Finning International Inc

TSX:FTT

Earnings Call Transcript 2021-Q4

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Finning International Inc. Fourth Quarter 2021 Investor Call and Webcast. The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Greg Palaschuk, Executive Vice President and Chief Financial Officer. Please go ahead.

[Greg Palaschuk, Executive VP & CFO]

Thank you, operator. Good morning, everyone, and welcome to Finning's fourth quarter earnings call. Joining me today is Scott Thomson, President and CEO.Following our remarks today, we'll open the line to questions. This call is being webcast on finning.com. We've also provided a set of slides that we'll reference during our prepared remarks. The slides are posted on the Investor Relations section of our website. You can also view the slides on our webcast page. An audio file of this call and the accompanying presentation will be archived on our website.Before I turn it over to Scott, I want to remind everyone that some of the statements provided during this call are forward-looking. Please refer to Slides 10 and 11 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 and our key business risks and in our MD&A under Risk Factors and Management and forward-looking information disclaimer. Please read this information with caution that our actual results could differ materially from current expectations. Scott, over to you.

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

Thank you, Greg, and Good morning, everyone. On today's call, I will speak about the key drivers of our 2021 performance and share our views on 2022. Greg will then review our financial performance in the fourth quarter and provide more details on our outlook by region and our objectives for the year.Please turn to Slide 2. We achieved strong results in 2021, driven by successful execution to deliver on our strategic plan and improve our earnings capacity. Market activity has recovered as the year progressed. Across the business, we saw tremendous momentum in capturing product support opportunities and winning major equipment deals.Our 2021 product support revenue was on par with the pre-pandemic levels of 2019, driven by our strategic focus on growing construction rebuilds and customer value agreements and increased spending on parts and maintenance by mining customers, particularly towards the end of the year.Over the course of 2021, we were awarded multiple deals from mining equipment and product support in Chile. We won a significant share of the HS2 equipment opportunity in the U.K., and we received an order for 20 797 ultra-class trucks in the oil sands as customers have increased capital budgets and started making tangible commitments. These deals have been driving growth in our equipment backlog, which is at near record levels as we enter 2022.On the supply side, we expect challenges from a constrained global supply environment to persist in 2022, resulting in longer lead times for equipment and parts in all of our regions and driving strong demand for used equipment, rentals and rebuilds. We have been leveraging our improved forecasting and supply chain capabilities to build a healthy inventory position, increasing our inventory by about $200 million from December 2020. We are also driving rebuilds and resale of used equipment to meet customer needs as supply of new equipment remains tight.We posted annual adjusted earnings per share of $2.18 and adjusted return on invested capital of 16.4%, exceeding our mid-cycle earnings per share and return on capital targets 2 quarters ahead of schedule, all while our revenue remained below pre-pandemic levels for the year.Our improved inventory management, data-driven pricing decisions and service and supply chain efficiencies enabled us to generate solid gross profit margins in a highly competitive and constrained supply environment. Importantly, we are seeing strong operating leverage from our reduced cost base and ongoing initiatives to increase productivity of our facilities and our people, so we can serve our customers in the most efficient way possible.All of our regions delivered outstanding results in 2021. Canada and South America both exited the year with 10.1% EBIT as a percentage of net revenue. Return on capital in South America exceeded 20%, and U.K. and Ireland posted very strong revenue and EBIT performance throughout the year.Our employees should be proud of these accomplishments. It is their dedication and exceptional execution in serving our customers that have delivered such strong results for our shareholders in a very dynamic environment.Our strong balance sheet provides us with growing capacity for reinvestment and return of capital to shareholders. In 2021, we raised our dividend by 10% and repurchased 5 million shares. We also expanded our 4Refuel capabilities to a wider range of renewable and low carbon fuels. This investment will further build on the success of our 4Refuel business, which continues to deliver excellent returns and customer outcomes.Looking ahead, we expect increasing interest from our customers in low and zero-carbon technology, including electric drive, electric battery, natural gas and hydrogen blending and hydrogen fuel cells.In partnership with Caterpillar, we will continue to offer our customers innovative and low-carbon solutions to help them reduce emissions and increase productivity. The recent announcement from Teck on partnering with Caterpillar to advance zero emissions mining haul trucks at its BC operations is exciting news for us.Importantly, we are advancing our own sustainability journey, including the transition to energy-efficient facilities and low carbon fuel for our vehicle fleets to further reduce our own emissions. In 2021, we were able to build on significant improvements we've made in 2020 despite higher activity levels and reduced our absolute GHG emissions by approximately 7%. This puts us substantially ahead of schedule on our 2027 carbon reduction commitments. Recognizing the critical importance of these improvements, we are currently reviewing additional initiatives to continue reducing our carbon footprint, and we'll provide an update later this year.We believe that our 2021 performance sets a great foundation for us to capture upcycle opportunities and compound our earnings going forward. We saw the transition from mid-cycle to upcycle market conditions earlier than we had projected. From the start of 2022, we expect to be operating in an upcycle demand environment.We expect ongoing economic growth in our territories and strengthened commodity prices to support a positive market backdrop for our business. We are encouraged by increasing capital budgets, higher commodity production forecasts and continued public and private investments in infrastructure in our regions.In summary, our team delivered excellent results in 2021, and we are optimistic about the year ahead. I am confident that we have rebuilt our business to deliver significantly improved operating leverage and expand our return on invested capital. We continue to target mid-teens and above earnings per share growth during the sustained upcycle.I will now hand it over to Greg.

