FINGF - Finning International Inc. (FINGF) Q1 2023 Earnings Call Transcript
2023-05-13 05:41:02 ET
Finning International Inc. (FINGF)
Q1 2023 Earnings Conference Call
May 09, 2023 10:00 AM ET
Company Participants
Greg Palaschuk - Executive Vice President and Chief Financial Officer
Kevin Parkes - President and Chief Executive Officer
Conference Call Participants
Cherilyn Radbourne - TD Cowen
Jacob Bout - CIBC
Yuri Lynk - Canaccord Genuity Corp
Michael Doumet - Scotiabank Global Banking and Markets
Sherif El-Sabbahy - Bank of America Merrill Lynch
Bryan Fast - Raymond James
Sabahat Khan - RBC Capital Markets
Maxim Sytchev - National Bank Financial, Inc.
Presentation
Operator
Thank you for standing by. This is the conference operator. Welcome to the Finning International First Quarter 2023 Investor Call and Webcast. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to Greg Palaschuk, Executive Vice President and Chief Financial Officer. Please go ahead.
Greg Palaschuk
Thank you, Operator. Good morning, everyone, and welcome to Finning's first quarter earnings call. Joining me today is Kevin Parkes, our President and CEO.
Following our remarks today, we'll open the line to questions. The call is being webcast on finning.com. We've also provided a set of slides that we'll reference during our prepared remarks. The slides are posted on the Investor Relations section of our website. An audio file of this call and the accompanying presentations will be archived on our website as well.
Before I turn it over to Kevin, I want to remind everyone that some of the statements provided during this call are forward-looking. Please refer to Slides 10 and 11 for important disclosures about forward-looking information as well as currency and specified financial measures, including non-GAAP financial measures.
Please note that the forward-looking information is subject to risks, uncertainties and other factors as discussed in our annual information form under Key Business Risks and 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.
Kevin, over to you.
Kevin Parkes
Thank you, Greg, and good morning, everyone. Our teams continue to execute well and delivered strong first quarter results. We achieved 27% growth in product support revenue, took actions to reduce our corporate overhead costs and continued to expand our operating margins to deliver earnings growth. We are pleased to see our adjusted return on invested capital now approaching 20%.
Over the last few months, we've been working with a broad group of leaders on the simplification and prioritization of our strategy. We are placing greater emphasis on the engagement and empowerment of our frontline teams and the regional execution of the company priorities.
As we reinvest into our business, we will be intentional in growing our addressable market opportunities. At this moment, we're calling this growth by design, a focus on more resilient segments of our business. Product support remains our primary focus, and we will continue to explore attractive opportunities in used equipment, rental and the electric power segments.
We also continued building full-cycle resilience into our operations by driving productivity improvements and making our cost base more flexible and variable. We are also very focused on optimizing our working capital levels, while ensuring we can support the long-term growth of the business. Our goal is to grow the business in a sustainable manner and deliver strong performance through all market conditions.
Please turn to Slide 3. As we look forward, we are excited about the momentum we are seeing in our operations. Our teams are focused, and activity levels and customer confidence remain strong. We continue to win significant opportunities in all market sectors and expand our equipment population, building our backlog.
Our backlog was up substantially from a year-ago and grew a further 6% from December 2022. Mining backlog is up significantly compared to a year-ago, and we continue to expect to add to our backlog in quarter two this year, including the full Artemis Gold order and additional orders on a framework agreement from South America.
While our construction backlog is below Q1 of last year due to HS2 deliveries, our order intake in construction was up 10% from quarter four 2022, driven by higher activity and order intake in Canada. Power system sector is showing great strength, with order intake more than doubled from last year and up 60% from quarter four 2022, more than offsetting the reduction in Construction backlog and demonstrating the diversity and resilience in our business.
We also see continued growth in demand for equipment rebuilds, and we have a growing book of rebuilds in our regions. All of our operations continue to hire technicians and build product support capabilities and capacity to capture market share growth in a disciplined manner. We've hired over 70 technicians in the first quarter, following the addition of 660 technicians last year.
We're also making targeted investments in our facilities to improve capacity and efficiencies to better serve our customers. For example, in British Columbia, we recently opened our single R, or response, branch in Campbell River and Kelowna. I had the great pleasure of attending the opening ceremony in Kelowna in the facility in April, and I was able to spend time with our employees and customers to reinforce our commitment to the Okanagan region.
Very soon we'll be complete and we'll be opening our new Kamloops RRR facility that will better help serve our customers with more workdays and more warehouse space. We expect to hire as many as 100 technicians to help meet increasing demand at this structure alone. Also, in Alberta, we're completing the expansion of our West Edmonton branch and productivity and capacity improvements at our OEM remanufacturing facility to address growing customer need.
