Finning International Inc. (FTT) Earnings Call Transcript & Summary

Good morning, everyone. It is my pleasure to welcome you to Finning's 2021 Investor Day. It has been just over 3 years since we've hold an Investor Day, and we're really looking forward to sharing with you our strategic plan and our long-term growth outlook. Following our remarks today, you will have an opportunity to ask questions. Please use the question window on the top left of your webcast page to enter your questions at any time during the presentation. We will do our best to answer as many of them as we can in the hour we have allocated to Q&A at the end. The presentation is posted on the Events and Presentations page of the Investor Relations section of our website. I would like to take this opportunity to remind everyone that some of the statements provided during the call are forward-looking. Please refer to Slide 67 and 68 for important disclosures about forward-looking information as well as currency and 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&A under risk factors and management and forward-looking information disclaimers. Please treat this information with caution as Finning's actual results could differ materially from current expectations. Today's event will feature live presentations by members of our leadership team, some of which will be live streamed and some are prerecorded. We will start off with Scott Thompson, our President and CEO, providing an overview of our strategic plan. We will then share a prerecorded presentation on our sustainability journey, a key area of focus for us here at Finning. Following this, we will hear from each of our regional operators before we take a quick break to allow you to refresh your morning beverage. When we come back from the break, we will share with you an update on our digital strategy and customer adoption of Performance Solutions. Finally, we will summarize our expectations for future financial results and outline our capital allocation priorities before we wrap up the presentation and open it up for questions. Before I pass it over to Scott, for those of you who are new to the Finning's story, we are the world's largest Caterpillar dealer, established nearly 90 years ago. We have operations in Canada, South America and the U.K. and Ireland, and we are well diversified in terms of the markets we serve and the products and services we provide. There is roughly 12,000 employees globally. I will now pass the presentation over to our President and CEO, Scott Thompson.

Thank you, Amanda, and welcome to our 2021 Virtual Investor Day. The entire Finning leadership team is with us online today and will be available to answer your questions. With us today, we have Kevin Parkes, President of Finning Canada; Juan Pablo Amar, President of Finning South America; David Primrose, Managing Director of Finning U.K. and Ireland; Greg Palaschuk, Chief Financial Officer; Dave Cummings, Chief Digital Officer; Jane Murdoch, General Counsel; Chad Hiley, Chief Human Resources Officer; and Alex Zanelatto, the Head of our Global Supply Chain. This team represents a good balance of diverse experience. Many are new to their roles over the last 2 years, which is a testament to the talent and leadership journey we've been on. And as you'll see today, all are executing extremely well on clear and aligned plans to drive our strategy forward in a coordinated fashion. I am proud of the work this team has done to manage through the pandemic and position our business for the recovery and confident in their execution capabilities, which will be demonstrated during the upcycle we are entering into. While the world has changed significantly since we hosted our last Investor Day just over 3 years ago, our strategic priorities have continued to be the right framework to guide us through the challenges of the pandemic as well as the next stage of our journey. We have navigated through challenging times while operating safely, supporting our customers and executing on our strategic priorities. We have made significant progress and have seen improvements across our strategic goals. First, customer centricity. Our focus on safety, digital capabilities and the unwavering commitment to providing essential services to our customers have been driving improved customer satisfaction. Our employees, many of whom are shareholders and on the call today should be proud of this accomplishment. Second, lean and agile. We reduced our cost base substantially and transitioned to what we refer to as our response, repair and rebuild service model in all of our operations. You'll hear more about the RRR approach later today. We continue to drive efficiencies and reduce our fixed costs as revenues recover. Third, global supply chain. We have achieved a sustainable improvement in our inventory and working capital metrics, which allow us to generate strong free cash flow. Fourth, digital. Our early investment and long-term strategic approach developing digital capabilities are paying off and driving market share gains and better financial results. Data insights and technology solutions have become key considerations and decision-making for our customers. Today, you'll hear more from the team on how our digital performance solutions are helping customers improve their operations. And lastly, growth and diversification. The 4Refuel business, which became part of our operations in February 2019 has not only contributed greatly to our EBITDA and free cash flow profile, but it's generated aftermarket revenue synergies as well. Importantly, we have made great progress in building a sustainable business and positioning for growth as the world transitions to cleaner energy sources. Our focus on sustainability, as evidenced by our fourth annual sustainability report released earlier this year, is appreciated by all of our stakeholders. We set a target to reduce our absolute GHG emissions by 20% between 2017 and 2027. Caterpillar and Finning have a meaningful role to play in helping our customers reduce their GHG emission. Progress with dual gas blending engines and electrical equipment, as evidenced by the R1700 battery-powered underground loader highlight past leadership in this transition. We have put a significant focus on employee engagement and enhancing capabilities, and we are pleased to see our engagement scores up in 2020 despite a top operating environment. We also appreciate the third-party accolades we have received on our diversity inclusion journey, and my commitment to building a more diverse workforce remains unwavering. And lastly, the health and safety of our employees remain our top priority, and our results highlight the progress we are making. You will hear more details about our sustainability journey, plans and objectives in the prerecorded presentation that will follow my remarks. 3 years ago, we outlined the return on capital potential for each of our regions. Our plan assumes growing revenues, but that short positive end market environment was disrupted in 2019 in all 3 regions. We also experienced challenges during our ERP implementation in South America. Although now the systems and the team are functioning well. And encouragingly, we are seeing the benefits of improved automation as we head into the next upcycle. Robust execution through 2020 put us back on track to achieve strong ROIC in line with our 2018 guidance, albeit 1 year later. Significant ROIC improvements in all 3 regions will be increasingly evident starting with our Q2 2021 results as improved market activity that we had projected for the back half of 2021 has started to unfold earlier and we are seeing strong revenue recovery and results in the second quarter. With everything we've done to build the foundation for growth, we are now positioned to achieve ROIC levels of up to 20% in Canada and South America in a sustained upcycle. Over the last 3 years, we've invested in capabilities that are closely aligned with our strategic priorities and critical to our future success. We have set the foundation for operational excellence with strong leadership bench strength to drive improved results. We have built our digital performance solutions toolkit and services to enhance our customer value proposition and grow our market share. We have transformed the traditional dealership to an omni-channel model with a strong online presence supported by local and subject matter [indiscernible] to make it easier for customers to do business with us. We have made significant technology investments in South America that today are improving efficiency, reducing costs and making our South America business more scalable with less capital deployed. And we have repositioned and optimized our rental business in Canada for improved customer outcomes and better financial returns. Now we are laser-focused on the execution of our strategy to demonstrate our improved earnings capacity as economic recovery gains momentum. We have a simple plan in place, which we will discuss today. We will continue to manage and grow our business with a mid-cycle approach, and I will define what that means for us in a moment. We have strong strategic alignment with Caterpillar to achieve our common objective of aftermarket services growth. And our cost and capital culture remains a foundation for driving improved profitability and return on invested capital going forward. I am confident in our execution plan and our readiness to deliver improved returns to shareholders in the upcoming mid-cycle and into the next sustained upcycle. This simple plan is our framework for today's presentation. We have rebuilt the breach to the business and are ready for this next phase of market growth. We have a very clear plan to drive key components of our return proposition. First, drive product support revenue. Accelerating product support growth on the back of connected machines and digital solutions, primarily in the construction market, provides a substantial opportunity in all 3 regions. Second, reduced costs. Great progress has been made, but there is more to do, particularly in how we service our customers and drive supply chain improvements across the enterprise. And third, reinvest the compound. We have demonstrated what the business model is capable of in terms of generating free cash flow with the foundations in place to reduce our working capital and sales further, I believe our balance sheet provides great optionality to drive earnings through organic growth, acquisitions and return on capital to shareholders. So now it is time to do the work. During my 8-year tenure, we have never been better positioned from a cost, inventory and capability perspective. And now it is all about execution. With the pandemic in the rearview mirror, I am confident the earnings capacity of this business will be evident to all beginning with our Q2 results in August and continuing through what we believe will be a sustained upcycle in demand. Undoubtedly, we have significant exposure to cyclical industries, particularly in mining and oil and gas. It is important for us to proactively manage our business through the cycle so we can grow and compound our earnings at each successive mid-cycle point. We are leveraging data to become more agile, proactive and responsive to economic and customer realities. And we have more visibility than ever to position us for success as we capture the strong market recovery that is currently underway in our region. Our objective is to increase earnings during each successive peak and increase earnings through each successive trough and reduce the amplitude of earnings fluctuations along that growth path, essentially compounding our earnings growth with each cycle. More product support, lower cost, consistent free cash flow generation and value-creating capital allocation decisions will allow us to achieve our objectives. Our strategy is well aligned with Caterpillar. We are both committed to driving product support growth through strengthening our value proposition to meet the rapidly evolving needs of our customers. Later today, you'll hear from each of our regional leaders about the early success of our strategy to capture product support market share in construction by leveraging our data and digital performance solutions with customer value agreements and rebuild remanufacturing and exchange options. Together with Caterpillar, we are in a great position to capture opportunities in the mining upcycle with industry-leading solutions including the Caterpillar autonomous haulage system, CAT 794 electric drive truck and Finning's integrated knowledge centers. Our common objective is to deliver increased value for our customers. Our unwavering focus on controlling what we can, namely our cost and capital has served us well as we successfully navigated the volatile markets and the challenges of the global pandemic through the last year. We are on track to exceed $100 million annualized cost savings this year, and more work is underway to drive SG&A to 17% of our consolidated revenue in the mid-cycle. Our digital platform, technology and data investments have enabled us to improve our processes and reduce our working capital. Machine connectivity has been essential in improving our inventory management. We have produced 8 years of consecutive positive free cash flow with $900 million generated over the last 12 months. Our target going forward is to continue converting roughly 50% of our EBITDA to free cash flow, building on our 8-year track record of generating positive free cash flow through the cycle. Our 3 operators and Greg will provide more details on our key initiatives to further improve our cost and capital culture as we continue to improve employee and facility productivity and supply chain efficiencies. Our RRR network service model, extensive machine connectivity and our investment in technology solutions provide us with a great foundation for profitable and capital-efficient growth in the next upcycle. Our outlook is strong as the global economy recovers in 2021 and beyond. 2021 GDP growth is expected to be around 6% in our region. There are large-scale investments planned in all of our territories. Strong commodity prices and the constructive outlook for increased mining investment is driving high quoting activity for mining equipment and product support in Canada and South America. Our participation in the largest infrastructure project in Europe and accelerated investment in cloud data centers over the next 5 years provides significant opportunities for our U.K. and Ireland business. The announced infrastructure stimulus spending by governments are supporting improved construction activity with major projects ramping up and driving higher order intake and utilization of construction equipment. Undoubtedly, in South America, there is significant political uncertainty, and our plans have been built assuming that royalties and taxes will increase and that miners will wait to make big capital deployment decisions until after the constitutional process is completed, which is likely 18 months out. I am confident that we have positioned our business for improved performance going forward. All of our operations are demonstrating strong execution. We are winning equipment deals, growing our product support market share and maintaining our focus on cost and operational efficiencies. With our backlog increasing and positive market momentum in all of our regions, we are set to exceed our prior peak earnings per share over the next 12 months. Now you'll hear from our Chief Human Resources Officer, Chad Hiley; our General Counsel, Jane Murdoch; and our VP, Environment, Health, Safety and Sustainability, Felipe Fuentes, on how we are building a sustainable business with long-term benefits for all of our stakeholders.

