Finning International Inc.

Mauk Breukels - VP, IR and Corporate Affairs Scott Thomson - President and CEO Steven M. Nielsen - EVP and CFO

Cherilyn Radbourne - TD Securities Yuri Lynk - Canaccord Genuity Michael Doumet - Scotia Capital Michael Feniger - Bank of America Merrill Lynch Jacob Bout - CIBC World Markets Ben Cherniavsky - Raymond James Devin Dodge - BMO Capital Markets

Thank you, Carl, 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 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.

Thank you, Mauk, and good morning everyone. I will start with the highlights and then provide some commentary on each of our regions.

We had a strong quarter, achieving the highest EBIT and EBIT margin in more than two years. Market activity continued to recover.

We saw revenue growth in each of our regions and across all lines of business. While our revenue was up 10% year-to-date, earnings increased by 60%.

The profitability improvement in the quarter was driven primarily by a lower cost structure in Canada. Consolidated SG&A as a percentage of sales was 240 basis points lower than in Q3 2016.

In South America, product support revenues in the quarter were up 12% year-over-year, the first meaningful increase in a few years, all driven by improved mining activity in Chile. Our working capital metrics are improving as we continue to transform our global supply-chain.

Our working capital sales ratio is down 320 basis points from Q3 of last year. And finally, our return on invested capital increased compared to 2016, as a result of higher earnings and improved capital efficiency.

In Canada, oil sands activity has held up well, driving demand for product support. Our Fort MacKay facility is busy with repairs and equipment rebuild and our OEM facility in Edmonton is rebuilding components at record levels this year.

Overall, we are seeing more confidence in our Alberta customer base as oil and gas activity has picked up significantly during Q3. Despite improved activity levels, the operating environment in Western Canada remains challenging, particularly in the oil sands.

We are maintaining a relentless focus on labor and asset utilization to become more efficient and competitive and support our customers in reducing their costs. Late last week we announced we will be utilizing Raptor Mining for our heavy welding activity.

Raptor is a strategic alliance partner with Caterpillar and an existing supplier to Finning in the oil sands and across our mining business. We expect this move will enable us to continue serving our customers with a more flexible cost model.

The transition of heavy welding to Raptor will be phased and is expected to complete by mid-2018. As a result of this strategic initiative, we expect to incur some modest restructuring cost in the fourth quarter.

We continue to optimize the composition and upgrade the quality of our rental fleet. Customers are responding well to the changes we've made.

We are achieving improved rates and utilization in Canada, which is driving stronger financial performance in rental. Importantly, since we have combined the management of our new, used and rental fleets, our customers now have a broader range of equipment options and price points.

This approach has improved the profitability of our overall equipment offering in a market which remains highly competitive. In South America, we are seeing positive signs in mining, which support our constructive view on longer-term copper opportunities.

Copper is holding above C$3 and 2018 copper production is expected to increase by 6% over 2017. This is aligned with our view that activity will increase in Chile in the medium-term, particularly if we get a positive outcome to the November presidential elections.

This quarter also saw a turning point in the aftermarket in Chile, with product support growing 12% year-over-year. If we exclude the impact of the Escondida strike, our product support revenues were up 7% year-to-date, reflecting improved equipment utilization.

Our growth driver in South America this year has been Argentina. The outcome of the recent elections gives us confidence that the growth momentum we have built in Argentina will be sustained.

President Macri's decisive victory should support the completion of economic and institutional reforms, which have already been underway for the past two years under his leadership. We expect that the new fiscal, tax and labor laws will improve competitiveness, lower the cost of doing business, and encourage investment in Argentina.

As a result, we believe that the current level of public investment in infrastructure will continue and oil and gas development will accelerate going forward. The team in the U.K.

has done a great job of transforming the business and achieving sustainable improvement in operating performance. Year-to-date revenue was up 15%, while SG&A is down.

