Mauk Breukels – Vice President-Investor Relations
L. Scott Thomson – President and Chief Executive Officer
Juan Carlos Villegas – President-Finning Canada and Chief Operating Officer
Dave S. Smith – Executive Vice President and Chief Financial Officer
Cherilyn Radbourne – TD Securities
Finning International Inc. (OTCPK:FINGF) 2013 Investor Meeting Conference Call December 17, 2013 9:30 AM ET
Good morning everyone. My name is Mauk Breukels and I’m the Vice President of Investor Relations for Finning. I would like to welcome you all to join us for this investor meeting today.
Before we start the meeting, I would like to remind everyone that some of the statements provided during this meeting and the information on the slides is forward-looking. This forward-looking information is subject to risks and uncertainties as discussed in the Company’s Annual Information Form under Key Business Risks. Please treat this information with caution, as Finning’s actual results could differ materially from current expectations. Finning does not accept any obligation to update this information.
Today, Finning’s management is represented by Scott Thomson, our CEO and President; Juan Carlos Villegas, President of Finning Canada and COO; and Dave Smith, Executive Vice President and CFO.
Here is a look at the agenda for this morning, we will have some discussions by our management team, we’ll have a coffee break in between and then we’ll have some more presentations and a Q&A. We ask that you hold your questions for the Q&A sessions and we invite you to join us for lunch afterwards in the room behind the entrance.
For those of you who are listening on the webcast, the video of the investor meeting presentations and accompanying slides are available as part of the webcast on the Investor Relations section of finning.com. The video file of this meeting along with the slides will be archived on our website immediately following the event. All presentations are now posted in PDF in the investor relations section of finning.com.
Scott, over to you.
L. Scott Thomson
Thanks Mauk and thank you all for coming today. We’re trying a little bit of a new format and we see the executive team upfront. As some of you know Dave has a bad back, so if he gets up as I’m speaking and starts walking around, making awkward faces is not because he is misaligned with what I’m saying, he is actually trying to stretch.
But seriously we are going to take a little bit of a different format today. I think historically you’ve seen a pretty granular detailed description of all the regions, people in this room know Finning, I don’t think we need to do that. What I want to do today is give you a sense of what the operational priorities are for our firm and by the way they’re consistent across all of our regions.
We’re going to use examples from our regions to show you and give you confidence that we’re making progress, give you confidence that there is a plan in place and highlight the opportunity for you. I’ve been in my role for six months; today I’m going to give you an impression of where we are starting from and what my vision is for the next three years. We’re not going to talk about revenue targets, we’re going to talk about what we control, we’re going to talk about costs and capital efficiency.
But I don’t want you walking out of this room and say Finning management reading research reports and say Finning management thinks that revenue isn’t going to grow for the next three years. That’s not what I’m focused on, what I want the impression to be left is even in a flat revenue environment we will grow earnings and we will do it in a capital efficient fashion.
So today, I’ll start by giving you an overview of the reasons why I’m confident we will drive shareholder value over the next three years, and an overview of what the general objective is which is driving return on invested capital. Juan Carlos will then come up and talk about the operational priorities and it will become apparent to you that those operational priorities are directly linked to the levers of improving return on invested capital. And then Dave will summarize with the financial overview, we’ll then leave lots of time for question and answers and we will be available at the back to through the lunch period if you have any other further questions or observations.
So let’s start. Why are we going to drive shareholder value over the next three years? Starts is always starts with the people, passionate and committed employees, passionate about the brand, passionate about Finning, passionate about the brand, passionate about Finning, passionate about Caterpillar, and passionate about the customer. This is a great foundation upon, which to build; there has been lots of discussions around the culture of Finning. The culture of Finning is fine, we need to evolve it; we need to increase the urgency with which we approach things. We need to put a sharper focus on performance, but the culture we have is a great culture upon which to build.
Best products, best territories and we’ll come back to that, we couldn’t be aligned with a better partner in Caterpillar and we couldn’t have better territories in our network. Compelling business model, the product support business is sustainable growth, lots of new equipment deliveries in the last five years or six years and aging fleets in territories that product support business will continue to grow going forward. Low capital intensity of the overall business means this company can and will be free cash flow positive through the cycle.
And then importantly and most importantly for you, there is a significant opportunity. There is a significant opportunity to increased profitability pull through and that’s my word for growing earnings at a faster rate than revenues and there is a significant opportunity around capital efficiency. we’ve been accused of not being great stewards of capital deployment. And what I can tell you is that historic investment is behind us, we now have the opportunity to capitalize and optimize on that investment and we will exert much more capital discipline going forward.
And lastly, on the working capital side, there is a significant opportunity to improve our working capital management and we’ll see that through my part of the presentation and through Juan Carlos and then summarized by Dave as well. What have we done in the last six months the yellow boxes represent either new people or new positions, CIO I’m a big believer the technology is going to be a competitive differentiator for our customers and for Finning going forward. So ensuring we have the right focus internally on that technology roadmap is crucial. Dave Cummings has been at the firm for six months lots of experience in this regard from outside the industry.
In the process of hiring a new head of HR, which reflects my fundamental belief that talent is a critical component to all of this. Juan Carlos our most experienced operator, now has his hands directly on the wheel of the Canadian operations. So the operational priorities we will talk about today, Juan Carlos has the ability to implement those. Marcello, Neil, Dave continuity in the management team been with Finning for quite a long time, Dave five years, Marcello 15 years, Neil 16 years, but what we’ve done is flatten the organization. So Marcello and Neil now report directly to me.
And we’ve created a new position focused on the customer and focused on safety. I think we continually have to come back to we are here for the customer, increasing customer loyalty will drive the outcome of improving return on capital. A few words on culture and safety, Finning is on a journey, we are making great progress on the safety front, if you look at the right hand side of this chart, this is our TRIF results come down significantly over the last few years, we are now at a one-times TRIF. That’s not the end our three year objective for TRIF is 0.6.
As I said, if you look at where we started from, we are making great progress but safety is a foundational issue that we need to get right. On the left hand side, employee engagement, I was extremely pleased when I saw the employee opinion scores last month. 2013 relative to 2012 across almost every dimension and in every region was up. I found that really encouraging and when you look relative to other Cat dealers, we actually place pretty well.
Alignment with Caterpillar, broadest product line, best heavy equipment, significant amount of innovation drives new products and a great alignment between Finning and Caterpillar. And I would say personally it’s been really helpful for me as I’ve transitioned into this new role to have the support of Caterpillar. And I can assure you as investors that this strategy that were placing out here today and these operational priorities that we’re putting on the board have the direct support of Caterpillar.
Most desirable territories, if you had to pick your territories, BC, Alberta, Chile, recovering economy in the U.K., I’m not sure you could pick better territories and another important aspect of this chart which I don’t want to go unnoticed, 50% of the revenue is in Canada. So when we’re talking about operational improvements today, and Juan Carlos will be here up talking about them and when we’re using examples, a lot of the examples we’re using are Canadian examples, because if we can move the dial in Canada that will create a lot of value for all of us.
It’s not all about mining, 66% of our new equipment sales are non-mining. Construction new equipment sales 32% relative to 27% in 2008 and as I look forward the power systems, slice of that pie on the right hand side, I’m convinced is going to become even a bigger component and the business model, product support, 48% in 2013 of overall revenues. In 2014 it will be close to 50% that’s up from 32% in 2008, product support growing at a compound annual growth rate of 11% since 2003 there is no reason to believe that that won’t continue into the future given as I said, the aging fleet, the amount of new equipment we’ve put into our territories over the last five years and the amount of activity that we see.
It’s a virtuous circle and it’s a great aspect of this business model that I know you’ve talked about a lot in the past. So here is our thesis, improving return on invested capital drives shareholder returns, you can see on the left hand side the correlation, on the right hand side you can see the companies over a three year period that we’re in the first or second quartile on the change, the improvement in return on invested capital had outsized returns for their shareholders.
We as a company have been very focused on revenue growth, on EPS growth, on EBIT margin, we haven’t been as focused on capital efficiency, and as a result the profitability improvements that we’ve had have been offset by a decline in our capital efficiency and over a three year period, our return on invested capital has essentially been flat at around 15.5% and our returns to shareholders reflect that.
So what is return on invested capital and where we are starting from? Return on invested capital is essentially EBIT margin, so profitability, multiplied by invested capital turnover, sales over invested capital. So in the numerator profitability, in the denominator capital efficiency. We're starting today last 12 months as of September 15.8%, that's been the same number for the last three years. Is there a performance gap? There is, there is a performance gap on EBIT margin. There is a performance gap on invested capital turnover.
We will address these two issues, what I find interesting is that look at the revenue side, from a revenue perspective, we've grown revenue at a 5% compound annual growth rate between 2006, and 2012. This reflects the attractiveness of our territories, and we do better than peers on the revenue growth side.
Revenue growth, market opportunity that’s not the issue, the issue is executing against that in an efficient fashion, and execute in that in a capital effective fashion. If you peel the onion, one more layer, and look at our return on invested capital, for the consolidated company and also the regional and each region there is a couple of interesting notes that come out of this, and Dave will talk about this more in his presentation.
On the left-hand side, margin we've actually increased modestly, relative to the seven year average. So the grey bars are the seven year average, the yellow bars are the LTM performance. And that has been driven primarily by an increase in margin in Canada from 7% to 8%. Where we’ve seen a significant erosion has been in capital efficiency, and this is a seven year versus LTM, if you go back to a three year versus LTM, you see the same dynamics.
A significant decline in capital efficiency, in both South America and Canada. So what has driven that increase in invested capital, Bucyrus acquisition, mining investment in FINSA, South America. Mining investment in the oil sands, most recently Fort McCoy, an erosion in our working capital performance, working capital to sales over the last three year period has increased from 22% to 23% to 28%.
