Finning International Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2024

Key Takeaways

  • We delivered record Q2 EPS of $1.02 and $330 million free cash flow, reflecting disciplined execution of our strategic priorities.
  • Year-to-date new equipment sales rose 12% and used equipment revenues jumped 57%, marking the third consecutive quarter of over 45% growth in the used market.
  • Mining order intake was very strong, driving a 59% increase in mining backlog since March and positioning us for future product support growth.
  • Product support growth is moderating, with lower utilization in construction and certain mines leading to flat or below-prior-year revenue in Canada and the UK.
  • SG&A expenses hit an all-time low of 16.2% of revenue, and working capital velocity initiatives are expected to sustain substantial free cash flow in H2 2024.
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Earnings Conference Call
Finning International Q2 2024
00:00 / 00:00

There are 8 speakers on the call.

Operator

you for standing by. This is the conference operator. Welcome to the Finning International Inc. 2nd Quarter 2024 Investor Call and Webcast. A reminder, all participants are in a listen only mode and the conference is being recorded.

Operator

After the presentation, there will be an opportunity to ask questions. At this time, I'd like to turn the floor over to Greg Talaschuck, Executive Vice President and Chief Financial Officer. Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to Finning's Q2 earnings call. Joining me today is Kevin Parks, our President and CEO. Following our remarks, we will open the line to questions. This call is being webcast on the Investor Relations section of finning.com.

Speaker 1

We've also provided a set of slides on our website that we will reference. An audio file of this call and the accompanying slides will be archived. Before I turn it over to Kevin, I want to remind everyone that some of the statements provided during this call are forward looking. Please refer to Slides 9 and 10 for important disclosures about forward looking information, well as currency and specified financial measures, including non GAAP financial measures. Please note that forward looking information is subject to risks, uncertainties and other factors as discussed in our annual information form under key business risks and in the MD and A under Risk Factors and Management and Forward Looking Information disclaimer.

Speaker 1

Please treat this information with caution as our actual results could differ materially from current expectations. Kevin, over to you.

Speaker 2

Thanks, Greg, and good morning, everyone. I'd like to start by thanking our employees for their commitment to each other, to our customers and for their contribution to our strong results. At Finley, we are committed to building a safe and inclusive environment where our teams are empowered to build customer loyalty. We're executing our plan with discipline and focus, simplifying our business and creating a positive impact for our people, customers and communities. Turning to our Q2 results on Slide 2.

Speaker 2

We are pleased with our Q2 results. We are growing our business sustainably and building greater resilience into our operating model, delivering record EPS and free cash flow for Q2. This reflects the diligent execution of our strategic priorities. We continue to build population in our end markets with strong new and new deliveries in the quarter from our robust backlog, which will drive future product support growth. New equipment sales are up 12% year to date, led by Canada with 19% growth.

Speaker 2

Used equipment revenues are up 57% in the quarter compared to Q2 2023. This is the 3rd consecutive quarter of more than 45 percent growth as we increase our participation in this important market. Large mining customers are deploying capital to support their long term funds for sustained production growth. Mining equipment order intake was very strong, reflecting significant strategic wins we announced in May. Mining backlog increased 59% from the end of March and we've already started to deliver equipment from the awarded deals in the quarter.

Speaker 2

4 ultra class trucks and a number of support equipment units were delivered before they even hit log. I recently spent 2 weeks in South America with Greg, meeting customers who produced more than 82% of the country's copper alongside a senior team from Caterpillar. We are encouraged with the constructive tone of the conversations and the accelerated acceleration of plans for increased production from brownfield mines. We expect quoting activity to increase in the second half of the year and our plans to increase capacity and build new capabilities in the region are progressing well. We've added 18 technicians in South America this year, built capacity at our remand center and fully commissioned our new automated warehouse, which many of you saw at the Investor Day last September.

Speaker 2

We are also seeing more constructive discussions in Argentina and positive news from our large mining customers since the government approved the new incentive program for large investments. Construction activity is generally softer than last year. However, we are starting to see customer sentiment improving. In Canada, we delivered 2 large construction packages in quarter 2, and in the UK and Ireland, sales are in line with prior year despite a material decline in the market opportunity with market share increasing and our backlog up 15% in Canadian dollars since the end of March. In Power Systems, demand is strong in our key markets, notably oil and gas and backup power capacity.

Speaker 2

We're taking orders for large engines into 2026 and quoting business well beyond that point. Turning to product support. As expected, we are operating in a moderating growth environment. Activity and utilization levels are lower than prior year, particularly in construction and also in some mines. Power systems product support continues to be very robust.

