Finning International Inc.

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

Jacob Bout - CIBC Cherilyn Radbourne - TD Securities Michael Doumet - Scotiabank Ben Cherniavsky - Raymond James Derek Spronck - RBC Devin Dodge - BMO Ross Gilardi - Bank of America Maxim Sytchev - National Bank Financial

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 turning 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 form 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, performance or achievements could differ materially from current expectations. Except as required by law, we do not undertake any obligation to update this information.

Scott, over to you.

Good morning and thank you Mauk. I will start by reviewing our financial results and outlook for our three regions.

Our financial results were strong this quarter. Five things standout to me.

First, earnings torque. While revenues increased by 9% earnings per share was up 44%.

Second, strong top-line momentum in our two key markets. Canada's revenue was up 15% and Chile experienced 24% revenue growth year-over-year.

Third, profitability improvements. Canada's EBIT margin of 8.5% as we continue to leverage higher revenues on a fixed cost base while maintaining tight cost control.

And in the UK profitability in excess of 5% which is the highest since Q3 2013. Fourth, working capital velocity in a difficult environment.

Working capital sales of 26.9% is 220 basis points better than in Q2 of last year. Finally, return on capital improvements.

14% was the highest return on capital we have seen since the commodity downturn. Most importantly, I believe there is much more to accomplish in our operational excellence journey particularly in Canada and South America.

This will result in even more benefits to customers and shareholders in the years to come. Turning to each of our regions.

In Canada mining producers and contractors continued to drive strong demand for parts and service including equipment rebuilds. We are projecting an increase in sales of mining equipment this year and are encouraged by strong quotation activity for future orders.

We agree with Caterpillar's assessment that we are in the early innings of the resource industry upturn. We are making good progress introducing autonomous ultra-class trucks.

In June as part of an ongoing pilot with Imperial and Caterpillar we completed the first fully-autonomous load-haul dump cycle to move waste and over-burden at [indiscernible] using a 400-ton Caterpillar 797 truck. This is the largest autonomous truck put into a productive operating environment globally.

A customer is working with us to ramp their testing program to include a trial fleet of seven autonomous trucks by the end of the year. From our Investor day we're also working with [tech] on autonomous haulage solutions.

There are strong interest in new mining technologies and we expect more autonomous haulage system implementations over the next couple of years both in Canada and South America. We are also seeing strong equipment sales and product support in construction and expect large infrastructure projects to provide further upside.

The federal government buying trans mountain pipelines should be helpful and we believe LNG Canada will proceed as well creating incremental future demand for construction equipment and product support. In Chile business confidence has improved significantly translating into strong revenue growth in the quarter.

Increased copper production and fleet utilization are having a positive impact on mining product support including component rebuilds. We do expect improved demand for mining equipment to follow.

The government's plans to invest in infrastructure underpin our positive outlook for construction equipment sales and product support. In Q2 construction revenues in Chile were up 36% from last year.

While the trade war between the U.S. and China has impacted copper prices macroeconomic conditions in Chile remains strong.

We are monitoring the progress of labor negotiations at copper mines. Similar to last year we have a mitigation plan in place to manage through any negative impacts.

Longer-term we believe addressing the industry cost equation in Chile is important to ensure that the mining sector is well positioned to capitalize on the significant growth potential inherent in increased copper demand. The Argentinean economy has weakened following the devaluation of the Peso.

This resulted in a significantly reduced government infrastructure spent and lower demand for construction equipment. Despite current economic uncertainty in Argentina we expect oil and gas development to proceed and provide meaningful upside over the long term.

We remain optimistic about growth opportunities in South America. With market conditions improving we expect South America's profitability to accelerate in 2019.

Regarding the UK and Ireland proposals concerning UK's economic partnership with the European Union are generating significant debate. Despite significant economic uncertainty regarding the impact of Brexit activity levels in our key markets remain robust.

