Finning International Inc. · TSX:FTT
Finning International — Investor Day (December 2013)
57 slides from Finning International's investor day presentation, Dec 17, 2013
Slide 1: New Focus: Driving Return on Invested Capital
NEW FOCUS Driving Return on Invested Capital Investor Meeting December 17, 2013
Slide 2: Forward Looking Information
Forward Looking Information This report contains statements about the Company’s business outlook, objectives, plans, strategic priorities and other statements that are not historical facts. A statement Finning makes is forward-looking when it uses what the Company knows and expects today to make a s
Slide 3: Agenda
Agenda 9:00 AM Registration and Breakfast 9:30 AM Welcome Mauk Breukels, VP, Investor Relations 9:35 AM Value Proposition Scott Thomson, President & CEO 10:05 AM Operational Priorities Juan Carlos Villegas, President, Finning Canada & COO 10:35 AM Financial Objectives Dave Smith, EVP & CFO 10:50 AM
Slide 4: Compelling Value Proposition
Compelling Value Proposition ! Passionate and committed employees ! Right people in the right places to execute on the plan ! Best products, best territories ! Aligned with Caterpillar, world’s best heavy equipment company ! Resource-rich territories with significant organic growth opportunities ! C
Slide 5: Revitalized Management Team
Revitalized Management Team New leadership, new focus Scott Thomson President & CEO Neil Juan Carlos Andy Fraser Dickinson Marcello Villegas EVP, Marchese Managing Dave Chief Human President, Dave Smith Customer & Director, Cummings Resources President, Finning External Finning UK & EVP & CFO Office
Slide 6: Engaged Culture & Strong Safety Record
Engaged Culture & Strong Safety Record 2013 Employee Opinion Total Recordable Injury Frequency Survey Highlights (per 200,000 hours) TRI Frequency Finning CAT Dealer 2009 - 2013 Average 75% 74% 3.00 Engagement 2.50 Frequency per 200,000 hrs 2.00 Safety 89% 84% Top Decile 1.50 1.00 Accountability for
Slide 7: Broadest Range of Quality Products
Broadest Range of Quality Products Over 300 equipment product lines Construction WHEEL LOADERS BACKHOE LOADERS SKID STEER LOADERS COMPACTORS FORBES Top 100 Most Valuable Brands Forestry FOREST MACHINES GRADERS SKIDDERS FELLER BUNCHERS Record 2012 R&D Investment Power Systems ELECTRICAL POWER GEN. IN
Slide 8: Market Leader in Most Desirable Regions
Market Leader in Most Desirable Regions UK & Ireland 13% Canada South 50% America 37% Revenue by region (nine months ended Sept 30, 2013) 8
Slide 9: Diverse & Growing Customer Base
Diverse & Growing Customer Base 66% of new equipment deliveries from non-mining New Equipment Deliveries by Industry Forestry Forestry 3% 2% Other* Petroleum Petroleum 9% 3% 5% Other* 7% Power Power Systems Systems 18% 17% Mining Mining 43% 34% Construction Construction 32% 27% 2008 2013 nine months
Slide 10: Powerful, Sustainable Business Model
Powerful, Sustainable Business Model 2012 Mobile Revenue by Line of Business Machine Population ~100,000 Rental Used 6% Large 4% Installed Base Product New Support Equipment 48% Product Support 42% 10-Year CAGR ~11% Product (2003-LTM) Support New Equipment Sales 2013 nine months ended September 30 1
Slide 11: Return on Invested Capital Drives Shareholder Value
Return on Invested Capital Drives Shareholder Value Correlation of Key Metrics Total Returns vs. Three-year Δ ROIC by Quartile to Total Returns Average Three-Year ∆ 12% 80% 76.9 ROIC 0.51 9.1 8% 60% 57.9 ROA 0.44 EPS 0.39 41.8 4% 40% 2.5 ROE 0.23 0.1 0% 20% Revenue 0.10 13.3 FTT – Flat ROIC over las
