Finning International Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

Key Takeaways

  • Finning delivered 23% revenue growth to $2.1 billion and 51% EPS growth to $0.89 in Q1, driven by 27% product support revenue gains and a 400-head reduction in corporate overhead.
  • Equipment backlog climbed 15% year-on-year and 25% quarter-on-quarter, with mining orders surging, construction intake up 10%, and Power Systems orders more than doubling.
  • The newly refined “growth by design” strategy focuses on product support as the primary growth engine, while targeting used equipment, rental and electric power opportunities and building a more flexible cost base.
  • Operational investments include hiring over 70 technicians in Q1, opening new branches in British Columbia, expanding in Edmonton, and boosting capacity in Antofagasta, with plans to add 100 technicians in Kamloops.
  • Capital allocation priorities include a 6% dividend increase to $0.25 (22nd year of growth), a renewed 15 million-share NCIB and maintaining net debt/adjusted EBITDA at 1.7× with a goal of strong cash conversion.
AI Generated. May Contain Errors.
Earnings Conference Call
Finning International Q1 2023
00:00 / 00:00

There are 11 speakers on the call.

Operator

You for standing by. This is the conference operator. Welcome to the Finning International First Quarter 2023 Investor Call and Webcast. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

Operator

I would now like to turn the conference over to Greg Palaszuk, Executive Vice President and Chief Financial Officer. Please go

Speaker 1

ahead. Thank you, operator. Good morning, everyone, and welcome to Finning's Q1 earnings call. Joining me today is Kevin Parks, our President and CEO. Following our remarks today, we'll open the line to questions.

Speaker 1

The call is being webcast on finning.com. We've also provided a set of slides that we'll reference during our prepared remarks. The slides are posted on the Investor Relations section of our website. An audio file of this call and the accompanying presentations will be archived on our website as well. Before I turn it over to Kevin, I want to remind everyone that some of the statements provided during this call are forward looking.

Speaker 1

Please refer to slides 1011 for important disclosures about forward looking information as well as currency and specified financial measures, including non GAAP financial measures. Please note that the forward looking information is subject to risks, Uncertainties and other factors as discussed in our annual information form and our key business risks and our MD and A and our risk factors and management and forward looking information disclaimer. Please treat this information with caution as our actual results could differ materially from current expectations. Evan, over to you.

Speaker 2

Thank you, Greg, and good morning, everyone. Our teams continue to execute well and delivered strong Q1 results. We achieved 27% growth in product support revenue, took actions to reduce our corporate overhead costs and continue to expand our operating margins to deliver earnings growth. We are pleased to see our adjusted return on invested capital now approaching 20%. Over the last few months, we've been working with a broad group of leaders on the simplification and prioritization of our strategy.

Speaker 1

We are

Speaker 2

placing greater emphasis on the engagement and empowerment of our frontline teams and the regional execution of the company priorities. As we reinvest into our business, we will be intentional in growing our addressable market opportunities. At this moment, we're calling this growth by design, a focus on more resilient segments of our business. Product support remains our primary focus and we will continue to explore attractive opportunities in used equipment, rental and the electric power segments. We also continued building full cycle resilience into our operations by driving productivity improvements and making our cost base more flexible and variable.

Speaker 2

We are also very focused on optimizing our working capital levels, while ensuring we can support the long term growth of the business. Our goal is to grow the business in a sustainable manner and deliver strong performance through all market conditions. Please turn to Slide 3. As we look forward, we are excited about the momentum we are seeing in our operations. Our teams are focused, Activity levels and customer confidence remain strong.

Speaker 2

We continue to win significant opportunities in all market sectors and expand our equipment population, building our backlog. Our backlog is up substantially from a year ago And grew a further 6% from December 2022. Mining backlog is up significantly compared to a year ago and we continue to expect backlog in quarter 2 this year, including the full Artemis Gold order and additional orders on a framework agreement from South America. While our construction backlog is below Q1 of last year due to HS2 deliveries, our order intake in construction was up 10% from quarter 2022, driven by higher activity and order intake in Canada. Our systems sector is growing showing great strength With order intake more than double from last year and up 60% from quarter 4 2022, more than offsetting the reduction in construction backlog And demonstrating the diversity and resilience in our business.

Speaker 2

We also see continued growth in demand for equipment rebuilds And we have a growing book of rebuilds in our regions. All of our operations continue to hire technicians and build product support capabilities and capacity to capture market share growth in a disciplined manner. We hired over 70 technicians in the Q1 following the addition of 6 60 technicians last year. We're also making targeted investments in our facilities to improve capacity and efficiencies to better serve our customers. For example, in British Columbia, we recently opened our Single R or Response branch in Campbell River in Kelowna.

