Finning International Inc

TSX:FTT

Earnings Call Transcript 2024-Q1

[Operator]

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

[Greg Palaschuk, executive]

Thank you, operator. Good morning, everyone, and welcome to Finning's first quarter earnings call. Joining me today is Kevin Parkes, our President and CEO. Following our remarks today we'll open line to questions. The call is being webcast on the investor relations section of finning.com. We've also provided a set of slides that we'll be referencing during our prepared remarks. The slides are posted on our website and audio file of this call and accompanying presentation will be archived.Before turning it over to Kevin I want to remind everyone that some of the statements made during this call are forward-looking. Please refer to Slide 9 and 10 for important disclosures about forward-looking information as well as currency and specific financial measures including non-GAAP financial measures. Please note that forward-looking information is subject to risks, uncertainties and other factors as discussed in our Annual Information form under Key Business Risks and then our MD&A under Risk Factors and management and forward-looking information disclaimer. Please treat this information with caution as our actual results could differ materially from current expectations.Kevin, over to you.

[Kevin Parkes, executive]

Thank you, Greg, and good morning, everyone. Today, I would like to start by thanking our employees for their commitment to serving our customers, winning strategically important deals, diligently building execution momentum of our strategic plan and delivering a solid quarter. Our people are our greatest competitive advantage and we are committed to building safe and supportive workplaces. We're working hard to simplify our business and empower our teams to build customer loyalty.Turning to our first quarter results on Slide 2. Our team and I are particularly pleased with our strong, new and used equipment performance that builds population of equipment and engines in our end markets and drives future product support business. We're also encouraged by the substantial backlog and the $700 million of additional backlog since the quarter end.Following a period of record growth and a very strong first quarter in 2023, our products support is slightly down year-over-year. We consider this a transitionary phase due to some challenging market conditions and specific customer plans.If we're looking at product support CAGR over the last two years, we've seen solid growth at 12% CAGR. Greg will provide more details on our product performance in each region. The great progress we're making to grow used equipment and power system sales in all regions drives resilience and helps to offset the impact of lower products support in the quarter. Used equipment revenue was up 48% year-over-year, reflecting our significantly increased participation in a very active used equipment market. We recently launched used equipment sales platform specializing in selling used equipment globally and targeting mostly non cat [indiscernible] machines.Our power systems revenue was up 37% year-over-year. We added large orders from data center customers in the UK and Ireland and Chile to our quarter 1 2024 backlog and secured significant new power systems orders post quarter 1. We're also demonstrating strong cost control with SG&A as a percentage of net revenue down 130 basis points from Q1 2023, which is a critical component of building full cycle resilience while increasing our earnings capacity.Looking ahead, our positive outlook for 2024 is underpinned by robust end markets and strong commodity prices, large customer orders awarded in April which bolster our backlog and the continued disciplined execution of our strategic priorities. We are extremely pleased with the important strategic wins in each region in April, including multiple copper mines in Chile, the oil sands in Canada and data centers in the U.K. and Ireland. These awards represent over $700 million of new equipment orders for delivery starting in the second half of this year, laying a solid foundation for future product support opportunities.As previously discussed, with the electrification trends driving strong copper demand, Chile is mobilizing for growth. We are very pleased with the large orders in April, including with Codelco, whose order was valued at $380 million, where the fleet will be supported under a 10-year maintenance contract and this is an important strategic win for Filling and Caterpillar. The new agreement covers 4 Codelco mines and marks the first time Caterpillar trucks will be deployed at 2 of those mines. Building equipment population and increasing our proportion of contracted revenue are key to our strategy, and this win is an excellent example.We're optimistic about the second half of 2024, and we are confident in the direction of our business. We are -- we expect product support growth rates to improve in the second half of the year as we continue to book and execute rebuilds, grow contracts and higher technicians. We remain laser-focused on improving our working capital velocity and unlocking invested capital to drive substantial free cash flow generation going forward with a number of key initiatives underway in all of our regions.These initiatives include increasing new equipment preparation velocity. We expect the new orders that we've taken to move through our backlog much faster than previously, increasing inventory performance, on-time in full performance for our customers, working closely with our customers on planning component, exchanges and rebuilds and optimizing lower ROIC activities.We are constantly reviewing the pace of investment in our rental fleet to ensure we're achieving the growth goals and return on investment. Our focus is squarely on executing our strategic plan, which we laid out at our 2023 Investor Day. We are growing our business in a moderating growth environment, demonstrating improved earnings power through driving product support, building full cycle resiliency by unlocking invested capital and delivering sustainable growth in used and power systems.We anticipate the execution of our strategy will have an increasing impact through the year with improving product support growth rates and substantial free cash flow. We are mobilizing all resources to build momentum, efficiently deliver our newly awarded equipment packages and execute rebuild in a capital-efficient way. We are pleased to increase our dividend by 10% and also renew our share repurchase program. The dividend increase is well supported by our improved earnings capacity and demonstrates our strong commitment to returning capital to shareholders.Before I turn it over to Greg, I want to mention that we'll publish our 2023 sustainability report soon. We are proud of the work we're doing to improve safety, reduce our emissions and support our customers in achieving their decarbonization goals. We are building a strong and inclusive company, which has a positive impact on the communities in which we operate. I encourage you to take a look at this report when it's available on our website.With that, I'll hand it back to Greg.

