Finning International Inc

TSX:FTT

Earnings Call Transcript

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Finning International Inc. Fourth Quarter 2024 Investor Call and Webcast. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Greg Palaschuk, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

[Greg Palaschuk, executive]

Thank you, operator. Good morning, everyone, and welcome to Finning's fourth quarter earnings call. Joining me today is Kevin Parkes, our President and CEO. Following our remarks, we'll open the line to questions. This call is being webcast on the Investor Relations section of finning.com. 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 Slide 11 and 12 for important disclosures about forward-looking information as well as currency and specified financial measures, including non-GAAP financial measures. Please note the 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 to differ materially from current expectations. Kevin, over to you.

[Kevin Parkes, executive]

Thanks, Greg, and good morning, everyone. I'm pleased to talk to you today about our 2024 performance. Following my remarks, Greg will provide more detail on our fourth quarter results. I would like to express my gratitude to our employees for their commitment to making a positive impact on one another; our company, our customers and the communities in which we work.

Through robust execution of our strategy, we are striving to build a strong, resilient business and a safe and secure workplace where our employees are empowered to build customer loyalty.

Please turn to Slide 2. We are really pleased with the overall growth of our business. The geographic and end market diversity of our business was critical to our strong performance in 2024. And this diversity will remain important as we move through 2025. In 2024, we grew net revenues by 6% over 2023 to $10.1 billion, a new milestone for our company by building equipment population and strengthening our product support capabilities and capacity.

Our product support revenue alone was $5.5 billion, and it's a record high and it's approaching the same level as our entire company revenues in 2020. This scale is a direct result of execution of our strategy and when combined with a simplified focused organization and operational discipline this has enabled us to unlock a new level of earnings capacity.

Our growth in 2024 was achieved through record high revenues in most lines of business, led by strong new equipment sales of over 10% as well as used equipment sales of nearly 30%. We also grew our backlog during the year by over $550 million, an accomplishment we are very proud of which represents the diversity in our geographies and end markets and our partnership with Caterpillar to win strategically and critically important business.

In 2024, we grew product support revenue year-over-year by 2% and led by a 6% increase in functional currency in South America. Importantly, we are exiting the year with solid momentum in all regions with Q4 2024 consolidated product support revenues up 6% relative to Q4 2023.

In South America, excluding the impact of a weaker Chilean peso to U.S. dollar, product support revenue was up 8% year-over-year in Q4 2024. We continue to build capacity and capabilities to capture opportunities in this growing market, adding nearly 350 net new technicians during the year.

In Canada, we saw product support levels stabilized quarter-over-quarter, reflecting strong activity levels in the power sector related to oil and gas activity and higher spending by mining customers, offset by continued slower activity in construction. Product support in the U.K. and Ireland is showing signs of improvement, exiting Q4 with a year-over-year increase of 5% in functional currency, with solid activity in rebuilds and power systems.

We continue to focus on maximizing product support revenues across all regions. We are pleased with the progress we are making in building a greater resilience into our business. Our SG&A as a percentage of net revenue was 16.3%, a new low level, and this is a result of our continued focus on cost management across our business.

We also delivered significant free cash flow in the year of $865 million, while at the same time delivering $3.80 of adjusting earnings per share. The last time we achieved this level of annual free cash flow, our adjusted earnings per share was $1.14. While we have made progress advancing on resiliency initiatives, we believe there is more opportunity for us to improve our cost structure and working capital efficiency, and Greg will share an update later regarding our progress to increase invested capital velocity.

We are making progress against our strategic priority of sustainable growth. We continue to develop our used equipment capabilities, including launching fused equipment, a brand-agnostic online marketplace to expand our presence and participation in this important market. In Power Systems, we continue to see healthy demand for our services with Power Systems revenues up 14% year-over-year with strong contributions from all regions.

Importantly, our Power Systems backlog was up 70% from the end of 2023 to approximately $860 million, driven by a 150% increase in multiyear data center backlog in the U.K. In Canada, we saw healthy activity in power systems in the oil and gas industry that drove a 15% increase in Power Systems revenues. While in South America, outer Systems revenues were up more than 30% on strong oil and gas sector activity in Argentina and data center deliveries in Chile.

Our rental business was softer than we anticipated, driven by the softer construction activity in Canada. But I want to reiterate, we remain committed to growing this important line of business in the long term. Before I turn the call over to Greg, I wanted to just share with you more information about some business I had in the regions this year. 2 weeks ago, I was in South America. And each time I visit, I'm more and more impressed by the growing capabilities and the team's commitment to executing the strategy in the region.

I had the pleasure of during our expanding facilities in Antofagasta region, met with our ever-growing team and visited some critical and important customers and operations to discuss both execution and growth opportunities. We achieved record net revenues in 2024 in the region, and we delivered backlog and our maintenance and repair contracts. We're optimistic that our mining customers in the region will continue to refresh and expand their fleets, in many cases, incorporating autonomous and electrification solutions. We are definitely mobilizing for growth in the region, as we highlighted in our Investor Day in September 2023, and we are excited for our business in the region in 2025 and beyond.

