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Finning International Inc
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Thank you for standing by. This is the conference operator. Welcome to the Finning International First Quarter 2019 Conference Call and Webcast. [Operator Instructions] The conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]I would now like to turn the conference over to Mauk Breukels, Vice President, Investor Relations and Corporate Affairs. Please go ahead sir.
Well, thank you, Claudia. And thanks to everyone for joining us. On the call with me today are Scott Thomson President and CEO; Steve Nielsen, Senior Vice President and CFO -- sorry, Executive Vice President and CFO; Anna Marks, Senior Vice President, Corporate Controller. Following the remarks by Scott and Steve, we will open up the line to questions. An audio file of this conference call will be archived at finning.com.Before I turn the call over to Scott, I want to remind everyone that some of the statements provided during this call and information on the slides is forward-looking. The forward-looking information is subject to risks uncertainties and other factors as discussed in our annual information form under key business risks and forward-looking information, and in our MD&A under Risk Factors and Management and forward-looking disclaimer. Please treat this information with caution, as Finning's actual results, performance and achievements could differ materially from current expectations. Except as required by law, we do not undertake any obligation to update this information.Scott, over to you.
Thanks, Mauk. I will speak of the highlights of the quarter, before I turn to commentary and outlook for each of our regions. Earnings per share for the quarter was in line with our expectations. Following the system implementation issues in Chile in Q4, we restored velocity for parts by the end of the first quarter. Concurrently, we are reducing our cost to serve in Chile to position the business for improved profitability.UK and Ireland reported a strong quarter. Return on invested capital was 14.8%, the highest since the completion of our restructuring 3 years ago. Canada had a good start to the year running at an adjusted return on invested capital of 15.5% which is up 150 basis points year-over-year. We are implementing restructuring initiatives in Canada to reduce the cost base and position the Canadian business for improved profitability in a low-growth environment. The dividend increase of 2.5%, which we announced this morning, reflects our expectation of sustainable earnings growth and positive annual free cash flow through the cycle.Regarding our regions, I will start with South America. In Chile, we had restored the parts velocity from our distribution center to our component rebuild center by the end of March. We are now rebuilding components for mining equipment at the same velocity as before the system go-live. As we said before, there is a lag between the restoration of our rebuilding activity levels and the return to our normal revenue run rate. We still expect to return to our normal product support revenue run rate during the second quarter. Overall, we believe Chile has a meaningful upside. GDP is projected to grow about 3.5% over last year and business sentiment is positive.The government is expected to increase infrastructure spend by approximately 10% in 2019. In addition, we believe the demand for copper will exceed supply. As a matter of fact, the price of copper is at an investable level today. While there has not yet been any evidence of an equipment replacement cycle, we are receiving more requests and some bidding proposals for mining equipment. And importantly, our total new equipment sales in Chile almost doubled year-over-year.Argentina remains weak, but relatively stable. Last year, we reduced our workforce by 25% and closed some branches to respond to the significant reduction of market activity. The business is now modestly profitable. In the meantime, we will maintain our capabilities to participate in the development of oil and gas in Vaca Muerta. But we will be cautious about investing in Argentina until we know the outcome of the Presidential election in November.On balance, we are positive on the growth prospects of our business in South America and the opportunity to improve profitability and return on capital to appropriate levels. However, over the past few years, our operating costs have increased mostly due to wage inflation, while productivity improvements have not fully offset the impact.The new ERP system enables us to improve operating efficiencies, decrease our cost base and drive more working capital discipline. We are making permanent structural changes to our cost base. By the end of this year, we will have reduced our workforce in South America by 7% since September 2018. During the second half of the year, we should return to 8.5% to 9% EBIT in South America.Turning to Canada. In mining, including the oil sands, activity levels and demand for product support from producers and contractors remains strong. Our component and equipment rebuild facilities continue to be busy. We are also starting to see more interest in replacing