Finning International Inc.

Mauk Breukels – Vice President, Investor Relations and Corporate Affairs Scott Thomson – President and Chief Executive Officer Steve Nielsen – Chief Financial Officer

Cherilyn Radbourne – TD Securities Jacob Bout – CIBC Michael Doumet – Scotiabank Michael Feniger – Bank of America Devin Dodge – BMO Maxim Sytchev – National Bank Financial Ben Cherniavsky – Raymond James Derek Spronck – RBC Yuri Lynk – Canaccord Genuity

Well, thank you, 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.

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 information on the slides is forward-looking. This forward-looking information is subject to risks, uncertainties and other factors as discussed in our annual information from under Key Business Risks.

And forward-looking information and in our MD&A under risk factors and the management and forward-looking disclaimer. Please treat this information with caution, as Finning’s actual results or performance or achievements could materially differ from current expectations.

Except as required by law, we do not undertake any obligation to update this information. Scott, over to you.

Good morning, everyone. We have a solid start to the year.

First quarter highlights, which stand out for me are as follows: Our adjusted earnings per share was up 42%, while revenues increased by 19%. Canada’s discipline on SG&A in a growing revenue environment was as expected, but impressive nonetheless.

As a percentage of revenue, Canada’s SG&A declined by 380 basis points and adjusted EBIT margin improved by 80 basis points to 7.5%. South America is seeing significantly stronger demand from the Chilean mining sector, which drove a 30% increase in product support revenues.

Our working capital to sales ratio improved by 340 basis points to 27% on higher sales and supply-chain improvements. This ratio as it is lowest level in the past two years.

Adjusted return on invested capital of 13.5% is up 350 basis points year-over-year. And most importantly, strong order intake across all regions increased our equipment backlog by over $300 million from December, 2017.

Our current backlog of $1.6 billion more than doubled from Q1 of last year and is now at the highest level since mid-2012. This highlights to me, that we remain in the early innings of the equipment recovery cycle.

I am particularly pleased with the progress we are making in connecting the addressable machine population, which is contributing to product support growth in all of our regions. We finished 2017 with just over 40% of our machine population connected up from 20% in 2015.

We expect to have 60% of our machines connected by the end of this year, and we are on track to our target of 80% connected machines by the end of 2019. This bodes well for future part sales because of the strong correlation between connected machines and our product support market share.

Our view on 2018 remains largely in line with what we communicated to you in February. In Canada, we are seeing improved activity levels from mining producers and contractors in the oil sands, copper and coal markets.

The increase in new equipment sales to the non-oil sands mining sector was the most significant contributor to Canada’s revenue growth in the quarter. We are also capturing improved demand from product support in the construction and oil and gas sectors.

We expect product support in Canada to remain strong, as coal is making a resurgence, our customers in the Tumbler Ridge area are putting equipment back to work and we are rebuilding their truck fleets. In the oil sands the aging profile of our large active machine population is generating strong rebuild activity of trucks and ancillary equipment.

We currently expect the number of 797 truck rebuilds to triple in 2019 compared to this year. As you know, OEM has been extremely busy to meet demand for rebuild components.

During the quarter, we had to perform unexpected maintenance of test equipment at the OEM facility, which negatively impacted Canada’s EBIT margin. The issues have been resolved and we expect to recoup the delayed throughput over the coming months.

Importantly, I am pleased to see the SG&A cost control and the resulting operating leverage in Canada. Canada’s profitability was in line with Q4, and we see a path to higher profitability in the back half of the year, despite the higher proportion of new equipment sales in our revenue mix.

I will now turn to South America. In Chile, copper production levels and fleet utilization continued to improve.

The increase in revenue was driven in large part by the strengthening demand for product support, including component rebuilds. The new government is already highlighting, it is business friendly, and will invest in infrastructure and therefore, our long-term outlook for equipment sales and product support in the construction sector has improved.

We continue to expect FINSA’s EBIT margin to be around 8.5% in 2018 with a more positive trajectory into 2019. In Argentina, we expect oil and gas development to accelerate going forward.

The construction market continues to be very competitive. Although, we have been successful in capturing market share, we are targeting higher risk-adjusted returns in Argentina due to continued political risks.

We have now almost reached our prior peak revenue level in Argentina, and we think that there is significantly more upside in the coming years assuming political stability. In the U.K.

and Ireland, while Brexit has resulted in some economic uncertainty, we have not seen any material impact on activity levels. The U.K.

government continues to invest in large-scale rail, power, road and airport infrastructure projects. Demand for mobile equipment in the quarry, general construction and plant hire sectors is strong.

