Finning International Inc

TSX:FTT

Q2-2025 Earnings Call

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Finning International Inc. Second Quarter 2025 Investor Call and Webcast. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to David Primrose, Executive Vice President and Chief Financial Officer. Please go ahead.

[David F. Primrose, executive]

Thank you, operator. Good morning, everyone, and welcome to Finning's Second Quarter Earnings Call. Joining me on today's call is Kevin Parkes, our President and Chief Executive Officer. Following our remarks, we will open the line to questions. This call is being webcast on the Investor Relations section at finning.com. We have 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 as 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 our MD&A under 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.

In addition, as previously announced on June 30, 2025, we successfully completed the sales of 4Refuel and ComTech. 4Refuel and ComTech's operating results were previously reported as part of our Canadian operations and are now presented as discontinued operations. Unless otherwise noted, this presentation reflects the results of continuing operations. Kevin, over to you.

[Kevin Parkes, executive]

Thank you, Dave, and good morning, everyone. Thank you for joining us today. The positive momentum we generated in 2024 and in the first quarter of 2025 continued with another strong quarter of results. These results reflect the commitment of our team to disciplined execution of our strategy and the diversity and health of our end markets and regions.

I'm excited to have the support of Dave in his new role of Executive Vice President and Chief Financial Officer. Dave's 36 years of operating experience at Finning demonstrates his commitment to our company and our customers. His contribution to our business across most of our functions, including leading two of our regions, makes him a great partner to support me and our dealer principals to drive growth and focus on cost and capital optimization. We are looking forward to the continued progress in executing our strategy under Dave's financial leadership.

I would also like to take a moment to thank Greg Palaschuk for his leadership as CFO over the past 5 years and his contribution to Finning for the last 11 years as he moves on to his new endeavor. Consistent with prior quarters, I'll provide a brief review of key highlights from the execution of our strategy before turning the call over to Dave, who will provide more detail on the results in the quarter.

Please turn to Slide 2. We continue to build on strong Q1 2025 results, sequentially growing revenue by 6% from the first quarter to $2.6 billion. We believe the diversity of our business positions us well for all market conditions and provides resilience and stability for our earnings, particularly in times of market uncertainty. Our new equipment backlog grew to $3 billion at the end of June, the fifth consecutive quarter of backlog growth and a new record. We are encouraged by this increase given we delivered nearly $1 billion of new equipment in the quarter, our highest quarterly delivery amount in the past 10 years.

This record level of backlog provides confidence for our business and future product support opportunities. Order intake outpaced deliveries in all regions, particularly pleasing was Canada with orders up more than 80% over the same quarter last year, with strong orders in all segments, including construction, where orders almost doubled. We also saw strong order activity from several mining customers as well as in the power sector related to gas compression. In South America, similarly, we saw strong mining sector order intake, complemented by power from both oil and gas and prime power segments. In the U.K. and Ireland, we are seeing improving orders from construction customers and steady power sector growth activity.

Moving to product support. Q2 product support revenue grew in all regions, reflecting our efforts in Q1 to reenergize sales efforts in improving market conditions. In Canada, product support revenues were up 4%, led by mining. Mining product support revenues improved year-over-year by 10% and 3% sequentially from the first quarter. As I've spoken about in the last couple of calls, we remain committed to supporting our customers to achieve lower production costs through stronger partnerships, planning and execution. In South America, product support revenues were up 4% in functional currency on strong mining activity.

We again added over 100 technicians in the quarter to help support our customers, including as we ramp up our capabilities to deliver on the new equipment awards we announced in May 2024. In the U.K. and Ireland, product support revenues were up 1% in functional currency on improved power segment activity levels, similar to last quarter as we continue to support a growing population of power systems equipment in the region. Maximizing product support remains a key focus for our regions.

During the second quarter, we also continued our solid progress on improving the resilience of our business to strengthen our earnings capacity with strong cost and capital control. SG&A margin was 15.5% in the quarter and included a meaningful increase in long-term incentive plan expense given the 44% share price appreciation. We also took further action in Canada to streamline our organization structure with expected annual future savings of over $20 million. We remain relentlessly focused on driving efficiency in our operations while building capabilities, coverage and capacity to drive loyalty and growth.

Invested capital turns were approximately 2.3x this quarter and have steadily improved since the beginning of 2024, demonstrating our focus on improving capital velocity and growing our business. From a sustainable growth perspective, we continue to see strong growth in our Power Systems business and improvement in our rental revenues. Our Power Systems backlog now exceeds $1 billion, reflecting a diversified mix of prime power packages, oil and gas-related equipment orders and data center standby packages to be delivered through 2027.

Relative to last June, our power equipment backlog is up 88%. Power Systems product support revenues also continued a steady growth trajectory as population builds. Revenue in our used equipment segment decreased this quarter, mostly due to large one-off packages last year. Used equipment margins have, however, improved in 2025 as the market inventory levels have normalized. This is generally in line with the expectations we outlined during the third quarter results last year.