Speaker 2

I had the great pleasure of attending the opening ceremony in Kelowna in the facility in April and I was able to spend time with our employees and customers to reinforce our commitment to the Okanagan region. Very soon we'll be complete and we'll be opening our new Kamloops Triple R facility We'll better help serve our customers with more work base and more warehouse space. We expect to hire as many as 100 technicians to help meet increasing demand at this spread alone. Also in Alberta, we are completing the expansion of our West Edmonton branch and productivity and capacity improvements at our OEM remanufacturing facility And I just returned from Antibogasto last week in Chile, where we reviewed plans to expand our capacity and capabilities in the region to We will remain diligent in our execution, Optimizing our business to make it more resilient and ensure we have the right people and capabilities to continue capturing market share and improve outcomes for customers. We are optimistic about 2023 and expect continued momentum in our business to be underpinned by our record equipment backlog, The successful execution of our product support growth strategy, including rebuild activity, and we are also pleased with the double digit growth in our rental and used businesses.

Speaker 2

I look forward to seeing our investors in the coming weeks and providing you a more fulsome update on our strategic priorities at our Investor Day in September. I'll then hand it back to Greg to provide Greg's level of insight into our Q1 results. Thank you and over to you, Greg.

Speaker 1

Thank you, Kevin. I'll talk about our Q1 performance in a little more detail, including our regional results. Turning to Slide 4, please. Q1 was another great quarter for us and we're pleased with the results. Net revenue of $2,100,000,000 was up 23 And EPS of $0.89 was up 51% from Q1 2022.

Speaker 1

We demonstrated continued strong Our product support growth strategy delivered solid operating leverage in all regions. Our consolidated equipment Backlog increased from December 31, 2022 on strong order intake, up 15% from the Q1 of last year and 25% from last quarter. Equipment inventory is healthy. A substantial majority of our inventory is backed by committed customer orders. Was up 8% from December 31, 2022 and up 40% year over year.

Speaker 1

We also have significantly more and overall larger rebuilds booked today that we did this time last year. Slide 5 shows changes in our net revenue by line of business compared to Q1 2022 and The composition of our equipment backlog by sector. New equipment sales were up 18%, led by strong mining deliveries in Canada. Product support revenue was up 27%, reflecting our expanded installed equipment base, year over year pass through of higher supplier costs and execution of our product support growth strategy. Equipment order intake in the Q1 was higher across all regions and market sectors compared to last quarter, led by Power Systems.

Speaker 1

Our consolidated Power Systems backlog is strong and growing, accounting for 25% of our total backlog at the end of March. We expect to deliver substantial majority of our equipment backlog this year. Turning to Slide 6 for details on our EBIT performance. Our gross profit was up 27% Gross profit as a percentage of net revenue increased by 80 basis points from Q1 2022 on strong product support volumes. 16% increase in SG and A reflected higher workforce and variable costs to support revenue growth as well as the impact of inflationary increases.

Speaker 1

As a percentage of net revenue, SG and A was down 120 basis points compared to Q1 2022. As we continue to simplify our operating model To empower our regional teams, we took a number of actions in the quarter to adjust our organizational structure. These actions had no net impact on EPS. We streamlined our corporate overhead costs by reducing non revenue generating full time and contractor roles by over 400 people. This includes a 25% reduction in Vice President and above positions globally.

Speaker 1

As a result, we incurred $18,000,000 or $0.09 per share of severance costs. We expect these fixed cost reductions to help offset inflationary and variable cost increases going forward. We also wound up 2 foreign subsidiaries to consolidate to existing operations where we could optimize our resources. As a result, we reclassified a foreign currency translation gain of $41,000,000 or $0.21 per share. And finally, we recapitalized and repatriated $170,000,000 of profits from South America, which resulted in withholding tax of $19,000,000 or $0.12 per share.

Speaker 1

Excluding these items, adjusted EBIT was up 54% from Q1 2022 on strong revenue growth and expanded operating margins. Moving to our Canadian results and outlook, which are summarized on Slide 7. Net revenue increased by 30% from Q1 2022 with broad based strength across all lines of business. Net revenue or new equipment sales were up 52% driven by mining deliveries stronger activity in the Construction and Power Systems sectors. Product support revenue increased by 26% led by mining, including increased rebuild activity.

Speaker 1

Canada continued to deliver solid operating leverage with SG and A as a percentage of net revenue down from Q1 2022, Adjusted EBIT as a percentage of net revenue up 220 basis points to 11.3%. Our outlook for Western Canada is positive, Supported by healthy order activity and continued strong demand for product support across all sectors. Equipment backlog in Canada was up a further 6% from Q4 Investment and renewal of aging fleets and product support opportunities, including growth in demand for component remanufacturing and equipment rebuilds. We are working with our mining customers on rebuild programs and expect strong growth in mining rebuilds in 2023. Turning to South America on Slide 8.