and adding mining equipment and are working on numerous proposals. In Alberta, we are currently seeing a slowdown in construction markets. On the other hand, BC continues to do well. We are encouraged by LNG Canada and Line 3 and are optimistic Trans Mountain will proceed. These large projects offer solid opportunities for equipment and power systems sales, rentals and product support.All considered, after 2 years of significant growth, we expect Canada to grow modestly in 2019 and we will continue to improve profitability. To remain competitive and reduce the cost to serve, the next phase of the transformation of our Canadian business will bring more operational discipline to the business and make it more agile. During strong growth in 2018, we added approximately 500 people, the majority of which were in revenue-generating roles to meet customer demand. These roles continue to be required even in a lower-growth environment.The measures we are taking now, to reduce our costs and capital, will impact mostly non-revenue generating employees and include the consolidation of a number of Cat rental stores with our branches to optimize our facilities footprint and increase the profitability of our rental business. We expect about a 6% reduction to our Canadian workforce in 2019.Over the last 5 years, our non-revenue generating workforce as a percent of total, has gone down by about 700 basis points. These measures aimed to support -- aim to support a sustainable mid-cycle cost structure and position the Canadian business for continued success in a low-growth environment.I am pleased with our results in the UK and Ireland. The Power Systems group had a particularly strong quarter. Activity levels remain robust even though Brexit has generated a lot of uncertainty. This environment underscores the need to be lean and agile. Our cost discipline in the past few years has been successful. In the first quarter, our revenue grew 18% year-over-year, while our costs increased by only 5%. We have significantly improved profitability and return on invested capital.At a ROIC of 15%, UK and Ireland now competes for capital with our other regions. We expect healthy construction activity and large infrastructure projects, particularly HS2 to continue to provide future upside for our UK business.In my closing comments, I would like to confirm our capital allocation priorities and 2019 outlook. We have generated approximately CAD 2 billion in free cash flow from 2013 to 2018. We've allocated this capital to a combination of debt reduction, reinvestment in the business, acquisitions, dividends and share buybacks. Going forward, you can expect us to continue with this disciplined and balanced approach towards capital allocation.On February 1, we closed the 4Refuel acquisition. Our integration efforts are still in early stages and directed towards maintaining excellent levels of customer service and generating cross-sell opportunities between Finning and 4Refuel. A significant number of leads have been produced across our customer segments, particularly in Power Systems and in large projects, which highlights the opportunity in front of us. We expect some of these leads will soon convert to wins and have created significant enthusiasm at both Finning and 4Refuel.Since the start of the year, we repurchased approximately CAD 25 million in shares and we have just renewed our NCIB. However, as we've done in prior years, we will wait until we generate free cash flow in the back half of the year, before we evaluate what capital allocation options to pursue. Our outlook for 2019 remains intact. In a slow-growth environment, we continue to expect profitability and return on capital improvements in all 3 regions.I'll now turn it over to Steve.
Thank you, Scott and good morning. We saw improved results in Canada and strong performance in the UK and Ireland in the first quarter. As expected, South America had a tough quarter as we restored the parts flow to customers. Adjusted earnings per share was CAD 0.30, severance and restructuring costs in Canada and South America totaled CAD 0.11 per share, and the acquisition cost incurred in acquiring 4Refuel were CAD 0.02 per share.Our Canadian results now include 4Refuel, which contributed CAD 19 million of net revenue in the first quarter, since the acquisition closed on February 1. Product support was the main driver of higher revenues in Canada compared to last year. We saw strong demand for component rebuilds in mining and higher parts volumes in construction. New equipment sales were up slightly, driven by construction. Mining new equipment sales were quite lumpy and were below the first quarter of last year. We had significant mining deliveries in the fourth quarter of last year and expect some large deliveries in the second quarter of 2019.Adjusted EBITDA was up by CAD 24 million, reflecting the adoption of IFRS 16, which increased Canada's EBITDA by CAD 15 million, 2 months of contribution from 4Refuel and improved operating performance. Adjusted EBIT was up by CAD 3 million and adjusted EBIT as a percentage of net revenue was similar to first quarter of last year. As Scott mentioned, we are reducing the cost to serving Canada to support the sustainable