I also visited the U.K. and Ireland last week, where I met with new members of our leadership team, employees and customers. I had the pleasure of traveling to Ireland on Thursday, where I visited with a customer who's recently awarded us a significant agreement to supply new quarrying equipment to multiple sites, both in Ireland and the U.K. We then crossed the road to visit a data center site where we have suppling more than 60 megawatts of standby power. We are supporting both of these sites with long-term maintenance contracts. Despite continued soft market conditions and activity levels, we are showing signs of improvement in the region with solid order activity added to the backlog in the quarter.

The U.K. and Ireland team has done a great job in controlling the controllables, managing costs in a lower growth environment and creating more sustainability in our operations. We're excited to promote Gary Megarrell as Managing Director of the U.K. and Ireland Dealership starting January this year.

Gary has more than 25 years' experience in the business, and we strongly believe that he will continue to sustainably grow this resilient business. In Canada, we are seeing activities modestly improve, particularly in the oil sands. However, we remain cautious given customer discipline and the continued political landscape. We exited 2024 with substantially better produce support sales and earnings before interest and tax.

And we believe the market should improve as we move through 2025. Tim Ferwerda has assumed the role of President of our Canadian business, and we are confident he will leverage the excellent work he led in the U.K. and Ireland to accelerate our strategic execution in our largest dealership. Our focus in 2025 will remain squarely on executing our strategy to maximize product support, drive full cycle resilience and grow our U.S. rental and power businesses to improve our return on invested capital.

With that, I'll hand it back to Greg.

[Greg Palaschuk, executive]

Thank you, Kevin, and I'm turning to Slide 3. Our Q4 net revenue of $2.6 billion was up 7% from Q4 of '23 led by strong growth in new equipment sales and product support revenue. EBIT was down 4% from Q4 '23, adjusted EBIT to $223 million, primarily due to lower earnings in our Canadian business, partially offset by substantial improvements in the U.K. and Ireland.

EPS of $1.02 was up 7% from Q4 of '23 adjusted EPS to a record level for Q4, reflecting our cost and capital resilience along with the benefit of a lower share count. Overall, we're pleased with the fourth quarter performance marked by healthy customer activity in the mining and power sectors as well as diligent execution of our strategy across all regions.

Our South America team delivered double-digit year-over-year product support growth, revenue growth. Our Canadian team demonstrated strong resilience despite challenging market conditions and achieved sequential EBIT improvement and our U.K. and Ireland team more than doubled the EBIT compared to Q4 of '23.

Free cash flow delivery continued in the fourth quarter at nearly $400 million. I'm now turning to Slide 4. We showed changes in our net revenue by line of business compared to Q4 '23 and the composition of our equipment backlog by market sector. New equipment sales were up 12%, driven by strong mining deliveries in South America and power project activity in the U.K. and Ireland.

Rental revenue was down 14% from reduced fleet size and lower utilization levels. Product support revenue was up 6% with solid growth in South America and the U.K. and Ireland. Our equipment backlog of $2.6 billion at the end of December was up 27% from the end of '23 and up 14% from the end of September of this year. Sequential backlog build reflected strong order intake from mining and construction customers, while deliveries continue to be efficient.

Turning to EBIT performance now on Slide 5. Gross profit as a percentage of net revenue was down 140 basis points, primarily due to a higher proportion of lower-margin, mining equipment deliveries in both South America and Canada. Meanwhile, we remain focused on cost control, with SG&A as a percentage of net revenue, down 30 basis points to 16%. We'll continue to build on this momentum to achieve a more resilient cost structure and drive higher earnings capacity going forward.

Q4 EBIT as a percentage of net revenue was 10.9% in South America, 8.1% in Canada and 5.8% in the U.K. and Ireland. Moving to our South America results and outlook, which are summarized on Slide 6. In functional currency, equipment sales were up 29% from Q4 of '23 driven by strong mining deliveries. Product support revenue was up 10%, driven by strong demand for mining and oil and gas customers.

EBIT was comparable to Q4 of '23 adjusted EBIT and EBITDA as a percentage of net revenue was down 170 basis points, primarily due to a higher proportion of lower-margin mining equipment deliveries, partially offset by lower SG&A as a percentage of revenue. Our Argentina operation remained profitable throughout the year.

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 in the mining equipment and product support space. While activity levels and outlook remain positive, we continue to expect continued challenging environment in attracting and retaining qualified labor.

In Chile, we continue to see healthy demand for large -- from large contractors supporting mining operations, and we expect infrastructure construction activity remains 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're also positioning our business to capture potential growth opportunities in oil and gas and the mining sector.

I'm now turning to Canada on Slide 7. New equipment sales were down 3% from Q4 of '23 with slower activity in the construction sector. Used equipment sales were up 15%, with strong growth in mining and power sectors, reflecting execution of our strategy. Product support revenue was comparable to Q4 of '23 with higher activities in the power sector related to oil and gas, and higher spending by mining customers, offset by continued slower activity in the construction space.