Speaker 1

In functional currency, net revenue increased by 16% from Q1 2022, driven primarily by mining product support. New equipment sales were up 8% due to higher sales in large contractors supporting mining operations and infrastructure construction in Chile. Product support revenue was up 19% driven by an increased demand for component exchange, equipment overhaul and fleet maintenance and mining and higher volumes from new mining product support contracts Adjusted EBIT was up 17%. Adjusted EBIT as a percentage of net revenue was 11.5%, up slightly from Q1 2020. We have accelerated productivity initiatives in South America to offset inflationary cost increases, a reduction in non revenue generating managerial and administrative positions.

Speaker 1

In addition, we have reduced contractor positions and increased Utilization of our shared service center in Uruguay. Our outlook for Chile remain that mining remains strong, supported by increase in copper demand and improved political clarity. We're encouraged that the Chilean government is in the final stages of a moderated mining royalty agreement. We're also pleased to see recent approvals for large scale brownfield expansions that have previously been on hold. We're seeing growing customer confidence for reinvestments into as well as brownfield and greenfield projects, which is translating into an increase in quoting and request for proposal activity.

Speaker 1

We also expect continued strong demand for mining product support and technology solutions. About half of our construction business in Chile is related to the mining sector. We continue to see strong demand from large contractors supporting mining operations. We now expect infrastructure construction activity in Chile to remain stable compared to 20 22 levels. We continue to win deals in Power Systems where order activity remains strong.

Speaker 1

Our backlog in South America was up 7% from Q4 2022 and includes additional orders for Please turn to Slide 9 for our results in UK and Ireland. Net revenue was up 5% in functional currency as growth in product support more than offset lower new equipment sales. New equipment sales decreased by 13% due to lower sales in construction, including lower HS2 deliveries compared to last year. Product support revenue was up 36%, driven primarily by increased activity in construction and the full quarter of contribution for Hydro Grip, which we acquired in March of last year. Adjusted EBIT as a percentage of net revenue increased by 70 basis points to 5.7%, reflecting a higher proportion of product support in the revenue mix and operating leverage.

Speaker 1

Order activity in the construction sector has been resilient to start the year and demand for equipment remains stable. We expect In Power Systems, we have a solid backlog of projects for delivery in 2023. We have secured additional orders from data center customers in the Q1 for delivery in 2024. We expect demand in our Power Systems business in the UK and Ireland, including the data center market to remain robust. We're also pleased to announce a 6% increase in our quarterly dividend to $0.25 per share, which marks the 22nd consecutive year of dividend growth.

Speaker 1

We also renewed our NCIB program to repurchase up to 15,000,000 shares. Under the current NCIB program, we were With net debt to adjusted EBITDA at 1.7x at the end of March. In summary, we're pleased with the strong start to the year and encouraged to see a further increase Our equipment backlog, service work in progress and book of rebuilds. We remain focused on disciplined execution of our product support growth strategy and improving full cycle resilience of our business. Looking ahead, we expect continued momentum in our business and are optimistic about 2023.

Speaker 1

Before I turn it over to the Q and A session, I'd like to remind everyone that we're hosting an Investor Day in Antibagasta, Chile on September 26. Investor Day presentations will also be webcast live. Investor tour of our mining operations starts on September 25th A visit to a mine site is scheduled for September 27. We hope that you can join us for this event in person. If you haven't received an invitation yet, please reach out to Alona.

Speaker 1

Your contact information is on our website. Operator, I'll now turn the call back to you for questions.

Operator

Thank you. We will now begin the question and answer session. We will pause for a moment as callers join the queue. The first question is from Cherilyn Radbourne from T. D.

Operator

Cowen. Please go ahead.

Speaker 3

Thanks very much. Good morning and congratulations on a strong start to the year. Kevin, I wanted to start with the headcount reductions. I was a little surprised that there were still 400 excess positions in the company. So I was hoping you could speak to the supporting analysis and Just why you're comfortable that you're not cutting too deep with those redundancies?

Speaker 2

Yes, sure. And thank you for the question, Cherilyn. So I mean, 400 employees, the first thing to say is half of that were contractors. And we have a lot of contractors in the business as we've been investing in systems and building new And so we have a very much a focus on optimizing our investments over the last number of years, which have been Substantial and very helpful, but we need to optimize those investments now and pause on some of the build and development work. Many of those, more than half of those employees are contractors.

Speaker 2

In total, that leaves 200, which is less than 1% of our workforce and that 1% of those 200 people would fall into a couple of categories. For sure, We're looking at how we simplify, decentralize and de layer our corporate overhead. And so there has been some work around that area. And then there has also been some work in all three regions to optimize the management I think these are all good activities. You should always look for ways to optimize and find efficiency

Speaker 4

in your

Speaker 2

organization. It's been well received across the organization. But we don't see this as something that continues. This was An action under my new leadership to kind of reset the other ahead in the management structure. And as we Roll the strategy out now.