Rental revenue increased 4% with a 10% increase in Canada relative to Q2 2024, including solid activity in heavy rentals despite a more challenging construction market. Our new rental leadership team are making solid progress as the coverage and fleet changes we made last year are improving utilization levels in each of our rental businesses in Canada. We remain committed to growing this line of business in the long term.

Before I turn the call over to Dave, I'd like to provide a few comments from each of our regions. In South America, the team continues to execute well across all countries and across sectors. We continue to see solid activity levels in our mining business with new ultra-class truck deliveries and support equipment awards added to our backlog in the quarter. Customers are actively managing their equipment fleet, adding new equipment while maximizing the utilization of their existing aging fleets. We expect continued growth for our mining business, albeit not in a linear fashion as mines build specific optimization and growth plans.

We are also continuing to focus on rebuilds in the construction sector with mining contract activity levels that are strong. Our Power Systems business remains active in South America, particularly in oil and gas, and in the data center market. In the U.K. and Ireland, the team continues to operate resiliently in a tough market. While the Construction segment continues to show signs of improvement from a quoting standpoint, equipment utilization levels are still subdued.

Our Power Systems business in the U.K. and Ireland continues to see strong quoting activity from prime power and data center applications, while at the same time, product support revenues in power are robust. We continue to leverage digital tools, as mentioned on the last call, to drive productivity improvements as we execute repair and rebuild work.

In Canada, the team is focused on capturing growth opportunities in the market, driving product support growth through adding technicians, and sales coverage remains a priority. Activity levels in Power Systems have been solid, supported by well servicing and gas compression end market demand. Construction activities remain on the slower side of our expectations, but we are relentlessly looking for ways to add value to our customers, whether through machine rebuilds or targeted component sales.

Our mining business continues to perform well and activity levels are robust despite some weakness in certain commodities. We added over 20 ultra-class mining trucks to backlog this quarter and quoting activity remains strong. Overall, we remain optimistic for the second half of 2025 with a strong first half behind us and lots of opportunity in front of us and continued momentum in the execution of our strategy. With that, I'll hand it back to Dave.

[David F. Primrose, executive]

Thank you, Kevin. I'll now turn to Slide 3. Our Q2 revenue of $2.6 billion was comparable to Q2 2024 with solid product support revenue growth, offset by lower used equipment sales. Our second quarter earnings were adjusted for severance costs of $12 million for headcount reductions related to consolidation efforts and changes to our organizational structure with a focus on non-revenue-generating positions, primarily in Canada.

Excluding severance, adjusted EBIT was down 2% from Q2 last year, primarily due to higher LTIP expense of $16 million or $0.09 per share relative to Q2 2024, reflecting a 44% appreciation of our share price during the quarter. Adjusted EPS of $1.01 was up 5% from Q2 '24 EPS, reflecting lower finance costs on a lower average debt level as well as the benefit of our share repurchases. Our adjusted EPS excludes 4Refuel earnings of $0.05 per share in the quarter.

We are pleased to see continued momentum in our business, underpinned by supportive mining and power system activities. At the same time, we continued executing our strategy to maximize product support, build full cycle resilience through diligent cost control and improving invested capital velocity. As Kevin mentioned, SG&A margin remained resilient at 15.5%. Invested capital turns reached approximately 2.3x, and we maintained our working capital to sales ratio of 26.4%, relatively in line with last quarter and with an improvement from Q2 '24 of 310 basis points. Consolidated adjusted return on invested capital and net debt to adjusted EBITDA also held firm from last quarter at 18.7% and 1.6x, respectively. Our Q2 free cash flow usage of $164 million reflected higher inventory levels to support increased customer activity.

On Slide 4, we show changes in our revenue by line of business compared to Q2 2024 and the composition of our equipment backlog by market sector. New equipment sales were comparable to Q2 '24 with strong mining deliveries in Canada and South America, offset by slower construction sales in Canada and the timing of power projects in the U.K. and Ireland. Used equipment sales were down 43% as in Q2 2024, we had large auction sales and onetime deals in Canada that did not repeat this quarter. Product support revenue was up 5% with consolidated growth benefiting from a stronger U.K. pound.

And as Kevin mentioned, we saw growth across all regions led by mining and Canada. Our equipment backlog reached an all-time high of $3 billion at the end of June, which is up 38% from the end of June last year and up 6% from the end of March 2025. We are pleased to continue to see the sustainable growth in our Power Systems backlog to over $1 billion, now representing 35% of our total backlog, which is another testament to our strategy execution focus.

Turning to our EBIT performance on Slide 5. Gross margin was up 40 basis points, primarily driven by a higher proportion of product support revenue in Canada and the U.K. and Ireland. SG&A margin was up 50 basis points, primarily due to the $16 million in higher LTIP expense in the quarter. We remain focused on simplifying our business and our restructuring efforts this quarter are expected to result in annual SG&A savings of over $20 million. Looking ahead, we will continue to seek opportunities to further improve efficiency, reduce overheads, and build more resilience into our operating model to drive higher earnings capacity. Q2 adjusted EBIT margin was 10.1% in South America, 9.4% in Canada, and 5.2% in the U.K. and Ireland.