And I just returned from Antofagasta last week, in Chile, where we reviewed plans to expand our capacity and capabilities in the region to support the encouraging outlook for increased copper production. We will remain diligent in our execution, optimizing our business to make it more resilient and ensure we have the right people and capabilities to continue capturing market share and improve outcomes for customers. We are optimistic about 2023 and expect continued momentum in our business to be underpinned by our record equipment backlog, the successful execution of our product support growth strategy, including rebuild activity, and we are also pleased with the double-digit growth in our rental and used businesses.
I look forward to seeing our investors in the coming weeks and provide you a more fulsome update on our strategic priorities at our Investor Day in September.
I'll now hand it back to Greg to provide greater level of insight into our first quarter results. Thank you, and over to you, Greg.
Greg Palaschuk
Thank you, Kevin. I'll talk about our first quarter performance in a little more detail, including our regional results. Turning to Slide 4, please. Q1 was another great quarter for us, and we're pleased with the results. Net revenue of $2.1 billion was up 23%, and EPS of $0.89 was up 51% from Q1 2022. We demonstrated continued strong execution of our product support growth strategy and delivered solid operating leverage in all regions.
Our consolidated equipment backlog increased from December 31, 2022, on strong order intake, up 15% from the first quarter of last year and 25% from last quarter. Equipment inventory is healthy. A substantial majority of our inventory is backed by committed customer orders. Product support activity levels remain strong. Our service work in progress, which includes internal service work in progress and unbilled receivables, was up 8% from December 31, 2022, and up 40% year-over-year. We also have significantly more and overall larger rebuilds booked today than we did this time last year.
Slide 5 shows changes in our net revenue by line of business compared to Q1 2022 and the composition of our equipment backlog by sector. New equipment sales were up 18%, led by strong mining deliveries in Canada. Product support revenue was up 27%, reflecting our expanded installed equipment base, year-over-year pass-through of higher supplier costs and execution of our product support growth strategy. Equipment order intake in the first quarter was higher across all regions and market sectors compared to last quarter, led by power systems. Our consolidated power systems backlog is strong and growing, accounting for 25% of our total backlog at the end of March. We expect to deliver substantial majority of our equipment backlog this year.
Turning to Slide 6 for details on our EBIT performance. Our gross profit was up 27%, and gross profit as a percentage of net revenue increased by 80 basis points from Q1 2022 on strong product support volumes. The 16% increase in SG&A reflected higher workforce and variable costs to support revenue growth as well as the impact of inflationary increases. As a percentage of net revenue, SG&A was down 120 basis points compared to Q1 2022.
As we continue to simplify our operating model and empower our regional teams, we took a number of actions in the quarter to adjust our organizational structure. These actions had no net impact on EPS. We streamlined our corporate overhead costs by reducing nonrevenue-generating full-time and contractor roles by over 400 people. This includes a 25% reduction in Vice President and above positions globally. As a result, we incurred $18 million, or $0.09 per share, of severance costs. We expect these fixed-cost reductions to help offset inflationary and variable cost increases, going forward.
We also wound up two foreign subsidiaries to consolidate activities to existing operations where we could optimize our resources. As a result, we reclassified a foreign currency translation gain of $41 million, or $0.21 per share. And finally, we recapitalized and repatriated $170 million of profits from South America, which resulted in withholding tax of $19 million, or $0.12 per share. Excluding these items, adjusted EBIT was up 54% from Q1 2022 on strong revenue growth and expanded operating margins.
Moving to our Canadian results and outlook, which are summarized on Slide 7. Net revenue increased by 30% from Q1 2022, with broad-based strength across all lines of business. New equipment sales were up 52%, driven by mining deliveries and stronger activity in the construction and power systems sectors. Product support revenue increased by 26%, led by mining, including increased rebuild activity. Canada continued to deliver solid operating leverage, with SG&A as a percentage of net revenue down from Q1 2022, and adjusted EBIT as a percentage of net revenue up 220 basis points to 11.3%.
Our outlook for Western Canada is positive, supported by healthy order activity and continued strong demand for product support across all sectors. Equipment backlog in Canada was up a further 6% from Q4, as activity levels and order intake from infrastructure and energy customers remained strong. Constructive commodity prices and improved capital budgets are driving investment in renewal of aging fleets and product support opportunities, including growth in demand for component remanufacturing and equipment rebuilds. We are working with our mining customers on rebuild programs and expect strong growth in mining rebuilds in 2023.
Turning to South America, on Slide 8. In functional currency, net revenue increased by 16% from Q1 2022, driven primarily by mining product support. New equipment sales were up 8% due to higher sales in large contractors, supporting mining operations and infrastructure construction in Chile. Product support revenue was up 19%, driven by an increased demand for component exchange, equipment overhaul and fleet maintenance in mining and higher volumes from new mining product support contracts in Chile.
