Finning International Inc

TSX:FTT

Earnings Call Analysis

Solid Q2 Performance and Positive Outlook

In Q2 2024, the company achieved a record EPS and generated $330 million in free cash flow, significantly up from $30 million in Q2 2023. Revenues rose by 3% year-over-year to $2.6 billion, led by a 57% increase in used equipment sales and a 12% rise in new equipment sales. Despite a 5% dip in EBIT due to lower margins in used and rental equipment, the outlook remains optimistic. The equipment backlog grew to $2.2 billion, reflecting healthy demand. The company anticipates substantial free cash flow generation for the second half of 2024 and is focused on improving efficiency and lowering fixed costs.

Solid Q2 Performance Driven by Used Equipment Sales

Finning International reported a Q2 net revenue of $2.6 billion, marking a 3% increase from the previous year. This growth was fueled primarily by a significant rise in used equipment sales, which surged by 57% year-over-year. Although EBIT decreased by 5% due to lower margins in used and rental equipment, the company managed to set a record EPS of $1.02 for a second quarter.

Focus on Sustainable Growth and Capital Efficiency

The company emphasized its commitment to sustainable growth and capital efficiency. Free cash flow reached a record $330 million in Q2, a substantial increase from $30 million in Q2 2023. Finning is actively seeking ways to lower fixed costs and enhance capital efficiency, aiming to sustain consistent ROIC performance. The strategy includes significant efforts in growing the used equipment and power systems markets, which have shown year-over-year increases of 57% and 11%, respectively.

Challenging Dynamics in Key Markets

In South America, equipment sales remained flat due to mixed results: growth in mining and power systems in Chile was offset by a decline in construction activity in Argentina. The company experienced a 12% year-over-year drop in EBIT, largely due to weaker margins in new equipment sales and currency impacts. Despite these challenges, Finning remains optimistic about the Chilean mining sector, driven by rising copper demand and prices.

Encouraging Prospects in Canada and the UK

In Canada, the company saw a 61% year-over-year increase in used equipment sales and a 7% rise in new equipment sales. While product support revenue was down 3% from a strong Q2 2023, the outlook is positive with expected improvements in the energy sector and ongoing projects like the Trans Mountain pipeline and LNG Canada. In the UK and Ireland, new equipment sales declined by 5%, but used equipment sales rose by 31% year-over-year, driven by increased construction sector activity.

Strategic Actions and Cost Efficiency Initiatives

Finning is implementing several strategic actions to improve cash flow and efficiency. These include reducing inventory lead times, automating warehouse operations in Canada and South America, and optimizing low ROIC activities. Capital expenditures for 2024 have been adjusted to a range of $220 million to $270 million, down from the previous range of $290 million to $340 million, reflecting market conditions.

Guidance and Future Outlook

Looking ahead, Finning expects substantial free cash flow generation in the second half of 2024, supported by improved cash-to-cash cycles and ongoing capital unlock initiatives. The company plans to maintain a low-risk approach in Argentina while cautiously optimistic about the positive impact of new government programs on large-scale investments by global miners. Finning is also preparing for increased product support demand, driven by the addition of technicians and the completion of major rebuild projects.

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Finning International Inc. Second Quarter 2024 Investor Call and Webcast. [Operator Instructions] and the conference is being recorded. [Operator Instructions]

At this time, I'd like to turn the floor over to Greg Palaschuk, Executive Vice President and Chief Financial Officer. Please go ahead.

[Greg Palaschuk, executive]

Thank you, Operator. Good morning, everyone, and welcome to Finning's second quarter earnings call. Joining me today is Kevin Parkes, our President and CEO.

Following our remarks, we'll open the line to questions. This call is being webcast on the Investor Relations section of finning.com. We've also provided a set of slides on our website that we will reference. An audio file of this call and the accompanying slides will be archived.

Before I turn it over to Kevin, I want to remind everyone that some of the statements provided during this call are forward-looking. Please refer to Slides 9 and 10 for important disclosures about forward-looking information, as well as currency and specified 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 in the 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]

Thanks, Greg, and good morning, everyone. I'd like to start by thanking our employees for their commitment to each other, to our customers, and for their contribution to our strong results.

At Finning, we are committed to building a safe and inclusive environment where our teams are empowered to build customer loyalty. We are executing our plan with discipline and focus, simplifying our business and creating a positive impact for our people, customers and communities.

Turning to our second quarter results on Slide 2. We are pleased with our Q2 results. We are growing our business sustainably and building greater resilience into our operating model delivering record EPS and free cash flow for Q2. This reflects the diligent execution of our strategic priorities.

