Finning International Inc

TSX:FTT

Earnings Call Transcript 2017-Q4

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Finning International Inc. Fourth Quarter 2017 Conference Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Mauk Breukels, Vice President, Investor Relations and Corporate Affairs. Please go ahead.

[Mauk Breukels]

Thank you, operator, and thanks to everyone for joining us. On the call with me today are Scott Thomson, President and CEO; Steve Nielsen, CFO; and Anna Marks, Senior Vice President, Corporate Controller and Treasurer. Following the remarks by Scott and Steve, we'll open up the line to questions. An audio file of this conference call will be archived at finning.com. Before I turn the call over to Scott, I want to remind everyone that some of the statements provided during this call and in the press release are forward-looking. This forward-looking information is subject to risks and uncertainties, as discussed in the company's annual information form under key business risks. Please treat this information with caution, as Finning's actual results could differ materially from current expectations. Our forward-looking disclaimer statement is part of our quarterly releases and filings. Finning does not accept any obligation to update this information. Scott, over to you.

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

Good morning. When I reflect on last year, I'm most proud of our outstanding safety performance. Each of our operations contributed to reducing our total recordable injury frequency by 35% over 2016. Last year's safety performance is our best on record, and I sincerely thank all of our employees for their contribution to reaching this important milestone. I will now speak of quarterly and annual highlights, market conditions and opportunities in each region and conclude with some commentary on the outlook for 2018. We had a strong finish to 2017, with solid profitability in all regions. Our Q4 earnings were up 43% on 16% higher revenues. Free cash flow was strong at $350 million, and our backlog was at the highest level in almost 4 years. Looking at our annual results, I'm pleased with the organization's focus on cost control which allowed us to achieve strong operating leverage. While our revenue increased by 11% in 2016, SG&A costs were only 4% higher. As a result, EBIT grew by 46% and EPS was up 55%. Importantly, our capital efficiency metrics improved significantly as we began to benefit from supply chain efficiencies and higher volumes. Inventory turns were up 14% year-over-year to 2.83x, the highest level over the last 5 years. Working capital and sales ratio improved by 330 basis points, and invested capital turnover increased by 11% from 2016. This enabled us to generate $165 million of free cash flow while purchasing inventory to meet stronger demand. Higher profitability and improved capital efficiency drove an increase on return on invested capital in all regions compared to 2016. In British Columbia, we are seeing activity -- we are seeing steady activity levels. While the decision on Site C is positive for our customers, we remain cautious with respect to the timing of significant infrastructure projects in the province. In Alberta, market conditions have improved significantly in the second half of 2017, particularly in the general construction and oil and gas sectors. Recovery in the gas compression market is generating strong demand for power systems equipment and product support. We believe the current and proposed infrastructure projects in Alberta should support an increase in demand for construction equipment. In the oil sands, equipment is fully utilized and our customers are increasing production. We expect product support activity to remain strong, including component replacements and machine rebuilds. Labor and asset utilization in the oil sands remain key focus areas for us. We've made great progress in 2017 and will continue to drive efficiencies that help our customers reduce their costs. Turning to South America. We are seeing positive market signals in Chile. First, the price of copper has strengthened significantly and has been holding. Miners are expecting to increase production by about 8% over last year, and we're seeing equipment utilization improving. The Lundin deal we announced in December is the first significant order for mining equipment since 2014. We are in active discussions with other customers and expect improved visibility of demand for mining equipment as the year progresses. Second, we believe the outcome of the recent presidential election in Chile is positive. President Piñera is interested in stimulating the economy. His 4-year $14 billion spending plan includes $2.7 billion in new investments in infrastructure and hospitals. He also intends to introduce regulatory changes which are more supportive of Chile's copper mining industry. Piñera will be sworn in next month. While his decisive victory has sent a positive signal to the business community, we don't expect it to translate into higher activity levels until late this year. Overall, we