Adjusted EBIT was up 17%. Adjusted EBIT as a percentage of net revenue was 11.5%, up slightly from Q1 2022. We have accelerated productivity initiatives in South America to offset inflationary cost increases, including a reduction in nonrevenue-generating managerial and administrative positions. In addition, we have reduced contractor positions and increased utilization of our shared service center in Uruguay.
Our outlook for Chile mining remains strong, supported by increase in copper demand and improved political clarity. We're encouraged that the Chilean government is in the final stages of a moderated mining royalty agreement. We're also pleased to see recent approvals for large-scale brownfield expansions that had previously been on hold. We're seeing growing customer confidence for reinvestment into existing fleets as well as brownfield and greenfield projects, which is translating into an increase in quoting and request for proposal activity. We also expect continued strong demand for mining product support and technology solutions.
About half of our construction business in Chile is related to the mining sector. We continue to see strong demand from large contractors supporting mining operations. We now expect infrastructure construction activity in Chile to remain stable compared to 2022 levels. We continue to win deals in power systems, where order activity remains strong. Our backlog in South America was up 7% from Q4 2022 and includes additional orders for large-scale data centers in Chile, one within the quarter.
Please turn to Slide 9 for our results in UK and Ireland. Net revenue was up 5% in functional currency, as growth in product support more than offset lower new equipment sales. New equipment sales decreased by 13% due to lower sales in construction, including lower HS2 deliveries compared to last year. Product support revenue was up 36%, driven primarily by increased activity in construction and the full quarter of contribution for Hydraquip, which we acquired in March of last year.
Adjusted EBIT as a percentage of net revenue increased by 70 basis points to 5.7%, reflecting a higher proportion of product support in the revenue mix and operating leverage. Order activity in the construction sector has been resilient to start the year, and demand for equipment remains stable. We expect demand for product support to remain strong, driven by high machine utilization across construction markets and growing contribution from Hydraquip.
In power systems, we have a solid backlog of projects for delivery in 2023. We have secured additional orders from data center customers in the first quarter, for delivery in 2024. We expect demand in our power systems business in the UK and Ireland, including the data center market, to remain robust.
We're also pleased to announce a 6% increase in our quarterly dividend, to $0.25 per share, which marks the 22nd consecutive year of dividend growth. We also renewed our NCIB program to repurchase up to 15 million shares. Under the current NCIB program, we were authorized to purchase up to 8 million shares, of which we purchased 7 million shares, or 4% of our public float. Our balance sheet remains healthy, with net debt to adjusted EBITDA at 1.7x at the end of March.
In summary, we're pleased with the strong start to the year and encouraged to see a further increase in our equipment backlog, service work in progress and book of rebuilds. We remain focused on disciplined execution of our product support growth strategy and improving full-cycle resilience of our business. Looking ahead, we expect continued momentum in our business and are optimistic about 2023.
Before I turn it over to the Q&A session, I'd like to remind everyone that we're hosting an Investor Day in Antofagasta, Chile, on September 26. The Investor Day presentations will also be webcast live. The investor tour of our mining operation starts on September 25, and a visit to a mine site is scheduled for September 27. We hope that you can join us for this event in-person. If you haven't received an invitation yet, please reach out to Ilona. Her contact information is on our website.
Operator, I'll now turn the call back to you for questions.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Cherilyn Radbourne, from TD Cowen. Please go ahead.
Cherilyn Radbourne
Thanks very much. Good morning. And congratulations on a strong start to the year. Kevin, I wanted to start with the headcount reduction. I was a little surprised that there were still 400 excess positions in the company. So I was hoping you could speak to the supporting analysis and just why you're comfortable that you're not cutting too deep with those redundancies?
Kevin Parkes
Yes, sure. Thank you for the question, Cherilyn. So I mean 400 employees, the first thing to say is half of that were contractors and that we had a lot of contractors in the business as we've been investing in systems and building new capabilities. And so we have very much a focus on optimizing our investments over the last number of years, which have been substantial and very helpful, but we need to optimize those investments now and pause on some of the build and development work. So many of those, more than half of those employees are contractors.
In total, that leaves 200, which is less than 1% of our workforce. And that 1%, those 200 people, would fall into a couple of categories. For sure, we're looking at how we simplify and decentralize and delayer our corporate overhead. And so there has been some work around that area. And then there has also been some work in all three regions to optimize the management layers and spans of controls. I think these are all good activities. You should always look for ways to optimize and find efficiency in your organization. They've been well received across the organization. But we don't see this as something that continues. This was an action under my new leadership to kind of reset the overhead and the management structure. And as we roll the strategy out now, we'll look to optimize that structure further to make sure we've got the right capabilities in the right places. And ultimately, we want to grow. So we see us potentially adding some of that headcount back in, but at the operating frontline level, in the revenue-generating level, rather than the administration or corporate overhead level. Hopefully, that helps.