[Greg Palaschuk, Executive VP & CFO]

Thank you, Scott. I'm going to provide more details on our performance in the fourth quarter and our objectives going forward.Our consolidated fourth quarter results and key drivers are summarized on Slide 3. Net revenue of $1.8 billion was up 14% from Q4 2020, driven by strong market activity across all regions and sectors and our solid execution.Product support revenue recovered to 2019 levels in Q4 with a notable improvement in product support activity and capital spending by our Canadian customers through the quarter. We also saw strong execution of our used and rental strategy, which helped us successfully manage through continued supply constraints and provide equipment solutions to our customers.All our regions delivered improved operating leverage in the fourth quarter, driving EPS up 71% to $0.66 compared to adjusted EPS in Q4 2020.Slide 4 shows changes in our net revenue by line of business compared to Q4 2020. Product support revenue increased significantly by 12% from Q4 2020 and was higher across all regions and sectors.As highlighted at Investor Day, we have been strategically targeting jointly with Caterpillar, outsized growth in our construction aftermarket segment. We've been very successful in executing on this plan.Construction product support revenue was up by over 30% in Q4 2020, driven by improved demand and our strategic focus on growing rebuilds and customer value agreements. An increase in new equipment sales in the quarter was driven by mining deliveries in Chile and strong construction activity in all regions.We posted very strong used equipment sales and rental utilization in the fourth quarter, especially in Canada. Our backlog was $1.9 billion at the end of December, up from $1.6 billion at the end of September. The increase was driven mainly in Canada, including an order for 20 797F trucks for an oil sands operator. This order was part of a multiyear agreement focused on enhancing operational efficiency through refresh, maintenance, repair and rebuild practices. Importantly, these trucks will replace aged competitor equipment and thus be incremental to our business.Given continued constraints in the global supply chain, we expect longer than typical delivery times for some orders in our backlog that were added in the second half of 2021.Turning to Slide 5. An increase in gross profit from Q4 2020 was driven by higher net revenue, higher rental utilization and improved equipment margins. Cost control was strong with SG&A up just 1% from Q4 2020 on 14% higher net revenue and over 140% year-over-year increase in backlog. SG&A percent of net revenue was 18.5%, down 240 basis points from Q4 2020.Our fixed cost initiatives clearly offset volume-related variable costs as well as some inflationary pressure in the quarter. We have more work to do here.It'll take us longer than previously communicated time frame of Q3 2021 to Q2 2022 to fully average 17% SG&A as a percent of net revenue over the full 4-quarter period. This is primarily due to lower than projected new equipment revenues in the second half of 2021 as the result of supply constraints and higher-than-projected product support growth rates, which are more SG&A intensive than new equipment as well as some inflationary headwinds.We remain committed to delivering on our fixed cost reduction initiatives, driving productivity gains, continuing strong operating leverage going forward.Moving to our Canadian results and outlook, which is summarized on Slide 6. Net revenue increased 19% from Q4 2020, driven by higher year-end spending by our customers. Product support revenue was up a robust 17% from Q4 2020, reflecting strong rebuild activity in construction and increasing spend across the mining sector.Used equipment sales were up 84% and rental revenue increased by 22% from Q4 2020, reflecting our strategic focus on rebuilds, resale, RPO conversions and rental to fulfill customer needs in a tight supply environment. In addition, our heavy rental fleet was highly utilized in British Columbia to support flood mitigation and infrastructure repair work.EBITDA as a percentage of net revenue was up 240 basis points from adjusted EBITDA as a percentage of net revenue in Q4 2020, which is reflecting improved equipment margins, higher rental utilization and lower SG&A as a percent of net revenue. Adjusted ROIC approached 17%, a significant improvement in profitability and a 20% increase in invested capital turnover in Q4 2020.Outlook for the Canadian business is positive, and we continue to manage through supply constraints and closely monitor the impacts of Omicron. Overall, we expect robust market activity in Western Canada in 2022, building through the year to be supported by GDP growth, strong commodity prices and increasing capital budgets by our customers.Please turn to Slide 7 for our