Finning International Inc.

Mauk Breukels - IR Scott Thomson - President and CEO Steve Nielsen - CFO Anna Marks - Senior Vice President, Corporate Controller

Michael Doumet - Scotiabank Cherilyn Radbourne - TD Securities Yuri Lynk - Canaccord Genuity Jacob Bout - CIBC Benoit Poirier - Desjardins Bert Powell - BMO Capital Markets Michael Feniger - Bank of America Juliane Szeto - RBC Capital Markets Ben Cherniavsky - Raymond James Maxim Sytchev - National Bank Financial

Thank you very much, Operator, and thanks, 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, Corporate Controller, and Treasurer.

Following the remarks by Scott and Steve, we will open up the line to questions. An audio file of the conference call will be archived, at 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 are 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.

Thank you, Mauk. Good morning, everyone, and thank you for joining us.

Before I begin with the first quarter review, I want to mention that our thoughts are with our employees, customers, and the broader community in and around Fort McMurray. Finning has 850 employees in that region.

Our priority remains on ensuring their safety as severe wildfires continue impact that area. We've been working to provide our people and their families with accommodation, food and water, and whatever assistance we can during this crisis, and we are developing longer-term relief plans and will continue working with our employees, customers, and the community in the months to come.

Moving now to our results, during our Annual General Meeting yesterday, I spoke about our achievements in 2015 as we continue our journey to transform our operations and emerge from this downturn a stronger Company. We continue to build on this positive momentum with a strong start to 2016.

The results we posted for the quarter, with EBITDA of CAD118 million and earnings of CAD0.19 were in line with our expectations and reflect our continued solid execution, as well as a rapid response to align with tough market conditions. Free cash flow generation exceeded our expectation and reflects the increased capital discipline with have in the operations.

I am particularly pleased with the performance in our Canadian and South American operations and the strong free cash flow we generated in both areas. Taking a closer look at our Canadian operations, the highlights were twofold: lower SG&A and increased revenues.

We previously stated that we were aiming to reduce permanent SG&A costs by CAD150 million compared to 2014 levels. We now expect to exceed this target, due to our additional efforts to reduce costs in 2016 as well as our ongoing efforts to optimize our operations to increase our effectiveness and efficiency.

An important point to consider as we transform our Canadian operations is that our facility footprint, our workforce, and our SG&A costs are each down about 20% in 2016 relative to 2014 levels. This is a testament to the Canadian team's ability to deliver against our objectives.

In terms of revenues, strong equipment sales accounted for the revenue increase in the quarter, and we look forward to these large equipment packages driving product support for years to come. We were also pleased to see parts revenues up in mining.

Another positive in this environment is our team's ability to win deals. In a shrinking market, we are building a significant market share across all provinces.

As an example, our team in Saskatchewan has more than doubled market share since taking ownership, and this was achieved at the same time that the overall equipment market came down by 25% in that province. This is a fantastic result and, moving forward, we will continue to focus on gaining share as well as improving profitability.

Our objective remains to return to the 6% to7% EBIT margin range in Canada by the end of the year. As expected, Q1 was a little light, given the significant proportion of low-margin revenues in the mix and the timing of the workforce reductions which took place at the end of the quarter.

We expect margins to improve in Q2. First, we will see a different trade-off between volumes and margins.

Coming off very strong equipment volumes in Q1, we expect Canada's Q2 new equipment sales to be down substantially from Q1 and likely softer than the back half of last year. Second, we will realize incremental benefits from SG&A cost reductions.

In South America, we are seeing another wave of cost reductions from mining customers and lower product support volumes. In response to lower-than-expected activity levels, I am pleased with how the team stepped up to the challenges, reacting quickly to reduce the workforce during the quarter and maintain profitability.

Looking ahead, we expect to realize the full benefits of our cost reduction measures while continuing to proactively manage costs and improve operating efficiencies. This will support us in preserving profitability.

In the UK, Kevin Parkes has made an excellent transition to lead the business, with an energized and motivated management team supporting him. I've been encouraged by the urgency the team has brought to improve profitability and supply chain velocity.

They are focused and committed to reshaping the business, with the aim of lowering the cost to serve our customers. We will achieve this by optimizing the facility network and streamlining the organizational structure.

While these actions will take a few quarters to implement and will result in severance and restructuring costs, the UK will return to historic profitability levels by the end of the year. Overall, our ability to execute in this environment and the strength of our business model gives me confidence as we continue to focus on sustainable value creation for our customers and our shareholders.

We have made significant progress to advance the operational excellence agenda across our operations. Safety, market share, supply chain, service, and customer loyalty are all showing meaningful improvements, despite the significant capital and cost reductions throughout the business.

This gives me confidence that the changes we are making now are sustainable when activity picks up. Supported by these efforts and our resilient business model, we expect to generate strong free cash flow in 2016, which not only enables us to maintain our strong balance sheet and secure our dividend but also provides considerable financial flexibility.

I'll now turn it over to you, Steve.

Thank you, Scott. Good morning, everyone.

Overall, we are very pleased with the quarter and the discipline with which we are executing on our commitments. Our focus on tightly managing working capital, particularly improvements in procurement planning, and increased capital discipline translated into positive free cash flow of CAD30 million in the first quarter.

This was a strong showing, given that we typically use cash at the start of the year. In fact, the last time we generated positive free cash flow during the first quarter was in 2010.

New equipment inventories in Canada are down nearly CAD70 million from year end, as we continue to sell through excess inventories accumulated in the downturn. We continue to expect our free cash flow to be modestly above CAD300 million for 2016.

Market conditions remained challenging across all of our territories. Customers in all segments continue to reduce operating costs.