The working capital sales ratio has improved significantly and is running below 15%. Substantially, higher profitability and capital efficiencies are enabling the U.K.

business to generate a solid return on invested capital of approximately 15%. The U.K.

team remains focused on transforming the supply chain, processing high-volume, lower-value transactions more cost-effectively and becoming a digitally enabled business. The U.K.

business has made significant steps forward in our e-commerce offering. Given a small geographic footprint, a centralized distribution center, and the proximity of supply sources, it is a prime market for achieving performance improvements from growing our e-commerce investments and an omni-channel strategy deployment.

We've achieved a meaningful increase in e-commerce activity in the U.K. compared to last year.

We expect our e-commerce initiatives to generate higher revenue, improved parts market share, and enhance the customer experience in all regions. Our long-term digital strategic initiatives continue to gain momentum across the whole business.

We've assembled a diverse and experienced digital team and the result so far this year have been excellent. South America's online transactions in the third quarter far exceeded the volume in the first half of the year.

In Canada, our business-to-business transactions online were well above our expectations. And I'm also pleased with the progress we are making on connecting the assets in our territories to increase the availability of real-time data.

Year-to-date, we've connected 70% more machines than over the same period last year. We remain on track to have 80% of machines in our territories connected by the end of 2019.

This is creating excellent data that will allow our analysts to deliver internal performance improvements and also the insights our customers are looking for. We are seeing some positive signs that the equipment markets are recovering.

Rental rates and utilization are up, auction results are weaker, inventory levels are being reduced, and factory lead times are increasing. Our revenue growth was 10% year-to-date.

Despite continued momentum in our end markets, we expect revenue growth to moderate in the fourth quarter due to the strength at the end of last year. In addition, we expect our EBIT margin in Canada will moderate somewhat in Q4 because of a larger mix of new equipment sales relative to product support.

Overall, I'm encouraged by the strengthening activity and opportunities in our markets and pleased with the ability of our team to deliver improved results in the early phases of the up-cycle. I will now turn it over to Steve.

Thank you, Scott, and good morning everyone. We are very pleased with the profitability improvements achieved in the third quarter.

Adjusted EPS of C$0.35 demonstrates strong operating leverage. While year-to-date revenues were up 10%, adjusted EBIT increased by 42%.

Canada reported a strong quarter as market conditions continued to recover. Year-over-year, revenues were higher in all lines of business and across most sectors.

In the oil sands, demand for parts, component rebuilds and machine overhaul remained robust. We are also encouraged by a pickup in parts support activity in the construction and oil and gas sectors.

Although demand for equipment has improved, pricing remains very competitive. As you'll recall, we have reduced our fixed cost base by about C$150 million since 2014.

So, despite a decrease in gross profit margin year-over-year, Canada achieved significant operating leverage in the third quarter with EBIT growing over 60% on a 19% increase in revenue. EBIT margin improved to 7.9%, supporting a lift of adjusted return on invested capital to 12.3%.

South America delivered an EBIT margin of 8.5% and an adjusted ROIC of 16.4% in the quarter. The team continued to capitalize on strong demand for construction equipment in Argentina, which was the main driver of higher new equipment sales in the quarter.

We remain optimistic about opportunities in the Argentinean construction and resource sectors. Importantly, our product support revenues were up 12% in functional currency, reflecting improved demand for parts in the Chilean mining industry.

Higher copper production and a gradual increase in mining fleet utilization in Chile should support a continued recovery of our product support volumes. As Scott mentioned, our U.K.

and Ireland operations have been transformed to generate a solid return on invested capital. Top line growth in Q3 was driven by higher revenues in power systems, particularly in the EPG and industrial sectors, and continued robust demand in general construction.

Improved project execution and tight control of SG&A costs resulted in higher profitability compared to last year. EBIT margin was 4.1%, the third consecutive quarter that targeted EBIT margin has been maintained in the U.K.

Third quarter free cash flow of C$22 million was lower than we had expected due to additional working capital requirements associated with strong revenue growth. We remain focused on achieving our annual free cash flow on working capital targets while meeting increased demand.

However, considering higher inventory needs, including some large orders for early 2018 delivery, our annual free cash flow will most likely be at the low end of our targeted range. The work to transform our global supply chain continues in all of our regions and we are seeing the benefits of better working capital efficiencies.

