Finning International Inc.

Thank you, operator, and thank you everyone for joining us. On the call with us today are Scott Thomson, President and CEO; Steve Nielsen, CFO; and Greg Palaschuk, incoming CFO and Anna Marks, Senior Vice President and Corporate Controller.

Following the remarks by Scott, Steve and Greg, we will open up the line to questions. This call is being webcast on finning.com and an audio file of this call will be archived for three months on our website.

Before I turn it over to Scott, I want to remind everyone that some of the statements provided during this call are 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 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. We delivered solid performance in Canada and the UK in 2019 as a direct result of the work we've been doing over the past several years to strengthen our operations and be more resilient.

In 2019, our Canadian operations achieved an adjusted EBIT margin of 8% on record revenue. This is the highest annual revenue and adjusted EBIT on record and the best profitability in our Canadian operations since 2007.

We are pleased with improved execution in Canada as demonstrated by a stable gross profit margin in a highly competitive environment with disciplined cost management. In fact, Canada's fixed cost base is expected to be below last year as we enter 2020 with a sustainable 6% reduction in the workforce.

Another important accomplishment of our market share growth in construction, which is up more than 300 basis points year-over-year. In the fourth quarter of 2019, Canada's EBITDA was up modestly year-over-year despite softer market conditions and lower revenue.

In the UK and Ireland, the team has been successfully managing through a prolonged period of political and economic uncertainty. We are pleased that, we were able to maintain profitability in 2019, despite the challenging market environment and a significant slowdown in customer activity in the fourth quarter, stemming from Brexit fatigue and the uncertainty of the general elections.

In South America, Q4 product support revenue was up 36% year-over-year, driven by strong parts volumes in Chilean mining post the launch of ERP system in Q4 2019. Improved product support was offset by disruption related to the social unrest in Chile.

Chilean GDP was down about 3% in the fourth quarter. We saw a decline in customer activity due to business disruptions and an increased level of uncertainty related to potential implications of the government's social reform.

The devaluation of the peso had an impact on the quarter, particularly on our service revenue, which is invoiced in local currency. We estimate that, the social unrest and subsequent devaluation of the Chilean peso reduced our EPS by about $0.05 in the fourth quarter.

The combined impact of the unrest and devaluation on our EBIT margins in South America was approximately 150 basis points. I will now speak about the outlook for each of our regions.

While the market environment in Western Canada continues to be challenging, particularly in coal mining and forestry, we don't expect the same rate of industry decline in 2020 as we saw in the fourth quarter. Our internal data is pointing to an approximately 5% new equipment industry decline in 2020, which compares to the 20% decline experienced in 2019.

There are many positive developments that are expected to drive GDP growth of about 2% across the western provinces. The infrastructure budget now per day shifting to private partnerships, which will fund some large projects.

The earthmoving work has started on Trans Mountain pipeline in Alberta with the latest federal court decision TMX is now in a better position to start construction on the British Columbia side of the border, while we expect other significant infrastructure projects in our territory to proceed in 2020, our assumption is that the construction equipment markets will remain relatively soft. The biggest opportunity we currently see in Canada is growing our share of aftermarket parts in the construction market.

We are focused on using technology to increase customer connectivity, equipment condition monitoring and the use of data analytics. This will create new business opportunities and improve the customer experience.

Product support fundamentals in the oil sands are strong and we expect steady activity levels to continue into 2020. We had a record year at OEM and we are expanding our exchange business through a combination of process improvements and investments in capacity.

Overall, we expect growing product support revenue and a lower SG&A run rate to drive continued improvement in Canada's profitability in 2020. In Chile, while the social situation appears to have stabilized, the potential impact of a government social reform agenda on the economy has created a lot of uncertainty.

In the near term, we expect continued low GDP growth, reduced business confidence and soft equipment markets to weigh on our Q1 and Q2 results. Chilean GDP growth is expected to turn positive during 2020, which bodes well for our longer term outlook.

The good news is that the mining environment is improving with copper production expected to be up in 2020. Our competitive positioning in this market is solid and the China, U.S.

phase one trade agreement is an important step towards a resolution the two year trade tension. This is an encouraging development that reaffirms our constructive view on the outlook for Chilean copper mining.