Speaker 2

This is resulting in lower construction product support, especially in Canada and the UK, where our business is tied to GDP growth and investments in large scale infrastructure projects. We do believe construction activity is bottoming out in these regions, and we expect to see incrementally better machine utilization hours heading into the fall. We're encouraged by our strong pipeline and growing number of construction rebuilds. We now offer to customers an attractive financing terms equivalent to that of new equipment purchases. Construction markets in Western Canada continue to be in a transitionary phase until we see the commissioning of major infrastructure projects.

Speaker 2

Mining product support fundamentals and outlook remains strong. I will describe the current situation as dynamic and specific to individual mine plans and customers as they drive optimization and production growth. This includes shifting rebuilding component schedules and in some cases deferring maintenance to maximize fleet availability. We are also preparing against extremely high growth in the same period last year, and we expect this to normalize over time and to grow on an annualized basis. We are encouraged by the sequential growth in our product support revenue, which was up 8% from quarter 1, 2024.

Speaker 2

Our Q2 product support CAGR over the last 2 years was a very solid 14%. We expect product support growth rates to improve in the second half of the year as we continue to add technicians, execute rebuilds, which were up more than 50% in construction in Canada and increased physical and digital sales coverage. Greg will provide more details on our product support performance in each region. Our teams are controlling what is in their control, operating thoughtfully and looking for further efficiencies as we continue to build greater resilience into our business model. We see strong evidence of cost control across the organization.

Speaker 2

Our SG and A as a percentage of net revenue was 16.2% in quarter 2, which is an all time low, despite costs in Argentina required to execute our lower risk approach. On the 12 months ended Q2 2024, SG and A as a percentage of net revenue was 16.9%. We are finalizing plans to reduce our fixed cost base and further reduce SG and A as a percentage of net revenue going forward. Improving working capital velocity remains at the top of our priorities. New equipment orders are moving through our backlog faster and we are working to execute exchange components and rebuilding a more capital efficient way.

Speaker 2

This supports our efforts to unlock working capital, deliver substantial free cash flow and $330,000,000 was the highest free cash flow we've ever generated in Q2, and we expect to generate substantial free cash flow in the remainder of 2024. I'm pleased with our progress and encouraged we are finding opportunities to lower our fixed costs and improve our capital efficiency as we increase our earnings capacity and strive to achieve consistency in our ROIC performance. We are making progress in our sustainable growth strategy, importantly in used equipment and power systems, which are critical to our resilience. As mentioned, used equipment sales were up 57% year over year. We significantly increased our participation in used equipment markets and are driving strong volume across retail and wholesale channels.

Speaker 2

Power Systems markets remain very attractive, both in oil and gas and electric power generation. Our power systems revenue was up 11% year over year, including double digit growth in product support. Our rental business was down in line with softer construction activity and warmer weather conditions. We remain committed to sustainably and profitably growing our rental market share. Optimism in our outlook is gathering momentum, and we are confident we are on track and we are delivering a track record of execution.

Speaker 2

In Chile, in particular, the copper mining environment is becoming incrementally more positive. During my recent visit to South America, which is in Chile, Argentina and Bolivia, I was impressed by the strength and engagement of our talent and our people there. We see optimism building in Western Canada Energy Sector with new pipeline capacity coming online and encouraging effort for LNG development. In the UK, the new government have a strong mandate and we are optimistic this will lead to greater stability, economic growth and infrastructure development. Our consolidated equipment backlog is substantial at $2,200,000,000 indicative of healthy customer activity and order intake in our end markets.

Speaker 2

We delivered solid results in the first half of twenty twenty four, which is a great platform to build on in the second half of the year. With that, I'll hand you back to Greg.

Speaker 1

Thank you, Kevin. And please turn to Slide 3. Q2 net revenue of $2,600,000,000 was up 3% from Q2 2023, led by strong growth in used equipment and higher new equipment sales. EBIT was down 5%, mainly due to lower margins in used and rental equipment, which we're working hard to offset through strong cost and capital resilience. Our EPS was up 2% year over year to $1.02 a record for the Q2, reflecting our cost and capital resilience as well as the benefit of lower share count.

Speaker 1

We're also pleased to generate a record $330,000,000 of free cash flow for Q2 compared to $30,000,000 in Q2 of 2023. This is an important milestone and we look forward to building on this momentum. On Slide 4, we show the change in our net revenue by line of business compared to Q2 2023, the composition of our equipment backlog by market sector. These equipment sales were up 57%, higher in all regions and sectors reflecting execution of our growth strategy. New equipment sales were up 3%, driven by higher sales in Canada.