Price competition has intensified, putting pressure on margins. Yet, as Scott indicated, we have improved our customer satisfaction and our market share.

Sequentially and year over year, revenues were down 3%, which is better than expected, principally due to strong equipment sales in Canada. As we announced in mid-February, we responded to the market conditions by continuing to transform our business and reducing our workforce, resulting in CAD17 million of severance costs in the first quarter.

To date, 435 employees have left the organization. Since most of the workforce reductions took place at the end of the quarter, we will realize the full cost benefits in the second quarter.

The Canadian results were better than expected for the quarter. As mentioned, sales were strong, driven by a number of large equipment packages at lower margins.

This lifted our revenues and contributed to profits and strong free cash flow, but did reduce our EBIT margin to 4%, excluding severance and restructuring costs. While the equipment market size had decreased by over 40% year over year, we have gained market share, albeit at lower margins.

By doing so, we exceeded our gross profit expectations in the first quarter and create significant product support opportunities. Product support revenues were consistent with the prior year quarter.

We saw good parts volumes in mining, including component rebuild activity. This was mostly driven by the oil sands.

Service revenues and parts sales in other sectors were down, particularly in construction and oil and gas in Alberta. On balance, product support was better than expected and is showing resiliency.

The used equipment market in Canada was very active, but margins were under significant pressure due to abundant supply. Consistent with the overall industry, rental markets continue to be particularly challenging, which negatively impacted Canada's results.

Our focus remains on transforming the Canadian business for sustainable profitability over the long term while supporting our customers through the downturn. We've taken thoughtful actions to reduce Canada's cost structure in a sustainable way.

Our SG&A in Canada was down 9% from the first quarter of 2015. Our actions in the second half of 2015 did meet our commitment to reduce costs in 2016 by over CAD150 million from 2014 levels.

With the additional workforce reductions and SG&A initiatives being implemented in 2016, our workforce in Canada will be down by about 1,300 people, or 22%, since 2014, and our facilities footprint will be scaled back by over 600,000 square feet, or 20%. We now expect permanent, fixed cost savings to well exceed our CAD150 million target and reduce Canada's annual SG&A costs by about 20% from 2014.

The team is executing very well in this tough and competitive market to win deals, grow market share, increase customer loyalty, and deliver improved profitability, going forward. As Scott mentioned, our Saskatchewan team significantly improved market share during the downturn and is on track to deliver steady revenues, strong free cash flow, and contribute, as expected, EPS in the CAD0.07 to CAD0.09 range.

South America delivered respectable results. Excluding severance, EBIT margin was 8.9%, despite persistent market weakness across all sectors and lower product support revenues.

We saw another step-down in mining product support from the fourth quarter of last year, as customers continue to reduce operating costs and more machines are being parked. Roughly 20% of mining fleets in Chile are now idle, with some mines working at 50% capacity.

This has reduced the consumption of mining parts. Service revenues were negatively impacted by in-sourcing of labor and a weaker Chilean peso relative to the U.S.

dollar. The team responded quickly and took out another layer of costs, including workforce reductions.

The cost savings have not yet been fully realized, as the workforce reductions occurred at the end of the quarter. Looking ahead, the South American team is proactively managing costs, improving operating efficiencies, and capturing product support business with the aim of maintaining solid profitability levels during the prolonged downturn.

In the UK, our key markets have softened significantly, particularly in the coal, steel, and oil and gas sectors, resulting in reduced equipment sales and margins and lower product support revenues. During the quarter, we completed a detailed review of our power system projects and contracts in the UK, and based on changes in estimate and new information we made the decision to report certain adjustments that reduced the profitability of those contracts by CAD5 million.

Having identified the issues, we are focused on improving project execution in power systems. As Scott mentioned, the UK team is in the process of executing a plan to reduce our cost to serve and improve our asset velocity.

This will take a few quarters to fully implement. However, we did see a sequential improvement in EBIT margin from the fourth quarter of 2015, excluding severance, higher provisions on power systems, and other significant items.

We expect continued progress as we begin to realize benefits from the transformation initiatives currently underway and anticipate that our UK and Ireland operations will return to historic profitability levels by year-end. Our invested capital is down CAD55 million from the fourth quarter, excluding foreign currency translation impacts.

This was mostly due to lower inventories and a decrease in rental assets in Canada, offset by seasonal inventory purchasing in the UK. We expect to continue reducing surplus inventories through the year, predominantly in our Canadian operations.

Our balance sheet is in great shape, and our adjusted net debt to EBITDA ratio remains at 2-times, the same as at the end of 2015. The resiliency of our business model and the transformational changes we are implementing throughout the organization will support our EBITDA and strong free cash flow, going forward.

This secures our dividend, providing shareholders with an attractive yield, at a current rate of CAD0.73 per share. We do still consider share repurchases at the right price to be a good use of cash.

However, we will continue to be prudent with our cash reserves, given the tough markets and the timing of our cash flows typically towards the back end of the year. Overall, we are very pleased with our first quarter results, given the operating conditions of the market environment.

We continue to manage what we can control and transform our business to deliver sustained improvements in customer and financial results. I will now turn it back to Mauk.

Operator, that concludes our remarks. Before we go to the Q&A, we request everyone on the line that, as a courtesy to your colleagues, you ask no more than two questions when it is your turn.

And please go to the end of the queue if you have more questions. Operator, can you please open up the lines?

I'd like to focus around product support. I know one quarter doesn't make a trend here, but we saw some strength in product support in Canada.

How would you characterize the growth in this quarter? And you've previously indicated, and I believe you continue to indicate, that you're experiencing deferrals in the business.

