Finning International Inc.

Mauk Breukels - VP, IR and Corporate Affairs Scott Thomson - President and CEO Steve Nielsen - CFO Anna Marks - SVP, Corporate Controller, and Treasurer

Cherilyn Radbourne - TD Securities Michael Doumet - Scotiabank Yuri Lynk - Canaccord Genuity Ben Cherniavsky - Raymond James Jacob Bout - CIBC Ross Gilardi - Bank of America Merrill Lynch Sara O'Brien - RBC

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, Corporate Controller, and Treasurer.

Following the remarks by Scott and Steve, we will open up the line to questions. An audio file of this 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.

Good morning. On today’s call I would touch on our fourth quarter and full-year highlights, provide my perspective on the market conditions across our regions and then discuss the year ahead.

I'm pleased with our fourth quarter results which capped a year of solid execution in a challenging environment. Fourth quarter revenue was up sequentially as new equipment sales in Canada and South America increased and product support in the oil sands returned to pre-fire levels.

In Canada, profitability improved year-on-year and sequentially. We achieved our fixed SG&A reduction goals and are starting to see the impact of operational improvements in the part supply chain and service business.

In the UK, we successfully restructured to align with changes in end markets. We are now operating with a smaller footprint, lower headcount and a more efficient distribution network.

If we look just at the second half of the year, return on invested capital was 15% which is aligned with my expectations for that business going forward. Across all regions, we meaningfully reduced invested capital throughout the year and positive free cash flow every quarter contributed to strong annual free cash flow.

Looking at market conditions, we have some reason for optimism with the green shoots we're seeing in our territories. Oil and copper prices have improved.

Significant infrastructure spending as planned in each of our regions and we are expecting greater equipment utilizations which will underpin our product support business. Encouragingly, order intake in both South America and Canada was up just over 20% relative to the third quarter.

These signs are promising but we believe it is premature to consider this a trend. We do think conditions have stabilized but are expecting flattish revenue year-over-year with modest growth in product support being offset by ongoing weakness in equipment.

Turning region to region. In Canada, we are pleased to see a few large customers land significant contracts at oil sands producers recently and our backlog of work at Fort McKay is healthy.

Although conditions remain challenging, our product support and mining has stabilized and we are expecting modest growth into 2017. While the construction sector remains soft particularly in Alberta, we remain encouraged by the anticipated government spent on infrastructure as well as the opportunity for pipeline construction which may start to benefit us near the end of this year.

Turning to South America. Copper has increased significantly recently.

So this has not translated to stronger activity levels, we are seeing considerably greater equipment quoting activity and the tone from our Chilean customers is more positive. In the quarter, EBIT margin was under pressured due to the underperformance on one contract which was an anomaly in an otherwise very strong contract portfolio.

As we look forward, I continue to expect the profitability of our South American business to be strong, a little lower than the 9% which we have done in the last few years because of the operational expense associated with our technology investment. But maintaining a mid-8% EBIT margin is a reasonable projection.

One development that has occurred in Q1 and will likely impact our results in the short term is labor unrest at Escondida. Argentina will provide some growth to our business in 2017.

Our strategy to regain market share is working well and accounts for the increase in South America’s new equipment sales. We are expecting positive GDP growth in 2017 and we are pleased to see the government working with the companies, the unions and local authorities to improve business conditions to put the [indiscernible] shale and to mass production.

Six companies including Total, Chevron and Shell have committed to invest $5 billion in 2017 and 15 billion from 2018 forward. In the UK, we have not seen any impact from Brexit.

Fiscal stimulus from the government including announcements on large infrastructure projects such as High Speed Rail 2 and Hinkley Point have partly offset the uncertainty. The devaluation of the British pound remains a risk.

That said we're confident in our ability to manage through this uncertainty due to the successful restructuring of our operations. Given this environment I believe we've taken the right steps across the organization to strengthen our business and then moving forward we have the right plans in place to support our continued success.

Reflecting on where we began in our operational excellence journey three years ago, we've made tremendous progress. We improved our safety performance with total recordable safety injuries declining by 33%.

We transformed our part supply chain and improved turns by 0.7 times. And we significantly increased the profitability of our service business.

In addition to implementing sustainable improvements across our operations, we reduced our cost structure to respond to the economic downturn. Despite the challenging environment we gained market share for new equipment and parts, and achieved all time high customer loyalty scores.