Cherilyn Radbourne
That's great color. And then for my second question, I was hoping you could give us a sense of how the supply chain is functioning year-to-date and how that's influencing your planning, both for inventory and rental fleet additions.
Kevin Parkes
Yes, sure. So I would say supply chain continues to improve. It doesn't get any worse. There are still some – there are pockets that are close to being fully recovered. Excavators would be a good example of that. And there are pockets that are nowhere near back to pre-pandemic levels. So we continue to be agile and thoughtful about how we manage through that situation, applying all of our resources, whether it be rebuild or rentals, to satisfy the customer demand. And obviously, using our balance sheet to make sure we're carrying the appropriate levels of inventory to ensure that we can support our customers effectively and continue the growth in the business and the market share gains.
So I would say that we're optimistic for the remainder of the year around supply chain, but I would say that we're not yet back at normalized levels. And that's what you see in the elevated working capital levels. Things are just a bit slower to get through the system right now. But we're happy to do that in the spirit of winning additional market share.
Cherilyn Radbourne
Perfect. That’s all for me. Thank you.
Kevin Parkes
Thanks, Cherilyn.
Operator
The next question is from Jacob Bout, from CIBC. Please go ahead.
Jacob Bout
Good morning.
Kevin Parkes
Good morning, Jacob.
Jacob Bout
Another quarter of solid product support growth. Maybe you can comment on the sustainability of this growth and what the growth in installed base looks like in both Canada and South America?
Greg Palaschuk
Thanks, Jacob. I mean, we feel really good about the momentum. Of course, it's been a targeted effort in partnership with CAT to look to gain back share of the aftermarket. I think we've had success there. There's also been supplier cost pass-through, which year-over-year was fairly substantial. And so we feel good that we've got good momentum there. Our service work in progress is up. Our book of rebuilds is strong. And so we see good continued momentum there. And so a healthy chunk of it would be price, but another double digits would still be volume. And so we feel good about that, and there's good strong continued momentum. And so some of it is that momentum and continued strength in the market, and some of it is the actions we've taken to win back chunks of aftermarket share. So feel good about that overall.
Kevin Parkes
And Jason, I would point you towards my remarks earlier today. We're adding significant capacity to our product support base; so our new Kamloops facility, which was designed specifically to bring the work to where the people are. For those of you who don't know and are new to Canada still, Kamloops is a terrific place to live and work and for young families to raise a family. We've been very pleased with the ability to attract technicians to that region.
So that adds a significant number of bays, and we're enhancing capacity and component rebuild capacity for the smaller components that don't go through the OEM. But we've also been making considerable investments in OEM to increase the capacity. And like I said, last week I was in Antofagasta with Juan Pablo. And we're putting together a five-year plan to expand capabilities in the Antofagasta region to capture our optimistic view of the outlook for copper production. So it's not just what's going on right now. We're planning for the future and adding capacity because we're very confident in the outlook to retain that level of product support business.
Jacob Bout
Okay. And maybe just a secondary follow-up question here. Just how the booking of ancillary parts and service business associated with the new equipment sale has evolved over time. And typically, what does this look like in a recession? And what could be different this time, if we are heading into a recession here?
Greg Palaschuk
A question just around product support volumes? Maybe you could clarify the question, Jacob.
Kevin Parkes
What do you mean by ancillary parts? Sorry, Jacob.
Jacob Bout
The ancillary parts and service business. So if you sell a new piece of equipment, are you seeing more parts and service business associated with that new sale than you have historically? And then how does that change in a recession environment? Are your clients doing more work? Or have things changed, I guess?
Kevin Parkes
Yes. So I think I understand your question, Jacob, but we're happy to follow up. So I mean, if you think about the equipment we sell right now, more than 80% of that equipment, in some cases, 90%, is now going with a CVA. We're spending a lot of time thinking about this as we look forward. And we spoke to growth by design or more resilient growth.
Our CVAs are our subscription. They're our recurring revenue stream, and they're pretty sticky. Because to have a CVA, you're making a decision on who maintains that piece of equipment certainly for the first three years. But we've got a really strong focus on Years four to 10 now for the CVA. So you'll make your own decisions around your own workforce in terms of outsourcing that to Finning or to any dealer to do that.
So I would suggest that the long-term view is that the product support revenue around equipment population adds is stickier than it's ever been. And so we would be hopeful that that would continue as we move forward. And of course, if you did see any kind of softening in the market, which we're not right now, some of that capacity that would have been with our customers to kind of replace our capacity has gone away. And so we're not – we haven't seen it yet, but I would hope that it's a lot more resilient. And probably the U.K. is a good example of that model. Does that answer your question, Jacob?