Slide 12: Return on Invested Capital Defined
Return on Invested Capital Defined EBIT $523M EBIT ÷ Margin 7.8% Revenue ROIC × $6,706M 15.8% Revenue Invested Capital Turnover ÷ 2.0x Average Invested Capital $3,308M Last twelve months ended September 30, 2013 12
Slide 13: Performance Gap
Performance Gap Invested Revenue Growth % EBIT Margin % Capital Turnover (’06 – ’12 CAGR) (LTM) (LTM) Ferreycorp Toromont Wajax Finning H&E Equipment Barloworld Wajax Seven Group Toromont Barloworld Finning Finning Strongco Ferreycorp Ferreycorp H&E Equipment Barloworld Strongco Toromont Wajax Seven
Slide 14: ROIC Performance
ROIC Performance Invested Capital EBIT Margin Turnover ROIC 7.8 2.0 15.8 Finning Finning Finning 6.9 2.6 18.2 8.1 2.0 15.9 Canada Canada Canada 7.0 2.4 16.9 5.1 3.3 16.8 UK & Ireland UK & Ireland UK & Ireland 4.5 2.7 12.2 9.6 1.9 17.9 South America South America South America 9.8 2.2 21.2 LTM Seven-
Slide 15: Priorities Will Drive Improved ROIC
Priorities Will Drive Improved ROIC All priorities are linked directly to EBIT or Invested Capital Priorities Market Leadership EBIT Service Excellence Safety & Talent Management (Foundation) ROIC Supply Chain Invested Asset Utilization Capital 15
Slide 16: Priorities Linked to Incentives
Priorities Linked to Incentives Safety Realignment of incentives Short EBIT Margin • From management to Term Free Cash Flow branch level • Metrics linked to what Incentive Customer Loyalty employees control Plan Invested Capital Turnover Long Return on Invested Capital 50% Term Total Shareholder Ret
Slide 17: Safety & Talent Management
Safety & Talent Management Foundation for all priorities Safety Right people People excellence in right roles development ! Rigorous, company-wide ! Recent vice president ! Continued investment in focus on safety appointments learning and development ! New role – Andy Fraser, ! Canada: ! Ongoing foc
Slide 18: Executing on Our Priorities
EXECUTING ON OUR PRIORITIES
Slide 19: Priorities
Priorities Foundational ! Safety & Talent Management Operational ! Supply Chain ! Service Excellence ! Asset Utilization ! Customer & Market Leadership 19
Slide 20: Supply Chain
Supply Chain Benefits ! Competitive advantage as Inventory Turns a world-class distributor ! Efficient supply chain drives customer loyalty ! Reduces invested capital 3.0X 2.4X LTM COGS $4,656M ! Reduces costs ! Improves cash generation LTM Average Inventory * $1,931M Primary opportunities 2011 LTM
Slide 21: Canada Supply Chain Action Plans
Canada Supply Chain Action Plans Network ! Implement direct ship from Caterpillar’s Spokane Distribution Centre ! Implement direct ship from Regional Distribution Centres to local customers ! Optimize existing warehouse and distribution network resulting in reduction of delivery touches Transportati
Slide 22: Dramatically Reduced Lead Times and Transfer Points
Dramatically Reduced Lead Times and Transfer Points Edmonton, AB Kamloops, BC Vernon, BC 12h Spokane, WA 7d Planned Logistics Model: Direct Stock Routes Spokane, WA Vernon, (Caterpillar) 12h BC Customer Legacy Network Model Morton, IL Morton, IL Edmonton, Kamloops, Vernon, (Caterpillar) 7d AB BC BC
Slide 23: Canada Supply Chain Progress to Date
Canada Supply Chain Progress to Date Emergency Parts Parts Service Level (%) Purchases (% of items) 24 Hours 72 Hours 100 100 92 93 95% Parts 88 2013 Inventory 82 85% TARGET 80 Turns 75 75 76 ∆ +0.3x 54 50 50 YTD 2012 2013 29 25 25 19 0 0 June Sept June Sept 2011 2012 2013 2011 2012 2013 23
Slide 24: Service Excellence