Hi. I'm Chad Hiley, the Chief Human Resources Officer. We're proud to have just published our fourth sustainability report. We've been focused on these things for a long time because we believe they're the right thing to do for our customers, employees and the communities we operate in, but also because we feel they drive long-term competitive advantage and shareholder value. The reports online at finning.com -- and far more interactive than in prior years. There's lots of ongoing activity. Our focus today will be on 4 topics: the first, reducing our own GHG emissions; the second, helping our customers reduce their environmental footprint; third, our inclusion and diversity journey; and lastly, governance and ethics. I'll be joined by my colleague, Felipe Fuentes and Jane Murdoch to discuss some of these topics. First, let's take a look at the overview on our approach to sustainability. [Presentation]

We set a short-term goal of a 20% reduction in our carbon footprint by 2027. You may notice on the slide that our GHG emissions are down significantly in 2020. This was due in large part to a reduction in activity. Normalized for activity, we show approximately 3% decline in annual GHG emissions, which is very aligned with the reduction projects that we undertook. Our GHG reduction strategy focuses on our facilities and our fleet as they are the core drivers of GHG emissions. We're reducing facilities footprint through our network strategy, reducing square footage causes us to consume less power. We're also improving the operating efficiency of the buildings we own and lease. Our greatest facilities emissions are generated by heating our Canadian shops in the winter, so our energy conservation projects are also focused there. Examples of projects include insulated doors, door curtains, auto adjust thermostats for 1 shift branches. We're also buying green power. This transition is done in the U.K., plans are in the works for Chile, and we're investigating cost-effective opportunities in Canada. As social forces and government policy drive Western Canada from coal to cleaner transition fuels like natural gas and eventually to green power generation, we'll be able to produce cleaner fuel and further reduce GHG. We're also looking at capital investments in microgrid solar technology for branches to accelerate this transition. Lastly, we are making our current fleet more efficient. We're using more fuel-efficient trucks, using the right service vehicles to the right task and using power packs. These are truck-mounted generators for heat and air tools while not running the full engine. I'm going to pass it over now to my colleague, Felipe Fuentes, our Vice President of Sustainability, to walk you through how we are helping our customers reduce their environmental footprint and cost.

Thanks, Chad. Hi, everyone. I'm Felipe Fuentes, Vice President for EH&S and Sustainability, and I coordinate the definition and implementation of the global sustainability strategy and the road map at Finning. One of the key topics included in the sustainability strategy is products to our chip. And within that, we include all -- everything we do to support our customers, to increase their productivity and to reduce their environmental impact. Our work in this topic is focused in 3 key areas. The first one is offering our customers, Caterpillar equipment and products with enhanced technology to reduce the GHG emissions. The second one, the set of performance solutions we offer to our customers through which we can share insight and work together with them to identify improvement opportunities to increase productivity, for instance, reducing the downtime and to reduce the environmental footprint. The third one refers to continue progressing towards a circular economy by offering our customers to review their used fleet which allow us to recycle components of the machine, reducing waste, which otherwise would end up in a landfill and renewed the machine to like new specifications at a cost that often is 40% less than a new machine, depending on the application. Let's take now a closer look to OEM remanufacturing by watching a video on how we work in circular economy, extending the life of the machine, generating cost savings for the customers and reducing significantly our environmental footprint. [Presentation]

Like I mentioned earlier, at Finning, sustainability also encompasses our people. We've been working on our diversity, equity and inclusion journey for almost 5 years. For the first 3 or 4 years, we focused on gender. We're proud of our progress in this area and are pleased to be named the 2021 Globe & Mail report on Business Women Lead Here list, which was published in March. It reflects a balanced effort at the Board and executive levels to improve our gender balance at Finning. Our goal is to increase gender balance at all levels in 2021 and beyond. Last year, we began to broaden our focus to other underrepresented groups, particularly indigenous people, the LGBTQ community and persons with disability. My colleague, Jane Murdoch, who also sits on our Inclusion and Diversity Counsel, will tell you more.

Thanks, Chad. We've been working on removing barriers to help our employees do what they do best and make sure they feel safe at work. As Chad mentioned, we are expanding our inclusion journey beyond our concentrated efforts on gender equity. In the last year, we've done a number of things we're proud of, ranging from delivering educational programs, removing barriers to success, updating policies and more. We published our indigenous guiding principles and have begun cultural awareness training, focusing first on Canada. We are launching a voluntary self-disclosure campaign with employees to better understand our current demographics and inform future activity. We've completed facilities audit and have a plan to improve accessibility and inclusion. We have established employee resource groups and are auditing our processes and programs to be more inclusive. All of these activities share one goal, to make sure each employee feels safe, bringing their authentic self to work and fully contribute to our success. Now that we've briefly summarized what we're doing in the E and S in ESG, I'm going to take you through our work in the G, governance and ethics. Good governance and strong ethics are essential to maintaining our reputation and being a trusted adviser and partner to our customers, our employees, our investors, and other stakeholders. For us, this starts at the Board level. We are fortunate to have a very diverse and experienced Board of Directors with an independent chair and a separate CEO. All have an ownership interest company and a vested interest in our long-term success. Approximately 85% of our Canadian employees are shareholders as well, which strengthens their alignment with management, both being owners and stewards of the business working together towards common goals. In the past year, we were tested in our ability to manage the COVID-19 pandemic and ensure business continuity, that includes managing cybersecurity while many of our employees are working remotely and maintaining a strong data governance framework. Because of our strong governance model, we were able to execute well in a challenging year. At a high level, we improved safety performance and customer loyalty. We improved profitability in South America. We reduced cost and improved productivity in Canada, and we won major equipment deals and projects in the U.K. and Ireland. We also generated strong free cash flow and strengthened our balance sheet. Good governance also looks out for our employees. We encourage employees to ask questions or raise concerns if they are concerned about potential misconduct or if they are unsure whatever behavior or activity is in line with our values or our code of conduct. We make it easy and safe for our employees to report such concerns with an accessible global platform, protection of their privacy and confidential, timely investigations and ongoing training. Last year, we rolled out our global respect, inclusion and diversity policy. It encourages the appropriate intervention and the reporting of behaviors that are inconsistent with diversity, inclusion and respect. It also enables the identification of barriers affecting people representing a marginalized group. Whether it is our employees' physical or psychological safety, the health of our employees is our top priority. Nothing is more important and making sure our people go home safe to their family at the end of every shift. Thanks for listening to our presentation on sustainability and ESG.

I'm now going to pass it over to David Primrose.

Hi, everyone. I'm Dave Primrose, Managing Director at Finning U.K. and Ireland. This region represents about 15% of Finning's consolidated revenue. We are a highly competitive market, and the business has evolved during a solid return on invested capital despite low margins. We are able to do this because we keep our SG&A very low, and we have high invested capital turnover. Here in the U.K. and Ireland, our business is very different from Canada or South America as we do not have mining. However, we have great opportunities in large-scale infrastructure and power systems, particularly over the next 5 years. As you can see on the slide, product support makes up about 1/3 of our U.K. and Ireland revenue compared to over 50% in the other regions. Our customers have smaller equipment but this is shifting with the increasing size of infrastructure projects like HS2. Another key difference in our revenue drivers is Power Systems, which represents about 35% of our business. I am going to highlight 4 areas of growth, and these won't come as a surprise since in Q1 2021, we achieved our largest backlog ever with major wins in Construction and Power Systems segment. Firstly, high-speed rail or HS2; our digital performance solutions; data centers; and finally, product support. Let's start with HS2. This high-speed rail project is the largest infrastructure project in Europe. It consists of 2 phases, with the first phase from London to Birmingham now underway. It is a project that lifts the entire construction industry in the U.K. Phase 1 will require approximately 1,500 units of heavy construction equipment, with a total all-in opportunity of nearly GBP 500 million, a larger opportunity than we have previously shared. We have now secured GBP 83 million of year 1 equipment orders directly for the project and have recently delivered our first unit. All units come with a multiyear product support contract or what we also call a customer value agreement or CVA, and we are well positioned to capture a large share of future opportunities for the remainder of Phase 1. The recent positive commentary from the U.K. government on Phase 2 is very encouraging, and it would be great upside for us in terms of long-term activity levels and product support opportunity. A key part of our value proposition to the HS2 project customers is our digital performance solution. Broadly speaking, our performance solutions offering consists of subscription-based technology and value-added services that combines digital hardware and live data with the technical expertise of our people. Being able to have actionable insights based on analyzed data is incredibly valuable to our customers. With this capability, we offer condition monitoring, fleet management, environmental performance and other services to our customers. These services give our customers a competitive edge with reliable insights that help them improve their safety, productivity, equipment health and overall project visibility and operational performance. These are now one of the major deciding factors when these customers select who to do business with, and they are critical in positioning us to capture our traditional equipment and product support opportunities. For example, we bring new levels of insight and performance reporting to track and optimize material movement. That enhances management and audit reporting for the customer. Capabilities like these help create gains in sustainability performance with our fleet management expertise, tracking fuel burn and CO2 emissions for the customer. In the case of the HS2 project, our construction performance solutions have been instrumental in us winning over triple our typical machine market share. Dave Cummings, our Chief Digital Officer, will provide a detailed overview of our offering later, including its applications in both construction and mining. Moving on to the third area of growth for us, the cloud data center market. It has already proven to be a material business for us, representing 12% of the total U.K. and Ireland revenue last year, and it has significant growth potential. The world's largest cloud services customers are choosing Finning as their strategic partner project after project. We have over 90% of the installed CAT population under a customer value agreement, agreements that make it easier for our customers to manage their preventative maintenance activities. Over the next 5 years, cloud data center capacity is projected to grow at a significant rate in both the U.K. and Irish markets. And we expect continued strong demand in this market as customers look to accelerate projects to meet the growing demand for their services. With our market share and track record, we are very well positioned to capture this growth. We have a strong backlog of Power System's projects secured, with deliveries expected to be phased towards the second half of 2021 and into 2022. We have a very talented team with deep expertise in this segment. And we are not limited to the U.K. and Ireland, we are able to follow our customers, and we have done several projects in other parts of Europe. Our strategy to drive product support growth is highly aligned with Caterpillar and focused on 3 areas: sales execution, customer value agreements and rebuild. In sales, we are investing in our aftermarket sales talent and motivating our team with a new incentive plan and taking customer account planning and execution at the next level. Caterpillar's proprietary algorithm, such as prioritized service events help us generate targeted product support leads. With better execution on sales and our targeted value proposition, we have impressed customers and have seen our customer loyalty scores increase by over 10% since 2019. The second pillar is supporting product support growth is our focus on customer value agreements. Making sure customers not only have the equipment to do the work, but that they are covered for parts, servicing, condition monitoring and more. Our CVA focus is driving contracts that cover customers for a longer duration, provide for a broader service scope, and we are putting extra emphasis to ensure they are renewed more often. More than 85% of our new machines are now sold with a customer value agreement. Customers appreciate our new, more flexible rebuild and remanufacturing options. With the full support of Caterpillar and CAT Financial, we make it easier than ever for customers to say yes when they are capital constrained. And our RRR operating model, which I will touch on in a moment, is critical in delivering improved rebuild quality, efficiency and turnaround times for our customers. Our strategy is having early success, for example, we tripled our rebuilds in 2020 compared to 2019, and we expect to exceed last year's record. Historically, our product support business in the U.K. was heavily reliant on coal mining and North Sea oil and gas. These industries have largely declined and we have restructured and refocused our business on driving product support growth in the Construction and Power Systems market. During the time period of 2016 to 2019, the business had significant success capturing product support market share in construction, which helped lift our growth rate back up. That is encouraging, but we still have a lot more room for improvement and growth. Looking ahead, we are targeting 6% to 10% annual growth in product support on average through the next upcycle. With market share gains in construction, having captured significant HS2 opportunities, growth in our rebuild business and CVAs and technology innovation, we are stepping up our growth rates in the U.K. and Ireland. As we grow our product support business, it is important that we do so efficiently. An important part of this is our branch hub and spoke model or the RRR strategy. The response, repair, rebuild model has helped us significantly improve our performance in the U.K. and Ireland. This network transformation was first implemented by Kevin Parkes, who is here before me, and is now leading the Canadian operation. It allows us to fully leverage our branch network, taking advantage of the fast experience and resources across our territory and sharing the collective workload. It is a model that ensures work goes to branches that have the time, space, tools and skills to complete it efficiently. As a result, it improves the quality and turnaround time for our customers while driving operating efficiencies and reducing costs. The model works. Our customer loyalty scores are strong. Like I mentioned, we set a record on rebuild last year and we run at a very efficient SG&A of around 13% of revenue. The Canadian team is well underway implementing this RRR model. And as someone who has spent considerable amount of time in the Canadian business, it is exciting to see the transformative impact that this will have on their operations. Kevin will give you the full details in his update. So in summary, the U.K. and Ireland business has been rebuilt over the last few years to give us the structure, capability and talent to provide a great customer experience and to enable us to take full advantage of this exciting next phase. With strong momentum coming out of our first quarter and exceptional execution, we expect the U.K. and Ireland will be an early leader in product support growth. Thank you.

