Finning International Inc

TSX:FTT

Earnings Call Transcript 2020-Q1

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Finning International First Quarter 2020 Conference Call and Webcast. [Operator Instructions] The conference is being recorded. [Operator Instructions]I would now like to turn the conference over to Greg Palaschuk, Executive Vice President and CFO. Please go ahead.

[Greg Palaschuk, Executive VP & CFO]

Thank you, operator, and thank you, everyone, for joining us on today's call. I'm Greg Palaschuk, EVP and CFO. And I'm joined today by Scott Thompson, President and CEO.Following our remarks today, we will open up the line to questions. The call is being webcast on finning.com and an audio file of the call will be archived for 3 months on our website. I also encourage everyone to follow Finning on Twitter, LinkedIn and Facebook where we have a regular flow of interesting content on products, promotions, customers and community involvement.Before I turn it over to Scott, I want to remind everyone that some of the statements provided during this call are forward-looking. This 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 in our MD&A under risk factors and management and forward-looking disclaimer. This quarter's MD&A includes important additional detail regarding the potential impacts of COVID-19 and the associated risks. Please treat this information with caution as Finning's actual results could differ materially from current expectations.Scott, over to you.

[L. Scott Thomson, President, CEO & Non]

Thank you, Greg, and good morning, everyone. On today's call, I'm going to comment on our performance in the first quarter, provide an update on how we are navigating the current environment and discuss our outlook going forward.First, I'd like to thank all Finning employees around the world who are demonstrating great resiliency and adaptability in serving our customers and taking care of one another. I'm very proud of our teams and of what they've achieved in the first quarter.Despite challenging market conditions to start the year and then complications from the COVID outbreak, we delivered strong performance. We kept close to our customers as the crisis developed, and we were able to maintain our operations with only minimal disruptions. The feedback I've received from our customers has been both positive and appreciative of our support and operational performance.Despite the difficulty of the situation, Q1 was one of our best quarters in terms of improved safety and customer feedback. Our total incident frequency rate decreased by 36% and our customer loyalty scores increased by 6 points in Q1 2020 compared to Q1 2019, both remarkable improvements achieved by our employees.During the quarter, we achieved what we set out to do at the start of the year despite an increasingly challenging market backdrop. Despite lower revenue, our EBITDA and EPS grew by 5% and 9%, respectively, year-over-year. Our execution in South America is improving as evidenced by strong product support, lower SG&A and profitability recovery. We are benefiting from a reduced cost base in Canada, and we delivered higher profitability on lower revenue year-over-year.Our U.K. operations were impacted by COVID-related disruptions more significantly than other regions in Q1, which exacerbated already low business confidence and activity levels at the start of the year. While we are expecting a challenging Q2, we are encouraged as we look beyond Q2 with a strong position to capture HS2 opportunities and a solid backlog of power projects when project delivery resumes in the second half of 2020.And finally, we're improving our cash profile and reducing financing costs. The organization-wide focus on working capital discipline and inventory reduction led to a strong foundation for free cash flow generation during 2020.We are benefiting from the diversification of our business across geographies and market segments. While our U.K. operations have been the hardest hit, our customers' copper mining operations in Chile have been less impacted to date. Overall, the resilience of our business model and improved execution amidst low commodity prices, low GDP growth and COVID disruptions at the end of March, delivered earnings of $0.33 per share in the quarter.It is worth highlighting what we're doing to protect the company and all of our stakeholders in a period of unprecedented uncertainty as we continue to adapt to COVID-related headwinds in each of our regions. Our global teams responded very quickly and effectively as the crisis unfolded. We have robust continuity plans in place, with our top priority being the health and safety of our employees, customers and the communities where we operate. We have taken a risk-based approach to assess each of our facilities, and the executive team has been meeting daily to review and reevaluate our actions. Our measures include distancing, team separation and extensive work from home as well as elimination of all noncritical travel. We are seeing the benefits of our investments in IT infrastructure which are now enabling efficient work from home. Employees who can work from home are doing so.In order to align our costs with expected changes in business activity in each region, we started by reducing Board and executive compensation and then worked with salaried and hourly employees as well as our union partners to implement pay reductions, reduced work schedules, furlough and workforce reductions in some areas. For example, in the U.K., about 50% of our employees are currently furloughed, and we are leveraging the U.K. government assistance programs. We also took proactive measures to control working capital investments. As a result, we were able to deliver significantly improved cash flow in Q1 while concurrently strengthening our liquidity position.With the full support of Caterpillar, our global supply chain continues to function well with minimal disruptions to date and global continuity plans in place. Our investments in digital and omni-channel technologies are paying off as adoption is accelerating. We now have 47% of our nonservice parts ordered online in Canada, up from 25% in 2017. We set a new record in digital parts drop box volume in April as the number of new customers more than tripled compared to the prior year. Globally, over 80% of the CAT assets in our territories are connected. This enables us to remotely monitor more equipment and become more sophisticated in ordering inventory. I'm pleased to see an increasing level of technology adoption from customers, which is helping our business maintain effective operations as well as increasing the rate of return on investments we've made in recent years.I will now turn to our perspective going forward. The ultimate impact of COVID is difficult to predict as it will depend heavily on the duration of social distancing and quarantine requirements. The timing and pace of macroeconomic and commodity market recovery are also unclear at this time. We expect the impacts of these factors on our second quarter results will be material. Our consolidated net revenue in April was down approximately 15% from average monthly net revenue earned in the first quarter of 2020.In each of our regions, our customers have been reducing capital spending and implementing cost containment measures and business continuity protocols with a range of impacts on activity levels. Since the middle of March, some of our customers have scaled back or, in some cases, suspended operations to comply with requirements and recommendations of governments and health care authorities.We are having ongoing dialogue with our oil sands and mining customers to understand the risk of potential disruptions to our operations. To give you a few examples, in the oil sands, our producer and contractor customers have indicated they may park about 20% to 30% of their truck fleets for a portion of the second quarter. Fortunately, our largest oil sands customers are more dependent on WTI than Western Canadian Select prices, so they are less impacted by the current oil price differential than other producers in the region.Near-term declines in activity are expected to be greater in the construction sector where machine utilization hours and product support run rates are down since mid-March but seem to have recently stabilized. Run rates have been more resilient in the regions of British Columbia, Saskatchewan and Chile but lower in Alberta, the U.K., Ireland, Bolivia and Argentina. Importantly, our mining customers in Chile continue to operate, and the vast majority of our equipment continues to be utilized. We will continue to control what we can, match our capital investments and cost base to activity levels and accelerate cost reductions where necessary.And on this note, I'll pass it over to Greg.