mid-cycle cost structure, to continue to improve efficiencies and profitability and position the business for success in a lower growth environment.The workforce reduction and optimization of the Cat rental stores footprint resulted in severance and restructuring costs of CAD 17 million. In UK and Ireland, revenues increased by 18% in functional currency, driven by higher new equipment sales in Power Systems in both the electric power and industrial segments, as well as general construction. EBITDA was up by CAD 5 million partly due to the CAD 3 million positive impact from the adoption of IFRS 16. Importantly, EBIT was CAD 3 million above the first quarter of last year and EBIT as a percentage of net revenue improved by 70 basis points to 4.4%, reflecting leverage of higher revenues on fixed costs.New equipment sales in Chile almost doubled from the first quarter of last year. However, economic conditions in Argentina remained soft, particularly in the construction industry. Our operations in Argentina are back to being profitable following the cost right-sizing in the fourth quarter of last year. In Chile, the parts flow velocity ramped up during the quarter and was fully restored by the end of March. Product support revenues are returning to normal run rates. Our goal is to leverage the new ERP system to drive efficiencies, improve velocity and reduce the cost to serve. We incurred CAD 8 million of severance costs in the first quarter related to the workforce reductions in 2019.As Scott mentioned, we should see profitability in South America return to the 8.5% to 9% range with product support revenues back at normal run rates on a lower cost base. First quarter 2019 free cash flow was a use of cash of CAD 374 million, mostly due to higher inventories. We have elevated inventory of fast-moving parts in South America to support our customers through the processing delays. With the ERP issues behind us, we will see the majority of this eliminated in the second half of the year.In Canada, we have a modest increase in equipment inventory for the selling season and significant mining deliveries planned for the second quarter. And in the UK, contingency plans for Brexit, in preparation we have added additional parts inventory. We expect these inventories to sell through in the back half of the year. And as we mentioned on our fourth quarter call, our capital and rental experience -- excuse me, our rental -- capital and rental expenditures will be reduced by about 20% year-over-year. We continue to expect to generate positive free cash flow greater than 2018.I'll now turn it over to Mauk for the questions and answers.
Operator, that concludes our remarks. Before we go to the Q&A, we request everyone on the line to ask no more than 2 questions 1 additional time. Please go to the end of the queue if you have any more questions.Operator, can you please open up the line?
We will now begin the question-and-answer session. [Operator Instruction] Jacob Bout, CIBC.
Maybe just comment on what's left to do in the restructuring and in the cost that we should think about for the remainder of the year.
I think we're doing a pretty significant effort right now. And so our expectations -- if there isn't anything to do with the rest of the year, I mean this is an effort to get this behind us. It's primarily in Canada associated with headcount reductions in some facilities, optimization, a continuation of what we've been doing the last 4 years or 5 years.And frankly, as [ Kevin ] has come into the Canadian business. Kevin put his fingerprint on that business like he did in the UK. in South America, we've been talking about this for quite a while and needed to get the FAP stabilization behind us frankly in order to make sure we saw the clarity of the revenue coming back, but also to -- as an enabler to address some of these costs. So our expectation is this is a one-time effort and I think it sets us up well for profitability to work in competitiveness going forward.
Then maybe just on the backlog being down quarter-on-quarter and year-on-year. Can you just comment on the various divisions? Was that down and what does this mean for the remainder of the year?
You know I think it's, if you look at backlog, order intake or deliveries, I mean it was a decent revenue quarter. Let's start with Canada. New equipment revenue grew modestly, product support grew modestly like we thought it would. Order intake was down in the first part of the year. Now that being said, you know things have changed modestly I would say, in the last 3 months. You've got a new government and in Alberta oil prices are significantly higher, differentials have stayed relatively tight, and we've seen a little bit of an uptick in order intake in April actually. So I think the backlog reduction is in line with what we told you last quarter and in line with our expectations of modest growth for the remainder of the year.
Cherilyn Radbourne, TD securities.
So I guess the positive surprise for us in the quarter was that you were able to increase product support revenue in South America sequentially versus Q4. So maybe you can just talk about how that was accomplished and comment on how much revenue do you think was lost in Q1.