Jacob Bout
Yes. That's very helpful. Thank you.
Kevin Parkes
Thank you.
Greg Palaschuk
Thank you.
Operator
The next question is from Yuri Lynk from Canaccord Genuity. Please go ahead.
Yuri Lynk
Good morning, guys. Kevin, you sound a little less cautious than you did last quarter, especially on the construction outlook. Apart from the obvious positives of the backlog and service [whip] and all that, I mean, what's kind of changed here in the last few months? And is that something that's been reflected in your conversations with your customers?
Kevin Parkes
Yes, sure. So I mean, three months is a long time, and I appreciate the question, Yuri. I acknowledge that we were a little conservative on the last call, but we were looking down a long runway against very tough comps, given the performance of the business in the second half of last year. As we worked through the last three months, conversations with customers, outlook, supply chain is improving. Chilean political situation and royalty discussion moving materially in the right direction. It's just made us feel better about the outlook.
I mean, the UK is – we're very fortunate in that we have a kind of UK, what's the word, canary in the mine, if you like. It gives an advanced view of what's going on in Europe. And certainly, the order intake for construction equipment, I would describe it as stable, not down, notwithstanding we had a record year last year. But what I'm particularly pleased with outside of the – so I would say we're more optimistic about a stable construction market in all territories. And Canada is – it keeps going from strength to strength.
But what I'm more particularly pleased with is the power systems growth in all three regions. We're leveraging the expertise in the UK, in Canada and in South America. And any kind of declines that we're seeing in the construction or any year-over-year declines in backlog are being more than offset by additions in power systems. And that power systems business is very secure. It's more resilient and obviously less prone to a recessionary impact. And we get product support business from that line of business as well. So I think more – construction businesses, I would describe them as stable versus uncertain, but the rest of the business is getting better as well. So that makes us feel more optimistic about the whole.
Yuri Lynk
Got it. That makes sense. Last quick one for me. Can you quantify the cost savings associated with the actions taken in the quarter?
Greg Palaschuk
Yes, sure, Yuri. So a lot of these are administrative and fairly senior positions. So it's a little longer payback than maybe an average restructuring. So it's more kind of nine months payback. So at the cost level that we outlaid, we think that it should be within nine months kind of fully paid back and then sustained from there.
Yuri Lynk
Okay. Thanks, guys.
Operator
The next question is from Michael Doumet from Scotiabank. Please go ahead.
Michael Doumet
Hey. Good morning, guys. The first question I have is really trying to focus in on the cost structure of the business that you guys are talking as being more variable, flexible. So I'm just wondering if you can give us a sense of how SG&A breaks down variable versus fixed today, versus how it has historically and just how we should think about, call it, the incrementals and decrementals as just, I guess, going forward as you manage the business and manage growth.
Greg Palaschuk
I mean, it would probably change a little bit by market condition, Michael. But if you look at the strong operating leverage we've had really for the last two and half years, you can kind of see quarter-by-quarter and pretty clearly in the bar charts we've had some pretty solid gains on the GP side that gets offset, about one-third, by SG&A.
And so we do see continued momentum. And so we think despite some of the inflationary increases, we're working on productivity. So we'd like to continue that type of operating leverage. And it would depend on the shape and the pace of any slowdown, but you'd see kind of the opposite the other way. Of course, we'd take additional actions to offset more. So those are the rough operating leverage that we see and expect.
Kevin Parkes
I would add, we're just changing the mindset here. So we're trying to make sure that we've got more of our revenue contracted or visible than our cost base. And so a good example of that would be when we're entering major contract discussions now for procuring goods and services, we want the very best commercial terms and service levels from that supplier. But more importantly, now we want flexibility in the contract such that we can withstand highs and lows in our business levels without being penalized for higher prices or poorer service. So building flexibility into everything we do is becoming a mindset shift at Finning.
Michael Doumet
That makes a ton of sense. Thank, guys. And then maybe just a simplistic question, I guess, since I look at Q2. If I look at the years where you've had, “normal seasonality”, EBITDA has grown about 10% to 20% from Q1 into Q2. Obviously, a strong start to the year, but I was wondering if there was anything that we should consider that might negate what typical seasonality has been to the business.
Greg Palaschuk
No, I think you've seen from our working capital injection in Q1, that would be kind of a normal-type level. So we're seeing fairly normal seasonality. You can see the backlog build, spring selling and delivery season. So we see continued strong momentum. Of course, there's inflation year-over-year, but we're working to offset that. But otherwise, we see it as a kind of typical seasonality.
Michael Doumet
All right. Thank you.
Kevin Parkes
Thank you.
Greg Palaschuk
Thanks, Michael.
Operator
The next question is from Sherif El-Sabbahy from Bank of America. Please go ahead.
Sherif El-Sabbahy
Hi. Good morning.
