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

Thank you for standing by. This is the conference operator. Welcome to the Finning International Inc. Second Quarter 2026 Investor Call and Webcast. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to David Primrose, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Finning's second quarter earnings call. Joining me on today's call is Kevin Parkes, our President and CEO. Following our remarks, we will open the line to questions. This call is being webcast on the Investor Relations section of finning.com. We have also provided a set of slides on our website that we will reference, and an audio file of this call and the accompanying slides will be archived. Before I turn it over to Kevin, I want to remind everyone that some of the statements provided during this call are forward-looking. Please refer to Slides 9 and 10 for important disclosures about forward-looking information as well as currency and specified financial measures, including non-GAAP financial measures. Please note that forward-looking information is subject to risks, uncertainties and other factors as discussed in our annual information form under Key Business Risks and in our MD&A under Risk Factors and Management and forward-looking information disclaimer. Please treat this information with caution as our actual results could differ materially from current expectations. In addition, unless otherwise noted, this presentation reflects the results of continuing operations only. Kevin, over to you.

Thank you, Dave, and good morning, everyone. Thank you for joining us, and thank you to our teams, our customers and Caterpillar for your hard work, trust and partnership. Strong strategic execution delivered record quarterly EPS of $1.22, up 21% year-over-year. Revenues exceeded $3 billion for the first time, and product support grew year-on-year for the ninth consecutive quarter, growing 11%. And even with record new equipment deliveries, which were up 34%, backlog remained strong at $3.8 billion, driven by strategically significant mining orders in Chile and gas compression orders in Canada. Quoting activity and fleet enhancement discussions are increasing in Chile and Argentina. Oil sands production, pipeline activity and infrastructure build in Canada, are gaining momentum, and market share gains across all regions give us confidence in future backlog growth. Most importantly, the machine and engine population continues to grow across our territories. That installed base is the engine for future product support growth and the clearest line of sight to long-term value creation. As in prior quarters, my prepared remarks will focus on the long-term earnings potential we are building. Dave will then cover our quarterly results in more detail. Please turn to Slide 2. Our performance across our three strategic pillars of our strategy is fundamentally increasing our EPS potential. Product support revenue reached $6.2 billion on a last 12-month basis. In the quarter, product support was up 11% year-over-year, led by 19% growth in Canada. Canadian product support is growing across every sector, supported by larger mining population, rebuild activity and increased contracted labor penetration. Indeed, customer value agreements with labor grew by 70% in the quarter, enabled by a deliberate strategic investment in capacity, including a 20% increase in technicians year-over-year. Our rental businesses are also gaining momentum in each region, with revenue up 19% led by Canada. Strategic fleet investments are allowing us to capture our improving end market demand while growing with new customers and growing our population. At the same time, our cost and capital discipline continue to anchor our resilient operating model. We are investing in building capacity and capability to create long-term growth, while maintaining strong operational leverage. SG&A as a percentage of revenue was 14.5% on a last 12-month basis, down by 120 basis points from 12 months of Q2 2025. Invested capital turns increased to 2.35x, and these are not just efficiency metrics. They are proof points that our operating model is more resilient, more scalable and more capable of compounding earnings. Before I hand back to Dave, I want to talk about a long-term opportunity for power and for data centers in Western Canada and specifically Alberta. We are working with operators, power producers and government on primary bridging and backup solutions. This is a generational power opportunity for Canada, Alberta and Finning, and it fits directly with our core strategy of building an installed base in our operating territories and supporting it over its life cycle by converting that population into long-term product support growth. I also want to say that this is not a new territory for us. Our U.K. and Ireland dealership has been supporting the build, maintenance and operation of data centers for more than a decade, developing a trusted capability and deep application experience. That capability is showing up in the numbers. In power and energy, new equipment sales in our U.K. and Ireland business are up 38% year-to-date, supported by a healthy product backlog. Turning to Canada. While we are encouraged about the generational opportunity for data center builds in Western Canada, our incumbent power and energy business is also building momentum ahead of any data center contribution. Sales are up 63% year-to-date, and our backlog is up more than 100% compared to Q2 2025. This is primarily driven by gas compression as the oil and gas outlook improves following significant business development announcements in the quarter. It is clear, power is becoming a larger strategic platform for Finning, and it strengthens the same installed base and product support flywheel that underpins our long-term earnings potential and growth. To close, quarter 2 demonstrates the power of the strategy. We are growing the installed base. We are converting that growth into product support, and we are maintaining disciplined cost and capital execution. And we are building a more resilient operating model and the combination is the foundation of our earnings growth potential and the reason why we remain highly optimistic about Finning's long-term future. With that, I'll hand the call back to Dave.