There is great news in this chart, the great news in this chart is that historic investment is behind us, we now have the opportunity to capitalize on the Bucyrus investment, we've done that well in Canada, there is lots of room for improvement in South America. And as it relates to historic capital investment, we have the opportunity to both capitalize and optimize on that spend, even if revenue growth was dramatically beyond our expectations, we have the capacity, in both Chile, and Canada to take on that new capacity, that new demand.
The other piece of good news, if you look at the U.K. and Ireland and I'm told three or four years ago, if we were in a conversation like this, we’d be talking about the U.K. and Ireland, we talk those would be the all the questions that I’d be facing. U.K. and Ireland modest EBIT improvement, margin improvement, significant improvement on invested capital turnover.
Significant improvement on return on invested capital, so there is a roadmap for us here, I think I have probably met with all of you, in the last six months, almost all of you. As I did the shareholder meetings in Montreal and Toronto, and we've talked about five priorities, five priorities being talent, market leadership, customer excellence, supply chain, and asset utilization.
Safety and talent are the foundation and we'll get that right in order to execute on the operational priorities and build a sustainable shareholder value creating vehicle overtime.
The other priorities, the other four operating priorities, which Juan Carlos will talk to, are directly linked to the drivers of improving return on invested capital. Market leadership, growth in the non-mining sector of our business and when I say growth, I mean growth in a non-growing industry. So improvements in market share without seeing the industry growth will improve EBIT.
service excellence will improve customer loyalty and improve profitability. supply chain improvements will increase customer loyalty and reduce invested capital. Asset utilization and capital discipline will move that invested capital piece down, all driving return on invested capital. What’s important to recognize is that return on invested capital is just an outcome. You need to get the inputs right and we’ve talked about the priorities, but it’s also helpful for you to hear from me what my key performance indicators are, what my KPIs are when I engage with my management team and my board.
If we can get these inputs rights, we will accomplish what we want to do on the operational priorities, but we’ll also drive return on invested capital up. So the metrics that I’m focused on safety, employee development, market share customer loyalty, parts growth, supply chain, service profitability and costs. That’s one aspect of this.
The other aspect is we’ve now linked the incentive plan to what we’re talking about today. On the short-term plan, we’ve added or we will add for 2014, invested capital turnover so capital efficiency and customer loyalty. So now in your short-term incentive plan for this room for that executive team and throughout the organization were compensated on the two drivers of return on capital, EBIT margin in the numerator, invested capital turnover in the denominator.
When we roll this out through the firm, it won’t be in the context of return on invested capital, that’s not meaningful to the Branch Manager, that’s not meaningful to the guy turning the wrench. What we’ll – how we’ll translate for everyone, costs, inventory, cash flow – free cash flow and CapEx. On the long-term plan, we’ve moved away from ROE. The long-term is now 50% options and 50% PSUs. The PSUs will be split between TSR and return on invested capital.
So in summary, we’ve established the overall objective, which is improving return on invested capital overtime. We’ve aligned internally around the priorities that will get us there. We’ve established the KPIs with the inputs that will drive that outcome and we’ve connected our incentive scheme to the overall objective.
Before I hand to Juan Carlos to talk about the operational priorities, one quick moment on safety and talent, I’m a big believer that these things have to be right in order to get where we want to get to and we’re making great progress on safety as I said; TRIF rate significantly over the last three years. But we’re on a journey; we need to do better and we have some aggressive targets to get better over the next three years. Andy Fraser is going to coordinate safety across the regions. I think this is an important point, because there is learnings we can apply, best practices we can apply across our regions.
And on the talent side, two areas of focus, developing our own people, developing our own people so they have the capabilities to execute on this plan and putting the right people in the right places. And we are already in progress on the right people in the right places. You will see over the last year, we’ve strengthened the Canadian team by taking the best across the organization, a new customer solutions and marketing head, a new supply chain head, a new HR head and as of today, a creation of a new position, service excellence reflecting the importance of the service agenda that Juan Carlos is going to talk about.
In South America added expertise, outside expertise on the supply chain, and HR specialized skills that we needed to add to our company. So this process of talent development, developing our own people and right people in the right places will continue. So with that I will pass it to Juan Carlos and I will come back at the end and summarize and cover one or two other issues.
Juan Carlos Villegas
Thank you, Scott. It’s a pleasure to be here again, I don’t remember exactly five or six time I’ve been here, maybe seven. Well but this is the first time that I’m going to be speaking in-depth about Canada. So priorities, what are we doing, what have we done? Scott already talked about safety and talent management. So I’m going to focus and talk about the operational initiatives we have.
Those of you that would have been here last year, you would remember that we talked about our operational excellence agenda. How that we wanted to move to a new view on how we run the company, not only in Canada, but everywhere and we start talking to you about what the operational agenda meant. It meant to focus on supply chain, it meant to focus on service excellence, it meant to focus on customer solution are you okay, all right. Okay focus on customer solution and really get in the field getting things done with a long-term view that’s what we are going to talk about today.
Let me start with supply chain. Supply chain to me is a fundamental area of improvement that the company needs to have. And there is a thought that I have said here a number of times, but very strict with me when were talking and one of you came to us to present many years ago to the management team, about being – what being a great dealer meant and being a great dealer meant to have a supply chain that can compete with the best distributors in the world.
And that is strict to me, as we really are not a supply chain world-class company. And we really need to become one. We need to be the Walmart of equipment deliveries, and everything needs to be flowed really, really well. Why? Because it is a competitive advantage that we can have is being a world-class distributor is a being a world-class supply chain company.
An efficient supply chain company will drive customer loyalty; the number one impact on a customer for their loyalty is parts supply. If we supply parts on time, collegially fast velocity, we turn enough inventory it help us to reduce invested capital. It will reduce cost, because we have a large footprint in supply chain today, especially in Canada, I’m going to be very specific about that, we are going to talk about that. The fast supply chain with the right velocity improves cash generation as we would have seen in 2013. Where are our prime opportunities? Canada no question about it and also in South America, but mainly in the newly created drills and shovels business.
Some of you will still call it Bucyrus, We can call it Bucyrus. So we will talk about drills and shovels. So what this means is that in 2011, we had three time turns, last 12 months 2.4 turns, what is our target now. As an inventory consolidated number is to improve our turns in three years between 0.5 and 0.9 times, you’ll see it there. 0.1 turns mean $15 million inventory reduction, or increase it depends how we manage, right. So very interesting opportunity over here.
Let me talk to you, how are we doing. When we start looking at a supply chain project for Canada, three things stand out at areas that we really need to be focused on and that we need to improve, each one of them have benefits. Network this is a footprint, this is a number of branches and warehouse that we have around the Canadian territory; we have today for the Canadian territory five distribution centers. We have 41 branches and we have more than 60 drop points, places where we send parts for our people to take them up and get them to the customers. Thus this tremendously extends a footprint that can be optimized.
You will see as an example that we are going to talk next, how that can be a streamline, how those transfer points can be decreased and still improve our service to customers. We are going to talk about that as well. Transportation about $100 million worth of transportation cost per year for Finning Canada. More than 400 carriers today in operation in the Canadian territory, two big opportunities. How would we improve our cost, in transportation cost, how do we reduce the number of carriers to become more efficient and service the customer better, so we can really optimize our goods and deliveries.
Inventory management; in Canada because many reason long history, we have really delegated the inventory management to our branch management. So that means that the branch management in front of the customers need in parts Q1 into that as many of us as possible, it did have the expertise of a supply chain expert or nor the minimum amass that should we manage on inventory. That has grown up to about 40% of our inventory in Canada on slow moving parts, right.
So what did we do reaction to that? Centralize inventory management, move Chris and Chavez from challenge from in site experience supply chain with good expertise in management inventory in a remote area like the four countries in South America, brought it to Canada that was around March of this year and began the transformation for our supply chain strategy inside Canada and we will see the progress.
So from now this year 2013, the inventory function is centralized in Canada. So we manage as a central office, we brought more expertise of supply chain experts and with management minimum match replenishing inventory turns from the central office.
So that means that we have can have our inventory turns faster, that’s why we feel confident on giving you this target for three years to come and that is a spirit of the other regions as well. We are learning from each other. I talk to you in some of the conference calls above the supply chain council. That global expertise that we have now developing all three regions is shared delicately that help us understand what are the targets and basement that we can have to improve our inventory management.
We also has standardized warehouse processes, which we didn’t have. It might sound simple, but we didn’t have that. Now they are standardized and we have been managing much better our inventory replenishment. So let me talk to you about one example. Morton use to be the place where we chip parts from Caterpillar to Canada. Now we have the Spokane, a game changer for us, a real game changer. With that, instead of having that, you will see create there an example and we use a better known customer example just to make it easier, but this applies to the whole territory.
If we would have shipped from Morton in the past, we would have seven days and we would have at least five transfer point. Never mind they transfer the parts or component or equipment is touched, it’s just the transfer points. So with this transferred points, we would have take seven days to get to that customer. The newly designed network in Canada on supply chain reduces to three transfer points, maybe in the future, we will have only two, but right now it’s only three.
We started this project based on the five branches that are of the Southern part of our regions. We are going to move up all the way to the north and by the end of 2014, all branches and all distribution centers are going to be under the new scheme of just what the new strategy on footprint. That might mean that we don’t need five distribution centers, that might mean that we don’t need as many warehouses in all the branches, the foot print of the network is going to do different by the end of 2014.
Let’s talk about progress. What progress have we made since we talked to you last year in December? It started in March, created a new supply chain footprint and the strategy in Canada, just developed the foot print. We have improved inventory turns by 0.3 times. Just for a minute pause and think, 0.3 times inventory turns, this is the Canada number, $50 million of the global company at 0.1 times. So if this would have been the overall company, we could have reduced $150 million of inventory globally, this is an example.