In Argentina market conditions will remain uncertain until the new government approves an economic plan. With restrictive monetary policies and capital controls when they are growth opportunities at this time, our focus continues to be on delivering product support to customers while managing exposure to the Argentine peso.

In the UK and Ireland construction equipment markets are off to a slow start in 2020. After having left the European Union, the UK is now in a transition period until the end of 2020.

To help offset reduced business confidence, the UK government has committed to accelerating infrastructure investment. Recent analysis with respect to pending government budgets, healthcare infrastructure plans, and confirmation that HS2 will proceed should drive modest GDP growth and have a positive impact on customer activity.

Phase One of HS2 will provide meaningful upside to our UK business beginning in late 2020. As many headwinds begin to abate in 2020, we remain laser focused on controlling the controllables and expected benefits from the following possibility drivers.

First with the ERP behind us, we expect to see improved execution in South America, while some risk of social instability in Chile remains, the situation should normalize through the year. We estimate that these two headwinds reduced our EPS by about $0.25 in 2019.

Second, a reduced cost base in Canada positions us well to continue improving profitability in a low growth environment. Third, we expect to see customer confidence recovering in the UK is uncertainty related to Brexit dissipates.

And finally, we expect strong free cash flow generation in 2020 to reduce our finance costs and provide flexibility for share buybacks. And on this note, I will pass it over to Steve.

Thank you, Scott. Good morning, everyone.

Our fourth quarter results reflect a number of macro headwinds that impacted our revenue. However, our continued focus on costs resulted in a $6 million increase in EBIT compared to the fourth quarter of last year.

And the inventory reduction helped us deliver strong quarterly cash flow of 386 million. Earnings per share of $0.31 was below $0.33 in the fourth quarter of last year.

The benefit of improved profitability in South America driven by product support growth was offset by the negative impact from the social unrest in Chile of about $0.05. $10 million of higher finance costs, as well as higher long term incentive plan costs due to an increase in our share price.

In Canada lower net revenue in the fourth quarter were mostly the result of reduced activity in coal mining, construction and forestry. Overall, the construction equipment industry was down about 20% year over year in Western Canada.

A slight decline in product support revenue from last year was attributable to stronger service revenue in the fourth quarter of 2018 due to a large scale dragline maintenance project during that period. Part sales were higher year over year driven by mining.

Canada's EBITDA was $17 million higher compared to the fourth quarter of last year driven by improved gross profits, disciplined cost management and the adoption of IFRS16. In South America we saw significant increase in product support revenue year over year reflecting a recovery in parts volumes as Chilean mining since the launch of the new ERP system.

This was the main driver of a $22 million increase in EBITDA compared to the fourth quarter of 2018. As Scott mentioned, the social unrest that began in October and subsequent devaluation of the Chilean peso had a negative impact on our fourth quarter results.

New equipment sales in South America were down 40% as a result of the disruptions and market slow down as well as large mining deliveries that lifted ourselves in Q4 of 2018. We expect low GDP growth, market uncertainty or reduced activity in non mining sectors in Chile to persist through in the first half of 2020.

Argentina was modestly profitable in the fourth quarter. However, operating conditions remained difficult and it's continued restrictive monetary policies and capital controls.

In the UK and Ireland construction equipment market softened considerably in the fourth quarter with Brexit and political related uncertainty causing economic stagnation by the end of 2019. Our revenue was down 17% compared to the fourth quarter of last year when our power systems business benefited from project deliveries to electricity capacity market.

The decline in the UK EBITDA year over year was driven by lower revenue across most lines of business. Our inventory was down by $225 million in the fourth quarter for a total of $375 million reduction in the second half of 2019.

We will continue to reduce our inventory in 2020 and improve our supply chain capabilities which are expected to drive strong free cash flow generation and lower our finance costs. Our net capital and rental fleet expenditures are down 25% from last year and we expect to see a further reduction in 2020.

We expect to demonstrate improved EBITDA to free cash flow conversion this year driven by reduced working capital requirements and continued financial discipline. Our average EBITDA to free cash flow conversion was in the mid 50% range in 2013 through 2016 and we expect to return closer to that level.

In closing, as I move on to retirement, I would like to say that has been a real privilege to lead the finance team of Finning over the last five years. I want to thank Scott for his support and my partners and the entire team for making it such a rewarding experience.