[Greg Palaschuk, Executive VP & CFO]

Thank you, Scott. I'm going to provide more details on our performance in the first quarter, comment on our actions to manage our invested capital and discuss our strong and improved liquidity position.Although the revenue profile was more challenging than we were expecting at the beginning of the year, strong execution from our global teams resulted in improved profitability and earnings. Product support revenue growth in South America was a key driver, with product support revenue up 23% driven by strong execution in Chilean Mining operations and resilient demand from Chilean Mining customers that continue to operate.SG&A was down in absolute dollars year-over-year and sequentially, reflecting ongoing improvements in productivity. EBIT margin rose to 7.8% and EBITDA to 12.4% ahead of pre-ERP implementation levels and the highest level of profitability in South America since the second quarter of 2018.Canada entered 2020 with a lower cost base and continued plans for cost-to-serve improvements. This strong cost focus, along with resilient product support volumes, which are up sequentially from Q4 2019, enabled us to demonstrate improved profitability on lower revenues. EBIT margin was 7.9% and EBITDA was 13.7% for the first quarter.In the U.K., low activity levels at the start of the year and COVID disruptions, which impacted the U.K. earlier than other regions, led to a low level of profitability in the quarter. Lack of mining exposure makes the impact of COVID in the U.K. more significant. Profitability of our U.K. operations is more sensitive to equipment and power system project volumes. We also experienced labor recovery reductions in the U.K. that impacted our SG&A costs prior to increasing the number of employees on furlough.Backlog increased in the first quarter by $100 million from $700 million to $800 million, mainly driven by order intake in Canada related to the pipeline sector and in the U.K. related to Power Systems projects, which adds to their backlog of high-quality projects with delivery expected to ramp up in the second half of 2020.Free cash flow used in the first quarter was modest at $50 million, reflecting strong inventory management from both improved long-term planning as well as a number of swift actions taken in Q1. In line with these themes, the Canadian operations generated positive free cash flow in Q1 2020 with a positive $14 million contribution from 4Refuel.These strong results were achieved while COVID-19 began to have an impact on our business in Q1 2020. These areas include: delayed equipment deliveries, lower parts sales in construction and lower rental utilization in March in all regions, reduced productivity at our component repair facilities and lower labor recovery at our branches due to shift separation and distancing measures, temporary closure of certain facilities in South America and allowance for doubtful accounts related to an increase in expected customer credit risk. These impacts were partially offset by swift action taken on discretionary costs and the many cost flexibility actions highlighted by Scott earlier. We continue to monitor customer demand closely and may implement further restructuring as appropriate.In addition to the impacts of COVID-19, our customers are dealing with historically low oil prices. And as a result, some headcount reductions will be necessary as we work to scale our operations to match expected end-market demand.I will now turn to our invested capital measures. We have acted swiftly and effectively to put in place capital controls for the remainder of the year. We have minimized capital expenditures to mission-critical maintenance and IT capital only, and we are limiting rental additions to match dispositions. As a result, we are now targeting 2020 net capital and rental fleet expenditures to be in the $90 million to $140 million range, down from the $200 million to $250 million range previously targeted.Inventory ordering and working capital management remain key focus areas throughout the organization. Our inventory was reduced by $250 million in Q1 2019, excluding the impact of FX. And we redoubled our efforts to ensure we are matching inventory to demand levels.We started the year with a reduced order book and early readings from connected data indicated a decline in machine hours in March, which informed our decision to further mitigate our inventory position at that time. This includes additional dealer trades, reduced uncommitted inventory orders and selected order deferrals. As a result of these process improvements and near-term actions, our prime product inventory is in much better position relative to previous downturns.Lastly, I'll comment on our strong and improved liquidity position. We have further improved our liquidity position by securing an additional $500 million committed revolving credit facility. The new facility has a term of 2 years, can be used for general corporate purposes and has substantially the same terms and conditions as existing committed global credit facility. This brings our total committed capacity to $1.8 billion.As at March 31, we had $260 million cash on hand and less than $300 million drawn on our credit facility. We have significant headroom in our financial covenant of 67.5% of net debt to total capital. While our expanded liquidity capacity provides flexibility for a wide range of both stress and opportunity scenarios, our base case and primary objective is to generate strong free cash flow and prioritize capital allocation towards debt repayment and meeting our dividend commitment. We expect strong free cash flow this year and are targeting approximately 50% EBITDA to free cash flow conversion. The absolute level will depend on the degree and duration of COVID disruptions, the resulting revenue and EBITDA profile for the remainder of the year.As we navigate through the current environment, our focus is on mitigating the near-term impacts while positioning for productivity, profitability and ROIC improvements in a recovering market.I will now turn the call back to Scott for some summary comments.

