Finning International Inc.

Mauk Breukels - IR Scott Thomson - President and CEO Steve Nielsen - EVP and CFO

Yuri Lynk - Canaccord Genuity Cherilyn Radbourne - TD Securities Ross Gilardi - BofA Merrill Lynch Ben Cherniavsky - Raymond James Ross Gilardi - Bank of America Merrill Lynch Christine Healy - Scotia Bank Chares Perron - Desjardins Capital Bert Powell - BMO Capital Markets Sara O'Brien - RBC Capital Markets

Thank you, operator, and thanks to everyone for joining us. On the call with me today are Scott Thomson, President and CEO; Steve Nielsen, CFO; and Anna Marks, Senior Vice President and Corporate Controller.

Following the remarks by Scott and Steve, we will open up the line to questions. After the Q&A Scott will make some concluding comments.

An audio file of this conference call will be archived with finning.com. Before I turn the call over to Scott, I want to remind everyone that some of the statements provided during this call and in the press release is forward-looking.

This forward-looking information is subject to risks and uncertainties as discussed in the Company's Annual Information Form under Key Business Risks. Please treat this information with caution, as Finning's actual results could differ materially from current expectations.

Our forward-looking disclaimer statement is part of our quarterly releases and filings. Finning does not accept any obligation to update this information.

Scott, over to you.

Good morning. Steve Nielsen our new CFO is with me participating in his first quarterly conference call.

I want to welcome Steve and to those who listening on the call we will ensure Steve gets out to meet you in the near future. Steve and I are in Regina this morning and we are pleased to announce the acquisition of the operating assets of a Caterpillar dealership in Saskatchewan.

This is an exciting growth opportunity for us expand our Western Canadian operations into neighboring territory and demonstrates our agility as we capitalize on this opportunity while continuing to focus on our operational excellent agenda. Before I get into the details of the Saskatchewan acquisition, I will provide an update on the actions we’re taking to navigate in the current macro environment and Steve will provide some color on our quarterly financial results.

Overall we had respectable results in Q1 in light of the macro environment. Adjusted earnings per share came in at $0.33 which reflects both the difficult market conditions in our two large regions and our swift and decisive actions to reduce costs in Canada.

In our South American operations, the cost reductions implemented over the last 18 months combined with resilient product support enabled us to actually improve our profitability on a much lower revenue base. In Canada, our profitability was similar to last year when you exclude severance and branch closure costs and since the cost reduction efforts were done throughout the quarter our results don't reflect the full run rate benefit that we expect for the rest of the year.

In Canada market conditions were extremely weak as we started the year. In some key product lines industry activity was down approximately 40%.

Product support in Canada was also weaker than we expected. The outlook for product support is uncertain depending on how much longer mining customers can differ overburden removal and maintenance.

With a similar experience in Chile last year, as product support decreased on a year-over-year basis during the first portion of the year before rebounding in Q4, which allowed for year-over-year growth. That gives us some optimism as we look forward in 2015.

Similar to our approach in South America last year, we have taken decisive cost reduction measures in Canada in response to slower market conditions, including reducing the size of our workforce in line with business volumes. Since the beginning of the year, we have eliminated more than 600 positions in Canada and 750 positions globally.

These are extremely difficult decisions but necessary in light of the business environment. We agreed with both our BC and OEM unions that there would be no wage increases in 2015.

This is consistent with measures taken to free salaries for all Canadian employees including executives. In addition we've accelerated the execution of our operational excellence agenda and have closed 10 facilities in Q1.

By the end of Q2, we will close five more facilities in Canada, including consolidating the two head office buildings we currently occupy in Edmonton. These decisions have already been communicated internally.

In the oil sands, we are optimizing our facilities footprint. We are moving the majority of our activity to Fort McKay, while maintaining dedicated customer support facilities.

In South America investment in copper mining continues to be impacted by a lower copper price and concerns regarding higher production costs. Our machine backlog remains very low across all sectors in South America.

We may see some improvement in the order intake once the Chilean government’s expected infrastructure projects are launched however we do not anticipate new equipment sales to pick up meaningfully in 2015. While copper production levels are being sustained mining customers continue to focus on reducing their operating cost and are deferring decisions on component purchases and major repairs.

Given mining activity levels, we believe that such a reduced spend on product support is not sustainable. We are encouraged by early signs that machine utilization might be improving.

South America continues to remain disciplined on cost and has taken the difficult decision to reduce approximately 100 positions in addition to the 600 reductions we've already made. We have laid off approximately 1,500 people across our region since mid-2013.

We’re closely monitoring macroeconomic conditions and will continue to reduce cost and invested capital to align with this expected activity level. We've a strong balance sheet and I believe the actions we’re taking now position us for positive free cash flow generation in 2015, and sustainable earnings growth over the long term.