Despite having to meet higher-than-expected growth in demand for equipment and parts, we continue to improve our working capital metrics. Compared to the third quarter of last year, inventory turns were up 15% and the working capital sales ratio improved by 320 basis points.

Invested capital turnover increased in all regions, contributing to a recovery in our return on invested capital. Our strong financial position, capital discipline and improved profitability support our capital allocation priorities.

We are investing in the business to capture growth in market activity, including the optimization of our rental fleet. We also continue to invest in our long-term strategic initiatives, particularly our digital and e-commerce capabilities.

Our dividend was raised by 4% earlier this year and we recently redeemed C$350 million of debt by repaying C$150 million and refinancing C$200 million at a significantly lower rate. The estimated interest savings will result in approximately C$0.06 in additional annual EPS.

I will now turn it back to Mauk for the questions and answers.

So, 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.

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

Wanted to start with a couple of questions on Chile specifically, maybe starting just at a very basic level, if you can update us on the utilization of your fleet in Chile?

So the fleet utilization is around 14%. So we have seen that come down from 20% to 21%.

I think the last time we updated you it was around 15%, and now it's about 14%, and so continued to improve when there is obviously more trucks to go back to work. I think the big difference in Chile relative to last couple of years is the increase in copper production.

So, if you look, even though the last couple of months copper production is up in I guess July and August 2017 versus July and August 2016, and then we look at 2018, we're forecasting 6% or 7% copper production increase. And I think that's the big driver between where we've been on product support growth and where we were in the third quarter.

And so, do you think that that increase in copper production next year will be enough to sort of absorb the fleet that's currently parked down there?

I mean you're never going to fully absorb the fleet, right. So, I think the average historically, correct me if I'm wrong, that's kind of 6% to 7% of fleet is always unutilized, right.

But you can see there is a big movement away from 14% to 6%-7%, and so I think you'll see some of that fleet go back to work for sure. But I must say, I have said this on a couple of calls previously, but I am feeling more confident about this now given the state of negotiations that we're having with our customers, but there is equipment activity going on in Chile.

And so, our customers are looking at not only putting fleet back to work but buying new equipment, and that's not in the third quarter numbers but I feel pretty good about that showing up in 2018.

Yes, I mean I guess I would have thought some of that would be starting to emerge just given there were some quite bullish comments made at LME Week last week. I think there's at least one large project that could see an FID early next year.

Presumably that's providing better visibility.

It is. So you've got an election in November, and right now I think the polls would put Pinera at quite a significant lead over his competition on the left, but it will undoubtedly end up in a runoff in December.

And so, I think as we end the year, you're going to have a lot more clarity on the business confidence levels in Chile. Actually if you track the business confidence, even as this polling has increased, you can see an improvement in business confidence, and so part of that is I think already being factored in and that's probably why we are seeing an uptick in our action with our customers around equipment frankly.

Great. That's helpful.

I'll pass it off.

Good quarter. Scott, operating leverage was as you mentioned very strong in the quarter.

How much more room do you have to leverage that fixed cost base before you have to add a little bit more on the fixed cost side? And maybe as a follow on to that, is there some metric that you want to share with us, whether it'd be SG&A as a percentage of sales or something like that, that you think you can strive for in 2018 and beyond?

Right. So, when you look at the results in the quarter, it's primarily a cost reduction story, right.

I mean gross profit margins are down modestly year-over-year and that highlights the competitive pricing environment that we see in Western Canada. I think it's – I mean we are all very cognizant of the pressures our oil sands customers are under and we want to make sure we're increasing our asset utilization and reducing our cost structure as much as we can to provide competitive services to them.

So that's kind of the backdrop. But you did see significant operating leverage here because we've been working hard over the last couple of years taking out C$200 million of costs in Canada through labor reductions and footprint optimization.

I think there is still a little bit more to do and you see this Raptor announcement, as we're being very sensitive on how to run a cost flexible model, and the Raptor strategic initiative is one example of that. This quarter I think our SG&A globally was down by 250 to 300 basis points, and consolidated basis it's the first time I think since I've been here that we're under 20% on a consolidated basis.