[L. Scott Thomson, President, CEO & Non]

I would like to conclude our comments today by highlighting the fundamental strength of our organization.First and foremost, we have great people. Keeping things running or getting things back up and running quickly is literally what we do every day. So when confronted with the types of challenges we have today, we are resilient and respond rapidly for each other and our customers.We have a resilient and proven business model anchored by a strong product support business and diversification by geography, industry and product line that is complemented by a countercyclical free cash flow profile that further supports our strong financial and liquidity position, all of which serves us well in a higher risk environment.We entered 2020 on a good trajectory of cost and capital focus, which allowed us to adapt quickly to the sharp downturn in the outlook. We are laser-focused on controlling the controllable, and our Q1 results demonstrate improved execution on many fronts. We have taken quick actions to match our capital investments and cost base to activity levels, and we're accelerating cost reductions where necessary.We are benefiting from our investment in technology and advanced digital and omni-channel capabilities. Technology is a great risk mitigator in a crisis. Our strong offering is facilitating accelerated adoption of online services and the extensive asset connectivity in all our regions enables us to be informed on a real-time basis, remotely monitor customer fleets and add significant insights and value to our customers.Looking forward, our business is very well positioned for the long term. We have many important large infrastructure projects in front of us. The oil sands are world-class producing assets with low operating costs and decades of reserves. Copper mining in Chile is resilient and positioned for long-term growth, and governments around the world stand ready to support shovel-ready construction projects when the recovery phase is ready to begin.We have a very engaged, rejuvenated and action-oriented leadership team that is executing well today and very excited about Finning and our future. And with that, operator, I'd like to open the call for Q&A.

[Operator]

[Operator Instructions] Our first question comes from Yuri Lynk with Canaccord Genuity.

[Yuri Lynk]

Nice quarter. Scott or Greg, I was wondering if you can just provide a little more detail on the April revenue split that you provided. Does that look similar to what you saw in the first quarter in terms of the product support being kind of 2/3 of that revenue? Just trying to get an idea of what we might see this quarter.

[Greg Palaschuk, Executive VP & CFO]

Yes. So I mean, obviously, Q1 was a large mix shift to product support, which is a feature of the business. So we do expect going forward that, that shift will continue and particularly on a year-over-year basis.

[Yuri Lynk]

Okay. All right. And then just as we look at your SG&A, what proportion of that would you characterize as having some flex or being variable versus fixed?

[Greg Palaschuk, Executive VP & CFO]

Yes. I mean, obviously, we've been on the cost theme for quite a while now. So coming into this downturn, we're obviously in a good position, I feel like we've been really proactive. So if you look even at Q1 itself, revenue was down 16%. And SG&A is down 5%. And Scott walked through a whole list of flexibility and cost reduction initiatives that we put in place, ranging from 5% to 20% salary reductions and obviously work on everything discretionary and a number of flexibility initiatives. So that's what we did in Q1, and we think we can continue to push on reducing SG&A going forward. And so Q1 is instructive, but I think there's more that we can do.