So I'll start with the accomplishments. And [indiscernible] on the phone on February 20, and we had just put in some of the mitigating steps to get that parts velocity flow back up and running by the end of March. And a lot of effort from the team, training, some system enhancements, you know a little bit more labor, but we recovered and it was back-end loaded in terms of getting that recovery in place. But as you think about the number of components now that are going from the warehouse into the component rebuild center, we'll go back to where we were at ERP. So I think a lot of hard work, frankly, from the team to get that done. And for those employees that are listening on the call today, I thank you for that because I know it has been a monumental effort.In terms of revenue loss, Steve, do you want to address that question?
Yes, so our revenue is around as we expected and perhaps a little better, but they came out strong into March. So we would estimate the revenue loss in total about the same as the fourth quarter where we had the revenue loss for about 6 weeks and so perhaps a little more. So probably around CAD 50 million to CAD 60 million in revenues.
And not necessarily loss.
So above all that, we find that a simple rule of thumb is, we think there is probably less than a third that was quite lost as customers had to find alternatives. And so we started returning -- restoring the velocity. Probably a third was deferred and a third was probably backlog that will get caught up over the next couple of quarters.
And then just in terms of the workforce reduction as it relates to South America, I just want to make sure that I'm understanding this properly because you sound fairly upbeat about market conditions in Chile. So should I interpret the workforce reduction as an indication that you're expecting better workforce productivity or are market conditions favorable, but somewhat less favorable than you thought, so you need to recalibrate resources?
No, it's the former. I mean, I think we are optimistic about the outlook in Chile and when you look at business sentiment and GDP, you know copper price stabilization have a relatively low start to the year. We are optimistic and so this is really about productivity. And I think to be a part of that allows us to reduce the cost base in some fashion. But there's other areas where we have tried to be more thoughtful about the cost structure and -- not in line with outlook at all, but more in line with what we need to do to improve the competitiveness of that business.
Michael Doumet, Scotiabank.
Scott, I mean sales in Chile were quite strong, I guess outside the parts flow recovery. I just want to ask the growth expectation question a little differently, because it's come up a couple of times. So where any of you, are you in the cycle as it relates to mining and construction spend in the region? Because I feel like Chile is a little late to the cycle versus maybe other regions. And then second, how sustainable was the growth that you saw this quarter?
Yes. No it's a great question. I mean, I think new equipment sales doubled, if I got that right, off a very low base. And I believe we're early stages in this mining replacement cycle in Chile. If you think about, the first stage was equipment going back to work. The second stage is uptime of that equipment, which we're seeing. And the third stages is new equipment, more new equipment (technical difficulty). When we look at the type of interaction with what we're having with customers, when we look at how customers are thinking about the -- in the investment levels of copper, I'm really encouraged about Chile long term. I mean, obviously the trade discussions that are ongoing have an impact on that. But putting that aside, I'm optimistic about what we're going to see from a growth perspective out of Chile in the near term.
Okay. So I mean you don't feel like you need to sustain -- invest in copper prices to sort of sustain the positive momentum at least for this year?
Yes, CAD 2.75, CAD 3, I mean that's when you look at the cost reduction that these miners have done and look at the cost reductions we're doing, I mean that's definitely an investable level for copper. And I think you've heard that from some of our customers when you think about Teck talking about QB2, when you are talking about [indiscernible] talking about an investable level there, when you when you hear BHP talking about expansions, Codelco talking about expansions, I mean Chile does feel it's not the low quartile cost place where it was 5 years, 10 years ago, but it's still a very attractive place to do business, develop the economy, and so I do think you're going to see capital flow into Chile in the years to come.
And then just flipping over to Canada. Can you comment on the pricing environment, maybe at least for the start of the year? And as you lower your cost to serve, I mean how should we think about the net savings in terms of maybe your desire to reinvest some of those savings elsewhere?