And so, as I look forward, I think we're going to see continued momentum, I think this recovery is broad-based, we're seeing it across all of our geographies. So, I think we're going to continue to see revenue growth.

Rebuilds as an example continue to be strong in 2018 relative to 2017, even modestly up. And so the key for us is exactly what you said, is keeping the costs contained and Juan Carlos and the team are laser-focused on that and you see the results in the first quarter and hopefully we can see similar type results as we look at 2018.

Okay, that's helpful. I guess my second question would, just on the margins, I didn't see a lot of talk in the MD&A about the service side.

So, how did the service side of the business perform relative to parts?

I think that's a really good point, Yuri. That has been a big change over the last few years, and the oil sands is the perfect example of that, as we have taken activity that was in three or four facilities and we have consolidated into Fort MacKay.

That Fort MacKay facility is a world-class facility, as is OEM, and both of those are running at very high rates of utilization. And so, as the economy picks up and as business activity picks up and we add people or mechanics to OEM, for example the third ship, that's additive or that's accretive to the overall financial results, and that's a much different situation today than three years ago.

And so, I mean that's a good point, I should have mentioned it.

Those were my two. I'll turn it over.

Thanks guys.

Good improvement in Canada. I want to maybe ask the flipside to Yuri's questions.

So, I mean gross margins were down there in the quarter. We're seeing lead times extend and pretty good price realization from Cat.

I know things are competitive out in Western Canada, particularly with the oil sands, but how much or what would it take to get gross margins to see some improvement here?

I mean I think we are not seeing price realization in our territories, and I think Cat, I mean I listened to the Cat call too and I've talked to the Cat folks, they are a global company. What I know is they are being very supportive and supporting our customers in our territories.

So I don't take the overall Cat results and put that on to Western Canada. And so, it is competitive, we're going to continue to focus on the costs and providing a good service to customers.

I think ultimately the environment hopefully lets up at some point. I think something like our rental strategy, rental, used and new, has been very helpful and will continue to be helpful.

By combining those businesses, offering different price points to our customers, allowing us to move new equipment quickly and provide a good option for customer, a slightly higher profitability for us, I think is something that we're going to continue to focus on 2018. It was really interesting that we have two quarters in a row on the rental fleet where we have increasing rate, increasing utilization and increasing profitability in our rental and used fleet.

And this is a win-win for customers because we are providing different alternatives, different price points, and it's a win-win for us because it allows us to help on the gross margin side. So that's going to be a big focus in 2018 for us as well.

Scott, thanks. For the rental component, just to follow-up, pretty decent increase on the net investment year-to-date.

How do you feel about the rental business today and potential upside there, and is the growth coming from certain areas or is this really just growth alongside the overall market growth?

I think it's true, I think there is a little bit of growth that's just market related, and then I think there's a part of this is better execution from us, and we've done a lot over the last three years optimizing the fleet, bringing in capabilities, combining our rental and used business. And so, I am feeling much more comfortable today than I would have a couple of years ago on allocating capital to the rental business.

And so, you've seen an uptick in 2017, you're going to see more capital deployed to that in 2018. I think that's going to be additive to what we see on the margins and the return on our capital side in Canada.

Okay, perfect. Those were my two.

Thanks Scott.

Scott, you mentioned that there could be some buying of new equipment in Chile. As we head into 2018, how much more inventory do you need to build for next year with this improving backdrop?

And with other regions, dealers also see improving activity. I'm just curious, do you need to place orders well in advance to get a hold of equipment, how are lead times with Caterpillar right now?

So, good question. I think Cat was pretty open on their call that they are seeing some extended lead times on both new equipment and parts.

We're feeling that as well. I think that's not just a Cat-OEM problem, I think that's worldwide among a whole bunch of OEMs.

So, I think we are all in the same boat. It is requiring us to be pretty thoughtful around when and how we order equipment, and so we are engaging with Cat pretty closely, and the customer frankly to make sure we understand the requirements, are very upfront around the lead times and get those orders in sooner rather than later.