Our capital disciplined supported us in generating 1.7 billion in free cash flow since we started this journey contributing to our strong balance sheet. About two thirds of our free cash was driven by EBITDA, the balance by efficiently managing inventories.

While we've made significant progress, we remain committed to building on our achievements. In 2017, we will continue to strengthen safety and talent, and improve our operational performance.

One area of great opportunity is to strengthen our equipment supply chain to enhance the customer experience and improve capital efficiency. This work is underway and the potential benefits are substantial when you consider that every 0.1 times improvement in equipment turns generates approximately $30 million in free cash flow.

Our strong financial position enables us to prudently reinvest in the business. A priority going forward is to increasingly leverage technology to support new ways of operating and delivering customer value.

In the digital space two areas of focus are e-commerce and connectivity. On the connectivity front, the business case is compelling given the low cost associated with connecting our installed machine population.

Approximately 25% of our active machine population is connected today and our aim is to increase that to about 80% over three years. Parts market share of connected machines has been shown to increase by about 10 points.

In 2017 we expect to invest $25 million to broaden our digital capabilities. We project our digital investments to be dilutive by $0.02 in 2017 and accretive to EPS by 2019.

We are also working to improve our processes and systems with a multi-year ERP implementation underway in South America. In 2017, we expect an increase of approximately $40 million in our capital expenditures, mostly in support of the ERP implementation and to a lesser extent digital initiative.

I believe this is an appropriate capital commitment particularly in the context of a strong free cash flow we expect to generate again this year. Apart from investing in our capabilities, we will be allocating capital to a combination of debt repayment, share repurchases and complementary growth opportunities.

For instance earlier this year, we invested under $5 million for a minority interest in Agriterra Equipment, a network of eight branches throughout Alberta which sells new unused equipment and provides parts and service to the agriculture sector. Finning will be distributing building construction product through Agriterra to its customer base.

Agriterra will leverage our capabilities while maintaining the independence of the agriculture dealer model. In closing we finished 2016 in line with our expectations and accomplished what we set out to do.

The testament to the outstanding efforts of the Finning people across the business, who continued to demonstrate extraordinary commitment during a challenging year. This commitment and the results we've achieved so far gives me confidence as I look to the year ahead and the longer term.

We've made significant improvements to our operational performance and considerably reduced our cost structure. We will continue to build on the progress while increasing our focus on leveraging technology to improve business performance and drive customer value.

Taken together these steps position our company well for improved profitability when demand normalizes and support us in delivering our company's promise to customers and shareholders. I will now turn it over to Steve.

Thank you Scott and good morning everyone. Adjusted earnings per share was $0.28 in the fourth quarter.

We recorded a tax recovery from an adjustment for an inflation in Argentina, while benefiting fourth quarter earnings per share by $0.07, $0.05 of this tax recovery offset higher tax expense in the prior quarters of the year. On the other hand, we incurred higher costs associated with the long-term incentive compensation due to significant share price appreciation.

This reduced our earnings per share by $0.04. Also our results were negatively impacted by under performance of a specific mining contract in South America which reduced our EPS by $0.03.

Canada reported stronger product support revenues as activity in oil sands returned to normal levels. For the full year product support revenues in mining were up from 2015 if we exclude the impact of the Alberta wildfires.

However, demand from construction and power systems customers was lower, particularly in Alberta. As Scott mentioned we expect a modest year over year improvement in product support activity in 2017.

New equipment markets in Western Canada remain weak and highly competitive. Our fourth quarter new equipment sales included a shovel delivered in the oil sands which put additional pressure on our equipment margins.

We recorded restructuring costs of $32 million and severance of $15 million associated with further optimization of our branch network that was announced in November and is expected to be completed in the first half of 2017. These costs include a closure of COE, consolidation of two customer support centers into one and the closure of a few cat rental source.

The Canadian business achieved substantial cost reduction over the course of two years. Excluding significant items in the Saskatchewan operations acquired in 2015, fixed annual SG&A costs in 2016 were down 22% from 2014.

As a result, fourth quarter adjusted EBIT was up 30% from last year on flat revenues and was the highest adjusted EBIT in 2016. Fourth quarter adjusted EBIT margin was 6.2%.

In South America, the increase in new equipment sales was driven by improved construction activity in Argentina. The team is successful growing market share in Argentina and will continue to strategically invest in inventory and rental assets to capture opportunities in that market.