Good morning. I'm Kevin Parkes, President in Canada, and I'm pleased to share with you an update on how we are growing product support and lowering costs in Canada. The Canadian business represents just over 50% of Finning International's consolidated revenues. Mining is our largest market segment, which provides a solid base of revenues across a broad range of commodities. It is important to note that Construction and Power Systems are both important markets in our territory, diversifying our customer base, end markets and providing growth opportunities. As Dave Primrose has just highlighted, Power Systems accounts for 35% of revenues in the U.K. versus just 10% in Canada. We see this as a real opportunity in Canada as we work through the energy transition where we believe natural gas will play a critical role, something I'll cover later today. We are confident that broad economic recovery, government stimulus and infrastructure investments will result in strong growth of construction machine sales. We are very focused on market share growth, which underpins our product support growth expectations in construction Industry. As Scott highlighted, oil fuel generates 4% of our revenue, and the business is growing and becoming more and more integrated into the Canadian business as we broaden our solutions to customers. In order to provide the context of product support in Canada, it's important to spend a moment explaining our journey and the foundational work we've undertaken in the past few years. Significant oil sands development, which took place from 2007 to 2015, consume much of management's focus and was a major driver of product support growth through that period. In 2014, the commodity downturn resulted in reduced oil and gas activity levels in Western Canada but also led to a significant focus on more efficient upstream operations. During that period, Finning Canada also embarked on a strategy to align our cost base, which included reductions in headcount and footprint. I began my role in Finning Canada in January 2019 and immediately looked at how we could build on this great work, but use some of the concepts and initiatives from the U.K. business to take us to the next level. We introduced the concept of mid-cycle to our employees, which is designed to help us better manage the cyclicality in our business. We are building a business with a more competitive cost base, increased agility and flexibility which we're confident will help us manage the peaks and values and position us for compound growth through the cycles. Service transformation and supply chain optimization through our supplier network strategy is at the center of this. I will speak to this in a few moments. We are leveraging this agile and responsive network model and combining it with our increasing digital capabilities and an extremely talented and focused team to grow product support across all segments. The Canadian Oil Sands is a large-scale, long-life resource run by world-class operators. Significant capital has been spent to build the current operations and most assets are now in the optimization stage of their development. They are focused on production efficiency, reducing costs and emissions. As asset optimization initiatives continue, we believe there will be incremental production growth through debottlenecking, improved bitumen recovery and enhanced mine productivity. While production is not expected to grow significantly, relatively low capital is required to sustain and add incremental production. Modest investment may be viewed attractive should oil prices remain constructive. As such, we see the mines continuing to provide a secure and stable supply of oil for the foreseeable future. And we expect our oil sands mining customers to generate significant free cash flow this year. The current operating cost structure of the mines is competitive as operating costs are relatively low compared to the current oil price. Through our long-standing partnerships, highly talented team, growing digital capabilities, including autonomy and the integrated knowledge center, we are committed to supporting our customers to reach the next levels of productivity, cost per tonne and emissions reduction. The significant base of mining equipment in our territory worked at high operating hours in very challenging conditions. This generates a stable and visible demand for product support. Major components can be exchanged 6 or 7 times during the life of the machine and there are many machines which are well into their second life. Indeed, we now have 797 trucks which are in their third life as illustrated by the example at Syncrude, which now has completed 150,000 hours, twice the original plan. Please click on the QR code on Slide 30 at your convenience to learn more about this work. And it's not just about trucks. There is also a significant base of support equipment at the mine site, which is also built to be rebuilt. As with the trucks, there are D11 dozers in operations at Teck mining, which are moving into their third life. This is all made possible by our differentiated capabilities. We have a highly skilled workforce. We are adding new expertise, and we have the support of our partner, Caterpillar. We are combining this talent with increasing data and insight from our integrated knowledge center, which is helping customers to improve maintenance and repair practices, minimize unplanned events and extend the life of their components and machines. This is ultimately driving better outcomes for our customers and increasing loyalty. As you saw in the video earlier, a significant factor in our differentiated capabilities is our world-class OEM remanufacturing facility in Edmonton. We believe OEM is a strategic competitive advantage with a very talented team. We continue to invest to expand and enhance our capabilities to better serve our customers. Slide 30 shows the selection of the projects that we have undertaken in the last year. which serves to increase capacity, efficiency and quality. We are achieving productivity gains, improved part cycle times, and we've also been able to increase our productive space by automating low technical work, such as cleaning. Digital capabilities and data are supporting component inventory planning as well as helping our teams to improve component reliability and durability, all of which drives lower cost for our customers. We've also been focused on expanding our capabilities to diversify our revenue OEM and position our offering for the future needs of our customers and markets. This includes remanufacturing of components for construction machines as well as engines, transmissions and pumps for well service and gas compression, as noted by the G3616 gas compression engine on the slide. This unit came into our facility last week and is the largest units we have ever remanufactured, we are also building electrical capabilities to ensure we can support the future electrification trends. With an increasing focus on emissions and the energy transition to cleaner fuels, we believe the natural gas opportunity in Western Canada has significant potential. The region holds 50% of Canada's natural gas reserves, and construction is underway for LNG Canada and the connecting pipeline, Coastal GasLink. This will help to export natural gas to Asian markets. In addition to the potential for future LNG projects, Nova Gas Transmission pipeline has significant capital expenditure program in place to expand and upgrade its system. Production in the Montney region is expected to grow by nearly 50% by 2030 and Finning is well positioned to support the natural gas development across the life cycle of the asset through its diversified products and capabilities. We are involved in the construction phase for lease preparation and pipeline development as well as engines and motors for gas compression and engines and transmissions for drill and frac equipment. We are really excited about the Tier 4 bi-fuel dynamic gas spending engine, the first on the market, which in a recent test was able to operate with up to 20% hydrogen blend. Indeed, more than 40% of the well services in our territory have already been converted to dual gas blending, which can displace up to 85% of diesel and reduce costs by around 30%. Turning to driving product support in construction. As you heard from Dave Primrose, we are coordinating this work across all 3 regions, and we are leveraging our digital platform to build stronger customer solutions and provide better data for our sales teams. We have reorganized and refocused our sales teams, built more compelling propositions and target our account management on loss opportunities, all of which has driven 15% growth in managed account part sales year-to-date. Customer value agreements are central to our approach. We know that CVAs improved asset life and performance while strengthening customer loyalty. CVAs can range in content from a simple part service kit to a full maintenance and repair contracts, from managing idle time and fuel consumption to forecasting individual component life, ultimately resulting in increased of time and lower operating costs for our customers. 95% of new and used machines were sold at a CVA in the first quarter of this year. And we have a systematic approach for execution and renewal. On rebuilds and major repairs, our customers told us very clearly, to win more of their work, we needed to be more responsive, flexible and competitive. We have overhauled our approach, cleared our offering, added warranty and finance options and our customers have received that very well. We've been able to successfully drive growth in rebuilds with over 52 completed in the first 4 months of 2021 versus '20 or in all of last year. 12 of those rebuilds was with customers that have never previously rebuilt a machine with us. As we look to future years, we believe we can continue to drive product support growth through the work I have detailed in this presentation. This work and this growth is underpinned by a stable oil funds equipment base that will continue to drive product support for the long term, given the long-life nature of the assets. What we also believe there is upside potential, in new mine development, both within and outside the Golden Triangle area and in potash in Saskatchewan. Continuing market share growth is also an opportunity as is the move to more rebuilds. Further development in our digital performance solutions platform to drive customer intimacy and loyalty will also help, and Dave Cummings will talk to that later. We do expect mining growth to be lower than construction due to the more stable base and higher share. Construction product support growth is expected to be 2x that of mining as we build off a relatively smaller base of revenue and lower market share whilst increasing population. As I mentioned, when I'm assessing the contextual product support growth, I will speak to how we have transformed our network and supply chain capabilities to support this. This work has been critical to improving responsiveness and competitiveness to improve productivity and lower cost to serve. We call this the RRR network, the concept used in the U.K. to help drive the same outcome in a very competitive environment. We are working diligently to transform the network footprint to function effectively in any market cycle through consistently formatted facilities supported by lower touch, more responsive supply chain. This allows us to improve labor and facility utilization, leverage our digital platform to serve customers more remotely across the whole network. A couple of examples of this. We are now able to dynamically see our work by capacity across the whole network through a new control tower. This control tower facilitates effective distribution to the branches which have the capacity and capabilities to turn around the repairs faster for our customers. It also balances workloads around our network, reducing both nonproductive and overtime. To support this approach, we have mostly moved our RRR branches to a continuous shift basis, effectively increasing available hours in those facilities by 60% and productivity by almost 10%. On supply chain, we have moved faster on integrated procurement, direct shipping, lowering cost to serve and reducing warehouse footprint. We have also partnered with Caterpillar to optimize inventory planning, which is helping us to improve order fulfillment and reduce emergency orders and the associated costs, which were over $5 million last year. Whilst we are pleased with our results today, we continue to drive a quarter of embracing cost optimization, and we continue to pursue further cost-savings initiatives. We have more network optimization plans which is expected to result in increased employee productivity, lower cost and an improved environmental performance. With the support of Alex, his supply chain, team and his fresh perspectives, we continue to look for more ways to improve supply chain performance. This includes further warehouse and freight optimization, better inventory forecasting and improved inventory performance. As we continue to leverage our digital platform and enhance our processes and systems, we believe there are considerable improvements also made in our customer self-serve capabilities, administrative processes and all of this enabling better technician productivity. My team and I, supported by our colleagues in FII are very pleased with how our strategy has helped us manage through the pandemic and we remain very optimistic about the future and the next phase of our execution Thank you.