So, we've seen a little bit of a recovery in commodity prices, maybe not enough, but are you seeing any light at the end of the tunnel at this stage?

Let me take it in a couple of ways. So, one, from a product support perspective, we were really pleased with the Canadian results in the quarter and somewhat surprised by the strength, to tell you the truth.

I think, on the other hand, we were a little bit surprised in the weakness in the product support in South America. And so, maybe we should address both of them.

The Canadian business, I think that you have seen an uptake in commodity prices. You've also seen a strengthening in the dollar.

So, I'm not sure our customers are feeling the full impact of the higher commodity prices right now. And what we saw in the quarter was a lot of exchange activity, which really helped on the product support side.

And I think that's going to be a trend, going forward, when you think about the lack of capital to buy new equipment but the requirement to exchange out components to increase productivity. So, our OEM facility, as an example, was really busy during the quarter, which I think it's positive signs for us, going forward.

The non-oil sands piece of the business continues to be very weak from a volume perspective, both on the product support side and the new equipment side. So, I don't, I'm a little hesitant, given the macro hasn't changed that much, to call this a trend, but I do agree we were pretty pleased with the product support in Canada in the first quarter.

In South America, I look at as Quarter 4 to Quarter 1 and the decline of 10%. And some of that is explainable because it's the seasonality.

January, February is a pretty slow month. But I do think there's more headwinds in the first quarter than we've seen over the last year associated with parked fleets, frankly.

There's a little bit of an uptick, not materially, but a little bit of uptick in trucks that are parked. And frankly, we've had as the Argentinian government has come in, in doing all the right things, but we've seen a little bit of a slowdown in activity there, as well.

So, those were the two drivers of the 10% down in South America.

Okay. Thanks.

And just, this relates to copper in Chile. I think production was down double digits at the beginning of this year, but I think or I believe expectations are for it to remain flat for 2016.

Could there be a little bit of a shift from Q1 to the other quarters? Or, is it something that you generally expect as a trend for the year?

You're looking at the same projection that I'm looking at. So, we're expecting copper production to be relatively flat.

And I think we have to get through another quarter here, because the South American business, in general, in January and February is pretty slow, just because that's vacation season. And I think there has been, like I said, not material, but you can see an uptake in a couple of our miners in terms of the utilization of their fleet when we're looking at the data.

So, I don't think that's necessarily a trend, but the copper production that I'm looking at is similar to what you're looking at, which is kind of flat year over year in Chile.

Okay. Fair enough.

Thanks. And maybe the second question, on SG&A, you made a comment that in Canada those savings should meaningfully exceed CAD150 million.

Would you be able to quantify that amount? And maybe just on a consolidated view, how should we compare 2016 SG&A to 2014 if we include the other regions?

This is Steve. We'd expect our SG&A costs over 2014 to be about down 20%.

Okay. Perfect.

That's it for me. Thanks, guys.

Let me expand a couple of things on that, though, because the progress that has been made here. Very difficult decisions from a people perspective.

But unfortunately, required in the context of the lower activity levels and if you look back to the peak in, I'm just trying to compare FINSA and Canada for you, Michael. If you look back to the peak, the headcount reductions in the Company are about 3,000 people, which is, that's a big reduction.

It's about 20% of the workforce and if you look at Canada, that kind of flows through to SG&A reductions. You have about a 20% run rate reduction between 2016 and 2014.

In South America, it's not quite 20%, because you have some inflation in there that offsets the reduction. But it's still a material 10% to 15% reduction in the UK and South America that's going to happen in 2016, going forward.

So, it does look like market conditions have taken another step down in South America. So, there, you've got a market where you're going through a very severe downturn, but you are optimistic about the medium to long term prospects for copper.

So, can you just talk about how you right size your cost structure to ride this out but make sure you don't compromise the business longer term?

That's a great question. As you look at the quarter, we reduced our headcount in Canada and in South America by about 500 people, and that was split about half and half between those two regions, in response to the activities.

And I think from a headcount perspective, in those two regions we've resized for lower for longer. It has been painful to get through this period, but I do think we now have the cost structure in place to ride this out for a lower for longer period.

And the team has maintained the profitability. Now, I don't think we're going to continue to see step changes down like we did this quarter, another 10%, another 10% on product support, because in order to do that you'd have to have materially more trucks parked and you'd have to have a material different outlook on that copper production.

So, I'm not sure how much further down we can go in FINSA, certainly not from an equipment perspective, but from a product support perspective. The one thing that's going through my mind a little bit, Cherilyn, is the team has done such a great job on maintaining profitability.

And there's very few deals out there from equipment perspective, but you're going to see some. We're going to have to wrestle to go after those.

And there may be a little bit of a price/volume tradeoff, going forward, not materially, but there may be a little bit of a price/volume tradeoff, going forward, in order to capture the business that's out there, as I think about 2016 and 2017.

Okay. And then, just jumping to the rental business.

The rental fleet was down a fair bit sequentially, which I assume reflects a very tough rental market, on the one hand, and an opportunity to satisfy strong used equipment demand, on the other hand, with rental dispositions. Can you talk about your comfort level with the size of the current rental fleet and how big of a rental fleet you think you need to have an appropriate level of participation in that market?

This is Steve. So, we're trying of course to match the investment to what we expect to be current demand but also what I'll call short- to midterm demand.

So, as you know, the market is looking still negative at rental for the rest of this year. So, we wouldn't expect to be increasing our fleet this year.

We look at used equipment. I would say we are less opportunistic about the used equipment market because of the abundant supply.

So, although demand is up, margins were tougher because there's abundance of used equipment in the market shown by Ritchie's auctions. So, it wasn't motivated as much by taking advantage of the used demand, as it was to right size the fleet to current activity for now and probably for the short term.