Product support in South America appears to have stabilized and was similar to third quarter and second quarter levels. In the fourth quarter, the South American operations recorded a $10 million estimated loss for which we have filed a criminal suit.

Claiming fraudulent activities by a large and long standing customer. This would in connection with nonpayment for equipment financed through Caterpillar and guarantee by Finning.

We believe that the customer took advantage of import and currency restrictions that existed at the time to take possession of equipment without paying for it. As a result, Finning was required to pay under its guarantee.

The customer subsequently filed for insolvency protection. In addition to bringing criminal action, we have filed a claim in the customers insolvency proceedings.

We consider this incident to be highly unusual and not indicative of any operational or financial trance. The adjusted EBIT margin was 7% primarily due to the negative performance of a specific mining contract which impacted South America's EBIT margin by a 140 basis points.

This was an exception in an otherwise strong portfolio of contracts. While SG&A was down year-over-year in South America, the strengthening Chilean peso relative to the US dollar in response to higher copper prices increasing our labor costs.

However, we do not anticipate the recent recovering in the price of copper to immediately translate into improved product support activity. Customer confidence in the sustainability of higher copper prices will need to improve before we can expect to see a ramp up in production and fleet utilization and a corresponding increase in demand for products and service.

In the meantime higher labor costs are expected to put pressure on our margins. We will also incur additional costs associated with our investment in a new ERP system.

As Scott mentioned we expect EBIT margin in South America to run in the mid-8% range in 2017. In the United Kingdom, the significant improvement in probability from last year was driven by a lower cost structure and successful execution of the turnaround plan.

Fourth quarter EBIT margin of 3.3% reflects an extremely competitive environment and product support being a small portion of the revenue mix. Excluding impact of foreign exchange, invested capital decreased by nearly 365 million from the year end of 2015.

This was driven mostly by improved management of working capital across the organization including $175 million reduction in new equipment inventory in Canada during 2016. Lower working capital contributed strong free cash flow of $370 million in 2016.

This was roughly 15% more than we expected due to favorable vendor terms and better than expected collections. 2016 was our fourth consecutive year of significant free cash flow.

As Scott mentioned, one of the year's priorities is to transfer our global equipment supply chain to improve new equipment turns. This will support us in sustaining a solid free cash flow through the cycle.

Because of acceleration in the fourth quarter we expect first quarter to be free cash flow negative. However, we anticipate another year of strong free cash in a range of $300 million plus or minus.

As Scott indicated we'll continue to make targeted investments in technology. In addition, as we discussed during the last investor call, we have been evaluating our options to further strengthen our balance sheet.

We have $350 million of debt maturing in 2018 with a 6% coupon. We intend to allocate some of our capital to retire about half of this debt in the second half of 2017 and refinance the balance of favorable rates and maturities.

While there are positive signals, we expect market conditions to remain soft in our territories. We do anticipate a modest recovery in product support, but weaker demand for new equipment.

Our lower cost structure will support improved profitability on relatively flat revenues. With that I'll turn it back to Mauk for questions.

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

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

Wanted to start by asking about South America, it looks like that region took a couple of knocks in the quarter, I think Steve covered fraud in his remarks. Maybe you can just elaborate a little bit more on the specific contract challenges and just how you think that business is positioned as we enter 2017.

So, one I feel pretty confident around the sustained profitability in South America and I think the issue we had in the quarter on the one contract was an anomaly and it's a contract which we have I think three or four contracts with this customer, three of the four contracts are profitable, this one contract has been a little bit of a struggle for us. It was signed I think during the 2011, 2012, we’ve improved the utilization on the fleet significantly but when you look at the next five years on our contract, so not on a cash basis but on NPV basis we weren’t going to get what we thought we should get for it.

And so that was why we took the write down. One of the things I would say on the management of those contracts in general over the last period, we've seen significant improvements in availability on all the truck fleets and that's one of the reasons we've been able to support this 8.5% to 9% margin.

That and the cost reduction, so I feel pretty comfortable about how South America's positioned, particularly when you start to think about increase in activity. I guess the one caveat to that would be what we're seeing right now with Escondida and there was a strike going on.

I think it started last week, we’re working with the customer very closely. And in fact doing some things with the customers right now that are keeping our teams busy and taking trucks off the mines site into some of our facilities.