remain constructive on the long-term outlook for copper, and we are optimistic about future infrastructure opportunities in Chile. In Argentina, the recent confirmation of President Macri's coalition is representative of the move to the right in South America and provides a sense of stability in the region. Macri's government encourages continued investment in Argentina. We expect public investment in infrastructure to remain at current levels and the oil and gas development of Vaca Muerta to provide a significant future opportunity. In the U.K., the uncertainty surrounding Brexit remains, but market conditions are robust. We are capturing strong demand for our construction equipment to support the government-funded infrastructure and residential construction activity. And our power systems group is selling and supporting engines for standby and short-term power capacity applications. While customer activity continues to improve, the equipment markets remain highly competitive in all of our regions, and we have not yet seen a benefit from price realization. In this environment, our integrated go-to-market offering of new, used and rental equipment is proving to be very successful. Pricing for good quality, low-hour used equipment remains strong and rental rates and utilization have improved. We will continue to renew our rental fleet in 2018 while strengthening operational performance and actively managing our fleet disposal channel.I am pleased with the progress we are making with our technology agenda. We are seeing a strong demand for autonomy from our mining customers. Caterpillar offers the industry-leading autonomy solution which supports an unlimited number of trucks and ancillary equipment on a mine site, can be retrofitted to existing equipment and will be interoperable across different machine makes. Caterpillar's autonomous fleet is growing rapidly. Caterpillar is currently supporting the largest autonomous site in the world, where it is enabling the customer to achieve productivity gains of at least 20% and significantly improved safety performance. In Western Canada, we now have a development agreement in place for an autonomous hauling system with an oil sands producer. Based on the growing level of interest, we expect more autonomous hauling system implementations over the next couple of years. Our digital team also had a successful year. At the end of 2016, about 15% of our over-the-counter parts were online, whether through our e-commerce or integrated procurement channels. By the end of 2017, that number increased to 23%. We are on track to sell 30% of our over-the-counter parts online by the end of 2019. We are also connecting more machines. We finished 2017 with 42% of our addressable machine population connected. That's up from 28% in 2016. We remain on track to our target of 80% connected machines by the end of 2019. Greater machine connectivity is enabling us to offer our customers data-driven insights and improve their equipment's performance. We are encouraged by the significant increase in customer interest and growth in our performance solutions revenue. As we start 2018, activity levels feel comparable to 2017. However, we expect year-over-year growth in the first half of 2018 to be a little higher than in the second half, given market activity began to really pick up halfway through 2017. We expect continued improvement in Canada's profitability to be the main driver of operating levers in 2018. In South America, we are investing in technology, which will ultimately improve our working capital efficiencies and reduce costs. We are excited about the prospect of significant top line growth and greater earnings leverage in South America, as we exit 2018 and into 2019. In the U.K., we've achieved sustainable profitability levels and return on invested capital of 15% following the successful turnaround in 2017. We feel there is upside in the U.K. as we continue to leverage costs, increase asset efficiency and grow digitally-enabled product support. Our first quarter revenues are generally below our fourth quarter due to seasonality, and we're anticipating a similar trend in 2018. Despite lower revenue, we are expecting similar profitability in Q1 relative to Q4 because of the ongoing operational improvements we are making and the lower fixed cost base. I'm particularly pleased that we demonstrated material free cash flow generation in 2017, along with 11% revenue growth, and our objective is to continue to generate positive free cash flow throughout the cycle. To sum it up, we delivered significantly improved financial performance in 2017, as market conditions began to strengthen in our regions. The operational efficiencies implemented across the organization, cost discipline and the strong execution of our strategic priorities have enabled us to generate a higher return on invested capital and solid free cash flow. Looking ahead, we are focused on generating earnings leverage while investing in growth opportunities and long-term strategic initiatives to transform our customer experience. I will now turn it over to Steve.