We don't see lower Q2 revenue as a trend and expect to grow at a rate modestly higher than GDP for the remainder of the year. We expect the government's investment in large-scale infrastructure projects such as HS2 and the Heathrow expansion to generate steady demand for construction equipment and product support.

Despite the very positive financial and operational performance I want to pause and reflect on a tragic safety incidents that occurred during the quarter. In May we had a fatality in our South American operations.

Our employee Roberto Venegas Casanga suffered a fatal injury while performing equipment maintenance in a customer mine site in Chile. Our priority has been to support Roberto's family and fully understand why this tragic event occurred.

We are committed to implementing changes that will reduce the likelihood of this occurring in the future. I will finish with a few comments on the leadership changes we announced this morning.

In the past five years we have made tremendous progress in our talent agenda to enhance our capabilities. We have developed a strong talent pipeline with succession in place for every dealer principal and functional leader.

This morning we announced that Juan Carlos Villegas President of Finning Canada and Chief Operating Officer of Finning International will retire at year end. On behalf of the board and the 13,000 Finning employees I want to personally thank JC for all that he has done for Finning in his distinguished career.

Five years ago I asked Juan Carlos to lead the turnaround of the Canadian business. This quarter highlights the progress we have made and is a testament to JC's commitment, passion, and perseverance.

As we move forward we are all excited to have Kevin Parks moved from the UK to lead our Canadian business. What Kevin has accomplished in short order in the UK is impressive.

His background with Finning and as a CEO of a private equity owned rental business gives him an intuitive understanding of the key drivers of return on capital, and his experience in our most competitive region with a heavy focus on digital will allow us to take Canada to the next stage in our journey. Lastly, David Primrose will be a great addition to the UK and Ireland business.

David has worked in the UK and therefore knows the business, customers, and employees well. David's leadership skills, operational experience, and Caterpillar relationships will allow us to continue the momentum we have in our European business.

I'm excited about what we can accomplish in the next few years at Finning and I know Kevin and Dave will continue the momentum we have established. I will now turn it over to Steve.

Thank you Scott. We delivered significant operating leverage in Q2 with EBITDA of 30% on 9% revenue growth year-over-year led by Canada all operations reported higher profitability.

In Canada customer activity was strong across all sectors. Robust demand in construction and some large mining deliveries drove 29% growth in new equipment sales.

Product support was up 13% with the most notable increase in construction. Used equipment sales were 16% lower compared to Q2 of last year, however, flat on a year-to-date basis impacted by limited availability of quality used equipment.

EBIT margin was 8.5% up a 150 basis points from last year driven by the leverage of growing revenues on operating efficiencies and cost discipline. Canada achieved adjusted return on invested capital of 15.1% the highest in the last three years reflecting improvements in both profitability and invested capital turnover.

In the second half of 2018 the revenue mix in Canada is expected to shift to new equipment sales reducing overall gross profit margin. Nevertheless, we expect to maintain solid profitability levels and deliver continued improvement in return on invested capital.

In South America we saw a strong revenue growth in Chile compared to last year up 24% in functional currency with increases across all industries and most lines of business. Chilean mining revenues were up 21% driven by product support.

Construction and power system revenues rose by 36% and 20% respectively reflecting improved demand for new equipment. This market recovery in Chile was partly offset by a challenging quarter in Argentina.

Economic uncertainty and reduced government’s spending on infrastructure negatively impacted construction activity and equipment sales in the second quarter. We are actively managing through market volatility and the devaluation of the Peso.

We expect to see some stability in customer demand in the second half of the year. As Scott mentioned labor negotiations at Escondida one of our largest mining customers could result in a strike.

Our team in South America has developed a mitigation plan with the customer similar to what they did in 2017. We estimate the potential negative impact on EBIT to be between $5 million and $10 million in the third quarter.

Although, somewhat painful in the short term the benefits from reducing the mining costs in Chile will be beneficial to the Chilean economy as well as our business in the long run. FINSA's EBIT margin was 8.5% in line with our expectations.