As a result we are raising our annualized dividend by $0.02 per share. We also intend to launch a share repurchase program, which takes advantage of our strong cash position when our stock price is negatively impacted by broader market volatility.

Both of these actions speak to my confidence and the path we are on. I firmly believe that our continued focus on controlling cost and invested capital will enable us to deliver respectable results during a period of macroeconomic weakness and strengthen the organization to realize its full potential and demand returns.

Given the challenging macro environment we ourselves in, I am pleased with how the teams have responded with a laser focus on controlling what we can control. I will now pass it over Steve to speak to the results in more detail.

Our Revenues for the quarter were $1.5 billion, down 9% from last year, as a lower price of oil and copper resulted in reduced mining activity in Canada and South America. New equipment sales declined by 20%, impacted more significantly by the reduced demand from mining in South America.

In Canada new equipment sales decreased by 10% due to lower mining and constructions volumes compared to the first quarter of last year. As expected, the significant and rapid depreciation of the Canadian dollar relative to the U.S.

dollar contributed to increased pricing pressure in the new equipment market, particularly from used equipment and products that benefit from a weaker Yen. Product support was down slightly on a consolidated basis.

Lower than expected product support revenues in Canada more than offset an increase in product support revenues in South America and the UK and Ireland. In Canada a 14% decline in product support reflected lower part sales across most sectors, particularly in mining, as well as lower service revenues.

Oil sands producers and contractors have parked some of their fleets, in source some service work and our postponing maintenance. In addition demand for product support and construction has been reduced due to low equipment realization in idle fleets, most notably in Alberta.

In South America product support was up 3% in functional currency, driven primarily by higher part sales in mining. Our gross profit was down 8%, in line with the lower revenues.

The gross profit margin was 30.3% was up from 29.8%. Driven by the revenue mix shift higher margin and product support in South America which contributed 74% to total [Indiscernible] revenues versus 56% in the first quarter of last year.

In addition service profitability improved in Canada, demonstrating the execution of our operational excellence agenda. These were partially offset by lower gross profit margins in some lines of business, reflecting customer’s focus on reducing operating cost in a very difficult market environment.

As we communicated during investor call in February, our Canadian operations have taken decisive actions to align our cost structure with the sharp drop in activity levels. As a result we incurred severance cost of about $17 million, $15 million of which were in Canada.

In addition we recorded roughly $2 million of facility closure costs, also in Canada. In Canada our immediate SG&A cost savings were about $4 million in the first quarter as the workforce reductions and facility closures occurred throughout the quarter.

If we add the benefit of these reductions for the entire quarter, we estimate our EBIT margin in Canada would have been over 6.5%. As Scott said, we will continue to reduce our cost as necessary to align expected activity levels and streamline our branch network in Canada to achieve a sustainably lower cost structure.

After adjusting for severance and branch closure cost, consolidated EBIT was $94 million and EBIT margin was 6.2%. With a full quarter of savings, consolidated EBIT would have been about 6.6%.

Our EBIT performance in Canada reflected a sharp decline in mining activity, driven mostly by the unexpected drop in the price of oil. Demand from non-mining sectors has also been negatively impacted, particularly in Alberta and unlike the 2009 recession when mining product support remained relatively strong, the current down turn has put pressure on our product support business, notably in mining.

Canada's adjusted EBIT margin of 5.8% was all most slightly below the 6% earned in the first quarter of last year as a direct result of our quick actions to reduce cost. South America delivered solid profitability despite a 21% decrease in revenue and functional currency as revenue mix shifted further to product support and we realized the benefits of cost reductions taken in 2014.

EBIT margin of 9.3% was up from 9.9% a year ago. In the U.K.

and Ireland, the decline in EBIT margin to an unusually low 3.1% was attributable to a low margin power systems contract, which we are managing closely as well as severance cost. Our basic earnings per share was $0.31 compared to $0.39 a year ago.

Severance and branch closure cost reduced earnings per share by approximately $0.08. Partly offsetting this was a $0.06 positive impact on EPS due to a $10 million tax benefit from previously unrecognized tax losses.

As a result of this tax benefit our first quarter effective tax rate was only 5% compared to almost 25% in the first quarter of 2014. We continue to expect our effective tax rate to be within the 25% to 27% range on an annual basis.

Our balance sheet is very healthy, with net debt to total capital at 36% which provides us with great flexibility in today’s uncertain market environment. Free cash flow was a $232 million use of cash mostly due to higher equipment inventories in Canada.

This was expected as we said during our last call as we’ve been receiving inventory which was ordered prior to the sudden drop in demand. This increase in our Canadian working capital, combined with lower revenues and earnings reduced our invested capital turnover and return on invested capital metrics in the first quarter.