In power systems, activity levels in industrial, marine and electric power are also very robust. We continue to move from strength to strength in the U.K.

with higher return on invested capital being driven by growing product support, good cost control and high supply-chain velocity. As I wrap up, I’d like to point out that we are celebrating our 85th anniversary this year.

We are committed to securing Finning’s sustainability for the next 85 years. Sustainable companies are innovative and efficient.

They adapt their businesses to improve their performance. I am very pleased that we have just released our first-ever sustainability report.

It covers the sustainability themes, which we believe are the most important contributors to our future success. We report on our metrics on safety, talent development, inclusion, diversity, environment and community, and outline our objectives.

I encourage you to take a look at the report, which is posted on our website finning.com. In a couple of hours, we will host our investor meeting, which will focus on the path to growth as we transform our customer experience.

During the event, we will be speaking about our strategy, digital agenda, and provide updates on each of our regions priorities. We are looking forward to this event, and hope you’ll be able to join us in person or by webcast.

I will now turn it over to Steve.

Thank you, Scott. Good morning.

Our first quarter results demonstrated strong year-over-year revenue growth, operating leverage, improved capital efficiencies and a significantly higher equipment backlog, excluding the insurance proceeds of $7 million or about $0.03 per share related to the 2016 Alberta wildfires. Adjusted first quarter EPS was $0.39 compared to $0.28 last year.

By the way, this brings our total insurance recovery to over $11 million. In Canada, revenue growth was driven by an increase in new equipment sales of more than 60% over the first quarter of last year as demand strengthened across all sectors.

Product support revenues were also strong up 11%. Adjusted EBIT increased by 40% and adjusted EBIT margin of 7.5% improved by 80 basis points, reflecting the leverage of additional revenues on fixed cost.

Excluding insurance proceeds, SG&A as a percentage of revenue declined by 380 basis points. As Scott mentioned, we believe Canada is on the path to deliver improved profitability in the back half of the year.

Canada achieved a 14% adjusted return on invested capital and nearly four point improvement from 10.2% in the first quarter of 2017, driven by a higher adjusted EBIT margin and a 15% increase in invested capital turnover. In South America, we are encouraged by the growing demand for our product support in the Chilean mining industry.

Product support revenues were up 13% in functional currency over the first quarter of last year. EBIT margin was 8.4% in line with our expectations.

And adjusted return on invested capital of 17.8% increased by 220 basis points due to an 11% increase in invested capital terms. The U.K.

and Ireland also reported strong quarter. Revenues were up almost 20% in functional currency, driven by nearly 30% higher new equipment sales in the construction and power systems market.

Profitability or EBIT margin improved year-over-year by 40 basis points to 3.7% as a result of the leverage of higher revenues on fixed costs. Adjusted return on invested capital of 13.4% was up from 7.7% in the first quarter 2017, driven by higher profitability.

Free cash flow this quarter was an outflow of $263 million due to higher working capital supporting increased sales and service activity as well as continued strong demand for equipment and product support. Specifically, we saw an increase in new equipment inventory in all regions, higher parts inventory in Canada, and an increase in accounts receivable and unbilled working progress in all operations.

Despite higher working capital needs, our working capital sales ratio continue to improve on higher sales and supply chain efficiencies. A 27.1% as it’s down by 340 basis points from the first quarter of last year to its lowest level in the past two years.

We remain committed to our goal of generating positive free cash flow in 2018. Our expectation for positive free cash flow and sustainable earnings growth is reflected in the 5.3% dividend increase, which we announced this morning.

I will now turn it back to Mauk for questions.

Operator, that concludes our remarks. Before we go to the Q&A we request everyone on the line that you ask no more than two questions to short turn.

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

Thank you.

Thanks very much, and good morning.

Hi, Cherilyn.

As I look at the total revenue trends in the quarter, what surprised me a little bit was to see used equipment up like percentage versus new equipment sales? And then sort of a slight decline in Rental, which I thought was just a bit surprising, given where we are in the recovery.

So maybe you can elaborate a little bit more on that dynamic?

Sure. I think it’s little bit associated with our run strategy that we’ve been talking to you about.