So that’s good news and that will mitigate the impact somewhat, but the longer this goes on, the strike, the more impactful it will be on us as BHP is a top five customer in South America. I think long term take a long term perspective, once they get back to work that usually results in an uptick similar to what we've seen in the oil sands with fires.

And then even longer term getting the cost structure and labor cost structure in Chile to a little bit of a different place, I think helps the whole mining complex and so you know that’s how I think about the Escondida piece of it.

So just by a way of clarification on the $7 million that sounds like it was sort of a Q4 true-up on the expected NPV of that contract rather than sort of a deterioration in the performance specific to Q4.

Correct

And if I could bounce to Canada for my second question. I'm just wondering if you could talk a little bit more about the 2017 backlog for Fort McKay that you referenced and how much of that would be what I'll call bread and butter product support versus increased rebuild activity.

So a little bit different, you've got the OEM facility in Fort McKay and both are busy and so the rebuild - typical rebuild type work will be done in OEM and we're seeing significant as I talked about it in the last call significant discussions and improvements in one of the drivers of our improvement in product support next year is definitely that. That being said Fort McKay is also very busy and I think we've seen a little bit of a turn here in terms of our customers asking us for service both onsite and in Fort McKay.

So we're feeling pretty good right now about our service backlog of Canadian business.

I mean we've seen the price of copper surge to the end of the year and you've commented on that. And seem to have little impact on your business aside from increasing your cost but I mean bigger picture here FINSA EBIT is down 40% from 2013 and a large part of the mining fleet is still parked today.

So, Scott, just in your view I mean what is the move in the copper price mean for your business in the medium to longer term.

So it's positive for sure, but it has to be sustained and I guess one of the concerns we’re seeing I think is you've got two big copper producers offline right now. One in Chile and one in Indonesia that's providing some support for copper and so you know I'm not sure there's a lot of confidence in that higher price, 0.1, 0.2 medium term, I think all believe that copper will be a very constructive commodity.

And we're seeing a little bit right now with an increased copper production a little bit of the fleet utilization decreasing. I mean I'd commented 20% and that has come down a little bit in the fourth quarter.

I mean not material enough to drive our product support business higher but the good news that you're seeing fourth quarter product support which is stable with the last three quarters and that's a change from the last two years where we have been declining. So I'm actually - I think we're starting to see some green shoots and I said quoting activity is higher.

It feels better I guess was the answer. I guess one of the things that we have to be sensitive about is this Escondida strike that I talked about but also in Chile you've got elections in November.

And I think there's a little bit of uncertainty around the outcome of those elections. So long way of saying Michael, I think you need to see a little bit of stability both in the copper price and the macro environment to get sustained improvement in activity levels in Chile.

And just back to the Canadian business and on those margins, I mean you landed within your guided range and up nicely year-over-year. So when we think of margins for next year, I mean, we've seen a lot of rightsizing.

How should we think of the cadence of further progression? Is Q4 a fair starting point?

Maybe just some thoughts on gross margin, SG&A expectation.

Sure. So if you think about margins in general, fourth quarter, 6.2%, we actually feel pretty good about that when you think about sequential improvement and year-over-year improvement.

A lot of that’s driven by SG&A. Also recall, there was some pretty significant cost efforts done in the fourth quarter.

So when you think about COE and headcount reduction, all of those headcount reductions have been announced and people have been notified. But people are still leaving the business as we go through the first quarter.

So I think you're going to see an even lower cost base through 2017. A couple of things to think about.

One, I think an improvement in gross margins on new equipment, as this inventory overhang goes away and the competitive environment normalizes a little bit. That would be helpful.

And if you go back to even the Cat results of a couple of weeks ago, they talked about price realization and how the environment globally was getting better. And I'm hopeful we see a little bit of that in our markets next year.

And then the last point I guess is I think about progression, I mean, first quarter is always a very seasonally low quarter in Canada and so as we start to see improvement in margins in Canada, I do think it will be a mid-year back year type event, but I feel pretty comfortable where we are given the SG&A reductions we've taken.

Okay. Thanks, Scott.

And if I just could sneak one more in, for stock comp, 24 million this year versus 1 million last year. Could you help precisely how much of that is associated to the movement of the stock price?

I don't have the answer on the full year. But in terms of the fourth quarter, which was I think $10 million in absolute, that was all [indiscernible] related.

I have to get back to you on the full year 2016.