We are well-positioned to manage through the temporary headwinds we are experiencing in Argentina and our longer-term outlook for this region remains positive. In the UK and Ireland, construction and power system markets continued to be buoyant.

Some delays in equipment deliveries from the second to the third quarter resulted in lower than expected new equipment sales compared to last year. At the same time improved margins in most lines of business a higher proportion of product support revenues and more parts sales through e-commerce channels helped with our EBIT margin to 5.3%; the best we've achieved in the last five years.

Subsequent to the quarter-end we took the first step in reducing our exposure to Energist. Energist has not met our performance expectation over recent years and has been a drag on our overall profitability.

We have worked diligently with the Energist team over the last 18 months to restructure the business. As part of this restructuring Energist sold its subsidiary in Argentina in early July which will result in a loss of approximately $10 million for us in the third quarter due to a reclassification of cumulative foreign translation losses to the income statement.

The ultimate objective is to reduce the scope of Energist to focus on power rental in Europe. Post this initial step our investment in Energist will have a 20 million carrying value.

We continue to assess Energist’s fit with our strategy. Our reduced footprint improvements in working capital from continued progress on supply chain initiatives and our successful e-commerce strategy are driving capital efficiencies as revenues increase.

The invested capital turnover of 2.13 times was up 8% from the second quarter of last year and is at the highest level since the end of 2012. Free cash flow was $28 million of cash used significantly less than the cash outflow in the second quarter of last year due to an increase in EBITDA and higher collections.

We continue to expect positive annual free cash flow for 2018. I will now turn it back to Mauk for the question and answer period.

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

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

Good morning.

Hey Jacob.

Hoping to get a little more disclosure on the impact of tariffs and maybe talk a bit about the prospect of higher pricing and is that impacting customer decisions right now?

Jacob this is Steve. We don't see that impacting our customer decisions right now.

As Scott announced we are expecting price increases, but we are very used to managing through these increases. It's a dynamic market the demand for our products is strong.

So we would expect to navigate this successfully.

Okay. And then maybe the second question on backlogs.

Backlog levels down slightly quarter-on-quarter but what's the expectation going into the back half of this year? Maybe talk a bit about the mix what are you seeing in Canada, South American and UK?

Sure. Hey Jacob, it's Scott.

So we've got a lot of momentum right now and if you think about you start with Canada new equipment year-to-date is growing at about 40% just over 40%, product support is growing at 12% and those sort of growth rates we are expecting for the back half of the year and so we don't see to your even your first question we don't see any decrease in customer demand. Customer order intakes is actually very strong when you look at year-over-year.

So that's good news. In Chile revenue is up 25% year-over-year and you look at that construction business and it's up 35% and mining I think it's very small still a very small part of the overall business.

So when I look forward I think Q3 is going to be modestly lower from an earnings perspective because of the one off of Escondida $10 million which I think long term is goods but it's $0.05 impact and a little bit of higher effective tax rate probably $0.02 or $0.03 associated with Argentina the devaluation but as we look longer-term out to ‘18 and into ‘19 I'm more positive today than I was six months ago when I look at that activity and revenue growth both on the new equipment side and the product support side.

Thanks very much and good morning.

Hey Cherilyn.

I wanted to ask in terms of Argentina and the volatility that you're managing through down there was the reduced government spending on infrastructure sort of fully in the Q2 numbers if you will?

Yes. Hi Cherilyn, it's Scott.

I mean definitely if you look at the growth in Chile in the quarter the revenue growth was -- in Chile was 24% but overall spends that was much less and that was because it was offset by Argentina. So Argentina came down pretty significantly and so both product support and equipment for the overall business was growing.

In the construction market it was I think up 36% in Chile. So strong growth in Chile offset by a pretty significant reduction in Argentina.

We don't see Argentina increasing off of that base for a while and we see that reduced spent staying with us probably through ‘19.

Okay and then I'm just on supply chain continued good performance in the quarter, but you certainly alluded to a more difficult backdrop. We've got strong demand and production constraints at the OEM level.

