Finning International Inc.
Highlights from the RBC Engineering, Construction & Infrastructure Symposium
TSX: FTT | CAD 27.23 | Outperform | Price Target CAD 44.00
Sentiment: Neutral
This afternoon we hosted Scott Thomson, President & CEO, Kevin Parkes, EVP & COO, and Greg Palaschuk, EVP & CFO, for a fireside chat at the RBC Engineering, Construction, & Infrastructure Symposium. We also hosted management for investor meetings over the recent days. We highlight the key takeaways from the meetings and the fireside chat below:
Supportive outlook across its regions — Overall, our read from the two days of meetings and the commentary from the fireside chat today is that the outlook remains favorable and the company is well positioned to drive YoY earnings growth in 2023 (albeit at a rate lower than the YoY growth expected in 2022 vs. 2021). Management noted that the outlook for Canada and South America remains strong, underpinned by the supportive commodity price backdrop. Steady activity levels and potential for fleet replacements/renewals offer further opportunity, and the company has significantly increased the mix of Product Support in its business (which positions it well from a margin perspective). The only area of softness noted in these two markets was construction in Chile; however, that is smaller part of the business. Management also noted that the macro backdrop in the U.K. & Ireland has softened; however, demand in this market is underpinned by large opportunities in the infrastructure space, such as HS2, and continued healthy demand from the data center end-market in Ireland.
5 strategic priorities going forward — Management laid out their 5 strategic priorities over the medium- to long-term, which include: 1) continuing to lead in the mining end-market; 2) growing the aftermarket business; 3) continuing to build out the company's digital capabilities; 4) introducing sustainable solutions (i.e., navigating the energy transition); and, 5) procuring used equipment (i.e., better managing the equipment cycle). Looking ahead, we believe the demand environment remains supportive across the company's regions (as indicated by the company's 3rd consecutive record backlog), and, in our view, Finning is well positioned to execute against its strategic priorities.
Chile offers a meaningful long-term opportunity; recent vote rejecting constitutional changes should lead to a more "balanced" outcome — Commentary on the longer-term outlook for Chile was very encouraging as it highlighted the role that the country is expected to play in the green transition (as a sizable supplier of copper and lithium) and the opportunity for Finning to grow its market share/presence in this market. On a more near-term development, over this past weekend, Chilean voters rejected the proposed changes to the constitution, which should pave the way for a more "balanced" proposal (i.e., one that takes into account the interests of businesses as well). This is a step in the right direction, in our view, as many large miners (i.e., Finning's customers) had previously paused decisions on major investments until there was some clarity on the constitutional reform.
Do electric drive trucks offer the same Product Support opportunities as "legacy" trucks? Yes they do — Last week, Finning announced an agreement to replace BHP's entire haul truck fleet at the Escondida mine, the world's largest copper-producing mine (currently composed of 160+ haul trucks), with the new Caterpillar 798 AC electric drive trucks (see our note here). One question we heard in many meetings and investor conversations is whether electric drive (and over the longer run, fully electric trucks) offer the same Product Support opportunities. The short answer is yes. While electric drive trucks have fewer moving parts, the autonomous versions typically would operate much longer hours, so these trucks are likely to have more "wear and tear", meaning that they would require more Product Support. Also, parts for such trucks are likely to be more expensive. So all things considered, there should not be a material difference in after-market opportunities with the current electric drive trucks.
Potential for additional market share gains in the mining end-market going forward — The Escondida award marks a significant win for Finning as it was the largest order in the company's history, and it also represented a meaningful share gain at the