In South America, invested capital continued to decrease with functional currency, in line with lower volumes. Excess inventories in South America have largely sold through and the inventories are being managed to decrease activity levels.

We are executing a similar scenario now in Canada. As we convert inventories into cash throughout the year, we expect strong annual free cash flow generation in 2015.

With that in mind, we have initiated a share repurchase program and raised our annualized dividend by $0.02 to $0.73 per share. In addition, our strong balance sheet allows us to make this very strategic acquisition.

And on that note I’ll turn the time back to Scott.

Thank you, Steve. As I mentioned at the start of the call, we couldn’t be more pleased that we become the dealer in Saskatchewan.

After seven years, the Kramer family has decided to retire from the business and this provided us with an opportunity to expand our Western Canadian territory. The Kramer family has earned a great reputation at the Saskatchewan and have built a strong business.

They have left a legacy in province of Saskatchewan that I am committed to building upon. The Caterpillar dealership in Saskatchewan has about 475 employees across nine facilities.

In 2014, the acquired dealership business generated approximately $275 million in revenue. We are paying approximately $230 million for the business subject to working capital adjustments.

The acquisition will be funded with cash and will be immediately accretive to our earnings per share. The acquisition of the dealership in Saskatchewan is a compelling strategic fit.

The dealership is adjacent to our existing territory in Western Canada. Saskatchewan makes for a natural addition to our strong presence at DC, Alberta, Yukon, the Northwest Territories, and Nunavut.

The Western provinces share distinct economic, cultural geological ties and trade flows that are increasingly creating a more harmonized region. Oil and gas reserves, rail roads and highways tie the provinces together seamlessly.

The new territory diversifies our revenue base into attractive growth sectors. Saskatchewan has world class potash and uranium deposits.

Finning’s mining expertise from both the oil sands and Chile will assist in facilitating Saskatchewan’s resource development. The Saskatchewan economy has been performing well and is projected to continue to grow this year.

Over the last few years, Saskatchewan has been one of the strongest Canadian provinces and I’m convinced that will be the case for many years to come. There is significant customer overlap Saskatchewan, Alberta, and British Columbia.

We know many of the customers who do business in Saskatchewan today and have an opportunity to create seamless relationships across the western provinces. The dealership have talented, committed employees with well-established customer relationships and an understanding of the local market.

This combined with Finning’s infrastructure along the Alberta, Saskatchewan backbone and our product support capabilities will provide added value to customers. I’m so pleased to have all of Kramer’s employees join Finning and I’m confident they will enjoy being members of the Finning team.

Finally it’s an opportunity time to be making this acquisition. Over the last 18 months, we have put ourselves in a position to fund this acquisition with cash, and given the downturn in the oil price, the growth opportunities to assist Saskatchewan will assist greatly and allowing us to weather the macroeconomic challenges in front of us.

We expect this transaction to close in July 2015 and we have a dedicated team working toward the seamless transition. We’ve appointed Tony DeSousa as Vice President to lead the transition and the business.

Tony has over 30 years of leadership experience at Finning and he will be relocating to Regina. We have a strong track record of success, integrating Caterpillar dealerships most recently in Ireland and I’m confident in a smooth transition for our new employees and customers.

As part of our discussions with Caterpillar to become the dealer in Saskatchewan, Finning and Caterpillar decided we will transition out of Uruguay. Uruguay has been a good business for us with annual revenue of approximately $30 million per year.

During this transition period we will continue as Caterpillar’s dealer in Uruguay until the new one is selected. That will ensure continuity of unmatched support for customers.

In summary I couldn’t be more pleased with today’s announcement. This is a win for Saskatchewan as we’re committed to investing in the province.

This is a win for customers as the combined dealership strength will provide better service and a lower total cost of ownership. This is a win for shareholders as the growth in Saskatchewan will enhance shareholder value over the long-term, and finally this is a win for Kramer employees.

You’ve been part of a great organization but I’m convinced you will enjoy being part of the Finning team and on behalf of Finning, I want to be the first to welcome you. With that I will turn the call over to Mauk for Q&A

Operator that concludes our remarks. Before we go to the Q&A I want to point out that there are some slides pertaining to the acquisition on our Website finning.com.

We request everyone online that as a courtesy to your colleagues you ask no more than two questions when it is your turn and then please go to the end of the queue if you have more questions. Operator?

Scott, on the Kramer, to help us model this in, can you provide any commentary on the margin profile of the Company? And, secondly, any color on how this process unfolded and what led to Finning being chosen, as I assume there was probably other dealers that were interested in the asset?