I think one of the real changes in the last – we've talked about this a lot with you folks, I mean we have really transformed our parts supply-chain over the last four years, I'm really pleased with what we've done on new equipment over the last year. And so you look at our new equipment, turns are up by 0.6 or 0.7 year-over-year.

And so, our new equipment supply chain is working better, it's higher velocity, but we've got some extended lead times and so we're going to have to continue to put in orders and be thoughtful on that S&OP process to make sure we are meeting the customer requirements but not getting stuck with excess inventory that we can't – we get stuck with. And so that's a day to day challenge we have at Finning, but I feel a lot better about where we stand today than where we were a year or two ago.

Thanks, and I might have missed it, Scott, but you mentioned in Alberta you saw a pickup in activity in the third quarter. Was that just an oil and gas mining comment, was that more OE, or is that just broad based, so if you could expand on that?

I mean we're definitely seeing a pickup in Alberta as a province, right. I mean, GDP is kind of 3%, which was last year negative 3%.

And so I think it's broad-based. I'd say where we're seeing the biggest difference from a new equipment sale would be in our general contractor base, and that in units sold this year relative to last year are up pretty significantly.

I think the oil sands is primarily a product support, rebuild activity set right now, but it's the general contractor base in Alberta around new equipment that's making a big difference.

That's great. And just to sneak one last in, with parts demand up double-digits in South America, the inflection there, should we be expecting you getting closer to that 9% margin as we move into, as we are in 2018, or is the pickup on new equipment, you're going to still see some of that mix issue there?

We were getting a little bit of a mix. So when you look at Argentina, I think Argentina sales are up 60% year-over-year, so I mean big uptick in Argentina and that's a lot of new equipment.

So we haven't seen that phenomena for a couple of years, which is good, but it does have a little bit of an impact on margins. And then, as we said when we started this year, we're really running at 9% in [indiscernible], which is historical average.

There is a 0.5 margin impact of implementing the ERP system, which is going really well. We're now halfway through it and it will be implanted next year.

And so we're going to still see that impact in 2018 relative to 2017. But then I do expect you're going to see profitability torque off of the back of that certainly.

Had a question on Finning Digital, I guess you talked about the levels of connectivity around 80%. Are the customers actually paying for this, and maybe you can talk a bit about some of the productive modeling that you're doing and how big of a revenue source will that be for you?

So, as you think about connected machines, we've been on this journey now for about a year and a half in terms of really putting the accelerator down on it. And I think when we started talking to you, we were about 23% to 25% connected in our territories, and now at the end of the year I think it will be 33%.

So you can see it's a significant increase year-over-year in progress, and the commitment we made to the Board and to you was to have 80% of our machines connected in territory by 2019. I think when you look at the Cat strategic review that's just come out, it's very consistent with what we're trying to do around connectivity.

And so I feel really pleased with Cat and Finning being aligned and driving that connectivity. What we see from a connectivity perspective is, people who are connected and have customer service agreements get better performance from their own fleet and it results in higher aftermarket for Cat and the dealers.

And so it's a win-win for both the customer and us. And we don't view it as a revenue source per se in terms of the connectivity, we use it more as an enabler to drive aftermarket, which also then allows you to build value-added services on top of that and those value-added services like connectivity, like insights off of the data, can be commercialized.

I would say that we are in the early phases of that commercialization of those value-added services, to be quite honest, Jacob. We've got a couple of customers right now who we've connected their whole fleet worldwide actually and we're providing some pretty interesting insights to them, and there is a commercial model associated with that, but that's the early days.

And so I feel good about it but this is a long-term journey to create services that both benefit the customer and benefit the larger Caterpillar dealer enterprise.

And so the data analytics, this is done by – is this done in-house, are you working with Cat on this, or…?

Yes, for us it's done in-house. So we've got a team of data scientists that we have hired now over the last two years.

It's a group of people that not only take the data but then drive insights. We're at different levels of progression across all three of the regions.

I think what you're going to see is it's going to be a combination of Cat and the dealers doing this over time. But right now, with some of the customers that I referenced, we are providing those insights to customers.