Emergency Parts; 19% was at June 2011. Most of you would know what covenants we had, I am not going to speak a lot of them. 54% of our parts were ordered under emergency, not brilliant that on customers, not brilliant people, very discouraging to get the business going and enrolling. As of September of this year, we have reduced it to 29%. As of November 30, we have reduced it to 26%, this is percentage of non-items that have ordered under emergency, this is not a dollar amount, this is line item, piece-by-piece, okay.
Service Level, the most important thing for our customers and not only for our customers for our efficiency and service as well, all right. So as of September 80% service level of 24 hours, our target for the year, 85%, 72 hours, 95% the target were at 93. As of November this year, 85.5%, 24 hours, 97%, 72 hours, that I call progress.
We are really making progress on how we service the customers, how we deliver parts to our service departments, this is the progress that we have done really in about seven, eight months, since the creation of the new supply chain strategy in Finning Canada, all right. That’s why supply chain is so important for us that’s the impact.
Another one of critical importance is Service Excellence. We also talked about this in December, what service excellence needs. The main advantage that we can have with the world-class equipment that we have with Caterpillar equipment is that we need to deliver a top service to our customers. That equipment needs to keep on running, needs to be up, needs to up all the time. So our service needs to be really sharp and efficient, we need to have our technicians being utilized the majority of the time. So we are keeping those equipments running. Also that brings customer loyalty, I buy an equipment and make a big investment, I want that investment returning, producing as many hours as possible.
Customer loyalty, key element of service excellence, that will also improve our profitability, because if everything is turning faster, we are giving more work to our service jobs, right and then therefore with the same cost, we can produce more.
And our technicians, you all know that one of the challenges in a growing economy in a very active business is to recruit talented technicians. If we are having a sense of this excellence company, technicians are attracted to a company like this, right that’s the benefits.
Now where, everywhere all the regions, but I don’t want going to speak about, mostly about Canada and FINSA, what does it mean, if we do all this and you will see what drives it, a consolidated EBIT improvement globally, all the regions of $40 million to $60 million to the bottom line in three years. That’s what service excellence means in dollar contribution to the company globally.
Now let’s talk about Canada, Labor Recovery, a very interesting concept. What does it mean? It means of I have 100 hours available improvement admission, how many of those hours are really recovered through the invoicing process to the customers, right. Any hour that is non-invoice is a hour that’s inefficiency, goes through the SG&A is unproductive right, not all hours can be invoiced, this is all people inside the service department.
Some of the hours are from technicians that hours are invoiced, some is from the support staff that is supporting the server departments, so those are hours that are not actually invoice, but at part of the costs of the service department, so which you will never see 100% of invoice hours.
While labor recovery is important and needs to be improved first of all we need to enhance our technical skills, if those are at the level that they need to be, the work is done faster, the hours that they are operating in the equipment, it all gets recovered through invoicing because the customer is willing to pay for those hours, employed by the technician. If the technician transferred it slow, takes more hours, the customer doesn’t want to pay for that that’s unproductive hours.
We have improved our availability to our service, so the mechanic needs apart, goes to the shelf, the part is there put us some of the equipment, in the track or whatever gets it on out, the way it’s available for another job, that’s velocity in the supply chain, impacted our service excellence.
The standard process and planning, we want everybody to do the same thing in all the branches, somehow we lost that. As Scott just mentioned, we made an announcement yesterday in the company, we are appointing a VP of Service Excellence because the magnitude of what needs to be done in service in Canada is significant that need the service somebody dedicated fully to this transformation.
We tried to do it so far this year, but I think that we haven’t gained the velocity that we needed, so we are really putting a lot of effort and 2014 will be the year of service excellence in Finning Canada.
The other thing we need to do is to improve our quoting process. What does it mean? It means that every time that we quote a customer that the work is going to be done in 100 hours, gets done in 100 hours, if we take 105 to 110 and 115, that differences of hours, don’t get invoiced that’s inefficiency and it has an impact on the labor recovery, so please go to the graph to the right of your screen, they will recover; 2008, 75%, 2013, 68%, seven points of non-recovery labor difference that needs to come back.
If you look at FINSA, FINSA has 80% of labor recovery, there is a difference though. FINSA has 15 maintenance center at great conduct, where all the people are paid at one and technicians are paid at 100% recovery of labor hours, that’s part of the labor contracts, so we might never get to 80% at Finning Canada, but certainly we need to get to 75% and better, that’s the improvement that we are targeting and when we look at the labor recovery, what impact does it have. 80% of the service opportunity on labor recovery is in Canada and 70% of the opportunity reaching $40 million and $60 million is in Canada.
So now I think that you can understand why I’m talking so much in detail about labor recovery because of the importance that it has. So what does it drive again in service excellence. We need to implement across all the branches a standardization; clear roles and responsibility, standard service rates and definitions. We have started this year rolling out same thing that we did in supply chain by branches with this project, service excellence project. The velocity that we required drove me to a point, EVP service to move it faster and get the standardization going into the branches in 2014 all across all the branches.
Another area that might sound simple, but we were measuring the branches and talking about compensation, as a whole. So if a branch was profitable as a whole, it was good. Now we are measuring the equipment areas, parts areas and service areas, so that unveiled that service had an opportunity that we were not really focused 100% in it. That’s the change on service excellence.
Next one, asset utilization; we’ve been investing, as you’ll see right of your screen, significantly over the last five years, and as Scott mentioned this as well in his portion of the presentation, you have there only some examples; Red Deer COE, $110 million, Fort McKay, $110 million, Truck Shop & PDC in South America, many of you have been in all these places, $22 million. This one you have not seen yet at Dump Body Manufacturing plant in South America in Chile, another $20 million. We have the investment.
In Canada, in fact, we have the investment enough for $5 billion revenue, right, summing from where we are, so what do we need to do here? Is optimize our footprint, make sure that we have specialized branches, facilities, so we can improve the utilization of those branches as well. Similar to the labor recovery, the asset utilization, any hour that the facility is underutilized means that we are not taking full advantage of what we have. That will help us improve our return on investment, that is talked about, improve the service delivery, driving customer loyalty, and of course will help us to reduce our invested capital going forward.
The two biggest opportunity; Canada and South America, so let’s talk about Canada. What’s the plan? First of all, we had a complete review; I’m going to say, started and dedicated to the oil sands facilities, a complete review and what is the utilization that we are having each one of the facilities, what percentage is dedicated to large truck, medium sized equipment, engines, all revised in our footprint. How can we optimize the work that we are doing in each one of these places? And clearly we with the current business environment in mining in Canada, our facilities, some of them brand new, are underutilized; interesting opportunity for growth, adding more work and making them more efficient.
So we need to make sure that rather than the branch manager deciding who takes the job from a customer to what branch that is managed centralized, so we can allocate time and space in a way that becomes more efficient and also drove us to make some decisions which you can read in the screen. So we have started to move work and to make them more efficient, to allocate work that is specialized in the places that can do better. You will see there a number of changes to move more work to Fort McKay. Why Fort McKay? Brand new facility, more technology, more CPS, that’s Caterpillar Production System, highly efficient, more technology applied to the work that we do, so we can make it more efficiently.
Also moving the drills and shovels business that we had in a separate business integrated through the mining business, therefore making better use of our existing footprint and facilities.
Our gross capital expenditure so far in the last year, have been an average of $150 million globally. This year 2014, our plan is to be under $100 million. So that part of our asset utilization plan going forward. More work to do, but good progress so far.
Customer and market leadership. Caterpillar really well recognized brand, customer loyalty is extremely high, but we need and have opportunities to improve our market share. When we sell more equipment we are building population that drives future product support. You all know the story, this is what really drives, and you will see some of the numbers of our growth, CAGR growth on product support. We need to keep that momentum, we need that population coming in, so more product support is coming.
We need to be aligned with Caterpillar growth focus and the opportunity for growth as Caterpillar investing in more and more in new facilities to have more products expand their product line, cover more industries, cover more segments. We need to be really focused in all of them.
The temptation when the business is going really well in some segments is that you divest your attention very much to that one or two segment, but the other segments are still growing, we need to cover them all. We need to participate in all the segments. And thus we need to expand our coverage to all the areas, all the segment. Where are the opportunities? Canada core equipment? Core equipment is the most traditional Caterpillar products that has been in the system, thus called core product, construction equipment.
In FINSA also in core products and mining trucks, many of you have heard that we are extremely competitive on mechanical drive trucks, but we are introducing electrical trucks for application that demand that type of application. We also have an opportunity to expand our market share in all the regions on parts, and you will see that opportunity. Power system another opportunity and we’ll talk about power system in more details.
So what’s the target for the next three years? Core equipment market share, grow market share two to four points. What does it mean? Every point $35 million in revenue, product market share two to four as well. What does it mean? $45 million of revenue per point.
Power system revenue in Canada 10% to 15%, 5% growth $20 million equivalent in revenues. Quick math, $280 million growth in revenue in a non-grown market, in a flat market as Scot mentioned. This is assuming that the market doesn’t grow, we just grow by gaining market share, nothing else changes. Okay.
Canada core equipment, let’s go to more details here. What had happened in Canada since 2008 and 2012, five points of market share losses in core equipment market share, five point, we need to get that back, that’s the bad news. The good news, customer solution BT [ph], new marketing group, redeploy salesforce, hire new people, start retraining, two points market share in 2013. That’s a good news. All right.
So what have we done? We have improved sales coverage. Industry segmentation we want to be in all segments attacking and with the same aggressiveness that we’ve been doing in mining. We spent [Technical Difficulty]. We haven’t been out there when people are buying. You can’t win if you don’t participate. So we need to span our participation. We measure and track that now, which we have not being doing.
Right equipment in the right place forecasting capabilities, linking this with supply chain, we now receive that word to be the best in forecast accuracy dealer in North America. That’s a huge step of progress. We are knowing what is going to be consuming the marketplace, we can forecast on time, Caterpillar can handle for us, we improve the supply chain, expedite velocity, eliminate transfer points, get faster to the customers, more effectively, we gain market share, and we are more efficient.