So on the financial profile, we said it's accretive in 2015, and it's a little bit hard to gauge given the macro environment, but I suspect this in 2016 is in the $0.07 to $0.10 type accretion level for us. So given the revenues we have given you, you can figure that out.

In terms of the process, I think this is a logical fit. As you think about customers, employees, connection between Saskatchewan and BC and Alberta, I think it's a very logical fit from a customer perspective and employee perspective, and I suspect that was the determining part of how this all came together.

And we couldn't be more pleased and we’re looking forward to seamless servicing to the customers and welcoming the Kramer employees. It is a great day for Kramer and it's a great day for us.

Just to clarify, the CAD0.07 to CAD0.10, that’s, did you say 2015 or 2016?

2016.

I'll count that as one, I guess. And just a quick update, Scott, on the performance improvement initiatives, specifically as they pertain to service in Canada.

Are you -- is Finning profitable in service at this time, and is the current environment a hindrance to getting some of these changes through, or is it actually an opportunity to drive some significant change?

So on a service side I was really pleased in 2014, 2014 with the improvements. I think we made great progress.

We actually -- Steve and I were in Edmonton last week going through the whole service agenda and I’m convinced we continue to make great progress. And then on the oil and sands part of the business, we’re making money on service in all parts of or operation, and providing great service level.

The customer loyalty, improvement year-over-year in Canada is dramatic. So I feel really good about the service excellence program.

I think the oil sands business, when you have a big downturn like this creates some issues around labor utilization and asset utilization and that’s what we’re working through with coordinated activities in Fort McKay and unfortunately we had to make some difficult positions on headcount reductions as well on the oil sands. So in summary, I feel good about it year-over-year.

We’ve improved the margins on service, but as you know, it's a journey.

Scott, I just wondered what your read was on how customers and competitors have reacted to the downturn in Canada? Has it been sort of an orderly we've been through this before kind of response or do you think your Q1 results reflect a bit of panic and maybe a reaction that’s been a bit overdone?

I must say I was surprised by the product support reduction of 14% year-over-year, and actually now that you see in the industry results come in, that’s pretty consistent with what you’re seeing throughout the industry. We a saw reduction last year and the first portion of the year but it wasn't to the extent of 14%.

Juan Carlos and I have done a lot of work with the team to figure out what’s driving that. And I think there is two big issues.

One is maintenance deferrals. And you've got I think some people pushing out that maintenance cycle.

And then second we've seen a slowdown and overburden removal, and so as a result you’ve seen quite a big portion of trucks parked up in the oil sands. There’s 97 trucks.

So is that sustainable? No.

But is it a quarter, two quarters, three quarters? I’m not sure.

But I think the Finn’s result we that saw last year gives pretty good guidance. First part of the year, it was down on functional currency and then it rebounded in the fourth quarter, and again we saw pretty good results in the first quarter.

So I hope that that gives you insight or not but it was a little bit unexpected to me.

And, can you just clarify the cost savings that you're expecting flowing from the workforce and facility closures, including those that will occur in Q2?

I’ll let Steve take that question.

As Scott mentioned, we've reduced a significant number of people in the first quarter and well, we have underway to take more people out in the second quarter but we are almost complete. We're looking at an impact on our EBIT margin in Canada, that with the full run rate savings would be about 6.5%, and on a consolidated basis about 6.6%.

And I think, I mean so that 50 million severance method quarters probably will be a number in the second quarter as well?

And we expect that severance in the second quarter to be in the 7 million to 8 million range across the company.

And I want to give so in globally, since the start of the year I think head count reduction is been about 750 people and that's all been communicated internally already. So I think the second quarter will show a pretty good indication of run rate savings subject to this severance, the one off seven.

Okay. So just to clarify.

When you're saying that the margin in Canada would have been 6.5% in Q1, is that versus the EBIT margin in Canada adjusted for severance and facility costs?

Yes. That would be adjusted for the severance and facility cost as well as a full quarter savings.

So as those reductions and closures were made, they were made throughout the quarter but more heavily towards after the midpoint of quarter. So all things considered, on a full run rate basis we would have seen the EBIT margin for Canada about 6.5% and companywide about 6.6%.

Good morning. Perhaps you can talk a bit about some of the synergies you think you can achieve with Kramer, and maybe talk a bit about the risk here with this acquisition that it will sidetrack or be distracting to the rollout of this operational excellence program in Canada, and do you expect that you need to roll out an operational excellence program at Kramer?

So, on the distraction piece no is the answer. I actually think there’s a great opportunity here on supply chain for example to coordinate activities and make sure we’re coordinating effectively with backend to cap, and I think that's a great opportunity for that's what operational excellence agenda.