Maybe you can just speak a little bit more in detail about how you're managing those dynamics.

Hi Cherilyn. This is Steve.

So we continue to work closely with CAT on coordinating and integrating our supply chain. Lead times have improved somewhat but they do remain an issue but we see demand and we're pleased with the market, our improvement in market share and our participation in the market.

So we think that demand is strong. Our performance on market share is improving and lead times are improving but so slow progress but continued progress.

Great. That's my two.

Before I pass it over I just wanted to very quickly recognize Juan Carlos and wish him our best in his retirement.

Thank you. I'm sure he will - I am sure he is listening and we will appreciate those sentiments and for from us too I mean he's done a great job in Canada not only in Canada and [indiscernible] we will miss him.

He's put a strong foundation in place for Kevin to build on.

Hi good morning guys.

Hey Michael.

Hey. So starting the year, I think the expectation was for stronger Canadian revenue growth in the first half compared to the second half.

I think the easier comp was a factor it seems like you're pointing to increased mining equipment deliveries. So all pretty robust construction sales.

I think you also mentioned lower gross margin expectations due to the mix which we didn't see in the second half. I'm just trying to put together what your sense for revenue expectations for the second half are?

Yes. It's great question I mean you go back six months and what we [spent] exactly what we said we said we were positive with given the harder comps we thought that growth would accelerate a little bit in the second half and that's not the case.

I mean as we look forward I think we see growth in the second half being pretty similar to the first half and there's a little bit more new equipment deliveries in that back half of the year. So you're not going to see the same type of margin improvement.

That being said from an earnings perspective it's going to be beneficial and so really positive on the Canadian end markets and in the Chilean end markets.

Okay. That's helpful.

And maybe just on the Canadian rental business there's been a significant investment in the rental fleet but we haven't really seen an equal sized increase in revenues which just to me that financial utilization rates are down comparatively. So I mean can you give us a sense if it's seasonality or if it's just a lack of a pick up from the macro side just to get a better sense there?

Actually we are pretty happy with rentals but there's a little bit of a seasonality focus. So there's a couple things going on.

One is if you look Q1 to Q2 I think we're up 15% on a revenue side, year-over-year were flat to slightly up and I think there's a few things going on. One gets the back of the lead times coming to get some of this equipment and came a little bit later than we thought and then you have to really separate the heavy rents business from the TCRS business and the heavy rents business we're seeing high financial utilization and pretty good returns.

On the TCRS business, there's a little bit of a mix issue going on and that we are adding new equipments which we're pretty pleased with but we've also been changing the strategy and taking out some of the allied gear and so we've lost some revenue associated with that. So I mean all in all we're pleased with where we're heading.

That being said it's been a little bit slower given lead times and I guess the third thing to add to that would be the used market. It's a pretty constrained market right now.

You see our used sales, I think down 16% year-over-year. I don't think that's the right metric.

I think you should look year-to-date and year-to-date were both flat, but it does highlight that it's a very constrained market on the used side.

And Scott just any sense on the rental rates in Western Canada where you're seeing an improvement there or maybe any historical talk contacts in terms of where they're at versus previous years?

Yes. Rates are improving a bit.

So we are seeing our rates are improving, utilization has increased. I think what is masking that's a little bit is TCRS and the mix of fleet and so again I think the third quarter is going to see again sequential improvement relative to the second quarter part of that seasonality, part of that's getting equipment and starting to see the impact of rates and utilization moving up.

All right. Perfect.

Thanks.

Thanks Michael.

Good morning guys.

Hey Ben.

Scott, it's been a couple years now 18/24 months since you executed the reformatted footprint and closed some branches, downsized physical presence, etc. What's been - are you feeling now with the market coming back that you've got the right kind of physical infrastructure?

I assume some of these markets you're not going back to but are there any places where your competitor has maybe taken some share when you left the market? I know for example Komatsu went into your old facility and Sparwood.

So I assume things like that come at some kind of market share cost. So I'm just wondering how you're feeling about that trade-off now with a little bit of perspective?

