Finning International Inc.
Highlights from the RBC Canadian Automotive, Industrials & Transportation Conference
This morning, Greg Palaschuk, Finning's Executive Vice President & Chief Financial Officer, and Kevin Parkes, Finning's Chief Operating Officer, presented during day two of RBC's Canadian Automotive, Industrials & Transportation Conference.
Our view – Overall, the commentary pointed to strong momentum in the company's three regions, driven by long-term public/private infrastructure investments and a supportive commodity backdrop. We highlight key takeaways from our discussion below:
• Outlook remains positive – Recall that at Q1 reporting, Finning nudged its 2022 EPS guidance higher and now expects "above" mid-teens YoY growth (vs. "mid-teens or above" previously). Management highlighted the strong momentum across its markets as a driving factor for the upward revision (as reflected in the record-high $2.1B backlog). Interestingly, a larger proportion of the current backlog is construction- related orders, implying there is still some runway for mining demand to increase (mining-related orders have typically accounted for a larger proportion of the backlog).
On inventory, it was noted that in recent quarters, ~70% of inventory sold has been "fast-moving" (i.e., inventory that turns over faster), which has helped with inventory planning. In addition, Finning has been able to better leverage data to predict customer demand, while also remaining proactive on ordering to stay ahead of potential supply chain-driven delays.
On digital tools, the capabilities embedded within CUBIQ were highlighted and management discussed how this platform helped secure a significant share of the business related to HS2. CUBIQ was described as a data aggregator (e.g., putting together geo-spatial, fuel, weather, and productivity data in one customer-friendly platform) that customers can leverage to better manage their projects. Recall that for HS2, Finning has been developing its technology offering since 2015/2016 in conjunction with one of the main HS2 contractors (see our recent note focused on the U.K. market here for a more in-depth discussion of CUBIQ and the HS2 opportunity). The company believes the successful test case with CUBIQ at HS2 should allow them to pursue other large opportunities across their markets.
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On Product Support, there has been a good recovery in this business over the recent quarters. The company has gained share with construction customers and is also seeing increased spending on maintenance capex (which should drive further demand).
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On capital allocation, the company has consistently increased its dividend (was recently increased by ~5% and has been increased for 21 straight years), and remains active on its NCIB (repurchased ~1% of float in each of the past 3 quarters). Management also remains on the lookout for M&A (e.g., recent Hydraquip transaction, see our note here).
• Demand environment in Western Canada strong – Oil Sands customers are still improving balance sheets and returning capital to shareholders; however, there has been an uptick in previously deferred maintenance capex. Mining demand remains very positive and the company noted this demand is broad-based, reflecting the strong commodity price environment.
• South America outlook remains constructive – Management noted the commodity backdrop was driving strong activity in Chile, but did note that the pending Chilean constitutional reforms are likely leading to some delayed decision-making (e.g., BHP awaiting further clarity before proceeding with ~$10B of capex).
• Closer look at the U.K. & Ireland – In the U.K., HS2 construction is well under way, and the company has a good pipeline of opportunities related to this "megaproject." The company has seen good traction in its power systems business in Ireland, driven by growth in both the U.K. & Ireland data center market as more and more customers seek backup power generation solutions.