Service Excellence Benefits ! Drives lowest equipment owning and operating costs for customers ! Maximum uptime for customers ! Improves customer loyalty ! Increases service profitability ! Attracts and retains technical talent Primary opportunities ! All regions Service Excellence Target ∆ in 3 Yea
Slide 25: Canada Service Excellence Action Plans
Canada Service Excellence Action Plans Improve labour recovery Labour Recovery ! Enhance leadership, competencies & technical skills 80% 75% 68% ! Improve parts availability by leveraging supply chain efficiencies ! Standard processes & planning ! Improved quoting process to reduce bid variances 200
Slide 26: Asset Utilization
Asset Utilization Benefits Major Infrastructure ! Optimizes footprint & distribution of activities Investments in Last 5 Years ! Maximizes return on investments made ! Improves service delivery 2008 – COE, Red Deer, AB $110M ! Reduces costs and invested capital $110M 2011/12 – Fort McKay Primary opp
Slide 27: Canada Asset Utilization Action Plans
Canada Asset Utilization Action Plans Optimize allocation of work across facilities Gross Capital Expenditures Current mining facilities underutilized ~ $150M /year Ensure more disciplined capital allocation going forward Under Decisions-to-date $100M ! Move oil sands new equipment preparation from
Slide 28: Customer & Market Leadership
Customer & Market Leadership Benefits ! Builds machine population and drives future product support ! Aligns with Caterpillar’s focus on market share growth ! Expands focus to entire product line Primary opportunities ! Core equipment in Canada ! Core equipment and large mining trucks in FINSA ! Par
Slide 29: Canada – Core Equipment
Canada – Core Equipment Customer & Market Leadership Action Plans Core Equipment Improve sales coverage Market Share ! Industry segmentation ∆ -5% ! Strengthening sales team Adjust sales force compensation Drive improved participation rates Right equipment, right time, right place 2008 2012 ! Foreca
Slide 30: FINSA – Equipment
FINSA – Equipment Customer & Market Leadership Action Plans Core Equipment Improved sales coverage Market Share ! Increased dedicated core equipment sales force ! Detailed competitive analysis by territory and product ∆ +3% ! Leads from remote sales force and internet passed to dedicated sales repre
Slide 31: Canada – Parts
Canada – Parts Customer & Market Leadership Action Plans Improve customer loyalty through enhanced parts availability Parts and mix Market Share ! Leverage supply chain for improved service delivery, ∆ -1.0% focus on fast-moving parts ! Develop high velocity and easy-to-use channels (i.e. e-business
Slide 32: Drills and Shovels – Parts
Drills and Shovels – Parts Customer & Market Leadership Action Plans Progress to date FINSA ! Canada exceeding expectations - solid performance on Drills & Shovels parts and service Parts Opportunity ! FINSA exceeding service expectations Opportunity – South America ! Addressing supply chain challen
Slide 33: Canada – Power Systems
Canada – Power Systems Customer & Market Leadership Action Plans Canada Power Seizing growing global power systems opportunity Systems Revenue Introduced new organizational structure to drive CAGR participation ! Segmented approach – by industry versus regional ! Key appointments: new Senior Vice Pr
Slide 34: Financial Objectives
FINANCIAL OBJECTIVES Focus On Metrics We Control
Slide 35: Improving ROIC