[Greg Palaschuk, executive]

Thank you, Kevin. I'll talk more about our first quarter performance in detail.Turning to Slide 3. In the first quarter, our net revenue was $2.3 billion, up 9% from Q1 2023, marked by strong growth in new and used equipment sales. Market activity was mixed, but solid overall, supported by strong momentum in commodities and growing demand for power solutions in all of our regions. Diligent execution of our strategic priorities, including strong used equipment sales and cost control helped offset the impact of lower product support revenue in the quarter. EPS was down 5%, primarily reflecting a shift in the mix to new and used equipment as well as lower margins in those segments.We've reduced risk levels in Argentina and are pleased that the business has returned to profitability in Q1, which is earlier than we anticipated.On Slide 4, we show changes in net revenue by line of business compared to Q1 2023, the composition of our equipment backlog by market sector. New equipment sales were up 25%, led by Canada and South America, where we continue to see strong demand in mining and power systems.Used equipment sales were up 48%, higher in all regions, reflecting execution of our strategic focus on used and our increased participation in this very active market. Product support revenue was down 1%, with solid growth in South America, offset by lower activity in Canada and the U.K., primarily due to a transitory phase impacting construction activity that I'll cover in the regional slides.Our equipment backlog was $2 billion at the end of March, maintained from December 31st levels. The new orders totaling over $700 million are not included in the Q1 backlog. With the wins announced today, we expect to see continued trend of increasing proportion of backlog and mining and power systems.Turning to Slide 5, which shows our EBIT performance. Gross profit as a percentage of net revenue was down 260 basis points from Q1 2023, mostly due to the shift in revenue mix to new and used equipment sales. As expected, with improved availability, we're seeing lower margins in used equipment and rental compared to last year.Our resiliency actions offset half the margin decline in the quarter. SG&A as a percent of net revenue was down 130 basis points from Q1 2023 to 17.7%, demonstrating operating leverage in the higher revenue environment and strong cost control.Moving to our Canadian results and outlook, which are summarized on Slide 6. New equipment sales were up 39% from Q1 2023 with broad-based strength across all market sectors and deliveries from backlog. Used equipment sales were up 37% year-over-year, driven by conversion of rental equipment for the purchase option to sales and stronger volumes across retail and wholesale channels.Product support revenue was down 4% year-over-year. We're in a transitory phase in construction with the lineup of several large construction projects and winter projects being deferred. Challenging operating conditions also led to reduced equipment utilization hours in most sectors in the first quarter. Despite this, over a 2-year period, our product support CAGR in Canada is 10%. In mining, we saw mixed activity by customer with a number of customers spending significantly more in Q1 and several spending significantly less due to adjustments in their mine plans.Overall, we are confident in product support growth going forward as customers pursue steady growth, some winter work missed this year will need to be caught up in the future. EBITDA was down 14% year-over-year, primarily due to a higher proportion of new and used equipment sales and the revenue mix as well as some inflationary cost pressures we're working hard to continue offsetting.[indiscernible] continue to deliver strong performance, achieving 16% growth in EBIT compared to Q1 2023 and generating positive free cash flow in the first quarter. We are proud of their consistent and strong execution. Our outlook for Western Canada is positive with the Trans Mountain Pipeline beginning operation in May 1. We're in a new area of steady growth in the energy sector. While the completion of major pipe volumes has slowed some construction activity in the near term, we expect to see increased activity in the energy sector and production growth.Turning to South America on Slide 7. Functional currency new equipment sales were up 20% from Q1 2023 on strong mining deliveries in Chile. Product support revenue was up 4% year-over-year, higher in all market sectors and increased activity in mining and power systems as well as demand for rebuild and construction. Part sales were up 7%, partly offset by lower service revenue due to weaker Chilean peso relative to the U.S. dollar compared to Q1 2023.In Chile, service revenues and costs are both in pesos, so the lower year-over-year peso reduces revenue growth, but ultimately, the margin percentage is held and profitability is strong. We expect a weaker year-over-year Chilean peso to continue, which will impact service revenue growth rates in 2024, while at the same time supporting lower SG&A.EBITDA was up 3% from adjusted EBITDA in Q1 of 2023 and EBITDA as a percentage of net revenue was strong at 11% despite a large proportion of low-margin mining equipment sales in the revenue mix. Our outlook for Chile in mining is optimistic, underpinned by growing demand in copper, strength in copper prices, government approvals of large-scale brownfield expansions and increasing customer confidence to invest in new projects.Although orders received in April are also strong evidence of the trend, we are seeing broad-based increase in quoting and tender activity for mining equipment across customer base and their growth plans are advancing and with greater confidence.We also continue to see healthy demand for large contractors supporting mining operations in Chile and growing power systems activity in industrial and data center markets.In Argentina, while we see pockets of strong activity, especially in oil and gas sector, we continue to take a lower risk approach in 2024.Please turn to Slide 8 for our results in the U.K. and Ireland. In functional currency, new equipment sales were comparable to Q1 of 2023 with higher power systems deliveries, offset by lower volumes in construction due to soft market activity. Used equipment sales nearly doubled year-over-year as we work to increase our participation in the used equipment market. Product support volumes were reduced by lower customer activity levels and lower machine utilization hours.EBITDA as a percentage of net revenue was down 120 basis points year-over-year, mostly due to a lower proportion of product support in the revenue mix and continued inflationary cost pressure. We are pleased with the sequential improvement in the U.K. and Ireland and 4.5% EBIT margin given these tough market conditions. We expect demand for new construction equipment in the U.K. and Ireland to remain soft, reflecting low GDP growth projected in 2024. However, we expect to see growing contribution from used equipment and power systems and resilient product support as we continue to execute on our strategy.We've renewed our normal course issuer bid for repurchase of up to 14 million shares, and our current NCIB, which expired May 12, we repurchased 7.2 million shares or 5% of our public flow. Our balance sheet remains healthy with net debt to adjusted EBITDA at 1.9x at the end of March, reflecting normal seasonal build of our inventory. We expect substantial free cash flow in 2024 as we sell through our inventory, start delivering new orders with improved cash-to-cash cycles versus prior backlog build and continue to execute our capital unlock and velocity plan.Operator, I'll now turn the call back to you for questions.