Moving to our South American results and outlook, which are summarized on Slide 6. In functional currency, new equipment sales were up 6% from Q2 '24, driven by strong mining deliveries in Chile. Product support revenue was up 4%, driven by strong demand from the mining sector, coupled with higher rebuild activities in construction. EBIT was up 2% in functional currency, and EBIT margin was down 30 basis points due to a higher proportion of lower-margin mining equipment sales.

Our outlook for Chile mining remains strong, underpinned by growing demand for copper and strong copper prices as well as solid levels of quoting, tender, and award activity for mining equipment and product support. While activity levels and outlook remain positive, we also expect a more challenging labor environment, including higher compensation and union agreement payments in upcoming union negotiations. These negotiations are expected to include cash bonus payments as is customary in that market. These payments may occur in late 2025 or potentially 2026 and will have an impact on capital expenditures.

In Chile, we continue to see healthy demand from large contractors supporting mining operations, and we expect infrastructure construction activity to remain steady. In the Power Systems sector, activity remains strong in the industrial and data center markets. In Argentina, we continue to take a low-risk approach and closely monitor the government's new rules and policies. At the same time, we are also positioning our business to capture potential growth opportunities in the oil and gas and mining sectors, and we are encouraged by steps taken by the government to reduce currency restrictions.

Turning to Canada on Slide 7. New equipment sales were down 3% from Q2 '24, primarily due to slower construction sector activity. Used equipment sales were down 58%, primarily due to the large auction sales and onetime deals in Q2 2024 that were not repeated this quarter. Product support revenue was up 4%, driven by higher spending from mining customers. Adjusted EBIT margin was up 50 basis points from Q2 '24, driven by a higher proportion of product support revenue. We incurred $11 million of severance costs in our Canadian business, primarily in selected back office and technology roles.

In terms of outlook, we are encouraged by the recent Bill C-5 legislation and announcements regarding the potential to accelerate resource development and infrastructure project activity, but we remain cautious with respect to the exact timing and magnitude. Meanwhile, we continue to expect ongoing commitments from governments and private sector projects for infrastructure development supporting activity in the construction sector. On the mining side, we expect our mining customers to deploy capital to renew, maintain, and rebuild aging fleets. And for Power Systems, we continue to see healthy demand for reliable and efficient electric power solutions. And finally, we remain focused on managing costs and working capital levels.

Please turn to Slide 8 for our results in the U.K. and Ireland. In functional currency, new equipment sales were down 8% compared to Q2 2024 due to the timing of power system project deliveries, partially offset by higher construction new equipment sales. Product support revenue was up 1% with higher activity levels in the Power Systems sector, offset by slower activity in construction. EBIT margin was up 60 basis points, reflecting higher proportion of product support in the revenue mix and a continued strong focus on cost control.

As we continue to grow product support business, which is more cost intensive, we remain committed to keeping our SG&A resilient. We expect demand for new construction equipment in the U.K. and Ireland to remain soft, in line with the low projected GDP growth. We continue to expect a growing contribution from used equipment and power systems and resilient product support as we execute our strategy.

Before I turn it back to Kevin, I would like to reiterate our go-forward strategic priorities. With the sale of 4Refuel and ComTech now completed, we are sharpening our focus in our core dealership operations to execute our strategy. To maximize product support, it will be our top priority to grow equipment population and market share across all areas of our business to unlock future opportunities. We are also actively seeking to grow our technician base to capitalize on our extensive service network and parts distribution platform.

On full cycle resilience, building upon the restructuring actions that we undertook this quarter, we will continue seeking further opportunities for cost and capital efficiencies, while at the same time, maintaining growth momentum in our business. Meanwhile, we also expect to continue to invest strategically in core dealership to support future sustainable growth in rental, used, and power.

Overall, we expect our adjusted return on invested capital to improve as a result of the sale of 4Refuel and ComTech and that the reduction of earnings from the sale of those businesses will be offset through a combination of share repurchases under our normal course issuer bid, subject to market conditions, debt repayment, and core dealership momentum, including SG&A reductions in Canada. The allocation of net cash proceeds from the sales will remain dynamic as we assess investment opportunities in our core operations and refine our future plans.

I'll now turn it back to Kevin for some closing remarks.

[Kevin Parkes, executive]

Thank you, Dave. Before I turn the call back to the operator for Q&A, I'd like to summarize our remarks and underline the strength of our core business following the sale of 4Refuel, which we're happy to complete ahead of schedule. We are proud of the accomplishments of this quarter as our teams continued the disciplined execution of the key pillars of our strategy. Product support grew in all regions and is up 7% year-to-date. New equipment sales were strong, and we achieved a new record backlog, which positions us well for future opportunities. And we continue to demonstrate cost discipline and increased capital velocity, and we are pleased with year-over-year earnings growth.