Yes. So it's -- I mean it's a very competitive market. And you know the oil sands, you've got a lot of customers under a lot of pressure and as a result, the cost to serve and competitiveness decisions we're making are critical. So yes, competitive environment. I think on the rental side, we've just actually seen a pretty good uptick. I think our Canadian rental business grew by about 30% year-over-year.And on the used side, I've heard a lot of people talk about, it's not a great pricing environment. That's not exactly what we're seeing to tell you the truth. So it feels -- from the commentary that I've seen over the last couple weeks, it feels a little bit better than that in the construction business to me. That being said, Alberta -- like I said Alberta order intake was down in the first quarter then slightly up. So it's a little bit of a fluid environment. But I guess I'm a little bit more positive than what I've heard from a number of calls over the last week or two.
Derek Spronck, RBC.
Just to get back to the labor and facility optimization that is due to just continued optimization, not a change in the underlying demand outlook. I just wanted to confirm that.
Correct.
Okay, and is there any way to quantify the opportunities of their labor and facility optimization?
Quantified in what sense?
Either from a -- from an expected cost reduction taking the absolute number or...?
What I think -- Steven and I have spent a lot time on this from last couple of weeks. As we think about those Investor Day projections that we gave to all of you a year ago now, that's what we're striving for. And in order to do that, we have to continue to be competitive and have a low cost structure. And I look at some of the things that we were able to accomplish in the UK over the last 3 years, and you look at the results this quarter, you look at the revenue growing at 18% and cost growing at 5%, and product support at -- and that is a -- that's a little bit of a signal of what we're trying to do in the Canadian business. It's -- you mean the agile, to be able to react, move more of our parts online, not to reduce, but the branch network because it's always going to be omnichannel. But it's just to be a little bit more lower cost and agile in our approach to our customer base while providing great customer service.And that's what we're trying to do. And I think there's a lot of opportunity for us to continue to do that in Canada. I think there's also going to be great customer service, better market share and an improved profitability, and a better outcome for our customers too.
Ross Gilardi, Bank of America.
I want to ask kind of a high-level question that kind of encompasses what what's happened over the last several years with your business. But -- I mean, if you had asked several years ago at the trough of the cycle in '16, what Finning would earn if you got back to [ CAD 7 billion ] in revenue, it would have been -- I would have thought it would have been a heck of a lot higher than what you had -- what you earned at the last peak. And it's like right now, it just doesn't look like it's going to shape out that way. I mean you did CAD 7 billion in revenue in '14, you earned I think CAD 1.90 of adjusted EPS. This year consensus is like CAD 7.2 billion and a CAD 1.90. I know you don't guide, but I mean it just seems very difficult to envision what you earn in the first quarter and the backlog. So what I'm really getting at, I mean you took out a couple of hundred million of SG&A, you've had all those focus on ROIC. I think the tax rate is higher, interest rate is more or less the same, so I'm wondering why isn't all Finning's hard work showing up on the bottom line? And is there a credible argument for peak or earnings to exceed where you were last peak and if so, when?
So, I think it's a great question. I think we're in our business has gone through a couple of cycles in 5 years and we're in a business that has become a little bit more competitive particularly with, I think mining customers. So when you think about a lot of the SG&A savings that we've done and you look at the percent -- SG&A as a percentage of revenue, that's come down dramatically.And we've banked some of that in terms of profitability improvements, some of that has been definitely reflected in the reduction in gross margin. When you think about peak earnings and whether we can get back to the [ CAD 1.95 ] which was this was the peak that you referenced, I have no doubt we can. And even in a low-growth environment this year and next year, you're going to see significant profitability improvements and significant growth improvements across all regions. So in my mind, if we're sitting here in '16, what I'd expect isthe cycle to last a year-and-a-half on the construction side. No, I would have thought that would have been a lot longer. I was not expecting Alberta to grow at 17% 18% and then decelerate to low revenue growth.But frankly, that's one of the reasons we're doing what we're doing today, it's because we see the opportunity to increase the peak earnings about where we had it before. We see that opportunity relatively near term and we built a better company and we provide better service and market share through that period. So probably a little bit harder than I thought 3 years or 4 years ago, but on the same path we talked about to Investor Day -- at Investor Day a year ago
Okay. And just on this ERP system, I mean I know you've talked about it now for a couple of quarters, but can you just go back and review? I mean how this actually happened, I mean after everything the company's gone through with the ERP systems over the last few years? You're saying margins are going to be back to 3.5%, 9% the second half in South America. I mean I'm just trying to get -- is that just because you're letting some people go or are you actually going to have the problem really fixed in the second half of the year?