Hello, everyone. I am Juan Paolo Amar, and I am responsible for Finning operations in South America. I have been with Finning for 28 years. We have a great team here, and we're excited about our opportunities, especially in Chile. South America represents about 33% of Finning's consolidated net revenue. Our operations sales, a variety of markets in Chile, Argentina and Bolivia, with Chile representing 85% of our revenue. We have just about 5,300 employees. The vast majority of them are qualified mechanics, servicing our diverse customers. Mining makes up about 70% of our revenue, creating substantial demand for our pro support business, which is the beauty of our business model. Construction is also a significant part of our business, and it is a growing market. We are seeing a strong commodity prospects in both copper and lithium production projected to grow significantly over the medium to long term. As we look forward, the economic outlook in Chile is strong, with a GDP projected to grow 6% to 5% in 2021 on the backdrop of vaccine rollout, commodity strength and government investment infrastructure. Our team in South America has done a great job managing the business in the pandemic and we are very well positioned to capture growth opportunities. We're encouraged by the macroeconomic growth drivers, including increased copper and lithium demand, driven by the megatrend of global electrification, significant infrastructure spending and investment in renewables and high volume in Chile as part of the global transition to clean energy. There is no doubt that Chile is in a critical period from a political and social standpoint, and we continue to monitor the constitutional reform process, the election that will take place in the fall and the centerpiece related to the mining royalties for our customers. The overall market environment is positive today. We are optimistic that a contracted business environment will prevail in Chile and are well positioned to capture significant growth opportunities in this next upcycle. We are very encouraged by the strong corporate outlook and production growth projection over the next 5 to 10 years. Chile copper production is expected to reach 7.2 million tonnes by 2027, growing at 4% CAGR from 2020, a significant higher growth rate compared to 0.6% CAGR over the last decade. About 2/3 of the projected $74 billion mining investment between 2020 and 2029 is allocated to brownfield expansion and about 1/3 to greenfield projects. We are actively quoted on multiple opportunities for new mining equipment and autonomous solution for both brownfield expansions and greenfield projects. There are multiple mining projects proposed in Chile and Argentina. Many of them are operated by Canadian mining companies we already have a great relationship with. Let me give you a couple of examples. Teck and Newmont with Nueva Union, one of the largest greenfield projects in Chile. Capstone with Santo Domingo project located also in Chile. First Quantum, another Canadian company with Taca Taca project in Argentina. And Filo Mining with Filo Del Sol project also located in Argentina. As oil rate declined, as moving and equipment utilization are expected to increase to maintain production levels. Customers will require more equipment and the equipment will need to run more hours as producers will need to move more material. We currently have 228 Caterpillar ultra-class trucks operating Chile, with an average fleet age of about 11 years. And many of those fleets will need to be refreshed over the next 3 to 5 years. We're in a great position to capture mining opportunities in the next upcycle. Our expanded product offering includes Caterpillar electric drive trucks and autonomous haulage system. Through our integrated knowledge center, we provide data and performance insight to our customers that enable them to achieve improved physical availability of equipment and operating efficiency. Ultimately, we are playing a key role in reducing the cost per ton and improving safety of mining operations. We are confident that higher copper production, declining ore grades, share gains and CPI escalation will drive profitable revenue growth rate higher than we have seen over the last 7 years. We are very excited about the contract wins with Chilean state-owned mining company Codelco, that we announced in early May. We will supply 22 Caterpillar ultra class trucks to develop Miro Tomic copper mine and support the fleet under a 5-year maintenance and repair contract. This is a great example of an important customer win as we begin to refresh their aging equipment fleet as well as invest in brownfield projects. In addition, we have secured a 5-year extension of our existing product support contract at Codelco Ministro Hales copper mine, which operates 39 Caterpillar ultra class trucks, 6 Caterpillar shovels and a large fleet of Caterpillar support equipment. Importantly, we are piloting Caterpillar's autonomous system at Codelco Ministro Hales operation that will showcase CAT's impressive autonomous capabilities, which has a potential to deliver over 20% increased productivity versus the conventional fleet. We are seeing an acceleration of autonomy adoption in Chile, with a very active coring activity. And we are now working with both Codelco and Teck QB2 to implement autonomous solution at their operation. We are also pleased to be providing trucks and support equipment to Teck's QB2 project, where they would be using autonomous electric drive 784 trucks. This is a great example of capturing an important opportunity with an excellent Canadian customer who are building a large-scale greenfield projects. Moving into our construction market. We are leveraging our connected assets to generate profitable leads in the construction sector. E-commerce is gaining traction in our territory as we are successfully onboarding consume customers to our online platform. For example, we have signed up a major contractual industry leader in Chile during the first quarter of 2021. We have about 80% of our construction fleet connected, which provides excellent data and lease guiding our sales teams very efficiently toward the sales opportunity slide and customer value agreements can be beneficial to our customers. Rebuild solutions are a very attractive value proposition for our customers as lead times for new equipment increased to interact, and we have seen a significant uptick in our construction rebuild this year. We have completed 85 construction reviews in Q1 2021 compared to 53 reviews in Q1 2020. Our construction process or revenue was up over 10% in Q1 2021 compared to Q1 2020, and we're encouraged by our strong construction equipment backlog and upcoming projects. We saw a DD support growth during the copper super cycle of 2010 to 2013, and the copper market moderated over the past 7 years, our possible growth potato We expect growth in postop revenue to return to a higher level than our next stand upcycle. We project our pro or revenue in South America to grow at an average rate of 5% to 9% annually, supported by higher copper production, large and aging fleets declining all grades and price escalation as most of our support agreements are linked to CPI. This combined with a strong upside potential confection market give us confidence in our pro or revenue end of our expected range assumes more green fee per development, higher market share gains and a further upside from digital performance solution. The low end of the 5% to 9% range takes into account a moderately higher royalty environment. While we are very focused on growing our total support business, we are equally focused on doing so while continuing to reduce costs. In 2020, we accelerated our strategic plans to drive employee and facility productivity. We have successfully leveraged 1 common ERP system to improve our efficiencies, restructure our operations and consolidated our facility network. As a result, our revenue per employee was up 17% year-over-year in Q1. And a good example of our system performance is our average projection rate for invoices is currently under 2%, a significant improvement from where it was with the previous IT system and there is a lot of efficiencies and reduces administrative time. We have not stopped there Our plan for 2021 and 2022 includes further optimization of our facility network, supply chain and procurement initiatives such as freight and logistics optimization as well as further efficiencies in our back-office function. In summary, the past few years for our South American business has been very challenging. However, we are pleased to now deliver improved execution, reduced cost and better working capital We are optimistic about the strong growth outlook, both in mining and construction, and we are keeping a close eye on the political and social development. We are now in a great position to capture the opportunities I have discussed And we're excited to see our businesses set prior profitability levers going forward and into the next sustained upcycle.

We will now take a short break to give you a chance to refresh your coffee and strike your legs. When we come back, we will hear from our Chief Digital Officer, Dave Cummings, on our digital journey and customer adoption of digital performance solutions starting at 9:20 Pacific Daylight Time. [Break]

Hi, everyone, and welcome back from your short break. My name is Dave Cummings, and I'm the Chief Digital Officer here at Finning. Today, I want to use the time that we have to discuss our approach to digital, our growth and customer adoption so far, and we'll give you an overview of our digital products and services. I do want to reinforce the messages that you've heard many times earlier today. And that digital has already helped improve our traditional business and equipment and product support. But I will also share our view of the potential for further value creation from digital. So to create the context for what we will be discussing. I'll start by describing our approach to digital. First and foremost, we strongly believe that the real value from both digital and data lies in using them to harness our decades of equipment and customer knowledge. And then to convert that knowledge into insights that we can deliver to our customers through performance solutions. And so the key focus of our investment in digital is to amplify the value of our traditional equipment business, improving customer satisfaction, driving product support opportunities and gaining equipment market share. In service to those objectives, we have developed new digital capability, and we've built a great team. Over the last 5 years, we have systematically grown our connected assets from 20% to roughly 80% of our population in territory today. At the same time, growing our online commerce to 45% of part. A cornerstone of Finning's digital strategy is to create a customer experience that is both holistic and easy to use, while bringing the power of digital to our customers through 1 single digital pain of glass. To that end, we've developed a Finning unified digital platform that covers the full range of our digital services. So this is a single platform that provides all digital applications and interactions that integrates digital products from our partners such as Caterpillar and Trimble while also digitizing our dealer processes, all from 1 place and all through 1 single pane of glass. We will demonstrate the power of the Finning Digital platform in action a little later in my presentation. But first, just a few points on growth in digital interactions with the customer. Adoption has grown materially in the last year and customer feedback has been positive. We are, of course, still at the very early stages of adoption. And as we roll out more features to our customers, We fully expect to see continued growth. But just to give you a snapshot, Currently, we have over 3,400 active customers today and 75% of all equipment owners are actively engaging with our digital platform in some form today. We also now have an approximately 60,000 live assets connected across 6 countries. That constitutes 75% to 80% of the population in our territory. Now just a refresh. Performance Solutions is how we describe digitally enabled value-added services. So other services that help our customers deliver improvements in safety, environment, cost and productivity performance. An important aspect in the growth of technology and digital adoption amongst our customers and therefore, an integral and critical part of our Performance Solutions strategy is autonomy or autonomous vehicles. The Caterpillar autonomy solution is scalable, interoperable across multiple OEMs and manufacturers. It is retrofittable to our existing fleet and has already shown to be faster in operation. All of this creates a significant advantage over the competition today. Autonomy can drive performance improvements for our customers in all 4 of the key focus areas of Performance Solutions, again, safety, environment, cost and productivity. As autonomous vehicles are generally utilized at a greater rate than nonautonomous, they also tend to increase product support opportunities in parts and service. And my final word on autonomy, last but not least, And autonomous via significantly increases operations data. Data that when harnessed can be processed in performance solutions products, driving even more performance solutions opportunities for our customers and therefore, for penny. You can see some examples of customer adoption of autonomy to date on the slide in front of you. So in the design of our digital platform, We do recognize that we have a wide range of revenue, fleet size and varying degrees of digital adoption among our customer base. At the entry level for customers that will use our platform We tend to focus on enabling digital interactions with the customer and serving their e-commerce needs. From that solid foundation, we can then build and grow digital services for asset management, asset health, equipment availability and equipment utilization at Level 2, as you see on the slide. Billing again from there, we provide fleet performance services at Level 3, including mixed fleets and mixed OEM. And even at this early stage of digital adoption for some customers, the conversation has already progressed to delivering productivity optimization services at Level 4. A Level 3 and 4 mix fleet Performance Solutions example is in the groundbreaking HS2 project discussed earlier by Dave Primrose. So to bring this concept of a range of performance solutions for a spectrum of customer needs to life, we're going to play 3 short videos showing the Finning digital platform in action. Each video will show a different level of performance solution These videos can also be accessed later with the QR codes on the slide. So this first video clip demonstrates order management and shows how our customer experiences day-to-day process interactions with Finning on the platform. [Presentation]

So building from those basic digital interactions with our customers, this next video demonstrates how our customer has an interest in asset management with monitor their assets, assess availability or utilization either doing this themselves or through an integrated knowledge center, as you saw earlier mentioned in both Kevin and Juan Pablo's section. [Presentation]

And now finally, this last video demonstrates the power of our platform for a customer that is focused on productivity optimization from their assets. Our approach to productivity performance solutions is to provide the ability to incorporate all customer assets, whether they be Caterpillar or mixed OEM. In other words, our digital platform can be deployed and is deployed today in mixed fleet situation. [Presentation]

So we've shown just a few deployment examples in these videos, but I hope we've demonstrated the power of Finning's unified digital platform strategy. We feel confident we've created a very innovative and valuable offering for our customers. You may also have noticed in the video the new finning brand, CUBIQ. The CUBIQ brand has been created in order to better position our digital value proposition to our customers. We're in the process of rebranding all of our existing and new digital products and services with CUBIQ. And the market launch for the CUBIQ platform and its value proposition is imminent. As we launch CUBIQ, we will lead with CUBIQ Dealer Services and then CUBIQ Performance Solutions with CUBIQ Mining and CUBIQ Construction being served. We anticipate as we expand adoption, we will launch in other market segments such as CUBIQ rental and CUBIQ power. As you have heard this morning, CUBIQ has already improved our ability to provide customer insights and to serve their digital needs. I hope you also heard that it is helping to drive market share gains in equipment, increase our product support performance. And the data on the platform gives us the opportunity to be much more informed in our inventory purchases and our service processes. We believe that as CUBIQ Performance Solutions grow, and we see more successes like the HS2 project, CUBIQ has great potential for value creation in Finning. Now based on what we see today, we believe, for example, that a 100-asset customer with a premium performance solutions service, could create a $3 million annual revenue opportunity at or around our product support margin. Now as I explained earlier, our approach is to provide CUBIQ Performance Solutions for all customer sizes in cohort. But this is just one example of how we see the opportunity shaping up. I do also want to repeat that though we believe in CUBIQ's inherent value, primacy is always to drive our traditional business with digital. And to do that, we will maintain flexibility on how performance solutions are commercialized, either through direct subscription, CVAs or other types of customer agreements. So to summarize, we see material value-add to our traditional business from CUBIQ, but we also see a digital value opportunity. And we anticipate growth in both dimensions as customers continue to increase their adoption of CUBIQ. So on that note, I will close and hand over to Greg, our CFO.