We’ve made so much progress on the part supply chain here in the last year, and I think that will be a great addition. In terms of your question on synergies, there’s obviously ways we’re going to capitalize and to provide better service to customers and that Alberta-Saskatchewan back bone where we have a great infrastructure program will be really helpful.

But I want to emphasize this situation was not done for synergies. We are very bullish on the outlook for our Saskatchewan resource development and suspect when we look back at this over a five or 10 year period, we will have more people and more distributions assets in the province.

And so I don't want you to think this was a synergy driven acquisition. This was a growth outlook decision, and a very strategic decision.

Okay. Maybe just looking at the decline of product support in Canada, if you go back at what happened in South America, originally it was down for basically a year before we started to see things improve.

You're expecting a similar pattern in Canada?

No is the answer, not to the extent of 14% decline. And I think if you go back to Finn’s quarter-over-quarter, first quarter last year was down 6% or 7% and then by the fourth quarter I think we were up pretty significantly in the first quarter this year we’re up pretty significantly.

Year-over-year 2014 versus 2013 in South America was up on a product support basis as I recall. So as we look at Canada this year, I don't want -- the outlook is uncertain.

So I don't want to say I feel confident about the price support outlook on the back of a 14% decline, but as we think of those minors ability to differ overburden removal and to park trucks while production is increasing, and as you look at all of the public releases from the old time companies, the production is up pretty significantly, I find it hard to believe that the product support should will be down that much for sustainable period of time.

Can you elaborate on the branch closures? Where have you -- presumably you're shutting these branches, or maybe as you said in Edmonton consolidated a few.

But just regionally, what have you done? What was the rationale?

And how does this help return on capital in terms of the denominator in the equation?

Sure. So, in the first quarter we closed the Edmonton Truck shop, the Rocky mountain house branch and four Park Depots in [indiscernible], and then very strong -- we closed the branch in Tumble Ridge and [indiscernible], rental stores and the way we looked at this is one how do we maintain appropriate customer service from branches that close by, but how do we optimize that network for the type of activity that we have going forward.

And I think there is opportunity here to reduce the infrastructure in the fixed assets in the region, while at the same time providing in fact improving the service to the customer, and this does not mean that we will take away mechanics from the regions. This does not mean we’ll take away sales people from the region, but to have the infrastructure in the region in the parts distribution network in the region, I think it’s costly given the current environment is when you think about the second quarter, these have all been announced internally.

So I'm not announcing anything internally, or externally, but there is some branches in Rebel Skill [ph], Castlegar, Squamish, and the Hay River branch in Northwest territories that will also be closed. And then we’re consolidating the head office in Edmonton.

I think that’s an important decision to consolidate the head office. I think it demonstrates that it’s not only in the field, but also that we’re taking some pretty significant decisions in the head office functions to align with the business activity that we have.

Ben, this is Steve. I would add to that the catalyst was the current environment but this isn’t to be foreseen as a move, where as demand returns we would have to re-expand and re-invest.

It was responsibly done to make the overall distribution network more effective for a sustainable period, including when it rebounds.

How much capital does it take out?

I was just going to say, a number of the facilities were leased. Some are owned.

We won’t be shuttering and keeping. We will be terminating leases or subleasing and disposing loan properties, but I don’t have a breakdown number.

So we can get back on that question.

But actually it’s beyond -- it’s beyond the capital. It’s a simplification of how we provide service and how we provide supply chain.

And so this is not a decision made for relative purposes. I don’t want anyone to think this is a financial decision.

This is how do we build a sustainable distribution network for the future success of this company. And we had two guys use a network, and we could provide as good a service to our customers with a more centralized approach and that’s the way we thought about this.

This is not a roll up driven decision.

And is there an opportunity to do this in Saskatchewan?

No is the answer. I think the growth -- actually I shouldn’t say that, because we’re just transitioning with the business, but what I would say is nine facilities in Saskatchewan.

There is a lot of business opportunity. When we look back five or 10 years from now, I suspect we’ll have more employees, more revenue and more distribution infrastructure in the Saskatchewan province.

I think there is a great opportunity for us to coordinate more along that Saskatchewan and Alberta back bone. I think that is definitely something that we will work together to do but I wouldn’t be expecting branch closures in Saskatchewan.

And my second question could be about that acquisition. What’s the peak revenue been for Kramer?

Frankly, I’m a bit surprised that the number isn’t higher in that market, just given the growth that Saskatchewan has had, and I’m aware of what a few other equipment-type companies do in the province. Is the market off a little bit?

Are the pins off for Kramer? What would explain that number being where it is?

Or am I just overstating the opportunity?

Ben, Kramer is a private company. So I’m not prepared to share beyond what we talked about in 2014.

I think the Kramer organization has done a very good job in the environment in Saskatchewan. They are very well respected.

