Mr. Kevin Parkes reports

FINNING REPORTS Q4 AND ANNUAL 2023 RESULTS

Finning International Inc. has released its fourth quarter and annual 2023 results. All monetary amounts are in Canadian dollars unless otherwise stated.

Highlights (All comparisons are with the results from Q4 2022 and full year 2022 unless indicated otherwise.):

• Q4 2023 earnings per share (EPS) of 59 cents included a 37-cent-per-share foreign exchange loss in Argentina due to prolonged government currency restrictions and significant subsequent devaluation of the Argentine peso. Excluding this and other significant items, adjusted EPS of 96 cents was up 7 per cent compared with Q4 2022.
• Q4 2023 revenue of $2.7-billion was flat and net revenue of $2.4-billion was up 1 per cent. This included used equipment sales growth of 48 per cent.
• Q4 2023 earnings before finance costs and income taxes (EBIT) were $177-million. Excluding significant items, Q4 2023 adjusted EBIT was up 9 per cent to $232-million, driven by lower long-term incentive plan (LTIP) expense and higher adjusted EBIT in South America.
• Q4 2023 free cash flow was $280-million. The 2023 year-end net debt to adjusted EBITDA (earnings before finance costs, income taxes, depreciation and amortization) ratio was 1.7 times, down from 1.8 times in Q3 2023.
• For the full year, 2023 adjusted EPS was $3.91, up 20 per cent from 2022, driven by a 16-per-cent increase in net revenue and strong operating margins, partially offset by higher finance costs. Two thousand twenty-three adjusted EBIT as a percentage of net revenue was 10.4 per cent in Canada, 12.1 per cent in South America, and 4.9 per cent in the United Kingdom and Ireland (UK&I).
• The 2023 adjusted return on invested capital (ROIC) was 20.0 per cent, up 130 basis points from 2022, led by South America.
• Equipment backlog was $2.0-billion at Dec. 31, 2023, compared with $2.3-billion at Sept. 30, 2023, due to strong deliveries outpacing order intake in Q4 2023. In Canada and the UK&I, Q4 2023 order intake was higher compared with Q3 2023.

"Two thousand twenty-three was a strong year for Finning. We achieved 17-per-cent growth in product support revenue, 31-per-cent growth in power systems revenue and 20-per-cent adjusted return on invested capital, resulting in record earnings per share. We also ended the year with positive free cash flow, a strong balance sheet and a solid equipment backlog.

"I am proud of our team's resilience and dedication to our customers as we managed through some business challenges in the fourth quarter. The change in government, extraordinary currency restrictions and a major devaluation in Argentina led to disrupted business activity and a significant foreign exchange loss. While changes being made by the newly elected Argentina government have the potential to be positive in the long run, the Q4 environment was very challenging. We have taken action to significantly reduce our go-forward financial exposure and are taking a low-risk approach in Argentina in 2024. In Canada, the delayed start to many winter programs and the completion of several major projects reduced product support and rental activity. Despite these challenges, our increased earnings capacity remains strong and we are making progress on our strategic plan.

"We will continue to build on our strong 2023 results, empowering our people to drive customer loyalty and execute on the strategic priorities we outlined at our investor day. As we look ahead, 2024 will be a year of execution, where we are focused on growing our business in a moderating growth environment through driving product support, building full-cycle resilience by unlocking invested capital, and delivering sustainable growth in used, rental and power systems," said Kevin Parkes, president and chief executive officer.

For annual key performance measures, refer to page 6 of the 2023 annual MD&A (management's discussion and analysis).

Q4 2023 highlights by operation

All comparisons are with Q4 2022 results unless indicated otherwise. All numbers, except ROIC, are in functional currency: Canada -- Canadian dollar; South America -- U.S. dollar; UK&I -- British pound sterling. These variances and ratios for South America and UK&I exclude the foreign currency translation impact from the Canadian dollar relative to the U.S. dollar and British 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 was up 7 per cent, driven by higher new and used equipment sales. New equipment sales were up 22 per cent, with strong deliveries across all sectors. Used equipment sales were up 34 per cent, with strong sales across retail and wholesale channels.
• Product support revenue was down 1 per cent as unseasonably warm weather delayed the start of winter programs, reducing equipment utilization in the construction and mining sectors. The completion of several major projects has also slowed some construction activities in the near term. In addition, Q4 2022 product support included revenues related to the autonomy conversion of the 797 fleet of an oil sands operator, which did not repeat in Q4 2023.
• Adjusted EBIT was down 5 per cent. Adjusted EBIT as a percentage of net revenue of 9.7 per cent was down from 11.0 per cent in Q4 2022, primarily due to a higher proportion of new and used equipment sales in the revenue mix. Selling, general and administrative (SG&A) expenses as a percentage of net revenue were comparable with Q4 2022.

South America operations:

• Net revenue decreased by 4 per cent due to lower new equipment sales.
• New equipment sales were down 24 per cent, reflecting challenging market conditions in Argentina and lower sales to mining contractors in Chile.
• Product support revenue was up 5 per cent, led by mining.
• Adjusted EBIT was up 6 per cent. Adjusted EBIT as a percentage of net revenue of 12.6 per cent was up 120 basis points from Q4 2022, primarily due to a shift in revenue mix to product support.
• South America generated 2023 adjusted ROIC of 27.6 per cent, up 310 basis points from 2022.
• On Dec. 13, 2023, the newly elected Argentine government devalued the official exchange rate by 118 per cent from 366.5 Argentine pesos to 800 Argentine pesos for $1 (U.S.). As a result of prolonged government currency restrictions, including no material access to U.S. dollars starting in late August, 2023, the company's exposure to the Argentine peso increased and during this period economic hedges were not available. As a result of the growth in the exposure to the Argentine peso and the significant devaluation of the Argentine peso in the quarter, the company's South American operations incurred a foreign exchange loss of $56-million, which exceeds the typical foreign exchange impact in the region.