Kevin Parkes
Hi, Sherif.
Sherif El-Sabbahy
Just to start off – the order intake and how that's trending into 2024 and maybe what the indicators of those orders look like into next year?
Kevin Parkes
Yes, sure. So we're really pleased with our order intake in Q1. So quarter-over-quarter, it was up 25%. Now there's seasonality, as Greg just mentioned, in our order intake in Q1, but we're particularly pleased. I mean, I've highlighted this a number of times now, power systems order intake was up over 60%, and that was quite well spread across the three regions. And that's a good indication, Sherif. That power systems revenue and order backlog is now stretching into 2024. So it would be – that's why we're really excited about the diversification that [indiscernible] brings. It's resilient. But also it gives us a long runway and more visibility into our revenue. So for sure, we'll be confident of that moving, taking us into the 2024 period.
Same with mining, really. In all reality, mining order intake, which was up 10% quarter-over-quarter but, like, 84% year-over-year, we continue to see the backlog build in mining. And for sure, those deliveries are stretching into 2024 now. So I mentioned in my remarks we expect to add a couple of significant opportunities to the backlog in Q2, and they won't be delivered until well into 2024.
Construction is more agile. Like I said, we're optimistic and encouraged by the stability we're seeing in the construction businesses. Potentially, as Greg mentioned in his remarks, we've seen particular strength in mining contracts, and this has been enabling works and mobilization for increased mining activity. So not only is it a good sign for our construction business, it's also a good sign that people are mobilizing in South America for increased opportunities in production. But construction activity is more agile.
What we do have – I mentioned supply chain. We do have certain models that are now for delivery in 2024. And so I would say that some of our business is stretching well into 2024. We still expect around 80% of this backlog to be delivered this year. But any [indiscernible] we see, which we're confident of seeing in Q2, that will start to stretch into 2024 then.
Sherif El-Sabbahy
Understood. And then you mentioned the scale of quoting RFP requests is up significantly. Can you frame the scale of that in dollar terms or versus prior years what it looks like?
Greg Palaschuk
I think I'd just classify it as good momentum, but also just looking a little further out as people start to get clarity around what the mining royalty structure would look like, start to get quotes for one or years further ahead. But it's just a good indicator that they're starting to wrap their heads around starting to commercialize, starting to budget and plan for expansion. So it's a solid pickup despite the increased activity from last year, but just an encouraging trend, but also tone.
Kevin Parkes
And I would say – I've answered this question a few times about the outlook for commodities in a super cycle. And I would say that we don't – we're not planning for, we don't expect, and we're hopeful not to see a super cycle. We really would like to see this be a sustained and well thought through expansion of activities. I think people, resources, government and investor license means that there are some things that mean you're holding on to the reins a little bit with this commodity cycle. But I think that works really well for us, and it helps us to build the business sustainably and support our customers more effectively. So I think it's a longer-term view.
Sherif El-Sabbahy
Got it. Thank you so much.
Kevin Parkes
Thanks, Sherif.
Operator
The next question is from Bryan Fast from Raymond James. Please go ahead.
Bryan Fast
Yes. Good morning.
Kevin Parkes
Good morning, Bryan.
Bryan Fast
The last few years, I mean, likely disrupted the average age of equipment in the field. Could you discuss maybe the age of fleet from your point? And are you still seeing an extended age of fleet? And does that really differ between regions?
Kevin Parkes
So, yes the average age is 11, 12 years in Canada; nine, 10 in South America. And for sure, equipment is being extended out. A number of reason is there's uncertainty in the outlook in Chile. And I think there's a lack of capital to invest. I mean, a lot of our customers have healthy balance sheets, but are being very thoughtful about their capital and how they get more out of their current investments. And so rebuilding equipment, the economics around rebuilding equipment, it continues to improve and catches the attention of our customers, and we continue to see that business grow and people more opt into that way of increasing their fleet production and their fleet capacity. We see in Chile, to a lesser extent, are seeing more incremental adds in Chile, but it does happen in Chile, and it is growing in Chile, but not to the same extent that it does in Canada.
But equally, you can see in our – I don't want to leave the impression that miners are not investing in new equipment. You can see in our backlog there's $2.7 billion in the backlog, and around 40% of that is mining. That's primarily mining trucks. There's some ancillary equipment, but it's primarily mining trucks. So that's the most mining trucks we'll have delivered into our two territories probably for nearly 10 years. So it's not a huge opportunity. Obviously, we've talked about the BHP’s opportunity, but there's lots and lots of incremental adds going on in the industry, combined with effective rebuilds as well. So all these incremental adds that go into the mining territory, we're not seeing the older assets come out. They're being reworked and rebuilt and staying in territory, which is fantastic for our business model.