[Operator]

[Operator Instructions] The first question comes from Jacob Bout at CIBC.

[Jacob Bout, analyst]

Maybe just talk us through some of the competitive pressures that you're seeing currently. I know with supply chain improving, a number of your competitors have been talking about competitive or pricing pressures. Is this broad-based or is this kind of more on a smaller horsepower equipment?

[Kevin Parkes, executive]

I think we've said this before, Jacob. In my 30 years, we've always worked in a competitive environment. And for sure, the pandemic changed the dynamics around that competitive environment due to different performance in supply chain. I think we're in a more normal position now. I think broadly, in terms -- particularly in terms of construction equipment sales, I think supply chains have recovered. So most companies would have equipment to sell.But I think we're -- we would consider that we're competitive. We're always looking at acceptable premiums for our products and services. And our early market share in construction equipment that I've seen through the course of the first part of this year would be encouraging. And what I'm hearing from the team -- I was in the U.K. last week, which is a very competitive marketplace, what I'm hearing is they feel well supported by Caterpillar. They feel like -- I asked our head of sales, have you got the tools you need to be competitive in the U.K. market right now? And the answer was yes. And we see more support coming from areas like cat finance with several financing programs in place to help kind of push orders through that are maybe stuck in the decision-making process due to capital constraints with our customers.But I wouldn't say that we're finding a dramatic shift in the competitive environment. And our margin decrease in this quarter was very much driven by mix.

[Jacob Bout, analyst]

And maybe just looking back at the Investor Day, talking about this full cycle resilience and this focus on earnings stability, I know driving products support was a big part of the strategy. You look over the past 2 quarters and margins in product support have lagged. As you look at that, is there anything you could have done differently to mitigate either some of these weather-related issues or utilization issues you saw?

[Kevin Parkes, executive]

I mean we live and learn all the time, Jacob. And so for sure, part of resilience is better planning, working more closely with our customers. I do think as it relates to this particular first quarter, the worst on distinct operational issues with our customers, general utilization of equipment was down on a broad base across our segments in construction. We had that major project transition, particularly in Western Canada, which I spoke to a lot of people in the past we've never seen such a swing in major product activity.And then we have some very specific mining plans and changes to mine plans within our customers. And so we're seeing perhaps we could have been close to that with our customers to understand a little bit more about that. I actually think the biggest thing we underestimated, if I'm honest, Jacob, is just how strong Q1 2023 was. And I think we may be could have managed that or communicated that a little better as we move through. But I feel confident as we move forward that product support growth rate or report a return to that kind of level. And we're getting closer to customers and increasing the number of unique customers we deal with to try and offset some of the lumpiness in our major customers.