Improving ROIC EBIT Margin and Invested Capital Turnover ! Operational cost efficiencies ! Improved working capital driven by ! Supply chain higher equipment and parts turns ! Service excellence ! Optimized asset utilization, including ! Discretionary cost control supply chain network ! Capital disc
Slide 36: ROIC Historical Performance
ROIC Historical Performance ! Significant Investments: - Drills & Shovels - Fort MacKay CAGR 30.0% ! Underperforming (2006 - 2012) Economic working capital 5.8% 25.0% downturn ! ERP implementation Revenue 20.0% 7.8% 15.0% 10.0% EPS 5.0% 0.0% 2006 2007 2008 2009 2010 2011 2012 LTM Average Values ROIC
Slide 37: Measuring Progress
Measuring Progress EBIT – Annual EBIT Margin (%) – consolidated & regions Canadian Service Labour Recovery (∆%) Market Share: • Core Equipment (∆%) ROIC (%) • Parts (∆%) consolidated & regions • Canadian Power Systems Revenue (∆%) Invested Capital – Quarterly Inventory ($) – consolidated Inventory T
Slide 38: Strengthening Balance Sheet
Strengthening Balance Sheet FCF per Share (dollars) Net debt to total capital ratio (%) 2.89 53 52 51 51 50 1.86 48 1.53 47 45 45% 42 0.31 0.13 TARGET RANGE -0.22 -0.62 35% -1.29 2006 2007 2008 2009 2010 2011 2012 LTM Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4E Q1 Q2 Q3 Q4 2011 2012 2013 2014 Positive free cash flo
Slide 39: Continued Commitment to Dividends
Continued Commitment to Dividends ! Important component of total shareholder return ! Committed to growing dividend, Annual Dividends consistent with sustainable earnings growth 0.5975 0.55 ! Target payout ratio: 25-35% 0.51 ! 10 year CAGR ~13% 0.47 0.43 0.44 ! 5 year CAGR ~7% ! Current quarterly di
Slide 40: Capitalizing on Attractive Market Opportunities
CAPITALIZING ON ATTRACTIVE MARKET OPPORTUNITIES
Slide 41: Oil Sands: Benefitting from Ongoing Projected Growth
Oil Sands Benefitting from ongoing projected growth Typical Oil Sands Start-up Fleet (for 100,000 bblpd operation) Oil$Sands$Raw$Bitumen$(Mbbl/d)$ Open Pit Oil Sands Production (Thousands of Barrels per Day) 2,000" Rope Shovel 2 Hydraulic Shovel 1 Mining" 1,000" 0" Off-highway Trucks 20-25 2012" 201
Slide 42: Oil Sands: Projections From Current Customers
Oil Sands Benefitting from ongoing projected growth Projections From Current Customers* New Project • 2013-2017 • Fort Hills (Suncor) - $13.5 billion • ~40% increase in overburden moved • Production starts Q4, 2017 • ~60% increase in tons of ore moved • ~180,000 bbls/day Expansions Potential New Pro
Slide 43: Copper in Chile
Copper in Chile Participating in long-term growth Mining Companies Investing Largest Copper Mining Investment in Chile 2014-2018 Producing Regions in Chile (in Billions) (in Billions) 20 Codelco Chile Teck China Peru 15 Barrick 13.9 13.4 13.1 USA 12.9 12.6 12.6 BHP Australia Goldcorp 10 Russia Antof
Slide 44: Construction Opportunities
Construction Opportunities UK Real GDP (% Change) UK#Real#GDP#(%#change) Non-Mining Order Intake – Consolidated ($M) 3.0 2.5 500 1.7 1.8 1.5 1.5 1.1 Replace chart, attached (Anson) 400 0.1 0 300 -1.5 % 200 -3.0 100 -4.5 -5.2 0 -6.0 2009 2010 2011 2012 2013F 2014F 2015F Q3-12 Q4-12 Q1-13 Q2-13 Q3-13
Slide 45: Western Canada LNG
Western Canada LNG Seizing new business opportunities Compression & Prime Power Projects proposed to transport gas Investment from Western Canada to Asia1 LNG Canada (Shell, Korea Gas, Mitsubishi, PetroChina) +$28B Projected Opportunity 7.25 bcfpd Malaysia (Petronas) +$20B Engines per bcfpd 89 645 K
Slide 46: Historical Revenue Correlation to Economic Growth