New products; there are also segments where we were not participating. But Caterpillar is eager and wanting to participate in those markets bringing back that information to get and discussing with them what new equipments or specification or products need to introduce in the marketplace, we are attacking those segments. We are competing more aggressively. And we are gaining market shares in areas where we have lost significantly. One of them will be excavator. Our gain of market share in excavator this year has been impressive, which is great, that’s what we need to do.
All right, let’s move to FINSA now. Different story, FINSA is I’m going to call it chapter two on the evolution of market share gain. FINSA has gained in the same period between 2008 and 2012, three point of market share, but we need to continue growing more opportunities, moving to place two. Similar actions, increased dedicated core equipment salesforce, detailed competitive analysis by territory, by product, lead more sales force, full integration with our operation and planning process, again the velocity in the supply chain brings market share gains.
You get to the customer prospects, commission a structure get the right incentive, improving the customer service experience, if the customers feel happy with you, our customer loyalty index and net promoter score we are measuring all regions now and then promoter score, we’ve seen five point improvements in net promoter score from last year to this year.
That’s another good indicator of progress. Sorry, I said price is three, pricing in South America globally. Strength product line-up, same thing bring the products that are needed to compete in all of the segments. But Canada, one point decrease on market share on products in Canada. Lot of things have happened in this years, the ERP also had an impact on this, we need to get that back and we need to gain more. Again supply chain critical elements of it. The velocity, here is where we have increased five point of market share I guess from [indiscernible] the other one, in part this is parts.
Customer service agreements, in Canada we don’t have enough service agreement. In fact, we have a very low percentage on customer service agreement where you would see in FINSA mostly in mining, we have a very large percent of the customer service agreement. This is where you get when you go to Best Buy or in any of the stores, you buy something somebody offers you a service agreement that you buy with the equipment, we just do it really well, but we have not doing it lately, we will come back to do it more aggressively.
And also we need to – what we do in OEM for mining, refurbish, rebuild components that are cost earning for mining, we need to do the same thing in the construction equipment.
The next thing we talked about this is talking about technology is to monitor our equipment remotely to measure exactly how many hours each equipment is operating, so give us exactly the information on part consumption going forward. In UK, we’re doing it. We’re moving that also to Canada.
Drills & Shovels – parts. First, Drills & Shovels is doing extremely well in Canada, really happy on how we are doing it. Now, the mining business activity for new equipment hasn’t been great, so we are now selling lots of new shovels and drills, but parts and service in Canada is doing really well.
Service in FINSA is doing really well as well, but parts is not, and right now, we have about 16% of the overall business on parts that we should have in FINSA territory. So that’s there, we need immediate action to get and get that 40% of market share back on drills and shovels and you’ll see there a number of actions plans that we have put in place. I think that one of the difficulties we have is that we merge too soon, the drills and shovel divisions into the mining group and because the mining activity has been so intense in Latin America this year we lost focus on the drills and shovel part business specifically. That’s a temptation, where you try to pursue synergies too soon. We’ve realized that. We changed it back. We are aggressively pursuing that business.
Power System, I don’t know how many of you know, but I used to be the Vice President, Power System for Finning Canada 2005 and 2006, so this is pretty close to me I know. What do we there? So when you look our CAGR in Power System revenue growth in Canada, zero from 2008 year-to-date, zero. Caterpillar has grown 4%. There is a disconnect there, right? We should have been growing much more aggressively. So another thing, Scott also mentioned, appointed VP Power System, restructured that organization, went on segmentation for the different industry that Power System attacks and we came more aggressively.
We have accumulated quite significant inventory of Power System, which with this new approach of more aggressiveness, we were able to sell most of it already this year, so good improvement there. Also we have created a global Power System team head Neil Dickinson out of the UK and we are using all that leverage and expertise that we have in the UK now to the other regions including Canada of course. And here you can see some of the examples of what collaboration means and business that have been completed with the collaboration team and the expertise that we have out of the UK and the focus of our new Power System business.
All right, so that’s, I will get through a lot of detail, last year, we talked about operational excellence, we talked about the concept, we talked about, where we were heading and we thought, when we discussed about what to present to you this year, that it was time for us to walk you through the details. I hope I didn’t bore you, but there is a lot of detail, that shows the progress, shows the opportunity, shows what we can do and we are committed. I mean, very well be that testimonial of me and my wife arriving to Edmonton on a weekday with almost 30 degrees below snowing, my wife and I walking in and Fred was right there, said, we are committed and we are committed. Thank you very much.
So that brings us to our break. We’ll start again at 10:45, so we’d like you to help yourself to coffee or use the washroom and after the break, Dave Smith will move forward with the financial objectives, Scott will wrap up and then we’ll go straight into the Q&A afterwards.
Dave S. Smith
All right, it’s a quarter up. so why don’t we get started, okay to your attention up here. Thanks, I’m going to talk about our high level financial objectives for few minutes and then Scott will come back and talk about some opportunities going forward and then wrap up and then we’ll take your questions before lunch.
So I’m going to talk about three things with you today. I’ll come back to return on invested capital first. Second, I want to talk about strengthening our balance sheet and our free cash flow, and third, our commitment to dividends.
Starting with return on invested capital, I want to talk about how are we going to improve invested capital going forward. Next, take a bit of a historical perspective on where we’ve been in return on invested capital, and thirdly, how are we going to measure it going forward.
Maybe, you can help me with this slide going forward and not seeing any good. Okay. Thanks. So this morning, we laid out fairly detailed outline of how we’re going to drive improved profitability and improve invested capital performance. Profitability as we talk about in terms of EBIT margin performance on the left hand side, you can see that over the last three years, we’ve improved EBIT margin performance.
However, as Juan Carlos described this morning there is great opportunity to continue to do that and improve that. He talked about their opportunity to improve service, excellence over the next three years $40 million to $60 million. He also talked about supply chain, we didn’t quantify it, but when you look at some of those maps, they’re pretty powerful in terms of the amount of infrastructure that we can affect in terms of delivering parts to customers more quickly with fewer transfer points.
The transportation efficiency opportunities as well as the – just the overall efficiency delivering parts to service. He also talked about market share improvement, when you look at parts, when you look at core equipment. When you look at power systems, there’s $200 million to $380 million of market opportunity within the existing industry activities. So we’re not looking at an increase in units sold, but capturing a greater number of those and you can estimate what the EBIT margin impact from those different lines of business can be. Where we have not improved is over the last three years is on invested capital turnover. And as you can see over the last three years despite a 30% improvement in revenue over that period our invested capital turnover decreased from 2.5% to 2.0%.
As Scott mentioned, we’ve invested significantly in the future in few of those items like our investment in Fort McKay and our acquisition in Bucyrus, which is the shovels and drills distribution rights, sold about 50% of that change in invested capital turnover. We [indiscernible] our recent acquisition there both in 2012, and there is tremendous opportunity to utilize those assets better as we go forward.
The other 50% change in the invested capital turnover during this period was working capital. We’re taking our working capital sales declined about 4 to 5 percentage points, largely around in parts inventory turns from about 3 down to 2.4 times. Obviously there is great opportunity to improve on the invested capital side and that’s what the plan is focused on doing.
When you look at the opportunity to improve inventory turns for example, just a mid-point of the range that Juan Carlos talked about is the opportunity over three years to take $350 million out of our invested capital base. There is further opportunity within that the plans that Juan Carlos talked about in supply chain in Canada in terms of network footprint. We are also looking at an asset utilization review of the facilities that Juan Carlos reviewed and that can bring further reduction in invested capital going forward.
And our focus on capital discipline will payoff over the last three years we averaged $150 million in capital investments not including rental, and we expect to be about a $100 million going forward.
The good news is that we made these significant investments in our future for growth and as that demand returns we are well positioned to take advantage of it. We are looking return on invested from a historical perspective, while we are not providing a target on return on invested capital.
We have laid out a clear incredible roadmap that how we’ll drive improved profitability and improved invested capital turnover. As you saw – look I think going back over time what we’ve done on return on invested capital and this chart shows you Finning consolidated from the years 2006 to 2012 in the last 12 months ended September from the return on capital, return on invested capital perspective. EBIT margin percentage as well as the invested capital turnover, a similar charts are in the back in the appendix for each of the regions for your use.
Now what you can see by despite the fact that we saw revenue growth of 6% in EPS growth of 8% over the same period of time, invested capital came down during this period and flattened out over the last three years at roughly around 16% slightly below the longer-term average of 18%. Again, mainly driven by the reduction in invested capital turnover which you can see in the graph in the bottom with the yellow dots associated with it.
Now it’s useful to kind of take a look at where we’ve been and although it’s arguably is in different times and the business has become more complex. I think this perspective gives you some idea of what the power of the business model is capable of doing.
Now how do we measure progress going forward? We know that you want to be able to track our progress as to how we are improving return on invested capital. We know we need to improve EBIT, EBIT margin, we know we need to improve invested capital and invested capital performance. In our plans all the initiatives we talked to you today are aimed directly at improving either EBIT or invested capital or in a number of cases they do both.
The challenge is then in a number of these metrics, it’s better to look at the progress overtime. For example, if you look at EBIT margin, we report that quarterly, you’ll continue to see that quarterly consolidated by region, but as you all know, significant shifts in mix can drive pretty important changes in that EBIT margin on a quarterly basis and so we believe that true progress is better judged over time.
Similarly in areas like labor recovery, which will drive service improvement, which will drive improved EBIT margin and in market share, be it for Core or Parts or for Power Systems, for competitive reasons, that can get uncomfortable talking about that on a quarterly basis and there is volatility involved on that and so our commitment is come back to you and report quantitatively on the improvement each year.
