A More Resilient Operating Model – Q2/24 Review Our Conclusion
FTT reported relatively in-line quarterly results with a slight revenue/EPS
beat but slight EBIT/margin miss. While the company has been operating in
a moderating growth environment, optimism in its outlook is improving in
Chile (copper mining environment more positive), Western Canada (new
pipeline capacity and LNG development), and the construction market (signs
of recovery in Canada/UK). As a result, FTT is more confident in product
support growth in H2/24. FTT is in the process of lowering its cost base and
reducing SG&A as a percentage of revenues (Q2/24 was all-time low).
Following Q2/24 results, we have made only minor tweaks to our estimates
and maintain our Outperformer rating and $49 price target.
Key Points
More Confident In Product Support Growth For H2/24: Product support
revenue grew 0.4% Y/Y in Q2/24 vs. a very strong Q2/23 and improved
sequentially in all regions. Y/Y product support growth in South America was
offset by lower levels in Canada and UK/Ireland. FTT is more confident in
product support growth in H2/24 vs. a quarter ago given an improved
installed base, the addition of technicians (80 added in South America YTD),
increased REMAN capacity (OEM facility in Edmonton), and doubling down
on physical and digital coverage. FTT expects strong pent-up oilsands
demand for product support work heading into winter programs. We model
product support growth improving to 4% Y/Y in Q3/24 and 8% Y/Y in Q4/24.
Backlog Higher Q/Q; Seeing Strong Activity In Chile Copper/Canada
And Construction Markets Bottoming: Backlog of $2.2B was up 11% Q/Q,
reflecting significant strategic wins in each region including contracts with
multiple copper mines in Chile, the oil sands in Canada, and data centres in
the UK/Ireland). Management notes that it is having “lots of conversations”
with customers in South America (tender activity for copper brownfields) and
Canada (fleet refresh). The construction market is showing signs of recovery
with increased activity in Canada and backlog build in the UK. While backlog
is down ~8% Y/Y, this is a function of improving velocity of deliveries (given a
more normalized supply chain).
Substantial FCF In H2/24; Lower Net Capex And Rental Investment;
Further SG&A Optimization: FTT now expects 2024 net capital and rental
fleet capex to be in the range of $220MM-$270MM, lower than the previously
communicated range of $290MM-$340MM. FTT anticipates the execution of
its strategy will have an increasing impact through this year, with improving
product support growth rates, greater working capital velocity (new orders
are moving through backlog faster), and substantial free cash flow
generation in H2/24. SG&A as a percentage of net revenue was 16.2% in
Q2/24 (all-time low). FTT is finalizing plans focused on the simplification of
corporate functions and the Canadian component exchange business to
reduce its fixed cost base and further reduce SG&A as a percentage of net
revenue going forward.