[Steven M. Nielsen]

Thank you, Scott. As Scott has reviewed, we had a very strong fourth quarter, marked by higher revenues, improved profitability, greater capital efficiency and strong free cash flow. Capitalizing on an improved marketplace, operational improvements and cost reductions implemented over the last couple of years are manifest in the results and have positioned us well for 2018. Our consolidated equipment backlog increased to $1.3 billion, up from $500 million a year ago and $900 million at the end of the third quarter. Canada's backlog more than quadrupled since the end of 2016, driven by improved order intake, primarily in mining. Adjusted fourth quarter earnings per share was $0.40, which included 2 items that offset each other. Severance costs in Canada and South America totaled $0.03 per share. The Canadian severance was related to the closure of the Center of Excellence facility in Red Deer as a result of transitioning heavy welding to our strategic partner, Raptor. Severance in South America was due to the closure of the Alumbrera mine in Argentina. Offsetting these costs are in proceeds -- are insurance proceeds of about $0.02 per share related to the business interruption impact of the 2016 wildfires in Alberta. In Canada, market conditions in the construction and oil and gas sectors improved significantly in the fourth quarter, driving demand for new equipment and parts. We also saw continued strength in product support in the oil sands, including component rebuilds. Despite increased activity levels, pricing remains highly competitive. We are achieving improved profitability in Canada by focusing on the things we can control including asset utilization, service efficiencies, rental operations and cost discipline. Canada finished the year with an EBIT margin of 7.7% in the fourth quarter. Compared to adjusted 2016 results, full year 2017 EBIT margin was up 190 basis points to 7.4%. Invested capital turnover increased by 7%, and adjusted return on invested capital was up 420 basis points to 13.5%. In South America, an increase in copper production and mining fleet utilization in Chile drove higher product support revenues, up 14% in U.S. dollars over the fourth quarter of 2016. New equipment sales increased by 21% in U.S. dollars on improved activity in the construction and mining sectors. Adjusted EBIT margin was strong in the fourth quarter at 9%, lifting annual adjusted EBIT margin to 8.6%. South America achieved an adjusted return on invested capital of 18% last year, an improvement of 300 basis points from 2016. We expect to see improved earnings leverage in South America in 2018 before our investment in the new ERP system which will enable more earnings torque in 2019. This year, we expect to maintain EBIT margin in South America around 8.5%. Our U.K. and Ireland operations reported a strong quarter. Revenues grew by 20% in functional currency, driven by robust demand in general construction and electric power generation markets. EBIT margin was 4% for both the fourth quarter and the full year. Importantly, the U.K. and Ireland team achieved a significant improvement in return on invested capital. 2017 ROIC was 14.7%, up from adjusted ROIC of 5.9% in 2016. As Scott stated, our goal is to generate positive free cash flow while growing revenues in the [ subcycle ]. We made great progress on optimizing our supply chain and improving working capital efficiencies in 2017, as our revenues increased 11% year-over-year. All of our capital efficiency metrics improved from 2016, even with the significantly higher inventory needs to meet current and future demand. We generated free cash flow of $165 million for the year, a marked contrast to the cash consumption in the early stages of prior [ subcycles ]. Our strong balance sheet, higher earnings and positive free cash flow will continue to support our investments in growth opportunities and our long-term strategic initiatives. This year, we expect our capital expenditures to be in the range of $150 million to $200 million which will include investments in the new ERP system, digital and e-commerce capabilities and electric drive mining vehicles. We also expect to invest about 20% more in rental assets this year to beat the demand for low-hour used equipment and increased rental activity from the integrated go-to-market strategy mentioned by Scott. We expect to continue to generate positive free cash flow in 2018 while growing our revenues. I'll now turn the time back over to Mauk.

[Mauk Breukels]

Operator, that completes our remarks. [Operator Instructions] Operator, can you please open up the lines?

[Operator]

[Operator Instructions] Our first question comes from Jacob Bout of CIBC.