I'll now turn it back to Scott.

Thank you, Steve. We've been extremely fortunate that we had Steve's guidance as we navigated a volatile and unpredictable economic environment during the past five years.

He's provided stability, thoughtful direction, and sage advice. We wish him the very best that he enjoys his well deserved retirement.

We are very pleased that Greg will be taken on the CFO position, a role he is well suited for, given his various global roles across the business since he joined us in 2014. Greg has a strong understanding of the market dynamics we face and his ability to find opportunity for growth and innovation are key to his new role, as is the connection he has with our customers, shareholders, partners and employees.

Thank you, Scott. It's an honor to take on this role.

I look forward to working with this leadership team to execute our strategy and build value for Finning shareholders over the long-term. I'm very passionate about building and executing business plans that deliver growth while being highly capital and cost efficient on a full cycle basis.

We have a great business model and one of its best characteristics is when our revenue growth rates decelerate, we generate significant free cash flow. Oftentimes, this coincides with opportunities for capital allocation choices.

Today, we see that as the case, and we have spent significant time analyzing our expected free cash flow profile, and return to historical EBITDA to free cash flow conversion rates. Based on this, we will be moving forward with share repurchases.

Going forward, I look forward to working with all of you on this call and thank you again to Scott and to Steve. Back to you Scott.

I'd like to conclude it by highlighting important organizational changes at Finning since the beginning of 2019. Our three regional operators are new to their roles and in March we will have a new CFO.

All these appointments were internal. These transitions have gone well and even more will be accomplished by this team in 2020.

All of these leaders are progressive thinkers, highly aligned, energized and ready to execute on the plans we've laid out. Each leader is highly dedicated to Finning and has a long career runway.

It's a new decade, new team and I'm highly confident in this team's ability to improve execution for the long-term benefit the company and shareholders. I'll now turn it back to Amanda for the Q&A.

Operator, this concludes our remarks. As we move to the Q&A, we request that 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?

Thanks very much, and good morning. If we set aside South American for just a second.

I guess what I'm struggling with a bit in numbers is that, the revenue and revenue mix in Canada and the UK and Ireland are relatively similar in Q4 versus Q3, and yet the EBIT dollars were down a fair bit sequentially in both regions. I appreciate that most of your analysis probably done on a year-over-year basis but just wonder if you can shed any light on that.

Steve, I'll go for the first couple of opening comment. One, I think it is important to recognize in the numbers that, revenue is down but EBIT is up.

And so, take Canada for example, you saw 5% revenue decline, but our overall margin and EBIT contribution was modestly up. So, as you look at the overall results, you have the benefit of recovery in product support and essentially comparable profitability in Canada is slightly up, offset by weaker revenue and margin in the UK, incremental finance cost given the free cash flow profile over the year.

Social disruption in sensor and a movement in long term share costs given the significant decline in the share price in fourth quarter last year, and the improvement in the share price in the fourth quarter this year.

And so I think you hit all the valid points. So, what I would add is with the lower activity, it has a decrease in the absorption of our labor and the throughput of lower revenues.

I guess I'm just struggling with this sequential decline in EBIT in Canada and the UK, Ireland because the revenue profile in Q4 versus Q3 was pretty similar in both regions?

So, I think that the, there isn't a sequential, sequential decline in EBIT in Canada, sorry. So, I was going year over year, so year over year, EBIT profitability and EBIT is modestly up, I think as you look for Q3 versus Q4 you have revenue down and margin modestly down right at 7.4%.

I think in the UK, you have pretty significant revenues decline with also some margin compression, given the slowdown in the overall market.

Okay, can you help us think about the cost savings associated with the headcount reduction you referenced in Canada and just comment on whether you think you might have to give back any of those savings to maintain or increase market share in a competitive environment?

So, if you look at year over year, we're down about 6% headcount reduction. And so that's essentially $25 million type fixed cost reduction.

So, I think we're entering 2020 with a pretty significant cost benefit relative to 2019. I don't see any scenario where we're adding costs to, to go after the market opportunity.

I mean, I think in this market, we've reduced costs and increased market share, and improved customer loyalty. And so when you look at that Canadian business, I think this is probably the first time since I can remember where it has a slight revenue increase with no increase in SG&A, I mean excluding the four refuel additions during the year.