Thank you, Dave, and hi, everyone. My name is Greg Palaschuk, and I'm EVP and CFO. So we've heard from Scott at the beginning about how we've had -- how we've rebuilt the business and are ready for the next step cycle. You've also heard from our operators the details behind our plans to drive product support growth while further improving cost efficiencies. I'm now going to recap those schemes on a consolidated basis then run through our plans to reinvest capital to further drive compounded earnings growth. We expect our consolidated product support CAGR, which has historically grown at about 5%, to grow in the range of 5% to 9% in a sustained up cycle. In the U.K. and Ireland, with HS2 and data center deals, one, we are stepping up our growth rate and expecting this region to continue to lead the recovery. In Canada, mining is providing a stable, lower growth pace with rebuild upside and outsized construction growth at 2x layered on top. And in South America, strong copper market, declining ore grades and the potential for share gains are driving significant growth potential in mining. In line with Canada and the U.K., great progress is being made in Chile to drive additional growth in construction, underpinned by strong infrastructure budgets. We do recognize there is currently significant political uncertainty in Chile, and our clients have been billed assuming that royalties and taxes will increase at a moderate rate. While we are confident that a moderate solution [ will rest ] -- be put in place, it allows for significant customer investment. It will take time to get full clarity. In the meantime, growth from QB2, which has a 15-year stability agreement; Codelco, which is a state-owned producer; and completion of brownfield projects would be in the base of our assumptions in the CAGR range. Faster [ clarity on the ] moderate solution and sustained copper strength would drive us to the higher end of the range in South America. In a higher royalty scenario, we do expect some offset in the form of higher infrastructure investment. In all regions, we believe CUBIQ will be an excellent enabler of future growth. While we grow, it's important to do so profitably. Managing competitive pressures is key. Overall, we've been successful in recent years through a number of initiatives to maintain our gross profit margin. Particularly important is business mix. We are focused on actively growing our market share and improving models that have the largest product support tail. We're also very focused, as we heard from the operators today, on growing aftermarket market share, which is our highest margin business. On the operational side, we have improved our governance around our bid-and-deal execution process to support stronger margins. We're executing equipment deliveries more consistently to be on time and on budget. And lastly, as you've heard today, we have a lot more data, and we're using it to improve inventory order decisions, to have the right products at the right time, which allows us to earn improved margins. Better data also allows for price elasticity management for selected products. And lastly, we have an ever-improving digital and technology suite that customers appreciate, helps with stickiness and overall, has a lot of potential. Overall, we feel confident that as we grow, these areas of focus will continue to help us -- helping us to manage competitive pressures going forward. Turning to our cost reduction efforts. In 2020, we accelerated strategic plans to drive employee and facility productivity. In Canada, we further leveraged back-office functions, streamlined reporting structures and relocated service work to lower cost operations. In South America, we successfully leveraged 1 ERP system to generate operating efficiencies and rationalize the branch network. We set a bold target of $100 million of annualized cost savings, and we have exceeded that goal. By the first quarter of 2021, our net revenue per employee was up 11% from prior year, with over 30% of our employees fully enabled to work from home. Critical to me in this is that we had an organization-wide focus on reducing discretionary costs and partnering success through with our procurement professionals to make them even more successful, realizing substantial savings as a result. This is critical because this is not just about finding near-term cost savings, it's also about creating a culture where our whole company is constantly looking for opportunities to increase efficiency and participate in creating a sustainable cost advantage. In Q1, our SG&A, excluding LTIP decreased by $35 million or $140 million annualized. While we're pleased to see an above planned run rate of savings, we recognize that some discretionary and volume-related cost savings won't be fully permanent, and so we know we need to do more. We talked about our goal to reduce SG&A as a percent of net revenue to 17%, and we've made significant progress towards this quarter with measures I've just discussed. As noted on our Q1 call, we did see a significant pickup in activity levels in mid-February, and that has continued. The stronger momentum we had expected in the second half has been pulled forward into Q2, so our revenue momentum is strong. At the same time, our SG&A to revenue percent has started to move. And our current 3 month run rate is down 18. 5% and declining. That said, we know that 18% is not 17%, which is our critical target. So we continue to execute on our strategic plan that includes an additional $50 million in annualized cost savings. For our next $50 million fixed cost savings are in the same categories of people productivity, facility productivity and supply chain, the rates are different, and this is not a restructuring. The majority of these savings are expected to come from facilities and supply chain efficiency. 20 years ago in Canada, we entered into a sale-leaseback for 2/3 of our facilities. In addition, early years, we have aligned other leases to expire at the same time to give us maximum flexibility. While we have attractive renewal options at each of the facilities next year, we are able to take the opportunity to exit a number of facilities to better align with our RRR strategy before we move 140,000 net square feet next year and over 300,000 net square feet by 2025. In South America, we will also be exiting approximately 200,000 square feet of facilities in 2021 in line with our RRR requirements for that region. As we've been on this cost journey for some time, and this next $50 million will take a concerted effort, we need to lead from the front as we push to the next cost frontier. And so we are. A quick trip to knowledge of what is possible, working from home very effectively in the last 15 months, now going to make permanent a hybrid work-from-home and work-from-branch models for head office employees. We'll be closing our Great Northern Way corporate head office and utilizing our Surrey branch as our lower mainland hub. Our colleagues from 4Refuel also moved in to Surrey last month, and Cat the Rental Store colleagues will move in and join us in the fall. This is a great opportunity to take the best of work from home and work from branch while bringing our corporate employees closer to the business. These are the loans, which will be done by this fall, to represent nearly 10% of the $50 million cost savings target. In addition to the ongoing supply chain and procurement initiatives that are being taken to the next level under Alex's leadership, support the note on the bottom left of the page that in recent years, we have invested in a number of highly automated, industry-leading tools that are going to help us scale very efficiently as volume ramps up. We look forward to updating you on progress towards our next $50 million of cost savings as well as our 17% SG&A target. We've made significant progress on sales to invested capital, particularly through 2020, but still have room for improvement, and we can be more consistent. We continue to drive initiatives across each of the key building blocks of working capital, saves in inventory, the payable outstanding and days sales outstanding. We have and we'll continue to make data and commercial excellence-driven improvements to DIO, procurement improvements on DPO and new credit and collections platform that will improve DSO going forward. [ Alex ] will continue to help convert robust EBITDA to free cash flow conversion. As we reinvest the compound, we take a balanced approach to return of capital. We are very proud to say that we've grown our dividend 19 consecutive years and are a member of the dividend Aristocrat index. We believe that our dividend is an important part of our return proposition to shareholders and expect continued growth in line with improvement in our mid-cycle earnings capacity. Our business model has a great feature of generating countercyclical free cash flow, and that's historically coincided with time with share price dislocation. This gives us a natural capacity to fund opportunistic share repurchases, in times like 2015 or 2020. It's something we look to do more methodically during the next -- this inventory destocking cycle. In the meantime, we'll more actively look to use our strong balance sheet and our disconnects between trading and fundamental long-term value. It could be helpful to for us to further compound our earnings per share. As we invest to compound organic business development and acquisition opportunities will compete to attract capital based on a rate of return, but also against the accretion potential of share buybacks. We have 6 potential growth areas competing for capital. We believe each area has -- is highly aligned with our strategy, typically to what drives improved outcomes for our customers and has the potential to provide above 15% after tax rates of return. I will touch on 3. Additional CAT territories, which would be highly attractive, the timing of opportunities aren't in our control. Being a high-performing Caterpillar dealer is an important consideration. We believe in the strategy we've discussed today in successfully growing our product support revenue and growth line in this Caterpillar will put us in good stead in the future. Maximum uptime solution, which includes our 4Refuel platform and looking for similar companies with a premium brand and customer share of wallet synergies. For 4Refuel specifically, we're looking at traditional bolt-on acquisitions but also opportunities to broaden our fuel offering, potentially to include condensed natural gas, renewable natural gas, liquefied natural gas and hydrogen. Lastly, Chile has a lot of potential to evolve into a sustainable copper and lithium production hub. In fact, with great wind resources in the South meant hydro potential centrally and abundant solar lithium and green hydrogen potential in the Atacama desert. According to industry studies, Chile's renewable sector has up to 70x the potential of its current space in order to require significant infrastructure across the country. We will continue to review opportunities in this space with lithium being an area we are spending the most time on currently. Overall, we see a deep set of opportunities to reinvest capital in an attractive way to return over both the near and the long-term to help grow and compound our business. We had a strong balance sheet and growing capacity for reinvestment. As we drive our EBITDA to free cash flow conversion at 15 -- at 50% and target 2x net debt-to-EBITDA leverage, we expect to have $1 billion of reinvestment capacity. Very similar to what we discussed in our Q1 investor call. So we prioritize organic growth first to capture the recovery, look to grow our dividend. And as just discussed, we've set up the competition for capital between business development and share repurchases. Of note, we have repurchased about 800,000 shares since May 28. So this is our simple financial plan on a page to drive product support, reduce costs and reinvest the compound. As we look forward and the markets are recovering, we believe the next 12 months approximate mid-cycle market. From June 30 of this year to June 30, 2022, we expect our revenue to be in the range of $7.1 billion to $7.5 billion, in line with 2018 levels plus 4Refuel. Over this period, we expect to grow product support by 8%, achieve our 17% SG&A target, and we have $250 million to reinvest in either M&A or share repurchases. That will put us in a position to exceed our previous book earnings and break to $2 per share EPS over a 12-month period, while demonstrating significant uptick in [ realized ]. Beyond this mid-cycle period into a sustained up cycle, which currently consensus GDP and commodity price forecast suggest is likely, we continue to compound park support as outlined today, a 5% to 9%. Up cycle new equipment mix may purchase SG&A below 17%, and we have approximately $1 billion of reinvestment capacity. In each year, this up cycle trend is sustained. We see the potential for EPS to grow compounded mid-teens and above levels, which we believe represents a compelling return proposition. I will now turn it back to Scott for some closing comments.

Thank you, Greg. Before we open it up for questions, I would like to summarize what you've heard from our team today. We continue to execute on our strategy designed to improve our return on invested capital performance and ultimately increase our earnings capacity. Our plan is simple. First, we are accelerating product support growth. Our strategy is well aligned with Caterpillar in driving product support growth through strengthening our value proposition to meet the rapidly evolving needs of our customers. We are leveraging our unified digital platform, CUBIQ, to help our customers deliver improvements in their productivity, costs, safety and environmental performance. Second, we are reducing our cost base by becoming more efficient and agile in serving our customers and driving supply chain improvements across our global organization. And third, we will be reinvesting our strong free cash flow to compound our earnings. Our balance sheet provides great optionality to drive earnings through organic growth, acquisitions and return of capital to shareholders. The outlook is strong as the global economy recovers in 2021 and beyond. With a solid market backdrop, we are excited about the next growth phase and our earnings potential going forward. Our leadership team is ready to take our execution to the next level. Now it's time to do the work. And with that, I will open it up to questions.

All right. Our first question comes from Devin Dodge of BMO Capital Markets. "On product support growth and construction, what are the key strategies for raising your market share for product support in the construction sector? Is it primarily from getting CVAs in place when the equipment is purchased?"

Great. Thanks, Devin. And I'll ask Kevin Parkes to take that question.

Yes. Sure, Scott. Thank you. And thank you, Devin, for the question. Yes, for sure, CVAs are centered to -- central to our aftermarket growth, particularly in construction industries. But it's not the only side. I think the way we think about it is it all fosters better data, so there's been a considerable amount of work done over the past year to better understand our market and particularly better understand the lost opportunities. So we've been very good in the past, they're building incrementally on existing customers who already have a level of commitments and loyalty to us. This work has been very, very focused on where we don't win. And so we have a way better understanding of where we're losing, and we can target our efforts by building new propositions and our sales force at targeting those opportunities. Then you have to acquire over that a closely reinvigorated and refocused sales force. I think it would be fair to say that in the past, our sales force and product support would have been more an extension of our service operations. Now they are very, very focused on their selling activities and their customer management activities. And for example, today, we have a measure called -- a new measure that didn't exist a year ago called sales funnel health. And I can tell that in any -- dynamically any day where we're at -- so as long as that funnel health is over 100%, we've got good line of sight in our forecast and our growth targets. Rebuild is also the other element that is really majorly important to this construction industry product support growth. So we've got a brand-new digital tool called product support quota. And our product support salespeople used to spend hours generating quotation, and now it's a very simple process. It's a standardized process where we can control the scope and the pricing of those quotes and increase the turnaround of those quotes and get back to customers and be more responsive. And as I said in the presentation there, we're also able to distribute the work around our network, which is turning the rebuilds around way faster, reducing the amount of time the customers are without machines, and they may be renting the machine in that period. And so all of that is helping us to be more successful in the rebuild space. So in summary, Devin, what I would say is CVAs are really critically important. They provide intimacy and touch points with customers regularly and benefit -- long-term benefits in terms of performance, data, higher retail value. But there are 3 really important components as well, know where to go and know where the opportunities are, how to manage the sales force and within that rebuild business.

[Operator Instructions] Follow-up question here from Devin Dodge again from BMO Capital Markets. "Finning has made good progress on drilling these CVAs across the division. What is the pitch to customers to get them on board when they purchase equipment? Do you blend it with equipment price for more of a package offering? Or is it more competitive rates and pricing?"

Kevin, I'll ask you to address that again.