[Rahul Malhotra, Associate]

This is Rahul on for Jacob. So nice uptick in backlog this quarter. Apart from the Lundin mining contract in Chile, could you elaborate maybe on which other sectors and regions drove this backlog increase? I think you had mentioned that Canada did quite well.

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

I think the major driver was -- well, actually, I shouldn't say the major driver. A big driver was Canada and a big driver of that was our mining customers in Canada. So there's 3 or 4 pretty big adds during the quarter in that backlog. But it was also South America as well. So it was pretty broad-based recovery in that backlog across all regions.

[Rahul Malhotra, Associate]

Okay. And maybe just another question on the sustainability of improving inventory turns. So as the U.S. ramps up, there's an argument that lead times will widen. How are you thinking about this as you look ahead?

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

Why don't I start, and Steve may be willing to add? So undoubtedly, I mean, you're seeing a broad-based recovery across the world, and I think you saw CAT's revenue growing at 35% in the quarter and a lot of discussion around equipment needs. And so I think it's expectation that lead times will extend a little bit. We actually saw a little bit of that in 2017 on our parts side, and we did make some forward-looking investments on parts to meet the needs of our customers. I think fortunately, our parts turn actually improved modestly but improved through that process. And then second, what I would say as on our equipment forecast to cash, I think we reduced that process by 35% through the year. And so that allowed us to still grow the top line and grow free cash flow. So undoubtedly, lead times will expand. We're going to have to manage that through 2017. It's a good problem to have, but it's going to create some complexities that we'll have to be really close to our customers. We have to make sure that we meet their needs but also be able to navigate effectively through a very robust environment.

[Operator]

Our next question comes from Cherilyn Radbourne of TD Securities.

[Cherilyn Radbourne, Analyst]

So to me, the gross margin percentage looked pretty resilient year-over-year despite a sales mix shift in favor of new equipment sales. So that was suggestive of improvements in other areas, notwithstanding the fact that you're calling out a highly competitive environment. Maybe you can elaborate on some of those dynamics. It sounds like rental maybe have -- may have been an important piece.

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

Yes, Cherilyn, thanks. So I mean, it is still a very competitive environment, and I would say, particularly in Western Canada and our mining customers, so oil sands. We are -- it's very competitive and it's very -- we're trying to be the best for our customers too, recognizing that they're under pressure with commodity prices not where they should be for the oil sands. And so that is a really competitive part of our business. I think some of the offset to that is the Rental business is performing much better. And I think this Rental used and new strategy that we're implementing is helping to improve overall performance. I think the used business this year, this quarter was one of our strongest on record or at least in the recent history. There's a little bit -- and I think we'll see more of this on the new equipment side, hopefully a little bit of margin improvement as lead times expand. I think that should be helpful. And then lastly, SG&A improvements have been pretty significant. There's been a lot of costs taken out of the equation, and it's providing leverage when we see increase in revenue. So I think those are the 3 dynamics that are at play here.

[Cherilyn Radbourne, Analyst]

Great. And then just on SG&A and your ability to sort of maintain the cost reductions that you made during the downturn. Can you tell us where you ended the year on headcount versus the beginning of the year? And just what do you see as your requirements for 2018?

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

I don't have -- Anna is trying to get the number, so I think we'll have them by the end of the answer -- at the end of this question. But we haven't seen a significant uptick in headcount, so I think one of the things that we're really going to actively manage is weighing off adding back cost versus meeting demand. I think the fortunate thing here is we've actually consolidated a lot of activity base, a lot of our -- sorry, infrastructure, particularly in the oil sands to focus around OEM and Fort McKay, as you know. And so there's not a lot of facilities for people to go back into. And then when we are adding people, which we want to do that if we have to meet demand. We've made enough improvements in our service business over time. That's actually accretive to the overall financial results. And so the number that, I think, we ended the year with is around 12,500 which seems slightly up probably to the start of the year but not significant.

[Operator]

Our next question comes from Yuri Lynk of Canaccord Genuity.