Yes. So -- and I don't think you were on the last call. So we talked about [indiscernible] in February. But what we said in February was we're going to get the parts flow back to normal run rates by the end of March. And that happened. So what happened was your question and what we reviewed in February with this group is that is that the velocity of parts from our warehouse and [indiscernible] to our component rebuild center slowed down.So much different than the situation that we were in 7 years or 8 years ago where we weren't getting parts from Cats in a timely fashion and we weren't getting into all the segments. This was localized to mining, it was localized to -- at gas stand, the component rebuilds are in general.So where are we today? We did what we said we're going to do in terms of getting that up and running. It was back end of the quarter. What I had said to folks on February 20 was you're going to see a similar quarter to Q4 because we've got 3 months of impact as opposed to 6 weeks of impact. And what I said at that time was we're going to return to normal revenue run rates in the second quarter and I'm repeating that again.And so as you look at the back half of the year, 8.5% to 9%, it's going to be a combination of -- back to product support run rates that we talked about and the benefit of cost reductions.
Right. 1 thing I...
[indiscernible] Ross.
Sure.
The 1 thing I would add is that much different than the historic event that you're referring to is we were able to identify quickly and remediate. We were able to get the parts fully established and Scott said that product support revenue run rate will be restored within the second quarter. What -- and then what also then strengthens our confidence in the back half is, while it did delay for, let's say, 3 months to 6 months, the benefits of process efficiencies enabled by the ERP will still start to be manifest within this year as we go into the second half.
If I get the revenue -- the run rates fixed, but just again like very simply will you consider the issue completely fixed and behind you in the second half of the year, or is a lot of the margin improvement just from a workforce? I mean some of it's from workforce reduction. So is this pretty much a done deal at this point?
It will be done. You -- we will not be talking about ERP in the third and fourth quarter of this year.
Devin Dodge, BMO Capital Markets.
I just want to come back to the Chilean mining business. I think we touched on this earlier, but just can you talk about what your customers are saying in terms of proceeding with their potential new mine sites? When we could see these commitments come forward in a more meaningful way and maybe how quoting activity has been trending in the last couple of months.
So one, it's been a pretty positive dialog, so there's been a lot of discussion around new investments and I mean you guys see that too. So I'm not telling you anything you don't know. You know my expectation is over the next you know '19 and '20 you're going to see people make some decisions around capital. As it relates to specific conversations with any customer that -- you know obviously not appropriate for me to discuss, but we are given the copper price and given the stability of Chile and the better political environment we are seeing a pretty significant uptick in quoting activity and you see it through the new equipment line.
I think you also mentioned in your prepared remarks that replacement quoting activity or replacement activity, you haven't seen any kind of tick up there. I guess what's going to take to get that -- kind of get started from your perspective?
Some of these people start to put capital to work. So when I talked about replacement activities as the quoting and the RFPs are in process, but we haven't seen people make decisions. And so you know that's the logical next step in terms of what happens in that copper market.
Okay. Got it. And then 1 more for me. But the MDA made reference to the expiry of a CBA affecting certain employees in Western Canada. Can you talk about how those discussions are proceeding and how we should be thinking about any kind of risk of a work stoppage, if an agreement doesn't reach soon?
Yes, that's right, Devin. So we actually had the expiration of our collective agreements with our Alberta Union on April 30 and so we're now -- we've extended that obviously, because we're in negotiations with the Union and the negotiations are constructive. That being said, you can see from the actions that we're taking today, it's a very difficult environment and we're very focused on costs throughout the organization. And so I think we'll continue to be constructive with -- both sides will continue to be constructive. But we've got work to do to make sure the cost structure of this business is appropriate for the economic environment we're in.
[Operator Instructions] Ben Cherniavsky, Raymond James.