And so I do think that's the trend that we want to continue is a very good cost discipline number on the SG&A side.

Yes, maybe that's my first question just going back to South American outlook. I guess a couple of things here.

How much of the bleed can be expected in the first quarter with the Chilean unrest. And then the second thing, just the impact of the coronavirus, when we take a look at the Chinese copper buyers, there's postponement of a number of shipments, specifically from Chile.

So, just wondering what the impact there is?

Yes. And also on the first question, I think the best way to look at the GDP probably right and you look in the fourth quarter, GDP was down 3% in Chile, and the 2020 outlook is around 1.5% to 2% for the year, but that is your third and fourth quarter, primarily.

So you see pretty low GDP not negative, but within the time of 0 to 0.5% for Q1 and Q2 and the improvement in Q3 and Q4. And I think that makes sense given that they have summer holidays right now in January, February, and then they have a referendum in April.

So that kind of seems to hold together for me. Once you get through the uncertainty, you start to see more activity.

In terms of the coronavirus, I think time will tell frankly, we've seen a couple demand sources out of China ask Chilean producers to hold back on their deliveries. I think the other aspect of that is you've seen some closure of facilities in China as they deal with this virus.

I think the good news on the latter is that at least as it relates to CATs going back to work. So I think they opened up their facilities yesterday or the day before, which was a little bit of the delay coming out of the lunar New Year holidays, but better than I was expecting.

So I think that's the positive. So I think time will tell on the, on the virus Jacob, it's too early to determine right now.

Okay. And then my second question just on the UK.

So see you talked a bit about the HS2 phase one. How should we be thinking about that as far as the timing and the dollar impact and then maybe also just related to the UK, where the opportunities you're seeing in power systems right now because it was fairly soft in the fourth quarter.

Yeah, I think the power systems side was more of a fade. So one UK was very soft in the fourth quarter.

I think GDP was 0.1%. And I think the combination of the uncertainty associated with the election and Brexit play that impact on that.

I think if it relates to our power systems though, it wasn't a, you can't look quarter to quarter; maybe you have to look year over year. And when I think about some of the investments that are being made primarily in Ireland, Facebook, Amazon, Microsoft and our position on the data center side, I feel really good about that business.

As we look forward to the UK a I think as you get past the general election and now more certainty around what's going to happen with Brexit that should increase confidence, recognizing that there's still a transition period. And our expectation was that the government was going to make some announcements around infrastructure, which we saw yesterday around HS2.

That is a very promising and I think a good development for us. And it gets not only the HS2 issue, but it's the ripple effect on confidence in the economy.

What we saw with a lot of contractors were holding back in the third and fourth quarter waiting for what the government was going to do around HS2. So to see HS2 announced I think is pretty positive in terms of how HS2 will impact us, we have a $1 billion business there approximately and HS2 has potential, assuming we get the type of market share that we're hoping for to be a $250 million to $300 million type opportunity for us.

And that starts late 2020. And so there's a, it comes pretty quickly and it is over a period of time, but the actual equipment, the earth moving it happens over a few years.

And so starting late 2020, I think you'll see some things come through on the revenue line.

So there more pair of headwinds today versus sort of back in November when you provided us with your 2020 flattish revenue guidance. So as you think about a sort of incorporating those headwinds, would you be willing to share a range of revenue expectations for the full year?

I'll tell you the variable in that. I'm not going to give you a range, but I'll tell you the variable that we are dealing with.

I think on the equipment side, we're definitely seeing a decline in the industry activity. I think that decline or the magnitude of that decline will depend on some big projects that are out there or maybe variables that are out there.

So, HS2 is one thing, that comes through as we expect in fourth quarter, that's really helpful. I think in Canada, the pipeline and the activity that happens on the pipeline is quite important and we're seeing some quoting on TMX right now, which is positive.

But obviously, there's a pace to that. And then in Chile, it's around the social unrest and when that stabilizes and when you start to see GDP growth in the region.

So, that to me, those two for me are the variables around revenue. On equipment side, on the product support side, we see continued positive growth I mean I think in Canada, you saw year-over-year in the quarter a slight down but that was not on the product side, the product side was actually up.

You saw a little bit of weakness on the service side because we have some big drag line outages in Q4 2018. And so, when we think about the aftermarket and construction and OEM at high levels, we're going to see continued product support in Canada.

