ago was mobilizing in South America, and what we mean by that is it's not gangbusters right now.
Mm-hmm.
There's not a huge amount of greenfield projects being developed. There's lots of mobilization for that potential. And there is, you know, brownfield expansion, and efficiency going on. So it's kind of mobilizing behind an energy transition trend, with a, I guess, a more constructive outlook than in Canada, where we describe that as just steady, steady growth. And so while we're constructive on Canada, you know, it is a more steady trajectory than we've seen in the past, and we like that. It's good for our business. But it is still growth. But there aren't any huge trends or macro themes to invest behind, other than a more sustained production of oil and gas, and
Mm-hmm.
And general investment in infrastructure and power. And in the U.K., we call it resilient growth, and you have to fight for everything in the U.K. You have to find a way. There are opportunities to grow. You know, we saw a huge growth last year, just with one infrastructure project. Obviously, down this year because we don't have the same level of project deliveries. But you know, it's finding a way to be successful and to, you know, generate the right return on invested capital that competes for capital in the broader organization. And you get there a different way in the U.K. by being more resilient, by... It's not a low-margin business, it's a low product support business, which is a higher margin part of-
Mm-hmm
... margin part of our business. But you have to run that way more efficiently and way more capital efficiently to get to the same outcomes. But, you know, nothing's changed from our Investor Day. The dark clouds, the dark macro clouds that everybody speaks to, are still there. You know, and we don't necessarily see those materializing in our business. And in any scenario, we always are very clear that we have market share opportunities. So even in a declining market, we have the opportunity to grow.
Perfect. Maybe moving to supply chain. So, supply chain's really tight in 2022. You know, they've loosened up this year, you know, maybe not back to normal levels.
Mm-hmm.
I think the way you characterize it is that looser supply chains would be a net positive-
Yeah
for Finning. Is there... I mean, I understand why it could be a net positive, but, but on the margin side, anything else that could offset that positive? Maybe you can, you know, also explain why the net positive as well.
Yeah, sure. So, I guess you're getting a good run of Caterpillar dealers here, and I could—I just, you know, did catch a little bit of Mike's presentation before. But I mean, for sure, there'll be a level of competitive intensity that comes from having two products on the fence and having to compete for that business. I've been in the business 27 years now, and I've been selling acceptable premiums for 27 years and trying to grow market share. So that's what we do. We don't sell the cheapest product on the marketplace.
Mm.
We work with Caterpillar to be competitive. We have to be competitive, and we have very strong ambitions to grow our market share. Not double our market share, but grow our market share. And so there may be some moderation or, I mean, for sure, we've been helped by... It's been a tailwind, right? Having a lack of supply and price increases. But we don't necessarily see that being something that, you know, investors should worry too much about in terms of pressure on the new equipment side. And it's less competitive and certainly less improved in mining and power. There's still very, very long lead times. And to a certain degree, consistent with what Mike said, you know, it's a very mixed bag in construction.
Mm-hmm.
So some products are readily available today, some are still pretty, pretty long lead times or longer lead times than we would have been used to in the past. So yeah, that's the downside, right?
Mm.
The upside is we can provide better customer service, and now I'm talking about equipment and parts, so we can fix machines faster.
Mm.
And we can provide better customer service. We can grow market share because we have more to sell, faster. And even if we're not growing market share, we're populating the market, right? So the more we... The more stuff we have available-
Mm
... the more we can sell into the marketplace. It helps with cost capital velocity. So our capital velocity has been somewhat hampered by the need to create buffers in our inventory to support our customers and to continue to support the growth trajectory. And it helps with cost to serve. So, you know, we have a higher proportion of what we call expedited or emergency fees and charges-
Mm
... to satisfy customers 'cause we're pulling parts and labor, so overtime from different places, because we're having to make things happen.
Mm-hmm.
And so margin pressure, for sure, to a certain degree, but we've been managing that for years. Upside, lots. And so I don't describe an improving supply chain as a headwind for this company. We're a distributor. You can't, you know-
Mm
... net, net, pre-pandemic, you, that wouldn't make sense, would it? That a distributor would be hampered by a, by a better supply chain.
Makes sense. Tough to argue against. Maybe just a hard pivot here. So we've talked about the macro for quite a bit. You hosted the Investor Day in September. You know, I think there was a lot of good details, and you outlined, you know, what the primary growth drivers were. And the timeline that you provided was through 2025. So I thought good detail there. So maybe, you know, in your words, since we have you here, what you thought the main takeaways-
Mm-hmm.