South America results. New equipment sales increased by 68% from Q4 2020 in functional currency, driven by deliveries to Chilean mining customers, including Teck's QB2 and Codelco Radomiro Tomic mines, and improved demand for construction equipment to support mining infrastructure and general construction projects. Product support revenue was up 10% from Q4 2020 in functional currency, with stronger demand across all sectors.Our streamlined cost structure in South America drove improved profitability as SG&A costs were flat to Q4 2020, while delivering 21% higher net revenue. EBIT as a percentage of net revenue was up 180 basis points year-over-year. Revenue per employee in South America in 2021 improved by an impressive 40% compared to 5 years ago. ROIC in South America was about 20%, exceeding our mid-cycle target.Looking ahead, we continue to closely monitor constitutional reform process in Chile and expect moderately higher mining royalties going forward. We recognize that the current uncertainty will continue to impact our mining customers' investment decisions in the near term, particularly as they relate to greenfield and new expansion projects.Our long-term outlook for copper mining growth in Chile remains positive. In the near term, we continue to see strong demand for mining product support and fleet replacement, driven by strong commodity prices, low peso, mature equipment population and customers focus on improving productivity by leveraging technologies such as autonomy.We remain very well positioned with both Teck and Codelco, who are key drivers to committed medium-term investment and growth in Chilean mine. We're also very encouraged by recent announcements of capital investment in Argentina's lithium and copper projects by large global mining customers, including Rio Tinto and Lundin. Our South America team is actively quoting on opportunities for power and equipment solutions for our global customers operating in Argentina.Turning to the U.K. and Ireland on Slide 8. Net revenue was slightly below Q4 2020 in functional currency due to the timing of power system project deliveries to data center customers. Construction activity though, was strong, with revenue from construction sector up 26% from Q4 2020, driven by equipment deliveries to HS2 and improved demand for product support.U.K. and Ireland delivered growth of approximately 15% in 2021, reflecting strong revenue recovery, increased EBIT and significant improvements in capital efficiency.With our backlog at record levels, continued robust construction activity and demand for Power Systems solutions, our outlook for the U.K. and Ireland business remains strong. We've captured more than $200 million of equipment orders for HS2 to-date. We believe we are well positioned to continue capturing a large share of opportunities for the remainder of HS2 Phase 1.Most Caterpillar machines working on the HS2 project are supported by a range of customer value agreements, and our construction customers have the option to benefit from our CUBIQ platform and our construction apps. This gives us good line of sight into product support opportunities in the U.K. going forward.Slide 9 summarizes our expectations and objectives for 2022. We're actively managing inflationary pressures through the continued focus on productivity improvements. We've also taken proactive steps to hire technicians to support our growing service volumes.Over the course of 2021, we added more than 180 technicians to our RRR locations in Canada. And in South America, we hired approximately 450 technicians last year to meet increasing business volumes and new contracts awarded by customers during the year, representing approximately 18% of our technical workforce by the end of the year.As our business environment shifts to upcycle demand, our entire organization remains focused on executing our strategic plan to grow product support, reduce costs and reinvest cash flow to compound earnings. We remain committed to demonstrating strong operating leverage as we continue to target mid-teens and above EPS growth during the sustained upcycle.We'll continue to make strategic investments in our facilities network, rental assets, used equipment business and digital platform. As a result, we project our 2022 net capital expenditures and rental fleet additions to be in the $240 million to $280 million range.We finished the year with net debt to adjusted EBITDA of 1.1x, which further strengthens our significant capacity to reinvest. We continue to advance our M&A strategy and expect to deploy capital with a near-term focus on complementary businesses in the small to medium size range and are aligned with our product support growth strategy, driving improved outcomes for our customers and deliver attractive rates of return.Operator, I'll now turn the call back to you for questions.