Operator, I'll now turn the call over to you for questions.

[Operator]

[Operator Instructions] The first question comes from Devin Dodge with BMO Capital Markets.

[Devin Dodge, analyst]

All right. I wanted to start with a question on earnings in the South American division. Last year, I think there was a meaningful drag from currency-related risks in Argentina. And with revenues up about 6% this year, I would have expected a bit of a stronger flow-through down to operating income. So I'm just trying to get a sense if there were some cost pressures in the business? And if there were, was it mostly a one-off? Or could some of this linger until pricing or operating efficiencies provide an offset?

[Kevin Parkes, executive]

Yes. Sure. Thanks, Devin. I appreciate the question. Yes, for sure, as we continue to grow in South America and the business evolves, there are cost pressures in South America. I think they extend beyond Finning into the general mining industry. We're still seeing the labor market being very hot. That results in some increased cost of labor. We're currently negotiating with a couple of units. We're pleased to have closed with two unions so far, and we're still negotiating with a couple. And also, there is incremental cost of executing the growth down in the region as well.

So growth is not linear. Sometimes you have to invest ahead of the growth as well. So at times, we're adding cost into the business to get ahead of that growth and to make sure we can support our customers. So there's some of that in there as well. But generally, the other part of it is we are seeing some pressures from product support margins as we continue to grow the business as well. But overall, we're pleased that, that business still operates at a margin in excess of 10% and very strong ROIC.

[Devin Dodge, analyst]

Okay. Second question, fairly meaningful buildup of working capital in the quarter. I think year-to-date, it was actually a bit higher than last year. I think there's been obviously a big focus amongst the leadership team to kind of streamline invested capital. Just wondering if you could talk about the drivers of that working capital buildup and how we should be thinking about the back half of the year in terms of working capital?

[Kevin Parkes, executive]

Yes. I think the working capital buildup, I mentioned on the last call, Devin, our SWIP was the highest, it's been for 10 years. So that's a result of the product support growth and the future business. So a lot of it can be attributed to that and increased parts inventories. We also have some lumpy inventory around the mining truck deliveries as well. So they are the three main drivers of that. I would say we expect working capital to remain at those kind of levels as we continue on this growth -- the current growth trajectory. As you mentioned, we're always looking for ways to streamline that and to close like close and SWIP jobs earlier to move equipment through the supply chain faster. But I think it's more a function of the growth that we're seeing in the outlook.

[Operator]

Our next question comes from Yuri Lynk with Canaccord Genuity.

[Yuri Lynk, analyst]

Can you just, Kevin, expand a little bit on the construction markets? I think sales activity was weaker, but I thought in your prepared remarks, you mentioned that bookings activity had kind of picked up. So any more detail on what's going on there?

[Kevin Parkes, executive]

Yes. To be clear, we're very pleased with the order intake in Canada. I mentioned that the bookings doubled. That's super encouraging for the future. The talk -- my comments around softer construction really relate back then to product support for the moment. We're still -- we're seeing a healthy order intake in the U.K. as well. So we are seeing investment or renewals of fleets in construction. But utilization levels, which we track are still at the lower end of the range. If you look at like quarry output, aggregate output in the U.K., it's still at the lower end of the range.

So the actual utilization equipment and therefore, the product support that we're achieving in that space remains still a bit subdued. But for sure, the order intake in construction in all three regions actually, but particularly in Canada, is very encouraging. And I would say that we're very happy, and we believe that part of that is through growth of market share. And obviously, that plays well to product support opportunities in the future.

[Yuri Lynk, analyst]

Okay. I just want to switch to the backlog, particularly Power Systems. It's almost -- the Power Systems backlog has almost doubled versus last year. Of that backlog that you've got now, how much of that is data centers versus prime and standby power?

[Kevin Parkes, executive]

I would say in the U.K. and South America, it's nearly all data centers. So if you use Pareto, it's 80% at least in the data center market. I think it's more broader split in Canada with -- to the oil and gas and gas compression sector. So -- but I'd say data centers are the secular demand driver in that backlog number for sure.

[Yuri Lynk, analyst]

And how has quoting activity evolved over the last few months?

[Kevin Parkes, executive]

Yes. So we were aware of some narrative around data centers and demand and some pausing. We're not seeing that in our order intake or in the general markets that we're seeing.

[Operator]

The next question comes from Steven Hansen with Raymond James.

[Steven Hansen, analyst]

Just want to follow on Yuri's question just on the power systems side. Is it possible just to maybe describe some of the pros and cons that you sort of see is facilitating this large buildup in backlog and order flow? It's all encouraging, of course, but I think you described it as being more cost intensive. Maybe just give us some other things to think about as we're thinking about the margin profile going forward and how you manage that sort of extended runway.