Scott, just actually a follow-up to Michael's question on product support in Canada. Could you give us the organic product support number, excluding Kramer, for the quarter?

So, Kramer on the top line added, I think, total revenue $50 million in the quarter, and product support was part of that. So, I think the product support was up slightly with Kramer.

And what was it? Down -- was it down slightly without Kramer, Anna?

Yes. Basically, Kramer was about half of [indiscernible] and product support was roughly half.

Product support, up $50 million.

Increase?

Yes, increase.

So, Kramer was about 25 million of product support.

Okay.

So, I think it doesn't materially change the question that Michael was saying, because there wasn't --. Yes, it's material, $25 million, but I don't think it changes those dynamics Michael was talking about.

No. No.

But just a question that I'm getting, as people want to make sure because it was a surprise certainly, positive surprise to the upside.

On this point, though, Yuri, the Canadian results this quarter were very good, in my mind. And when you think of revenue year over year up in this environment -- and, yes, there was some margin offset, which is associated with getting some big deals: Hydro's Site C; we had some deliveries to Dominion Diamonds; we had some deliveries that were in the first quarter that brought down those margins a bit.

But to see revenue up year over year and product support being that strong, I was pretty pleased with those results in Canada, and recognizing that the SG&A benefits hadn't yet come through because the cost reductions were at the end of the quarter. So, I think it puts us in a great place for the remainder of the year as we look at the profitability of that Canadian business.

All right. Understood.

Sticking with Canada, can you just talk us through -- you're obviously going through, as you said, a 20% reduction in the branch network. Your footprint is shrinking.

How do we think about your ability to not only generate revenue, if and when the market turns, comparable to what we had in the past, but also to service a lot of the clients that you might not be as close to now physically? And if any technology initiatives being brought forth by CAT, whether it be connected equipment or such is going to help achieve that?

Certainly. So when you look at the optimization of the footprint, and it is 20% of the footprint and it's a number of branches and I think, by the way, we're through that now; so, I want to it's been a big effort over the last year and a half, but I think, in general, we're through that.

The thinking was with the customer in mind. So when we closed branches, we made sure there was service facilities very close by, within a certain geographical territory.

We didn't reduce the sales force; so, the contact with the sales force. And we kept mechanics in field.

So, those touchpoints are still there. In fact, through this whole downturn, we've been -- other than performance management, the sales force has stayed intact.

So, when the rebound comes, I think we're going to be pretty well placed for it. So, that's point one.

The second point, I would say, is the major decisions in facilities, in my mind there's been two real big major decisions that we spent a lot of time talking about, and that's why it took us probably nine months more than some of these others to get at. And that was the oil sands rationalization going from the three facilities to the Fort MacKay facility in terms of where most of the activity will take place.

And that is based on a longer-term view on oil sands being a good business for us, but not growing from a revenue perspective where it has in the past. And the challenge for us is to make it a better business from a profitability, and a value perspective.

And I think we can do that with some of the things we're doing on the cost side. So, that all makes sense to me.

And by the way, I hope I'm wrong, and hopefully that growth comes back. And if I am wrong, we've got lots of expansion capabilities in Fort MacKay, so, extra shifts and could expand if we wanted to.

The other big one was Farwood, very difficult decision on Farwood. And what had changed over time is we used to have five customers in that area and it had kind of consolidated to one.

And the customer and Finning worked really hard to find out the best way to serve them in a way that was also cost efficient. And so, that was done jointly with the customer.

So, I feel really good frankly about that process that has taken place. And I think it shows our customer loyalty scores this quarter are as high as I've seen them in Canada and our market share, as well.

So, that feels good. Your second question, on technology, I think that's an emerging trend for us that we're spending increasingly amount of time on.

And I think your point on the data from the machines are going to become increasingly important, it's going to provide increasing value to the customer from running their operations. And I want to be a leader in that.

And so, connecting our machines is a pretty high priority. We've got a lot of machines connected already, but we want to accelerate that going forward and then also have the capabilities to provide the value to the customer that helps them run more efficiently.

I had a question on these wildfires. Obviously, a very fluid situation, but maybe talk us through what your thoughts are right now of any potential impact from these wildfires?

And maybe just remind us again, I know you just talked a bit about the majority of your operations moving to Fort MacKay. But what is your footprint right now in Fort McMurray?

Certainly. So, I haven't spent a lot of time thinking about the future, for Q2 financials, to tell you the truth, Jacob.

I'm more focused on making sure our 850 people are safe and they've got all the supplies they need. And so, I see some oil sands operators that have shut down and some are on reduced shifts and we're supporting where we can.

But also, the first priority is our people. And so, the time will come to think about the future in terms of financial impact.

It's not today. Now, where are we from a footprint perspective?

We have spent a lot of time moving activity from Mildred Lake to Fort MacKay. That being said, we still have a presence in Mildred Lake, which is being used for a specific customer activity and some warehousing.

So, not a lot of people there, but we do have that facility that we need to secure. We've got Fort MacKay which, frankly when this all happened we opened up to the community and I think at one point we had a couple of hundred people in there taking shelter.

I think that's less now because we've evacuated a lot of the community. And then the two facilities that are kind of right in the center of this is the Fort McMurray town shop and the rental shop.

And for those of you who have been up to Fort McMurray, I think this is right at kind of the center of the forest fire. And fortunately for us we've got all 850 employees accounted for and safe, and that's our main priority right now.

Maybe and talk a bit about -- so, you were mentioning when you were talking about parts and service in western Canada, still there's been this continued trend of in-sourcing. Has that leveled off at all?

Or, do you expect to see that to continue?