Most of my questions have been asked, though. Maybe I can just take them in a slightly different direction. One, restructuring in Canada, there's been a number of these restructurings and optimization efforts in Canada over the years. Can you talk a little bit about how this one is different? What position specifically are you eliminating and what triggered this? Because I don't think in the last couple of calls or opportunities we've had to chat, you've sort of -- kind of really talked about a specific restructuring initiative that was coming in the region.
So if you think back over the last 5 years, we went through the downturn and we made very difficult decisions to reduce about 20% to 25% of the workforce and optimize facilities. And that allowed us to have a cost structure that was more appropriate for the environment we're in. In '17 and '18 we saw pretty significant growth. Top line I think in Canada grew at about 20% and we ended up adding about 500 revenue-generating roles. So particular -- primarily mechanics from mine folks.As we look at you know the next phase in Canada and you think about Kevin coming into this business and seeing you know how we've approached, like I said the UK business, I think there's some lessons there for us. And so as you look at the next phase here of the journey, we need to be more lean, we need to be more competitive, we need to be more agile. And this reduction is primarily non-revenue generating roles. So back office administration, consolidation of some of these functions, frankly between FII and Finning Canada, and between the 3 of the 3 big business units, Power Mining and Construction and between branches, I mean ones we are doing with the Cat rental store, is bringing standalone car rental stores into our overall branch network, which is going to have an impact on unfortunately people and bricks-and-mortar.And so I view this -- that as a logical next step in a transformation that we've been on and we're doing that to continue to maintain our competitiveness and continue to deliver the types of returns that our shareholders are expecting of us.
Okay. Well...
The last thing and I said this in my note, opening comments. If you look at revenue-generating -- or sorry, non-revenue generating roles as a percentage of the overall headcount in Canada, that will have been reduced over a five-year period from about 23% to 15%. And so this is a journey -- this is a journey we're on and it's about being lean and agile, it's about being competitive.
Okay well, my second question I guess would be somewhat related to the color you just provided. And also I think Ross touched a little bit on this, but can this business become a compounder over time as opposed to a cyclical? Like can we move away from talking about where -- trying to predict where copper prices are going and where we are in the cycle and what peak earnings are going to be? Because if you look back since 2006, your net earnings have pretty much been flat. I mean I think they've compounded up about 1%. The stocks fluctuated between CAD 20 and CAD 30 in over 13 years and spending is at this point, I think rightfully perceived, as a cyclical to the trading stock. How do you change that narrative? How do you change the business to become a compound or absent opportunities to buy more dealerships, is that even possible in a business that relies on customers who deal on cyclical markets?
Yes, now it's a great question. And on my mind, obviously, I think what we're trying to do here is get the cost structure to a point where you're continuing to see relic enhancements over time. So, that's point one. And we've had -- because of the market we're in, in Alberta and the oil sands, we've had pressure on the gross margin side and we need to get ahead of that. We need to get ahead of that with the cost structure. And so that's part of what we're dealing in on the Canada side.The second thing I would say is that will allow us to get more market share, that will allow us to be more competitive, that will allow us to grow the revenue base at a significantly higher level peaking over cycles than we have historically and that will be through competitiveness, connected machines, digital and more product support. And you heard that through the Cat Investor Day around services. I mean, essentially what services are, this product support and we think we can have a growth relative to history on our product support side.And then the third piece of it is capital allocation. And this is why I focused on that. Because what we do with that capital is extremely important for our shareholders. And if we can do a combination of growing the top line through some of these complementary acquisitions like 4Refeul or returning that to shareholders through share repurchases like we've done, then you actually have a business that through the cycle improves its earnings potential, so that you're not just peaking at an earnings level and profiting at an earnings level depending on where the copper price and oil price is. In every cycle you're getting a better earnings profile and a better ROIC profile than you have in the previous cycle. And frankly, you know as you look at this business moving towards 20% ROIC in Canada, we're up last -- this quarter we're up 150 basis points, last year we were up 350 basis points. If you can see the path to '20 that is significantly in my view, stronger business than we have been historically, and that's what we're trying to do here.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Breukels for any closing remarks.
Well, thank you very much Claudia and thank you everyone for listening. We look forward to speaking with you again next quarter.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.