Bryan Fast
Okay. Thanks. And that might answer part of the next question here, but you mentioned gaining your portion of market share on the product support side. Maybe could you discuss how that differs regionally and maybe where there is opportunity for further improvements?
Kevin Parkes
Sorry, Brian. Did you say how we view market share in product support in the different regions? I didn't quite get the question.
Bryan Fast
Yes.
Kevin Parkes
Okay. So I mean, broadly, we don't state this, but I mean, broadly, our market share for the aftermarket opportunity in mining is considerably higher than it is in construction, but construction is the biggest area of opportunity and growth. So a lot of the growth that you're seeing in our product support growth is coming from the construction sector, where we've got the biggest runway or what we call lost opportunity.
And then power system is a mix really. So on the oil and gas side, it would be up there with mining in terms of, I'll call it, dominant market share opportunity in the aftermarket in oil and gas, for example, in the power systems segment. And then in the electric power generation segment, it would be very high as well, but obviously less product support that depend on whether it's [indiscernible] or prime power. If it's prime power, it's up there with mining and oil and gas. If it's just standby power, then the product support opportunity is less. But we reflect that in the way that we sell the prime product. We do the comparison between what's the aftermarket opportunity when we're making those proposals.
So I would say we think that the runway is the longest and best in construction and particularly as you come down the product size and customer range. So we've got an absolute focus now on what we call the more retail segments, which is customers that own less than 20 machines, and that's where the team are doubling down to make sure we sustain this level of product support growth in construction that you've seen over the last two or three years.
Bryan Fast
Okay. That’s great color. That’s it for me. Thanks.
Kevin Parkes
Thanks, Brian.
Operator
The next question is from Sabahat Khan, from RBC Capital Markets. Please go ahead.
Sabahat Khan
Great. Thanks and good morning. You provided a bunch of color on kind of the mining outlook. And I'm just curious, if you kind of look closer at that market, the demand that you're seeing, the fact that it's sustained even with the macro backdrop where it is, is it just your customers are investing for that long demand outlook or the long demand visibility for copper? Is it the political situation settling a little bit? And are they taking a long-term view? Or what is sort of their decision-making criteria at this point, given all the moving pieces?
Kevin Parkes
Thanks, Sabahat. I mean, in all reality, when we look at our mining outlook and our conversations with our customers, there's very, almost no macro discussion in those discussions. I mean, the miners, the commodity price is strong, the demand outlook is good. And so we're not – it's kind of thoughtful incremental production rises. I've spoken to lots of customers. And you can see there the public company's results. Nobody's talking about managing through a macro situation in the commodity sector right now, which we've spoken to for the last couple of calls here on providing Finning with some shelter that other companies may not have. So I wouldn't say they're investing beyond the macro. I would say that they're not necessarily seeing the effects of that macro. And the strong commodity price and the healthy balance sheets means that they're very focused on productivity and output right now.
Sabahat Khan
Great. And then just kind of looking in terms of your capital allocation strategy at this point. Obviously, I think you doubled the size of the NCIB relative to before. Kind of maybe just walk us through how you're thinking about capital allocation at this point? Thanks.
Greg Palaschuk
Thanks, Sabahat. So we're happy to increase the dividend again on a steady basis this year. So 22 years in a row. And so we feel good about that, and we'll continue to make that an area of focus. We are focused on generating cash at this point. Seasonally in Q1, you'll consume a bit of cash, and then we go through selling season here and pivot to positive. And so we'll have to see how the full shape of the year goes, but there's – we expect to have considerable cash to allocate. And as we highlighted last quarter, we will prioritize reducing leverage through the fullness of the year, but we expect to have additional capital to deploy, and we think the NCIB is a good way to do that. And so that will be an area of focus, but always share price-dependent.
Sabahat Khan
And then just one last quick one. This is just a hypothesis. But if you think about the tight supply environment and the way it's impacting the dealers, and you talked about your market share in the aftermarket repair business, does this tight supply environment favor dealers such as yourself that might be better able to secure CAT parts and maybe get more of the aftermarket business, and that's something that could be maybe a sustainable benefit here? Do you find that it's something that will continue to help? Or is that not a factor here at this point?
Greg Palaschuk
I think we've had a good – supply chain has been challenging for the last 18 months. We've definitely made sure we had enough resources around us to smooth that out. On a relative basis, I think we've performed well. I think customers who have found alternatives over the years, the supply chains might not have held up as well through that period. So we feel good that we provide good service levels despite the challenges, and I think we've won some loyalties through that period. And so we feel good about that. And we think some of that will be sticky over the long term as people appreciate the kind of full-cycle capabilities we bring.
Sabahat Khan
Great. Thanks so much.
Kevin Parkes
Thanks, Sabahat.
Operator
[Operator Instructions] The next question is from Maxim Sytchev from National Bank Financial. Please go ahead.