On the other hand, on the invested capital front, there is a number of metrics that we can watch on a quarterly basis to show how we’re tracking. For example, there is inventory dollars and inventory turns as well as invested capital and invested capital turnover and we’ll provide you with the regional as well as the consolidated information on those, as well as working capital to sales and free cash flow and net debt to total capital.
Moving to the second objective that I mentioned at the outset; strengthening our balance sheet. We know that through better operating efficiencies we can drive positive free cash flow throughout the business cycle. The strong cash flows that we have from operation, better working capital management and disciplined capital expenditures will drive a more consistent free cash flow throughout the cycle.
What we want to avoid is the volatility that we see, as you can see in the upper left hand chart here, which is a chart of free cash flow per share, and what it shows is that in the past during periods of strong economic growth or demand, we had pressures on working capital and you see relatively low to negative free cash flow, where conversely where you see positive free cash flow tend to correspond with periods of lower economic demand.
Now it’s interesting to know that in the last 12 months, where we’ve had reasonably high levels of revenue activity across all lines of business, revenues are roughly even or tracking to similar levels to last year, which were record revenue numbers, we have better working capital management, better capital discipline and we have a pretty respectable free cash flow per share number. Now we know free cash flow will fluctuate as we go through the cycle, but we also know that improved sales forecasting, order process, safe supply chain management as well as asset utilization and capital discipline will drive a more consistent positive free cash flow through the period.
Now turning to the leverage side, we remain committed to strengthening the balance sheet through reducing debt. In the fourth quarter, we expect to have significantly positive free cash flow in this quarter, which will drive our net debt to total capital ratio to about 45% at year-end. We’re expecting another strong year of free cash flow in 2014. We expect to reduce our net debt to total capital ratio to the lower end of our range of 35% to 45% and further reduce our net debt to EBITDA metrics.
Let me turn to our third objective; our commitment to dividends. Let me say that return of capital to shareholders of which dividends is a part of is a very important part of our capital allocation discussions. We recognize that dividends are an important part of total shareholder returns and we strive to maintain a competitive dividend and to grow it consistent with sustainable earnings growth.
Our payout ratio is about 30%, which is in the middle of our range of 25% to 35% and our yield is at about 2.4%. We have grown – we’ve increased the dividend for more than the last 10 years at respectable growth rates and next year of 2014 expected to be strong positive cash flow and a stronger balance sheet subject to prevailing conditions at the time and of course our Board’s approval, you can expect that trend to continue. So I’m going to leave it there and turn it back to Scott.
L. Scott Thomson
Great, thanks, Dave. So I wanted to spend a few moments summarizing. But before I do that, we’ve talked a lot today about the things we can control, costs and capital efficiency and it’s a crucial point, but earnings growth, improved return on invested capital, this vision is not dependent on revenue growth. It’s dependent on better execution and better capital efficiency.
However, it’s important not to lose perspective of the market opportunity in front of us. We’re going to focus on things we can control, but it is worth just reviewing the market opportunity in front of us, because the territories we’re in and the market opportunity in front of us is significant.
From an oil sands perspective, open pit mining will continue. You see projections here from CAT on the left side of the page and you all know how equipment intensive open pit mining is for our customers. Kearl, already delivering equipment; Fort Hills, it’s been approved by the partners; Jackpine been approved by the partners. And what’s really interesting is when we talk to our customers, they think there’s going to be a 40% increase in the amount of overburden removed between 2013 and 2017.
Copper in Chile, lots of discussion right now about mining investment, reduction in mining investments, supply of copper, modestly exceeding demand. None of the analysts I read from, none of the market information I have, suggest copper will go below $3 and in the long-term, it will ultimately be dependent on Chinese demand. But a few pieces of information to keep in mind.
On the left hand side of this page, our customers are spending a lot of money. Chile is the top copper producing region in the world and mining investment in Chile will continue. And a message I want to leave you with it’s not all about mining.
Construction order intake has increased significantly across our firm. Western Canada infrastructure spends, significant improvement and it will continue to grow and then if we look at the UK GDP growth talking to Neil, the other day, a 40% increase in our backlog today, relative to the end of 2012. I have a definite perspective on Western Canadian LNG, given my background in oil and gas. Gas will be exported off the West Coast of Canada. It might not be five LNG schemes, but even two LNG schemes in Western Canada is in excess of $70 billion of capital coming into the BC in Alberta economies.
On the right hand side of this chart, we’ve just simply given the engine opportunity for gas compression and prime power. So this doesn’t include well servicing, this doesn’t include pipeline lane, which I think you’ve all got a toy here that are the pipeline layers. This doesn’t include getting the pipeline and removing or making way for the pipeline to get from Western Canada to the Coast and it doesn’t include the construction of the liquefaction facilities.
So just this one piece gas compression and prime power is a $1 billion parts, service and new equipment opportunity for Finning. And there is a feeling that this opportunity is a 2018 or 2019 opportunity and I’ll tell you that’s wrong. Petronas is looking to have first gas in 2018; late 2018, early 2019. Petronas is running 20 rigs in Western Canada right now. Half the rigs that are running in Western Canada are for Petronas delineating the gas resource.
Chevron is spending money today in Kitimat, preparing for the liquefaction facilities, and if you assume 2018 or 2019 as first gas going off of West Coast to Canada, the final of this investment decision needs to be made at the end of 2014 or early 2015. So this is an opportunity in front of us and something that I’m going to be sure Finning is prepared for.
And then lastly before I summarize, I just thought this was an interesting chart. Over the last eight years, FINSA, our South America business has grown at 15%; Chile GDP, 11%; Western Canada, GDP, 4%; Finning Canada, 6%. So we can now all have debates around the market opportunity, but I thought this was a pretty interesting relationship to consider.
So the key takeaways today, what we want to leave you with; we’re going to focus on what we can control; costs, capital. We have had a significant increase in invested capital over the last few years and that provides a great opportunity for us. With the investments behind us, we have an opportunity to capitalize on it, we have an opportunity to optimize it. You will see market improvement in working capital performance in this firm over the next three years and that will drive improvements on return on invested capital.
Our operational priorities are linked to the levers that improve return on invested capital and the compensation throughout our company is linked to improving return on invested capital. This management team is aligned and this management team’s sole focus is on execution going forward.
So with that, thank you for coming today and I am happy to open it up for questions. Give us a second, we’re going to move the chairs out, but happy to take whatever questions from the floor.
Okay, good, so we’ll start with the questions. Sir, you’re first? Thanks.
Thanks. Scott, you talked about focusing on what Finning can control, so the internal workings, but outside of that, if there is an LNG opportunity that’s going could be a billion dollars or if there is Chilean mining slowdown in CapEx next year, how do you feel about Finning’s ability to operationally adjust to those types of environment, particularly if you’re looking for improving in new equipment preparation through new facilities, will Finning have an opportunity to get that right before the next big opportunity or before the next decline?
L. Scott Thomson
I will start and then Carlos you might want to add. Given the investment that we’ve had in the oil sands, given the investments we’ve had in Chile, if an unintended or an unexpected increase in orders occurred, we would have the capability or the capacity to adjust. So Juan Carlos mentioned, the oil sands footprint right now is build for $5 billion revenue business and we’re at $3.5 billion. When we think about asset utilization, we’re not going to do things that benefit us in the short-term, but hurt us in the long-term and we’re going to be smart about this. It’s going to be done in a measured fashion. We are going to optimize the spend, but we’re also going to keep in the back of our minds the type of opportunities that may present itself and be prepared to act on that.
The LNG opportunity, I think is actually more of a capability issue as opposed to a fixed asset issue. I just don’t think as a company we’ve – frankly, as Canadians, this isn’t a Finning issue, this is a Canadian issue. Canada Inc. does not appreciate the opportunity in front on us on LNG. We’ve already now sold the integrated chain to state-owned enterprises and supermajors, all right. So the supermajors and state-owned enterprises, they own the upstream now, they’re going to own all the way to the Coast and they’re going to have the buyer. So Canada Inc. has given away that chain. The companies that are really going to benefit are the services company like Finning.
We are the services company that provide these services now to the state-owned enterprises. This is a huge opportunity for us. Now we have to get the capabilities, we have to get the mindset, we have to make sure that our organization is talking to upstream providers, whereas before we talked to the OEM that sold the engine to the upstream, we need to be having that direct relationship, we need to be talking to the Petronas’s of the world, we need to make sure we are ready for it from a capability perspective, but I don’t think it’s a capacity perspective.
If you do have a question please raise your hand, you’ll get your microphone from the audio [indiscernible] webcast. So Bert is next.
L. Scott Thomson
I just wanted to add on one thing on the new equipment perhaps, Sara. In FINSA, we do expect to see lower mining equipment deliveries next year and we’ve already taken steps in the organization to right size the organization for the amount of new equipment prep we expect to do. So we’ve already taken care of that. We had record mining deliveries this year, we expect them to be lower next year and we’re already set for that.
Okay, thanks. A lot of the plan is over the next three years, I’m wondering if you could give us a sense as to the linearity around that, how that ramps, what are the things that are working well today on that plan, which things are going to be kind of more year three kind of deliverables, just to help us fill in the trajectory of some of these metrics?
L. Scott Thomson
So why don’t I start and then you can give…
L. Scott Thomson
The team was here in front of you last year and talked a lot about the operational excellence agenda and I think it’s important for this group to go away with the recognition that we are making progress. So when you look at Canada supply chain and you see the progress between this year and last year, I think it’s pretty dramatic, 0.3x increase. Centralized supply chain, we didn’t have a centralized supply chain in Canada until nine months ago, a recognition of the opportunity in the network, five regional distributional centers, 445 carriers, $100 million of freight, I mean, there has been real progress on that aspect and we’ll continue to see progress.