Speaker 2

We'll look to optimize that structure further, make sure we've got the right capabilities in the right places. And ultimately, we want to grow. So, we see us potentially adding some of those headcount back in, but at The operating frontline level and the revenue generating level rather than the administration or corporate head level, hopefully that helps.

Speaker 3

That's great color. Thank you. And then for my second question, I was hoping you could give us a sense of How the supply chain is functioning year to date and how that's influencing your planning both for inventory and rental fleet addition?

Speaker 2

Yes, sure. So, I would say supply chain continues to improve. It doesn't get any worse. There are still some there are pockets that are close to being fully recovered. Excavators would be a good example of that.

Speaker 2

There are pockets that are nowhere near back to pre pandemic levels. So we continue to be agile and thoughtful about how we Managed through that situation, applying all of our resources, whether it be rebuild or rentals to satisfy the customer demand And obviously using our balance sheet to make sure we're carrying the appropriate levels of inventory to ensure that we can Our customers effectively continue the growth in the business and the market share gains. So, I would say, we're for the remainder of the year around supply chain. But I would say that we're not yet back at normalized levels and that's what you see in the elevated working capital Things are just a bit slower to get through the system right now, but we're happy to do that in the spirit of winning additional market share.

Speaker 3

Perfect. That's all from me. Thank you.

Speaker 2

Thanks, Charlene.

Operator

The next question is from Jacob Bout from CIBC. Please go ahead.

Speaker 5

Good morning.

Speaker 1

Good morning, Jacob.

Speaker 6

Another quarter of solid product support growth. Maybe you can comment On the sustainability of this growth and what the growth in installed base looks like in both Canada and South America?

Speaker 1

Yes. Thanks, Jacob. I mean, we feel really good about the momentum. Of course, it's been targeted effort in partnership with CAF to Look to gain back share of the aftermarket. I think we've had success there.

Speaker 1

There's also been supplier cost pass through, which Year over year was fairly substantial. And so we feel good that we've got good momentum there. Our service work in progress is up. Our book of rebuilds is Strong. And so we see good continued momentum there.

Speaker 1

And so a healthy chunk of it would be price, but another double digits would still be volume. And so we feel good about that and there's good strong continued momentum. And so some of it is that momentum and continued strength in the market and some of it is the actions we've taken to win back Chunks of aftermarket share, so feel good about that overall.

Speaker 2

And Jacob, I'll point you towards my remarks earlier today. We're adding significant capacity to our product support base. So, our new Kamloops facility, which was designed specifically To bring the work to where the people are, for those of you

Speaker 1

who don't know and I'm new

Speaker 2

to Canada still, but Kamloops is a terrific place to live and work And we've been very pleased with The ability to attract technicians to that region. So, we've had a significant number of bays and warehousing capacity And component rebuild capacity for the smaller components that don't go through OEM, but we've also been making considerable investments in OEM to increase the capacity. And then like I said, last week I was in Antifa Gas to Juan Pablo and we've got a we're putting together A 5 year plan to expand capabilities in the Antwerp Gaspar region, to capture The optimistic our optimistic view of the outlook for copper production. So it's not just what's going on right now. We're planning for the future and adding Asserti, because we're very confident in the outlook to retain that level of product support business.

Speaker 6

Okay. Maybe just a secondary follow-up question here. Just how the booking of ancillary parts and service business associated with the new equipment sale has evolved over time. And typically, what does this look like in session. And what could be different this time if we are heading into a recession here?

Speaker 1

The question just around product support volumes? Yes. Maybe you can clarify the question, Jacob. What do you mean by

Speaker 2

ancillary parts? Sorry, Jacob.

Speaker 6

The ancillary parts and service business. So if you sell a new piece of equipment, are you seeing more Parts and service business associated with that new sale than you have historically? And then how does that change in recession environment? Are your clients Doing more work or have things changed, I guess?

Speaker 2

Yes. So I think I understand your question, Jacob, but happy to follow-up. So I mean, if you think about The equipment we sell right now, more than 80% of that equipment, in some cases 90% is now going with the CVA. We spend a lot of time thinking about this as we look And we spoke to growth by design or more resilient growth. Our CVAs are our They are our recurring revenue stream and they are pretty sticky because to have a CVA, you are making a decision on who maintains that piece of Certainly for the 1st 3 years, but we've got a really strong focus on years 4 to 10 now for the CBA.