Scott, you mentioned, in terms of capital allocation, plan to pay down some debt in the back half of this year. What does that mean in terms of your ability to do buybacks and just maybe how you think about buybacks and the overall capital allocation plan that you've got going forward versus M&A and other options?

Yeah. Thanks.

So the $370 million of free cash flow was, I mean, that was a good outcome for us and we were projecting probably 330, 340 and we did a little bit better, because of the pull-forward of some cash. So we feel good about that.

And then as we look in ’17, I think Steve indicated in his opening comments it’s plus or minus 300, coming in the first quarter a little low, but plus or minus 300. So the balance sheet is in great shape.

So as we think about allocating that capital, lots of options. The first option is repayment of half of the debt essentially that we've been struggling with, that’s an ’18 maturity and then we have more capital and that more capital can be allocated to internal growth, internal initiatives, share buybacks and M&A and I'm open to all three of those to tell you the truth and you're seeing actually some internal capital being deployed, both in ERP and digital to the tune of over $40 million improvement.

You're obviously going to see us renew our NCIV in May. That all is dependent on share price and where we are in that whole valuation, DCF valuation of share price.

And then M&A, I mean you saw a little bit of that this quarter. I mean, immaterial, $5 million, less than $5 million.

But, all four of those options are open to us here and we’ll evaluate as we go through the year.

Okay. And then just as a follow-on to Michael's question, would you care to put a number on where you see the Canadian EBIT margin in ’17 like you did for South America?

No, I mean, we said 6 to 7 for ‘16. We got that number, albeit at the low end.

As you think about ’17, more costs on a normalized basis are coming out because some of that actual is taken in the fourth quarter and we’re thinking about flattish revenue and so I think you guys can make your judgment based on that.

Okay. And you feel like you're done at this point in terms of the restructuring and stuff like that and the focus is really going to be now on operational initiatives or you're still, you’re watching it closely, but you’re a little more comfortable than you might have been six months ago?

Definitely more comfortable, never say never, but I would say that our focus is turning to growth, profitable growth that pivot from the pure cost reduction mode to taking advantage of some of the green shoots and that's a difficult pivot to make frankly. But that's what we're focused on as we think about ’17 and ’18.

Good morning, guys. On the -- Scott, you’ve talked a little bit about it, but I'd like to get more specific commentary on where you think you are with inventories now and what the working capital assumptions with flat revenue would look like in 2017?

Sure. I’ll let Steve answer that.

Good morning, Ben. As far as I noted, we met our commitment and we reduced new equipment inventories in Canada by 175 million.

That was then offset by modest investment of around 25 million in increased inventory, supporting the growth in Argentina and you saw which drove revenue growth in Argentina and South America. So we feel pretty comfortable with where we are on parts management and parts turns where you feel there is continued improvement and we have initiative to improve new equipment turns.

So we think there's still room to go on inventory and as a percent of sales and we're working towards that. So I would anticipate modest improvements in 2017 in new equipment turns and think about in terms of them generating about plus or minus $300 million in free cash flow again.

So there's maybe another $300 million of inventory to come out?

No. I don't think so.

But I mean if you -- like we've had this discussion before and if you look at the turnovers and Scott, it was interesting how you alluded to the sensitivity of your inventories, the turnover ratio, a small fraction drives a lot of cash from inventories and your turnover ratios are still historically low. I think you sad 30 million for every 0.1.

So for every full turn, you get 300 million and I mean this is real back of the envelope, but I look back at your 2011 inventories were about 200 million, $150 million lower than where we ended ’16 and you had higher turns despite the problems that ERP caused at that time on the same revenue base, like your revenues in ’11 were above where they were last year. So I know something's just not adding up for me in terms of how much inventory you could still free up if your turnovers went to a more normalized level?

Yeah. I think Ben, the disconnect a little bit is to your question is I don't think we feel like we have $300 million of excess inventory.

When we had, I think we said $200 million and we've worked through that. But we've also been very open that we need to do better on equipment turns and I agree with you, getting back to almost the turn, right back to where we were in 2011 and that creates a lot of opportunity for us going forward.

So I think as we look in ’17, ’18 and maybe even ’19, I mean as you look through depending on what revenue does, there's an opportunity here to generate cash from EBITDA conversion and also an opportunity to generate cash from improving that equipment turn and it’s the sales to invested capital metric by the way. It’s not just reduction in inventory and that efficiency -- improved efficiency will improve the customer experience and generate free cash flow for us.