And then in Chile, we believe, we're going to see continued product quarter as well. A part of that is the easier comps given we're through our ERP situation but a part of that also is copper production increasing year-over-year.

And so, that should be helpful. So, hopefully that gives you a sense of the type of variables we're dealing with.

Yeah. I know it definitely does.

Thanks for that. And then, maybe just shifting over specifically to South America, just thinking about the margins there into 2020.

I mean, it certainly sounds like a tale of two halves to see, it's the political landscape, I mean, should we be thinking that as a gradual margin improvement and what type of exit margin should we be thinking. I mean, is it possible that we see return to historical margins by the end of the year?

Yeah. I mean, I think the way we're approaching this is, we have reworked the UK business and we reworked the Canadian business because of the growth pressures or the revenue pressures, and those two businesses are in very good shape from a resiliency perspective, and hopefully you see that when you look at the annual results.

The Cenza business or the South America business has seen a pretty significant re-rating on the revenue side. I mean you just have to look at the GDP situation to come to that conclusion.

And so, we need to continue to be much more disciplined on how we manage the cost base there, and working capital. 2019 was an interesting year, because we dealt with the Argentina situation and we've reduced our headcount there by about 25% and our footprint significantly.

Overall in South America, we've reduced our headcount I think by 7% year-over-year on an annual basis. So, that sort of cost focus in our South America business is going to continue throughout 2020, and not only cost but on the working capital side as well, and that will underpin some of our free cash flow that's comes out of that business in 2020.

And so, I do think that you're going to see a gradual profitability improvement in our South American business through the year, and the question in my mind is the social unrest and how you get through the back to growth phase in Chile around GDP.

Okay. That's really helpful, Scott.

Thank you. These were my questions.

So, given the big working capital recovery in Q4, we were a bit surprised to see that you weren't buying back shares just in the case that you wanted to retain some cash in the business, maybe as a hedge against 2020 being a potentially bit soft or were there other considerations we should be thinking about?

Our cash flow is backend loaded in the fourth quarter and a little bit more than historically has been the case because of some of the challenges we were facing during the year. And we want to make sure the balance sheet was in good shape heading into or in a volatile environment.

And so now that that free cash flow has come in, and we have a lot of confidence around returning to historical EBITDA to free cash flow conversion rates, we feel comfortable repurchasing shares, once we come out of blackout here and will start to do that coming out of this quarter and progressing for the year.

Okay, that makes sense. And I apologize if I missed this, but can you give us a sense for how you feeling about your inventory position across your businesses?

And how should we thinking about working capital in 2020?

Yes, I'm feeling good. The comment around reductions in inventory in the back half of the year and it was around 350 million.

I'm feeling really good about our Canadian situation. I mean, I think we went from '18 industry that was growing at 20% to a '19 industry that was declining 20% and in the mid part of this year, we had some excess inventory but the team did a great job working through it.

And we've got inventory on hand, but nothing that concerns me in Canada. So, I feel really good about the Canadian situation.

In South America, as we work through the ERP issues, we find ourselves with probably $100 million, maybe a little bit more of excess parts in the South American side and that's been exacerbated a little bit, we thought we're going to work through most of that in the back half of 2019. But with this, social disruption that impacts us a little bit more than we would have thought.

And so as we enter 2020, we have, essentially excess inventory in South America that will provide a good underpinning to our free cash flow performances in 2020.

How should we think about the backlog I mean, your backlog, obviously down a fair amount again in the fourth quarter, but it's only 10% of sales and given your product support business. I know the size of it, I'm just trying to understand how you factor it into your thinking and, when do you, do you have any visibility on when we see stabilization and the backlog and can you break it out at all by region and what it will look like?

I know you don't ordinarily do that. But if you at least qualitatively help us, that'd be great?

Yes, sure. So the backlog has come down.

I think, frankly, the backgrounds a little less relevant right now as availability from CAD has improved pretty significantly. And so what if we look to is order intake, and I think the good news on the order intake side is we've seen a little bit of a pickup in the fourth quarter else, the third quarter on the construction side.

The other thing that gives me comfort is looking at some of these big projects that we're bidding on right now TMX as an example, there's quite a lot of equipment that needs to go to work there and that is in our plans for 2020, that all being said, you know, we're expecting continued weakness in the equipment markets. And I think I said on my opening comments around 5% type industry decline in 2020.