They’ve created a great legacy. I do think there is great opportunities.

You think of resource development in Saskatchewan with potash with uranium. So I do think there is a great opportunity for us.

But I do not want you to think in any way that the Kramer family hasn’t done a great job running that business. I think they’ve done a great job and our job now is to build on the legacy that they have established.

Part of that includes a presence in the Ag market with Challenger. How substantial is that for the business there and is that an opportunity you are interested in sort of growing and maybe expanding into the Alberta region?

I think the key for us is going to be how we do sale Cat products, through to the agricultural market. And that is going to be the key opportunity for us.

And frankly that’s not just a Saskatchewan opportunity. That’s a Western Canadian opportunity.

And the Ag piece of business is not a big part of the overall Kramer business. I think they had made some strategic moves a couple years ago on that front.

So I’ll leave it at that.

I’m sorry I got cut off earlier. A couple questions.

First, Scott, I just wanted to hear what’s the strategy for coping with the excess inventory in Canada? Have you stopped buying from Cat?

Are you reducing prices? And did your competitors that are aligned with other OEMs experience the exact same thing, do you think?

Hi, Ross. So we do have excess inventory in Canada.

And when you look at the overall parts inventory, I don’t feel that way. I think we’ve done a great job on the part side, and actually trends have increased through this location.

And I think that’s a credit to the team. On the equipment side I also think we've done a good job, frankly.

We stopped ordering from the factory in November of last year, but as you know, the order for six months, seven months in advance. So we still see an equipment arriving, that has been declining through the back half of the year.

but that combined with the industry downturn and reduction in industry activity up to 40% is some product lines by-the-way. So we had pretty significant reduction in situation where we have too much equipment inventory.

Now to put it in the context however, if you look at this year's free cash outflow of minus 235 when you compare it to last year of minus 150, it is not a significant difference. So I feel pretty good about what the team has done and how fast they have reacted.

And a similar process to what happened in South America, and we will see in Canada over the next 12 months to 18 months. And if you look at the free cash flow we generated, I think part of what we generated over the last 18 months was because of our internal improvements, but also part of it was because of inventory destocking.

And we got to a great level of inventory, preparing us now for the upturn when it comes. And in Canada I suspect we will go through that same process.

We have to be a little bit careful, because we don't want to -- we want to make sure we’re ready for new opportunities, but we also have to be cognizant of the fact that with the new Kramer combination, we also bring inventory from them as well. So I think how long it will take to work through this, we will have to see.

It will be dependent on industry activity and market share, but I am confident over the 12 to 18 months you are going to see pretty significant free cash flow out that Canadian business.

And then could you talk a bit more about your share repurchase comments and what type of regulatory approvals they are subject to? And should we assume, given that you announced the Kramer acquisition, that your future share repurchase will be on the smaller side, more to the level where you're maybe offsetting option dilution versus a more substantial buyback of say 5% to 10% of the market cap?

So we have filed with the regulators either today or tomorrow. And there will be a press release on that to implement the NCIB.

Clearly when you think about uses of cash, acquisitions, and this is an acquisition, our one use of cash. But as I think about that free cash flow generation over the next 12 to 18 months in Canada and the excess equipment inventory we have, we will generate cash and that will provide us with the opportunity to both the acquisition of Kramer and also share repurchase.

Now is it going to be as large as it would have been without the acquisition? No.

And will we be thoughtful about when we do it? We want to make sure the cash is generated before we do too much.

But it will as I said last quarter, by the end of 2015 we will have done both in relatively significant size.

So in terms of -- like your historical free cash flow pattern has really been more fourth quarter weighted. So given your comments right there that even if you announce an authorization, should we assume that this is going to be very heavily back-end weighted for 2015 in terms of the program really scaling up?

I think we’ll want to see the free cash generated before we expand ourselves too much. But we’ll progress throughout the year but you’re probably right.

We’re probably more backend weighted than second quarter weighted.

First question on rental in Canada. It was really weak in the quarter, down 26%.

You had initially said that you plan to expand the fleet this year to capture market share, but just curious if those plans are now on hold given the market conditions?

So rental was low in Canada and I guess not unexpected. The rental business, when things are good, it goes pretty quick and when things are bad it's one of the places where people pull back.

So 16% or 26% down, $16 million is a pretty significant impact on the results for the quarter. What I would say is it’s pretty consistent with everything we’re seeing in Western Canada from rental competitors.

And then second, I’m actually quite pleased with the disciplined approach we've taken over the last two years as we've been building the capabilities in the rental business has meant that we don't have a lot of excess fleet. There will be some frankly that we’ll have to deal with in the second, third and fourth quarters, but it's not overly significant in the whole context of the things.