Thank you, Kevin. I'll now turn to Slide 3. Our Q2 revenue of $3.1 billion was up 20% compared to Q2 2025, primarily driven by strong new equipment deliveries across all regions and continued product support growth, particularly in Canada, exceeding $3 billion in quarterly revenue for the first time in our history, helped to drive record EPS and reflects continued execution momentum. We are pleased with our growth across our diversified end markets. New equipment deliveries accelerated in all regions, increasing our installed population and creating a base for future product support opportunities. Product support revenue also continued to grow, supported by robust mining activity and an improving construction sector. EBIT was $249 million, up 16% compared to Q2 '25 adjusted EBIT. And EPS of $1.22 was up 21% compared to Q2 '25 adjusted EPS of $1.01. Long-term incentive plan expense was $21 million this quarter or approximately $0.13 per share of EPS impact, driven by continued strong share price appreciation. This compares to LTIP expense of $25 million or approximately $0.13 per share of EPS impact in Q2 '25. Our balance sheet and capital efficiency remained strong. Free cash flow was a positive $15 million with increased collections from higher revenues, largely offsetting investments in working capital to support growth. Net debt-to-adjusted EBITDA was 1.6x at the end of June. Invested capital turns were 2.35x and adjusted return on invested capital from continuing operations was 19%, all within our target ranges. On Slide 4, we show changes in our revenue by line of business compared to Q2 '25 and the composition of our equipment backlog by market sector. New equipment sales were up 34%, driven by increased mining deliveries in Canada and South America as well as construction deliveries in all regions. Used equipment sales were up 18%, primarily driven by increased activity in the Canadian construction business. Rental revenue was up 19%, reflecting improving construction and power and energy activity across all regions. Product support revenue was up 11%, primarily driven by strong activity in Canada, where product support was up 19%, led by mining. Despite the record level of new equipment sales in the quarter, equipment backlog remained at record levels of $3.8 billion at June 30, '26, in line with March 31, '26, and up 26% from June last year and up 22% from December 2025. Order intake continued to outpace deliveries in the quarter. Power and energy benefited from oil and gas activity in Canada, while mining was supported by strong activity in South America. Backlog remains well diversified by market sector with approximately half in mining, about 1/3 in power and energy and the remainder in construction. Backlog strength continues to provide confidence in future product support opportunities. Turning to our EBIT performance on Slide 5. Gross profit margin was 21.3%, down 240 basis points compared to Q2 '25, reflecting lower product support margins on strong volume growth and a higher proportion of new equipment revenue in the sales mix. SG&A margin was 13.3%, down 220 basis points from Q2 '25. This demonstrates continued cost discipline through the growth cycle and also reflects a higher mix of new equipment sales. EBIT margin was 8%, down 30 basis points from Q2 '25 adjusted EBIT margin, reflecting lower product support margins and higher new equipment revenue mix. Importantly, EBIT dollars increased 16% year-over-year. Q2 EBIT margin was 9.7% in South America, 8.3% in Canada and 6.2% in the U.K. and Ireland. Looking ahead, we will continue to seek opportunities to reduce costs, improve efficiency, enhance operating leverage and strengthen resilience to drive higher earnings capacity. Moving to our South America results and outlook, which are summarized on Slide 6. In functional currency, new equipment sales were up 35% from Q2 '25 due to higher construction and mining deliveries in Chile. Product support revenue was up 3%, driven by higher mining activity in Chile and also increased revenue in all sectors in Argentina. EBIT margin of 9.7% was down 40 basis points from Q2 '25 adjusted EBIT margin, primarily driven by the higher proportion of equipment revenue in the mix and also lower product support