Should be for that investor day?
Yeah, sure. So just to touch on the timeline there, Michael. So I've been, as I mentioned, in the company quite a while now, and I was a big part of the leadership team that put the previous strategy together, which it can't be disputed that it worked pretty well-
Mm-hmm.
post-pandemic. And so, number one, I don't think I have a luxury of a long-term learning curve. Number two, you know, I think that our current strategy is working well. It needs refining, not reinventing. The other thing is, I believe in the second half of the decade, there's a lot to consider in terms of the energy transition and-
Mm.
-and so we made the decision that a short, sharp burst refinement of the strategy would be the right way to go, and we put that kind of, I guess, just short 2.5-year timeline on it. And essentially, it's focused around more of the same. So our product support growth is the, is the headline. We're explicit around a range of product support, which is moderating, as we move forward, but it's not... it's still growing. That was the first message, and how, that growth, that structural growth in product support over a well, well-managed cost base, has driven real value creation in the company and earnings, earnings capacity, and how that's structurally different to how it was in the past. So we wanted to land that message that this is a product support business-
Mm-hmm
... essentially. And so we talked a lot about that. The second part of the, of the investor day was all around South America and the opportunity that exists, and, primarily around Chile. We were very clear about that. I think we had a half a slide on Argentina. And so, the opportunity around the energy transition, the metals and the resource development, the copper, lithium, nickel that needs to be produced to support the energy transition, and how, you know, Argentina and Chile more so are very well-placed to participate and benefit from that. And equally, that we have, and you were there, Michael, you saw, we call it Albemarle. You saw lithium plants going up. You saw tower cranes. You saw copper mines in full swing. Brownfield, not a huge expansion.
But Teck did ignore, yeah, inaugurate-
Mm-hmm
... their new mine last week and a half ago, I think, in QB2. So we feel like South America, the risk-reward profile, particularly in Chile right now, is rebalanced and in a good place. The third thing was about a growth platform. And so, yes, we're, you know, probably a more, a bigger mining organization than some of our peers, and we're very heavily focused on product support, but, you know, as you just heard from Toromont there, there's rental, there's CIMCO, there's other opportunities to grow, and we feel that our opportunities to grow are around power systems, development, rental and used. They're businesses we know very well, and they're customers that we know very well. We can grow organically without having to do M&A, although M&A is always a possibility for the right opportunity.
And so we wanted to evidence that we have a platform which we can grow incrementally at the right kind of reward returns. And then the final piece of the presentation was around resiliency. So we know very clearly that we have opportunities to become more cost and capital efficient.
Mm-hmm
... to be, to improve our free cash flow conversion. And, that's been the biggest... I think we're kind of proving out the growth credentials, but the resilience is the missing piece for me. And, you know, growing up in the U.K. for 22 years, in that part of my career, you had to be resilient every day. And so I know the playbook. It's not a perfect science as it relates to the other geographies, but, we know what we've gotta do.
Perfect. I'm gonna hit a couple of the topics that you just mentioned, but I'll start with the Product Support. Product Support has been, I don't think this gets talked enough, but for Finning, since 2020, 2021, there's been a lot of Product Support growth, and I think in the last three years, you've been able to achieve more Product Support growth than you have in the decade prior to that-
Mm-hmm
... combined. Presumably, some of that is pricing, but, you know, I get asked this question often: What drove this particular inflection point, 2021, 2022, 2023? And just trying to get a sense for, you know, how much of it was market-driven versus, you know, what you, you would describe as execution-driven.
Yeah. So, so the first thing I would say is, I mean, we, in our investor deck, we went back to 2016, so, you know, we've grown in all but two years since 2016, product support. The CAGR since 2016 is 7%, which I would class as a healthy-
Mm-hmm
... kind of CAGR, despite 2016 being down and 2020 being down, never more than 10%, hence why we describe it as our most resilient part of our business. But certainly that growth trajectory has increased. Post-pandemic, more like 15%, since 2021. And, you know, the markets have improved. For sure, there were a couple of tailwinds there from a market perspective in terms of activity, constrained spend through the 2020 year, where you had a bit of catch-up.
Mm-hmm.