[Operator]

Our next question comes from Jacob Bout with CIBC.

[Jacob Jonathan Bout]

The strong margins that you saw in the first quarter, how much is a result from mix versus reducing cost? And then maybe just talk about maintaining these higher margins given everything that's going on right now with COVID.

[Greg Palaschuk, Executive VP & CFO]

Yes. I mean there was a strong mix shift in the first quarter, and so that was a key future. But even margins within the mix were quite strong. New equipment was reasonably strong and there was high-quality product support mix. Last year, we had more subcontractor work as well as some lower-margin mining in the mix. So that helped. And we do think that, that mix shift and the higher-quality stream, I think, is a feature that we see being able to be maintained.

[Jacob Jonathan Bout]

Maybe my next question is -- and I know it's early days, but as you kind of work through this period of the pandemic, some of the lessons that you're learning here. I know Scott talked on this a bit about connectivity and digital. But how is it going working from home? What are some of the things you're looking at right now?

[L. Scott Thomson, President, CEO & Non]

Yes. Thanks, Jacob. So first, we reflect on the last 3 years and the amount of capabilities we've invested in on the digital side and some of the investments we've made on strengthening the foundation. And I think in times like this, it's really demonstrating the importance of that. And so very quickly, we were able to get everybody that could work from home to home. And that -- we did that without any hiccups, and that continues. And I think there's a strong lesson there in terms of how we work going forward, both from a travel perspective and just a flexibility perspective for our employees. So I think that would be one thing.Secondly, on the omni-channel capabilities. I mean you've been watching for the last 3 or 4 years, we've been growing at a pretty significant rate. But to have now 50% of our nonservice parts revenues -- in Canada, I think, 47% -- that's a big shift. And I think it's a win-win for customers. And setting it and also in the context of omni-channel, so you'll have both opportunities for customers -- the digital drop boxes have tripled in terms of what we've seen just the last year, which we wouldn't have been in a position to do unless we've made those investments.And then lastly, on the asset connectivity, we've been on that journey for 4 years, but to see the benefits of asset connectivity right now in terms of looking at trends for inventory ordering, but also providing insights to customers has been hugely important. So I don't -- I think it's confirming a lot of what we've been doing the last few years and giving us the confidence to even accelerate the digitization of the business, and we'll continue to do that going forward.

[Jacob Jonathan Bout]

How many employees can actually work from home or percentage of the workforce?

[L. Scott Thomson, President, CEO & Non]

Yes. Do you have the percentage, Greg?

[Greg Palaschuk, Executive VP & CFO]

Yes, it's about 1/3.

[L. Scott Thomson, President, CEO & Non]

1/3. But that is not limited by our IT capabilities. Our IT capabilities are have not been a constraint in this environment. That's limited by the fact that we are an essential service, and we're on the frontline. And so the back office can work from home, a lot of the back office, but we've got a lot of field technicians and mechanics who are, by necessity, keeping our customers up and running are on the frontline. So that 1/3 is -- you have to keep that in context.

[Operator]

Our next question comes from Cherilyn Radbourne with TD Securities.

[Cherilyn Radbourne, Analyst]

In terms of some of the social distancing protocols that you've implemented at your own facilities, can you give us a feel for how that's impacting internal productivity? And do you think you can reduce that inefficiency over time as it becomes the new normal at least for a while? And do you find ways to get better at it?

[L. Scott Thomson, President, CEO & Non]

Yes. That's a great question, Cherilyn, and I think we're all learning through this process. So one, from the work-from-home perspective, I actually think that could provide some benefits from both the cost flexibility and amount of real estate that is required. And so that, I think, is a benefit from a productivity perspective. On the other side, definitely taking care of our frontline employees in terms of how we think about shifts, how we think about transportation, how we think about spacing within facilities, I think, will take some time to get used to. And I've been really pleased with how we've adapted very quickly. And I think our health rates are much better than what we're seeing in our various regions, partly because of how quickly we acted. But no doubt, there's going to be a learning stage here where we're going to have to put the health and welfare our employees ahead of the productivity and make sure we grow into that productivity.

[Cherilyn Radbourne, Analyst]

Okay. My next question is a little more difficult, but we're getting this a lot from investors. With respect to Canada, has there been any change to your view of the company's revenue opportunity over the cycle in the oil sands specifically and in Western Canada more generally?