And then just second, the new equipment sales in Canada being down 10%, I actually don't view that too bad considering the market conditions that you are going through. Is that largely because you are delivering on your backlogs through the quarter and you'll see more of an impact in Q2 and going forward?

No that’s not the reason. These were real sales during the quarter.

I guess I would say a couple of things. In some industry segment they were down much more than 10%.

So I would say that as point one. And in some industry segments it was up pretty significantly.

So power systems was pretty strong in the quarter. What I would say is that we went through the quarter.

It got stronger each month from an order intake perspective, and we’re feeling that same way in April as well. So I guess the 10% did surprise me a little bit as well given the industry activity, but you kind of have to go product by product given any sense.

Good morning, gentlemen. This is Charles Perron filling in for Benoit.

Thank you for taking my question and congratulations for the acquisition. The first question, I'm curious to know if you would expect any impact for the oil and gas industry and for your Company in general from last night NDP win in Alberta?

Great. Thanks, Charles.

So, for Finning, we are a pretty global company and we operate with lot of governments across all our territories and we’ve found a way to do that constructively in each region we are in. So I think we’ll clearly have a good relationship with the new government and find ways to work with them.

So no, I don't think it's going to have a significant for us. And I think time will tell.

I’ve spent some time in Alberta as you know and it's a pretty resilient population, and I think the new government will do the right things to make sure the economic growth is rebounded in Alberta.

Okay. And also, can you provide more details about the reasons to transition out of Uruguay, and if you also are considering maybe exiting other countries in the area in the future?

So on that last -- no is the answer to considering other exits of territories. We’re extremely committed to the South America business.

That's a very important strategic part of this business. The Uruguay decision was done in the context of Saskatchewan.

So as we talked about the Saskatchewan opportunity, Cat and Finning agreed that we would transition out of Uruguay. And from a shareholder value perspective, when you think about the addition of a $275 million business and with the exit of the $25 million business, I think it's an accretive acquisition for shareholders, and I wouldn't expect any other exits from Finning.

Thanks. Scott, how prevalent is in-sourcing in Alberta?

And I'm wondering what kind of response you’ve had to have on your labor rates generally for service across your system?

Right. Okay.

I don't think that service in sourcing saw a little bit of that but service in sourcing was not the driver of the negative 14%. I think point one.

Point two, as you think about labor rates and margin pressure on parts, that is a reality we’re dealing with. But again that wasn't the driver of the negative 14%.

This was mostly a volume type conversation back to the over burden and maintenance. That being said we’re in a lot of discussions.

We are trying to be constructive. We’re trying to help our customers and those discussions are ongoing.

We’re trying to clearly create win-win situations where we are able to capture more volume in the Canadian business for those margin pressure type discussions, but it wasn't the driver of the negative 14% of price important in Q1.

Okay. Thanks for that.

And just with the reductions in Canada, I have got to bet for Juan Carlos and his group that morale is probably fairly challenged. And I'm just wondering how you and the group are dealing with that in the context of accelerating your operational excellence agenda?

Yes. Thanks Bert.

I think whenever you go through the type of situation we’re going through right now, it challenges morale. There is no getting around that.

And I think the way Juan Carlos and team have handled that has been extremely constructive and then we've been very transparent with all our employees, town halls on a really regular basis. My Semitism employees understand what we are dealing with and the fact that Juan Carlos is out in front and being very transparent, I think they really appreciate that.

I think the combination of Kramer with Finning I think is going to be a great boost to morale of the Canadian employee workforce. This is something that BC and Alberta employees have seen as a national fit for a long period of time.

And so I'm very pleased that we could do this because I think it demonstrates to all of our employees that we’re on the right path and I think that's going to have a big impact on our employee base.

Just last one quickly; was there any contribution to EBIT in South America from Uruguay?

Well, there would have been but I don't the answer, I don’t the EBIT margin particularly in Uruguay but it's a $30 million business.

Hi. Good morning.

Can you help us balance out the EBIT margin expectation in Canada? It sounds like on a normalized basis the 6.5% was pretty positive for Q1 in light of the product support falling off so much, but now you're entering with higher levels of inventory a more competitive environment on the new equipment side.

Just wondering how you are thinking Scott about the trend of EBIT margin into the remainder of the year with these backgrounds?

I think when Steve or when we gave you the context of greater than 6.5% with full run rate and what we’re demonstrating is that the team has taken really decisive action here, and relative to first quarter last year, which was a much stronger macro environment, profitability is up year-over-year. Now first quarter last year wasn’t our best quarter of the year, but I think it demonstrates that the team is on top of this and taking swift actions.