It continues. I think our customers are trying to find every way they can to reduce their costs and maintain their employee base, as well.

So, I think -- I was up there in Fort McMurray a couple of weeks ago, and the good news is that the shop was full and we had dedicated programs with CNRL and Shell that were keeping the shop full. But that being said, I think this trend to in-sourcing will continue for a while probably, while the profitability of our customers are challenged.

The key for us: focus on the high-value work that Finning is known for and can contribute well to; make sure that our labor costs and labor utilization are in line so we're providing value to the customers; and get that facility footprint resized for a level of activity that will probably be a little lower than we've had historically.

Just looking at the UK, last quarter you were mentioning you were expecting the UK and Ireland to kind of return to historical profitability going forward. So, looking at your comments, it seems that the outlook has changed a little bit.

I was wondering if you could provide more color, especially on the provision for power system, whether it's a new contract? And just provide what kind of normalized level would you expect to be at toward the end of the year?

I'll take that. As you know, I have been dissatisfied with how we've been performing in that business over the last year.

And it's a difficult situation because there's a number of things going on, which I'll try and give you some transparency on. One is we are, the commodity exposure, there is commodity exposure in the UK.

And so, what you see, coal prices come off and oil prices come off. Some of our customers are under pretty significant pressure, and that's impacting the product support business for us.

So, that's one aspect that's impacted the financials last year. And then, the second is on the power systems side, and that's what's coming through the financial statements this quarter.

I think we went down the path of building value add services around the core CAT product. I think, frankly, we got out in front of our skis a little bit, in terms of margin erosion or the appropriate level of margin for the risk we were taking on.

We have, as you know, a new team there as of January 1, with Kevin Parkes, who joined us from the CEO of Hewden, and Greg Palaschuk, who we've moved from Finning International over to the UK. They've spent the last three months doing an extremely detailed review of these power system contracts, which they've reviewed now at length with Steve and I.

These are not ongoing maintenance contracts; that's important to note. These are contracts that have a defined date.

And I feel very confident now seeing the plan that we are going to get through this. It's not going to take one quarter.

I think it's going to be a quarter or two to get back to those historic profitability levels that I talked about in the fourth quarter. But I'm extremely confident we're going to get back to that by the end of this year.

I think the plan is in place to do that.

Okay. Perfect and second think.

The plan, just to finish, the plan is twofold, and I said this in my speech. The plan is twofold, is restrict the exposure to some of these power systems' maybe more risky contracts.

And we've done that. So, there's no more of those coming in the system.

Secondly, reduce the cost to serve, to address the reduction in the commodity price and that is in flight. And third, increase the supply chain velocity on that business, which is going to be a massive priority and help with free cash flow generation coming out of that business throughout the year.

Okay. And my second question is on the free cash flow generation.

Obviously, a nice reduction in the inventory. I was just wondering when you take into account your $300 million free cash flow generation, what would you consider right now as excess inventory?

And is it mostly the inventory that will drive upward the free cash flow with some EBITDA contribution, Steve?

So, as you know, we have two situations with our inventory. So, first is the improvement.

We've made significant improvements in our parts logistics and improved our parts turns. We're now focusing on new equipment.

So, while, I don't like the word destocking, because that denotes kind of a reactive fire sale, which you know we have not taken that mentality. So, we do have improvement in our turns, which will reduce our inventories.

We also have the excess inventory that was ordered before the quick downturn in the fall of 2014 which we received and paid for largely in the first two quarters of last year in Canada. So, we would hope to see some inventory reduction.

If we look at, we sold through the new equipment inventory in Canada in the last quarter about CAD70 million, and we would expect to sell through more. I hesitate to give a number.

Our parts inventories with the improvement in turns are staying relatively constant and close to the demand. We do have some seasonality volatility and hope to see some demand put upward pressure on that, but that will be offset by new equipment inventories as we continue to sell through.

And we'd expect to sell through CAD150 plus million through the year.

For the rest of the year, right, Steve?

No, inclusive of the first quarter. So, $150 million to $200 million including the first quarter of CAD70 million.

Okay. Perfect.

Very good. And just quickly, in terms of net rental add and CapEx numbers for the year, are you still looking at CAD25 million and CAD75 million, respectively?

I don't think we gave that guidance, Benoit. I can tell you the dynamics.

I'm pretty sure we haven't given guidance on CapEx or rental. So, I don't want to address those numbers, specifically, but I'll tell you the dynamics that are going on.

One is, rental, as Steve said, there's not a lot of fleet being added, given the 30%, 40%, to 50% downturn in industry activity. And the good news is we hadn't added a lot of fleet coming into this downturn.

So, we didn't have too much excess fleet. The bad news is, we had excess fleet.

So we are downsizing accordingly. So, I wouldn't expect too much on the rental side.

On the capital side, it's going to depend on the free cash flow delivery. You saw a pretty significant disappoint in the first quarter.

As we look forward, I think there is some technology spend that I would like to do associated with what I was talking about on digital. But we'll make sure that we get the free cash flow before we start spending that money and be thoughtful about how we allocate in that environment.

Okay. Perfect.

So, CapEx might be slightly up versus last year, while net rental will improve?

Yes, I think that's right. I think that's right, slightly up.

And I think the capital -- actually, I don't have the financial statements in front of me, but you might have seen a little bit of an uptick in the capital in the first quarter, and that wasn't what I would call CapEx. That was actually a union bonus in South America, which was the four-year renewal of the union agreements.

And I think that was about a $22 million exposure. So, that wasn't maintenance or growth CapEx associated in those numbers in the first quarter.

Okay. Perfect.

Inside the 38 million of addition to land, building, and equipment?

Correct.