EBIT was down 17% from Q4 of '23 adjusted EBIT. EBIT as a percentage of net revenue was down 160 basis points, primarily driven by a higher proportion of lower-margin mining equipment deliveries. As noted last quarter, margin recovery in the used in rental sectors is expected to take several quarters, but these lines of business also contributed to lower margins in Q4.

In terms of outlook, we expect continued spending discipline from our large mining customers as they work to achieve operating cost targets. Going forward, based on customer commitments and discussions, we anticipate stable demand for product support. The recent government changes and announcements in Canada and the U.S. create additional uncertainty for our business and our customers regarding tariffs and exchange rate fluctuations.

In response to a near-term market environment of slower growth and higher uncertainty, we are focused on managing working capital levels and evaluating opportunities to create further sustainable cost efficiency. Specifically, we're excited about the opportunity to further improve our cost structure in Canada, leveraging the structural changes and overhead reduction strategy demonstrated in our U.K. operations.

Please turn to Slide 8 of our results on U.K. and Ireland. In functional currency, new equipment sales were up 11% compared to Q4 of '23 driven by strong project activity in the power sector. Our U.K. and Ireland team demonstrated resilient strategic execution this quarter with solid year-over-year product support revenue and EBIT growth.

Product support revenue was up 5% driven by strong capture of rebuild opportunities as well as improved activity in the power sector. EBIT more than doubled from adjusted EBIT in Q4 of '23 with higher new equipment and product support revenue, coupled with 8% lower SG&A through execution of structural changes and overhead reductions to our cost base.

EBIT as a percentage of net revenue was up 310 basis points from Q4 of '23 adjusted EBIT with improvements in both gross profit and SG&A as a percentage of net revenue. We expect demand for new construction equipment in the U.K. and Ireland to remain soft, in line with 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.

Please turn to Slide 9 for an update on our invested capital progress. It is been a year since our 2023 Investor Day where we laid out our refreshed strategic priorities. We saw execution momentum, particularly exiting 2024 as we diligently carried out our strategic plans. Alongside our milestone achievements in SG&A, free cash flow generation and substantial growth in used equipment at Power Systems, I'd like to share an update on our progress on our invested capital reduction journey.

We're making progress on our focus to improve invested capital position. As an example, 2024 saw our free cash flow exceed net income by nearly $360 million. On the left-hand side, we have listed 3 major categories of opportunities and action items to improve our invested capital from our 2023 Investor Day. Under the exit and optimized category, we have been continuously evaluating lower ROIC activities, and we have significantly reduced our run rate [Indiscernible] spending and operating costs, also successfully completed the optimization of our U.K. pension in Q4 2024. We continue to seek and review further opportunities for improvement.

For real estate sales, our South America master plan has been proceeding on track. We've completed the planned facility sales and are currently near completion of our new facility in Antofagasta region that will add incremental capacity. This will strengthen the quality and efficiency of our product support offerings as well as continue to service the expanding and aging equipment population in the region.

Canada, we conducted and reviewed our facilities and proceeded with several land and building sales to optimize our footprint. Moving to the largest dollar opportunity category, increasing working capital velocity, we are seeing solid progress driven by fundamental operating improvements. Our new equipment preparation velocity has significantly improved as reflected in an 11% year-over-year revenue growth in 2024, while at the same time, new equipment inventory levels reduced by 23% in December '24 versus '23.

We're also pleased with our efficient backlog deliveries throughout the year. In some instances, we started to deliver equipment on awarded deals before it hit backlog. We continue to optimize our service work and progress balance as well as work on expedited invoicing and improving collections management. We restructured and streamlined our remanufacturing operations in Canada. And we've made considerable progress in improving parts velocity and reducing in-transit times.

In Chile, we implemented AutoStore, which is a robotic warehouse automation system that enables lower costs and improved speed and accuracy of fulfilling customer orders. Currently, over 50% of our parts orders in Chile utilize the system. In our Edmonton parts distribution center in Canada, approximately half of the total parts volume to customers flow through are automated vertical lift modules and vertical buffer modules, which also enhance both the efficiency and accuracy of our fulfillment process.

Overall, our invested capital at the end of '24 was down $200 million compared to 2023, and our business has grown with the full year net revenue exceeding $10 billion. We are encouraged by the progress to date on improved capital efficiency -- we're very pleased with the resilient free cash flow performance. However, we still have significant room for continued improvement in invested capital turnover, which will lead us to sustainably higher overall ROIC. We look forward to making continued progress here in 2025.

Now I'm going to turn the call over to Kevin for some concluding comments.

[Kevin Parkes, executive]

Thanks, Greg. To summarize, 2024 was another strong year for Finning. We have built a stronger and more resilient company. We continue to grow sustainably with improved resilience, including substantial free cash flow of $865 million, which is well in excess of our net income.