Historical Revenue Correlation to Economic Growth CAGR 8-Years Chile Real GDP (2005-2013) Forecast Chile GDP (USD) 11% 4.7% 5.2% FINSA Revenue (USD) 15% 2014 2015 CAGR 8-Years Western Canada (2005-2013) Real GDP Forecast Western Canada GDP (CAD) 4% 3.3% 3.2% Finning Canada Revenue (CAD) 6% 2014 2015
Slide 47: Key Takeaways
Key Takeaways ! Focus on what we can control: costs, working capital and capital investment ! Significant increase in invested capital has offset profitability improvements over last three years ! Bucyrus ! Oil sands investments ! ERP ! Increase in working capital to sales ! Opportunity to materiall
Slide 48: Appendix
FINHING 2 l APPENDIX
Slide 49: ROIC – Historical Performance: Canada
ROIC – Historical Performance Canada 30.0% 25.0% 20.0% 15.0% 10.0% Average Values (2006 - 2012) 5.0% 0.0% ROIC 2006 25.0% 2007 24.9% 2008 16.7% 2009 7.3% 2010 14.4% 2011 14.4% 2012 15.7% LTM 15.9% ROIC 16.9% 10.0% 3.0x EBIT% 7.0% 8.0% 2.0x Invested Capital T/O 2.4x 6.0% 4.0% 1.0x 2006 2007 2008 2009
Slide 50: ROIC – Historical Performance: South America
ROIC – Historical Performance South America 25.0% 20.0% 15.0% 10.0% Average Values 5.0% (2006 - 2012) 0.0% ROIC 2006 22.9% 2007 23.4% 2008 22.0% 2009 21.6% 2010 18.8% 2011 20.0% 2012 19.7% LTM 17.9% ROIC 21.2% 12.5% 3.0x EBIT% 9.8% 10.0% 2.0x Invested Capital T/O 2.2x 7.5% 5.0% 1.0x 2006 2007 2008 2
Slide 51: ROIC – Historical Performance: UK & Ireland
ROIC – Historical Performance UK & Ireland 20.0% 16.0% 12.0% 8.0% Average Values 4.0% (2006 - 2012) 0.0% ROIC 2006 11.6% 2007 13.0% 2008 11.6% 2009 5.9% 2010 7.9% 2011 18.3% 2012 16.3% LTM 16.8% ROIC 12.2% 6.0% 4.0x EBIT% 4.5% 2.7x 5.0% 3.0x Invested Capital T/O 4.0% 2.0x 3.0% 2.0% 1.0x 2006 2007 20
Slide 52: Market Outlook
Market Outlook Canada ! Continued stable oil sands activity ! Solid infrastructure activity and market share gains to drive growth in Core and BCP ! Growing power systems opportunities (LNG) ! Product support remains solid South America ! Slower pace of growth - copper producers are focused on produ
Slide 53: Finning 101
Finning 101 World’s largest Caterpillar dealer: ! New equipment and engines sales ! Used equipment sales The Northwest Yukon ! Products support / parts and service Territories ! Equipment rental Main industries: British Fort McMurray Columbia Alberta ! Mining (oil sands, copper, coal) Edmonton ! Con
Slide 54: Glossary
Glossary ! BCP Building construction product ! COE Centre of Excellence – Finning’s service facility in Red Deer, AB ! COGS Cost of goods sold ! CRC Component rebuild centre ! CRM Customer relationship management ! EBIT Earnings before finance costs and income taxes ! EBITDA Earnings before finance
Slide 55: Definition of Terms
Definition of Terms ! EBIT margin: earnings before finance costs and income taxes ÷ total revenue ! Free cash flow: cash provided by (used in) operating activities less net additions to property, plant, and equipment and intangible assets ! Invested capital: book equity + net debt (total debt less c
Slide 56: Finning Peers
Finning Peers Barloworld Multinational distributor of leading equipment brands and provider of integrated rental, fleet management, product support and logistics solutions; headquartered in South Africa; operates in 26 countries. Ferreycorp Peruvian conglomerate engaged in the distribution and maint
Slide 57: Investor Relations Contact
Mauk Breukels Vice President, Investor Relations & Corporate Affairs 604-331-4934 Mauk.Breukels@finning.com Finning International Inc. Ilona Rojkova Suite 1000, Park Place Manager, Investor Relations 666 Burrard Street 604-331-4900 Vancouver, BC V6C 2X8 Ilona.Rojkova@finning.com finning.com 57