Speaker 2

So You'll make your own decisions around your own workforce in terms of outsourcing that to Finning or to any dealer to do that. So, I would suggest that the long term view is that the product support revenue around equipment population adds is stickier than it's ever been. So, we would be hopeful that that would continue as we move forward. And of course, if you did see any kind of softening in the market, which we're not Right now, some of that capacity that would have been with our customers to kind of replace our capacity has gone away. And so, we're not that we haven't seen it yet, but I would hope that it's a lot more resilient and Probably the UK is a good example of that model.

Speaker 2

Does that answer your question, Jacob?

Speaker 6

Yes. No, that's very helpful. Thank you.

Speaker 2

Thank you. Good. Thank you.

Operator

The next question is from Yuri Lynk from Canaccord Genuity. Please go ahead.

Speaker 7

Good morning, guys. Kevin, you sound a little less cautious than you did quarter, especially on the construction outlook. Apart from the obvious positives of the backlog and service whip And all that, I mean, what's kind of changed here in the last few months? And is that something that's been reflected And your conversations with your customers.

Speaker 2

Yes, sure. So I mean, 3 months is a long time, and I appreciate the I acknowledge that we were a little conservative on the last call, but we were looking down a long runway against Very tough comps given the performance of the business in the second half of last year. As we work through the last 3 months, conversations with customers, outlook, Supply chain is improving, Chilean political system political situation and And royalty discussion moving materially in the right direction. It's Just made us feel better about the outlook. I mean, the U.

Speaker 2

K. Is we're very fortunate in that we have a kind of U. K, What's the word? Canari in the mine, if you like. It gives us an advanced view of what's going on in Europe.

Speaker 2

And certainly, The order intake for Construction Equipment, I would describe it as stable, not down, Notwithstanding, we had a record year last year. But what I'm particularly pleased with outside of the so I would say we're more optimistic about a stable construction market In all territories, and Canada keeps going from strength to strength. But what I'm more particularly pleased with is the Power Systems growth in all three regions. We're leveraging the expertise in the UK, in Canada and in South America. And any kind of declines that we're In the construction or any year over year declines in backlog are being more than offset by additions in Power And that Power Systems business is very secure.

Speaker 2

It's more resilient and obviously less prone to a recessionary impact. And we get good product support business from that line of business as well. So I think more the construction businesses I'll be describing the stable versus uncertain, but the rest of the business is getting better as well. So that makes us feel More optimistic about the whole.

Speaker 7

Got it. That makes sense. Last quick one for me. Can you Quantify the cost savings associated with the actions taken in the quarter?

Speaker 1

Yes, sure, Yuri. So, a lot of these are administrative and fairly senior positions. So it's a little longer payback Then maybe an average restructuring. So it's more kind of 9 months payback. So at the cost level that we outlaid, We think that it should be within 9 months kind of fully paid back and then sustain from there.

Speaker 2

Okay. Thanks guys.

Operator

The next question is from Michael Doumet from Scotiabank. Please go ahead.

Speaker 8

Hey, good morning, guys. First question I have is really to try to focus in on The cost structure

Speaker 2

of the business that you guys

Speaker 8

are talking as being more variable, flexible.

Speaker 2

So I'm just wondering if you can

Speaker 8

give us a sense How SG and A breaks down variable versus fixed today versus how it has historically and just how we should think about, Call it the incrementals and decrementals is, I guess, going forward as you manage the business and manage growth.

Speaker 1

Yes. I mean, it would probably change a little bit by But if you look at the operating strong operating leverage we've had really for the last two and a half years, You can kind of see quarter by quarter pretty clearly in the bar charts, we've had some pretty solid gains on the GP side that gets offset about a third by SG and A. And so we do see continued momentum. And so we think despite some of the inflationary increases, we're working on productivity. So we'd like to Continue that type of operating leverage.

Speaker 1

And it would depend on the shape and the pace of any slowdown, but you'd see kind of the opposite the other way. Of We take additional actions to offset more. Those are the rough operating leverage that we see and expect.

Speaker 2

And I would add, we're just changing the mindset here. So we're trying to make sure that we've got more of our revenue Contracted or visible than our cost base. And so, a good example of that would be when we're entering major On track discussions now for procuring goods and services. We want the very best commercial terms And service levels from that supplier. But more importantly now, we want flexibility in the contract, such that we can withstand Highs and lows in our business levels without being penalized for higher prices or poor service.

Speaker 2

Building flexibility into everything we do is becoming a mindset shift at Finan.

Speaker 8

Thanks for the time. Thanks, guys.

Speaker 2

And then maybe just a simplistic

Speaker 8

question. I guess if I look at Q2, if I look at the years where you've had normal seasonality, EBITDA has grown about 10% to 20% from Q1 into Q2. Obviously, a strong start to

Speaker 1

the year, but I was wondering if there was anything

Speaker 8

that we Consider that might negate what typical seasonality has been to the business.