Our balance sheet is healthy with a net debt to adjusted EBITDA of 1.5x, and we continue to return capital to shareholders via share repurchase and dividends. Importantly, we exited the year with strong momentum, included record Q4 earnings of over $1 per share, while concurrently generating Q4 free cash flow of nearly $400 million. We're also building our backlog to a new record $2.6 billion, driven by the diversity in our end markets, which with mining up 41% and Power Systems up 72%.

We exited the year with positive product support growth and improved earnings capacity. We believe these solid outcomes are a result of robust strategic execution, our diverse and attractive end markets and laying the foundation for long-term sustainable growth and positive impact.

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

[Operator]

[Operator Instructions] And your first question today will come from Sabahat Khan with RBC.

[Sabahat Khan, analyst]

Just, I guess, to the extent you can talk about it, I know you guys don't have official guidance, but just given the puts and takes on the guidance, can you maybe just talk about maybe the margin profile heading into 2026. Part of that is likely going to be driven by mix. Just curious, based on your outlook today what your expectations are for product support mix and maybe the direction of the margin through this year.

[Greg Palaschuk, executive]

Yes. We're not adding any extra guidance. I mean, overall, we continue to focus on the strategy, right, which is to grow our product support business to the maximum degree. As we highlighted last quarter, we continue to be really optimistic about the growth rates in South America and Q4 was obviously excellent. U.K. on the slower growth end in the economy, but really delivered well to end the year and have some good momentum.

And in Canada, there's a bit wider range in the mix dependent on some of the customer spending patterns as well as just overall economy. But product support continues to be the focus, continue to drive resilience cost and capital and then growth focus on used rental and power. So that continues to be the frame. And overall, we continue to be very optimistic.

[Sabahat Khan, analyst]

And then maybe just looking at Canada specifically, I think you called out amidst its current spending environment, focusing a bit more on costs. How much more runway do you see on that front to take costs out of that geography just to rightsize it for your outlook for spending patterns over the next -- or is it more driving product support or a mix of both? Just on kind of what are the focus areas there? And how much from kind of each of those 2 buckets do you expect?

[Kevin Parkes, executive]

Yes, I couldn't catch -- what was the second -- I'm sorry.

[Sabahat Khan, analyst]

Yes. I guess would that geography likely impacted by lower product support mix as well. Just curious, as you look ahead how much contribution do you expect from maybe better mix over the next few years versus cost reduction on the SG&A or overhead side?

[Greg Palaschuk, executive]

Yes, we expect it to come from both. We're encouraged by the sequential improvement in product support in the region. And as we've said before, our outlook hasn't changed. We call it slow and steady in Canada. Obviously, it's impacted by the oil sands producers. Who continue to exhibit discipline in the way that they're running the business, which we encourage and we're endeavoring to support.

But we do see some encouragement in that space, particularly as we need to tend to get reset at the start of the year and typically leads to more normalized spending behaviors. And so we're encouraged by that. I also believe there's a fair degree of self-help in terms of capturing more market share in Canada and tackling the cost and capital that are required and appropriate to whatever the product support and business level activities are in that region.

That's why you see -- you've seen us move Tim into that region. We believe that he's got a track record of balancing those 2 things as demonstrated by the U.K. and Ireland results. He's what, 4 weeks into the job, but he spent most of Q4 in Canada. And so we would be encouraged that there's opportunity to increase product support sales in an improving market, but we would say, as we said last quarter. We think there's a couple of more quarters of softness in there.

There's some self-help in terms of energizing the sales teams and getting out and winning market share, and there's an opportunity to ensure our cost of capital base is appropriate to both support that product support growth and to increase the resiliency in the Canadian business.

[Sabahat Khan, analyst]

Great. And just one last quick one. There's some commentary out in the industry about pricing. I think I talked about a little bit after last quarter. How is the pricing environment in each of the 3 regions? And has it at least stabilized as you head into 2025? Or is this still dynamic for the machines.

[Kevin Parkes, executive]

I think -- I mean, I always say this right? So the pricing is dynamic as you talk, it's always dynamic. But we have to be competitive in the markets that we serve, and we believe we are competitive in the markets we serve. We are a premium business. But those competitors -- those premiums have to be in the competitive range. I would say that if you look at the backlog build, quarter over quarter sequentially and year-over-year that would suggest we're well positioned for that. We have some externally accretive market share figures, which we would be encouraged about as well.

And even in Canada, we're seeing sequential quarter backlog build of more than 20%. Another price-sensitive market, obviously, is the U.K. and we saw sequential improvement in backlog there. In fact in construction in the U.K. The backlog was up around 40% both year-over-year and quarter-over-quarter. So that would suggest that we're well positioned from a pricing perspective. And -- but we're committed to selling the premium services.

[Operator]

Your next question today will come from Steve Hansen with Raymond James.

[Steven Hansen, analyst]

Greg, you outlined your capital improvement plan, the progress to date, it looks like you got an extra $200-plus million still to go there. Do you have sort of a time line on how quickly you think you can get there through the balance of the opportunity?