[Yuri Lynk]

You've obviously got a substantial order backlog, Scott. Can you help us with the cadence of those deliveries for modeling purposes? And I just want to make sure that I get your comments on growth for the first half being a bit more heavily weighted than the back half. You're talking revenue growth? And is that driven mostly by the deliveries in backlog?

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

Yes, so I think what we are trying to message is -- I know what we're trying to message -- is that the environment feels the same as we sit here in January, early February as it did in the fourth quarter, so there's been no real change in momentum. But as you think about when we really saw a pickup of activity, it was mid-year last year. And so I think you can expect percentage growth increases on the top line higher in the first half of the year than in the back half of the year. So that's point one. Point two, when you look at the backlog, I think the big change here is the quadrupling of the backlog in Canada. I mean, that's a big move over a year period of time, and it's pretty broad-based across all of our different segments in Canada. And there's -- subject to these lead times, which is something we're going to have to manage, the deliveries in this environment happen pretty quickly, and so there's not a lot of deliveries that we're looking out in 2019 and 2020. I would say, the first quarter is always seasonally lower than the fourth quarter, and so you have to be sensitive to that when you put in your models. But that has nothing to do with the overall environment that we're in.

[Yuri Lynk]

And just so I understand, you are also calling for year-over-year growth. In H2, it will just be less than...

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

Exactly.

[Yuri Lynk]

What we saw in the first quarter?

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

Exactly.

[Yuri Lynk]

During the first half, okay. On SG&A, can you give us or update us -- you've provided this in the past -- with the fixed versus variable split as we sit here today. And it was -- I think your SG&A was about 20% of revenue on a normalized basis. Should we look at it as a percentage of revenue or do you think you can get that number lower? It sounds like you can at least in Canada, but lower as we see higher revenues in '18?

[Steven M. Nielsen]

Yuri, this is Steve. So when we think about our fixed variable costs, of course, with the downturn in the revenues in spite of taking out fixed costs, typically, you have a shift in the percentage to fixed -- to higher fixed costs. So we're probably in a range -- I'll give you a range because it will fluctuate as we re-add variable costs which almost all the personnel adds that Scott referred to, to Cherilyn's question, we're adding back, mechanics and other variably-driven costs. So I'd put the range of the fixed costs depending on how that variable cost comes back in the 55 plus or minus range and the variable cost at 45. But the important number is the incremental leverage which is for every dollar of incremental revenue, we typically add $0.04 to $0.06 of incremental variable costs. That's what's creating the earnings torque.

[Yuri Lynk]

So at every dollar is, sorry, $0.04?

[Steven M. Nielsen]

$0.04 to $0.06 depending on the mix of the revenues.

[Operator]

Our next question comes from Michael Doumet of Scotiabank.

[Michael Doumet, Analyst]

So Scott, can you help us frame the 2018 margin story for Western Canada? Last year, we saw cost reductions in operating leverage. And given the expectation for continuing margin expansion, maybe give us a sense of how it plays out probably between operating leverage and pricing improvement.

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

Sure. So on the -- as we think about the year and as we put together the budget, we're not expecting price realization. I mean, if that happens, that's great. But I think -- and ultimately that should happen at some point in these cycles when they turn, but we're not planning on that. We do see incremental margin improvement in Canada, and it's all about higher revenue on a fixed cost base that doesn't expand. And that's one aspect of it. I think there's also some improvements that we'll see in Rental, used and new. Our strategy there, which will offset some of the lead time issues that we talked about, I think, will also provide a little bit of upside to margins and ROIC. And so this earnings leverage story in Canada is -- we expected to fully continue. If we get pricing realization over time, then all the better, but we're not planning that given where our customers are. Particularly on the oil sands right now, we're not planning on that as we're trying to help them deal with a pretty difficult environment as well.