margin, partially offset by lower SG&A margin. Adjusted return on invested capital of 23.5% was down 240 basis points, impacted by working capital investments supporting growth and the resulting increase in average invested capital. In Chile, our longer term outlook remains positive, underpinned by growing global demand for copper, strong copper prices, capital deployment into large-scale brownfield expansions under supportive government priorities and customer confidence to invest in greenfield projects. We are continuing to see a broad-based level of quoting, tender and award activity for mining equipment, product support and technology solutions. Some of these awards hit our order backlog in Q2, while others are expected to be finalized in Q3 and beyond. In the near term, we continue to expect some moderation in product support activity levels and a more stabilized labor environment through 2028. In the Chilean construction sector, we continue to see a healthy demand from large contractors supporting mining operations, and we expect infrastructure construction activity to remain steady. In power and energy, activity remains strong in the industrial and the data center markets. In Argentina, the outlook is increasingly positive and quoting activity remains high. We are diligently monitoring what is a dynamic operating environment to ensure we are best positioned to capture opportunities, particularly in oil and gas and mining, as they arise. Turning to Canada on Slide 7. New equipment sales were up 33% from Q2 '25, with strong sales across all market sectors, led by mining and continued market share gains in construction. Used equipment sales were up 25%, reflecting increased activity in the construction sector, in line with overall market activity. Rental revenue was up 22%, driven by improving construction and power and energy activity. Product support revenue was up 19%, reflecting strong demand across all sectors and particularly in mining. EBIT margin of 8.3% was down 110 basis points, driven by lower product support margin and increased equipment sales mix, partially offset by an improved SG&A margin. Return on invested capital from continuing operations was 18%, up 170 basis points, driven by higher profitability and improved capital efficiency over the last 12 months. Our outlook for Western Canada remains positive. Mining activity continues to strengthen with customers actively looking to increase production and fleet capacity through both performance and investment. In power and energy, oil and gas activity remains strong and backlog is increasing. Data center sentiment continues to grow, supported by recent announcements, although the timing remains uncertain, pending project approvals. Construction sector activity continues to improve with customer demand increasing ahead of anticipated major project confirmations. We expect this to have a positive impact on new, used and rental revenue, while remaining cautious with respect to the exact timing and magnitude of future projects. Our focus remains on building resilience by managing costs and invested capital levels, while driving productivity improvements through the growth cycle. Please turn to Slide 8 for our results in the U.K. and Ireland. In functional currency, new equipment sales were up 34% from Q2 '25, driven by delivery of delayed sales from Q1, as mentioned last quarter. Product support revenue was down 2% due to lower activity in both construction and power. We expect the product support business to remain stable in the short and mid-term. EBIT margin of 6.2% was up 100 basis points, driven by robust SG&A control on higher revenues. Adjusted return on invested capital of 21.6% was up 320 basis points year-over-year, reflecting the higher profitability achieved during the quarter and optimization of the pension assets. In terms of outlook, market sentiment in construction is improving, but we continue to expect demand to remain soft, in line with low projected GDP growth. We continue to expect a growing contribution from power and energy as we execute our strategy. Quoting activity remains strong, driven by healthy demand for both primary and backup power generation solutions. I'll now turn it back to Kevin for some closing remarks.