On the parts side that's not really factored into the backlog. That's the regular product support that has, I think shown a good resiliency and ability to grow through any kind of macro headwinds.

So I feel good about that.

And maybe you could just help a little bit on this. I'd love to hear your thoughts on just the state of the mining cycle, particularly for big equipment in Western Canada and you know Chile irrespective of the recent headwinds.

I mean, where are we, I mean it felt like just, six months ago you could have still argued that we were in the nascent stages of recovery and then we just did rolled right over. Like what are the structural issues that are really preventing this market from recovering much at all.

And like any sense, it's like what is replacement demand these days versus what it used to be. I mean, I know those are big questions to answer, but.

I know Ross you cover CAT as well and a lot of what CAT said on the call it resonated with me in terms of kind of the mining outlook. We're seeing really good product support in mining in both regions in Canada and South America.

And you know, I think part of that is the rebuild opportunity. I think autonomy has an opportunity in Canada to increase the new equipment demand.

And we're looking at as an example Pearl where we have 13 trucks running autonomously. And I think they've said publicly that they're planning on ramping that up to 20 next year and then moving fully autonomous some point in the future.

And so I think there are some opportunities there for new trucks. In South America, I think the good news is something like QB2, right I mean QB2 is a $5 billion or $6 billion investment.

And for us that's material. We'll see some of that come through.

And in 2020, I think it starts on the second and third quarter for us in terms of deliveries. But frankly that's social unrest in Chile has caused people to wait a little bit and we've had a number of RFPs in process where I think the customer's going to continue to go forward with it, but they're also hesitant, not hesitating but waiting a little bit to see what happens here over the next couple of months from a stability side and a GDP side in Chile.

So hopefully that gives you some context.

Hi, good morning. Thanks for taking the question.

Maybe first just to follow up on Ross's question about the equipment demand in South America. I guess just, so I guess I was a little surprised that the social unrest is limiting the mining equipment purchases there.

But I guess, because I was thinking most of that production would be for export markets like China. But I just was wondering is that your impression?

I just wanted to clarify that. Make clear that social unrest is impacting mining as well, if not more of like an economic issue.

No and I don't want to confuse it. So we saw a significant decline in equipment revenue year over year in Chile, that wasn't all related to social unrest.

We had a lot of those deliveries in the fourth quarter of 2018 associated with some large mining orders, and when you look at the impact, I think we said, that was $0.05 times of EPS and 150 basis points, only a small part of that was revenue, to tell you the truth. The other aspects of that was the productivity in our facilities given people couldn't get to work and the devaluation impact of service.

And so, when I was answering Ross's question, I was talking more about our RFPs quoting replacement cycle on big mining equipment or the new mining projects. And like I said, the good news is we have QB-2 but our expectation is that, there's going to be a few more of those given where Chile sits on the supply side for copper.

But, I think we have some uncertainty in Chile and then also with China demand, I think producers is just positive. And I think, that's what we're seeing from a quoting and RFP perspective right now.

Okay. Great.

That's really helpful. And then going back to the increasing parts market share to connectivity and ability to sort of think about predictive maintenance.

I'm just wondering in often to this point, you lost share, but as we trying to think about recapturing share, how much of that is a function of the prices and economic decision on the second and third buyer versus just making contact with those customers since you have predictive ability now?

So, I mean I think we have made a huge step forward as a company over the last 3 years on connectivity and the group gone from 20% of our fleet connected to 80% of our fleet connected, and we know that, you can see it through our that if you have connective machine and you have customer service agreement with that, we can get more parts market share. I think there is a big opportunity in both Canada and South America in particular on the construction side to increase our market share and part of that is we know how to optimize the value and the price there is a great opportunity and a high margin opportunity and we should be very thoughtful about how we trade-off that volume and so long as accretive to our enterprise and I think we've shown what we've done, it is, We should be willing to go after that.

I think we're well placed now with the connectivity and our sales approach to capture this market share. I don't want to leave any impression that we've lost market share there.

I think that was your comment. We haven't lost the market share in the aftermarket at all.