[Greg Palaschuk, executive]

Yes. It's going to be a continuous focus throughout the year. We're pleased with the cash flow performance, but in a lot of ways, we're just getting started. And if you look at sales to working capital or working capital to sales, pleased to get it down to 28.1%, which is better than 30%, but certainly not back to that kind of 25% level that we've been in the past and want to get back to -- so just a lot of running room left and we want to get after as much of that within the calendar years we can. Of course, there's regular seasonality and [Indiscernible] selling season to start the year here. But through the rest of the year, we -- similar to this year, we want to put consistent points on the board in Q2, 3 and 4.

[Steven Hansen, analyst]

Helpful. And just going back to the Canadian side and product support, not trying to parse words so I apologize. But I think the commentary in general is fairly balanced or mixed as described in the MD&A. Kevin, I think you said you would see some improvement through the year in your prepared remarks, but you've also suggested there could be a couple more quarters of softness. I'm just -- can we see positive growth in product support in Canada in '25? Is that a possibility?

[Kevin Parkes, executive]

Absolutely. Yes. We're confident we can grow product support in Canada in 2025. The sequential improvement points to that. Combine that with ton of energy from Tim and the team that he's building and really strong support from our partner Caterpillar. Look, I think I want to make sure people -- just continue discipline in the way that customers are spending is a good thing. It drives a sustainable mining business. And we -- it's our role is to support that and to help our customers be competitive and run really effective operations. As we've said, when we have a turn of a calendar year, we do see some refresh budgets, some catch-up. But I don't see it dramatically improving, but we do -- we would have a level of optimism around that mining side of the business.

The continued softness over the next 2 quarters really is figuring out how the new construction season starts in Canada. It's always really important to see how that side of the business gets going once the weather improves. And clearly, there's a lot going on in the Canadian markets right now, which we are monitoring very, very closely as well.

So -- but that softness really is more a function of that continued software activity in construction. I would be a little bit more encouraged about the outlook for mining. But the combination of that and the renewed energy from Tim and the focus means that we've been pretty confident that we can grow product support in Canada in 2025.

[Operator]

Your next question today will come from Yuri Lynk with Canaccord Genuity.

[Yuri Lynk, analyst]

Can you talk a little bit about the rental markets in Canada, still seeing some contraction there, yet you're planning to add more fleet. So just wondering what gives you the visibility to move ahead with that capital plan.

[Kevin Parkes, executive]

Yes. Sure, Yuri. I mean it's important to note that, as we've said a few times that our rental line of business, as you see in our financials is more diverse than you'd see in other rental businesses. So we have heavy rents, and we have rental purchase options as well.

So I would say that we're happy with the way that we're building the plan for rental. As I mentioned on the last call, we strengthened the team. We've added a new Vice President of Rental Services. Lyall is working hard to -- his main priorities that he's working on right now is optimizing the fleet and the returns profile from that fleet.

Hence, why you need to invest, right, to make sure you're optimizing that fleet regardless of how you're seeing demand play out. So he's doing that is also building sales and operational coverage and also developing a compelling value proposition for what is rental, particularly in Canada. So I would say that, I guess, your question is, if you see this, you're still seeing the softness, why you -- why you thinking about investing? 2 reasons.

We have to reframe and realign and optimize the fleet, and that will take some investment. And the second thing is, we believe, regardless of softness in that space, we have incremental and quite substantive market share opportunities to go after. And so that's the reason why you see that level of investment.

[Yuri Lynk, analyst]

Okay. Last one for me. I just want to shift to South America. You mentioned oil and gas -- increased oil and gas end market activity as a driver in the quarter. I don't recall that end market being cited before. So maybe just a little more detail on assuming it's Argentina, but what you're seeing there and how sustainable that oil and gas activity is?

[Kevin Parkes, executive]

Yes, sure. So I mean, oil and gas -- the oil and gas opportunity in Argentina has been around for decades. We started to see that development start to develop probably 5 or 6 years ago, we actually -- we've shared in the past, we've made substantial investments in the Neuquén region, which is the Vaca Muerta basin, and we continue to see -- be optimistic and see development in that area. That's only been accelerated given the change of government in Argentina, and so that opportunity continues to gather more and more momentum.

And we continue to see that come through product support in Argentina, but also in terms of backlog build for engines and transmissions to support the development of that oil and gas sector. So it's a key strategy for the Argentinian government to develop those resources, to become an export of those resources in the region. And we're super well placed to support that work.

[Operator]

Your next question today will come from Jonathan Goldman with Scotiabank.

[Jonathan Goldman, analyst]

Given all the recent headlines around tariffs, have you noticed any change in customer behavior, thinking or conversations around capital investment due to a higher level of uncertainty?

[Kevin Parkes, executive]

No, no -- yes, Jonathan. I mean, it's -- the last 2 or 3 weeks has been a period of listening, learning, educating, for sure, we're also looking at mitigation for if tariffs came in. We were certainly encouraged by the announcement that they were going to be paused for a while to allow for some sensible and helpful dialogue, I think, between the 2 administrations.