We continue to build population in our end markets with strong new and used deliveries in the quarter from our robust backlog, which will drive future product support growth.

New equipment sales are up 12% year-to-date, led by Canada with 19% growth.

Used equipment revenues are up 57% in the quarter compared to Q2 2023. This is the third consecutive quarter of more than 45% growth as we increase our participation in this important market.

Large mining customers are deploying capital to support their long-term plans for sustained production growth. Mining equipment order intake was very strong, reflecting significant strategic wins we announced in May. Mining backlog increased 59% from the end of March, and we've already started to deliver equipment from the awarded deals in the quarter. 4 ultra-class trucks and a number of support equipment units were delivered before they even hit backlog.

I recently spent 2 weeks in South America with Greg, meeting customers who produce more than 82% of the country's copper, alongside a senior team from Caterpillar. We are encouraged with the constructive tone of the conversations and the acceleration of plans for increased production from brownfield mines.

We expect quoting activity to increase in the second half of the year, and our plans to increase capacity and build new capabilities in the region are progressing well.

We've added [ 80 ] technicians in South America this year, built capacity at our [ reman ] center, and fully commissioned our new automated warehouse, which many of you saw at the Investor Day last September.

We are also seeing more constructive discussions in Argentina and positive news from our large mining customers since the government approved the new incentive program for large investments.

Construction activity is generally softer than last year. However, we are starting to see customer sentiment improving. In Canada, we delivered 2 large construction packages in quarter 2, and in the UK and Ireland, sales are in line with prior year despite a material decline in the market opportunity, with market share increasing and our backlog up [ 15% ] in Canadian dollars since the end of March.

In power systems, demand is strong in our key markets, notably oil and gas and backup power capacity. We're taking orders for large engines into 2026 and quoting business well beyond that point.

Turning to product support, as expected, we are operating in a moderating growth environment. Activity and utilization levels are lower than prior year, particularly in construction and also in some mines. Power systems' product support continues to be very robust.

This is resulting in lower construction product support, especially in Canada and the UK, where our business is tied to GDP growth and investments in large-scale infrastructure projects.

We do believe construction activity is bottoming out in these regions and we expect to see incrementally better machine utilization hours heading into the fall. We're encouraged by our strong pipeline and growing number of construction rebuild that we now offer to customers at attractive financing terms equivalent to that of new equipment purchases.

Construction markets in Western Canada continue to be in a transitionary phase until we see the commissioning of major infrastructure projects.

Mining product support fundamentals and outlook remain strong. I would describe the current situation as dynamic and specific to individual mine plans and customers as they drive optimization and production growth. This includes shifting rebuilding component schedules and, in some cases, deferring maintenance to maximize fleet availability.

We are also preparing against extremely high growth in the same period last year and we expect this to normalize over time and to grow on an annualized basis.

We are encouraged by the sequential growth in our product support revenue, which was up 8% from quarter 1, 2024. Our quarter 2 product support CAGR over the last 2 years was a very solid 14%. We expect product support growth rates to improve in the second half of the year as we continue to add technicians, execute rebuilds, which were up more than 50% in construction in Canada, and increase physical and digital sales coverage. Greg will provide more details on our product support performance in each region.

Our teams are controlling what is in their control, operating thoughtfully and looking for further efficiencies as we continue to build greater resilience into our business model. We see strong evidence of cost control across the organization. Our SG&A has a percentage of net revenue of 16.2% in quarter 2, which is an all-time low, despite costs in Argentina required to execute our low-risk approach.

[ As ] the 12 months ended quarter 2 2024, SG&A as a percentage of net revenue was 16.9% and we are finalizing plans to reduce our fixed cost base and further reduce SG&A's percentage of net revenue going forward.

Improving working capital velocity remains at the top of our priorities. New equipment orders are moving through our backlog faster and we are working to execute exchange components and rebuild in a more capital efficient way.

This supports our efforts to allow working capital, deliver substantial free cash flow, and $330 million was the highest free cash flow we've ever generated in Q2, and we expect to generate substantial free cash flow in the remainder of 2024.

I'm pleased with our progress and encouraged we are finding opportunities to lower our fixed costs and improve our capital efficiency as we increase our earnings capacity and strive to achieve consistency in our ROIC performance.

We are making progress in our sustainable growth strategy, importantly in used equipment and power systems, which are critical to our resilience. As mentioned, used equipment sales were up 57% year-over-year. We've significantly increased our participation in used equipment markets and are driving strong volumes across retail and wholesale channels.