UK&I operations:

• Net revenue decreased by 10 per cent mostly due to the timing of power systems project deliveries and lower new equipment sales in the construction sector. Q4 2022 benefited from higher power systems project deliveries and HS2 deliveries.
• Product support revenue was down 6 per cent, impacted by slower activity in the construction sector.
• Adjusted EBIT as a percentage of net revenue was 2.7 per cent, compared with 4.4 per cent in Q4 2022, mostly due to a decline in net revenue. The proportion of fixed costs in SG&A on lower volumes and persistently high inflation contributed to lower operating leverage.

Corporate and other items:

• Corporate EBIT loss was $1-million in Q4 2023, compared with $26-million in Q4 2022, primarily due to lower LTIP expense.
• The board of directors has approved a quarterly dividend of 25 cents per share, payable on March 7, 2024, to shareholders of record on Feb. 22, 2024. This dividend will be considered an eligible dividend for Canadian income tax purposes.
• In 2023, the company repurchased 7.2 million shares under its normal course issuer bid at an average cost of $37.75, representing 5.0 per cent of its public float.

Board chair succession

Finning announces that Harold Kvisle will step down from his role as chair of the board of directors following Finning's 2024 annual meeting of shareholders on May 7, 2024. He will be succeeded as board chair by James Carter, an independent director, effective upon his re-election at that meeting, while the board identifies a longer-term board chair by Finning's 2025 annual meeting. Mr. Kvisle will remain on the board and stand for re-election at the annual meeting.

Mr. Carter joined Finning's board in 2007 and has served in various leadership capacities during his tenure, including as chair of the pension committee, the safety, environment and social responsibility committee, and the human resources committee. Mr. Carter has extensive experience in mining and the oil sands, including 28 years at Syncrude Canada Ltd., including 10 years as president and 18 years as operations chief.

"I am honoured to be appointed as board chair to lead the board during this important time while we execute on Finning's strategy announced at our 2023 investor day," said Mr. Carter.

Mr. Carter added: "On behalf of the board, I would like to thank Hal for his exceptional leadership and many contributions as board chair that helped advance and evolve Finning's strategy to better serve our customers, while delivering strong returns to our shareholders. We look forward to Hal's continued contributions on the board."

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. Actual outcomes and results may vary significantly.

Canada operations

The company's outlook for Western Canada is positive. While the completion of major pipelines has slowed some construction activities in the near term, it creates additional capacity to move heavy oil and liquefied natural gas to end-markets, and Finning expects to see increased activity in the energy sector and production growth going forward. The company's mining and energy customers are expected to increase spending levels, including investment to renew, maintain and rebuild aging fleets. In the oil sands, based on customer commitments and discussions, Finning anticipates strong demand for product support, including component remanufacturing and rebuilds.

The company expects continuing commitments from federal and provincial governments to infrastructure development to support activity in the construction sector. In addition, growing demand for reliable, efficient and sustainable electric power solutions across communities in Western Canada creates opportunities for Finning's power systems business.

South America operations

In Chile, the company's strong outlook is underpinned by growing global demand for copper, the recent approvals of large-scale brownfield expansions, and increasing customer confidence to invest in brownfield and greenfield projects. Mining activity is expected to remain strong, driving demand for equipment, product support and technology solutions.

In the Chilean construction sector, Finning continues to see healthy demand from large contractors supporting mining operations and the company expects infrastructure construction to remain stable. In the power systems sector, activity remains strong in the industrial and data centre markets, and the company is well positioned to benefit from growing demand for electric power solutions.

In Argentina, steps are being taken by the new government to rapidly address the fiscal imbalances in the country with the goal of ultimately stabilizing inflation and opening the economy for free import and export of goods in the long term. However, the near-term steps of significantly devaluing the currency, containing public spending, reducing subsidies and lowering spending on public works are driving continued challenging market and operating conditions. Starting in January, 2024, currency restrictions have been significantly reduced for new imports and economic hedging alternatives are once again available. In early February, Finning began a series of transactions to reduce its cash balance of Argentine pesos to zero, the cost of this program is being covered with support from the company's key suppliers. While the company's currency access, exposure and risk of losses are much lower today than in Q4 2023, new government rules and policies, as well as economic conditions, are subject to change, and Finning requires continuing support from key suppliers to return to profitability. The company is actively monitoring the new rules and policies and continues to evolve its operating model, taking a low-risk approach in 2024.

UK&I operations

With the HS2 project deliveries completed and low GDP (gross domestic product) growth projected in the United Kingdom in 2024, the company expects demand for new construction equipment to remain soft. Finning expects a growing contribution from used equipment and power systems as it continues to execute on its strategy. In power systems, the company expects continued healthy demand for primary and backup power generation, including in the data centre market and short-term capacity power for utilities and other applications.

The company expects its product support business in UK&I to remain resilient, driven by steady machine utilization, rebuilds and growth in customer value agreements.

Execution focus and building on strong 2023 results

Finning is committed to growing its business in 2024 while building more resilience into its operating model and progressing toward the investor day targets. The company is working to increase its invested capital velocity, with the goal to unlock over $450-million of capital by 2025 from Q2 2023. It expects its 2024 net capital expenditures and net rental fleet additions to be in the $290-million-to-$340-million range, reflecting the overall steady growth environment it expects in 2024.

To access Finning's complete Q4 and annual 2023 results, please visit the company's website.

Q4 2023 investor call

The company will hold an investor call on Feb. 7, 2024, 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 over 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.S. and Ireland.

We seek Safe Harbor.