Speaker 1

Product support revenue was up 0.4% compared to a very strong Q2 2023 with growth in South America offset by lower levels in Canada and UK and Ireland. Rental revenue decreased by 10% due to lower utilization and rates compared to last year. Our equipment backlog was $2,200,000,000 at the end of June, up 11% from the end of March. In South America, our equipment backlog is at an all time high and reflects solid wins as well as industry momentum. Equipment order intake was very strong in the quarter, reflecting significant strategic wins in each region, including contracts with multiple copper mines in Chile, oil sands in Canada and data centers in the U.

Speaker 1

K. And Ireland. As highlighted previously, we do expect improved cash to cash as equipment moves more efficiently through our backlog. Turning to our EBIT performance on Slide 5. Gross profit as a percentage of net revenue was down 90 basis points, mostly due to lower margins in used and rental equipment.

Speaker 1

Lower margins in used and rental are consistent with current market dynamics of moderating growth environment, improved equipment availability and price normalization. SG and A as a percent of net revenue was 16.2%, an all time low and unchanged from Q2, 2023 driven by strong cost control. Moving to our Canadian results and outlook, which are summarized on Slide 6. Used equipment sales were up 61% year over year. We are driving strong volume across retail and wholesale channels and are seeing higher conversions of rental equipment with purchase option to sales.

Speaker 1

New equipment sales were up 7% from Q2 2023, driven by strong activity in the construction and oil and gas sectors. Product support revenue was down 3% from Q2 2023, which was an exceptionally strong quarter in both mining and construction in Canada. Currently, large oil sands customers are in the process of optimizing their mine plans and scopes of contractor work, which led to deferral maintenance and rebuild activity in the Q2. Construction customers are in a transitory phase after completing large projects. Compared to Q1 2024, Canada's product support was up 7% with increase across all sectors.

Speaker 1

Over a 2 year period, our product support CAGR in Canada was 10%. EBIT was down 4% year over year and EBIT as a percentage of net revenue was down 70 basis points to 9.2%, primarily due to higher proportion of new and used equipment sales in the revenue mix and lower margins in used equipment and rental. We expect to see increased activity in the energy sector in Western Canada and steady production growth with the Trans Mountain pipeline now in operation and the commissioning and ramp up of LNG Canada beginning. Our large oil sands customers are achieving production growth. Going forward, we expect them to deploy increased capital to renew, maintain and rebuild aging fleets.

Speaker 1

We anticipate strong pent up demand for product support, including component remanufacturing rebuilds heading into this year's winter works programs. Turning to South America on Slide 7. In functional currency, new equipment sales were flat. Higher new equipment sales in Mining and Power Systems in Chile were offset by lower construction activity in Argentina. Product support revenue was up 4% year over year, led by increasing activity in power systems and construction.

Speaker 1

Excluding the impact of weaker Chilean peso on service revenue, product support revenue would have been 7% higher compared to Q2 of 2023. EBIT was down 12% year over year, mainly due to a lower gross profit compared to Q2 of 2023, which benefited from higher margin product support contracts in mining, as well as lower new equipment sales and margins in Argentina in Q2 2024. Our Q2 2024 SG and A included $13,000,000 of costs related to transaction we completed in Argentina to allow access to U. S. Dollars and pay suppliers and reduce our peso cash balance.

Speaker 1

These costs were partially offset by the favorable impact of weaker Chilean and our Argentina peso relative to the U. S. Dollar compared to Q2 of last year. Importantly, while managing our territory risks in Argentina, we remain profitable in Q2. Q2 'twenty four EBIT as a percentage of revenue was 10.4 percent, down 170 basis points year over year.

Speaker 1

Adjusted ROIC was 26.5 percent on par with Q2 of 20 3. As Kevin mentioned, our recent trip to Chile reinforced our encouraging outlook for Chilean mining underpinned by growing demand for copper and strong copper prices. We're seeing capital be deployed into large scale brownfield expansions with a lot of coating activity and tender activity underway for mining equipment and product support. We are in conversations with all major producers and are encouraged by our strong competitive position. As many of you will have seen firsthand at our Investor Day year, activity by contractor supporting the mining operations in Chile is healthy.