[Operator]

The next question comes from Yuri Lynk of Canaccord Genuity.

[Yuri Lynk, analyst]

Just looking at product support, those projects you mentioned rolled off in Canada, the U.K., is a bit tough. So just wondering if you could put a little more meat on the bone in terms of where you're getting the comfort to call for improving product support growth rates throughout the year?

[Kevin Parkes, executive]

Yes, sure. So a couple of areas. So we're seeing equipment mobilize. We watch the equipment utilization as they've improved in April. So kind of spans back to more normal levels. We also see that through our rental fleet utilization. In the U.K. last week, I met with 3 customers, and they all were consistent, saying it was a really terrible winter, but their activity levels just in the last 3 weeks have really started to improve.And so, there's some customer sentiment out there and some activity levels around utilization hours and rental fleet utilization. That gives us some encouragement that the construction season is starting, albeit a little bit late. It's at point one, so we just feel better. And I'm talking specifically about construction more so than mining and power systems.The second area is execution capability. So to Jacob's question about what could you do differently, I do believe that our commitments in our Investor Day and some of the softness in Q1 has reinvigorated and made us double down and revisit some of the basics in the plan, things like customer coverage, making sure we've got the right propositions for our customers. So I think there's an execution quality that improves as we move through the course of the year. So we just get better at what we're doing and build on where we're at.And then I think more broadly, as we look into the second half of the year, we still have the view that the macro improves, the pipeline capacity comes on in Canada, which drives activity around the oil sands. And we're already seeing, as Greg mentioned in his remarks, mobilization of contractors around Chile as well to support the large mining wins.So -- that would be -- I think things are -- we're already seeing things improve coming out of the winter season. I think we're very, very focused on execution. And I think generally, the macro starts to help us. And of course, we'll be lapping different comparisons in the second half of the year.

[Yuri Lynk, analyst]

Yes, for sure. That makes sense. Maybe Kevin staying with you, just trying to get your temperature here on the overall outlook. Last quarter, you kind of characterized it as steady growth. You've removed that language from the MD&A. You've got these great awards in April. You seem to have better visibility on product support. So just overall, I mean, how are you feeling about top line growth in 2024 versus a few months ago when you last updated the market?

[Kevin Parkes, executive]

As I just said, I would be happy -- I would be more confident than I was working through Q1. Our Investor Day targets remain, and so we're not moving off those. We believe that those moderated growth rates are still in play over that 2-year period. We said on the last call, it's not linear. And for sure, this Q1 was more transitionary than we thought it was going to be. But we still -- the optimism level has improved. Clearly, we're still seeing some restrained behavior and spending behavior. I think that improves as our customers get better line of sight to the utilization of their equipment.And of course, we're really excited about the commitment of capital from our major customers in all 3 regions around committing to large capital spend, which gives us that broader horizon, a better activity level. So I would say, in general, more optimistic than the prior quarter, and our committed and stated goals on the Investor Day remain.

[Yuri Lynk, analyst]

Okay, Kevin. I'll turn it over.

[Operator]

The next question comes from Sherif El-Sabbahy of Bank of America.

[Sherif El-Sabbahy, analyst]

I just wanted to get a bit more color. Looking at order patterns, you obviously have those big orders in April. Typically, for the second quarter, would we see orders ramp through the quarter, or are they weighted towards April?

[Greg Palaschuk, executive]

So normally in the second quarter, we'd have -- we're in selling season. So some of the construction, we'll have lot inventory on hand and sell-through, and we expect that to be pretty active this year. But otherwise, order intake on mining and power tends to be a little lumpier. Of course, we've had a number of wins right in April, but there are more out there that we continue to wait to hear on and continue to quote on.So of course, we have like $700 million, which is a very large amount for 1 month. But of course, we expect to close more deals in May and June. And as we highlighted, particularly in South America, kind of year on from the royalty review copper prices in the mid-4s, and we're seeing a lot of customers look at both refresh and expansion of fleet. And so nearly all lines have some form of tender going at the moment.So lots of activity, and so we expect that to continue through the year. And it's a bit lumpy, but certainly, we've had some great wins in April, but we expect some more activity elevated, particularly in Chile in May and June.