No I'm feeling good. I think these were difficult decisions, but I think in general 95% of them were the right decisions and if you look at both the UK and in Canada we probably reduced the footprint by 30% to 40%.

We took a more centralized approach. We didn't reduce service base but we did lighten up the bricks and mortar a bit and I think what we're seeing now is the benefits of that.

So you're seeing labor utilization, facility utilization up significantly. If you think about the OEM facility or the Fort McKay facility both of those are really busy right now, but with the ability to expand if we need to.

So we're taking those assets and we're working on them really hard and I think the good news is our NTS is up, our customer loyalty is up and our market share has not been impacted and so we have as Steve said our market share has been improving this quarter we had a little bit of a slow start to the year our market share but it was I think it's more associated with equipment lead times and equipment availability as opposed to any coverage issues. And then the last thing I would say is this is an Omni-channel approach right and when Omni-channel means is bricks and mortars are important part of it but so is the e-commerce delivery piece and if you look at our e-commerce delivery you take the UK as an example 40% to 50% of our addressable market in parts right now are being done through channels other than over-the-counter.

And that's a big change from a couple years ago. So that's going to be one channel, additional channel that will allow us to get to some of these markets that are hard to get to from a cost or some of these customers that traditionally we haven't been able to get to because of our cost structure.

So I think all of us are pretty pleased with the way this is played out over the last few years.

You see that going in the same direction in Canada like to that extent of Omni-channel and online transactions as the UK?

I think UK's a little bit easier than Canada because of the smaller geography and little close to the supply source and we can have a situation in order, I think 95% of our parts are in a central location, but in Canada as the momentum we've seen on e-commerce is pretty significant as well and I might get these numbers slightly wrong, but I think we're at about 25% right now of our addressable share; the e-commerce. So it's a - I think it's a it's a good from a customer experience.

It's good from a cost of serve perspective but we've always got to remember it's Omni-channel and the bricks and mortar and branch will play a role in this. You can just be a little bit more thoughtful into where those branches have to be located.

So I think we're feeling pretty good about the strategy and where we are so far.

Okay. That's all for me.

Thanks.

Thanks Ben.

Okay. Thanks for taking my questions.

Just on the electric drive and autonomous vehicles are you feeling comfortable around the competitiveness of Caterpillar’s products in those two aspects and as it relates to your markets and as that increases in the marketplace are you be able to leverage your digital services more in that regard?

That's great question. So on the autonomous side I think we went through this an investor day we're feeling really good about the competitive positioning of CAT's autonomous system and I think we're hearing a lot of feedback from customers on the benefits and the scalability of that platform.

I think we've now got two pretty good used cases. I mean early days but pretty good used cases which I detailed in my opening comments with Imperial and [Tech] which we'll continue to try and scale overtime.

So I feel good about that. On the electric drive truck side this is primarily in the first instance a Chile application and there are applications in Chile that are more suited to mechanical and there's others that are more suited to electric and so CAT's positioning which we welcome is to introduce an electric drive truck and we are doing that.

We're going to do that in the back half of this year with a couple of customers. That's why there's a little bit of uptick on CapEx by the way this year versus last year.

So and by the way early reviews on that electric drive truck we've seen it in action both in the U.S. and in Peru and the availability and competitive positioning of that truck versus the Komatsu is very positive.

So I guess yes to both questions. Lastly, you said digital services.

Well that's interesting because autonomy is more than just taking people out of trucks. A lot of what autonomy is about is the data that you get and the insights that you can drive to improve the customers' productivity and one of the reasons that we're spending a lot of time thinking about digital and thinking about domain expertise and data analytics, data insights is because of that exact issue which you raised.

We've introduced the integrated knowledge center about two years ago in Chile. We've seen great improvements and availability of the truck for customers.

Customers are pretty excited about that and this quarter actually we just introduced the same integrated knowledge center in Canada and that's just starting to ramp up. So I suspect that will have the same sort of impact for our Canadian customers as it has had for our Chilean customers.