Speaker 1

We also expect infrastructure construction activity in Chile to start improving going forward. Power systems activity remains strong in the industrial and data center markets. In Argentina, we're seeing pockets of strong activity in the oil and gas sector today. However, restrictions on public investment and infrastructure significantly reduced construction activity. Construction industry is down 50% from the first half of twenty twenty three.

Speaker 1

We continue to monitor the government's new rules and policies, but we see renewed optimism in Argentina as new government programs are helping drive large scale investment by global miners. A low risk approach remains our key priority for 2024. Please turn to Slide 8 for our results in the UK and Ireland. In the UK and Ireland, in functional currency, new equipment sales were down 5% compared to Q2 of 2023 due to the timing of power system project deliveries. Used equipment sales were up 31% year over year, led by increased volume in the construction sector.

Speaker 1

Product support revenue was down 3%, reflecting lower machine utilization hours and customer activity levels. EBIT as a percentage of net revenue was 4.6%, down 90 basis points year over year due to reduced volumes and inflationary pressures. This is a solid profitability for the U. K. Given the current market activity.

Speaker 1

We expect demand for new construction equipment in UP and Ireland to remain soft, in line with low GDP growth projected in 2024. We continue to expect a growing contribution from used equipment and power systems and resilient product support as we execute our strategy. We expect substantial free cash flow generation in the second half of twenty twenty four as we continue delivering our backlog with improved cash to cash cycles and execute our capital unlock and velocity initiatives, which include increasing new equipment preparation velocity to move new orders through our backlog faster, rigorous inventory plan and ordering, including leveraging improved lead times, automating warehouse operations in Canada and South America, simplifying and improving efficiencies through our component exchange program, particularly in Canada, and optimizing low ROIC activities, including our U. K. Pension asset.

Speaker 1

In addition, we're monitoring our net capital and rental fleet expenditures for 2024 to reflect market conditions. We now expect the range to be $220,000,000 to $270,000,000 lower than the previous range of $290,000,000 to 340,000,000 dollars We're actively building our talents and capabilities in rental. We're committed to growing a profitable rental business, increasing our rental customer base. Balance sheet remains healthy with net debt to adjusted EBITDA of 1.8x at the end of June. In addition, we're in the process of finalizing our plans to lower our cost base and further reduce our SG and A as a percentage of net revenue going forward.

Speaker 1

This will include further simplification and focus by our central corporate and administrative functions as well as simplification and efficiency actions in our Canadian component remanufacturing business. Overall, we remain laser focused on executing our strategy to drive product support, build resilience and deliver sustainable growth. We anticipate the execution of our strategy will continue to have an increasing impact through this year with improving product support growth rates, greater working capital velocity and substantial free cash flow generation in the second half of twenty twenty four. Operator, I'll now turn the call over to you for questions.

Operator

Ladies and gentlemen, we'll now begin the question and answer session. And our first question today comes from Yuri Lynk from Canaccord. Please go ahead with your question.

Speaker 3

Good morning, Kevin. Good morning, Greg.

Speaker 1

Good morning, Kevin.

Speaker 3

Good maybe this one's for Kevin. Just trying to square your comments on construction. That end market did drive new equipment sales in Canada and you noted rebuild activity, I think was up 50%. But yet you did trim your CapEx for rentals. I'm assuming that's tied into construction.

Speaker 3

So what exactly are you seeing in that market? And is it mostly limited to Canada?

Speaker 2

Yes, sure. It's Yuri. So no, it's not limited to Canada. So I'll work in reverse. It's not limited to Canada.

Speaker 2

Obviously, U. K. Has been the construction market in the U. K. Has been soft for a little while now.

Speaker 2

As I mentioned in my remarks, the industry is down. So we're super happy that actually our equipment delivers for construction in the U. K. Are flat despite the market being materially down, as noted in caps call yesterday for the Europe region. So we're happy.

Speaker 2

So I would describe the construction market as kind of bottoming out. There's some green shoots. Obviously, selling the construction season in Canada has driven some of the results in Q2. But we're also encouraged to the backlog build in the UK quarter over quarter due to people starting to make decisions for the new construction season in the back half of twenty twenty four and into 2025. So we would describe it as leveling off and bottoming out for sure.

Speaker 2

It could give us some more encouragement from major projects, the stability in the UK government and some deployment of capital in Western Canada. And we've seen an encouraging outlook for mining enablement in construction. So construction is sorry, in Chile. So construction is starting to show some green shoots. As it relates to and so we're positive about that and we're still rebuilding machines.