Speaker 1

No, I think we've seen from our working capital injection in Q1 that would be kind of a normal type level. So we're seeing fairly normal seasonality. You can see the backlog build, it's Spring selling and delivery season, so we see continued strong momentum. Of course, there's inflation year over year, but we're working to Stop that. But otherwise, we see it as a kind of typical seasonality.

Speaker 2

Great. All right, guys. Thank you.

Speaker 1

Thank you. Thanks, Michael.

Operator

The next question is from Sherif El Sabahi from Bank of America. Please go ahead.

Speaker 9

Hi, good morning. Just to start off, I wanted to talk about the order intake and how that's trending into 2024 and Maybe what the indicators of those orders look like into next year?

Speaker 2

Yes, sure. So we're really pleased with our order intake in Q1. So Quarter over quarter, it was up 25%. Now the seasonality, as Greg just mentioned, in our order intake in Q1, But we're particularly pleased, I mean, I've highlighted this a number of times there. Power Systems order intake was up over 60%, and that was quite well spread across The 3 regions.

Speaker 2

And that's a good indication, Sherif, that Power Systems revenue And order backlog is now stretching into 2024. So it would be that's why we're really excited about the diversification that Perus brings, it's resilient. But also it gives us a long runway and more visibility into our revenue. So for sure, we'll be confident of Taking us into the 2024 period. Same with mining really, in all reality, Widing order intake, which was up 10% quarter over quarter, like 84% year over year.

Speaker 2

We continue to see the backlog build in mining and for sure those deliveries are stretching into 2024. And as I mentioned in my remarks, We expect to have a couple of significant opportunities to the backlog in Q2 and they won't be delivered until well into 2024. Construction is more agile. Like I said, we're optimistic and encouraged by the stability we're seeing in the In Chile, as Greg mentioned in his remarks, we're seeing particular strength in mining contract and this is the enabling works And mobilization for increased mining activity. So not only is it a good sign for our construction business, it's also a good sign that People are mobilized in South America for increased opportunities in production.

Speaker 2

Construction activity is more agile. And so what we do have, I mentioned supply chain, we do have Certain models that are now for delivery in 2024. And so I would say that some of our Our business is stretching well into 2024. We still expect around 80% of this backlog to be delivered this year. But any ads that we see, which we're confident of seeing in Q2, that will start to stretch into 2024 then.

Speaker 9

Understood. And then you mentioned the scale of quoting our fee request is up significantly. Can you frame the scale of that In dollar terms or versus prior years, what it looks like?

Speaker 1

Yes. I think I just That's good momentum, but also just looking a little further out as people start to get clarity around what the mining royalty structure would look like, You'll start to get quotes for 1 or years further ahead. But it's just a good indicator that they're starting to wrap their heads around, starting to commercialize, Starting to budget and plan for expansion. So, it's a solid pickup despite the increased activity from last year, But just an encouraging trend, but also tone.

Speaker 2

Yes. And I would say, I've answered this question a few times about The outlook for commodities in the super cycle and I would say that we don't we're not planning for we don't expect and we're Hopeful not to see a super cycle. We really would like to see this be a sustained and well thought through expansion of activities. I think people, resources, government and investor license means that there are Some things that mainly holding on to the reins a little bit with this commodity cycle. But I think that works really well for us and it helps us to build the business sustainably and support our customers more So I think it's a longer term view.

Speaker 4

Got it.

Speaker 9

Thank you so much.

Speaker 2

That's okay.

Operator

The next question is from Brian Faust from Raymond James. Please go ahead.

Speaker 1

Yes, good morning.

Speaker 2

Good

Speaker 5

morning. The last few years, I mean, likely disrupted the average age of Equipment in the field, could you discuss maybe the age of fleet from your point? And are you still seeing extended age Fleet and does that really differ between regions?

Speaker 2

Yes. So the average age It's 11, 12 years in Canada, 9, 10 in South America. And for sure, equipment is being extended out. A number of reason is, there was uncertainty in the outlook in Chile. And I think there's a lack of capital to invest.

Speaker 2

I mean, a lot of out of Christmas has healthy balance sheets, but not being very For about their capital and how they get more out of their current investments. And so rebuilding equipment, the economics around rebuilding equipment It continues to improve and catches the attention of customers and we continue to see that business Well, people more opt into that way of increasing their fleet production and their fleet capacity. We see in Chile, to a lesser extent, we see more incremental adds in Chile, but it is It does happen in Chile and it is growing in Chile, but not to the same extent that it does in Canada. But equally, you can see in our mine so I don't want to leave the impression that miners are not invest In new equipment, you can see in our backlog, there's $2,700,000,000 in the backlog and around 40% of that is mining. That's Primarily mining trucks, some ancillary equipment, but it's primarily mining trucks.