Power systems markets remain very attractive, both in oil and gas and electric power generation. Our power systems revenue was up 11% year-over-year, including double-digit growth in product support.

Our rental business was down in line with softer construction activity and warmer weather conditions. We remain committed to sustainably and profitably growing our rental market share.

Optimism in our outlook is gathering momentum, and we are confident, we are on track and we are delivering a track record of execution. In Chile, in particular, the copper mining environment is becoming incrementally more positive. During my recent visit to South America, visiting Chile, Argentina and Bolivia, I was impressed by the strength and engagement of our talent and our people there.

We see optimism building in Western Canada energy sector, with new pipeline capacity coming online and the encouraging outlook for LNG development.

In the UK, the new government have a strong mandate, and we are optimistic this will lead to greater stability, economic growth, and infrastructure development.

Our consolidated equipment backlog is substantial at $2.2 billion, indicative of healthy customer activity and order intake in our end markets.

We delivered solid results in the first half of 2024, which is a great platform to build on in the second half of the year.

With that, I'll hand it back to Greg.

[Greg Palaschuk, executive]

Thank you, Kevin. And please let's turn to Slide 3. Our Q2 net revenue of $2.6 billion was up 3% from Q2 2023, led by strong growth in used equipment and higher new equipment sales.

EBIT was down 5%, mainly due to lower margins in used and rental equipment, which we're working hard to offset through strong cost and capital resilience.

Our EPS was up 2% year-over-year to $1.02, a record for a second quarter, reflecting our cost and capital resilience, as well as the benefit of lower share counts.

We're also pleased to generate a record $330 million of free cash flow for Q2, compared to $30 million in Q2 of 2023. This is an important milestone, and we look forward to building on this momentum.

On Slide 4, we show the change in our net revenue by line of business compared to Q2 '23, and the composition of our equipment backlog by market sector. These equipment sales were up 57%, higher in all regions and sectors, reflecting execution of our growth strategy.

New equipment sales were up 3%, driven by higher sales in Canada.

Product support revenue was up 0.4% compared to a very strong Q2 2023, with growth in South America offset by lower levels in Canada and the UK and Ireland.

Rental revenue decreased by 10% due to lower utilization and rates compared to last year.

Our equipment backlog was $2.2 billion at the end of June, up 11% from the end of March. In South America, our equipment backlog is at an all-time high and reflects solid wins as well as industry momentum.

Equipment order intake was very strong in the quarter, reflecting significant strategic wins in each region, including contracts with multiple copper mines in Chile, oil sands in Canada, and data centers in the UK and Ireland.

As highlighted previously, we do expect improved cash-to-cash philosophy as equipment moves more efficiently through our backlog.

Turning to our EBIT performance on Slide 5. Gross profit as a percentage of net revenue is down 90 basis points, mostly due to lower margins in used and rental equipment. Lower margins in used and rental are consistent with current market dynamics of moderating growth environment, improved equipment availability, and price normalization.

SG&A as a percent of net revenue is 16.2%, an all-time low and unchanged from Q2 '23, driven by strong cost control.

Moving to our Canadian results and outlook, which are summarized on Slide 6. Used equipment sales were up 61% year-over-year. We are driving strong volume across retail and wholesale channels and are seeing higher conversions of rental equipment with purchase option to sales.

New equipment sales were up 7% from Q2 '23, driven by strong activity in the construction and oil and gas sectors.

Product support revenue was down 3% from Q2 '23, which was an exceptionally strong quarter in both mining and construction in Canada.

Currently, large oil sands customers are in the process of optimizing their mine plans and scopes of contractor work, which led to deferral of maintenance and rebuild activity in the second quarter. Construction customers are in a transitory phase after completing large projects.

Compared to Q1 2024, Canada's product support was up 7% with increase across all sectors. Over a 2-year period, our product support figure in Canada was 10%.

EBIT was down 4% year-over-year, and EBIT as a percentage of net revenue was down 70 basis points to 9.2%, primarily due to a higher proportion of new and used equipment sales in the revenue mix and lower margins in used equipment and rental.

We expect to see increased activity in the energy sector in Western Canada and steady production growth with the Trans Mountain pipeline now in operation and the commissioning and ramp-up of LNG Canada beginning.

Our large oil sands customers are achieving production growth. Going forward, we expect them to deploy increased capital to renew, maintain, and rebuild aging fleets. We anticipate strong pent-up demand for product support, including component remanufacturing rebuilds heading into this year's winter works programs.

Turning to South America on Slide 7. In functional currency, new equipment sales were flat. Higher new equipment sales in mining and power systems in Chile were offset by lower construction activity in Argentina.