[Michael Doumet, Analyst]

Okay. Perfect. But just putting the comments together, my sense is that -- and correct me if I'm wrong, we should see incremental margins of, call it, 20% for every revenue dollar, and that doesn't include any pricing improvement for next year. Is that how we should think about 2018?

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

I'd have to do the modeling. I'm not -- I don't think we've ever said that.

[Michael Doumet, Analyst]

It's just the gross margins of, call it, 25% minus the $0.04 or $0.05 of SG&A.

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

Yes. I'm not sure I'm going to commit to that, Michael. I mean, I think when Steve's talking about adding back variable cost to fix cost, it made a very -- a small component of the revenue, but I'm going to have to think about your guidance there and come back to you in a different forum.

[Michael Doumet, Analyst]

Okay. Fair enough. Maybe second question. We've seen a pretty healthy rebound in construction sales in Western Canada. Any sense of how those sales compared to maybe what you guy would view as a normalized level? And maybe what you're seeing in terms of incremental demand for [ the main ] infrastructure in 2018?

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

Sure. I mean, I think if you look at the last couple of years, the oil sands has been pretty consistent, as we talked about. And in fact, that product support growth now, with '17 behind us, has been growing at a compounded annual growth rate of about 10% over the last 3 years. And I think the momentum continues there. We look at our OEM facility, we look at our Fort McKay facility, and those are fully utilized and we're adding shifts. So that feels good. What really took the downturn, and we've talked about this a lot, was the general construction business in Alberta, and in some asset classes, that was off 60% or 70%. We've seen a pretty significant rebound off that bottom but it's off of a lower base and it's probably 30% or 40% off of that lower base in terms of industry activity. We think a lot of that is driven by those trucks going back to work and more demand for trucks, and we would expect that to continue. I think a lot of the contractors are seeing more work from the oil sands producers on overburden removal, and I think in general, the overall economic environment in Alberta has improved pretty significantly.

[Operator]

Our next question comes from Derek Spronck of RBC Capital Markets.

[Derek Spronck, Analyst]

Just with regards to your top line growth, it came in over 11% this year and the demand indications and your backlog and the visibility that you have. Is that sustainable next year or somewhere in and around that level?

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

Yes, I mean, I think back to, I think, one of the first questions. We're seeing the same sort of economic environment or end market environment as we did at the end of the year. And so I think first half of the year, probably a little bit higher growth because of the year-over-year comparables. And back half of the year, a little bit lower growth because of the strength of the Q3 and Q4. So I think if you put all that together, it gives you a good sense of what we're expecting from a top line perspective in 2018.

[Derek Spronck, Analyst]

Okay. That's helpful. And you're in a pretty good debt position. You're investing internally. Would you be able to break that out a little bit, the $150 million to $200 million between the European investment, the digital initiatives and, I guess, the electric drive mining system? And just as a follow-on on, on that, what sort of EBIT margin headwind in South America is related to the ERP investment? If you're able to quantify that, that's really helpful.

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

Sure. So we're about 50% on the way through our ERP implementation. We expect that to happen Q3 and Q4 of this coming year. So far, going well. That is providing a drag from an operating expense perspective in South America, so you're not seeing through the financials the full leverage that, that team is delivering. It's about 50 basis points, probably. Getting that behind us, combined with, I think, better top line activity, gets us pretty comfortable with significant both top line and earnings leverage as we exit 2018 and into 2019. The second point is, we are spending a little bit more capital as we go into 2018 and there are 3 components, as you talked about. One, is the technology investments. Second is digital, which is a little bit higher. I think we're seeing good success-based funding there given the results we've seen this year. And then third, we are introducing into Chile the new CAT electric drive truck which has had some good success in other regions of the world. We've got a few customers where we think it might be appropriate to introduce that truck and we will do that in [ 2019 ], and that's probably 3 or 4 trucks. So all that combined leads you to a little bit of an uptick on capital. Rentals, a little bit of an uptick too. Probably 15%, 20% over where we headed into the year, and that's again success-based. I mean, we're seeing, I think, some pretty good results from this rental used and new strategy, and we look forward to next year at lead times expanding, having the ability to roll fleet out of rental into used as a replacement for new is a pretty good strategy. It helps on the margin side and it also helps to meet customer demand. So hopefully, that gives you a sense of capital and rental for 2018.