Speaker 2

So that's the most mining trucks we will have delivered into our 2 territories, Probably for nearly 10 years. So, it's not huge opportunities. Obviously, we've talked about the BHBS candida opportunity, but there's lots lots of incremental adds going on in the industry combined with effective rebuilds as well. So all these adds Incremental adds that are going into the mining territory, we're not seeing the older assets come out. They're being reworked and rebuilt and staying in territory, which is fantastic for our business model.

Speaker 5

Okay, thanks. And that might answer part of the next question here. You mentioned gaining your portion of market share on the product support side. Maybe could you discuss how that differs regionally and maybe where there is opportunity for

Speaker 2

Sorry, Brian, did you say how we view market share and product support in the different regions?

Speaker 5

Yes. Yes.

Speaker 2

I didn't quite get the question. Okay. So, yes, so I mean broadly, we don't say this, but I mean broadly, our market share for the Aftermarket opportunity in mining is considerably higher than it is in construction. But construction is the biggest area of Opportunity and growth. So a lot of the growth that you're seeing in our product support growth is coming from the construction sector, where we've got the biggest runway or what we call lost opportunity.

Speaker 2

And then power system is a mix really. So on the oil and gas side, it would be up there with mining In terms of, I'll call it dominant market share opportunity in the aftermarket, in oil and gas, For example, in the Power Systems segment and then in the Energy Electric Power Generation segment, it would be very high as well, but obviously Less parts will depend on whether it's actual power or prime power. If it's prime power, it's up there with mining and oil and gas. If it's just standby power, then the product squad opportunity is less, but we reflect that in our in the way that we sell the prime product. We do the comparison between what's the aftermarket opportunity when we're making those proposals.

Speaker 2

So I would say the runway is longest and best in construction. And particularly as you come down the product size and customer Ryan, so we've got an absolute focus now on what we call in the more retail segments, which is customers that own Less than 20 machines, and that's why the team are doubling down to make sure we sustain this level of product support growth in construction that you've seen over the last 2 or 3 years.

Operator

The next question is from Sabahat Khan from RBC Capital Markets. Please go ahead.

Speaker 4

Great. Thanks and good morning. You provided a Bunch of color on kind of the mining outlook. And I'm just curious, if you kind of look closer at that market, the demand that you're seeing, the fact that it's sustained even with the macro backdrop where it is, Is it just your customers are investing for that long demand outlook? Could long demand Visibility for copper, is it the political situation settling a little bit?

Speaker 4

And are they taking a long term view? Or what is sort of their decision making

Speaker 2

In all reality, when we look at our mining outlook and our conversations with our customers, there's very Almost no macro discussion in those discussions. I mean, the miners the commodity price is strong, the demand outlook is good. And so, we're not it's kind of thoughtful incremental production rises. I've spoke to lots of customers and you can see there the public company's results. Nobody is talking about Managing through a macro situation in the commodity sector right now, which we've spoke to for the last couple of calls here on providing filling with some shelter Well, the companies may not have.

Speaker 2

So, I wouldn't say they're investing beyond the macro. I would say that they're not necessarily Seeing the effects of that macro and the strong commodity price and the healthy balance sheets means that they're very focused on Productivity, and I will put Brian in.

Speaker 4

Great. And then just kind of looking In terms of your capital allocation strategy at this point, obviously, I think you doubled the size of the NCIB relative to do it before. Can you maybe just

Speaker 1

dividend again on a steady basis this year, so 22 years in a row. And so we feel good about that and we'll continue to make that an area of focus. We are focused on generating cash at this point. Seasonally in Q1, you'll consume a bit of cash and then we go through selling season here and pivot And so we'll have to see how the full shape of the year goes, but there's we expect to have considerable cash to allocate. And so highlighted last quarter, we will Prioritize reducing leverage through the fullness of the year, but we expect to have additional capital to deploy and We think the NCIB is a good way to do that.

Speaker 1

And so that will be an area of focus, but always share price dependent.

Speaker 7

And then

Speaker 4

just one last quick one. This is just a hypothesis, but if you think about the tight supply environment and the way it's impacting the dealers You talked about your market share in the aftermarket repair business. Does this tight supply environment favor dealers like As yourself that might be better able to secure cap parts and maybe get more of the aftermarket business and that's something that could be maybe A sustainable benefit here. Do you find that it's something that will continue to help or is that not a factor here at this point?

Speaker 1

I think we've had a good supply chain has been challenging for the last 18 months, we've definitely made sure we had enough resources around us to smooth that out. On a relative basis, I think we performed well. I think customers who have found alternatives over the years, the supply chains might not have held up as well through that period. So, feel good that we provide good service levels despite the challenges and I think we've won some loyalty through that period. And so we feel good about that and we think some of that will be sticky over the long term as people appreciate the kind of full cycle capabilities we bring.