So Rental being flat in the quarter isn’t a surprise, I mean, it’s a seasonally slower quarter. And so as you move into the second and third quarter, I think third quarter is probably the strongest quarter, and you’ll see our run strategy is going really well and so you’ll see an uptick in the Rental going into the back half of the year.

And then I think it highlights – this run strategy highlights the benefits of it. So we have a lot of flexibility to move between Rental use and new.

Our used equipment sales were strong up 31% year-over-year. And so I was really pleased with that because the market is heightened, and I think we differentiate ourselves on the stock.

And then in terms of South America, it still sounds very much like a product support story. Maybe you can comment on machine utilization rates?

And just how are you seeing the new equipment opportunities starting to materialize in areas like mining, infrastructure and the shale in Argentina?

Yes, thanks. So I was there with Marcello, probably about a month ago, three weeks ago.

And I guess the big takeaway for me is how quickly the sentiment has changed associated with the new government, and we’ve met with the Minister of Economy. It’s clear that the government is focused on getting bureaucracy out of the way and getting things done, so permitting et cetera.

So I think that bodes well for Chile in the medium term. We were positively surprised by the strength of product support this quarter, I mean, up 12% or 13% was really pleasing.

Still you’re right, it’s been a product support story. And I think it’s probably until next year where you start to see these minors release their capital budgets a little bit and buy some new equipment.

Utilization – truck utilization continues to trend down. So I think it’s all coming together in Chile.

But you’re right, product support over new equipment in this last quarter, which relates to Argentina. I think you asked – like second question was Argentina, I mean, Argentina is in the news, obviously, 40% interest rate, so lot of political uncertainty.

We’re managing that business very closely. We think there is a great opportunity there, if we can continue to see political stability.

We haven’t seen a big contribution from the Vaca Muerta yet, but we expected that will be the case. So very pleased with Argentina, but as usual, you’re managing the quarterly volatility associated with political instability.

Thank you.

Thanks, Cherilyn.

Maybe just continuing with South America. So nice uptick there on the product support side, but margins, actually down year-on-year.

Maybe just talk a bit about the competitive environment there?

Yes, no that said. So I think we told you at the start of the year, we were expecting margins in the 8.5%, so this will be in line with what we’re expecting.

Couple of things in the – on the SG&A side that contributed to the decline. So we had associated with Argentina.

Actually, as we’ve seen some of the political instability, we did a little bit of a downside that’s included in those numbers and so there’s some severance costs there. And then also, as expected, we’re getting closer to our ERP go-live and so completely budgeted, but there is a little bit of an uptick in the SG&A in the quarter, associated with that.

So we’re going to continue to stick with this 8.5% through 2018, but as we move into 2019, I think you’re going to see some really positive trajectory on profitability.

Maybe just on the backlog. Nice uptick there, maybe talk a bit geographically, what’s been driving that?

Yes. So the backlog, I mean, I think up $300 million since the end of the year.

And this is the highest backlog we’ve seen since mid-2012. And to tell you it’s broad-based, I mean, it’s across all three regions and it’s across every segment and every region.

And so when you look at Canada, in particular, which I think had the biggest uptick in the backlog. We saw whole construction, oil and gas, oil sands, I mean all of the sectors contributing to the increase in backlog.

And I think this is a really good sign that we’re in the early innings of this recovery. You had a lot of people hesitating to buy equipment, we’re now seeing better end markets and people are starting to recognize that they have to upgrade the fleet.

And so I think it bodes well for the next few years for us.

So it’s not kind of as lumpy kind of big win for first quarter, you just see a sustainability here?

No, we see sustainably. That being said, there was a couple of big orders in the first quarter, which again bodes well.

We’re not going to point those out exactly. But this is not an anomaly.

I mean there is a few big orders in there, but this is a pretty sustainable growth in backlog.

Okay, thank you.

Hi, good morning guys.

Hey, Michael.

Hey. So in your outlook you point to a 18% target on SG&A rate that you expect to achieve in a few years – the next few years.

How much of that do you expect to, say, to come from reengineering your cost base? And how much do you expect of that to come from operating leverage?

Just to get a sense.

Hi, Michael, this is Steve. So that’s a – that’s very good question.

We will get some from the continued uplift in our sales. However, there are significant initiatives to continue to improve our efficiencies.

And as we look over the next few years, we’ll have the benefits of the completed ERP implementation in South America. We’ll further our digital agenda as well as our investment in other process improvements.