Scott, with the data that you have and the machines being tied in, do you have a sense of what the overall health of the fleet is? I'm just trying to figure out whether deferrals and insourcing, whether that's been successful and the health is reaching critical levels?

Or, are people actually having some reasonable success in keeping their fleets and availability at decent levels doing this themselves?

I think When you listen to the CAT commentary and I've said this the last couple of quarters we've seen deferral of maintenance, for sure. And I guess we've all been a little bit surprised that we've deferred that long.

And it does make us a little bit worried about the health of the fleets. That being said, oil sands production is increasing and copper production is flat.

So, from a customer perspective, if your sole focus is on near-term production, then maybe you could argue that's working. I think what we saw here in the first quarter in Canada and time will tell, but I think it's pretty instructive you saw the amount of parts and service revenue coming through our Canadian business and our OEM facility.

It's hard to believe in this environment, but they're actually thinking about trying to add mechanics because we're running overtime there. And so, I don't want to say we've hit that point, because that's just this world is too uncertain for that.

But the mining/oil sands business in Canada has seen pretty significant repairs, I would say, this quarter.

Was it catchup? Or, is it just the fleets are working as hard as they've ever worked and it's just a normal step up that you would expect with the activity levels?

I can't figure that out, to tell you the truth, Bert. I think part of it is a little bit perception.

As our customers go through the budgeting process, typically the end of the year, particularly in a down market, they become pretty tight on capital. And then, they get new capital budgets.

And maybe now, they're taking care of some of the machines that probably should have been taken care of last year? But I wouldn't want to make an overall comment on health of customer machines, because I think they're under a lot of pressure and they're doing the best they can in a tough environment.

But I was encouraged by the activity in Q1, in OEM in particular.

Okay. And then, just on G&A, relative to 2014 seems to be how to think about this and the 150 million more.

But round numbers, and we don't have the G&A by each of the geographies, but probably reasonable to expect that revenues are down 1 billion relative to that year. So, there's going to be obviously a volume component to the G&A.

So, the 150 million doesn't contemplate the volume component. That is simply hard dollar savings.

Have I got that right?

Yes, Bert. It's fixed costs.

Fixed costs.

It's not the directly volume-related costs.

So, Steve, how should we think about the volume component of it? I know I can't remember whether your warranty provisions get booked into cost of goods sold or G&A, but that's usually a couple of percent.

How should we be thinking about the volume side of it?

We don't think of in terms of warranty, as much as the...

I was just giving that as an example. Overall, if you're down 1 billion, what's kind of the G&A impact?

Fair enough. It's about 2% to 3% of the SG&A reduction.

So, about 2% to 3% of revenues. So, if we had 20% reduction in total SG&A against revenues, we would have about a 17% reduction in the fixed costs portion.

So, we're looking at --. So, when we talk about Canada, we're looking at down about 21% of fixed costs.

Yes.

And consolidated, because we get offset with some inflation and regulatory mandated wage increases in South America, we're at about 16% to 17%.

The first question was just on Canada. I think you guys mentioned the backlog was stable because you delivered a lot out of the backlog.

But I think I saw in the release a, quote-unquote, very strong order activity in Canada? Just hoping I could get some more color on that?

I think probably, Michael, that's associated with Site C. So, we had 160 pieces of equipment, I mean, that's a big backlog.

Some of that was delivered in Q1, and some of it will be delivered in Q2. And so, that was probably the comment in the release around backlog.

And then, I was just hoping you could flesh this part out in how you're balancing this dynamic. On the one hand, we should expect margins to return closer to historical profitability levels.

You're there in FINSA. You expect that in Canada.

But on the other hand, you also were mentioning that you're increasing market share, you're going after these fewer deals, and you're also saying there's a compromise on the volume versus margin. So, I'm just trying to understand how we should really think about that as that plays out through 2016 and maybe even into 2017?

So, it's different by region. And what I was trying to get at, in the first quarter in Canada I think there was a little bit of a price volume offset here associated with some large deals that we -- and Site C is an example of that.

And there is a couple of other examples of it actually that happened in the quarter. A large shovel, for example, that was delivered at pretty low margins.

We're not going to see that type of new equipment in the second quarter. To expect revenue to be up year-over-year in this environment that's quite impressive, and I don't think you should think that, going forward.

I think as you look at second quarter, as an example, it's probably more in line maybe even modestly lower, than third and fourth quarter last year from a new equipment side. So, I think that gets you back to a more normalized margin for that Canadian business.

Particularly, then you also have the SG&A cost savings that I think kick in. So as I look at Canada we said 6% to 7%, I think that's a reasonable range for the third and fourth quarters of the year.

On FINSA, you've seen what we've done. The team has done an unbelievable job maintaining the profitability through this environment.

My only comment was volume -- in an environment where there's no volume, getting that volume is pretty important. So the good news is we got the product support as 70% to 80% of the overall business.

As we move forward, if there are green shoots we're going to want to make sure that we're thoughtful about that price/volume trade-off. And then in the UK getting back to historic margins, we're going to make a lot of progress on cost to serve and we're going to make a lot of progress on supply chain.

So, getting back to that historic margin is an appropriate way to model the business, going forward. And it's going to take a couple of quarters, as I said, but when you think about run rate fourth quarter type levels getting back to the historic margin with higher turns is going to be the objective.

Did pricing pressure intensify as we went through the quarter, or, in Q1 versus Q4? Or, overall it's just remained a very competitive environment?

I think it's just remained a competitive environment. I don't think anything that I saw in Q1 was more pricing pressure than Q4.

It's Juliane, dialing in for Sara. My first question is on the EBIT margin in Canada.