Speaker 4

Great. Thanks

Speaker 2

very much. Thanks,

Operator

The next question is from Maxim Sytchev from National Bank Financial. Please go ahead.

Speaker 10

Hi, good morning, gentlemen.

Speaker 2

Hey, Max.

Speaker 10

I think in the beginning of the call, you were talking about Capacity expansion and specifically in LatAm. I was wondering if you don't mind maybe quantifying sort of the envelope of Spending, firstly. And then secondly, what does it mean in terms of both, I guess, absolute revenue generation, But perhaps your ability to maybe debottleneck and do more product support in that geography, just maybe any thoughts on that subject? Thanks.

Speaker 2

Yes, sure. So, this is some of this is what we want to share at our Investor Day, and that's why we're encouraging Investors to come spend some time with us, so we can we're very proud of our capabilities, our capacity, and our people in the region. And I think seeing that firsthand is the best way of understanding the level of And professionalism we have in the region. In terms of the level of investment required to achieve The kind of expansion that I spoke to, actually, we have some opportunities. It's like in Canada, we Greg and I put together With the team here, we put together a long term network strategy in Canada and the Kamloops, Kelowna, Campbell River, we've opened 5 branches in the last 2 years.

Speaker 2

We had some opportunities, because of the end of our long lease arrangements. So we put together a very broad plan. And there's some ins and outs in that, some capital inflows and some capital outflows, but we're very happy with how that And it's really coming to its conclusion now. And I think you're seeing that in the product support growth that you're seeing In Canada, it's enabled us to capture way more product support. Same applies in South America.

Speaker 2

So we've got some facilities that are less used And some opportunities to find efficiencies in some areas of South America And then reinvest that money back into the Antifagasta region, which is the ultimately the big engine room of the South America or Chilean operations. We've also made some investments in Mendoza in Northern Argentina to capture Opportunities that are such as Belo and in that area. So it's not at the expense of other Brian, it really is realigning our network to support the market that we see today. I mean, the team in Chile have a great A Graham, a program that we're working on for future proof and competitive today and that's part of this work to make sure that we've got The right facilities we need today, but we're investing in the facilities for the future. In terms of quantifying The final product support that will give us in South America.

Speaker 2

We are hopeful to see competitive growth year after year and we've already made commitments at our past Investor Day of high single digit product support growth moving forward. And Our view and our outlook of that hasn't changed. And so the network and the investments are to support that level of growth to the next level.

Speaker 10

Yes, 100%. And then actually, maybe if you don't mind, if we stay in the same geography, some Discussions around more government involvement on the lithium side of things. Just curious what are you thinking in terms of Potential opportunity in this market, whether that's more positive Or more negative from your perspective, given all these discussion points? Thanks.

Speaker 2

Yes. So it's early days, Max, and this is pretty fresh news. And so the first thing I would say is lithium is a net incremental business for us, right? So that's a good thing. The general sentiment when I was down there last week with the team and we met with a couple of customers as well in this area Is that government support for or government involvement in the expansion of the lithium Opportunities in Chile is actually a net positive because It means that the projects will get the go ahead and they'll get the investment and they'll they want to be part of the lithium future in Chile and they see that as A big value driver for them.

Speaker 2

So I think a lot of people take off government involvement in industry is not ideal. Well, they have they kind of have experience with Codelco. And so the general sentiment I got last week was, Well, at least these projects will get going and we'll participate more. So hopefully that helps give you a bit of color from last week.

Speaker 10

Okay. No, that's super helpful. Thank you. And maybe just one last one for Greg, if it's possible, in terms of how we should be thinking about non cash working capital as the year progresses? And maybe can you provide a bit of a range or some thoughts on that front?

Speaker 1

Sure. I mean, it will be dependent on some of the backlog build. We do have quite a few quotes outstanding that could But overall, obviously, we've been quite profitable for the last 2 years and cash has been a net investment. At some point, these growth rates will slow a little bit and the cash flow will come through. So we do think this is more Seasonality as I talked about earlier, so we did inject capital in Q1 that will pivot sometime in Q3 or middle of the year to positive and we expect to be Fairly strongly free cash flow positive in the back half of the year and that will give us some good positive choices to make on capital allocation.

Speaker 10

That's great.

Speaker 1

But as we've said before, we think we convert 50% of EBITDA over a full cycle. Obviously, we're continuing to see some pretty solid growth. In the fullness of time, we expect to deliver that cash.

Speaker 10

Okay, that's great. Thanks.

Speaker 2

Thanks, Mike.

Operator

This concludes the question and answer session. I would like to turn the conference back over to Greg Palaszak for any closing remarks.

Speaker 1

Great. Thank you. This concludes our call today. Thanks for your participation and have a safe day. Thank you.

Operator

This concludes today's call. You may disconnect your lines. Thank you for participating.

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