Look, as we think about tariffs from my perspective, and we've done a ton of work on this. But from my perspective, it doesn't change anything. We've got -- our strategy is designed to withstand challenges in the market, both in terms of growing that resilient part of our business, product support and driving more resilience into our business.

So as it relates to Tim's strategy in the U.K., nothing changes. In fact, all this does is serve to provide more urgency to accelerate that strategy. We're also -- it's also important to understand that the diversity in our end markets do shelter us to a certain degree from that being off our business being outside of the current geographies that are discussing tariffs.

And a lot of our earnings growth right now is coming from those -- those are the regions. So important to realize that. But long term, we're optimistic and we feel that this discussion and the dialogue that is happening right now will be good for Canada in terms of working on developing resources, building infrastructure, energy, and I think this management team has a track record of managing through challenges and coming out of the other side of them stronger as a business with stronger customer relationships and loyalty, a more resilient and reliable results. So I guess my answer to the question is yes, of course, as you'd expect, we're doing a ton of work, but we're just focused on our strategy and the execution. And it's designed to withstand challenges like this.

[Jonathan Goldman, analyst]

That's really helpful. And I guess my second question, maybe a little more nearer term, could you provide any color around how equipment margins are trending now relative to 2019 levels?

[Greg Palaschuk, executive]

All right. So relative to 2019, I mean, obviously, you've seen a mix shift to product support, which is always helpful, having grown that business the extent we have since 2019 is super helpful. And then really, a lot of it is SG&A, right? So they hit 16% in Q4 is obviously a good place to be when you compare that to 2019, which is probably more around that 19% level. That's a good chunk of the earnings capacity that we've gained.

And so we are very focused on continuing that and improving upon that. So I say on the gross profit side, it would be more mix that's moved towards product support and really growing that business. And then it's the SG&A, structural improvements that are really driving to the bottom line, and we look to continue to focus on that, as Kevin highlighted.

[Kevin Parkes, executive]

I'm not sure whether you said machine margins there or new equipment. I mean, we don't disclose that. And I'd just point you back from our previous answer to Sabahat, we have to have competitive premiums. In my 30 years in the company, our new equipment margins, I would say, have been largely stable. Of course, that different by end market and type of product.

But we have to be well positioned and competitive. And I think our backlog build reinforces that we are.

[Operator]

Your next question today will come from Cherilyn Radbourne with TD Cowen.

[Cherilyn Radbourne, analyst]

So just on the product support side, Caterpillar disclosed earlier that it services revenue is at USD 24 billion on the way to an aspirational target of USD 28 billion in 2026. So in light of that, are there things that Cat will be doing in concert with dealers to incent product support growth, including rebuilds in 2025?

[Kevin Parkes, executive]

Cherilyn, I mean the -- we're -- obviously, we saw product support growth levels soften in 2024, probably a little more outside of Chile, a little more than we anticipated. That's only served to reenergize and refocus the whole enterprise, including Caterpillar. Our teams are working daily closely together to both reenergize and to look for new ways to improve that growth support trajectory on the way to that really critical $28 billion target.

Our dealerships are significant and large in that regard. And we take that responsibility really seriously. And we get the subsequent support and encouragement from our partner, [Caterpillar] in terms of making sure that we are playing our role in delivering on that really important target. But I would say that the level of energy and focus around product support growth within the enterprise is as high as it's ever been.

[Cherilyn Radbourne, analyst]

Okay. That's helpful. And then I don't want to jump ahead too much, but can you give a bit of color on the learnings that you think can be taken from the U.K. and Ireland and be adopted to Canada?

[Kevin Parkes, executive]

Yes, sure Cherilyn. So, I mean, it's not rocket science. As I said, Tim's in kind of week 4, he's just moved into Edmonton base, which is really important. It's going to be super close to the team there. But he did spend most of Q4 in Canada. I think his priorities being making a stand on safety. There's an opportunity to improve our safety performance in Canada, and there's a lot we can learn from the U.K. and Ireland in that regard.

So important, we don't walk past that because safety is our most critical responsibility. And then you spend other time meeting with the team. He's already worked on simplifying and prioritizing the org structure. He's added 3 new members to the [EC team], all internal recruit, some more of an internal strengthening of the team there. And then the next focus is energizing the sales teams, meeting with customers, making sure we're on the front foot with our customers. And we saw that the energy that Tim drove in -- to your previous question about energy brought to the table on support growth in the U.K. and Ireland really started to take hold in the second half of last year.

So I think pick that playbook and run with it in Canada. And of course, then there is the cost and capital optimization. As with myself, Canada is a heavier business in that regard. And it's a different business for sure. And so it's not an exact rinse-and-repeat opportunity, but there are opportunities to bring fresh perspectives and to challenge everything to make sure that we're not losing this and not overtaking advantage of this opportunity and the fresh eyes to think and ask the question about how we could run the Canadian business differently.

So that's how I'd summarize the work that he's got in front of him. It's not an exact playbook, but it's pretty, pretty simple one.

[Operator]

Your next question today will come from Krista Friesen with CIBC.