Service profitability, I mean I think that we had done a great job over the last year recognizing the issue. We have a team, and someone asked me a question, does just putting a service VP excellence in today gives you the sense that this is just starting. I don’t want to leave that impression. There has been a team working on this, but it’s been shared responsibility between three executives and what Juan Carlos has done today is put one executive directly in charge of it, but on the service excellence journey, we’re at the front end of that journey, I would say.
On the market share piece of that, great progress, I mean, this is part of creating a winning culture at Finning. I’m not going to give you the number, but it’s dramatic, the improvement, and if I gave you the number, my market guys would kill me. But the dramatic improvement on excavator market share over the last nine months, it’s really impressive and it’s this focus, it’s this different sales segmentation, it’s not just focusing on mining, it’s focusing on construction and that’s resulting in a two point increase in share, 2013 to 2012. Some of these things will happen sooner than later, others will take a little bit more time.
In fact some of these things we may get all of the benefits and some of them we may not, right, but we will get benefits from supply chain that aren’t on that page. There’ll be cost benefits from supply chain and what we were trying to do for you here is provide you a roadmap. At the end of the next year, we’ll come up with a scorecard and I’ll be able to say here are the 10 things we told you and we got seven of the 10 right, here is what we didn’t get a couple of them, but overall, return on invested capital had this type of improvement, and that was the objective today, it wasn’t to say, this is the only piece of dollar associated with service. I mean, there is other pieces here and it’s – the objective today was to demonstrate and give you confidence that there is going to be a significant improvement on return on invested capital.
Is it just…
One more there…
We will have two questions or…
Two questions each and then you go back to the end of the queue.
Okay. Okay, good. So Scott, I just want to go back to your opening comment about culture and how you are satisfied or happy with the culture, I don’t exactly what the wording was, at Finning, but can you speak a little bit more between the cultural differences in Canada and South America, and is the team really ready here to go ahead, have you got the culture you think you need to deliver on this in the Canadian operations?
L. Scott Thomson
Ben and I’ve had, where is Ben. Ben and I have had a number of conversations about this too and I mean, one of the reasons I wanted to join Finning was because of the people. I must say that was one of the big drivers. I grew up in B.C., I had family that had worked at the company, I knew the values that it had, I knew Mike through Talisman, I knew Doug and that type of value, integrity, trust, I really appreciated.
So it was the people, that was the reason I came and when I heard all about, we got a cultural problem, we got a cultural problem, I don’t buy it. I don’t buy it. I go out and meet people and I spent the first six months in as many facilities, meeting as many employees, meeting as many customers as I can, and people are passionate, they are committed, they want to be on a winning team, they want to serve the customer, they want to be winners and part of this is creating the atmosphere that we can win and we will win. And yes, we have to evolve the culture.
We have to evolve the culture. We have to increase the urgency with which we go after some of these issues. We have to put a shaper edge on performance, all right, no doubt about it, but that’s an evolution as opposed to a revolution, so that would be point one.
Point two, FINSA versus Canada, that’s interesting, FINSA, the compound annual growth in FINSA over the last 10 years has been, I mean, very significant, and this organization is used to growing and growing and growing, and now we’re in a situation where new equipment mining sales are going to be down in 2014. And how do you adjust to that, and that’s going to be the big challenge in FINSA. Marcello and team they are on it. They recognized it, in the third quarter, we made adjustments to the cost structure to adjust to that, and if things are worse than we expect in 2014, we’ll have to think about other ways to adjust. But I think that’s the challenge in FINSA. In Canada, it’s the urgency and it’s the edge on performance, which I would be focused on.
Cherilyn Radbourne – TD Securities
Yes. I just wanted to ask a question about the geographic information that you provided in the appendix, if I compare the return on invested capital in South America to Canada, it’s about 400 basis points higher, but in fact, the invested capital turnover is actually somewhat lower in South America. So I guess, two questions come to mind; one is can the return on invested capital in Canada be as high as it is in South America ever and how much of that comes from EBIT margin improvement versus improving invested capital turnover?
Dave S. Smith
Do I take it?
Dave S. Smith
Well, I think if you go back, Cherilyn, and look historically, Finning Canada got up around 25% a number of years ago. As I mentioned, I think that those were different times, the business in Canada has gotten far more complex. Our customers demands and requirements have become that much more, so I don’t want to just compare apples to apples or I don’t think it’s quite apples to apples, but that said, I think, what we have talked about today, there is so many opportunities to improve efficiency on both the cost side and on the capital efficiency side, and I can’t give you an exact percentage, it’s going to be this much EBIT and this much invested capital, but if you look at where we’ve been, what we think is possible on the invested capital efficiency perspective.
I know we can do a lot better than we’re doing from inventory as well as the utilization of the assets, we know that, 8% can be improved upon from an EBIT percentage, so you can run the numbers and you can see with where Canada has been in terms of EBIT margin percentage some improvement on the invested capital. They can produce numbers that are right up there with FINSA for sure.
The other thing I would say, Cherilyn is that if you go back to 2006, 2007 there was pretty significant invested capital turnover numbers in Canada and for Finning as a whole. Part of this presentation is interesting, the numbers that we’ve given you simply by doing – simply by getting back to where we were in 2011.
There is a huge step change in return on invested capital and that’s not what we – we are not coming here and saying, hey, we are just trying to get back to 2011 that’s not the objective, the objective is to improving invested capital turnover – improve return on invested capital and drive that forward, but just by getting back to where we were, three years ago huge movement.
Cherilyn Radbourne – TD Securities
Could you just say a few words about market outlook in Canada, I mean I think you’ve been fairly candid that you expect to down here in terms of equipment sales in South America, but it’s been a pretty strong year for unit deliveries in Canada what you see, as you look at to 2014?
Juan Carlos Villegas
Not the same story that in South America, we don’t see that significant reduction of mining equipment as FINSA had. But you got to remember that in the case of FINSA, this probably 2013 is going to be the best year ever by far in new equipment deliveries in South America, by far. So not the same story, I think that I see Canada relatively flat no big changes in 2014. We will be delivering some of the equipment were sold in 2013 some other projects will probably started in 2014, some probably by the end of the year or intake. And so our market share gains, continued growth on product support. I don’t see a decrease on Canada, I don’t see a huge growth either but very stable.
Yes, you haven’t talked about rental at all and historically that’s been a use of cash or capital, it varied quite a bit but it can be quite chunky. So can you give us a bit of an outlook there and are there things you can do in rental to improve the efficiency of that part of your business.
L. Scott Thomson
That’s a good question. Noted by the absence, permutation. The rental is the tough one, and this is sixth month end learning the business and learning the business model. So our expectation for 2014 is essentially flat rental relative to 2013, so not a huge increase in capital associated with rental so that’s the good news.
We do need to define our approach to the rental market, and right now rental is growing as a percentage of North American new unit sales. And Caterpillar and the dealers are not doing as good a job as we can in addressing that market. I think part of it, Andreas it’s treating the rental business as a business, so not using it for FINSA growth or market share growth, but instead trying to run a good rental business that has an appropriate return on invested capital and market share falls out of that as opposed to we’re going to go capture market share with rental.
So that would be one comment. Second comment is, there is a lot of work going on in 2014 with Caterpillar and the dealers across their network to figure out how better to address a growing market. So for now, flat we are going to figure out – we are going to make sure we are running the rental business as a business as opposed to as a market share gain. And I think over the next year or two Caterpillar and the dealers will improve their way to market on rental.
Who’s got the next question, gentle over here.
Could you guys just address growing your market share in a flat environment, and how we should put that in context of really the pricing environment right now? I mean, I know that we are having out of Australia, there are some mines that are looking at emerging market suppliers to help them drive down the cost, I’m wondering if you’re seeing that in Canada or in South America as well?
Juan Carlos Villegas
Yes, we were talking in the break about to some of this as well, and I see competition coming out of China in product support and mostly in parts that are for the non-mining equipment, the construction equipment. Some of that but not really growing at a phase that you could imagine or you have seen in other industries there is some of that, not a lot.
We don’t see China becoming yet a big supplier for parts, for Caterpillar equipment. You got to remember that CAT has – most of their parts are quite predatory. So they are designed and manufactured to Caterpillar’s fact for the parts that are not CAT owned, I would say filters are varying somewhat that. You’ll see more competition, but also our customers, the majority of them are very focused on the like of the equipment, on the performance on the equipment, on the uptime and the quality of the income that equipment is generating. So most of the time, they focus on having prime quality parts installing those equipment that will generate the best performance out of the cost per hour of that equipment.
So it’s smaller costs on parts for those types of items probably doesn't help lot on the cost per hour or uptime of the equipment. So I’m not saying that it’s not going to happen. but today, we don’t see it in an aggressive way.
I think the question two is, are you planning to get market share, are you planning to discount margin? And the answer is no.
Juan Carlos Villegas
L. Scott Thomson
We have a premium product. We have a competitive advantage with that product. We have a great opportunity to increase market share, because of the way we’ve been going to market. We’ve already seen improvements and we plan on continuing to get that changed market share improvement without taking a margin ahead.
Then just my second question, do you guys have any idea about when you look at your equipment, how much of it is idle now relative to what it might have been maybe six months ago. Have you seen it improve or?
Juan Carlos Villegas
It varies across the territories; it’s quite different across the territories and the industry. If you look at the construction equipment in BC, the information that we are getting is the equipment is utilized more than before. If you look at the oil sands construction equipment, probably over certain size about 100 contracts is lower than before. So it varies across the industry similar to South America that we see the construction equipment is in Argentina, very high utilization we see in South America, also pretty different utilization, not so much in mining and construction or contractors.
So it varies across the different industry, the beauty of that that in the past we use to calculate that instinctively and now we are monitoring that with our GPS systems that is given us a fact with the amount of hours, but each equipment is working. So it’s much easier to link it with our supply chain strategy and predict future consumption. So that’s why I say it’s different on different industries and different regions, but it’s pretty stable. Other than mining contractors, it’s pretty stable.