[L. Scott Thomson, President, CEO & Non]

The answer is no. I mean I think we're in a particularly difficult time right now with the oil price, where it's been in the last month. But on the other hand, it's lost -- we now have 4 pipelines in construction. Who would have thought 2 years ago that we have 4 pipelines in construction? And so I think the crisis, from an oil price perspective, has forced industry and the government to really move forward on getting this commodity to tidewater, which I think is helpful, or to other markets. I think the second thing that I would say is we also recognize we have a significant market share opportunity on the aftermarket side. And I do think opportunities like this, so opportunities in the aftermarket, this is where we shine in crises like this because of our people and our service capabilities. And I think that will be helpful.And then I guess the third thing is there is going to be pain undoubtedly in Western Canada. But I do think it's probably consolidation around the end customer as opposed to overall reduced production, if that makes sense, or oil price production. And I think we'll continue to be there for our customers, both large and small, to capture those opportunities. So I don't see -- I see this as a short-term blip in terms of the trucks being parked as opposed to anything long-term in nature.

[Operator]

Our next question comes from Michael Doumet with Scotiabank.

[Michael Doumet, Analyst]

So you identified the April sales were down 15%. That's roughly in line with Q1. And I guess in my perspective, I thought April sales would have been lower given the decline started in mid-Q1. You also had an easier comp in Q1 with the ERP issues in South America. So what explains the relative strength? And can April actually be the low point for Q2 given the economies reopening in some regions?

[Greg Palaschuk, Executive VP & CFO]

Yes. I mean April is complete. So we put out the number. Obviously, there's a seasonality typical in this business, and we're obviously not in a normal seasonal cycle. So we put out the number, 15% is the number that we put out into the market. And I think it's too early. We've seen signs of stability in many pockets. But we're in many regions, and so you see different pieces of data. But I think it's too early to say exactly what's the bottom. Obviously, our goal is to put a bunch of sales campaigns in place and go and sell the inventory that we have and control our own destiny. But I think it's too early to call bottoms or sequential growth.

[Michael Doumet, Analyst]

Okay. Just going -- so last time Finning recorded sales of $1.4 billion, if I just go back in my model, that was Q1 of 2017. And the product support business has grown since then, and you've made a number of permanent cost reductions. So I'm assuming that's what explains the higher EBIT margins versus that period. I mean is there a reason to think that if revenues continue to track at or above your 2017 levels for the remainder of the year, with favorable mix and lower costs, that even margins should at least exceed those of 2017? Or is the downturn -- or is this downturn more disruptive on the cost side in your perspective?

[Greg Palaschuk, Executive VP & CFO]

Yes. I think it's a little early to do a full comparison to previous cycles and duration. Obviously, we showed in '15, '16 that we can take a lot of costs out of the business. And we think we've got a toolkit today that allows us for improved employee productivity, probably more in a methodical way. So obviously, near term, we're doing everything we can on the cost front, Scott named a list of them. And you have to have a view on what shape the recovery is. I know there's a whole alphabet of letters out there. But if it's longer, we think we've got lots of productivity improvements, similar to what we made in '15, '16. If it's shorter, we've got a toolkit around some of the actions that we've done. And we're hopeful that the recovery is earlier rather than later, but we have to be ready for both.

[Operator]

Our next question comes from Ben Cherniavsky with Raymond James.

[Ben Cherniavsky, Managing Director & Head of Industrial Research]

My questions have been addressed, although I was just hoping that you could maybe elaborate on -- a little more on Michael's question about the cadence of sales decline in April. Because I'm with him, I don't quite understand how the decline in April, when everything shut down, was equal to the decline in the entire first quarter when you had January and February in their normal operations. Can you maybe just address that specifically?

[Greg Palaschuk, Executive VP & CFO]

Yes. Sure, Ben. I mean so every -- we've got multiple regions that have different shape to different months. So I mean it was a reasonably slow start to January and February was strong. And then March does have a mix of the dynamics that we did talk about, but it's typically also a high component change of season. So you've got mixes depending by sectors. And so it's not a typical January, February and then a bit of a dip down in March. There's a mix in there. And so that's why we highlighted April versus the average for Q1.

[Ben Cherniavsky, Managing Director & Head of Industrial Research]

Okay. I'm still a little -- I mean, March, we're talking year-over-year, right? So seasonality shouldn't really be -- unless the seasons were different, was it warmer or colder? Or was weather a factor? Or...

[L. Scott Thomson, President, CEO & Non]

No. I think -- Ben, it's Scott. I think the 15% is relative to Q1, right? So...

[Ben Cherniavsky, Managing Director & Head of Industrial Research]

You're saying you're down 15% to Q1, not Q2 of last year?

[L. Scott Thomson, President, CEO & Non]

Right. Correct.

[Ben Cherniavsky, Managing Director & Head of Industrial Research]

Okay. That's clear. Okay. That's helpful. I guess while I've got you, just on the SG&A, and I apologize if I missed this in the disclosure. But what component of the decline in SG&A -- can you quantify what was accounted for through lower stock-based comp?