[Kevin Parkes, executive]

I'll just talk a little -- so our backlog in Canada is predominantly construction equipment now, which is encouraging. Order intake for construction equipment in the U.K. was quarter 1 versus quarter 1 was up considerably. And so we are seeing the consumption industry starting to move. And so there's a couple of points of encouragement there. But we need to know that as our mining business mobilizes and we continue to grow power systems, those revenue streams are way more lumpy, and so they can be -- they can make dramatic changes within a quarter. And so we just need to be conscious of that.

[Sherif El-Sabbahy, analyst]

Of course. And I realize there's a bit of a digestion with some of these larger project completions in construction. But looking ahead, do you see a project pipeline to fill the gaps as we head into '25?

[Greg Palaschuk, executive]

Yes, you definitely see some more projects coming through the Highway 1 expansion in British Columbia. But we do expect more private sector ramp up over the next couple of years versus some of the public works over the last couple of years. And so, the activity that goes in and around the LNG upstream development as well as some oil capacity now in Alberta for that to grow, you'll see some effects around road clearing, well pad construction, gas plant and gathering lines. So we expect to see more of that over the next couple of years, particularly if you start to see natural gas tick back up a bit more.

[Kevin Parkes, executive]

And I think power systems, again, gives us -- that's probably the most visible segment we have. And so we're seeing visibility well into next year and even beyond in power systems projects, particularly in the U.K. but also Chile. And so that gives us some confidence that the revenues are robust in our segment.

[Sherif El-Sabbahy, analyst]

And just looking specifically at the mining wins, are you seeing a share shift towards cat products take place with these orders coming in or is it more broad-based strength across mining?

[Kevin Parkes, executive]

No, definitely market share shift. I think following a period of where our market share in Chile particularly was probably not where we wanted it to be in the previous cycle. We've talked about this previously around the electric drive truck and how that was essential to win in South America. I think we have a great electric drive truck now. We clearly know that the BHP's [indiscernible] last year, we went from 2/3 to full cat size.We believe the Codelco win that we're announcing today, we won a high proportion of the available equipment now for the biggest opportunity in Chile as well. So I would say that the team in South America are doing an absolutely amazing job using the tools they have, the product they have, partnering with Caterpillar to make sure we're -- we have the appetite and the solutions to serve our customers, but without a shadow of a doubt, it's market share.

[Sherif El-Sabbahy, analyst]

And just lastly, there's been some large M&A in the mining space that's been announced. Is that holding back capital spend at all? And historically, has that typically held back CapEx in the space?

[Kevin Parkes, executive]

I mean, of course, there will be some decisions that are considered when there's bigger M&A. I don't think there's anything other than the Glencore tech that would impact us directly right now. Other things are on the kind of -- are on the burner plate. So again, we've met with Glencore locally here in Canada. And the initial conversations suggest that they were in a very decentralized model, and that we're looking forward to working with them locally in the Elk Valley for sure.So no, I don't specifically think that it's an impact on us today. For sure, if some of this big M&A happens, there'll be a period of consolidation and review around fleets and performance and even individual assets. But what we're seeing is that even where assets change hands, they're typically being picked and, in some cases, one more locally, and we're enjoying some good success. Good example of that is just the coal business in Northern British Columbia where we've got some customers that are picking up and running with assets that were run by larger miners in the past and they're doing very well.

[Operator]

The next question comes from Michael Doumet of Scotiabank.

[Michael Doumet, analyst]

I was wondering if you could maybe isolate the impact from the completion of the major projects to products support in Canada? And also, you talked about improved product support growth in the second half, wondering how we should think about the Q2 bridge to that?

[Greg Palaschuk, executive]

Sure. Well, on the Canada side, obviously, being 4% down, a portion of that is due to construction as well as some of the lower utilization hours. So I'd say that the decline part would be there because on the mining side, as I highlighted, there's a couple of customers that were up quite significantly over a year. There's a couple that were reworking mine plans, were down significantly, and therefore, were kind of flat. So from a construction perspective, I'd say the decline portion was pretty direct drive.

[Kevin Parkes, executive]

And I would just add, Michael, to that. Within the construction phase, we can very much point to the decline. It's less than 10 customers. And that's what I mentioned in my earlier answer around what could we learn differently. And I think we are very focused on increasing the number of unique customers we deal with to try and manage some of the lumpiness in our revenues, but we know a vast majority of the decline in Canada was less than 10 customers, and we can name them and we can attribute them to those projects.

[Michael Doumet, analyst]

Okay. Perfect. And then just in terms of the Q2 bridge because -- look, I'm looking at my model here, and it's a pretty tough comp as well. So just thinking about that quarter versus maybe expectations in the second half.