[Kevin Parkes, executive]

Yes. That's a good question. I'll make sure I understand it. So for sure, the secular trend that we're seeing in data centers is a meaningful driver of business growth for filling. And so I think that in terms of the equipment sales or the engine sales, that's a very healthy business. Of course, depending on the application of the power system's deliveries, the product support intensity can different -- it can be very different. But we've always said that, and we've seen it as a driver in the U.K. that data center maintenance and customer value agreements are a really good source of product support revenue moving forward.

And so we think it's -- we know it's a very healthy business. And we're very pleased to go over $1 billion of backlog in that segment now. And I think from net-net, margin, it would be helpful to margins over time. But as you know, in our business, that mix of new equipment sales. So if you do a healthy or like a big delivery of a big project in a quarter, that can change the mix that we see in that quarter, and it can impact margins in that quarter. The way I'd encourage you to think about power systems is the long-term secular trend, how they delivered and is going to lumpy and continue to be lumpy. But the underlying population and therefore, the product support revenue stream annuity is kind of a net new or an incremental for our dealership.

[David F. Primrose, executive]

I'll just add to that, Steve, with the power customers are typically the large -- the data center, large global sophisticated customers to do long-term planning, and we work very closely with them. And that long-term planning is beneficial to them and also to us as we plan our execution of those projects.

[Kevin Parkes, executive]

So I mean, in terms of -- I don't see any cons to your original question, Steve.

[Steven Hansen, analyst]

Okay. That's helpful. Just want to go back to the cost savings efforts that are still underway here in Canada. You described some of the takeout already and the $20 million of savings. Is it possible just to give us a sense for where we sit on that journey maybe in just inning terms? Are we in the fifth inning, sixth inning? Presumably, a lot of the big changes happen upfront as you adopt this U.K. playbook, but I just want to get a sense for whether we'll be seeing additional actions for the balance of this year as well?

[Kevin Parkes, executive]

Yes. I mean it's -- we've said this continuously as well. And I think you've seen it through our overall SG&A. We'll never stop looking, and I've been consistent in this. We'll never stop looking for cost efficiencies for sure. When you bring a new President into the company, they are reviewing the business and looking for opportunities with a fresh set of eyes and some different perspective from a different operating region. And so we fully expected that with Tim taking on that role, we would start to see some changes there. And we think there's more to go at. It's very difficult to say which innings we're in right now, say, for the fact that we believe there's more to go out there in Canada.

[David F. Primrose, executive]

Yes. I think, Steve, I'll just to add there is, we see this definitely as a continuous journey. And if you look back in time, we've taken our SG&A percent from 20% or 19%, 18%, we're now in the 15% range. So it's -- I look at it a bit like safety. We're -- it's never finished, and we're always going to be looking to improve. And that with Tim coming into Canada, again, we just -- will continue to identify opportunities in all regions.

[Operator]

The next question comes from Cherilyn Radbourne with TD Cowen.

[Patrick Sullivan, analyst]

This is actually Patrick on for Cherilyn. The first one is just back on product support margins in South America. So you mentioned a bit of pressure there. I guess with product support up, but new equipment sales also up, does new equipment going up out tie-up technicians who could be working on the higher-margin product support business? So is that something that could be at play there with the margins? Or is the drag related to that hiring of technicians, I think you said more than 120 since last quarter?

[Kevin Parkes, executive]

Yes. No, we definitely wouldn't say that the delivery of new equipment, we have a very -- a super process. I think some of you saw it last -- when we did the Investor Day and how we deliver equipment in -- from our La Negra facility in Antofagasta. And so no, there's definitely not a mix of shift of technicians. A lot of technicians are dedicated to mine sites.

For me, it's more the -- I would describe it as the kind of growing pains, the extra cost from growing pains, training technicians, they're not as productive as they would be if they're -- if they were fully trained, moving parts around in new volumes is also more expensive. And so I would say that it's more a function of growing pains. We're very focused on ROIC and the margin, but then the ROIC that we're delivering in South America, we feel like it's a very strong business.

But like to the other question around -- that we just had around cost savings; we'll never stop looking at ways to offset that. We want to be competitive. We have to be competitive. And our business -- and we want to grow the business, and we feel like there's opportunity to grow the business. So there may be some movement around from margins to cost -- from margin and looking for cost offsets as we move forward. I think that's healthy. And I think most businesses would -- most good businesses would look to do that.

[Patrick Sullivan, analyst]

Okay. Great. And then I guess on the call, you also mentioned the target component rebuilds being a strategy to accelerate product support business in Canada. I guess is that something -- are there learnings and sales practices being levered from the U.K. Ireland business implemented in Canada? Or was this just an area you identified as something that needed more focus or was like a playbook brought in?