Price increases, as you mentioned, certainly helped in terms of that CAGR number. But I would say that if you look at our product support growth over that period of time, similarly with Caterpillar and others, you know, it was primarily focused on a very clear and explicit strategy to grow services at a double-digit rate for 10 years, 2016 to 2026. Caterpillar call it double services, we call it grow product support. But a complete alignment of two big organizations around a common goal, where the whole organization was focused around it. The tone from the top was very clear.
Mm-hmm.
We were all committed to the right coverage, the right propositions, the right capacity and capabilities in our organization. There's three examples of that I would point to. One is CVAs, so an absolute relentless focus on having a contracted and recurring revenue stream with our customers. We call it CVAs. It's basically a service agreement. And so now everything we sell goes with a service agreement, and we have, you know, very strong renewal rates after the first contract. And of course, we have, you know, component contracts in mining, so making sure we, you know, we boxed off as much of that. So we talk about having more product support revenue contracted than costs. You know, that's a good model to try and get after.
I'm not saying we're there yet, but it's a, it's a focus of ours. The second part is rebuilds. So again, for sure, I'm very transparent. There would have been a tailwind there in terms of availability of new equipment.
Mm-hmm.
Potentially, it's a further tailwind in terms of the... when the equipment became available, the cost increased, the price increase of that equipment. You know, when we look at rebuilds, we look to build propositions that are broadly two-thirds the cost of new to get a like-new product. So two things happened. Obviously, prices increased, but we've doubled down on our efficiency of the rebuild cost to get into that kind of range of commercial proposition, which customers like. And I would suggest that more than half of the rebuilds we're doing right now are with net new customers that never rebuilt before.
Mm-hmm.
I believe it to be to have a level of stickiness moving forward. So we're encouraged by that. We've also built capacity to turn the rebuilds around faster. I mean, if you rebuild a machine in six weeks versus the twelve weeks, it's a lower cost, right? It's less hours.
Mm-hmm.
So if you do it in a really efficient way in your bigger locations, and you move the equipment to the capacity rather than trying to do it in the smaller location, that helps, too. And the third area is the digital capabilities. So whether it be absolute digital capabilities like e-commerce or integrated procurement, or whether it just be data collection and the use of that data to better guide your salespeople to where they should be selling. Or the fact that customers are using their equipment more effectively and efficiently because of the digital information they have around them. So I'd point to three big changes in how we approach that as a strategy versus a market tailwind.
Perfect.
Good market tailwinds.
Perfect. And I guess on that, I mean, how is it... What's the strategy behind, and you talked about this here, just now with some of the details that you provided, but, you know, growing Product Support more quickly, but also doing it, you know, to reduce the cyclicality of Product Support, in particular. So, you know, choosing the type of business in particular.
Yeah.
So, is there a difference in maybe how that's being done now versus previously?
Yeah, sure. So I mean, you know, I'll give you an example of that. You know, a customer wants 100 technicians to help them with their, their site, their job site, whether it's a mine or whatever, and, and we say: "Do you want them for 10 or 20 years?" Right? Not 10 weeks. Okay, so, you know, the fact that the market's a little constrained in terms of labor and supply, product supply, permitting, ESG license, capital license, is a... We think it's a net positive for us 'cause we're able to grow. So we don't want to accelerate product support growth. We've been, you know, there was questions at the investor day, Michael, you were there. You know, we've heard all this great stuff, and then why are you only saying 6%-7% product support growth?
Well, we don't want to grow much faster than that-
Mm
... because it's expensive, and it's not sustainable. And then we'll, you know, we don't help with the cyclicality. We overbuild capacity, we over-engineer, we over-buy inventory. And we want to build a sustainable business. You know, I've made a statement to our, our business that we're, we're never going to lay off a frontline person again. We don't know how we're going to do that yet, but we're very committed to it, right? Because... And to do that, you have to build out. It's not about what you've done in the past; it's about how you build in the future.
Mm-hmm.
And so, you know, one could say that we're artificially restraining or, no, we are, we're absolutely restraining our ability to grow in product support. You know, I'd rather have 7% a year for the next 10 years or 6% a year for the next 10 years, than 26 next year, 36 the year after, and then minus 20 the year after that. It's been something that... And like, like I said before, you know, product support is the most resilient part of our business. If there's an area of our business we should be able to build sustainability, it's product support. It's only declined twice since 2016, and one of those was a pandemic. Never more than 10%.