Yes. Sure. So yes, for sure. [ May ] CVA -- as you see, the CVA at point of sale is 95% now. That's almost always blended with the equipment transaction. And so in that regard, it can be financed over the period of the finance contract and spread the cost of maintenance of the duration of the -- of that finance contract. So that's really important. So creating the right value proposition is important, too. So we have a tiered offering. So we have essential contracts, ultimate contracts and total maintenance with power contracts. So imagine it is gold, silver and bronze. So in the past, we may have only had one proposition to take to market. Now we can understand the customer's requirements in terms of their own labor capability or a mixed fleet need and which were -- we have over 800 CVAs today in Canada, they are on non-CAT equipment. And so it's all about making it easier for the customer, understanding what capabilities they have in-house. Blending the transaction to make that easier as well. And then following through on the benefits on the back end, which is, like I just said previously, improving equipment performance, the insights they have around the machine and higher retail values at the back end. So it's about ultimately lowering the cost of ownership for our customers and making it easy to transact with us and then fulfilling on that promise through execution. And then hopefully, this leads to renewal.

And final follow-up question from Devin Dodge with BMO on that same topic. "Do you feel that you're taking share from local shops? Or is it transitioning from companies doing it themselves? If with some external shops, have you seen a competitive response, such as lower markup on parts to reduce labor rates?"

Kevin, you're on a roll. [ Won't you take that one. ]

Yes. So both. Yes. So even if -- we know we're winning. So we know where the lost opportunities, and we know we're gaining market share. So that opportunity is coming from local shops, for sure. But equally, from customers transitioning from their own labor force to Finning's labor force. Obviously, when you get a dislocation like we had last year and the cycle comes into play and there's quite a change in labor force and our customers, as they look to rebuild that and they think about this mid-cycle opportunity, they're looking to leverage and to lean on the dealer a lot more to manage the need to recruit new technicians to support their equipment. In terms of a response, we know we live in a competitive environment, and we expect that response. And we're being much more responsive ourselves than competitive. Like I mentioned in my presentation, customers really like working as Finning. They like the customer product. They like the service quality and the repair quality they get. But they want us to be absolutely responsive. They want us to be flexible, [ so as to give them peers ] of offering not just the gold standard. And they want us to be much more competitive. And we have to fight for every piece of work that we're getting, but we are. Our teams are more responsive. They have better tools. And we know we can compete for the long-term in this space.

Following on that same topic, a related question from Jacob Bout at CIBC. "One of the assumptions between -- behind product support targets is increasing market share in construction. What is different now versus the past? Is it the improved CAT product?"

Listen, Jacob, I think -- Kevin, I'll ask you to add-on or Greg. But hopefully through today, you've highlighted the difference, right? I mean we've gone from a structural situation where we had 20% machines connected to 80% machines connected. The introduction of expertise and capabilities around the CUBIQ platform, insights to customers and then all the things that Kevin and the other regions talked about. By the way, Kevin talked about it, but you will hear that same, exact approach from the U.K. and South America, which is another, I think, added benefit of kind of a new approach. So I think a much different situation than where we were 7 years ago. But Kevin, any comments on that based on previous ideas?

Yes. No. Like I said, it's about -- there has been a dramatic change. I don't want to underestimate the approach. There's been a transformation in the way that we approach this supported and focused as well by Caterpillar, our partners. But like I said previously, just to summarize, if you could see the level of data we have from the connected data from machines and the analysis of the market, and how our sales force are operating, we have this approach where we can get that intimacy to the CVA, improving the content, adding the performance solution to it at the point of sale, then we secure that relationship and that product support opportunity at the point-of-sale for the duration of that equipment. If we don't, then we send in the product support teams afterwards to finally capture that in the aftermarket. And we're proving to be very successful. I think most of the regions are seeing double-digit growth through the course of this year. And that's our target, and that's what we've talked about in the product support element of today's presentation.

Question on SG&A costs from Devin Dodge of BMO Capital Markets. "If the U.K. and Ireland can achieve SG&A cost of a percentage of revenue of 13.5%, are there structural differences that prevent similar cost efficiencies in Canada and South America?"

So Greg, why don't you start and then either Kevin or Dave Primrose, who are running those businesses can add on.

Yes. Sure. Thanks, Scott. So -- well, it's -- been fortunate to work in both businesses through my tenure here. And yes, the retail runs a very, very lean operation. It's a very competitive market. They absolutely have to reduce cost to that point to get there, relative to the level that they do. And it's also working capital that's very efficient. The country is smaller, the footprint smaller. The equipment tends to be smaller, and the business mix is a bit different. So as Dave Primrose highlighted, it's more a third product support than 50% and the fixed SG&A to support -- product support is higher over the long term. And so we do see a higher mining proportion in Canada and South America, a need for a higher cost base that you'd have, say, in Fort McMurray or Antofagasta. We're working on making those more efficient, but the mine does have a little higher cost to serve price point, but we continue to work away at that. So it's instructive. It's helping to highlight where there's gaps and opportunities. But ultimately, with the higher product support in the mix, it is a little higher cost base and mining does draw some additional costs.

Yes. So okay -- [ you think you can ] -- I mean -- I guess all 3 of us have worked in both territories over the last few years. So -- I mean the biggest driver of that major change is the product support mix, I would say, but there are some additional costs in kind of the labor cost is higher than it is in the U.K. Greg mentioned the distances that we have to travel. And there's a premium labor content and premium to the services we're providing in mining. So there are some structural differences side of your question. Dave, I don't know whether you have anything else to add.

The only thing I would add is the RRR model does stimulate structural differences. It does present significant opportunity for Canada, which the team is well underway on. And like I said in my earlier comments, it's exciting to see the opportunity there. So there's big geography, big equipment, but there's still big opportunities as well.

Question from Jacob Bout at CIBC. "Product support target CAGR of 5% to 9%, does this assume a status quo political regulatory environment in Chile? What implied copper and oil price assumptions are baked in?"

Great. Greg, why don't you take the question on the forecast.

Yes. Absolutely. So as we build up and consolidate the forecast, it's built on about a $65 oil and higher and about [ $3.50 ] long-term copper or higher. And then in terms of tax and royalty structure, as we mentioned earlier, we have assumed a moderately higher royalty impact structure in Chile in our base case assumptions. And we do think that we've got good stability and growth outlook with -- between tech. QB2 which has a 15-year stability agreement. We got Codelco, who is the government in over 50% of the brownfield CapEx and a growing share with that customer and good progress. And then we've also got brownfield projects that are over half complete, but likely have their own stability agreement. So we still got good line of sight to a growth rate that's better than the last 7 years. So we'll obviously have to keep an eye out. But it's still a solid backdrop in our opinion.

Related question from Cherilyn Radbourne of TD Securities. "Could you be more specific about what you're assuming with respect to higher mining royalties in Chile? Do you expect customers to delay investment decisions on greenfield projects only or both greenfield projects and brownfield expansions as a new constitution is drafted. Is that process expected to impact fleet renewal activity?"

Great. Why don't I take a shot at that. And then Greg and Juan Pablo, you can add on. So -- I mean -- I think what's become clear, to me, at least, in a very unclear environment is that royalties and taxes are going to increase in Chile. But I think it's also clear, given the current debate that's going on in the Senate, is that current proposal that's in front of the Senate and in front of the Mining Committee and the Finance Committee is going to be revised. And you can just see that in the debate that's happening. In terms of timing, our expectation is that all gets resolved in probably the first quarter of next year in terms of the new royalty rate. And our expectations, which are baked into the product support forecast that you saw is that's a moderate increase. If it's higher than moderate, then I think it pushes you to the bottom end of the range. We feel comfortable about that because of the tax and Codelco comment that Greg highlighted. I think the other thing in terms of timing, I do think there's going to be capital deferment, particularly on greenfield. Not in the case of tax because of the transition agreement that they have, the 15-year transition agreement. But I suspect in the case of other miners, there will be capital deferment on new projects, and that will happen. Probably until you get clarity on the constitutional reform process, which is about 18 months out in our view. That being said, in terms of operations, ongoing operations, our expectation -- and I feel very strong about this expectation is that customers will continue to run their fleets. They will continue to run maintenance. And they will continue to do that because if they don't, obviously, their costs increase. And so we feel really good about the continued fleet utilization over the next period of time. So I think that addresses most of your questions, Cherilyn. But Greg and then Juan Pablo, maybe you can add on to that.

No, I think that was a good summary, and maybe JP can comment on some of the activity on the ground that remains strong.

Sure, Greg. Thank you. To your point, Scott, we -- what we are seeing today at the [indiscernible] [utilization] that we saw at the lower [ house ] kind of more [indiscernible] and kind of technical discussion, which is good for the country, and we believe that it's going to be -- country's is going to be the more competitive way going forward. What we are seeing is a very important activity on the [ group ] potential side. So very good opportunity there. And to your point, we see a marginal sustained type of capital, based on the current operations we have today in order to keep the equipment running. So we are seeing the quotation high today as we speak. And we've seen that the reduction or the increase in [indiscernible] will continue in the same level that we are seeing today, which is probably is going to be a bit higher in the second half of the year.

Related question from Devin Dodge of BMO Capital Markets, just in case there's anything to add here. Sure, what gives you confidence that you'll see a sustained up cycle and growth in copper production given the uncertainties around mining royalties and political instability? What are your customers saying in terms of pursuing brownfield and greenfield expansion projects?

Yes. I think we just addressed most of that, but what we're hearing from customers is a hesitancy to think about big new greenfield investments until they get some clarity on the constitutional reform process. That being said, the debottlenecking continues; the brownfields continue; tech, given the transition agreement continues; Codelco continues, and we do have a lot, as you can see through the backlog, which continues to build a lot of construction and mining capital equipment on brownfield developments, particularly given the copper price. And so we recognize this is an uncertain environment, and it's worth keeping a very close eye on. And if things are worse, than we expect, I do think that pushes you to the bottom end of that range that we've highlighted. Our expectation, as I said, is that we're not going to be in a situation where Chile comes to a conclusion that's not competitive on a global scale. And there's room to go from where they currently are to maintaining the competitiveness, and that's where we think it will end up. And if that's the case, that pushes us to the midpoint of the range that we talked about today. And then there's other reasons that either push you higher or lower, and that will be copper price dependent and obviously, capital deployment dependent. So I think that's pretty fulsome answer to what we talked about to those 3 questions.

Next question is from Bryan Fast of Raymond James. A few quarters back, you referenced that you were looking at ways to participate in the lithium opportunity in ways beyond dozers, graders and excavators. Can you elaborate on that?

Sure. Greg, why don't I pass that to you.

Yes, I'll start and JP, feel free to top up. But we have great relationships with the existing lithium producers in Chile and increasingly also in Argentina. And yes, we do provide dozers, graders, trucks today and increasingly power systems solutions. And so those on their own are pretty good opportunities. But ultimately, there's a big value chain there and a long CAGR for the next 20-plus years. and a very high-quality lithium products that's in increasing demand. So we have sat down with customers and started to talk to the value chain of where we might play an additional role. There's some commission monitoring things that we can help with. There is plant maintenance and bump maintenance that are an opportunity. And then there's also logistics that are pretty -- should be pretty sophisticated, and we think we could add some real value around almost in a similar way to 4Refuel's business. So We're looking across the spectrum. We're spending a lot of time on it, but no further updates today, and it's just 1 of those 6 areas that we highlighted would compete for capital in this next period.

Another question from Bryan Fast with Raymond James. What needs to happen to get you to the top end of the product support CAGR estimates?

Greg, why don't you continue on?

Yes, absolutely. So it's the building blocks of each that we talked through. And so for the U.K. and Ireland, it's HS2 going wells but also Phase 2 being approved. Because Phase 2 would be really good upside for us because all of the equipment going today would hit its product support sweet spot as you got into that second phase and would be continuation and more equipment. So that would be strong and get you to the upside in the U.K. In Canada, it's oil sand producers being less restrained on capital over this next period. And they will get, at some point here, they're generating a lot of cash. The equipment is getting very aged, we'll have a decision between new and rebid. And there is a scenario where as they get to new -- lead times extend out then they choose more rebuilds, and that's a really good business for us. So that helps push up Canada and then just being higher on the market share spectrum and construction during that period we pushed to the top as well. And then in South America, as we talked to, I think, a faster clarity for our customers on taxes and royalty would have them put their projects back to work and at copper at these levels, I think that would be a lot of work. And so as JP laid out, if you're going to get the 4% production growth, you need to move more material because of declining ore grades. You've got CPI linkages and we're gaining share. You can see it on mining. And then on the construction side, similar to the other 2 regions, we're seeing higher level of growth with all the great activity Kevin went through in the 3 or 4 questions. So that's the spectrum, that's the range. We feel good about the range and pushing for the upsides. And we'll see how things unfold, but we'll control everything that we can on our end.