[Kevin Parkes, executive]

Yes. I think it's -- so it's been a focus for a while. In Canada, we've been pleased to win back a big chunk of component business from a major customer that was being outsourced elsewhere. And so that's driving some growth there. We see, obviously, the rebuilds, we've been -- rebuild activity, machine rebuild activity has been strong since the post-pandemic -- the post-pandemic era. As that rebuild opportunity, we talked about before, as you come down the pyramid of size classes of machines. The value proposition for a full machine rebuild gets tested. We're constantly looking at ways to expand the pool of equipment we can rebuild to get it into that kind of cost optimization window.

But in cases where we can't, we're using our network to rebuild individual components, engines, transmissions, where a full rebuild doesn't make sense. So I think it's 2 things. One is constantly looking ways to expand the opportunity for rebuilding equipment and components and the other one is significant incremental wins with large customers.

[Operator]

The next question comes from Krista Friesen with CIBC.

[Krista Friesen, analyst]

Maybe if I can just go back to the previous question on margins in South America. Can you give a bit more color as to maybe what the internal impact is, whether it's technicians maybe not being fully trained versus the external impact of just that operating environment? I'm just curious kind of what's within your control versus what's more of a macro impact?

[Kevin Parkes, executive]

Yes. So as we've said before, and I think if you look into the mining sector, most of the mining sector are looking for ways to improve costs, if you improve efficiency. If you think about mining growth, ore grades have declined, fleets have aged, there's been a labor challenge across the whole sector. And so all of these things are a perfect storm of growing pains, which we're helping our customers to navigate. And so for sure, we're looking for ways to be more efficient and to help our customers lower their costs. But I would describe most of it as -- and where we have that and where we have to become more efficient. Then we'll look for the SG&A offsets.

I think what you're seeing in South America, as I mentioned in my previous remarks to -- on the previous question, I would categorize it more so as growing pains as we strive to add more than 1,000 technicians. And add new supply chains. We have a dedicated warehouse that we've opened to help us increase the velocity of parts that we're shipping into the mines in the Antofagasta region. That's an incremental cost that we didn't have 2 years ago. And so I would categorize it more of those growing pains than external pressures. But for sure, we take our responsibilities very seriously, and we're very focused on helping our customers reduce their operating costs.

[David F. Primrose, executive]

What I would add there, Krista, is, again, keep in mind also the equipment shift to mining in South America. So as we see a shift to mining product support and a shift to mining equipment, it does put pressure on that. But at the same time, like Kevin said earlier, we're in that -- still in that range that we've talked about before for South America. And to the extent there are margin pressures, we're always looking to offset that to the extent we can through SG&A as well.

[Krista Friesen, analyst]

Okay. Great. And then maybe just shifting gears a bit. Your outlook for Canada seems modestly more positive than last quarter just as a result of recent legislations and announcements there. Can you add any color as to what you're hearing at this point?

[Kevin Parkes, executive]

Yes, I would say we're encouraged by the announcements and the approach of the new government. It's significantly more positive sentiment or commentary about how they want to build Canada and build Canada strong. So that's a net positive for us. I wouldn't say that -- so that's an incremental positive. We feel better about Canada than we did a year ago.

Also, I think that's given some confidence in the market, and you're seeing that in customers willing to commit capital and place orders, particularly in construction. But I think our -- and our -- our comments around more positive around Canada are more a function of what we're seeing in the business, which is good product support growth, strong equipment sales, very, very significant backlog build in Canada this quarter. And so our comments are more around what we are seeing in the business more so than being getting too carried away with the initial kind of sentiment or commentary from the government.

[Operator]

The next question comes from Sabahat Khan with RBC Capital Markets.

[Sabahat Khan, analyst]

Great. You touched a little bit on this across some of the questions. Well, maybe if you can just dig a little bit into your current backlog. And I think in the past, you've made comments around the backlog during the peak mining cycle would be sort of X percent. One, can you maybe just talk about where you see the mix of the backlog relative to typically when demand is at high levels? And then secondly, as we look at the backlog mix across mining, power system and construction, should we just generally assume the power systems part becomes a bigger proportion over the next 1, 2, 3 years as maybe growth or accelerates relative to the rest of the business?

[Kevin Parkes, executive]

Yes, sure. Thanks, Sabahat. For sure, so I mean this is a record backlog level. So it's hard to kind of comment on previous comparisons. The way I would describe it, and we have done previously is that -- our construction is back at more normalized levels. And so it would be the 20%, 20% range of backlog. And the remainder, there's -- we're obviously being very successful in mining. Orders over the past little while, and they take a longer time to go through the system. So backlog would be around half of our -- sorry, mining would be about half of our backlog right now.

And then obviously, we talked about power systems being $1 billion. That just incrementally keeps growing as part of the proportion of the share of the backlog in every quarter. And to your question, we would see that continuing as we move forward.