So I think we’re saying the same thing, which is I don’t want you to think we’ll have excess inventory anymore. We’re through that.

But, I mean I guess it depends on your defined idle inventory, but if you can improve your turnovers by a full points, that’s -- I mean you laid out the math yourself as $300 million of inventory that -- lower inventory that you can run the business on at this current revenue rate.

So, Ben, so I think it’s a factor of sales and time. So improving the turns over time and as you know like elements of cost in a distribution business, you do have a fixed level of inventory even in a slow demand area.

You have to have really to respond to customer demand and because your supply chain isn’t as responsive as one would like in times like this, so you can’t assume a direct correlation in a flat sales and a low demand environment. So we do agree there is room to improve inventories, room to improve turns that will take greater efficiency in our equipment supply chain, where one of our primary focus is.

It will also take faster activity throughput from the market.

Right. Okay.

That makes sense. And then, just on FINSA, you were talking about a mid-8% EBIT margin for ’17.

I might be splitting hairs here, but I think in the last call, you were a little more precise at 8.7, 8.8. So is that a small reduction in target range for the margin and if so, what would account for that?

Yeah. Nobody has, Ben.

I mean I think we've been really successful last couple of years running that business at the high 8s and 9% type margin, very consistent and a lot of that has been because of both SG&A and improved contract performance. So the team has done a great job.

As we look forward, we're going to make some investments in the FINSA and that is primarily going to be the ERP and digital initiatives and that comes with capital expense, but also some operational expense, and so that takes the margin down from that 8.7, 8.8, 8.5 and you picked up on it. That’s the right way to think about it.

Okay. That's helpful.

And sorry, can I just squeeze in a real quick question on the tax rate, because there were lots of moving parts, not just this quarter, but past quarters and I think there was $0.05 of accrued benefits from prior quarters. This quarter, so how do we think about that on a normalized basis going forward, Steve?

Can you give us -- has anything changed there?

No significant change, Ben. So we qualified for this inflationary adjustment in Argentina in 2014.

You can’t see if you quality until late in the year. So we think our tax rates will continue in the 25% to 30% range in the current situation with lower earnings and higher earnings coming from higher tax jurisdictions such as Argentina.

Then you could expect it to be in the middle to the upper part of that range.

Good morning. Had some questions on UK outlook.

You talked a bit about the product support opportunities that they've changed, can you talk a little bit about the changes you're seeing and also the changes that you expect coming to your operating model there?

Sure. Yeah.

So a couple of things just on the UK in general. The 3.3% margin, I think what they did in the quarter, I'm actually pretty pleased with.

I mean, that’s -- when you add on the improved capital efficiency and here is an example of taking new equipment turns from 3 to 5 and that should be higher because of the small unit, but you get to a 15% ROIC on the back half of the year and that’s ultimately the sign of success for that business. We keep that up.

That's what I'm trying to do in 2017. When you think about product support, I mean this has been the reason we've had to adjust the model a little bit is we were over reliant on coal and oil and gas and a few large customers that had a little bit higher product support and a little bit of margin.

So when they went away, we had a cost structure that couldn't support the current business levels. And as you think forward, I don't think the coal business in the UK is coming back.

I don't think the North Sea business in the UK is coming back. I think there's some opportunities potentially in decommissioning.

There may be some relief in steel and you're seeing that with Tata. And I think there's some real opportunities in infrastructure.

But if that has changed the business going forward, you need to adjust that cost structure and I think we have the benefit also of an e-commerce opportunity and a digital initiative to take an omnichannel approach or with facility optimization and that is what we've done, both on the facility side and the cost structure side and it’s paying dividend. So as I look forward, I think you should just expect the same, right that what you've seen in the last two quarters and if we can do that, that business attracts capital.

It’s over the cost of capital and it attracts capital from us.

Can you talk a bit about the competitiveness of the Cat product in the UK market? I thought it was interesting to see some of the comments you made about the UK market, but then it sounds like in Canada or at least in BC that you’re actually seeing we’ve taken some market share on the construction side.

So clearly, it's working there, just hoping to see or hoping to hear a bit about the difference between the two markets?

So on the general construction side in the UK, we’ve done a great job of getting more market share as well. I think the challenge has been on the smaller machine product and we're working hard with Cat to pursue profitable market share opportunities and that will be the focus going forward and it's not a different situation in Canada.