[Operator]

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

[Devin Dodge, Analyst]

Just to start with Argentina. Can you comment on whether you think the current level of demand is sustainable? Or should we consider some of the recent strength you've seen as a bit of a catch-up? And just to follow on that, just I think there was some commentary in the MD&A about oil and gas activities accelerating. So if you could provide a bit of color there on what you're seeing, that would be helpful.

[Steven M. Nielsen]

Devin, this is Steve. We do expect to see continued demand in Argentina with the favorable political and economic environment created there. So we expect to see continued strong activity in construction forestry. We also think that there's a -- for oil and gas industry is starting. It's a slower ramp but there's a great opportunity there. And so we expect continued growth. Argentina with probably the oil and gas opportunity manifesting itself later in the year and into next year.

[Devin Dodge, Analyst]

Okay, okay, that's helpful. And then, I guess your leverage continues to moderate. I believe it's down below the target of the range here. Just can you comment on your comfort level for leverage and maybe your capital deployment priorities going forward?

[Steven M. Nielsen]

Sure. Steve, again. So we are comfortable with our leverage. We are pleased that Standard & Poor's upgraded us slightly just a bit ago. And we do have a tolerance for leverage for the right opportunities. So our capital priorities remain to invest in the business, particularly in the subcycle, as Scott described, and to reinvest in the technology enablements that will continue to create leverage in the future years. We expect, and would, to provide free cash flow to continue our strong dividend performance. We are interested in very disciplined complementary opportunities through acquisition and at the right opportunity, which in this type of market may not be as it was a couple of years ago, but we would always remain prepared and poised to reinvest in ourselves through share repurchases if that opportunity were created by the market.

[Operator]

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

[Maxim Sytchev, Managing Director and AEC]

I have a question in terms of free cash flow guides for a positive number in '18. And one of the things that we're known in history, I think we'll go back to 2011 and '12, acceleration of top line growth and negative free cash flow generation. So what are you guys doing differently that enables you to have positive FCF generation despite the revenue pickup? Any color there, please.

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

Thanks, Max. I mean, I think that's one of the biggest changes that we've been trying to institute in our company around capital efficiency. And as we went through this downturn, we generated a lot of free cash flow, I think, to the order of about $2 billion. A lot of that was driven by inventory destocking, but a lot of that was driven by capital discipline and really managing that EBITDA to free cash flow and the free cash flow conversion. I think we've now had the opportunity this year to demonstrate that those changes are real in terms of how we're running the business. And so to see 11% top line growth and generate $165 million of free cash flow, you're right, that's different. And that's something that we've been talking about for 3 or 4 years. This should be a free cash flow sustainable business or a free cash flow positive business through the cycle. I couldn't be more pleased that we were be able to do it in 2017. As I look forward to 2018, I have no doubt we'll do it again. A lot of this is around inventory management, [ suite ] management, working capital management. And when you look at reducing our forecast to cash processed in Canada by 35%, that frees up a lot of free cash flow that we can then deploy either in the business or through back to shareholders through dividends and share repurchases. And so I think it's the fundamental -- one of the fundamental changes we've tried to instill in this company over the last 4 years, and you can have an expectation that will continue into the future.

[Maxim Sytchev, Managing Director and AEC]

Okay. No, that's very helpful. And I mean, obviously, you're not committing to an absolute number, but is it conceivable to be able to generate something similar in terms of free cash flow in '18 as you've done in '17?

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

That is very conceivable.

[Operator]

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

[Mauk Breukels]

Well, thank you very much, operator, and thank you everyone for listening. We look forward to speaking with you again next quarter.

[Operator]

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