So I'm pretty excited about that development this quarter as well.

Okay that's great. Thanks Scott.

Just one last question, just as you see the current demand outlook in your backlog and if everything kind of holds as is do you expect return on vested capital should continue to expand? I mean you've shown some fairly strong expansion return on vested capital but should we expect that to continue to move higher as we move into 2019 as the current demand outlook stands today?

Absolutely. The whole strategy here is about improving return on invested capital and when you look at those charts that we showed in investor day we feel strongly but that's - those are achievable and if I think of the UK we're close to 15% return on invested capital.

I'm actually in the UK right now taking this call and there is significant opportunity to continue to be lean and agile and continue to drive product support and frankly even to continue to drive velocity on the supply chain. When I think about FINSA, South America once we get through this ERP implementation which we will in fact we went live in Argentina earlier this week and so far so good.

So we're pleased with that. We're going to see enhancement and profitability both because of benefits realization of the ERP but also because of lower cost associated with some of that technology spend and so when I think about 2019 you're going to see margin expansion in South America and then in Canada there's more to go, right I mean 8.5% today this quarter is the highest quarter since I think Q2 2014 before the commodity downturn.

But there's lots more to do on both the profitability side and the capital efficiency side and I'm really looking forward to phase two of this journey led by Kevin bringing the discipline and the [roll up], the intuitive understanding of [roll up] that's going to help push that increase into Canada.

Yes. That’s great.

Thanks very much.

Hey good morning guys.

Hey Devin.

Just to start with FINSA here just with copper prices pulling back, do you think this has impacted the timing of some of the new mining investments in Chile? Just I'm hoping to get a sense for what customers are saying and what coding activity's been like and whether you think some of the larger mining orders could come forward over the next 12 to 18 months?

Yes. It's interesting I mean if you look at the Chilean growth at 25% a lot of that was construction.

So 36% up construction and then good product support too. I think product support was up 10% to 15%.

It hasn't been driven yet by big new mining orders and our expectation is that is going to happen over the next few years. I think this tariff war and trade war has been a little bit of a pause in that because a lot of the copper demand comes from China but I think this is - I'm pretty confident that as we look out medium to long term and you think about worldwide GDP growth and the requirements for copper, it's a pretty positive story and Chile's going to be a big part of that.

That's why this Escondida thing actually, although a little painful in the short term I think it's beneficial in the long term because it makes Chile even more competitive. So I feel good about Chile.

We're going to continue to invest behind that business. I think it's going to see outsize growth for us in the next few years and we've set it up for success during the downturn by enabling it from a technology perspective and that will allow us to see margins expand as we capture that growth opportunity.

Okay. Then maybe switching to Canada just given the pickup in activity levels we've seen there this is becoming harder to hire technicians in that market?

I just wondering what you're seeing in terms of labor turnover and wage inflation, etc.

I expect that that will become more of an issue to date it hasn't been, I think we've done a good job with our employees. I think we've treated them fairly through wage discussions over the last few years.

I think our employee engagement scores are higher and I think we've got a good value proposition for our employees and morale seems to be getting better. That being said when you see this type of growth, labor and availability of labor is top of mind and so something we definitely need to consider going forward.

Okay. That's helpful.

Thank you.

Great. Thanks.

Hey everybody. Hey Scott.

Hey Ross.

I am a little surprised you didn't see better margins in South America because you had 14% growth in product support, you talked a little bit about the margin outlook in the next year but are there structural factors keeping the margins in FINSA going back to 10% a few years or is fact that we're just still in the kind of [mid 8s] more of just the reality that Chile is barely off of trough. So any thoughts on that?

Yes. No.

There's absolutely no reason why we should not go to historic profitability levels and I think they, the challenge this year which we've been very open about we've said it was going to be [8.5%] is because of some of the technology spend that we're doing enabling that business which will be behind us in the next month or so. So that's a good news.