[Greg Palaschuk, Executive VP & CFO]

Yes. Year-over-year, that was down about $9 million.

[Operator]

Our next question comes from Ross Gilardi with Bank of America.

[Ross Paul Gilardi, Director]

Not to dwell on this 15%, but now I want to make sure I totally understand what you're saying. If you take down 15% in April and you extrapolated that for the entire second quarter, it would actually imply that you're down like 35% to 40% year-on-year. I'm not asking you to endorse whether or not 15% will be the reality for all of Q2. But am I thinking about it correctly? Because I thought it was clear as day in the press release that the down 15% is relative to Q1 and not a year-on-year comment.

[L. Scott Thomson, President, CEO & Non]

Yes. So you're right, if you extrapolated April with those numbers, I guess I would caution you not to do that or would be very thoughtful about doing that given the uncertainty. I think we're all kind of learning day-by-day on this. I think the good news is in the last week, we've seen a little bit of stability, particularly on rental utilization, which has been helpful, and then also back-to-work programs and also oil price increasing a little bit. So if you -- what we're trying to do is just be as transparent with you as possible since we had the April results, you'll have to come to your own judgment in terms of where we are in the recovery cycle.

[Ross Paul Gilardi, Director]

Got it. And just in terms of the parked fleet, it sounds like you think this is just a short-term dynamic but I guess risk that you could see the spike in parked fleet, cannibalized parked demands over the next 6 to 12 months if it persists longer than you think it will.

[L. Scott Thomson, President, CEO & Non]

Yes. So I guess 2 things on that. One is in Chile, it's been very stable, right? And you've seen very little parked fleet. And I think that plays a little bit with copper price, peso devaluation, input cost lower. And so that's been a pretty helpful component. On the oil sands, I think it's more related to storage and oil price as opposed to COVID. In fact, I know it's related to oil price and storage. And so your view on the recovery there will be dependent on what your view on oil price and storage is. Our communications with our customers is they've indicated 20% to 30% for a portion of 2Q. And frankly, we're at that 20% number right now. So again, some guidance that we're trying to give you to be helpful from what we're seeing.

[Operator]

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

[Maxim Sytchev, MD & AEC]

I was wondering if you don't mind maybe commenting on the rebuild activity as some of the equipment is parked, obviously, in the oil sands or clients are not touching those assets at all.

[Greg Palaschuk, Executive VP & CFO]

Yes, great question. That's an opportunity that we're really looking at. I mean, obviously, given, hopefully, the temporary nature of COVID and the potential recovery, it's not a typical shape. And so we are in conversations with our customers to put together a proposition that allows us to rebuild some of this equipment that is being parked. And so we're in ongoing conversations about that opportunity.

[Maxim Sytchev, MD & AEC]

Okay. But right now, there's nothing kind of in writing or in stone from the clients.

[Greg Palaschuk, Executive VP & CFO]

We always have rebuilds ongoing, but the incremental due to park is a pretty recent. And so we're in discussions as we speak.

[Maxim Sytchev, MD & AEC]

And the ability to actually perform this work given all the social distancing requirements and so forth, do you still think that you can be able to capture, I mean assuming that you're going to get a go-ahead from the sub clients?

[Greg Palaschuk, Executive VP & CFO]

Yes. We continue to rebuild every day of the year even through this period.

[L. Scott Thomson, President, CEO & Non]

Our OEM facility has done a great job in terms of distancing, shift management and so we haven't had any significant issues in that OEM facility. And again, back to management and leadership, they've done a great job there, keeping the rebuilds up and running.

[Maxim Sytchev, MD & AEC]

Okay. That's helpful. And then, Scott, obviously, there's language around HS2 in the MD&A. I was curious in terms of, again, that opportunity. Are you getting a sense that you will be successful on that? Or -- because, I mean, like it's -- H2 2020 is pretty close in terms of the contract announcement, so forth, maybe any commentary there?

[L. Scott Thomson, President, CEO & Non]

Yes. So the government announced right after the prime minster came out of his isolation that they were going to move forward with HS2. I think that was on April 14. So that was a big decision from the government. And I think the government is trying to put some infrastructure capital to work to offset, obviously, the slowdown. And so our expectation is this -- the contract awards happen relatively soon, in the next couple of months. And so we'll have clarity here pretty quickly on how we perform from a market share perspective. We feel really good about what we've been doing. We've put a very, I think, thoughtful proposition forward from a technology and equipment perspective. We've been working on it for 3 years, and we've got great relationships with the customers. So I'm feeling good about it. And I think it should be a second half 2020 opportunity.And so for our U.K. business, which is obviously been impacted by the slowdown, I think the potential to start delivering under HS2 and then also power system contracts, which we see a really good backlog accumulated on the Power Systems side, and I think a lot of that is driven by COVID and the need for more storage and data, I think that will really help our U.K. business in the back half of the year.