So we’ve targeted and spoken about in the past, it’ll be a combination of both. But we think there is a sustainability amount of reduction or improvement in our efficiency through those investments and process improvements and technologies.

Okay. Perfect.

And maybe just if you could break that into improvements from the regional basis, as well?

I think, Michael, it’s going to be primarily Canada and FINSA, South America, right. I mean, I think the U.K.

is running at a pretty low cost structure and we’ll keep – try to keep the cost out of the equation. If you look at what we’ve done in Canada over the last few years, from a cost perspective, and even in this quarter 380 basis points down in SG&A.

We’re running it below 20% now, which is the first time since I’ve been the CEO, that we’re running at those levels. So there’s been great improvement, but, of course, when you start to do these things, you see more.

And some of these things like this equipment forecast to cash, where we’ve taken out a 1/3 of the time out of the system from when we forecast for about – forecast to cash, when we collect the cash, reduce the touches. I think we’ve reduced the touches in some of these areas for you by 50%.

30%, 40%.

30% 40%, right? I mean, and when you start to do that, the cost start to fall out.

And so I see that opportunity in Canada, and then as Steve said for FINSA, this ERP, we wouldn’t have done the ERP if we didn’t see a big uptick in our cost structure. And so I think that provides a big opportunity in South America.

Yes, I know that’s got a – I don’t think anybody would disagree that there’s been a great improvement. Maybe just turning to my second question on gross margin.

I feel like only a couple of months ago, I think there’s a lot of discussion about extended lead times and how that would eventually translate into a positive impact to gross margins. I feel as though the market conversation has changed somewhat recently, you might have higher steel prices?

What’s your overall sense of the gross margin trend there, Scott? I mean is it safe to say you get call back on pricing, but that expectation may have been pushed back a bit?

Yes. So there is a lot in that question.

So steel, as we think about it and we’re one step away from the OEM on steel, but our understanding it’s a pretty small contributor to the overall input cost. So I’m not sure that’s a material contributor.

I think you saw CAD talk about price increases last quarter, I think for us, it’s a regular course of doing business, so kind of immaterial. When you look at the gross margin mix, this quarter, a lot of that was equipment mix, although there was some one-offs in there that we can do better on in terms of OEM being down and for a period of time.

And so, as we think forward – and then lastly, Rental. I didn’t talk about the Rental thing in the first quarter was seasonally slow.

And I think as you go through our Rental used in new strategy will allow us to continue to improve the profitability. But it’s still, as I said, a very competitive environment, I think it will remain a competitive environment, and I believe, I guess we’ll leave it at that.

Okay, fair enough. Thank you.

Hey, guys, thanks for taking my question. Is with – just piggybacking off that the last question.

It’s great to have that target for SG&A as a percent of sales. I’m curious, how do you think about the gross margin on the multi – over the next one to two years.

Is the goal to hold it flat and leverage at the lower fixed cost? Or do you think you can continue, you could actually be in an environment where you can increase your gross margin, while also leveraging at lower cost base?

Yes. I think, to date, what we’ve done is we’ve taken out a significant amount of costs out of the company, and we’ve seen an evolution of our fixed and variable mix.

So fixed has reduced significantly and the improvements that we’ve seen over the last, I guess six quarters, have been primarily higher volumes on that lower fixed cost base. So that’s where we’ve been getting a lot of the leverage.

And I think that will continue, as Steve said. We don’t look at a gross margin target because it’s still impacted by the mix.

And obviously with this business, you want to make sure you continue to grow the infield population, that’s part of this. So frankly, we do see a path through this year, added future years, we’ll talk about future years with you later this morning, but we do see a path through 2018 even with the type of new equipment sales you’re seeing, and I think the growth in Canada was 60% or something, quarter-over-quarter – year-over-year.

Even with that type of growth, we see modest profitability improvements through the year on the EBIT line in Canada.

That’s really helpful. And just you mentioned early innings, which certainly looks to be true.

Your revenues probably going to finish the year maybe closer to your prior peak. Now that obviously includes Kramer and your parts business keeps growing to the field population.

Is there any reason, Scott, why your new equipment revenue – do you see any reason why that should not go back to peak levels? Could exceed it?

I’m just curious how you’re kind of looking on a multiyear view on the cycle there?

Yes. We’re not – let me take it away from the peak question and just go to what I see as the main drivers in the two big regions for us.