As we move forward to the year, I think you are going to see -- my own personal view, I think you are going to see improvement in industry activity. And the oil price is improving significantly little bit, Canadian dollar is weak, which helps our customers, differential is tighter.

That being said, I don’t think we’re going to see any big capital projects. But I’m hopeful that you are going to see a little bit of an improvement in both industry activity on the equipment side and also on the product support side.

I can’t see a 14% type reduction year-over-year continuing. That being said, I’m not going to give a forecast on profitability, because it’s going to be completely dependent on industry activity and you probably have a better sense or I’ve got a sense on that as I get.

But then just commenting on the increased inventory level and more competitive environment, you talked about the free cash flow ability, but in the last cycle downturn that came at the expense of margin. I'm just wondering do you feel the need to right size the inventory at the expense of margin?

Absolutely not. And I think if you look at South America last year we did a great job improving on the margin and destocking on the inventory.

And when you look at the Canadian business this year, this isn’t big mining equipment inventory. This is quick to move core inventory that when -- it’s going to be relatively easy to move.

It’s just the matter of time and that time will be dependent on our market share and industry activity, and I don’t feel the need to be out discounting equipment to get through that inventory, particularly given the strength of our balance sheet. The balance sheet is extremely strong and I don’t -- we’ve got a lot of flexibility on that regard.

Okay. And maybe on the Kramer acquisition, how many family members were involved in the business and how integral were they to the operation?

I'm just wondering how many people you have to replace if the whole family is retiring.

So Tim Kramer was the head, and he had run that business for 23 years. And he will be retiring.

And so the replacement for Tim will be Tony de Sousa, and Tony has been with Finning for over 30 years. I’ve spent a lot of time with Tony.

He ran a big part of our Alberta operations. He’s actually been in BC now, in BC, Alberta and Saskatchewan.

He’s moved his family to Regina and we’re going to continue to have the Saskatchewan head office in Regina. The teams met late last night after markets closed and I think it was a great introduction for Tony and Juan Carlos to the team.

So I think we’re -- from an integration perspective we’re well placed and on the way and I think it will be pretty seamless.

So, in terms of like head of sales and stuff, do you have other positions that you need to fill?

I think Kramer is a fully functioning Company that had great people and have done a great job. So I’m not sure what you are pushing on I mean it’s…

I'm just wondering, is it just Tim Kramer retiring or are there other family members?

Tim is the dealer principal. He’s been 22 years.

His faster Don Kramer had been with the business for 15 years before retiring and passing the baton to Tim, and then before that it was Don’s father. So it’s I think it’s setting a history here of the Kramer family being the dealer principal.

And so that’s going to be the change as Tim retiring, not anything else in the organization. All 475 employees are joining Finning.

I just had a follow-up. So Scott, could you give a little more color on your comments on gross profit in Canada, and increased competition challenging pricing dynamics tied to the Canadian dollar?

Can you just flush that out a little bit more on what exactly is going on? Do you view that as more of a short-term issue or is that sort of the new normal?

I think the rapid devaluation of the Canadian dollar in the quarter, and we did a great job on supply chain side, hedging the equipment purchases and so we didn’t see the same sort of impact we saw first quarter last year on the SG&A line. But when you think about the revenue line and you have that evaluation, there is a natural move from new equipment to used equipment.

And you’re seeing that with the Ritchie Brothers auction. So that’s one aspect of it.

And I think the good news about the Ritchie Brothers auction which just happened last week, the pricing was pretty strong and there was a modest uptick in non-Alberta purchases. So that equipment is getting out of the region.

The second aspect of that is when you can combine Canadian dollar and then also yen devaluation, some of your competitors become a little bit more competitive. And we’re definitely seeing that in the market in the first quarter.

And is that in one particular type of equipment? Are you seeing that kind of across the board and how new of a dynamic is that?

With respect to the yen.

The yen used dynamic is pretty new because that’s kind of happened over the three months or four months with the decline in the oil price. We’ll work our way through that because the used pricing has stayed pretty strong and so we’ll work our way through that.

The yen devaluation has been going on a for a while and it’s made some of our competitors internationally very, very competitive. And that combined with the mining downturn across the world has I think changed the dynamics a little bit on the competition side which probably will be with us for a while until the mining industry picks up a little bit.

Can you give a rough split of product support versus new for Kramer in 2014?

I can't Ross. You may have to wait till get it in our financials in the next couple of quarters.

Thank you operator. So in summary we expect current market conditions to prevail for some time.

So we will remain focused on controlling our expense levels and invested capital. We will continue to deliver respectable results in 2015, but more importantly by controlling costs and invested capital, we are positioning the company for future growth.

The acquisition we announced today is an important step in this journey. Thank you very much for participating on the call, and I look forward to speaking with you again next quarter.