We just now with all these connected machine see the amount of market share that we can actually capture and so I do think that's a big opportunity for us in those two regions over the next few years and it's consistent with cap strategy to double our services revenue. And so, we're well-aligned on that approach.

Great. Thanks for that clarification.

Just I guess some of it already been discussed on the impact of free cash flow if you go back in year. I think the expectations were for more free cash than you generated this year.

I think you'll hit sort of debate what significant means. But, I know that was highly framed it and there were associations, it would be up year over year.

So, and of course, those are we look at it on a consolidated basis. But can you maybe break out where you fell short.

South America, I think you already reviewed. But are there other headwinds, just in terms of inventory or working capital management that didn't quite transpire the way you expected this year or for that matter.

Did you end up on your CapEx, allocating more capital to places you hadn't originally anticipated?

So, I mean, definitely. If you look at '18 and '19, the EBITDA free cash flow of EBITDA conversions wasn't where it had been in previous years I think '18 with more because of growth.

Both on the capital side, frankly, and on the revenue side investment in inventory in '19, where the miss came was in South America, and that was coming out of the ERP, we invested in parts and components that take care of our customers to the tune of 100 to 150 million and that was the major cause of the miss. If you look at rental and capital, we reduced that 25% to 30% year over year and as you, look forward to 2020 that's going to continue to come down.

There was in Canada the miss was mostly timing and that there was a strong push at the end of the year to go through that inventory that was a little bit elevated for the start of the year. And that didn't hit us in the overall free cash flow performance.

But it did hit us in the financing costs as we went through the year, and that would have obviously had an impact on EPS. I think that's a much different situation as we look in to 2020 partly because we're coming into the year in a much better situation in Canada.

We have a decelerating operating equipment environment. And so you know that the business model works, it will generate free cash.

So, I feel very good about getting back to our historical EBITDA and free cash flow rate in 2020.

The only thing I would also add is this, we came through the ERP and remediation, we restored parts flow and therefore product support revenues, but it does cause a ripple on the signing of conversion to free cash flow. So, we also had a delay pushed out from '19 to '20 on the bill to cash, right.

But going into '20, you would have known that right those issues that come up in the fall of the fall of '18?

So that rippled from the fourth quarter, the first quarter was a bit greater than we expected and South America is we were focused on restoring the revenue flow, and then we send the invoices so we expect to have that come from four quarters first quarter strengthening the prospects for free cash flow this year. So, as just as product support revenues been recovered, that monetization will come pretty rapidly in the first part of 2020.

My second question, Scott, could you maybe talk a little bit about how your digital strategy is playing into opportunities like the one in the UK with the high speed rail and how you're sort of using that? Or if you're using it to position yourself to get a more significant piece of business that you might have not otherwise got?

So, I mean, the digital strategy was threefold. Right was one with the productivity, which we talked about a second was the e commerce, which was had been successful or kind of growing that business at 35% to 40%.

And so that's been helpful from a cost of service perspective. And the third portion is are there value added services you can provide to customers, to both increase customer intimacy, increase market share, and hopefully increase revenue through subscription based services.

I think where we've seen most success on that is in the integrative knowledge centers in both South America and Canada and that is connecting mining equipment and then driving insights back to customers. And we've seen particularly in South America, which is probably a couple of years advanced on our Canadian business, increased availability of the fleet, which I think has helped a lot in terms of market share position us for future bids.

The point on HF2 is our technology platform that we've been developing in conjunction with one of the main contractors in HS2 and that technology platform allows us to connect not only CAT machines but also mixed fleets and then drive insights off of those mixed fleets back to the customers to increase their productivity. And it's not only around machines, frankly, it's around their whole operations.

And so it helps them think about where to dig, how to move, how to move the earth, where to move the earth, when to move the earth, thinking about fuel efficiency, thinking about operator performance. And I think that's positioned us well with this customer in particular, but also with the whole HS2 consortium.

And so one of the reasons I feel good about us capturing our fair share or better in HS2 is because of the work we've been doing on the digital front in the last three years in the UK.

Okay. Oh, it's interesting.

See how that will evolve. Thanks for the extra perspective on that.

And Steve congratulations on your retirement. All the best.

We never got our ski day, and now that you're not working, maybe we can make that happen.

Let's do that. Thanks man.

I appreciate it.

This concludes our call. Thank you operator, and thank you everyone for joining us today.