[Krista Friesen, analyst]

If I can just follow up on Argentina. So it seems like things are slowly starting to improve there. Has Finning adjusted maybe not necessarily how you're thinking about it, but any incremental investments in Argentina or still taking a bit of a slower approach there?

[Greg Palaschuk, executive]

Yes. I mean, certainly, from a foreign exchange perspective, we're keeping our risk extremely low, and we'll continue to take proactive steps to make sure that, that risk is in check. But the business opportunities are improving. There is midterm election this year that will provide the full mandate and give you the more visibility.

So keep an eye on that. We'll keep our risk low. But yes, oil and gas, as we talked about earlier or mining, there's a lot of even public Canadian companies talking about some pretty significant large investments. And so some of our recent investor slides, we've highlighted a couple of investments we've made in terms of -- on the mining side and on the back of Vaca Muerta shale side. So a little bit of physical footprint improvement.

I'm certainly happy that we preserved our capacity through the last couple of years even through the volatility. So we'll take a low-risk approach. But as we've highlighted before, we think the option value of that business continues to go up and certainly some larger scale opportunities that continue to grow and mature and become more serious. So some encouragement there. We'll balance the risk reward, but definitely net encouragement.

[Kevin Parkes, executive]

I'll just add, Chris, to that we're really proud of the team in South America and particularly Argentina, how they've managed the last 18 months. We talk about that option value, and they make sure that we still retaining that whilst positioning ourselves for growth and thoughtful growth. We talked about the Vaca Muerta and the oil and gas and that beyond that, there's mining and copper opportunities.

So we're well placed to take advantage of those opportunities, but we're -- the team are running a really disciplined and thoughtful business down there, and I've got a record of saying how much we would appreciate that.

[Krista Friesen, analyst]

Great. And then just a last one from me. Obviously, a pretty strong performance in the U.K. and Ireland this quarter. Do you view that as sustainable as we look out through 2025?

[Kevin Parkes, executive]

Yes. And so it's important to note that the product support mix has shifted in the U.K. It's still not at the level of the other 2 dealerships. But as per our strategy, when these product support mix as a proportion of total sales, it continues to increase, so does your absorption.

And so that is a great enabler for sustained earnings performance. It's a dynamic market, and we have to return that agility and the discipline of execution and cost management because the market can move around very quickly over there. But as I said, I think there's -- if I think about the U.K. business now, and I think about the product support mix, mix of long-term data center opportunity, as I mentioned previously, in U.K. backlog year-over-year for multiyear data center is up more than 150%.

That's multiyear, goes over a couple of years. As I said in my remarks, the pleasure of visiting big cement works and then crossing the road and going to a huge data center build that we're working on. And that represents a different in U.K. and Ireland business. and a different path to look forward for that business and quite remarkable.

I never thought there would be a day when I went to a cement works and cross the road and went to see a huge data center build and that just plays to the diversity of our business now and how well the team have done to position themselves in these growth markets.

[Operator]

Your next question today will come from Devin Dodge with BMO Capital Markets.

[Devin Dodge, analyst]

I wanted to start with a comment that we've seen in the outlook for South America for the last while, specifically around a more competitive labor market for qualified technicians. I'm just wondering if you can give us a sense for how retention and wage inflation has been tracking there? And just can you remind us how easily these cost pressures can be passed through to your customers on some of those long-term contracts?

[Greg Palaschuk, executive]

Yes, sure. So I think I'm pretty consistent in this regard -- acquiring and retaining skilled technicians has been a constant challenging opportunity for the 30 years that I've been around. The work that we do in South America takes that to a whole new level.

As I said in my remarks, Devin, I was in -- I was at a big mine site 2 weeks ago. And you need to get a bit of a medical check before you go in there, and I bumped into 3 new women that have joined our company. From outside of the industry, it helps -- to help us with that support of that growth. So I'm really pleased with how the team are approaching that recruitment drive, looking outside of traditional pools, ensuring we have the right -- we're looking into the right gender diversity, which is a big opportunity for us.

And so it really is -- I mean, it's a really innovative and structured approach we're applying in South America. Retention is challenging. It's an enterprise, right? I guess the word people use, it's an ecosystem of technicians. And we understand that technicians move around and part of our role is to strengthen the overall technician base. And so we're always mindful of turnover rates. But I would say they're at normal or acceptable levels.

And then finally on costs and negotiations, we are going to be negotiating with some really important unions this year across the company, but particularly in Chile. I was -- when I was there 2 weeks ago. It was a big part of the discussion, not just meeting with technicians, ensuring that they're happy and that they're pleased to be part of our company, but also meeting with the team who are going to be negotiating with the unions to make sure we've got a solid plan. I was really pleased by the level of productivity there.

And we're going to try and get ahead of that to avoid any kind of compressed time lines or hard stops. And as a company, we're committed to fair and balanced agreements for the long time success of our people and our company. In terms of the ability to pass it through in Chile, definitely, we have that opportunity that we passed through -- it doesn't mean that we don't manage -- we don't negotiate and carefully, and we're very thoughtful about the value proposition that our labor -- the important part of labor plays in the value proposition. But -- we do have the ability to pass that through, particularly in the Chilean mining contract. So hopefully, that helps Devin.