So if we can manage a pandemic resiliently, which I think we did, we can manage anything going forward if we build appropriately in front of us.
That's really good color. So switching to the used and the rental side, it looks like you're, you know, while you raise your CapEx on the rental, so you're looking to grow that a little bit faster. I guess the question is, well, maybe there's two questions. You know, how you view the total addressable market, and two, why you think this opportunity to accelerate used and rental-
Yeah.
-exists now?
Okay. So on the first point of capital, we didn't necessarily raise capital just on rental. Ultimately, we haven't... we've kept some equipment longer in the fleet. We've got some mining opportunities that we're-
Mm-hmm
... we're exploring. And so there's lots. It's not just rental, as you kind of would define, not you define it, as the market defines it, as kind of rental services, Sunbelt, United kind of world. We're not even. We've not done that yet. In terms of going forward, why do we think it's a good time? Well, it's a mega trend.
Mm-hmm.
Rental penetration is growing in North America, and when we talk about rental, we're talking about Canada, not the UK or South America. Right now, we do have rental operations there, but our main focus to prove out the model is in Canada. Rental penetration will continue to grow in North America, as it is in lots of other things, asset light or asset sharing type economies. It's a big addressable market. We think it's, you know, CAD 5 billion-CAD 6 billion in Western Canada alone. You know, the opportunity for rental actually is bigger in Alberta than it is in Ontario. Different mix, different products, but there's a lot of rental services that go to support the resource sector. And so we will...
We're looking for opportunities to grow organically with the right returns in the markets that we understand and we know. And so, we wanna grow our addressable customer base. So, we think it's a good opportunity. We're gonna be really thoughtful about it. It has to contribute to the company-
Mm-hmm
... and it has to, you know, generate the right levels of return, and we think we can. Now, is it the returns of the dealership business? No. Is it accretive to cost, you know, weighted cost of capital and a growing segment? Yes. So we'll figure our way through that.
Perfect. You know, at the IR day, it did feel like you were laying out a growth agenda, mostly. You know, you talked about capital efficiency, but where my perspective was, you know, had less of, was on costs and margins. Don't know if that's on purpose, but you know, versus, I guess, previous IR days, where there was a lot more focus on costs and margins.
Yeah.
So, yeah, maybe that speaks to the business where it is today. But, you know, as investors, how should we think about the overall opportunity on costs and margins?
Yes. So, the, you know, we deliberately... It's, there's only so much you can consume, right, in an Investor Day, and so we were trying to be pretty targeted and deliberate about our messages, which were about, you know, product support, growth, growth of, growth platform and, and resiliency. Now, it doesn't mean we don't have any cost opportunities by, by, by any stretch. We still have cost opportunities, particularly in how we, run and administer our service business. You know, so we're making some technology investments this year in terms of... One of them is called case management, which is, you know, cradle-to-grave management of the customer when we, when we're in service. So everybody has visibility to what's going on in that, rather than if somebody has a day off, nobody knows what happened yesterday.
And then the other one is workforce management, so making sure we're allocating the right skills and capabilities to the right jobs with the right parts. Okay? And so, there's a big opportunity in terms of every labor hour we can't sell is a cost to us, okay? As is, if you have six people administering it versus four. Yeah, and so there's opportunity around that. The second area of opportunity is around warehousing and distribution. As I mentioned before, you know, we've got a lot of emergency charges and extra charges to manage, you know, to executing our supply chain right now. We've gone from eight warehouses to five. We'll get to three in Canada. We're already at three in the U.K. And we have two, and you saw some examples of investment in, in San...
in Antofagasta, which will, you know, reduce our labor intensity in the warehouses. So I think there's some opportunities around how we manage our warehouses and how we get the parts to the end customer. And the final one, and interestingly, I just caught the end of the presentation. I mean, you know, I'm an operator. I'm in favor of decentralization.
Mm.
I think it drives accountability, empowerment, entrepreneurism, and I think that reduces the need for such a big head office or central functions. I think we'll need some centers of excellence, particularly as it relates around finance and some aspects of HR. But I think there's opportunities there, IT, but I think there are opportunities for it to, for us to be much leaner in the center as well. So there's three examples of where we're not satisfied on cost right now, but we, the reason why we de-emphasized it a little bit at the Investor Day, was to draw attention to the invested capital opportunity.
Perfect. Thanks very much, Kevin.
Okay, thanks.