Maxim Sytchev
Hi. Good morning, gentlemen.
Kevin Parkes
Hey, Max.
Maxim Sytchev
I think in the beginning of the call you were talking about capacity expansion and specifically in LatAm. I was wondering if you don't mind maybe quantifying sort of the envelope of spending, firstly? And then secondly, what does it mean in terms of both, I guess, absolute revenue generation, but perhaps your ability to maybe debottleneck and do more product support in that geography? Just maybe any thoughts on the subject? Thanks.
Kevin Parkes
Yes, sure. So some of this is what we want to share at our Investor Day, and that's why we're encouraging investors to come spend some time with us so we can – we're very proud of our capabilities, our capacity and our people in the region. And I think seeing that firsthand is the best way of understanding the level of investment and professionalism we have in the region. In terms of the level of investment required to achieve the kind of expansion that I spoke to, actually, we have some opportunities – like in Southern Canada, Greg and I have put together, with the team here, we put together a long-term network strategy in Canada. And Kamloops, Kelowna, Campbell River, we've opened five branches in the last two years, and we had some opportunities because [indiscernible] of our long lease arrangement.
So we put together a very broad plan. And there's some ins and outs in that. We have some capital inflows and some capital outflows, but we're very happy with how that works, and it's really coming to its conclusion now. And I think you're seeing that in the product support growth that you're seeing in Canada. It's enabled us to capture way more product support.
The same applies in South America. So we've got some facilities that are less used and some opportunities to find efficiencies in some areas of South America and then reinvest that money back into the Antofagasta region, which is ultimately the big engine room of the South America or Chilean operations. We've also made some investments in Mendoza, in northern Argentina, to capture opportunities that are [indiscernible] in that area.
So it's not at the expense of [indiscernible] branching. It really is realigning our network to support the market that we see today. I mean, the team in Chile have a great program they're working on called future-proof and competitive today. And that's part of this work, to make sure that we've got the right facilities we need today, but we're investing in the facilities for the future.
In terms of quantifying the kind of product support that will give us in South America, we're hopeful to see competitive growth year-after-year, and we've already made commitments at our past Investor Day of high-single-digit product support growth, moving forward. And our view and our outlook of that hasn't changed. And so the network and the investments are to support that level of growth to the next level.
Maxim Sytchev
Yes, 100%. And then actually, maybe if you don't mind, if we stay in the same geography, some discussions around more government involvement on the lithium side of things. Just curious what are you thinking in terms of potential opportunity in this market, whether that's more positive or more negative from your perspective, given all these discussion points?
Kevin Parkes
Yes. So it's early days, Maxim. This is pretty fresh news. So the first thing I would say is lithium is a net incremental business for us, right? So that's a good thing. The general sentiment when I was down there last week with the team, and we met with a couple of customers as well in this area, is that government support or government involvement in the expansion of the lithium opportunity in Chile is actually a net positive, because it means that the projects will get the go-ahead and they'll get the investment, and they want to be part of the lithium future in Chile and they see that as a big value driver for them. So I think a lot of people say, well, government involvement in industry is not ideal. But they kind of have experience with Codelco. And so the general sentiment I got last week was, well, at least these projects will get going and we'll participate more. So hopefully, that helps give you a bit of color from last week.
Maxim Sytchev
Okay. That's super helpful. Thank you. And maybe just one last one for Greg, if it's possible, in terms of how we should be thinking about non-cash working capital as the year progresses. And maybe can you provide a bit of a range or some thoughts on that front?
Greg Palaschuk
Sure. I mean, it will be dependent on some of the backlog built. We do have quite a few quotes outstanding that could straddle year-end. But overall, obviously, we've been quite profitable for the last two years and cash has been a net investment. At some point, these growth rates will slow a little bit and the cash flow will come through. So we do think we'll – this is more typical seasonality, as I talked about earlier. So we did inject capital in Q1. That will pivot sometime in Q3 or middle of the year to positive, and we expect to be fairly strongly free cash flow positive in the back half of the year, and that will give us some good positive choices to make on capital allocation.
Maxim Sytchev
Okay. That’s great.
Greg Palaschuk
But as we've said before, we think we convert 50% of EBITDA over a full cycle. Obviously, we're continuing to see some pretty solid growth. But in the fullness of time, we expect to deliver that cash.
Maxim Sytchev
Okay. That’s great. Thanks.
Kevin Parkes
Thanks, Max.
Operator
This concludes the question-and-answer session. I would like to turn the conference back over to Greg Palaschuk for any closing remarks.
Greg Palaschuk
Great. Thank you. This concludes our call today. Thanks for your participation, and have a safe day.
Kevin Parkes
Thank you.
Operator
This concludes today's call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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Finning International Inc. (FINGF) Q1 2023 Earnings Call Transcript