[Kevin Parkes, executive]

I think that we see the kind of product support run rate continuing into Q2. Potential to improve slightly because of the activity levels in construction and some of the optimism around copper. But I think if we look at product support growth rate, as I mentioned in my remarks, if you look back over 2 years to this point, we're 12% CAGR. And that's broadly double our Investor Day targets.And so we think it's probably better. We feel quite confident that when we get to the end of the year and run rate into next year, we'll be able to demonstrate that Investor Day target trajectory.

[Michael Doumet, analyst]

Perfect. Very clear, Kevin. And then just maybe moving to gross margins. Look, those were lower in Q1. And then, Greg, you talked about lower use and rental. But from what I can tell, equipment and product support margins were firm year-on-year. So just wondering if you can maybe just clarify that for us. And then as it relates to passing price, retaining price, cost spread for the balance of the year, what are your thoughts?

[Greg Palaschuk, executive]

Yes. So on margin, it's proportionate mix with, as we said, lower margins in rental and used, which, as we've said many times before, we don't expect the margins in the last 2 years. We would average those into the future. So those have come down to more kind of normalized levels. So that would be really the margin mix story within the quarter.And going forward, I think we are in more normalized rental and used margins, maybe a bit better in rental, given some of the pickup that Kevin talked about as we get into the spring here. But on new and product support, we feel fine. I mean a large proportion of what's going through is mining equipment and data centers and those margins don't move as much. There wasn't a big windfall and there isn't a normalization going on. So we feel solid that new and product support are in the same ZIP code and rental and used are more normalized.

[Operator]

The next question comes from Steve Hansen from Raymond James.

[Steven Hansen, analyst]

Greg, just following up on the rental market commentary, understanding margins have normalized here. Does that change any of the capital spending plans that you aligned at the Investor Day? I think 15 sites was talked about in terms of build-out in Western Canada, just by memory, but just any plans on the capital deployment there?

[Greg Palaschuk, executive]

Yes. Certainly, I mean, when we look at the market, some of the utilization factors are down across the industry. And we, of course, look at our fleet and see what our utilization levels are and want to manage those appropriately. So certainly, we continue to have that as a priority area. We will continue to deploy capital at a reasonable rate, probably down somewhat from a few months ago where we were thinking just to make sure our utilization factors or profitability are in the zone that we want. So it's kind of more of a steady growth year as opposed to what we're thinking a few months ago, might have been at a higher level. But that's something we'll continue to monitor the market and evaluate.

[Kevin Parkes, executive]

And we -- so we're -- I'm encouraged that the original cost on rent is back to where it was last year after a slower start and kind of clunky winter. That's pretty encouraging given the lack of major projects that we spoke to previously. But we did make some investments last year. So -- and we -- the lack of major projects has adjusted our sentiment for this rental season. So we'll just make the adjustments to make sure we're well positioned to meet our growth targets, but we're not overcommitted.

[Steven Hansen, analyst]

That's helpful. And just to follow on the U.K. margin side, again, down year-over-year, but a nice sequential uptick. Is that the new range that we should be thinking about here? I'm trying to understand the sustainability of that pattern on this latest print?

[Greg Palaschuk, executive]

It's a bit of a tough market out there, as we said, in the low GDP environment. It's a bit of a grind in construction, but power has got quite a bit of momentum. So good to see the sequential improvement. As Kevin said, being there recently, there's some improved sentiment, but it's still a bit of a slog through the year. So I'd look for some sequential improvement but not huge moves.

[Kevin Parkes, executive]

I think that I'd be surprised if the second half of the year was way more constructive than the first half, and obviously, you started to see the real slowdown in back end of the summer last year. So a lot of optimism about the U.K. and a great week there last week with employees and customers. And of course, they're running into an election, had a great few hours on the HS2 project. I'm absolutely amazing to see that come to fruition after so many years, and that work is well underway. And that the actual -- we won't deliver any more product to that, but that continues to work. So very encouraging week, last week in the U.K.

[Operator]

The next question comes from Devin Dodge of BMO Capital Markets.

[Devin Dodge, analyst]

Turning [ now to ] Canada, look, I think it was a bit higher year-over-year. Product support was a bit lower. Just wondering if you have a sense for the drag that's had on margins and earnings in the quarter or were you able to pull some levers to kind of neutralize that impact?

[Kevin Parkes, executive]

So, I mean, definitely had a drag in the quarter. Product support is a huge value creator for us. As I said in my remarks, we were really pleased that the additional new equipment in particular used in Canada, which was up considerably, help mitigate that. We see that as -- we always felt it used to play an important role in building resilience into the company, and that has played through in this quarter, which is very encouraging.But for sure, the product support trajectory has been a drag. And we probably see that more normalizing -- as Greg mentioned previously, we don't expect to use to continue on that trajectory, and we expect product support to sequentially improve. But nice to be talking about offsets and levers in Canada, being able to deliver that earnings performance.