Okay. Next question, Benoit.
Yes, my question is on the warrantees. Is there any opportunities for margin improvement that the way it’s currently managed between you, the customers and Caterpillar?
L. Scott Thomson
Yes. In Canada mostly, we have been benchmarking the difference between South America and Canada, the way that we manage warranties and we are not in Canada as efficient in warranty management as we are in FINSA, there is a significant opportunity to improve that. I’m not saying that we’re going to give less warranty to customers; we guess that we have been managing warranties in a centralized fashion as effectively in comparison as a percentage of equipment sales in Canada versus FINSA is a significant difference.
Juan Carlos Villegas
If I could just add to it, warranties, a lot of that’s around the service efficiency, the labor delivery part on the warranty. It’s important to note that warranty is a part of the service excellence initiative that Juan Carlos described. So we talked about labor productivity as the main driver, there is a number of costs or efficiencies around service that are beyond labor recovery, that’s a main driver, but another key one right up there number two or three is around warranty opportunity.
Let’s get to the next question. Peter?
Thank you. You’ve laid out a detailed plan here of how you’re going to improve on return on invested capital, but I understand that these initiatives very often have some upfront cost associated with that. I am just wondering if you think that the efficiencies you gain whether though outpace the upfront cost over or throughout the timeframe?
Juan Carlos Villegas
Yes, is the answer, I mean, I think there are some upfront costs around people and process, but frankly those will be outweighed by other changes that we will do. So overall, you will see improvement in return on invested capital. The upfront costs are not significant, I guess, that’s another way of saying it. Again, it speaks to a lot of the investments been made, right. I mean, thankfully, we haven’t talked about ERP here today, which I think is a huge step forward, because we don’t want to be talking of that with shareholders or customers, but there is an example, right, continuous improvement, we will continue to make on ERP. That investment is behind us and you’ll start to see some of those improvements come through on the supply chain. For example, auto replenishment, things like that, so not a lot of significant one-time investments required.
I’d just to like to lodge you on your focus now on ROIC and tying it to management conversation, I wonder if you do a bit of a retrospective, I know it will be tough for Scott, but if we look back at the decisions that have been made in the past, how would they have been made differently based on this new focus like we do have made certain investments in Alberta or elsewhere in a different manner and perhaps other lessons you have learned going forward?
Juan Carlos Villegas
I’ll start off. I think it’s a difficult question to answer in hindsight clearly, but I think that if you – let be honest, if you step back and look at say the oil sands opportunity and mining in general and you look at the facilities throughout the center of Alberta, one would not start today and take a clean piece paper and have exactly the same facilities we have today. I mean I am not sure there is any business that you could say that, that maybe a little bit unfair, but that goes to the work we are doing to look at asset utilization, are we doing the right work in the right place and to see what we can do to improve that and we are already taking steps in that regard.
We have excess capacity today, but we also know that the oil sands has the capacity to double over the next number of years as well and so what level of business do we see in the foreseeable future and how will that play out. So I think we haven’t reached any conclusions yet on that front and I’ll probably leave it there, but I think there is significant growth in the oil sands that we see. It’s not outside of the capacity that we have, but we can better utilize it and do it cheaper.
L. Scott Thomson
Let me now give you a one example, it’s a small example, but we talked in FINSA, when Juan Carlos and I were there around a new branch in Antofagasta, capital going into the Antofagasta branch and that will be required, but the feedback to the team was let’s sell the Bucyrus facilities that are excess before we think about new capital into the Antofagasta branch and that’s just a little bit of a different mentality, which I think is helpful and similarly when you get to Canada, if you could break from a white piece of paper, would you have the facility structure that we have today, would you have the supply chain network that we have today, clearly you wouldn’t. There’s reasons why we are there, they were logical at the time, but increased capital discipline going forward is going to be extremely important.
Let’s go to the next question.
Good morning. I’m going to maybe follow-up a little bit on John’s question. First of all, I think it was a good presentation, congratulations, but having said that, this maybe the first time you sat in front of this room and given your pitch on Finning, but it’s not the first time for most of the people in this room to be here and hear a story about improving targets and evolving culture and all these sorts of things, so maybe with just being realistic about some dose of skepticism that’s in market, can you or maybe even it’s better for guys like Juan Carlos and Dave who have been around before, in a few sentences just tell us why you think it’s different this time?
L. Scott Thomson
I think that one reason why it’s different is because we have outlined an global trend and we have much more details on how that plan is going to be executed and we are absolutely more than outlining an idea of where we are going to get, we are detailing the plan on how we are going to get there. The how today is much more clear than in the past, I’d say. I’m talking specifically about Canada perhaps and the changes that needed to be done are being made.
We can see clear progress in all the metrics that we have had. We are driving more with KPIs that people can see a measure. We are integrating our guys and the question about culture before I think that people have really started to change their mindset that we need the velocity, we need the change, that change is good and that destination is something good for everybody. And I think that that evolution happened in 2013.
I mean I’ve been a lot in front of employees lately, we just had a all employee conference call on Friday with all employees and people are absolutely convinced that the change needs to happen. I don’t think that was so embedded a year ago in Finning, Canada. There has been a lot of change. People were quite distracted for the events that we all know. Today people are focused on winning. The mentality in Canada is to win. People wants to win. There is a strong tradition in our people even though 50% of our people are new, the 50% that has been there for a long time, they really want to be back to the training that we used to be. I think that we have that quite embedded. The fact that I’m moving to Edmonton warehouse move my family and there we are really committed with the change. So I think that they that’s going to be different.
And then with all due respect EBIT margin was the sole focus. There is a big difference between EBIT margin and return on invested capital. EBIT margin drives behavior. The discussion internally revenue, EPS growth, EBIT growth, EBIT margin it ignored the denominator, that is a huge change.
L. Scott Thomson
Yes, I would just support what Juan Carlos said I think for those that haven’t been here the last couple of years, there has been a clear focus operational excellence improvement, I think the level of maturity that you saw today or heard today should be clear to you and if you take a look at last year’s presentation, the amount of details Juan Carlos is able to provide of things that not only we are thinking about doing but we have already done is a pretty clear evidence of the progress that we are making, and then I think the leadership that we have in place starting right from the top is Scott and a clear focus with KPIs across the organization driving the incentives to drive that behavior, trying the incentives and try that behaviors there.
But the leadership in the organization with Juan Carlos with his team, I mean it’s been almost a year now, little less than a year that Gary Agnew has come over from the U.K. to lead market leadership there and [indiscernible] is a supply chain expert who has come over since the beginning of the year and drive the change there. So we got the leadership in place to drive this change to and I really, it feels very different to me.
Just a quick question, you provide some very good color about all the initiatives that you’ve already started to implement, what about the timing of those changes unfolding should we expect, let’s say, more details not more details sorry but more impact in 2014, is it more linear over the next three years, is there any big pockets of the change we should see among the initiatives.
Juan Carlos Villegas
I think it’s going to be consistent improvement. I think you’re going to start to see or you’ve already started to see inventory improvements and you’ll start to see that starting right away. So the invested capital focus is happening. As you see on the market share and supply those improvements are happening. So this is not a back ended plant. We are giving you a three year period, because I am new and three years anything less than three years, I think is too short. But this is not a back ended plan.
L. Scott Thomson
The supply chain transformation as you heard will be finished and completed in 2014. The service excellent will be deployed all throughout the branches in 2013 as well, the market share gains are in place in 2014 yes, and the asset utilization the studies were done, we are making progress, we’re doing some changes. So I think that you will see impact in 2014 already and more in the years to come.
Who’s got the next question.
So given the three year outlook and sort of the mission that 2014 is going to be tough from market perspective, is management more inclined to give up margin and maintain share in 2014 or give up share to maintain margin. And if that thinking changes across different product lines or geographies could you expand upon that?
L. Scott Thomson
Give up margin to maintain share or vice versa. And this is not I mean, I don’t want people to walk away on the chart here talking about parts market share growth, power systems growth and core equipment growth essentially. This is not a margin share issue. This is an issue where we had a sales force that was focused on mining. We didn’t have a sales force focused on core equipment. We had a sales force that wasn’t rewarded on participation rights. If you have the best product in the world, the key issue is participate in the sale.
Right, so what I don’t want to leave people with a view that we’re going to give up margin to get those that share. This is about sales force, having more sales people on the ground, having them focused on the core market, for tracking participation rates and incenting them properly, and actually the allocation pieces are really interesting one, that I think maybe you missed. We are now the top forecaster in the Caterpillar North American network around what we need, which is huge. I mean the fact is when we ask Cat for something, we are typically right that we need it.
Now the question is, how do we get rewarded from that by CAT, so that we get the equipment when we need it. And we’re making progress in that, but I don’t want anyone to leave the impression here that it’s a mark – this is a share margin issue. The one area where that might not be right is parts and the only reason I say this is I think we look at our part share and frankly until three months ago, we didn’t have our part share in Canada, right. So we now have detailed view of our part share.
Parts is a huge opportunity for this company, going forward. When you looked at difference between FINSA part share and Canadian part share and the profitability and customer loyalty frankly that’s tied to parts, that’s a huge opportunity for us, because we’ve been cost based pricing. We haven’t been sophisticated in our revenue management of parts and equipment, and there maybe opportunities where we may want to participate in something that we are not participating at a lower price and that’s better from a volume perspective.
You know what I mean? But that’s not the dynamics you’re talking about, that’s just more sophisticated revenue management and overall profitability for the firm and better for the customer as well. So it doesn’t directly answer your question, but we’re not talking about the market share margin issue here.
As analysts and investors we look at your try to back into your absorption ratio. You don’t disclose details around the absorption ratio, but that doesn’t diminish your efforts. The question that they have is at least according to my calculation there is a huge gap there and hence the opportunity. My question is two fold, first of all, why not disclose it to allow us to monitor the progress. And second if maybe if you’re not disclosing, maybe we’re preoccupied with the wrong target. So I’d just like to hear your views on that?