Product support revenue was up 4% year-over-year, led by increasing activity in power systems and construction. Excluding the impact of weaker Chilean peso on service revenue, product support revenue would have been 7% higher compared to Q2 of '23.

EBIT was down 12% year-over-year, mainly due to a lower gross profit compared to Q2 of '23, which benefited from higher margin product support contracts in mining, as well as lower new equipment sales and margins in Argentina in Q2 '24.

Q2 '24 SG&A included $13 million of costs related to transaction we completed in Argentina to allow access to U.S. dollars and pay suppliers and reduce our peso cash balance. These costs were partially offset by the favorable impact of weaker Chilean and our Argentina peso relative to the U.S. dollar compared to Q2 of last year. Importantly, while managing our treasury risks in Argentina, we remained profitable in Q2.

Q2 '24 EBIT as a percentage of revenue was 10.4%, down 170 basis points year-over-year. Adjusted ROIC was 26.5% on par with Q2 of '23.

As Kevin mentioned, our recent trip to Chile reinforced our encouraging outlook for Chilean mining. Underpinned by growing demand for copper and strong copper prices, we're seeing capital be deployed into large-scale brownfield expansions with a lot of coating activity and tender activity underway for mining equipment and product support. We are in conversations as all major producers are encouraged by our strong competitive position.

As many of you will have seen firsthand at our Investor Day last year, activity by contractors supporting the mining operations in Chile is healthy. We also expect infrastructure construction activity in Chile to start improving going forward.

Power systems activity remains strong in the industrial and data center markets.

In Argentina, we're seeing pockets of strong activity in the oil and gas sector today. However, restrictions on public investment in infrastructure significantly reduce construction activity. Construction industry is down 50% from the first half of '23.

We continue to monitor the government's new rules and policies. While we see renewed optimism in Argentina as new government programs are helping drive large-scale investment by global miners, a low-risk approach remains our key priority for 2024.

Please turn to Slide 8 for our results in the UK and Ireland. In the UK and Ireland, in functional currency, new equipment sales were down 5% compared to Q2 of '23, due to the timing of power system project deliveries.

Used equipment sales were up 31% year-over-year, led by increased volume in the construction sector.

Product support revenue is down 3%, reflecting lower machine utilization hours and customer activity levels.

EBIT as a percentage, net revenue was 4.6%, down 90 basis points year-over-year due to reduced volumes and inflationary pressures. This is a solid profitability for the UK given the current market activity.

We expect demand for new construction equipment in the UK and Ireland to remain soft in line with low GDP growth projected in 2024.

We continue to expect a growing contribution from used equipment and power systems and resilient product support as we execute our strategy.

We expect substantial free cash flow generation in the second half of 2024 as we continue delivering our backlog with improved cash-to-cash cycles and execute our capital unlock and velocity initiatives, which include increasing new equipment preparation velocity to move new orders through our backlog faster, rigorous inventory plan and ordering, including leveraging improved lead times, automating warehouse operations in Canada and South America, simplifying and improving efficiencies for our component exchange program, particularly in Canada, and optimizing low ROIC activities, including our UK pension asset.

In addition, we're moderating our net capital and rental fleet expenditures for 2024 to reflect market conditions. We now expect the range to be $220 million to $270 million, lower than the previous range of $290 million to $340 million.

We're actively building our talent and capabilities in rental. We're committed to growing a profitable rental business, increasing our rental customer base.

Our balance sheet remains healthy with net debt to adjusted EBITDA of 1.8x at the end of June.

In addition, we're in the process of finalizing our plans to lower our cost base and further reduce our SG&A as a percentage of net revenue going forward. This will include further simplification and focus by our central corporate and administrative functions, as well as simplification and efficiency actions in our Canadian component remanufacturing business.

Overall, we remain laser focused on executing our strategy to drive product support, build resilience, and deliver sustainable growth. We anticipate the execution of our strategy will continue to have an increasing impact through this year with improving product support rate, growth rates, greater working capital velocity, and substantial free cash flow generation in the second half of 2024.

Operator, I'll now turn the call over to you for questions.

[Operator]

[Operator Instructions] And our first question today comes from Yuri Lynk from Canaccord.

[Yuri Lynk, analyst]

Maybe this one's for Kevin. Just trying to square your comments on construction, that end market did drive new equipment sales in Canada, and you noted rebuild activity, I think, was up 50%. But yet you did trim your CapEx for rentals. I'm assuming that's tied into construction. So what exactly are you seeing in that market? And is it mostly limited to Canada?