[Maxim Sytchev, MD & AEC]

Sure. And just in terms of the structure for the HS2 contract, I mean, is it a type of situation where you could get kind of 100% of that or nothing? Or is it going to be partitioned into multiple slices, so we can sort of guesstimate your probability of success?

[L. Scott Thomson, President, CEO & Non]

Yes. No we partitioned it to multiple slices. So there's 7 big portions of HS2, and there's probably 3 that are -- still a lot of equipment associated with it. And then on each of those 3, there's a number of contractors and then some subcontractors underneath that. So that's why -- in a project like this, you literally have been working on it for 3 years to put ourselves in a good position. And so there's probably not a scenario where you're 100%, you're -- it's probably not a scenario where you're 0. I think you're somewhere in between, and the work that we've done, I think, will position us pretty well for a good outcome.

[Maxim Sytchev, MD & AEC]

Right. And then just shifting gears to Chile. Any update in terms of how we should be thinking around deliveries for QB2? Is that being delayed? Or what's kind of the update there?

[L. Scott Thomson, President, CEO & Non]

We're a little bit dependent on the customer. And so the customer has suspended operations because of COVID. And I know what you know from a public disclosure perspective. So that's all I can say at the current time.

[Maxim Sytchev, MD & AEC]

Okay. Fair enough. And last question, just in terms of retention strategies around technicians, especially in Alberta and Chile. Any comments there, please?

[L. Scott Thomson, President, CEO & Non]

Yes. I mean I think the most challenging and the most important thing through this crisis is human capital, and you need to maintain your human capital. It's the #1 thing that, as a team, we're talking about every day. And so we will be very thoughtful on that front. And we'll take advantage of government programs where we can. That will help us do that. So for example, in the U.K., it's hard to believe, but 50%, 5-0 percent, of our employees are furloughed right now. And that's because the activity levels are so low. And the U.K. government program is helping us not make more dramatic changes than are necessary. And we're using that government program but also topping up our employees to a percentage of their salary to help them manage through that. And so that's a place where we've worked with the employee, with the government, with Finning to try, and all contribute to keep our human capital in place.And we're doing the same sorts of things with our employees in Canada and Chile around vacation time, around work -- reduced work schedules, around those sorts of things. Unfortunately, we're also in a situation -- COVID will pass, but we're also in a situation where you have significantly lower oil prices, and those lower oil prices are likely to stay with us for a period of time. And you have Chile GDP, which has gone down, as we've talked about in prior calls. And so there will be some headcount reductions we will inevitably have to do in those 2 regions. But our objective here, through COVID, is to maintain as much human capital as we can so we come out the other side stronger than when we went in.

[Maxim Sytchev, MD & AEC]

Right. And sorry, I don't want to be too granular, but in terms of the furloughs, how should we think about it from a P&L perspective? Is there like an extra restructuring charge or things like that? Or does that G&A basically just disappears from the P&L?

[L. Scott Thomson, President, CEO & Non]

Yes. Essentially, the G&A will disappear from the P&L to the extent that you have some support from governments. And there's various programs via various regions, which we're evaluating. And I guess my only point -- and it's still uncertain in terms of how you -- do you qualify and how do you participate. I guess my point in that is, if there's opportunities to maintain our human capital by participating, we think that's the right thing to do, and those are what those programs are for. So we'll take advantage of them.

[Operator]

Our next question comes from Devin Dodge with BMO Capital Markets.

[Devin Dodge, Analyst]

I just wanted to come back to the Canadian product support. Look, direct sales through e-commerce, I think you said it was up almost 50%. Obviously, encouraging there. I think it shows the power of some of the investments you've been making. But just wondering if you're seeing customers shifting to, say, parts only where, otherwise, there might have been a service element attached to that.

[L. Scott Thomson, President, CEO & Non]

Good question, Devin. I mean I don't think we've seen a significant amount of that to date. And we are -- back to the point on human capital, we really like having that relationship with the customer where we're providing service and parts because it's a more intimate relationship. Undoubtedly, as our customers become stretched, they have to make difficult decisions as well, and that sometimes impacts our employees and then we have to react. But in an ideal scenario here, we are providing the service and the parts, and that just keeps us closer to the customer.

[Devin Dodge, Analyst]

Okay. That makes sense. Okay. Maybe a question for Greg. I guess how are you feeling about your accounts receivable right now? And I'm not sure if I missed this, I apologize if I did, but just have you taken any additional provisions on your bad debt expense? Sorry, bad -- yes, just collectability of accounts.