And my second question just on the competitive pricing environment in Canada, is that primarily just on the new equipment or does this extend to the parts and service?

It's broad-based. I mean we've got as we all know a very difficult commodity price environment on the oil and gas side and a lot of our customers are under considerable – continue to be under considerable pressure.

And so, as we are working to be more efficient, to be competitive, they are too, and so it's across both new equipment and parts.

Can you elaborate, I know you already had a few questions on rental, but I wouldn't mind digging a little deeper on that. In just maybe taking a step back and talking about how that strategy has evolved, it sounds like you are now in a more integrated approach.

A couple years ago I think you were trying to break that out a bit and set up more of an independent rental operation. It seems like the strategy for rental with Cat dealers sort of varies from dealer to dealer.

So, what's the driving, the strategic sort of vision of what rental is doing, and how do you know if it's – sounds like this integrated approach with used, how do we look at the profitability of that as a rental business versus your used profitability, like what kind of transparency do you have to the performance of that business unit?

So, great questions, and it has been a pretty significant change over the last few years. And so, as I've been pretty open with everybody, when we started this journey four years ago, I think we were pretty convinced we didn't have necessarily the capabilities to run a rental fleet and compete with the United [indiscernible] of the world, and I'm not sure the whole interaction between Cat and the dealer was designed for success in terms of allowing us to have a financially sustainable business.

So there has been a lot of work done with Cat over the last few years, and Cat has committed to actually making this attractive and sustainable for the dealers, which is step number one, and us and dealers have gone out and got capabilities. So, as you think about Kevin Parkes, who runs our U.K.

business, he comes from a rental background. When you think of our Canadian rental leadership right now, they come from a rental background.

And one of the things that both of them have highlighted to us is the imperative of having the rental and used fleet connected. And so, you're right, it does change the way you track this business.

You have to think about rental and used together from a profitability perspective, but it has so many advantages because you can use that rental fleet to feed a used market and that used market then can create different price points for our customer base, and frankly then sets the foundation on which new equipment margins can be built off of. And so, I think there is a real opportunity here for us to have a more profitable business, but also to provide different price points for customers and make it helpful for them as well.

And so, the last couple of years has been getting the rental fleet resized, getting the composition of that fleet appropriate for what's then appropriate for the used fleet, because if you don't have rental equipment that actually can flow in the used and be desired or demanded by the end customer, that whole situation doesn't work. And it's been complicated by the downturn, and when we had the downturn and you saw the reduction, all the progress that we had been making over the last couple of years was masked.

But now when we see a little bit of an improvement, we see that rental and used fleet working together, we see a fleet that's been resized, we see SG&A at a better level relative to what we're trying to do, and you're right, better integration between the core dealership and the rental operations, you start to see the results that we've seen in the last couple of quarters. So, pretty significant philosophy change, but I am convinced that this is the right way forward for our region.

So can you give us a few goalposts on what this could mean? I mean, rental has shrunk down to a fairly small part of the business compared to what it used to be at least, but also I guess we have to think about that now with rental and used.

And was there a – my understanding is I think particularly in depressed times there, rental was actually a drag on your profitability in Canada. Is it now contributing to profits or are you sort of seeing that on the horizon or what's the sort of needle-moving capability of the strategy?

I think it's really important to think about rental as a return on capital business. I mean it's an asset velocity business.

So one of the challenges you get into it, if you just think about as the profitability, like an EBIT margin, you end up with too much fleet, a negative return on invested capital, which is exacerbated when you go through downturns because you have too much fleet and then the activity goes away. And so rental has always been additive to the margin of the business, but when you run a business on return on capital, it has not been additive to the return on capital of the business.

And now to dig up another philosophy change and one of the reasons why the fleet got shrunk down during the downturn, now as we have the right-sized fleet, we have the right equipment in that fleet, we can have high velocity from a rental fleet into our used fleet, everything on the rental fleet is for sale at all time, so it's a good customer proposition, and you see then higher margin used opportunity, higher asset velocity in your rental fleet, and it sets the residual value, the foundation for which you price then your new equipment margin. So, it provides all benefits, both from the asset velocity and the margin perspective.