Speaker 2

As we said previously, we're super happy that, that rebuild growth is still there in Canada despite a normalized supply chain, which we've spoken about previously about changing the proposition and our approach to rebuilds and how we felt that would be stickier even in a normalized supply chain world. So pretty happy with that. As it relates to rental, Yuri, I would kind of for filling, I would disconnect that a little the general construction sentiment for sure. Construction softer construction doesn't help with your kind of optimism around investing in rental. But ours is linked as well to building capabilities.

Speaker 2

We are committed to rental. We're building new capabilities. In fact, we had a new Vice President of rental join us yesterday for Western Canada. And so we really want to allow that person to come in, understand what we're working with and put the plan together to build out a really robust and sustainable rental plan moving forward. So it's as much about that in Canada.

Speaker 2

So hopefully that helps you to square the circle in terms of the kind of positive green shoot sentiment for the CapEx decision.

Speaker 3

Okay, that's helpful. Just on the your plans to reduce SG and A a little bit more. Were these plans that were already contemplated in your Investor Day targets or are they incremental cuts? And related to that, are those costs in Argentina recurring or how do we think about those?

Speaker 1

Sure. Yes, I'll take that. Certainly, as we look back at our Investor Day, I mean, our number one focus coming at Investor Day of September 23 was just on the working capital opportunity. We're pleased to see some of that progress in Q2 with the cash coming through in a quarter that typically doesn't have that. But we'll continue to focus on that through the rest of the year and into next year.

Speaker 1

But we think we're in the positive cash flow generation side and there's still a big opportunity to have there. SG and E, of course, is a big value driver in the business. At that time, with the amount of inflation and some of the procurement conversations, it felt like that was going to be a second step after the working capital phase was complete. And so we are finishing the design of that. We begin executing parts of it.

Speaker 1

And we just think there's a really good opportunity particularly for 2025 for the whole team to focus on the next frontier in terms of sales to SG and A. And so that will focus on continued optimization of our corporate area as well as the support functions. And then there's a big opportunity in our Canadian business for our component exchange business that's kind of been run separately over the years. And I think given all the good progress we've made as a company on collaboration that it's time for that to be fully integrated. And there's a lot of efficiencies from both a working capital and a cost perspective associated with that.

Speaker 2

And then

Speaker 1

on the Argentina side, as you know, in the Q1, we partnered with our suppliers to access U. S. Dollars through the transactions that you do in Argentina. We decided to do that again in the Q2 just to make sure that we can keep the risk as low as possible. That was not supported by our suppliers to the same degree.

Speaker 1

And it's something we wanted to do to keep the risk low. We don't think that will be a recurring cost in Q3 and Q4. We're going to reenter the official market there and get our exposure back to 0 through that channel. And so we don't think that will reoccur, but it's something we wanted to do to just make sure we kept that balance as low as possible while supporting the product support side of the equation in the country.

Speaker 2

And to be clear, it's not sorry, it's not a reaction to it was always in the plan. We prioritized invested capital and free cash flow performance, which you've seen coming through. And I think we've slightly sloughed up product support sales than we had in the Investor Day. We're just reenergizing that and moving some of those cost actions forward.

Speaker 3

Okay. Can you quantify the Argentina costs that were in SG and A, the additional costs?

Speaker 1

About $13,000,000

Speaker 3

Okay. I'll turn it over. Thanks guys.

Speaker 1

Great. Thanks, Henry.

Operator

Our next question comes from Cherilyn Radbourne from TD Cowen. Please go ahead with your question.

Speaker 4

Good morning. Thanks for taking my question. This is Pat Sullivan on the line on behalf of Cherilyn. My first question is related to gross profit margins. So could you tell me what extent was mix versus lower margins on equipment and rentals that was called out a factor in the year over year decline?

Speaker 1

Yes, sure. It was roughly equal. Part would be mix. Obviously, we've got higher new and used volumes relative or growth rates relative to rental and product support. So there is a mix shift there.

Speaker 1

But also within in rental and used, as we've been pretty consistent with over the last couple of years, we couldn't expect the same used and rental margins from 20222023 every year. And so those have come in and normalized to an extent. And we're working hard to offset that through SG and A control and further SG and A actions.

Speaker 2

And there's also a mix within the mix as well, Patrick. We're dividing deliveries in new equipment as well, so we need to consider that.

Speaker 4

Okay, great. Thank you. And then I guess is it possible to quantify how much maintenance activity was deferred in U. S. Sands in Q2 or H1?

Speaker 4

That's something that's called out in the earnings release.