[Devin Dodge, analyst]

That was excellent color. Second question, just wondering if you could speak to the mix of rebuilds that you saw in Q4 and if it continues to be tilted more towards smaller machines. And just wondering how that pipeline for rebuilds looks currently in Canada and South America.

[Kevin Parkes, executive]

Yes. So I'd be encouraged by the trajectory and the -- I mean, that rebuild business, I think we've said a number of times now is a structural change in our company. And despite in some areas, softer product support revenue, I would point to the fact that the amount is either rebuild or contracted through a maintenance contract to strengthen even through -- even if the number is overall softer as we saw in Canada, so I'd be happy that, that revenue base is a higher quality. As one of the previous questions, in terms of energizing and driving product support, rebuild is the go-to place.

And so not only because it's high-quality work, we've got a growing workforce that need to be kept busy. And we want to make sure that we're fully utilizing our facilities. So in both -- in all 3 regions actually I'd be very encouraged by the trajectory in rebuilds. For sure, the product range is coming down and the scope is probably narrowing because the scope will generally narrow as you come down in the size of product range, just that's the economics and how it works.

And so you have to do a lot more rebuilds to achieve the same goal. But I still think it's a #1 of our product support growth opportunities. So yes.

[Operator]

And your next question today will come from Maxim Sytchev with National Bank Financial.

[Maxim Sytchev, analyst]

Maybe the first question for Kevin, if I may. There was some discussion around potential accelerating 18 kind of large projects in B.C. And I mean some of them you actually worked on in the past. I'm wondering how quickly do you think you could see any potential impact from this? Or is it more sort of a 2026 dynamic?

[Kevin Parkes, executive]

Yes. I saw that, Max, yesterday. I mean -- so from my previous point around tariffs, I think that one of the encouraging things that's come out of the discussions over the last 2 or 3 weeks is a recognition that Canada can do more to help itself, which we would agree with.

And we think that the discussions are happening, right. There's lots of different opinions here, but the discussion around kind of helping itself and strengthening and taking and optimizing the opportunities that it has within its own borders, there's no disagreement on that. So that's really encouraging. There has been in the past -- it hasn't always been aligned. So see that long list of projects over the last couple of days is a good example of that. We see -- really looking to how they can take their destiny into their own hands and accelerate some of these projects.

Now in terms of how quickly that I couldn't answer that, Max. I mean I'm sure that this is an incentive to reduce administration and red tape to get some of these projects moving faster. And for sure, our business model would mean we would be confident that we can build -- we can build our capabilities and have the inventory to be able to support rapid execution of these projects.

I guess the biggest limiting factor to Devin's previous question is that would be labor, skilled labor, with the advancements of technology now mean that's -- we can -- that helps in that regard. But I wouldn't know how quickly they will get executed. I'd be happy that we could support and accelerate the execution, and I'm very happy that the Canada is looking to its own destiny and looking to control its own destiny by getting some of these critical projects moving faster.

[Greg Palaschuk, executive]

It's encouraging to see the list that includes copper projects, gold projects, more LNG and to have that supported by government and more upstream oil and gas. I mean that's -- those are all helpful things for sure.

[Maxim Sytchev, analyst]

And I guess like none of these things are as part of your official outlook? Is that fair to say?

[Kevin Parkes, executive]

No, none of it would definitely not in backlog. And in terms of outlook, they would go a long way to supporting particularly the construction softness or improving activity in construction, but also some more encouragement and confidence in energy production too.

[Maxim Sytchev, analyst]

Right. Yes, fair enough. And then a quick question for Greg, if I may. In terms of thinking about sort of leverage, what do you think is the optimal level where you're comfortable being at. I mean, like is it -- does it make sense to come down even more or where you are is sort of the optimal level?

[Greg Palaschuk, executive]

Yes. I mean I think very consistent around this. I mean, full cycle, midcycle, 2x net debt-to-EBITDA, we're comfortable to run the business and supports our credit rating. We've been pleased to generate a lot of cash and have good capital allocation choices to make. Be down at 1.5x feels pretty good, and particularly in a market where we have some uncertainty.

So staying at that level feels pretty good. But we have the ability to go back up to 2 if we need to or see an opportunity, sure. But as we highlighted earlier, we still think we have a lot of ability to generate free cash and make some good positive choices. And as always, it will be a balance between returning capital to shareholders, managing the debt, investing in organic projects. So the good news is cash has been excellent, and we look to continue on that path.

[Operator]

This will conclude the question-and-answer session. I would like to turn the conference back over to Greg Palaschuk for any closing remarks.

[Greg Palaschuk, executive]

Yes. Thanks, operator. Thanks, everyone, for joining today's call. I appreciate your time, and I hope everyone has a safe day.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines, and have a pleasant day.