Given some people are liquidating their used equipment, we're just wondering how that translates into margin? And maybe a little bit on how we should think about the margin trends, moving forward, in Canada?

So, if you think about our margins, let's focus on the new equipment margin, I think there's probably three components to that. One is, this is kind of responding to the last question, too so, I'll maybe repeat myself in a little bit.

You've got three in particular big deals in the quarter that helped that margin, and I've talked about the shovel, I've talked the Dominion Diamonds, I've talked about Site C, which these are big deals that had a little bit lower margin than what we would historically expect. We've also got some aged inventory as you know in Canada, which we're getting pretty good margins on but it's not like at historical levels.

And then in the new equipment construction activity we're seeing similar type margins, but a lower activity level. So, that's the kind of dynamics that's going on.

And then, you combine that with lower utilization on your rental fleet, and you get to that 4% margin that you see in the first quarter. I'm actually pretty pleased with it.

I'm reiterating myself, but I'm actually pretty pleased with it, because I think you actually ended up with a better gross profit than you would have had if you would have had a higher margin but lower revenue. You guys can do the math on that.

I've done it. I've proved it to myself, and it works.

So, I feel pretty good about that situation. I don't think we're going to have that situation, going forward, because we're not going to have the benefit of the revenue, these bigger deals that we saw in the first quarter.

And therefore, you're going to see more product support in the mix. You're going to see SG&A cost base which is lower in the second quarter than it has been in the first quarter.

And as a result, you're going to see higher margins.

As for my second question, we're just wondering for the FINSA structural changes, what that means on? What does Finning do in terms of structural changes for the weaker markets in FINSA?

A couple of things. The team has been, unfortunately had to make some very difficult decisions on the headcount side, and they continued to do that in the first quarter.

And I think in total it's about 1,500 people have been reduced from that business since the peak, which is about 20% of their workforce. I think we're now resized to a lower copper price for longer and I think every quarter we go, we see that it probably is going to be lower for longer in copper, when you see uncertainty in China and you see increasing supply on the copper side.

So, I think this rebound in copper is probably a couple of years out and as a Company, we need to prepare for that, and I think we've resized the cost base to do that. And kudos to the team in South America for acting in a fashion that put us in the position that we can survive and thrive in this type of environment.

Scott, can you just clarify your last comment on the margins? You said that you would be, if I heard you right, that had you had lower revenue, your margins would have been lower, as well?

Is that correct?

Relative to the plan that I had, my budget, my expectations, I see more GP dollars from more revenue at slightly lower margins than I would have had if I would have had higher margins with lower revenue and so, that price volume tradeoff in the quarter, which happened with the Site C, with Dominion Diamonds and our increased market share. We talked about Saskatchewan as an example of doubling our market share.

That, to me, was a very good strategic tradeoff in the quarter and as I look forward, I think we're going to see increased margins because of the mix that I talked about. But that was the comment that I made.

I'm just trying to clarify that, because had you been. You said had the GP been, had you not had those revenue, the GP would have been worse.

But in the coming quarters, you won't have the same revenue, yet the GP and the margin should improve.

I said EBIT margin should improve. So, you've got a product mix that goes higher product support, lower new equipment, but a higher margin and the benefits of SG&A.

So, in the quarter, we had a reduction of our cost base about 250 people. And so, that didn't get reflected in the first quarter results.

It will get reflected in the second quarter results.

But you had done some cost reductions already last year.

Yes. So, of the 20% reduction, well, I guess, of the 1,300 people, 1,100 had been reduced last year.

So, I hate to belabor the margins, but I'm just trying to better understand. You had year-over-year revenue growth in Canada, 7%.

So, presumably, you had some form of operating leverage there. You have been making cost adjustments through last year.

Your mix actually didn't change all that much. And yet, the EBIT margins were down almost 50%, or 170 bps, by my math on an adjusted basis.

So, maybe you can just give a little more color as to what are the margins like in each segment category? Like rental, obviously, a very competitive market right now.

The parts and service business, you said your parts business was up to the mining market. So, is that a slightly lower margin business?

Or how do you? I guess I'm just struggling to understand how the margins ended up where they did after all was said and done, unless There's a very large gear.

It's not the first time you've ever sold very large equipment. Was it extremely low margin?

Did you have to give the stuff away, or what?

Okay. So, let me use the anecdote to try and get what I'm getting across, and I'll come back specifically to your segments.

And then, if we don't do a good enough job you can go with Steve and Mauk to take it offline. But here's, the Saskatchewan example is a perfect one for us.

So, industry down 25%. Market share up twice, double, actually more than double.

EPS at the high end of the range of CAD0.07 to CAD0.09. So, that's the concept that I'm trying to portray for you.

That's one example, in our Saskatchewan business. As I look at the different lines of business right now, on new equipment we are seeing lower margins than we've historically seen in new equipment, and there was three components, which I think I talked to RBC about.

One were these big deals, which were not given away, at all, but they were at significantly lower margins than what we've probably historically done because of very competitive pressures. I think there's also a component on rental and aged inventory that hasn't historically in the mix, which has pushed margins down somewhat in the quarter.

So, as we've been making progress on the free cash flow, those margins of some of that inventory that's been there for a while is not at the same margins as we've historically had. And then, on the rental fleet, the decrease in the utilization has impacted the margins, as well.

On the parts side, the product support side, obviously cost pressure throughout the business. And we're responding to that through our cost reductions, et cetera.

But there's a little bit of GP pressure there, as well. Those are the dynamics that are going on in the business.

Okay. That's helpful.

If I could -- my second question, I guess, would be more of a philosophical one, but for many years it was quite easy to see Finning, or to pitch it, as a growth story. You had the oil sands and the new mines going in there.