[Greg Palaschuk, Executive VP & CFO]

Yes. In Q1, we did take $4 million for allowance for doubtful accounts. Obviously, it's something we're working on every day. We've mobilized the organization to make sure that we're doing everything we can on that front. It is a risk at the end of the day. It's something that we're monitoring very closely. There's a lot of government programs and a lot of bank support for medium- and small-sized customers that we think will help as we go forward, but it's something that we have to monitor every day. Q1 cash collections were good. April was good. We just have to stay on top of it.

[Devin Dodge, Analyst]

Okay. And maybe just one last one. Just on 4Refuel. Can you just remind us -- is fuel delivered on a spot basis? I'm just not sure if there's a lag for that pass-through of the decline in diesel cost to your customers.

[Greg Palaschuk, Executive VP & CFO]

Yes. I mean it's a day-to-day operation. There's no inventory. There's no commodity exposure, it's buy and sell in the same day.

[L. Scott Thomson, President, CEO & Non]

It's interesting, though. And if you look at the 4Refuel, I think the first quarter 2020 was the best first quarter 4Refuel has ever had. Free cash flow generation, which Greg highlighted, it was, I think, $14 million, and that built on a very strong 2019. And we've had a pretty significant -- 2 or 3 significant revenue cross-sell opportunities with 4Refuel and Finning in the first quarter, most notably in Fort St. John with IDL Projects, a great construction civil works company that is a good customer of ours, and they've started to use the 4Refuel service. And so this investment and collaboration between 4Refuel and Finning, I couldn't be more pleased with.

[Operator]

[Operator Instructions] Our next question comes from Cherilyn Radbourne with TD Securities.

[Cherilyn Radbourne, Analyst]

Just a couple of follow-ups from me with respect to Chile. I assume that you're on a path down there back to historical levels of profitability. Just wonder if you could give some commentary on how much of that will depend on the macro versus sort of internal initiatives. We had a robust discussion on the call about some of the e-commerce and the digital drop boxes and how they're helping Canada. How well do initiatives like that translate down to South America?

[L. Scott Thomson, President, CEO & Non]

Sure. Thanks, Cherilyn. So a couple of things. One, this quarter -- and the FINSA team, and I want to call them out because I know a lot of them are listening, it was just a great quarter for the team. And after 18 months of trying to get that business up and running, I couldn't be more pleased with that quarter when you look at product support growth, when you look at SG&A costs and when you look at profitability, and that profitability in Chile was the highest since 2 -- second quarter of 2018. And so we're on the right path. And Juan Pablo has got the right focus on cost and working capital, and I'm confident we're going to continue to see improvements there.Now it's a challenging time, right? So you've got the mining operations which are continuing to run and I think will continue to run because the government is very supportive of the copper mines there. And you've got a copper price that, although a little bit lower than historical with the input cost and the devaluation of the currency, it's still a very strong economic proposition for customers. So I feel like those mines will continue to run. But there are some headwinds. Argentina has essentially shut down. Bolivia is shut down and Chile construction market is weaker because of what's going on there. And so they're not immune from COVID.I think the good news is Chile has probably been the best country in South America to deal with this. President Piñera has been very aggressive in terms of isolation, in terms of making sure people stay at home. And therefore, the spread in Chile is a much different scenario than in Ecuador, in Peru or what will likely be the case in Mexico. So I am very optimistic about Chile being able to navigate through this and help the overall company.Again, one of the great things about diversification is when you have different pieces of your business at different stages, but they're not immune from this. And I do think coming out of this, you'll still be in a lower GDP growth environment than where we thought 2 years ago. And therefore, the -- and that's because of the social unrest and the need to continue to address some of those income inequality issues. And so the need to address our cost base is still there. And we'll continue to get after that cost. Last year, reducing costs significantly; this year, good progress on SG&A and Pablo and the team are going to have to continue that through the rest of 2020 and into 2021.

[Cherilyn Radbourne, Analyst]

And just on the government's need to improve the social safety net in Chile. What are you hearing in terms of what levers the government may pull in order to finance that?

[L. Scott Thomson, President, CEO & Non]

Yes. So they've taken -- well, one, the balance sheet of Chile's in pretty good shape. So that is, I think, a positive. That being said, they've actually put quite a bit of fiscal stimulus into the economy on the back of COVID to keep that economy running. And ultimately, infrastructure and construction will benefit from that. But I do think they're going to have to, coming through this, also think about -- and they have been, by the way, they have been, the health care reform and the labor reform and the pension reform. And that will cost some money as well from the government. And so I don't think the full chapter has been written on that, Cherilyn. I think everyone's focused on COVID right now and responding to that. But as you get through that, there will be the income inequality issues and the fiscal resource -- fiscal levers, I think, will be the places that the government goes to address some of those things.

[Operator]

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

[Greg Palaschuk, Executive VP & CFO]

Thank you, operator. This concludes our call, and thank you, everyone, for joining us today, and please stay safe.

[Operator]

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