[Devin Dodge, analyst]

Okay. Makes sense. And then the outlook mentioned a broad-based increase in quoting tendering and award activity in Chile for mining equipment. Is there any way to scale that or provide a framework for how that sales funnel looks now versus whether it's 12 or 24 months ago?

[Greg Palaschuk, executive]

I would just say it's matured. As we highlighted at Investor Day, I mean, most fleets are quite aged in Chile. So people have been evaluating decisions for quite some time. So it's gone more from the budgetary quote to competitive quotes to people making decisions and awards. I mean even the words that we've recently got, there were some delays in getting those and decision-making. That still takes some time, reducing it more mature and more serious and nearly every mine is looking at some form of refresh or expansion, whether that's dealing with ore grades or some of the brownfields announced. So it's pretty broad-based, but it's matured also.

[Kevin Parkes, executive]

I think we'll be in a better position to answer that question on the next call, Devin. I think obviously, even before the orders that we announced that came in after the quarter and order intake for mining in South America was up 48%. And as these orders percolate through the system and miners start to calibrate that to supply chain and lead times, I think these orders will probably have miners think more about thinking ahead and where they're placing their capital and their capital program. And so I would imagine that we'll see more of those tenders and a clearer pipeline looking forward over the next few weeks here because there definitely has been a mobilization shift in the last quarter.

[Operator]

The next question comes from Sabahat Khan of RBC Capital Markets.

[Sabahat Khan, analyst]

I guess maybe just a bigger picture question on product support. Obviously, there was a bit of a push into product support during the lower equipment availability that threw off sort of the natural cyclicality of that business. I guess, presumably, the product support mix maybe improves year after a bit of uptick in equipment sales in the first half of this year. Maybe can you share some perspective on how you view the product support trajectory over the next 6, 12 months? And where you think we are in that sort of longer-term trajectory of product support based on the macro?

[Kevin Parkes, executive]

Yes, sure. So I think I mentioned this previously, we expect this trajectory to remain at the lower end of -- or just off our Investor Day to I'll get in Canada specifically. And order intake remains strong on new equipment including power systems. And we are well [ past the fact ] that we are announcing are strategically important within the oil sands on this call as well. So I think our product support mix might move 300 or 400 basis points up and down, but we expect all of the lines of business to be growing as we look forward.So we're very confident that if we look back -- as we turn the year and the run rate into next year, that will be on the Investor Day targets. And I would suggest that the activity we've seen in the last 3, 4 weeks here, just general activity, particularly in Canada would support a more improved outlook, specifically in Canada, but also to a certain degree, in the U.K. and Chile is doing fine in South America.

[Sabahat Khan, analyst]

Great. And then there's a bit of discussion earlier sort of around pricing and inflation. The expectations of the market had was pricing could generally be lower this year. But I guess, given where inflation is at, can you just talk us through how your discussions with customers are going? Are you sort of managing to a certain margin? Maybe just how you're thinking about that given where -- demand seems to be in a good place. So how are you sort of managing that inflation and cost situation?

[Kevin Parkes, executive]

So I think we've said previously that we see pricing returning to a more normalized level now. And pricing and margin are different things, and we work with our partner really closely to make sure we have the right value proposition to win share. As I said previously, I'd be very encouraged by the public or the publicly accredited market share data that we have around us in our businesses. So we'd be happy with the start that we've had, expect a competitive reaction, expect a more normalized competitive environment there. But I also know that we have got the strongest partner in Caterpillar. We're very committed to growing our business.And as I said previously, I travelled for a day with the head of sales in the U.K. last week in the most competitive environment we have and asked him if he's got the tools to be successful this year. And the answer was yes. And to a certain degree, he's thinking about if there's any incremental we could -- incremental business we could win this year versus having a negative impact in the competitive environment.So we love the competitive environment. It's what we've done for years. We can be very creative. Cat Finance were an amazing partner in that regard. And so this -- I describe when I walk around salespeople right now, this is normal, right? This is normal. What we had experienced in the past was not normal. This is normal, and we have to roll our sleeves up and get out there, participate in as much business we can and be as creative as we can. And I think we have the sales team to do that.

[Operator]

The next question comes from Cherilyn Radbourne of TD Cowen.

[Cherilyn Radbourne, analyst]

Many of my questions have been asked. But in terms of the strength in used equipment sales that you saw in the quarter, is most of that equipment staying in territory? And just strategically, would you give up something on price or margin on used sales to ensure that it does stay in territory?