And part of that, as we've said previously, some of that is due to the growth that we're seeing and the ability to supply that backlog, and Caterpillar building more capacity to help us with the velocity that we can deliver those engines. And sort of, as Dave mentioned just a few minutes ago, is around the data center. The power systems customers tend to plan longer term. They're having to build infrastructure, roads, sheds or by service. So they're planning way further ahead than we would typically see in our other segments. So that helps us with backlog. So some of that backlog that's in there, is deliberately going to deliver 2027 because that's when they want to.

[Sabahat Khan, analyst]

And then just on the comment around your OEM sort of supporting this growth in power systems. Can you maybe just talk about the availability of the products that your customers want within power systems, having the right products? Are they getting it on time because presumably, the data center demand the OEM is likely seeing globally. So just your ability and confidence in delivering against this elevated demand over the next, call it, 12 months or so?

[Kevin Parkes, executive]

Yes. So when we take backlog, we book orders with Caterpillar, build slots. And as with any supply chain, that can move around a little bit. But I think in power systems, specifically due to the planning nature, we're confident, and we've got a track record of delivering power systems projects on time. I guess we are seeing a tightening of that supply chain. That's -- as I previously mentioned, that's why Caterpillar are expanding their production capacities at Lafayette. That will come on stream, I believe, next year and into 2027. So that will further improve our ability to support our customers in this space. So yes, no, we're super confident and we have to be. These projects are very precise, and we need to deliver them effectively and on time.

[Operator]

The next question comes from Maxim Sytchev with National Bank Financial.

[Maxim Sytchev, analyst]

I was wondering if it's possible to get a bit of an update on your parts automation initiative in Canada. And when do you think we could see the potential benefits down the road?

[Kevin Parkes, executive]

Yes, great question, Max. So I mean -- so that's all signed off. My understanding is that will be implemented in the second half of the year. As we've seen in South America, and you saw the plan when you came down there in 2023, got new AutoStore technology demonstrably changes the way that we pick and pack and ship parts, and it reduces the labor intensity, which is important given labor scarcity and labor cost in South America, but labor is at high cost in Canada as well.

And so we would see that as one of the key streams for further SG&A reduction in Canada. So if we look at the runway in Canada that we spoke about, we've got Tims, I would class it as the fresh eyes looking at the organization and removing any excess that we may have built up over the post-pandemic period. And then there's another section of transformational cost change, which we need to ensure that we remain competitive. And we put the part of transformation in the AutoStore into that category.

The good thing about it is we have had it in South America for a year now or over a year. And it's working fantastically well. So we've got a proven track record. We've got people that have used in South America for a long while. There are other Cat dealers and Cat distribution centers that use the same technology. And so we have a high degree of confidence of execution there and seeing the subsequent cost savings.

[Maxim Sytchev, analyst]

And then I just wanted to pivot a little bit to the used market. I mean, like obviously, the whole thing is kind of recalibrating. But I'm wondering if you don't mind kind of linking the used product with the fact that Caterpillar is talking about sort of a normalization of pricing dynamic on the new side and I guess, general availability, how do you think that bucket, i.e. used will play out on a going-forward basis?

[Kevin Parkes, executive]

Yes. So it's a new equipment supply is broadly normal. And so what that's led to is a bit of an excess in used equipment over the past year, which obviously, when there's an excess of used equipment, prices come down and that can impact your current inventory. And I think you saw that through the course of last year, especially the second half of last year in Canada, specifically. We would say that used equipment business is more normal now. The sales are -- I would say the demand is a little lighter than normal right now as the market recalibrates as you suggest, but margins of more than improved, right? So there's an offset to margin, which means that the business is performing well. Our priority and our intention there is to effectively participate more in that market, Max.

And so if you're participating more in the used equipment business, when the prices are lighter, it's going to hurt you. When the prices are better, volumes will drop. And we also -- you have to roll into there. So we're really trying to participate more in mining used equipment as we move -- participate in moving equipment between our own regions and others. And that can be very lumpy as well.

[Maxim Sytchev, analyst]

And sorry, just to follow up on that. Do you have to invest incrementally? Or you already have like sort of all the capability process-wise and people-wise to, as you said, participate more in that vertical?

[Kevin Parkes, executive]

Used equipment is something that we do. We just weren't participating, enough in it, Max. So we have the capabilities, and we've enhanced it with people coming from the market into our company and that have been available. So we have more than enough capability to do that. It's a very light business, we have the branches, we have the infrastructure, we have the system. So now there's very little incremental cost. That's why it's good to participate in it.

[Maxim Sytchev, analyst]

Of course, of course. Makes sense. And just one verification. In terms of your data center capability, correct me if I'm wrong, in the past, you were saying that you were working with other Cat dealers in outside of your geographies, like in Europe, for example, is that still the case? And is that also part of the reason that we're seeing that accelerated growth curve in power?

[Kevin Parkes, executive]

Not so much in power, and that's just specifically in Europe as we help the other European dealers. We've developed a track record of delivering on data centers, and we collaborate with the support of Caterpillar and the local dealers to execute on those programs. We're also -- we have the dealership in Northern Ireland, where a lot of this equipment is built and packaged. And so that gives us an advantage there as well. But I wouldn't say that's part of the incremental -- that's a big part of the incremental growth. I think it's more coming from our domestic -- from our legacy and domestic markets. That's not a big driver. We are -- the driver is our domestic markets.