Speaker 2

It's hard to quantify actual numbers for individual mine sites. I can tell you that we've the 6 mines in the oil sands, 3 grew product support at kind of levels we were expecting, 3 didn't. And so the specifics around the individual mine plans and how the mines are operating, that's in the control of the miners. We need to be ready and make sure we're able to support them as they require the services. But it's hard to quantify that as an absolute number in the product support.

Operator

Our next question comes from Jacob Bout from CIBC. Please go ahead with your question.

Speaker 5

Good morning. I had a question on backlog. It's difficult to it can be quite lumpy. So up quarter on quarter, but down year on year. But if we look at the $700,000,000 plus that you announced in April, it's down from those levels as well.

Speaker 5

How are you thinking about that and what's in the hopper right now?

Speaker 2

Yes, sure. Thanks. So I mean, we're still pleased with the rise in backlog. If you think if you look at it as a percentage of the total backlog that Cat and Manchester today, it's still pretty encouraging. For sure, we had a you can see it through our new equipment line, we had a sell through in Canada, which is normal for the spring selling season.

Speaker 2

So that would have took then backlog and then we're selling through some of the lumpier Power Systems projects as well. But our backlog still stands at well over half a year sales. There's a good mix across different industries. So mining, that's a very encouraging. We did mention that some of those mining, when we were in South America in June, there was already machines being built on-site ready for delivery in the same quarter.

Speaker 2

And so things are moving through the backlog a little bit quicker. And so I think it's important that we calibrate the backlog figure now with the reality of the new supply environment and our guide to move things through the backlog quicker. And so that backlog level is still incredibly encouraging. As I said, it's more than half a year's sales booked already. And in some cases, as I also mentioned, that backlog is extending out with Power Systems projects well beyond the end of next year.

Speaker 2

And so we feel it's a nearly solid foundation from which to build. But we need to normalize against the kind of backlog levels that we saw when the supply was constrained.

Speaker 1

And just to switch around, the second part of your question, Both South America and the oil sands, there's lots of conversations going on that in the second half of the year and particularly towards the end of the year, lots of brownfields in South America and some fleet refresh in Canada.

Speaker 5

Okay. That's helpful. And then just on the improving product support growth rates in the second half of the year. I'm assuming that part of that is just your larger installed base. What else is driving that?

Speaker 5

And are you more confident about second half growth than where you were, say, 3 months ago?

Speaker 2

Yes. So definitely more confident than we were 3 months ago on the trajectory. And of course, we're lapping some more favorable comparisons. So we're still very happy with the 2 year CAGR. This lapping Q1 and Q2 last year was always going to be difficult, But we're pleased with the progress and it's actually particularly quarter over quarter.

Speaker 2

That's very encouraging. And look, the team is our number one priority. We talk about this and pretty much invested capital and generate free cash flow on that invested capital velocity. We talk about product support constantly. It's the number one priority.

Speaker 2

It's our biggest priority. As you mentioned, we're I think we've added 70 ultra class trucks in the last 4 quarters into our 2 regions. New sales are healthy. So on the population side, we're encouraged in that regard. What else?

Speaker 2

We're building capacity. So I mentioned we've added 80 technicians in South America. It's one over 100 if you take the other two regions. We're building capacity at our OEM operation in Edmonton here and better distribution capabilities, meaning we can service our customers faster, get parts quicker, which hopefully will have a greater growth tailwind too. Continue to build capabilities around rebuilds, I mentioned that in my remarks as well.

Speaker 2

CVAs and condition monitoring are also helping us to stay closer to our customers

Speaker 1

and build the right kind

Speaker 2

of value propositions for them to capture more market share. And we're doubling down on coverage, both physical and digital coverage. So I think we in Canada, we added 12 salespeople in Q2 to add to our coverage for product support growth. I think it was 5 in the field and 7 inside sales. And we're developing specialist sales as well to go after things like undercarriage in general and gauging tool.

Speaker 2

So we're not done yet. We're still committed with building plans and we're executing them with velocity. And so we hope that was the slightly easier comparisons will get us to a place where it's closer to our Investor Day targets.

Speaker 5

Helpful. Thank you.

Speaker 1

Thank you.

Operator

Our next question comes from Devin Dodge from BMO Capital Markets. Please go ahead with your question.

Speaker 4

All right. Thank you. Good morning, guys.

Speaker 2

Hi, Devin.

Speaker 4

In South America, maybe picking up on an earlier question, but as you mentioned that quoting tendering and award activity in the mining sector was elevated. Are you able to frame how that pipeline looks now in terms of size or the maturity of opportunities? And if the momentum of order intake that we've seen in the last, say, 6 to 12 months can be sustained?