I think this quarter 8.5% with higher product support I can see why you think that we should have done a little bit better on the margin. It was held back a little bit by Argentina and so now with the, if you hadn't had Argentina in the mix you would have seen a little bit higher than 8.5% I agree with.

But the point is as you look forward this is going to get back to historic profitability.

Next year?

What there's going to be a big uptick in profitability. I'm not into the AOP process yet and I'm not going to forecast but you are going to see a pretty significant improvement in profitability as we go into 2019 in South America.

Okay. Good.

Where are you guys on new equipment inventory right now? I mean obviously you've had this long-held concerted efforts to improve working capital terms and have had some success there but do you feel like you're struggling to catch up on inventories?

I think that $1.97 billion of inventory is almost backed up to prior levels, prior peak levels and absolute dollars but you've also had some statements and there might be some seasonal distortions but just wondering if you feel like you're back in balance on inventory are still sort of struggling to catch up.

So let me start I don't think so I mean I think if we look at our working capital to sales and see the improvement over time and then the ICT turns. I feel like we're heading in the right direction and the fact that we've been able to continue to generate free cash flow despite the topline I think it highlights that.

It has been a little bit of a challenge to get new equipment given the kind of the global growth and CAT's been open about that but I feel like we're catching up. I feel like we've got a lot of equipment either onsite are coming and that will again it's helped us with our market share a little bit in the second quarter and it will result in more new equipment sales in the third and fourth quarter.

I think this last quarter was a very significant delivery quarter for us. So I feel pretty good on the new booking side.

Okay. Great that's my two.

Thanks guys.

Thanks Ross.

Hi, good morning.

Hey Max.

I had a clarification around the 8.5% EBIT margin guide. Does that include or exclude Escondida?

No, if Escondido goes on strike that could be a $10 million impact in Q3 for us and that's not in the 8.5%.

Okay and then given the free cash flow generation especially in the back of the year how should we think about the capital allocation priorities on going-forward basis especially maybe not necessarily in the next kind of three months but I'm talking about 12 to 18 if it's possible?

Yes. Well, I think a couple things.

One is frankly not much different than what we've told you before Max I mean the balance sheets is in great shape right now. We're trending under two times.

You saw us when the stock went into the low 30s this last quarter active in the share repurchase market. You've seen us continue to increase the dividend.

We're looking for complementary opportunities which will always be weighed against share repurchases and so we're just going to continue to focus on generating free cash flow to the cycle and that will create a lot of optionality for us and for shareholders. So not much change from what we've told you in the past.

Okay. That's helpful.

That's it for me. Thank you.

Thanks Max.

Yes. Hi guys.

Thanks for taking the followup.

Hey Michael.

So nice nice up take in the Canadian margin. I remember I know it was last call or the call before that the expectation was for an improvement in the latter half of 2018.

So I'm just thinking did the improvement come a little earlier than expected or as we sort of go into the second half can we see operating leverage offset the gross margin pressure due to mix?

Yes, I think I mean we're pretty pleased with the first performance; the 8.5% came probably a little earlier than we thought and we weren't expecting the type of new equipment sales and accelerations in the back half of the year. So I think what you're going to see is continued type of revenue for our new equipment growth that you've seen in the front half of the year and that mix will offset some of the internal improvements we're making.

So the type of market you saw in the second quarter is probably a pretty fair representation of what you'll see in the third quarter.

Okay. That's helpful.

Thanks.

Hey, it's me again. Thanks guys.

So just on the used equipment sales down 19% is that mostly - is that more you I mean you are making a conscious effort to hold on to used because lead times from CAT are increasingly extended and because of their managed distribution efforts.

The answer is no. We've actually and I think again I don't think I would focus on the quarter down 16% in Canada I think I'd focus on the year-to-date which is zero but we've introduced this new strategy the rental used the new and what we've seen in so far is just not very much equipment out there and so if we could do more we would.

Okay. Got you.

Thanks.

Well, thank you very much operator and thank you everyone for listening. We'll talk to you again after the next quarter.