[Kevin Parkes, executive]

Yes and yes. So our best data suggest that it's an 80-20 scenario, Cherilyn. So 80% is staying within the territory. And for sure, as we were doing -- we have this term in the company now, which is kind of product support by us. So we have a very strong bias towards equipment which generates population, which builds population, which generates product support activities for us. And so we would have a very creative view on that type of equipment and where its second life is and how we ensure that its second line is within in a territory that provides us point of support opportunities.I think if I told you that, walking around Edmonton site 3 weeks ago, seeing machines with U.K. customers, logos taken off and could still see the U.K. logo customers was an extremely important moment for me. I've been asking the teams, obviously, working in the U.K. and Canada for many years to align our approach in those 2 markets. We're very lucky to participate in a very active used equipment market in the U.K.And so our first priority is to make sure that that stays in the territory. If that territory is in a different continent, but it's in the Finning territory, we're working hard to make that happen in the first instance. Where we're not, then we would look to participate actively in that deal and partner with our other cat dealers in North America to make sure that that opportunity stays within the family.

[Cherilyn Radbourne, analyst]

Okay. That's good color. And then in terms of the inventory level, obviously, pretty elevated. So I assume that bringing that down is a priority for the rest of the year. Is there any way you can kind of give us some guidepost on what you're looking for in terms of free cash flow for the year?

[Greg Palaschuk, executive]

Yes, absolutely a big priority for us. Obviously, we've got -- some more equipment came in for the selling season. We do think the backlog build that we're talking about today moves through the system much faster on a cash-to-cash cycle than the last backlog built over the last couple of years. So we do think we'll convert that at a faster pace. As we highlighted, a lot of these orders we'll start delivering pretty early in Q3.We have moderated some of our orders given the improved availability on certain product lines, and we continue to work on all the items we listed at our Investor Day around warehouse automation and velocity, and then continue to work on some of those low ROIC activities. So we think all of those contribute. And so we highlighted $450 million of capital unlock, and that continues to be the plan, and we think you'll see more and more of those catalysts here in the second half of the year.

[Operator]

[Operator Instructions] The next question comes from Maxim Sytchev of National Bank Financial.

[Maxim Sytchev, analyst]

I just have a couple of very quick ones. In terms of when we look at the oil sands, sort of customer behavior because on the one hand, obviously, as you mentioned, [ WTI ], good spots and take a look at pass that is improving. Is there anything structural from the client behavior which is sort of different from how they behave sort of previously or it's really just sort of a tactical intermittent dynamic that was sold to us for the last couple of quarters?

[Kevin Parkes, executive]

I'd say the latter, Max. I think there's some -- as you can probably read, there are some specific plans in place. I think the oil sands is moving to transitionary phase as well as lot of talk of expansion and mine development. There's a pivot between mines slowing down and mines ramping up. And so I would suggest that it's not structural, and we remain optimistic about the long-term fundamentals, particularly given the [indiscernible] and the incremental pipeline capacity. So it really is more a function of the mine plans today and the specifics today and everything points to a more constructive and consistent outlook in the oil sands.

[Maxim Sytchev, analyst]

Okay. And then lastly, just I'm going back on used. Obviously, very strong performance. And I'm just wondering in terms of what have you changed when it comes to go market strategy, processes, people, maybe some of that stuff, if you can provide any color there?

[Kevin Parkes, executive]

All of those things, Max, starts with people and talent. And so we have dedicated leadership that wake up every morning and think about used, and they have a team that wake with every morning, think about used and act on used and work with all of the regions to participate more effectively in that market. It's a process, as you mentioned there. So the team are absolutely committed to simple agile processes, which wouldn't typically -- which would have an opportunity in the rest of the dealership to work to improve and to work on.So they come from a different DNA in a different space. It's a close relative, but it's a different DNA, and we're empowering them and giving space to do what they need to do to participate in a very active used equipment market. We see that moderating because I think there's a sense that coming out of the pandemic and supply chain improving, there's maybe a little bit of overshoot in terms of customers buying equipment and we see that kind of calibration happening right now, and we're just really happy to be participating in that more than we have been in the past.But used equipment looks and feels very different than it did 12, 18 months ago at Finning. And as I mentioned in my remarks, we've even launched an independent used equipment platform or marketplace called, fused equipment that is helping us to participate in the non-cat side of the business as well. So that's important as well to have those capabilities.So looks and feels very different. We're really excited by the trajectory over the last couple of quarters, building this for the previous 6 quarters before that. And hopefully, we've got really strong hopes that we can build a sustainable business there that can contribute more to Finning.

[Operator]

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

[Greg Palaschuk, executive]

Great, thank you. That concludes our call. Thanks for everyone for participating. And I hope you have a safe day.

[Operator]

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