We've been very successful on the general construction as well. So the real difference between I think Canada and the UK is on the smaller machine product and we're going to have to work really hard with Cap to make sure we’re pursuing profitable market share opportunities.

I think the one thing we all have to be sensitive to is the devaluation of the pound relative to the euro. And that's know another impetus to making sure we have this cost structure and capital efficiency in as good a place as we can.

Yeah. Thanks, guys.

Just a couple of questions. First, can you elaborate a little bit more on the significant quoting activity that you saw in Chile?

Is that for mining trucks, is it for construction or your whole suite of products and any help there will be appreciated?

Yeah, sure. It was mostly mining.

It was mostly mining and hence that we saw not only, I mean, we saw order backlog, an improvement pretty significant in Argentina and that was a big driver of it, but we also saw and that was from the order intake perspective, but we also saw more quoting I would say associated in our mining business in Chile. And I think what's happening is people are preparing for a higher copper price, but not necessarily willing to commit yet, until they see some stability in that copper price and that’s what I'm talking about to.

Okay. But it's in Chile and Argentina and it's in mining and it's in new equipment or is it just more like rebuild activity that you’re talking?

Yeah, sorry. So let me clarify.

So we saw an increase in new equipment sales in the quarter in FINSA, which was very encouraging, because I think it was the highest new equipment quarter in the last two years. That is Argentina.

That is improvement in construction activities in Argentina and improved market share. As I think about the quoting, it's mining in Chile and that is both on the rebuild side and on the new truck opportunity.

Okay. Got it.

And then on the rebuilds in Canada, I mean you talked about this for the last quarter or two. Would you say that that has accelerated even further with since maybe OPAC’s decision to ratchet back production or anything like that or has it just stayed stable with where you were six months ago.

Well, I was pretty open about our optimism for that three months ago and I think that's coming to fruition. And so when you look at product support in, well, just look at product support year-over-year, Ross and adjust for the fires and in a flat market, right.

It is flat product support and that has strengthened mining or weakness in construction. As we look forward, we're actually expecting modest growth in product support and it's the same drivers, right, rebuilds and oil sands driving the strength, a little bit of weakness in construction.

And then what's offsetting that is new equipment weakness in Canada and so that’s a little bit how we’re thinking about 2017.

Hi. Good morning.

There was a comment made about the digital initiative being accretive in year two like 2018 or so. I just wondered if you could clarify what that means, is the EPS, are you expecting significant EPS growth in ’17 to start with or I just wasn't sure about those comments?

So I think what I said was there's going to be $25 million of spend in 2017 and that will be dilutive to EPS by $0.02. As we ramp up the revenue associated with our digital initiatives, we expect to get to that accretive part in 2019, so where revenue and gross profit is exceeding the expense.

Okay. And I just wondered if you could comment, I thought it was a little unusual that Finning will be guaranteeing a CAT financed piece of equipment out of Argentina.

How much of your new sales are guaranteed by spending in Argentina that are financed by Cat Financial.

Not many, Sara. So this was very unusual.

It was before the currency rules and the import export limitations put us in a situation where Cat Inc sold these machines on our behalf and they were financed by Cat Finance who only finances blue ribbon companies in Argentina by the way. And because of the nature of that three way transaction and they were selling, Cat Inc selling on our behalf to meet the import/export limitations and we guaranteed that.

So it's a bit of a very unique transaction. It's not the normal transaction where Cat Finance is financing to abstract with a customer and then abstract in passing the cash to us.

So it was a unique situation to meet the import/export and currency restrictions and limitations. So very unusual.

So the recent sales, I mean I think they were up 33 million or something in the quarter year-on-year to Argentina. If we look at those, is that like a direct sale where you receive US dollars upfront from the customer or they’re financed by cap, but not guaranteed by Finning?

Yeah. A few of those are financed Cat, like I say Cat Finance in Argentina only does the blue ribbon large companies and so these are typical general construction market customers, some with local banking, some where we carry normal credit and no terms and normal security of the equipment and et cetera.

I think the other thing to know too Steve is that we get the US dollars out given the currency restrictions going away, the payment is quickly brought out in US dollars. So we're not taking pace of risk either.

Correct. And the sales receivables from sales are all indexed to US dollars.

Okay. So you feel like this issue is behind you at this point?

Yes. It was very unique.

Thank you operator and thank you everyone for listening. We look forward to speaking with you again next quarter.