[Operator]

The next question comes from Jonathan Goldman with Scotiabank.

[Jonathan Goldman, analyst]

Maybe just to start off, we spoke a lot about growth in this call and you're investing for that. That's encouraging. But how much visibility do you have on that growth? When you're making the plans and you're investing, how many quarters or years out are you thinking or do you have visibility on?

[Kevin Parkes, executive]

Yes. Well, so I think if you look at it by sector, in terms of mining, that growth is steady in Canada. We have good visibility to the mining, the oil sands producers. And that's a steady 2% to 3% growth. So you're looking to add technicians. And there's not a huge amount of additional capital needed in that space. We look to increase the efficiency of the facilities we have to support customers there. There may be a little bit of incremental capacity, but not significant. South America, the plan has been significant. And I would say that we've just finished Phase 1 of that with the developments we've had in what we call the Antofagasta master plan, which we outlined at the Investor Day. So the bays are open, the AutoStores in.

Right now, we're just -- I would say, in the process of stepping back from that a little bit and looking at what the longer-term secular trend and commodity trend is for copper mining. We're talking to our customers about their plans and their mine plans. So I would say that -- so copper is taking a breath right now, but it doesn't take away from the long-term trend and the long-term opportunity in copper. So I would say that we're currently calibrating and looking out to the second half of the decade now in terms of what additional capital we need to support the growth of copper production in that region. So I would expect more to come on that.

The U.K. is really -- growth is low and so the visibility is not very good. So at the moment, it's more about maintenance CapEx there and what we're doing to improve our facilities to improve efficiency.

So I'd say the only other -- I mean, the growth in power systems, again, that's just secular. So we continue to look at the capabilities we have to support that business.

[Jonathan Goldman, analyst]

And Kevin, you touched on this on the U.K. Is there any incremental positives there from the new budget that was passed and maybe stimulus money that may flow in the second half or maybe more fulsome in 2026?

[Kevin Parkes, executive]

No, Jon, not at the moment. We're not -- I mean, the government -- I've learned over time not to listen to governments, but to watch what they do. And so obviously, there's some encouragement in terms of equipment delivery. Some of our customers are closer to the actual contracts and the execution of those contracts. So there's some encouragement to be heard from that. But I've learned a long time ago not to run our business based on what the governments do -- say, sorry, what they do.

[Jonathan Goldman, analyst]

I'll feed the fifth on that one. And then maybe just one more for me. On the backlog build, really nice build, another record. But based on the activity levels you're seeing today and maybe the conversations you're having with customers. Do you have a sense there's continued momentum there on the new equipment side? Or is there a risk we're approaching peak at the backlog build?

[Kevin Parkes, executive]

Yes. It's hard to say. We don't like to talk about peak because we're growing our business. We're certainly not a peak in power systems as we've -- for the reasons we've previously articulated on this call. So we continue to try and grow market share there. They're planning further out. So whilst the backlog, what you're seeing in power systems deliveries, and we'll see more deliveries in the second half of the year than we did in the first half of the year. So you'll see timing of big deliveries happening and new orders coming in. So it could be lumpy over time. And the same for mining, there's a lot of quoting activity going on in South America right now. And we've taken orders from all 3 oil sands producers in the quarter, hence the Canadian backlog, and we'll see that continuing.

Currently, we work on delivering in mining a truck a week between South America and Canada. And that's encouraging, and we've got further opportunities ahead of us. But most importantly, it's a good indicator for the health of those end markets and the product support opportunities in the future.

[Operator]

We have a follow-up question from Steve Hansen with Raymond James.

[Steven Hansen, analyst]

Yes. I just want -- I know it's only been 2 quarters, but is it fair to say that product support growth, the pressures that we saw in product support growth in the oil sands that you endured through, I guess, late '23 and most of '24 are largely now behind us. I know there's been different elements to that line item in the sense that construction was also pressured. But just in the oil sands specifically, the behaviors you've described over the past 1.5 years or so. Is that -- are we passed that now into a more regular cadence or rhythm?

[Kevin Parkes, executive]

Yes. I think from a component perspective, our OEM remanufacturing facility, I would say, yes, and we're working with our customers to optimize component change-out. In terms of machine rebuilds, that will always be lumpy and based on the local mine and their plans and what they're doing. And so -- and the, of course, the summer months tend to be slower for us in the oil sands with the soft under conditions. So what we're saying about mining, Steve, is that it remains dynamic based on individual mine plans and activities. And we don't expect it to be linear quarter after quarter after quarter, but we do expect to grow every year.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Primrose for any closing remarks. Please go ahead.

[David F. Primrose, executive]

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

[Operator]

This brings to a close today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.