Speaker 2

Yes. I mean, it's hard to say kind of the whether that can be sustained. It's very lumpy, right, Devin? It's the timing and the decisions and the capital approval are very lumpy. I would say that incrementally, we have just won 2 very big pieces of businesses in South America with the BHP award and the Fadalco award.

Speaker 2

There's nothing of that size that we're working on right now, but there are multiple opportunities which would add up to a a similar level of order intake, if not a little bit more when you add more. And that's all saying we win the more, we've been very aggressive. I would say that in visiting 6 customers in Santiago over 3 days and 2 mine sites, There's a definite acceleration of what can be achieved given the current constraints of machine supply, labor supply and approvals for brownfields. And I think we've moved from inquiry to very definite quoting activity. We expect to submit a number of quotes before the end of the summer here for substantial pieces of business.

Speaker 2

So what's this space? But the general sentiment is go faster what's possible in terms of machine supply and execution.

Speaker 1

And Evan, I'd just highlight that if you go to each of some of the producers' investor presentations, all will have some form of update on brownfield sanctions or intentions. If you look at Anglo or KapStone or Freeport, they've all given up recent updates. So have a look and they're all maturing their brownfield plans, whether they're sanctioning them or having that on the horizon.

Speaker 4

Okay. Good color. Thank you. And then maybe sticking to South America, just margins in the quarter, it seemed like one of the main drivers, I thought that was called out in the MD and A was for that moderating margin was some high margin mining product support contracts that benefited last year.

Operator

Can you just provide some more specifics behind that

Speaker 4

and if we should be expecting this to be a headwind in the coming quarters?

Speaker 1

No, I think that was pretty unique to the quarter. I mean, this time last year, there was quite a few larger rebuild programs that were coming to a conclusion to refresh particularly one mine, but also just a couple of contracts that came to the end of their life and there's a bit of a washout in that process. So that was a year ago. That didn't replicate this year. And so that's a factor, but we feel fine with the overall margins and product support and the growth profile going forward.

Speaker 4

Okay. Makes sense. I'll turn it over. Thank you.

Speaker 1

Thanks, Evan.

Operator

Our next question comes from Steve Hansen Raymond James. Please go ahead with your question.

Speaker 1

As a follow-up to one

Speaker 6

of the earlier questions, Kevin, you described all the strategies that you're deploying to help grow the product support business, which is hoping you provide some additional comments regarding the customer activity that you're seeing on the ground and if that's actually accelerating here into the back half and ultimately whether you think you can exit the year at the 7% target that you've outlined for the category?

Speaker 2

Yes, sure. So without doubt, activity levels are improving. We look at machine utilization levels. They're kind of back to normal levels in Western Canada and improving in the U. K.

Speaker 2

Like I said, it's the big challenge is the dynamics around individual mine sites and plans. But net net, we expect product support activity to be stronger in the second half of the year and to have a more I mean, we're planning for a more kind of normal winter season there in terms of how we support our miners through that schedule and help them to produce more. We're very committed to our targets, Steve. And like I said, I listed off things we're doing. We work tirelessly every day to get better product support, to win more business and to execute it more effectively.

Speaker 2

And we're not wavering from that. And we can remain committed to those targets. And we're confident that we can demonstrate exit rates closer to the Investor Day targets than we are today.

Speaker 6

Okay, that's helpful. Thank you. And maybe just a follow-up on South America and just thinking about the duration of this new equipment cycle. You've described record backlog there. It sounds like quoting activity is accelerating to the second half.

Speaker 6

How should we think about new equipment deliveries into next year? I mean, you've got some tough comps to face, but can we actually see growth in new equipment deliveries next year? Or how do you think about that plan?

Speaker 1

Yes, it's too early to talk about 2025. We just are we're encouraged with the backlog. Obviously, a lot some of that build is coming through the year and some of it stretches into next year. There's like you highlighted, there is good quoting activity that would benefit in 2025. Part of the dynamics there, some of those are customers that are competitive customers and so they're big opportunities.

Speaker 1

There's a bit different profile than the kind of Cadelco's and BHPs where we've been incumbent or growing our share. These are breakthroughs. So we'll have to see how those play out. Of course, we're working aggressively to win in that area. Yes, so there's good momentum across not just mining power systems in particular as well.

Speaker 1

And so we do think there's momentum into 2025, but too early to call levels at this point.