L. Scott Thomson
We don’t disclose it, but I truck it.
Dave S. Smith
And I am not sure it’s the right target.
L. Scott Thomson
We have tried a lot of conversation whether there is something that could lead you or mislead you, but from my point of view I truck it, I don’t worry at all about absorption rating piece. We are – if we talk about ideal absorption 100%; FINSA exceeds 100%, Finning Canada is slightly below the 100% and the UK is farther below the 100%. I don’t think that UK, we’re going to get it to a 100%. Canada will get to a 100% in our plans. So I think that it’s a good metric, it’s a good operating metric and we track it periodically on each part of our balances so far and each one of the Branch Manager [indiscernible] see that everyday.
Juan Carlos Villegas
All right. The second question, why don’t we disclose it? Yes, I mean, the part of the problem is and one of the reasons we’re not going to disclose parts of market share frankly is, it’s – directionally, it’s a great thing to use internally and we’re going to use that internally to drive the right behavior, but it’s a theoretical calculation based on the amount of equipment used, the amount actually part or not part and I just – I’m afraid or concerned of giving that out to the market when it’s a theoretical type of number, it provides misleading information. So that’s why, but you know internally, we track it directionally.
L. Scott Thomson
And you should be aware of that.
Juan Carlos Villegas
And the key opportunity is in Canada, I mean, so that’s right, I mean, there is a key opportunity in Canada to get that to approve that.
Dave S. Smith
But with the service excellence project and the part market share, we’ll be where we need to be or better.
L. Scott Thomson
Go back here.
You may have answered this question, two questions ago, but partially, I was wondering if you could illustrate, if you could sort of go through what changed in Western Canada when you had a huge improvement in your excavator sales. So I’m assuming something changed and perhaps you can just take us through, maybe illustrative of what’s going to go on elsewhere?
Juan Carlos Villegas
I think that I’m going to use that example. Caterpillar is a very data driven company. So the more data that you gather and put together for defined plans, the more success that you get when you get the campaigns programs and marketing programs to address the specific market needs. So we have been lacking in that market information that puts out first of all a solid marketing plan together and come back to Caterpillar to show what needed to be done to address that specific market share.
We gathered that – we recreated the customer solutions group, we brought Gary from the UK, that market is all about data, all about granularity, all about competing in a day-to-day, all that methodology together data and information and define a specific plan of [indiscernible] Gary put that marketing programs in place, gather the data, went to the industry managers in Caterpillar, outline the plan segment-by-segment, industry-by-industry, show what needed to be done, developed a forecasting plan, developed a velocity in the supply chain for excavators and guess what that were – it’s not that complex, I mean, it is not rocket science, it’s process, discipline and knowing what you want to go to and bring people that has the power and authority to help you to do it. that’s one example, the same thing with this industry.
Caterpillar is a great company, but fragmented by industry, each one of the product managers and industry managers, they own the product, they own the manufacturing, they own the specs, they own the pricing, they own the inventory.
So are there verticals or other equipment segments where you see that you can replicate what you’ve just done in excavators in Western Canada?
L. Scott Thomson
Yes, a number of them and we’re working on them. I don’t want to give you names and example, I don’t want to alert our competitors, but because you might be surprised, but a lot of our competition listen to this call. So we’re going to give you information, but not to them.
L. Scott Thomson
I think it comes back to coverage and segmentation though and that we have historically, because mining was such an – a great opportunity for us with segment of the market and focused on the mining opportunity and the change has been getting the people in place, the metrics in place, the information in place, the sales force in place, so 20 new sales individuals to go after the market that we haven’t historically been spending as much time.
Thank you, Mauk. You guys mentioned a couple of times that you guys really improved your forecasting ability and how exactly are going to share all those forecasts for 2014 with us right now, but at least with Power Systems, you talked a lot about the opportunity, $1 billion and gas compression seemed strong, do you guys see for next year, when you guys are forecasting is that still going to very strong market to you guys, do you think that can still be one of the markets that we can look to instead of mining?
Juan Carlos Villegas
What we told you is that we see growth in the next 10 years of 10% to 15% in Power Systems.
L. Scott Thomson
Juan Carlos Villegas
Three years, sorry, and that’s the largest growth opportunity that we outlined to you, that is telling you directionally that we see the largest opportunity to grow in Power System as a percentage of revenue our market share.
L. Scott Thomson
But that’s almost beyond the LNG opportunity?
Juan Carlos Villegas
L. Scott Thomson
I mean, we have seen Caterpillar spent a lot of time, a lot of focus on Power Systems, they’ve grown that very effectively, 4% compound annual growth rate. If you look at their recent research reports, it’s a big focus of theirs going forward, and in Canada, we’ve been flat and we haven’t had the organization focused on that, we’ve lost strength in the organization. We’ve had new leadership over the last six months.
Juan Carlos Villegas
L. Scott Thomson
We’ve actually created a new organization, we’ve added expertise that’s focused on the oil and gas business as well as the EPG business, so the types of growth rates that we’re talking about there, that’s not related to the $1 billion big market opportunity I put on the board.
And then in inventories, Finning is talking about it, but a lot of other companies [indiscernible] talking about having to wind down inventories to better inventory management. Have you guys look at when you see Caterpillar making comments about inventory, you guys improved your inventory management and even your customers going through some destocking with some parts and improving their inventories, so how should we look at it, when we look at the whole value chain of controlling inventories, is someone a winner and someone a loser there or can – is it possible that everyone can kind of improve their inventory management at the same time?
Juan Carlos Villegas
Yes, I wouldn’t talk about winners or losers, I think that to me the key is the velocity of the supply chain, because if you have inventories seated in your warehouse to be able to meet the service level of 85 and above, then, yes, you are satisfying your customer, but you are doing that at a high cost, the 59% of your orders are under emergency, yes, you are satisfying your customer at a high cost. If you are forecasting on velocity turns faster and you eliminate transfer of points, you can get the same parts to the customer in the time they need, but you can reduce your inventory significantly and also reduce your cost significantly, that’s the target.
L. Scott Thomson
And I’d add to that and say that the opportunities that we discussed today was around the things that we can control, so to separate the Cat supply chain from what we do. We’re focused on the types of initiatives today are what Finning can do once it receives things from Caterpillar the way things are today. If you’ve listened to Caterpillar over the last year, their number one focus is that they can do a better job of delivering inventory on a more timely basis, so from my perspective, if we do – we got to look at our own house and get it in order, but as Caterpillar continues to evolve and do that, to me, it’s nothing, but upside from it.
Juan Carlos Villegas
And I also maybe should add that some of you know, because we’ve been talking about this in the conference call that we have a project that we call it integrated supply chain, so we have a team of Caterpillar people and our people working from the factory to customers on how do we get that going and part of the three legs of the supply chain project that you see, that are with them. So yes, we can do everything we want and do it fantastically, but if Caterpillar doesn’t do it really well, we will still be in trouble. So the integration is very important and we have that and we’ve been one of the pilot dealers in Canada to get that going and that’s part of the benefits that we are seeing here.
Let’s go to the next question. Another question in the back from Tom.
Good morning. I get the sense that 2015 towards the tail end or 2016 is going to be a year, where things can really start moving in Western Canada, you have added some major projects, there are others that aren’t in this presentation, but if everything sort of kicks off and shovels hit the ground, what’s the risk that the efficiencies you’ve made or will make over the next couple of years start to unravel as you’ve got your labor contracts coming up in 2015 and 2016 and things start getting frothy again like they were six years ago or so. Can you maybe talk about the risk if you look forward to the end of those three years and if things really get frothy, how do you see things unfolding for Finning?
Juan Carlos Villegas
Let me start, I mean my whole carrier – the return on invested capital is not a new thing, right. I mean this is something that has been burned into me, and I truly believe return on invested capital drives total shareholder return. And so we will be faced with a growing market and great opportunities, but we need to keep the focus on invested capital, and it’s so important that we get after some of these things right now, so that we are in a good place, in an efficient place to take advantage of some of those opportunities, because the market will grow. But I don’t want to leave with the impression that this is the flavor of the day and we’re going to be back here next year, and I am going to start the presentation by talking about market outlook or market – here is the market outlook because this is what we control.
So hopefully we are in that position, frankly. Hopefully we are in the position where you’ve got huge LNG spent, you’ve got Kearl, Fort Hills, Jackpine, all going but we have to find a way to do it efficiently and we have to make sure we’re not get over skews on the working capital management side.
Dave S. Smith
I guess from the parading point of view is making sure that we have the processes well established in the organization under our major structure that is running supply chain, is running customer solution, that is running service excellent is well embedded as a process, so when the commercial guys, the industry guys go directly to the customers, really go wild if you well because the market is very active, these guys are in the matrix, are making sure that our process that follow, everything is controlled, that the standardization is in place, that we are still looking for efficiency, from the parading point is getting those processes that we started to embed in 2015, fully embedded in 2014, so if the market really comes out strong, we will maintain the discipline, but we’d also maintain the processes, and the process will drive that efficiency.
L. Scott Thomson
As an example, supply chain, the improvement in supply chain this year that Juan Carlos and team have done is dramatic, centralizing a supply chain function, I mean that’s essentially what’s been created this year. So if you get into that situation in 2015 and 2016, the branch manager cannot call Caterpillar and order more equipment, right. He or she is coming through a centralized system that will control that. I mean that’s a big change, that’s a big change for this company and an important step forward.
The next question? Are we all done?
L. Scott Thomson
Good. Well, thanks is there one more?
L. Scott Thomson
Good, well thanks for coming today. I am looking forward to a great 2014, looking forward to meeting all of you through marketing efforts, I guess in the first half of the year and thanks for your continued support.
Thanks. And we’ll sign off. For everyone on the audio webcast, thank you very much for joining us.
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