As I look at Canada, and I think about this product support business and rebuild activity, I made a quote around 3x more 797 rebuilds in 2019 and 2018. I think we have 7,500 pieces of equipment to mine in Canada.

It’s actually relatively old and that is going to, I think, provide a great runway for continued product support, it’s a great value proposition for customers. It’s a great opportunity for us.

So that’s what’s going to drive the Canadian business forward. And then in South America, I mean, think it’s a different story.

I think you’ve got great dynamics emerging on copper demand, you’ve got historical buildup and or lack of investment in supply, you’ve now got a government that is really focused on making that sector competitive. And so I think you’re going to see both product support and new equipment grow – significant growth in Chile in the years to come.

Thanks.

Hey, good morning guys.

Hey, Devin.

Just in your opening remarks, you talked about a tripling of 797 rebuild in 2019. I guess how should we think about that in terms of the overall rebuild revenue?

Just trying to get a sense where there is up cycle in current levels? Or is it more about maintaining this rebuild activity over the next few years?

Yes. Don’t extrapolate three times 797 to three times or 300% of product support growth next year, that would be a mistake.

But I think what we are trying to say is that our OEM facility is running two shifts even added a little bit more, we see increased interest from customers on rebuilding, we look at the age of the fleet, and we can see it aging. And so I think this is a big backlog of rebuilds for a number of years for our Canadian business.

Okay. So yes, it’s more about, I think it’s just keeping this revenue run rate going forward and a good pipeline there.

Yes, I think with – most of the quarter it was like 10% or 11% on product support in Canada. I mean, and that feels pretty good to me.

And then just going back to maybe Canada, are you still seeing competitor sell two, three equipment into this market? And do you think this is one of the reasons that’s holding back pricing?

A little bit. I mean I think there is a little bit of Tier 3.

Although, I was talking about Kearl’s yesterday, and it sounds like some of our competitors are having some issues with getting older product into the market, so that bodes well I think for us going forward. One of the things that, I think we should be thoughtful about – lead times have expanded, we had a little bit of problems getting equipment.

I think we’re working through that, that has impacted despite the growth, the 62% growth that has impacted a little bit. Our ability to capture the full potential of the market.

What I’m really pleased about is when I think about next generation products with CAT, CAT is just rolling out a large hex [ph] products, which they’ve been working on for a long time. Productivity boosts of up to 45% from the technology on board, fuel savings up to 25%, maintenance savings up to 15% from the previous model.

So I’m actually not that worried about market share in that main product. I think we’re going to capture and grow our market share because of the quality of the product in that segment.

Okay, that’s helpful. Thank you.

Hi, good morning, gentlemen.

Hey, Max.

I was wondering is it possible to quantify that the impact from the OEM issue in Q1 in Canada?

Max, this is Steve. We think the impact was between $3 million and $4 million of profit.

So when you say profit, is it EBITDA or net income?

EBITDA.

EBITDA. That’s very helpful.

And then maybe just more of a sort of high-level question. We are at – right now at two times net debt-to-EBITDA, can you maybe just talk about capital allocation priorities, because as you reiterate the free cash flow generation in 2018, what are you thinking in terms of capital deployment?

Yes. Think on capital deployment, I mean, I think we’re going to keep the similar path to what we’ve been doing, right?

You saw us increase the dividend 5%, so that’s in line with what we’ve done over the last five years. I think our compound annual growth rate is 6% and this was 5%, but it was – we did something in August last year, so it’s kind of in line with what we’ve historically done over the last five years.

You saw us renew our NCIB last week, and so we’ll keep that – continue to keep that as an option. And then, organic investments, which you’ve seen a little bit of an uptick in 2018 or you will see a little bit of an uptick.

I would say on the organic investment, a big part of the uptick, in fact, almost all of the uptick is associated with ERP, digital and some investments in trucks. And if you took those out, we’d be back to where we were in prior years, so it is pretty targeted organic investments.

And then the last is M&A, and I think on the M&A front, we’re going to be very thoughtful, it have to have synergies. So from a cost capability or customer perspective, we will look at various options there.

The bar is always higher on M&A, I mean, as I think about the last five or 10 years for this company in terms of executing M&A, we’ve been very successful when we do things like Saskatchewan and Ireland, and in fact, I think Saskatchewan, all stakeholders would say this was a dealer – a model dealer transition, so I feel really good about that. Similarly, PLM, when you look at PLM or it’s in our backyard, pipeline expertise, oil and gas expertise, which we really know well, we do pretty well.