[Kevin Parkes, executive]

Yes. Yuri, it's not limited to Canada. It's -- I'll work in reverse. It's not limited to Canada. Obviously, UK has been -- the construction market in the UK has been soft for a little while now. As I mentioned in my remarks, the industry is down. So we're super happy that actually our equipment delivers for construction in the UK are flat, despite the market being materially down, as noted in Cat's call yesterday for the Europe region. So we're happy.

So I would describe the construction market as kind of bottoming out. There's some green shoots. Obviously, selling the construction season in Canada has driven some of the results in Q2. But we're also encouraging the backlog build in the UK quarter-over-quarter, due to people starting to make decisions for the new construction season in the back half of 2024 and into 2025.

So we would describe it as leveling off and bottoming out. For sure, it could do with some more encouragement from major projects, the stability in the UK government and some deployment of capital in western Canada. And we're seeing an encouraging outlook for mining enablement in construction. So construction is in Chile, so construction is starting to show us some green shoots as it relates to -- and so we're positive about that and we're still rebuilding machines. As we said previously, we're super happy that that rebuild growth is still there in Canada, despite a normalized supply chain, which we've spoken about previously, about changing the proposition and our approach to rebuilding, how we felt that would be stickier even in a normalized supply chain world. So pretty happy with that.

As it relates to rental Yuri, I would kind of thinking, I would disconnect that a little from the general construction sentiment for sure. Construction -- software construction doesn't help with your kind of a optimism around investing in rental, but ours is, is linked as well to building capabilities. We are committed to rental. We're building new capabilities. In fact, we had a new vice president of rental joined us yesterday, for Western Canada. And so we really want to allow that person to come in, understand what we're working with and put the plan together to build out a really robust and sustainable rental plan moving forward.

So it's as much about that in Canada. So hopefully that helps you to square the circle in terms of the kind of positive green shoot sentiment with the CapEx decision.

[Yuri Lynk, analyst]

Just on your plans to reduce SG and a little bit more. Were these plans that were already contemplated in your Investor Day targets? Or are they incremental cuts? And related to that, are those costs in Argentina recurring? Or how do we think about those?

[Greg Palaschuk, executive]

Yes, I'll take that. Certainly, if we look back at our Investor Day, I mean, our #1 focus coming at Investor Day as of September '23 was just on the working capital opportunity. We're pleased to see some of that progress in Q2, with the cash coming through in a quarter that typically doesn't have that, but we'll continue to focus on that through the rest of the year and into next year. But we think we're in the positive cash flow generation side and there's still a big opportunity to have there.

But SG&A, of course, is a big value driver in the business. At that time with the amount of inflation and some of the procurement conversations felt like that was going to be a second step after the working capital phase was complete. And so we are finishing the design of that. We begin executing parts of it, and we just think there's a really good opportunity, particularly for 2025, for the whole team to focus on the next frontier in terms of sales to SG&A. And so that will focus on continued optimization of our corporate area as well as the support functions. And then there's a big opportunity in our Canadian business for our component exchange business that's kind of been run separately over the years.

And I think given all the good progress we've made as a company on collaboration, that it's time for that to be fully integrated. And there's a lot of efficiencies from both a working capital and a cost perspective associated with that.

And then on the Argentina side, as you know, in the first quarter, we partnered with our suppliers to access U.S. dollars through the transactions that you do in Argentina. We decided to do that again in the second quarter just to make sure that we can keep the risk as low as possible. That was not supported by our suppliers to the same degree, and it's something we wanted to do to keep the risk low. We don't think that'll be a recurring cost in Q3 and Q4. We're going to reenter the official market there and get our exposure back to 0 through that channel. And so we don't think that will reoccur, but it's something we wanted to do to just make sure we kept that balance as low as possible while supporting the product support side of the equation in the country.

[Kevin Parkes, executive]

To be clear, it's not -- sorry. It's not a reaction to -- it was always in the plan. We prioritized invested capital and free cash flow performance, which you've seen coming through. And I think we've slightly slopped product support sales than we had in the Investor Day. We're just reenergizing that and moving some of those cost actions forward.

[Yuri Lynk, analyst]

Can you quantify the Argentina costs that were in SG&A? The additional costs?

[Greg Palaschuk, executive]

$13 million.

[Operator]

Our next question comes from Cherilyn Radbourne from TD Cowen.

[Patrick Sullivan, analyst]

This is Pat Sullivan on the line on behalf of Cherilyn. My first question is related to gross profit margins. So could you tell me what extent was mix versus lower margins on equipment and rentals that was called out, a factor in the year-over-year decline?