Thank you, Dave. Before I close, I wanted to talk about the leadership transition in South America and recognize my colleague, Juan Pablo Amar, who will be retiring later this year. For more than 30 years, Juan Pablo has made an enormous contribution to our business. His loyalty, flexibility and commitment to our company, customers and employees, has been inspiring. Under his leadership, our South American business has more than doubled by many metrics. And importantly, he has positioned our business for the next phase of growth. He has led critical investments in our team, facilities and capabilities to ensure our business is ready to support our customers as they embark on their growth plans. I feel lucky to have had his support for the past 4 years and wish him well in his retirement. He will continue to support me and the new team led by Sebastian Reisch to ensure we have an effective and energized transition. To close, we are pleased with the continued execution of our strategy and the results we are generating. We are committed to growing our product support business by growing population and building new capacity and capabilities. And we are excited about the more transformative opportunities we have in Argentina, power generation and rental. With that, we'll open for questions.

[Operator Instructions] The first question comes from Cherilyn Radbourne with TD Cowen.

I do want to quickly wish Juan Pablo our very best on his retirement.

Thank you.

Kevin, the prospects for energy egress in Western Canada have shifted in a fairly short period of time. So I was hoping you could spend a bit more time addressing that opportunity set for Finning and also sort of the timing and scale of a corresponding production response?

Yes. So I mean, undoubtedly, it's been a good summer for positive sentiment and collaborative announcements between the federal and provincial government in Alberta. And -- so that's really encouraging. And I think that are built on an already improving sentiment and outlook from the major producers in Alberta. I think that there is a -- there's a long way to go. There's a lot more discussions to happen, some critical hurdles or agreements to overcome and some infrastructure to build out as well before we see any kind of real meaningful growth in production in the region. But I expect -- I mean, it's a tailwind, and I expect miners, the oil sands producers and energy producers to be organizing themselves around that positive outlook for more production in Western Canada. And we're seeing some of that just in general confidence and sentiment today. I point to our gas compression business being a good example of that, but also we delivered a truck a week into the -- in Canada in the quarter, and we expect that to continue from our very healthy backlog. And so we're seeing some of that immediately, I guess, Cherilyn, in our backlog and how we deliver that. Dave mentioned about strong gas compression sales in the quarter. And so it's more an incremental and positive improvement right now rather than a step change in production and impact on our company.

And related to that, as we think about the labor that will be needed to support nation building infrastructure, do you think the government needs to be doing more on that front in addition to expediting the approval process?

A 100% and I've had some of those conversations with the major projects' office. There's a lot of positive momentum, but it's companies like Finning that supply the equipment and the labor and the talent to really make the projects happen. We are -- we have been recruiting, as we've said, a technician a day. That's still going very well. Our technician base, not including OEM, is up 20% in Canada year-to-date. And so we are encouraged by our ability to attract talent in the marketplace. And we're kind of preempting the projects. But any confidence that the government can provide and the market can provide in terms of what they think that demand will actually look like, will help us to organize ourselves even more effectively. I think the most important thing to say about that, Cherilyn, is that we're doing it anyway because of our opportunity and our ambition to increase -- dramatically increase our -- the percentage of labor that we have are working on our -- on and around our machines anyway. So we have a market share opportunity ahead of us anyway, which we're getting after. And that gives us momentum in the recruitment, the training that's required, that we can lever up and down as the demand materializes.

What I would add there, Cherilyn, is, I mean, we're certainly supportive to any government initiatives there. But in the meantime, like Kevin said, we've had very good success in Western Canada. We have a very strong brand in the employment market. And we've doubled down even further this year with the various trade schools all across Western Canada. So the teams had very good success to date.

The next question comes from Devin Dodge with BMO Capital Markets.

For data center-related projects in Western Canada, would Finning consider internalizing the packaging of that power system? I know Finning has done some of that work in the past, but I'm not sure if the capacity is available to do that work at the scale required for the opportunities in front of you? And just wondering if that approach would differ between prime and backup power?

Yes. So the answer to your question is absolutely yes. We are totally committed to packaging the data center requirement in our territory. We have a fantastic facility that requires minimal investment to move that forward. You've been following us for a long time, Devin, and you probably remember our investment in Collicutt and the facilities we have in the Red Deer region. And so we feel well positioned that we can build that capability and capacity relatively quickly and without a kind of major investment. And we think it's critical to participate in all aspects of the data center opportunity, including controlling the quality and the velocity of packaging. Particularly as it relates to cold weather in Alberta and being associated and working with that package as it goes through build and deliver and commissioning and ultimately to participate and to partner with the product support opportunity, which is really the big opportunity for us as we look forward. From a packaging perspective, there's no real difference, material difference between prime and backup from a packaging perspective. But obviously, there's a demonstrable difference as it relates to life cycle product support in a prime application. I think that was the second part of your question, but forgive me if I got it wrong.