Mr. Kevin Parkes reports

FINNING REPORTS Q4 AND ANNUAL 2022 RESULTS

Finning International Inc. has released its fourth quarter and annual 2022 results. All monetary amounts are in Canadian dollars unless otherwise stated.

Highlights (all comparisons are with Q4 and annual 2021 results unless indicated otherwise):

• Q4 2022 EPS (earnings per share) was 89 cents, up 36 per cent from Q4 2021, driven by strong revenue growth and operational execution.
• Q4 2022 revenue of $2.7-billion and net revenue of $2.4-billion were up 36 per cent and 34 per cent, respectively, from Q4 2021, reflecting large new equipment volume and strong product support growth rates. Significant mining deliveries in Canada and South America drove new equipment sales growth of 52 per cent compared with Q4 2021.
• Q4 2022 EBIT (earnings before income taxes) of $214-million was up 36 per cent and included $19-million higher LTIP (long-term incentive plan) expense compared with Q4 2021. EBIT as a percentage of net revenue was 9.0 per cent, led by South America at 11.4 per cent and Canada at 11.0 per cent.
• Q4 2022 free cash flow was $332-million. Annual free cash flow was a use of cash of $170-million in 2022 due to investment in working capital to support the delivery of record equipment backlog and strong product support growth rates. Two thousand twenty-two year-end net debt to adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of 1.6 times was down from 1.8 times in Q3 2022.
• For the full year 2022, EPS of $3.25 was up 49 per cent from adjusted EPS in 2021 on a 23-per-cent increase in net revenue, demonstrating improved earnings capacity and strong operating leverage.
• Two thousand twenty-two ROIC (return on invested capital) of 18.7 per cent was up 230 basis points from adjusted ROIC in 2021.
• Consolidated equipment backlog was a record $2.5-billion at Dec. 31, 2022. Compared with Dec. 31, 2021, backlog was up 35 per cent, driven by higher order intake in mining and power systems.

"We are grateful to our employees for their commitment and contribution, which helped us finish 2022 safely and deliver record results. Our strong execution combined with significant strategic wins across the business in 2022 have provided us with great momentum into 2023, setting the stage for continued improvement in our full-cycle earnings capacity.

"Looking ahead, we are mindful of the uncertain global business environment, including slowing rates of growth, and we are reinforcing our mid-cycle operating cost and capital model. On balance, we see constructive demand conditions in our diverse end-markets, where we expect strength in mining and energy sectors to more than offset slowing construction markets in the U.K. and South America. We are seeing continued momentum at the start of 2023 and expect growth in the first half of the year, underpinned by our record equipment backlog, very busy workshops and growth in rebuilds driven by the strong execution of our product support strategy," said Kevin Parkes, president and chief executive officer.

Q4 2022 highlights by operation

All comparisons are with Q4 2021 results unless indicated otherwise. All numbers, except ROIC, are in functional currency: Canada -- Canadian dollar; South America -- U.S. dollar; United Kingdom and Ireland -- U.K. pound sterling. These variances and ratios for South America and U.K. and Ireland exclude the foreign currency translation impact from the Canadian dollar relative to the U.S. dollar and pound sterling, respectively, and are therefore, considered to be specified financial measures. The company believes the variances and ratios in functional currency provide meaningful information about operational performance of the reporting segment.

Canada operations:

• Net revenue increased by 28 per cent from Q4 2021, with higher revenues across all sectors driven by continued strong market conditions in Western Canada.
• New equipment sales were up 56 per cent, driven by mining deliveries in the oil sands and higher volumes in the construction and power systems sectors.
• Product support revenue was up 30 per cent, reflecting strong demand in all sectors and successful execution of the company's product support growth strategy, including the positive impact of supplier cost passthrough.
• Supply of used equipment remained tight in Western Canada. Used equipment sales were down 36 per cent from record levels in Q4 2021, which saw large used equipment deals in mining and construction sectors.
• EBIT was up 39 per cent and EBIT as a percentage of net revenue increased by 90 basis points to 11.0 per cent compared with Q4 2021, driven by improved operating leverage. SG&A (selling, general and administrative) expenses as a percentage of net revenue were down 190 basis points from Q4 2021.

South America operations:

• Net revenue increased by 34 per cent from Q4 2021, driven by strong mining activity.
• New equipment sales were up 54 per cent from Q4 2021 due to higher deliveries to copper producers and large contractors supporting mining operations in Chile. In addition, the company was able to catch up on some backlog deliveries from Q3 2022, which were delayed due to supply chain constraints.
• Product support revenue was up 25 per cent, driven by Chilean mining, with strong overall demand and higher volumes from new and expanded mining product support contracts, as well as the benefit of supplier cost passthrough in all market sectors.
• EBIT increased by 51 per cent and EBIT as a percentage of net revenue of 11.4 per cent was up 130 basis points compared with Q4 2021, reflecting strong revenue growth, improved cost structure and service productivity, as well as the favourable impact of CLP devaluation.
• South America generated a record ROIC of 24.5 per cent in 2022, a 420-basis-point increase from 2021.