[Greg Palaschuk, executive]

Yes. It was roughly equal. Part would be mixed. Obviously, we've got higher new and used volumes, relative -- or growth rates relative to rental and product support. So there is a mix shift there, but also within, in rental and used as we've been pretty consistent with over the last couple of years. We couldn't expect the same used in rental margins from 2022 and 2023 every year. And so those have come in and normalized to an extent. And we're working hard to offset that through SG&A control and further SG&A actions.

[Kevin Parkes, executive]

Yes. And there's also mix within the mix as well, Patrick, with the mining deliveries in new equipment as well. So you need to consider that.

[Patrick Sullivan, analyst]

And then I guess is it possible to quantify how much maintenance activity was deferred in the oil sands in Q2 or H1? That's something that's called out in the earnings release.

[Kevin Parkes, executive]

I'd say, it's hard to quantify actual numbers for individual mine sites. I can tell you that we've -- with the 6 mines in the oil sands, 3 group product support at the kind of levels we were expecting, 3 didn't. And so the specifics around the individual mine plans and how the mines are operating, that's in the control of the miners. We need to be ready and make sure we're able to support them as they require the services. But it's hard to quantify that as an absolute number in the product support.

[Operator]

Our next question comes from Jacob Bout from CIBC.

[Jacob Bout, analyst]

I had a question on backlog. It's difficult to -- it can be quite lumpy. So up quarter-on-quarter, but down year-on-year. But if we look at the $700 million plus that you announced in April, it's down from those levels as well. How are you thinking about that? And what's in the hopper right now?

[Kevin Parkes, executive]

Thanks. So I mean, we're still pleased with the rise in backlog. If you think -- if you look at it as a percentage of the total backlog that Cat announced yesterday, it's still pretty encouraging. For sure we had a -- you can see through our new equipment line, we had a sell through in Canada, which is normal for the spring selling season. So that would have took then backlog. And then we're selling through some of the lumpier power systems projects as well. But our backlog still stands at well over half a year sales. There's a good mix across different industries, so mining adds are very encouraging. We did mention that some of those mining, when we were in South America in June, there was already machines being built on site ready for delivery in the same quarter. And so things are moving through the backlog a little bit quicker.

And so I think it's important that we calibrate the backlog figure now with the reality of the new supply environment and our drive to move things through the backlog quicker. And so that backlog level is still incredibly encouraging. As I said, it's more than half a year's sales booked already. And in some cases, as I also mentioned, that backlog is extending out with power systems projects well beyond the end of next year. And so we feel it's a really solid foundation from which to build. But we need to normalize against the kind of backlog levels that we saw in when the supply was constrained.

[Greg Palaschuk, executive]

[Indiscernible] the second part of your question, both South America and the oil sands, there's lots of conversations going on that in the second half of the year and particularly towards the end of the year, lots of brownfields in South America and some fleet refresh in Canada.

[Jacob Bout, analyst]

And then just on the improving product support growth rates in the second half of the year, I'm assuming that part of that is just your larger installed base. What else is driving that? And are you more confident about second half growth than where you were, say, 3 months ago?

[Kevin Parkes, executive]

Yes, so definitely more confident than we were 3 months ago on the trajectory. And of course, we're lapping some more favorable comparisons, so we're still very happy with the 2 year CAGR. This lapping Q1 and Q2 last year was always going to be difficult, but we're pleased with the progress and this is actually particularly quarter-over-quarter, that's very encouraging. And with the team, it's our top #1 priority. We talk about this and pretty much invested capital and generate free cash flow from that invested capital velocity. But we talk about product support constantly. It's the #1 priority. It's our biggest priority.

As you mentioned, we're -- I think we've added 70 ultra-class truck in the last 4 quarters into our 2 regions. New sales are healthy, so on the population side, we're encouraged in that regard.

What else? We're building capacity. So I mentioned we've added 80 technicians in South America. It's well over 100 if you take the other 2 regions. We're building capacity at our OEM operation in Edmonton here and better distribution capabilities, meaning we can service our customers faster, get parts of them quicker, which hopefully will have a better growth tailwind too.

Continue to build capabilities around rebuild as mentioned that in my remarks as well, CVA and condition monitoring are also helping us to stay closer to our customers and build the right kind of value propositions for them to capture more market share. And we're doubling down on coverage, both physical and digital coverage. So I think we -- in Canada we added 12 salespeople in Q2 to add to our coverage for product support growth. I think it was 5 in the field and 7 inside sales. And we're developing specialist sales as well to go after things like undercarriage and ground engaging tools. So we're not done yet. We're still committed with building plans and we're executing them with velocity. So we hope that was the slightly easier comparisons will get us to a place where it's closer to our Investor Day targets.