You had expansion mining in South America infrastructure. They were growing economies.

Go back far enough you were investing in rental in the UK. But now, if we are in a low-growth world for some time and I don't necessarily expect you to make a corporate strategy based on a macro bet like that but, yourself, you said lower for longer assumptions.

What is the pitch on Finning at this point? How do you position the company?

Does it become more of a returns-orientated business? Or, how are you guys thinking about that at the Board room table strategically?

Longer term, we're at a very moment in time difficult environment right now. That's not a surprise to anybody who is following commodity stocks.

And we're responding by getting our cost structure and our operational excellence agenda in line. And it's been a painful process to go through what we've done over the last two years, but I think we're there.

And I think what you're going to see going forward. And I don't think we need even a significant uptick or better outlook I think you're going to see a little bit more normalized economy, profit, and returns come back into this business based on all of the cost reductions that we have gone through.

And key to that and you've said it many times is making sure these costs don't come back into the business. And I think the structural changes that you're seeing should give you some comfort that that's not going to happen.

So, the profitability of this business should improve, going forward. The second piece of this is the free cash flow, and I was hoping you'd give us a little credit for free cash flow this quarter, given how focused you've been on it in the past.

But the free cash flow yield and the commitment around the discipline of free cash flow, to think that over a two-and-a-half-year period $1.6 billion provides then opportunities, financial flexibility for growth. And that growth could take various forms.

To date, we've acquired Saskatchewan, we've paid a dividend, and we've looked at capital reallocation. One of the big focuses for us, going forward, is the innovation agenda.

And I think there is opportunities for us to provide more value for our customers, to make it win-win so we get some of that value, to take out additional costs because of the influence of technology. And I do think that will provide some growth, to be determined on how much.

And right now, I think the focus is on exactly where we've been: getting this business and cost structure down so we'll see profitability return and return on capital improvements in an environment that's a little bit more normalized.

That's helpful. I think the digital side of things is exciting.

I look forward to see how that evolves. And we only get to ask two questions, Scott.

So, I can't ask you about free cash flow. And if it's good, I don't need to ask.

A couple of quick questions for me, if you don't mind? Do you mind, please, commenting on the non-oil-sands-related weakness in terms of what's driving that?

And any green shoots from that perspective? Just any commentary, please?

And I said this last quarter, I think. That continues to be a struggle.

The oil sands business, oil continues to be produced. The trucks continue to run.

We saw a lot of exchange activity that was helpful. The relationship with the customer is very strong, because they realize we're all in this together.

So, that has gone well. I think the surprise -- I said this last quarter -- has been the weakness in the, what I will call, the construction side of the business.

And I think there's a couple of things going on there. I think there's some insourcing from oil sands customers that's taken that type of business away.

I think there's some deferral of things that that business used to do for oil sands customers that's not happening. And then, I think this FX movement which has become a little bit better over the last little while, but this FX movement and going from new equipment to used equipment as our customers are under significant pressure is a real phenomenon.

And the $110 million Ritchie auction a couple of months ago and I know they did a big auction yesterday not as relevant because not as many CAT machines in it. I think that just highlights some of the struggles the Alberta economy is in right now.

Now, the good news is there is light at the end of the tunnel. And the light at the end of the tunnel is the infrastructure program that everyone is talking about.

The concern is what's shovel-ready. And for me, how much of it is vertical and how much of it is horizontal?

The green shoots are things like Site C, things like ring roads. And I think you're going to start to see those Maxim but it's probably not going to be, well, it's not going to be in ’16.

It's probably latter-end ’17. And so, as I look a year and a half out, I feel pretty good.

But right now, I think it's a pretty tough time for our non-oil sands customers.

That makes sense. And the second question relates to the shift from maybe services to parts and the potential impact on margins.

Should we expect any or, how should we think about this?

Nothing jumps out at me as from your modeling perspective that is going to be material, I don't think. Let me take it away.

But a couple of things that are going on on service; one, we are doing less service business because customers are in-sourcing. But we're doing it much more consistently, profitably, and that's helpful.

That's offsetting some of losing some of this service. And there is an opportunity here from an asset utilization and getting the labor cost right to continue to make improvements in the oil sands business.

And on the parts side significant pressure from customers on prices, but I think you look at how much cost we've taken out of this business, how responsive we've been to our customers to try and keep them in business and operating profitably. I think the conversation is changing, because I don't think there's much more to give, frankly, from a Finning perspective.

I think we've been extremely responsive. You can see our margins.

There's not a lot of excess. We've reduced the cost.

We've facilitated and optimized the facility footprint. We've been very active.

So, I think that conversation is going to change a little bit over the next little while.

And if it continues like that and you say that there's not much to give, what's happening in that environment? Is there more ability to cut?

Or, how would you position yourself?

Well, I think that's the point. I look at, and I think our customers appreciate this, see how responsive we've been, how much cost we've taken out of the business.

1,300 people, 20% of our distribution footprint, 20% of our SG&A costs, our supply chain is operating at and our part supply chain is operating at a basis that hasn't been this good for a long, long time. So, we're providing a lot of value to our customers.

We have seen some price reductions. And I guess when you look at back to Ben's comment it's a 4% margin.

It's going to improve because of the mix, but we're at the type of margin levels where we've kind of given all we can give to customers. And we need to keep in business and keep operating.

And so, we're being very engaged with them, trying to think of different ways, as opposed to price, to address their concerns. And when I think about that, I think about availability.

I think about supply chain, how to think about supply chain differently. I think about truck up-time.

I think those are the sorts of things that need to be focused on all of our customers right now.

Thank you very much, operator. And thank you, everyone, for listening.

We look forward to speaking with you again next quarter.