U.K. and Ireland operations:

• Net revenue was up 38 per cent from Q4 2021, with increased volumes across all lines of business.
• New equipment sales were up 39 per cent, driven by higher power systems project deliveries, higher HS2 deliveries and robust demand in the construction sector.
• Product support revenue was up 38 per cent, reflecting solid activity in all end-markets, strong execution of the company's product support growth strategy, including the positive impact of supplier cost passthrough, and the contribution from Hydraquip, which was acquired in March, 2022.
• EBIT increased by 40 per cent from Q4 2021 and EBIT as a percentage of net revenue of 4.4 per cent was slightly higher compared with Q4 2021.

Corporate and other:

• Corporate EBIT loss was $26-million in Q4 2022, compared with an EBIT loss of $6-million in Q4 2021, mostly due to higher LTIP expense driven by significant share price appreciation in Q4 2022 compared with Q4 2021.
• The board of directors has approved a quarterly dividend of 23.6 cents per share, payable on March 9, 2023, to shareholders of record on Feb. 23, 2023. This dividend will be considered an eligible dividend for Canadian income tax purposes.

Market update and business outlook

The discussion of the company's expectations relating to the market and business outlook in this section is forward-looking information that is based upon the assumptions and subject to the material risks. Actual outcomes and results may vary significantly.

Canada operations

The company expects market activity across Western Canada to remain healthy, supported by the strength in the mining and energy sectors.

Constructive commodity prices and improved capital budgets are expected to drive investment in renewal of aging fleets and product support opportunities in the oil sands and other mining. The company expects to see growing demand for component remanufacturing, equipment rebuilds and autonomy implementation as mining customers are looking to extend the life of their assets and improve productivity.

In the construction sector, federal and provincial governments' infrastructure programs and private sector investments in natural gas, carbon capture, utilization and storage, and various power projects are expected to continue driving demand for construction equipment and product support, rentals, and prime and standby electric power generation.

In the power systems sector, higher activity levels from energy customers are driving a notable increase in quoting and order intake. The company's power systems backlog in Canada is at its highest levels since 2014.

South America operations

The company continues to closely monitor the Chilean constitutional reform, including the process for approval of the proposal for a revised mining royalty framework. It is encouraged by the latest moderated proposal. However, it expects the timing of investment decisions related to greenfield and new expansion projects to remain uncertain until the new royalty proposal is approved. Longer term, the company expects Chile will remain an attractive place to invest as electrification trends drive increasing global demand for copper.

The company expects a strengthening copper price to support positive mining outlook in Chile in 2023. Mining deliveries are expected to be driven by Finning's recent wins with BHP and Codelco, as well as committed medium-term investment in fleet replacements across the company's mining customer base. The company also expects to see continued strong demand for mining product support and technology solutions, including autonomy.

Slowing economic growth and higher interest rates are expected to continue impacting construction activity in Chile in 2023.

In Argentina, activity in construction, oil and gas, and mining is expected to remain stable. However, high inflation, currency restrictions and new import regulations will continue to impact the company's business in Argentina as Finning manages through the challenging fiscal, regulatory and currency environments.

U.K. and Ireland operations

As equipment deliveries to HS2 have largely been completed, Finning expects lower construction new equipment sales in the U.K. in 2023 compared with 2022. In addition, overall demand for construction equipment in the U.K. is expected to decline in 2023 due to slowing economic growth rates. However, Finning expects strong demand for product support to continue, driven by HS2 activity and high machine utilization rates across broader construction markets.

Finning expects demand for its power systems business in the U.K. and Ireland to remain robust, including in the data centre market. The company has a solid backlog of power systems projects for delivery in 2023 and it is well positioned to capture further opportunities.

Considerations for 2023

Finning is mindful of the uncertain global business environment, including slowing rates of growth, and it is reinforcing its mid-cycle operating cost and capital model. Over all, Finning expects constructive demand conditions in its diverse end-markets to be supported by favourable commodity prices and strong demand from mining and energy customers.

Finning is reducing its capital expenditures budget in 2023, with a higher proportion allocated to reinvestment in rental fleet and strategic investments in electric drive mining trucks for demonstration purposes. The company's 2023 net capital expenditures and net rental fleet additions are expected to be in the range of $190-million to $240-million, representing about a 25-per-cent reduction from 2022. In 2023, Finning will be placing a higher priority on debt repayment and reduction in its net debt to adjusted EBITDA ratio.

Finning is seeing continued momentum at the start of 2023 and expects growth in the first half of the year compared with the first half of 2022, underpinned by its record equipment backlog, very busy workshops and growth in rebuilds driven by the strong execution of its product support strategy.

To access Finning's complete Q4 and annual 2022 results, please visit the company's website.

Q4 2022 investor call

The company will hold an investor call on Feb. 7, 2023, at 10 a.m. Eastern Time.

The dial-in numbers are 1-800-319-4610 (Canada and the United States), 1-416-915-3239 (Toronto area) and 1-604-638-5340 (international). The investor call will be webcast live and archived for three months. The webcast and accompanying presentation can be accessed on the company's website.

About Finning International Inc.

Finning is the world's largest Caterpillar dealer, delivering unrivalled service to customers for 90 years. Headquartered in Surrey, B.C., the company provides Caterpillar equipment, parts, services and performance solutions in Western Canada, Chile, Argentina, Bolivia, the U.K. and Ireland.

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