We’ve had a couple of thoughts there – a couple of areas where we haven’t done as well. So when we went a little bit outside our core in the UK, we had some problems, right?

And so we have to be thoughtful about that, and similarly, we have a JV Energyst, which is outside of our territories in a little bit higher risk markets and that hasn’t been a good experience for us. We’ve had to restructure the business.

We’re thinking about what to do with it now. But all I’m highlighting is these acquisitions, if we’re going to go down that path have to be very complementary, they have to be synergistic, and they have to, we have to see a path to execution in creating value.

So when you look back on all of that, a couple of years forward, I think you’re going to look back to what we’ve done over the last five years. And it’s been a pretty balanced approach.

We’ve paid off a lot of debt associated with the Bucyrus acquisition in Saskatchewan, so you can call that either debt or acquisition. We’ve repurchased $100 million of shares.

We’ve paid about $500 million or $600 million of dividends. And we’ve uptick the organic investments a little bit.

And I’m continuing to see a pretty shareholder-friendly deployment of capital as we move forward.

Okay. That’s very helpful.

And actually, do you mind if I could – just one more in relation to LATAM, I think maybe last year, you were talking about pickup in new equipment sales in the back half or 2018/2018. Has that timing shifted at all from your perspective?

Or it’s still kind of intact on what you telegraphed before?

I guess I’m a little bit more positive, to be honest, Max, on the new equipment side. I mean I do still think it’s primarily a 2019 story, but I mean I was struck by the commitment from the governments to getting permits to being business-friendly, and just to getting things done, and it takes time.

And as you know, there is a lot of labor disruption right now, potential for labor disruption in Chile, and so that may, probably will, I mean, it’s not an 2018 opportunity. But I came back from that trap more optimistic than when I went, and that’s Chile.

In Argentina, it’s pretty volatile situation right now. And we’ve grown that business back to where we’ve historically had it.

We’ve recaptured the market share, but in the last three or four months, you’ve seen a pretty significant slowdown in the industry activity. And you’re all reading the press and seeing the 40% interest rates in the IMF $30 billion package.

And so we’re watching that very closely. That being said, if Macri can navigate through this latest crisis, I think the long term opportunity in Argentina is really strong.

I think Vaca Muerta massive potential there. And when I talked to our Canadian customers who have operations in Argentina, they’re all very optimistic about what’s going on there.

So I hope that it gives you a little bit of color of what we’re thinking.

Yeah, that’s very helpful. Thank you very much.

Hi, good morning. I apologize, I was on the call a little late.

So maybe you touched on this, but, I recognize, Scott, that the mix has changed pretty significantly in the quarter, and that would, obviously, has an impact on the margins. But can you just help us a little bit on granularity of margins by business line?

Like what’s happening to your margins in Rental and service versus the new machine sales. I would have thought that maybe even after accounting for mix of margins, might have been a bit higher, but maybe there is some still margin pressure in one of those units that, that are not taking full account it, I don’t know if you could help me there.

Ye. Sure, Ben.

So Steve touched on this a little bit. I mean a big of its mix, but you’re right.

I think we’ve put it down a little bit better and the one contributor that Steve highlighted was OEM. And we had what we call a test bench down for about a 1.5 month and that impacted our throughput and that was a $3 million or $4 million impact probably one of our – yes, that was one contributor and then the other was what Cherilyn asked the first question was Rental.

And we’re really pleased with our run strategy, I think you can sneeze some real positive attributes of that in the first quarter, sales up significantly. But Rental’s a pretty seasonal business, as you know, and first quarter is always seasonally slow, so as we go through the second and third quarter, I think you’ll see a little bit more positive contribution in Rental going forward.

On the service side, it couldn’t be more pleased, it could not be more pleased with how we’re managing our service business, particularly, in the oil sands right now. And so that is a positive contributor, but it’s a small line item, so it doesn’t have overall meaningful impact on the margins.

Yes. Could you maybe just elaborate on how you’re – like what you’re seeing that – or what you’ve done that, that makes you so happy with that, is it a scheduling issue?

Is it warranties? Is it just flow in processes?

I know probably all of the above. What have you done to make your oil sands service business more profitable?

Because I know that was a major overhang for quite a long time.

Yes. I think and you have to go back three years, right?