Question from Sabahat Khan of RBC Capital Markets. Can you talk about profitability associated with digital initiatives as you move up the pyramid? How do you monetize the additional service you provide as you move up the pyramid? What are most of your customers on the hierarchy as of today?

Great. Greg, let's move to you on that question.

Yes, I give a brief answer. I mean we're putting out kind of our first statistics today on one spectrum, which is more at the top end of the pyramid. And it's kind of easy to understand because it's a chunky set of customers. But at each of those steps, there's a potential proposition. At the lower end, it is more enabling customers to transact with us, and that's a broad tail. And there are modules we can add 1 at a time that would have a potential CVA implication or subscription. And as you move up, it potentially becomes more bespoke and there could be some more value add in the equation. So we think there's good opportunities at each 1 of those stair steps.

Related question from Devin Dodge at BMO Capital Markets. Digital solutions, what elements of FTT's digital services resonate best with customers or proved to be a difference maker? How does FTT and CAT's digital services stack up versus the competition?

Great. I'll ask Dave Cummings to address that question. And maybe, Kevin, you can build on that as well.

Great. Thank you for the question. I refer you to Slide 15 in the deck, I think, just to give a response to this. As Greg has just mentioned in actual fact, the expectation is that customers are going to be at different places in that triangle when they think about what is important to them today. At the foundational level, many of our customers today, I think I mentioned 75% of the equipment owners, in fact, need to be able to interact digitally, just like most of us do in our day-to-day lives. And so that is growing pretty rapidly, quite frankly, 170% in the last year. Other customers have come in directly at the level of 3 and 4, where they want to look at fleet optimization services or they want to look at productivity optimization services. Frankly, our firm belief is participating in the entry-level conversation with our customers, creates an excellent digital relationship. So when our customers are ready to adopt the more complex services as we move through that triangle, that we're in that position to be present in that conversation. There's no doubt in our mind that our customers will adopt digital solutions for either asset health, fleet optimization or production optimization at some point in the future. And we need just to need to make sure that we're there and present to be able to provide those services to them.

Yes. So I mean, I'll speak on behalf of my colleagues in the other regions. We feel we're really well placed form a digital performance solution standpoint. We don't hear or see real effective solutions on the ground, such as the 1 that we're working on with the U.K. with HS2. Of course, there's a lot of work going on, and we're not blind to that. And so we're very -- we have a healthy paranoia, I guess, around what's going on in the industry, and we continue to look at what's out there. But I can tell you, in terms of the HS2 project, That's the best example we have today, and it's one that we're using as a framework in the other regions to build off. And it's got that start at the very top of the pyramid. And it solves -- it's a bespoke solution that we're solving for a customer. And the best competitive information I can talk to you today is the fact that, that solution has been pushed through, all of the contractors on that project regardless of what equipment they have. It's also taken components of other technology suppliers such as Trimble and made that available through one platform to our customers. And so we feel very strongly that we're ahead of the curve in that regard, and we have a very tangible and real example of that. And as we move forward, not every project will be bespoke, as Dave mentioned, at the top of the pyramid, there will be push and pull, so there'll be new the bespoke projects that we build or products and services that we build. And we -- but then may become standard features that we then go out and sell to our customers in the lower elements of the pyramid there and package those up in a way that suits customers and we get some scale and leverage out of the technology work that we've done in building those bespoke solutions. So I feel very good about where we are against the competitive market.

Thanks, Kevin. I'll just pick up again, just on 1 or 2 of those points. As Kevin said, we don't see a huge amount of competition right there. We know that everyone that is in the equipment business is going to have to serve these kind of needs at some point somehow. And there are third parties that will want to be in this space. But we feel like we have a pretty strong first-mover advantage and importantly, a unified approach. And don't underestimate the impact of a customer that's able to do all the things they want to do in that full spectrum through 1 single pane of glass. Making life easy is a big part of doing this the right way. Now just to address the point of bespoke versus standard product, the approach that we will take and that we're taking today is that we have a catalog and a list of standard products focused on environmental performance, asset health, productivity and safety. When we use the term bespoke what we mean is customer B may need a different collation of those products for their particular use case in a quarry, versus customer C in a hard rock mine site versus customer D in an oil sand site. So the intention and the whole architecture here is to deploy repeatable components, assemble those components in a use case that matters to that particular customer base. We'll continue to sell the products and the services from the library, from the catalog as they stand. But we also need to adapt to a particular customer's needs, and that's what we mean by taking a bespoke approach.

Next question is from Jacob Bout of CIBC. CUBIQ Performance Solutions' premium package could bring in $3 million per year per customer and have 200 relevant customers. How do you see ramp and customer adoption over the next few years?

Greg, why don't I pass that to you?

Yes, sure. So as we've highlighted, we've got a good case with -- in the U.K., and each region has a funnel that they're working through for the next period of time. And so we don't have an adoption curve to share today. We'll provide updates here as we go. We just want to provide that as a first statistic to give you a sense of the scale. And of course, our teams in each regions are building that sales funnel, and we'll work through that in the fullness on time here.

Question from Cherilyn Radbourne of TD Securities. Supply chain constraints were not mentioned as a key risk to the company's outlook. Could you address this issue?

Sure, Cherilyn. Thanks for the question. I'll pass it to Alex, our Global Head of Supply Chain to address that.

We're monitoring with CAT about some potential lead time increase, and they are manageable. We don't see as being more impacted than any of other industries. For a backlog in a number of projects like [indiscernible] and HS2, that underpin our revenue forecast, we feel good about delivering those projects on time. On parts, we haven't seen any material disruption on the supply chain. And know that CAT is focused and keeping the flow of good [indiscernible], given their focus on service.

Great, Cherilyn. So I think you heard from Alex, we recognized what CAT said on their last call that they're monitoring closely. On the equipment side, I think we're fortunate that We've got some big projects HS2, QB2 and then some larger infrastructure projects where we feel really good about the supply. And then on the part side, given the importance of the services agenda, both Caterpillar and Finning, we feel good about that as well. So undoubtedly something to keep monitoring. And I think it's industry-wide, it's not Caterpillar specific. But right now, I don't see that's a big risk to what we've put out today in terms of guidance.

Next question is from Michael Doumet of Scotiabank. In the last cycle, even excluding the impact of ERP, there was quite a bit of gross margin pressure across business lines, more so than can be explained away by mix. How should we think of the parameters around gross margins through the upcoming mid-cycle as it relates to mix and ability to maintain or recoup margins by business line?

Great. Michael, that's a great question. And Greg, I'll ask you to address that.

Yes. Thanks, Michael. So I mean, we addressed that on a specific slide in the presentation. I mean if we've got a number of initiatives in place to make sure that we're growing the most profitable part of our business. But as we look to gain shares, we've talked about already, of course, there will be competition and so we need to manage that. I guess, we feel that we've got enough initiatives to counterbalance that competitive activity. And so if you look at that 5-year period, we characterized that as stabilized, but the percentages of new equipment along the bottom. So no doubt, GPs are higher right now. So we're at 60% product support. We fully expect in the mid-cycle into the up cycle, you do get back into the left side and then into the middle of the page. But we feel like that page is a representative view of what that kind of stabilized mix looks like, and we feel like we can hold at that level as we grow the business.

Related question from Yuri Lynk, which I think is largely just answered, of Canaccord Genuity. Is gross profit margin purely a function of mix? Or are there other considerations that might make it vary from past years?

So Greg, why don't you continue?

Yes, absolutely. So I mean there's lots that goes into gross profit margins. And so mix is obviously 1 of the large ones. But there's execution underneath. There's procurement with non-CAT suppliers. There's the [ Ps and Cs ] that we put into our commercial deals. There's a lot that goes into it. I feel like we're maturing on each of those, and I laid out several of them. But there's a lot about capturing good margins, executing well to sustain those margins and then growing in the products that you have the highest margin in. So we're targeting all of those to make sure that we're able to secure solid profitable business that drops to the bottom line. And so the one that you see, of course, is new equipment mix, but underneath there's lots of variables, and we're focused on maximizing all of them.

Question from Cherilyn Radbourne of TD Securities. Can you give us some perspective on what sales mix as contemplated by your guidance for Q3 2021 to Q2 2022?

Great, Cherilyn. Thanks for that question, Greg, over to you.

Yes. that we're going to get as granular as giving our equipment mix by quarter. But of course, the nature of going from last year back in the mid-cycle and then the up cycle is that the new quote mix has become a higher proportion. Again, I think that GP mix that we highlighted on that page is instructive as we go to the mid-cycle in the up cycle. And so new equipment will be part of the mix and growing even though we grow product support at the same time. So we do think it gets back into that low 50s in the mid-cycle to up cycle. But obviously, every cycle is a bit different. So we'll have to see what unfolds and what product lines, but that's a reasonable guidepost.

[Operator Instructions] Next question from Maxim Sytchev from National Bank Financial. We have spent a lot of time trying to understand the SG&A as a percent of revenue targets. Are there any structural changes to the company that can undertake on the cost side of sales -- on the cost of sales side sorry, a much bigger bucket presumably? It's quite variable as revenue rebounds.

Great. Thanks, Max, for that question. It's a great question. I'll ask Greg and Kevin to address that.

Sure. So specific to cost of sales, I mean, I think we kind of just went through it. There's a number of areas under the hood over and above new and product support mix. Yes, all the moves that we've done on procurement in the last 5 years continuing and accelerating under Alex's leadership, helps for non-CAT components to get performance and cost of sales, which can help impact our margins. Having a very efficient technical workforce can have a big impact on those gross profits and nonchargeable time in SG&A. So there is a number of initiatives under the hood that help us to maximize that. And so we're looking across the board for every part from what we charge to how we execute the deal to our SG&A to support the whole piece. The areas where we have initiatives and ultimately, we're trying to drive the maximum amount of revenue down to the bottom line. So I think it's across all fronts. Of course, SG&A is one that we've been on the journey for quite a while and continues to have a huge impact. And I think we laid out pretty clearly the buckets today that we'll continue to address. But anything you wanted to top up there Kevin?

Yes. So I mean, [indiscernible] to Greg. So I mean I'll just give -- Maxim, I'll give you a couple of examples, really from an operational standpoint. So if you think about the [indiscernible] network and you go back to that map. So we're moving a considerable amount of work now from out of the oil sands to the other triple-R locations. And obviously, that means that we don't have to necessarily pay the premium labor charges that exist in that region. And then there are other regions where we have to pay premium labor charges where you have fly in, fly out or remote communities. And so to move that work to other parts of the location where not only do we have those premiums. We have a more productive workforce because of the continuos shift that's going on there. That's a good example of the SG&A of the cost of goods sold example. Other examples would be new equipment preparation time. So setting a stopwatch on preparation. Maybe you've got 50 hours to prepare a machine and trying to do it through efficiency and lower touch points, doing it in 40 hours would be another good example. And then there's all sorts of examples in the supply chain where every time you remove a touch point, you give an opportunity to reduce the cost of achieving that sale or that transaction. Greg did touch on it, but one of the big areas -- so we have this thing we call the big 4 service costs. And there are areas that we're constantly monitoring nonchargeable time being the largest one that we focus on. And so the ability to move the work around means we can balance the work and avoid the nonchargeable time. And then there are other examples such as warranty. So doing the work with higher quality in triple-Rs that have the capabilities to do that work is another good example of where we're looking at becoming more efficient and reducing the cost of executing our business.

Next question is from Yuri Lynk of Canaccord Genuity. Does your 17% SG&A to revenue ratio target include the $50 million of cost savings announced today?

Greg, do you want to take on the SG&A?