So I don't want to belabour it, but you mentioned a good point about how it drives pricing through the whole organization, and when you said that it was additive to margin, I'm assuming you mean on an EBIT basis, but is there a way to understand like after you account for the disposal value of it and if you were recognizing losses when you sold the equipment, or if it has a depressed nature on your gross margins, was it dilutive in that respect at all?

I mean I don't have the full rental/used P&L in front of me, but it's not dilutive. I mean what we're seeing is it's actually pretty significantly accretive.

But historically, was it…?

No, historically, I don't know that answer, Ben, other than – because we didn't run the rental fleet and the used fleet together. I mean I can go get those numbers, but…

No, okay, that's all right. But I mean that was, the idea is to sort of prevent that from happening?

Here's a perfect example. You had siloed businesses, right.

So you had a rental business and you had a used business. Historically, the use on rental business is keep the fleet five, seven years, and that's [indiscernible] does.

And so you sit there and you do that as a rental business and at your year four, five, six, your maintenance starts to improve and your profitability starts to decline and you have no way to dispose of that business because we didn't have the combination between rental and used. Now when you run rental and used together, you decide when the fleet goes from the rental business into the used business, and you do that at the point of maximizing residual value.

And when you do that, you see an overall uptick to the economics for both the rental, the used and the new fleet.

Right. Okay, that's all helpful color.

Thanks Scott.

We've seen some E&P players announce their intention to invest in the Vaca Muerta Shale since late October. So how you see this opportunity over the next couple of years related to the shale play?

Should we think about it being mostly choosing directly into drilling activity or is there going to be some investment in the underlying infrastructure as well?

So I'm pretty excited about Vaca Muerta. I mean I had to temper my excitement a little bit because these things always take a little bit longer than what you think.

But you've seen significant moves by the Macri government to make this an economic place to invest. You have seen some high-profile announcements from E&P customers that they intend to invest, and then you see the midterm elections, which gives people comfort that this is going to be a stable environment for the next couple of years.

And so, our team is working hand-in-hand with Cat to address some of our customers' opportunities. And primarily in the near-term, it's going to be engines, so 3,500, 3,600 engines around gas compression and frac jobs.

And again, it's not a fourth quarter or first quarter issue, but I do think you're going to start to see an impact from this in 2018 at some point.

Okay, thank you. My other questions have been answered.

Thanks.

Just a follow-up, I mean on the oil sands, I know you have mentioned that you are seeing the recovery on parts and rebuild. Just over the next 12 months, do you still see this recovery more of a parts rebuild story or are we be shifting higher to see what may be a bigger pickup on the OE side?

And I know that the higher copper price is incentivizing demand in Chile, but oil prices have also recently moved higher too. Like how do you see, I know you touched on it with the last question, but how do you see engines into oil and gas drilling and gas compression, how is that activity holding up into 2018, because it's been a good story for 2017?

Yes, for sure. So on the rebuild side, I was a little bit surprised I said when I listened to the Cat call and they had indicated that they were seeing softness in rebuilds in 2018 versus 2017 after a strong 2017, because that's not what we are seeing.

We're actually seeing an uptick, modest I mean, but strong 2017 and a strong 2018 with a potential modest uptick. And I think after reflecting on Cat's comment, I think that may have been an Australia based phenomena, because we're not seeing that in Canada.

So I feel pretty comfortable with the momentum in the rebuild activity. I think that was point one.

Point two, on your conventional oil and gas or drilling, well servicing, I agree, I mean we're seeing a pretty significant uptick, and if you look at the Calfracs, the Precision Drillings of the world and you look at the drilling rigs that are deployed today versus last year, it's a significant increase, and I don't think they are seeing or that I don't think they have plans to reduce that as we go into 2018. So, I agree with you, Michael, I think it's a pretty positive story on the well servicing side.

Thank you very much, Carl, and thank you everyone for listening. We look forward to speaking with you again next quarter.