[Operator]

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

[Devin Dodge, analyst]

In South America, maybe just picking up on an earlier question, but as you mentioned that quoting, tendering and award activity in the mining sector was elevated. Are you able to frame how that pipeline looks now in terms of size or the maturity of opportunities? And if the momentum of order intake that we've seen the last, say, 6 to 12 months can be sustained?

[Kevin Parkes, executive]

Yes, I mean, it's hard to say, kind of the -- whether that can be sustained. It's very lumpy, right, Devin? It's the timing and the decisions and the capital approval are very lumpy. I would say that incrementally, we have just won 2 very big pieces of businesses in South America. With the BHP award and the Codelco award. There's nothing of that size that we're working on right now. But there are multiple opportunities which would add up to a similar level of order intake. If not a little bit more when you add more, and that's all saying we win more. We've been very aggressive.

I would say that in visiting 6 customers in Santiago over 3 days, and 2 mine sites, there's a definite acceleration of what can be achieved, given the current constraints of machine supply, labor supply and approvals for brownfields. And I think we've moved from inquiry to very definite quoting activity. We expect to submit a number of quotes before the end of the summer here for substantial pieces of business. So what's this pace? But the general sentiment is go faster and what's possible in terms of machine supply and execution, so.

[Greg Palaschuk, executive]

And I just highlight that if you go to each of some of the producers, investor presentations, all will have some form of update on brownfield sanctions or intentions. If you look at Anglo or Capstone or Freeport, they've all given up recent updates. So have a look. And they're all maturing their brownfield plans, whether they're sanctioning them or having that on the horizon.

[Devin Dodge, analyst]

And then maybe sticking in South America, just margins in the quarter. It seemed like one of the main drivers. I thought that was called out in the MD&A was for that moderating margin was some high margin mining product support contracts that benefited last year. Can you just provide some more specifics behind that? And if we should be expecting this to be a headwind in the coming quarters?

[Greg Palaschuk, executive]

I think that was pretty unique to the quarter. I mean, this time last year there was quite a few larger rebuild programs that were coming to a conclusion to refresh particularly 1 mine. But also, just a couple of contracts that came to the end of their life. And there's a bit of a washout in that process. So that was a year ago that didn't replicate this year. And so that's a factor, but we feel fine with the overall margins [ and ] the product support and the growth profile going forward.

[Operator]

Our next question comes from Steven Hansen from Raymond James.

[Steven Hansen, analyst]

As a follow-up to one of the earlier questions, Kevin, you described all the strategies that you're deploying to help grow the product support business, which is hoping you provide some additional comments regarding the customer activity you're seeing on the ground. And if that's actually accelerating here into the back half and ultimately whether you think you can exit the year at the 7% target that you've outlined for the category.

[Kevin Parkes, executive]

Yes. So without doubt, activity levels are improving. We look at machine utilization levels, they're kind of back to normal levels in Western Canada and improving in the UK. Like I said, the big challenge is the dynamics around individual mine sites and plans. But net-net, we expect product support activity to be stronger in the second half of the year and to have a more -- I mean we're planning for a more normal winter season there in terms of how we support our miners through that schedule and help them to produce more.

We're very committed to our targets, Steve. And like I said, I listed off things we're doing. We work tirelessly every day to get better at product support, to win more business and to execute it more effectively. And we're not wavering from that. And we can remain committed to those targets. And we're confident that we can demonstrate exit rates closer to the Investor Day targets than we are today.

[Steven Hansen, analyst]

And maybe just to follow-up on South America and just thinking about the duration of this new equipment cycle, you've described a record backlog there. It sounds like quoting activity is accelerating to the second half. How should we think about new equipment deliveries into next year? I mean you've got some tough comps to face. We actually see growth in new equipment deliveries next year? Or how do you think about that plan?

[Greg Palaschuk, executive]

Yes. I'd say it's too early to talk about 2025. We just are -- we are encouraged with the backlog. Obviously, a lot -- some of that build is coming through, through the year and some of it stretches into next year. There's like you highlighted, there is good quoting activity that would benefit in 2025. Part of the dynamics there are some of those are customers that are competitive customers and so they're big opportunities. There's a bit different profile than the kind of Codelco's and BHP's where we've been the incumbent are growing our share. These are breakthroughs. So we'll have to see how those play out. Of course, we're working aggressively to win in that area.