Yuri, absolutely, it does. So as we originally go back to the start of this journey, we talked about the $100 million last year to be an acceleration of the plan that we had, which was medium-term plan to get to 17% workforce efficiency as well as facility efficiency, really lining up with the lease maturity that I walked through earlier. And so part of that client is the first $100 million of fixed cost savings. We've exceeded that, as I highlighted. We did highlight originally that about 1/3 of those would be discretionary or variable that would come back as the market fully recovers. So that's the first $100 million. And so really, the sold for the 17% in that mid-cycle earnings revenue that we discussed today, we need to complete those $50 million through that period and coming out the other side. And so those -- our planning can meet during our forecast period. And so not all $50 million need to be out on June 30 to achieve the forecast, but the 2 do meet and blend throughout the period in the guidance.

Next question from Michael Doumet of Scotiabank. Last 12 months revenue amounted to approximately $5.8 billion. Through the next 5 quarters, you're essentially calling for revenue growth of 25% at the midpoint of the guide. How should we think about that revenue growth by region and by end market in terms of mining versus construction and power systems?

Greg, over to you.

Yes, absolutely. And you started to see this in Q1 in our backlog build, which was up substantially. And as we talked on Q1, it's broad-based and across the board. So as reviewed today, HS2 and data centers in the U.K. building the backlog in construction and increasingly mining in Canada, and then largely led by mining backlog, including QB2 and Codelco in South America. And as we've discussed before, it's broad across the full spectrum of product offering in South America. So part of it is really broad-based improvement in all 3 regions concurrently. And it's new equipment. You saw in Q1, used is doing very well, and we're putting a lot of emphasis into that area as well. So we didn't talk as much about new and used today, but that's a big part of the recovery in mid-cycle and up cycle. But for us, what we feel like we can -- is in our control is the population, the product support market share gains that we have right in front of us. So we spent the time talking about that today. But all of those building blocks lead up to the guide. And of course, within that new equipment, used equipment, are playing a few role on that top line.

Another question from Michael Doumet of Scotiabank. In each of the regions, you highlighted quite a step-up in construction rebuilds into 2020. Can you elaborate on the overall opportunity there on a go-forward basis?

Sure. Why don't I start with Dave Primrose in the U.K. given the success we've had there and then Kevin, maybe you can add on in Canada.

Thanks, Scott. Yes, certainly. We see an increasing opportunity for us in the U.K. and Ireland, specifically. And I think what's -- couple of things that is driving that is, one is we are offering very flexible rebuild solutions for our customers. So as Kevin said before, even on the [indiscernible], this gold silver, bronze type approach. So it's not a one-size-fits-all really based on what the customer needs are. And then the other thing is we've really expanded the number of machine models that we will do rebuilds for. So again, it really opens up the opportunity versus just focusing on a select few. The larger machines, we now have a very large portfolio of machines where we can really drive value for the customer by offering rebuilds to different standards.

Yes. So I wouldn't say that we don't have a specific outlook or market opportunity for rebuild specifically. It's more around the total market opportunity for part sales. So we understand that really well and really effectively now, and rebuild is a component of that loss opportunity. And it moves around. It moves around in terms of -- for example, now we've talked about the supply chain challenges. So rebuilds become more of a predominant discussion with customers if you can't necessarily get a new piece of equipment. So that may change and it may drive the parts opportunity up if we see a swing to more rebuilds. The economics around rebuilds will continue to improve as well. As you see price escalation in certain products and new models as well. So we'll continue to monitor that, but we don't actually break it down by a rebuild opportunity. It's a more holistic view of market share. And I would suggest we talked about 2x in Canada. The opportunity for growth in market share in construction industries is significantly more than it is in mining where we're already very integrated with our customers, and they work very, very close with them.

Next question is from Barry Haimes of Sage Asset Management. You mentioned that the second half recovery that you had expected has been pulled forward, which parts of the business are improving currently?

Great. Thanks, Barry. And Greg, why don't you take that?

Yes, sure. And it's similar to the last answer. I mean, it is across the Board. It's wide based, it's by product lines. And so as we think about the way the year shapes up, as I highlighted in my section, we think of 2018 kind of a mid-cycle comp. So I think that's pretty instructive in terms of category by category with the caveats around product support is still a bit in the recovery phase. But then our SG&A is significantly lower than it was in 2018. So it's across the board, kind of used 2018 as the mid-cycle guidepost.

Next question from [ Moji Kai ] of [ TELUS ] Pension Fund. Can you provide more insight into construction in Canada? Do you have any measurable metrics that you are monitoring? Does 4Refuel have any influence on the strategy?

Great. Thanks, [Moji]. Kevin, do you want to take that?

Yes. Sure. So we are constantly monitoring the areas I discussed earlier around major infrastructure projects, housing starts, the housing market, flooding and then water works in Saskatchewan, public sector hospital developments. And remember, in terms of -- when we talk about infrastructure, there are also power opportunities within there. So we constantly monitor -- we actually have a very digital -- detailed digital model called the Storm and Lighting index, it takes, I'm not sure, lot's of -- multiple factors into consideration, and it helps us predict how we feel the market is going to move and change in the coming months. And that -- we've tracked that over the past 2 years really now. And given the considerable dislocation we had last year, we're very pleased with the output that, that model gives us, and it helps us to plan our inventory, both in terms of being conservative in managing the down cycle, but also knowing when to pivot to be more assertive in our inventory orders so we make sure we can capture and maximize the market share. And I would say that's [ expanding ] us in really good stead right now as we -- this model really helped us to start being a little more assertive back in the fall of last year, particularly in Canada, and expanding us is good stead in terms of supply chain as we move through this recovery period.

And Greg, any comments on 4Refuel?

Yes. And I'll just do 1 top up to Kevin. I mean in terms of key KPIs to know how well we're doing, I mean work with CAT on a very detailed assessment of market share. It's obviously not a stat that we share, but that's what really drives us is we call POPs and we review that with CAT, but -- and we're making progress, but it's not something that we put out in the public today. And then on 4Refuel, I mean, it's been a really great success story in terms of their performance through 2020, our ability to first start with taking some back-office costs out. But more and more get into the revenue synergies to the point where we're co-selling on projects like the Kicking Horse project with AECON on highway 1. And so you start to see some of the sales synergies. We're also -- there's just a big opportunity, given they're on-site 24/7, to keep looking at ways that they can provide more services or more logistics. And so we just think the combo sell at point of sale is a big one, but there's still is more opportunity for such a sophisticated logistics operation that's going 24/7, so we'll continue to work on that.

Next question from Sabahat Khan of RBC Capital Markets. On M&A, you outlined areas of focus. Are you comfortable with the operating backdrop and the outlook to be active with larger M&A over the near term?

Thanks, Saba. Greg, do you want to take that?

Yes. Thanks, Scott. Yes, as I highlighted in my comments, we're spending areas in each of the -- it's a competition, it will compete with share buybacks. I think we're safe to say that we're starting small, and we'll work our way into it. So from anything large perspective, I don't think that that's not on the agenda right now. Of course, on the dealer territory side, I think we'd be open to a spectrum, but that's not in our control. And on the rest, we're really focused on bolt-ons and maybe another platform like 4Refuel, so I think we're on that scale.

A related question from [Moji Kai] of [ TELUS ] Pension Fund. Considering acquisitions versus buybacks, can you share some more information on your gating criteria? Any time line information would be great.

Greg, why don't you keep going?

Sure I'll keep doing. So we have a DCF model for the company, like most would do. And our goal is to increase that DCF per share, and we'll look at the different variables around accelerating CapEx versus adding another business versus buying back stock, with the goal of making the NAV per share go up. And so that's the model that we start with. The math usually works that we 15% after-tax rate of return from business development to even get started. So we're building a portfolio of opportunities, we think, can put that mode. And of course, there's always timing in those opportunities to whether they'll fit at the time that you want to deploy the capital. And that's a process you have to go through, and we have to mature that pipeline. And so it's something where we'll look where there's -- you feel like there's dislocation in the market, we have the ability all of the time to put the balance sheet to work. So we continue to mature the price point and 15-plus percent IRR opportunities and if those become available and they're strategic, we'll do the cross-check versus share buybacks, but that's a continuous process, and we'll continue to work through that.

Question from Cherilyn Radbourne of TD Securities. What type of size are you contemplating in terms of acquisition opportunities related to lithium?

Greg, why don't you keep going?

I'll keep going. So I mean, starting today, it's organic business development. It's looking at ways to work with customers to potentially outsource some areas. Again, I highlighted an opportunity potentially on the logistics side that again would be a fairly organic initiative. So we're still learning about the market. It's early days. We would start small, in my opinion. There aren't any big chunky acquisition targets that we're looking at. So it's about building into it, building skills and keeping relationships with customers for now.

I guess, Cherilyn, I guess 2 other quick things to add. I mean if you look at our Western Canadian business and our South American business, I mean, they're operating under quite a different dynamic. I mean in North America, I do believe natural gas is going to play a very important role in the transition to clean energy, and we're well positioned there, both from a product portfolio perspective and also just Western Canada and the amount of natural gas. In South America, and lithium is part of that, but the transition is going to be much more renewable opportunities. And as we highlighted in the potential that is a massive opportunity in South America. So there may be an opportunity to increase our total addressable market by thinking about renewables and how do we play in that space. And lithium could be part of that. So stay tuned on that. But again, relatively small scale to start out with.

[Operator Instructions] Our next question is from Cherilyn Radbourne of TD Securities. How important is rental to capturing the revenue opportunity associated with this upturn as lead times for new machines lengthen. What factors could tip more reinvestment in favor of rental versus the other 5 buckets?

Great. Thanks, Cherilyn. I'll let Kevin take on the rental question.

Yes. Thanks, Cherilyn. So for sure rental is becoming even more important as we see customers trying to manage their own workloads, many projects have become more difficult to manage. So if you think about the pipelines in Canada that are being built right now, it's been a little soft start with legislation and COVID. And so having a really [indiscernible] rental offering has become even more important to our customers. So as is in the power systems sector as well as people manage this -- the energy transition and the power independence. We see power rental becoming increasingly important as well. Of course, rental is under the same constraints as well as supply chain constraints, as new equipment would be. But we do have a good rental fleet where we're able to react to customers. maybe work with them on rental purchase options as well to help them get into fee. So rental is a really important -- as rebuilds are a really important tool in our tool kit for managing through these extended lead times. But more generally, we still believe that rental will become a bigger part of the market and a bigger part of our business. But we are still at this moment in time, very, very focused on the rental fundamentals and a successful rental operation balancing the fleet and getting the right fleet performance. We believe we've got the right cost structure. in place now. And so as with a lot of the other areas that we've discussed today, we are looking at being really thoughtful about how we grow that business and participate in markets, but we're looking at it through that mid-cycle lens and that -- the asset performance lends and ultimately providing accretive return to the Canadian business.

Next question is from Barry Haimes of Sage Asset Management. Could you talk about the availability and pricing of potential acquisition candidates?

Sure. Greg?

Sure. That's something that we typically disclose until it was ready. I mean, I think we've given some color on starting small. In the presentation, we highlight as 4Refuel bolt-ons is something that we're looking at currently. And so that's, I think, all the color we'll give for today.

Great.

And that is our last question for today. I'll pass it over to Scott Thomson for some concluding remarks.

Great. Thank you, Amanda, and thank you all for investing the time today. We recognize that 3 hours is a big commitment. We are extremely excited to be where we are today from a cost perspective, from a capital perspective, inventory perspective. And then also from a market backdrop perspective. So we very much look forward to keeping you updated over the next period of time, and we look forward to executing over the next year to demonstrate and highlight the peak earnings story that we told you. And then longer term, this product support driving earnings on the back of a cost base that we feel has more room to go is a significant value creator for all of you. And then lastly, on the capital allocation, thoughtful capital allocation, I think we've done a good job over the last year on generating free cash flow. But there's more to do on that front. And if we can execute on the 50% EBITDA to free cash flow conversion rate and then thoughtfully deploy that capital, always looking at both organic growth acquisitions and benchmarking that against share repurchases, and then executing on share repurchases when those are appropriate. I think that's a good proposition for our shareholders. So thanks again, and we look forward to coming out and seeing you live in the fall when travel restrictions are removed. So thanks again.