I mean when the market went down, we’ve recognized we had way too much capacity in the oil sands, and we’ve consolidated all of that activity around our two world-class facilities Fort McKay and OEM, and so we’re doing all the rebuild activity out of OEM, and a lot of the drills, which will work, and we’re doing all of the oil sands activity out of Fort McKay, and these are big facilities, we’ll try to increase the asset utilization significantly and we’ve worked with our union on labor productivity and efficiency, which has been very helpful. And now we’ve got two and a little bit shifts running at OEM and we’ve got a full shift and maybe a little bit more Fort McKay, and when you have these big world-class facilities and you’re putting a lot of activity through them and you’re doing that activity from a process prospective very well, you see the benefits.

And this is not a one quarter phenomenon, we’ve been at this for five years and you’re starting to see it come through the numbers. I couldn’t be more pleased with our team up in the oil sands and how they’re running the service business.

Ben, I would say too, that you can’t underestimate outcome of three years of focus on service excellence, through the processes, through the service in our shops.

And then lastly, just one thing is customer loyalty is of all-time high. And so it’s the combination of all those things, Ben, which is driving a better customer outcome and a better outcome for Finning as well.

What about the, I guess the culture of the oil sands service business and the people up there making all the decisions, I mean, there had been certainly in the very active and robust days, at a mission that you guys were sort of chasing every last dollar up there. And sort of bit more focused on revenues than anything else.

How has that mentality changed and worked its way sort of manifested its way into the results?

I mean, I think you’re going back to five years prior to this team’s arrival, because we’ve been pretty consistent over the last five years. 1, we think the culture is a competitive advantage.

And so we have got great people, who know the service business well and are very focused on customer service, and so if you got that as a starting point, I think you’re in a pretty good position. Second piece is we’ve changed the dynamics, you’re right, from – revenue growth has been determinant of success to ROIC as the determinant of success, and when you change that dynamic you have to be a little bit more thoughtful because it’s a more complex decision or a discussion around both revenue and cost and balance sheet, right?

And then I think the third thing that’s a really positive contributor is when OEM moves to ROIC as they are determinant of success, so profitable growth. I think that’s really helpful.

And so under Jim ample piece of leadership, he’s highlighted that his determinant of success is profitable growth, which has been our determinant of success for the last five years, and you combine those two things, and I think you’ve made a – we’ve made a lot of progress.

So just lastly on that. I mean it’s a good point of you telling that with the changing Caterpillar’s philosophy, life has been kind of easier for you guys to focus on the things you want to focus on?

I wouldn’t say easier, because it’s always these are two big businesses and we’re trying to align them. What I would say is the alignment between CAT and Finning, is as strong as it’s been since I’ve been the CEO.

And I mean it was always strong, but I think the relationship is as strong as it’s ever been. And I think a large part of that is because of our improved performance in Canada.

I mean, we are a top decile dealer in Canada, right now and that hasn’t always been the case, and I think that bodes a lot of credibility with CAT. I think when you look at what we’ve done in the U.K.

in the most competitive market in the world. I think that bodes a lot of credibility with CAT.

And then I look at our FINSA business, I see what we’ve done on the mining side by combining technology and mining expertise to drive increased truck availability and actually more sales, which we’ll talk to you a little bit about later this morning. I think the relationship has been really good right now.

Excellent. Thanks very much.

You built inventory in the first quarter, it makes total sense considering the strong growth in the backlog. Just curious, do you expect to build that type of inventory again in Q2, given the strong backdrop and what you’re seeing?

April, would you build that same amount in Q2? Or you kind of set for constructive season?

Just curious how you could talk about that?

Sure. Michael, this is Steve.

We could have additional inventory builds. We have both equipment inventories as well as our work in process building because of the service activity.

I don’t think it’s building disproportionate to the activity nor the expected demand that we see coming. As we look at our turns they’ve continued to improve and our working capital sales is down to 27% and even as we meet this higher demand that we see continuing in the year, we believe that our working capital to sales will continue to improve.

Okay. I mean, and is there a – did you guys provided guidance, forgive me, on free cash flow for – and, obviously, you’re in a kind of a growth mode, right now.

But is there a free cash flow guidance for 2018?

Yes, we’ve indicated, Michael, that we’ll be free cash flow positive and that doesn’t change. So we had $250 million of free cash outflow in the quarter.

Seasonally, first quarter is always our biggest equipment inventory at quarter, but we still see nothing has changed since what we’ve talked to about in February, and this is going to be a free cash flow positive year despite the top line growth.

Perfect, thanks guys.