Yes, so there's good momentum across not just mining power systems in particular as well. And so we do think there's momentum into 2025, but too early to call levels at this point.

[Kevin Parkes, executive]

Yes, I think so. It's really important to look at it by the same way. The mining business is extremely lumpy, as you know, Steven. So to forecast quarter-by-quarter annual growth, we're just very focused on winning market share and delivering to our customers as quickly as possible, so we can support them in growing their production targets and we can have an opportunity to grow our product support business. Power systems and deliveries, I would expect those to continue to increase year-over-year. And the current sentiment in construction would suggest that next year's construction machine sales should be better than this year.

[Operator]

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

[Maxim Sytchev, analyst]

Most questions have been asked already, but then just a couple of quick ones. I was wondering, Greg, if you don't mind providing a bit of color on rental CapEx, including dispositions, if you have a -- bit more of a specific range that we should be thinking about for 2024?

[Greg Palaschuk, executive]

Yes. We don't break it down to that level. I mean, we brought the range down. As you can see, year-to-date, we've been pretty low on the net rental CapEx. We do have some load in the back half of the year to get ready for next year. So we do see that at a lower level overall, in line with the CapEx change, but we're not breaking it down by category.

[Maxim Sytchev, analyst]

But I guess dispositions, we can just kind of straight line up [Indiscernible]

[Greg Palaschuk, executive]

Yes, a lot of the dispositions have happened -- a lot of the dispositions are in the first half of the year.

[Kevin Parkes, executive]

Yes. So Max, it's important to remember the mix of our rental business, Max, is slightly different. Remember, and so we would have a much higher proportion of heavy rents and power rents than many others. And so given the pipelines finishing, there was a kind of higher level of dispositions in the first half of the year in heavy rents.

[Maxim Sytchev, analyst]

And then the last question I had, just in terms of the power business and sort of the ability to leverage your kind of UK success in other geographies, I was wondering if there's any update on that strategy and its stickiness.

[Kevin Parkes, executive]

Yes, it's [ 11% ] [Indiscernible] Max, I'm super encouraged. I had a meeting last week with our Canadian power systems team. Super encouraged by the outlook there and the progress that we're working on. We expect to -- we've got some good projects working on -- we're working on in western Canada, which we'd hopefully be adding to the backlog in the second half of the year here.

UK, we're in our Board meeting this week, I mean we have 6 approvals, Greg, to talk about this today. And so that business continues to be very robust.

And then in Chile, I'd say we're to a certain degree very, very happy and optimistic just at the pace of growth there. It's from a small base in Chile, but the team in Chile who are again being supported by our UK business. So I think our power systems business [ sort of ] 11% year-over-year in the quarter, if that's a trend, and we see that continuing. We think we've got enough more based activity across the 3 regions to continue that despite it being lumpy projects in some cases.

The one area of weakness, particularly in the UK, is around that industrial sector, which is supplying into that softer construction market. So that's one thing that's dragging us. And then obviously in the quarter, the UK revenue was down a little because of lumpiness in terms of our product support. And the cross-country collaboration is strong, the optimism is strong, and we continue to be really encouraged about the power system as both.

[Operator]

[Operator Instructions] Our next question comes from Sherif El-Sabbahy from Bank of America.

[Sherif El-Sabbahy, analyst]

Just wanted to ask, we've seen some significant move in currencies in recent months. Are you seeing other OEMs or dealers becoming more aggressive with pricing, driven in part by those shifts?

[Kevin Parkes, executive]

No, I mean, currency is something. We have to be competitive in our local market, Sherif. That's our modus operandi. We have to give our teams the tools to be competitive. We do have an external data source in terms of market share for new equipment, and we are growing market share in all 3 regions, specifically on the kind of large construction area. We're holding a strong position in mining and winning in market and winning in persistence, as I've previously spoken to. So now, I think this is more a function of we have to be competitive, we have to work with our partners to make sure we've got the right propositions for the marketplace.

But for example, I was up in Prince George last week for a couple of days. We have a definition called parts focused market share. And I would say in that Northern BC area, we're 1 in 2 machines, we were selling right now as a Caterpillar.

[Operator]

And ladies and gentlemen, [ in ] showing no additional questions, I'd like to turn the floor back over to Greg Palaschuk for any closing comments.

[Greg Palaschuk, executive]

Great. Thanks, operator. That concludes our call. Thank you for your participation and hope you have a safe day. Thank you.

[Operator]

And ladies and gentlemen, that will conclude today's conference call. We do thank you for joining. You may now disconnect your lines.