Speaker 2

Yes. I think so. It's really important to look at it by segment. The mining business is extremely lumpy, as you know, Stephen. So to forecast quarter by quarter annual growth, we're just very focused on winning market share and delivering it to our customers as quickly as possible.

Speaker 2

So it can support them in growing their production targets and we can have an opportunity to grow our product support business. Power Systems deliveries, I would expect those to continue to increase year over year. And the current sentiment in construction would suggest that next year's construction machine sales should be better than this year.

Speaker 1

Helpful comments. Thanks guys. Thanks, Steve.

Operator

Our next question comes from Maxim Sytchev from National Bank Financial. Please go ahead with your question.

Speaker 7

Hi, good morning.

Speaker 1

Good morning, Maxim.

Speaker 7

Most questions have been asked already, but just a couple of quick ones. I was wondering, Greg, if you don't mind providing a bit of color on rental CapEx, including dispositions, if you

Speaker 2

have a bit more

Speaker 7

of a specific range that we should be thinking about for 2024?

Speaker 1

Yes. We don't break it down to that level. I mean, we brought the range down. As you can see year to date, we've been pretty low on the net rental CapEx. We do have some load in the back half of the year to get ready for next year.

Speaker 1

So we do see that at a lower level overall, in line with the CapEx change, but we're not breaking it down by category.

Speaker 7

Okay. But I guess dispositions, we can just kind of straight line it.

Speaker 1

A lot of the dispositions are in the first half of the year.

Speaker 2

Yes. So Max, it's important to remember the mix of our rental business, Max, is slightly different, remember. And so we would have a much higher proportion of heavy rents and power rents than many others. And so given the pipelines finishing, there was a kind of higher level of dispositions in the first half of the year. In heavy risk.

Speaker 7

Great, great. Okay. And then the last question I had, just in terms of the Power business and sort of the ability to leverage your kind of U. K. Success in other geographies.

Speaker 7

I was wondering if there's any update on that strategy and its stickiness.

Speaker 2

Yes, Mike. It's Frank from strength to strength. Max, I'm super encouraged. I had a meeting last week with our Canadian Power Systems team. I'm super encouraged by the outlook there and the progress we're working on.

Speaker 2

We expect to we've got some good projects working on we're working on in Western Canada, which we're to hopefully be adding to the backlog in the second half of the year here. U. K, we're in our Board meeting this week. I think we have 6 approvals, Greg, to talk about this today. And so that business continues to be very robust.

Speaker 2

And then in Chile, I would say we're, to a certain degree, very happy and optimistic just at the pace of growth. It's from a small base in Chile, but the team in Chile, who are again being supported by our U. K. Business. So I think our Power Systems business was 11% year over year in the quarter.

Speaker 2

That's a trend and we see that continuing. We think we've got enough broad based activity across the three regions to continue that despite it being lumpy projects in some cases. The one area of weakness, particularly in the UK is around that industrial sector, which is supplying into our softer construction markets. So that's one in its bag in us. And then obviously in the quarter, the U.

Speaker 2

K. Revenue was down a little because of lumpiness in terms of our product support. And the cross country collaboration is strong, the optimism is strong, and we continue to be really encouraged about the power systems

Operator

Our next question comes from Sherif Al Sabahi from Bank of America. Please go ahead with your question.

Speaker 3

Hi, good morning. Just wanted to add, we've seen some significant move in currencies in recent months. Are you seeing other OEMs or dealers becoming more aggressive with pricing driven in part by those shifts?

Speaker 2

No, I mean, currency is something we have to be competitive in our local market, Sharief. That's our modus operandi. We have to give our team the tools to be competitive. We do have an external data source in terms of our market share for new equipment. And we are growing market share in all three regions, specifically on the kind of large construction area.

Speaker 2

We're holding a strong position Power Systems as I've previously spoken to. So I think this is more a function of we have to be competitive. We have to work with our partners to make sure we've got the right propositions for the marketplace. But for example, I was looking at Prince George last week for a couple of days. We have a definition called parts focused market share.

Speaker 2

And I would say in that Northern BC area, we're wanting 2 machines we're selling right now as a caterpillar.

Speaker 1

Filler.

Operator

And ladies and gentlemen, I'm showing no additional questions. I'd like to turn the floor back over to Greg Palaszczuk for any closing comments.

Speaker 2

Great.

Speaker 1

Thanks, operator. That concludes our call. Thank you for your participation and hope you have a safe day. Thank you.

Operator

And ladies and gentlemen, that will conclude today's conference call. We do thank you for joining. You may now disconnect your lines.

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