Great, thanks for taking my questions. On revenue, the last four quarters, you’ve grown 16% to 20%, so as you now are coming up against tougher comps.

How should we think about year-over-year revenue growth for the remainder of the year?

Nothing different Derek than what we told you in February. So we said in February, the momentum in the market felt the same in 2018 as it did in 2017, and frankly, sitting here today, it feels the same as in February.

And what we told you then was a little bit higher growth in the first half of the year relative to the second half of the year only because of comps, and we would stick with that. I mean, we see a lot of momentum in the end markets, and we see that continuing to the back half of the year and into 2019, but just the math of comps is playing out as we said it was.

Okay. And return on invested capital is quite high, I believe perhaps the highest it has been.

So do you think you still have ability to continue to push return on invested capital higher going forward?

Absolutely. And we’re going to talk to you a lot about, this morning, later.

But as we look at all three regions, I think we feel really comfortable through both profitability and balance sheet. So Steve was talking about working capital sales, as you know, this has been a big part of what we’ve been trying to do over the last five years and the combination of profitability and sales to ICT will improve return on invested capital in all three regions over the next few years.

Are you seeing any pressure on your cost of capital?

Cost of capital in terms of debt financing or is that what you mean?

Yes.

Derek, this is Steve. So with the refinancing that we did last fall, we see some increase as interest rates grow, but not material.

Not material because of the refinancing we did and the amount of reduction that created in our line of credit and our long-term debt.

The objective here to, Derek, is to run the business free cash flow positive through the cycle. So the requirement to go out and access new debt financing other than through complementary acquisitions or things like that is variable to do the business.

So it’s not going to be a material impact to us going forward.

Yeah, okay. Great.

Thanks.

Hi, guys.

Hi, Yuri.

Scott, just a quick one from me. Where does LNG Canada sit on your prospect list as you look out over the next year or so.

And what could that project mean, if it were to get a positive feed later this year?

Yes, so I – I mean, as you know, five years ago, I was pretty positive about this and I though given my oil and gas background, I saw the opportunity with gas, I saw the lower oil prices, and I was pretty convinced. We’re going to see the same in the coming years.

And then we went really quite close to Petrobras challenges both in their home market and with the communities, the average little communities up in north. I think things have changed pretty dramatically over the last six months, to be honest.

I think the Shell program is real. I think they’ve done a great job with hyphenation [ph].

I think they are getting more comfort that they’re going to receive relief from the equipment need they have, the modular steel and the DC government is really support of it. And so I wouldn’t be surprised to see FID from Shell in the relatively near term.

Now that’s results in a construction cycle that’s longer term, but the impact of that is pretty meaningful for us, all right. As you think about pipeline, development, what’s required for gas compression associated with that, what’s required for frac trucks and not only the engine, but in the product support and those are ongoing in an LNG scheme and even with a couple of trains you see a pretty significant revenue opportunity.

And then, of course, there is the one time earthmoving opportunity associated with the facility. So as we thought through all of that we think it’s about a $300 million revenue opportunity for us, and so significantly material.

And more importantly, as a Canadian, we got to get this done. I mean we really need to look out a way to get the gas out of Western Canada’s fix this stranded issue, because if we don’t have an LNG exit, all of that gas is going to continue to stay in that kind of $2 echo [ph] which would be a real shame.

The frac trucks that you mentioned, does that – is the opportunity there on the – in the engines? And is there – do you know about the market share that CAT might have in that market?

So the opportunity is much broader than the engines. So I think I’m going to maybe get this a little bit wrong, but you’ll get that correct.

I think that each truck is $1.5 million to $2 million of CAT components on it. And so you have the engine, you have the transmission, you have the comps, you have flow iron, you have valves, I mean there’s a lot of CAT components on it.

I think one of the really interesting things that we’ve seen in this last year is, rebuild opportunities of the full frac truck. And if so you go into our OEM facility and take a tour, you’ll see a portion of that facility dedicated to frac truck rebuilds.

And so, one that’s a great opportunity. And then when you go to the market share and you look at that engine, the 3,500 engine for CAT it does really well from a market share perspective both in the gas compression side and in the frac truck side.

Interesting, okay. Thanks very much.

I’ll turn it over.

Thanks, Yuri.

Well, thank operator and thanks, everyone, for listening. We look forward to having you join us at our investor meeting in person or by webcast at 10:00 Vancouver time today.

Talk to you soon.