[Operator]

Our first question comes from Yuri Lynk of Canaccord.

[Yuri Lynk]

Congrats on finally punching through $2 in earnings, having covered the company for a long time. It was nice to see.

[Greg Palaschuk, Executive VP & CFO]

Thank you. We appreciate that.

[Yuri Lynk]

Yes. The upcycle that you're referencing for 2022, I just want to make sure that we're -- you're talking about revenue as well as earnings. Just given the supply constraints, I'm struggling a little bit with how to think about the cadence of the backlog burn or anything you can -- any additional color on revenue expectations would be helpful.

[Greg Palaschuk, Executive VP & CFO]

Yes, sure. So we're certainly seeing up cycle demand, and we're working to meet it with the supply side of the equation. I think for the first half of the year, the guidance we've given at Investor Day for the first half of the year still holds. So given the $3.5 million in the second half of last year, we're looking at kind of the $3.6 million to $4.0 million for the first half, probably a little bit more product support in used and a little less new equipment in that balanced mix. And in H2, that's when more of the backlog delivers, so you see a bit of a step up depending on the supply equation at that point in time.

[Yuri Lynk]

Okay. So the caution on the 17% SG&A target, that's solely due to -- not solely due, but mostly due to the revenue shortfall that we saw in the back half of the year. How closely are you monitoring the cost situation there? And how challenging is that?

[Greg Palaschuk, Executive VP & CFO]

Yes. I think we're managing it well. We're certainly happy. We've had a lot of fixed cost initiatives in flight. It was a little less new equipment than we're expecting in the second half and the great momentum and product support, that mix shift, just the equation a bit. But we still got the fixed cost initiatives in flight, people working our way through. And as new equipment ticks back up a little, we'll still be working towards the operating leverage.

[Operator]

Our next question comes from Jacob Bout of CIBC.

[Jacob Jonathan Bout]

Had a question on the backlog. So nice growth quarter-on-quarter and year-on-year. But -- and I know you made the comment that it was driven primarily by Canada. But maybe you could break that down with a bit more color by region? And particularly in South America, do you expect deliveries to slow down in 2022? And then what you're expecting in the U.K.

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

Yes, sure. So in terms of South America, we had some large builds last year. So of course, that QB2 in the backlog for quite a while, and it's delivered and continues to deliver the remaining pieces. And then we also have the Codelco order that started to deliver in the back half of last year, and there are some more units to go. We haven't completely refreshed. While order intake continues to be strong, we haven't had orders of that magnitude to replace. So that's more kind of balanced. And then in the U.K., it's a record backlog as we highlighted, won over GBP 200 million of HS2 orders. So that's solidly in backlog and delivering, mixed with data centers. So I think it's fairly balanced there. We'll kind of have to see how the remaining HS2 orders go throughout the year, but I think both are fairly balanced. And Canada has certainly seen a nice uptick than last year.

[Jacob Jonathan Bout]

Okay. Maybe just a second question here on capital allocation. You're approaching a 1x leverage ratio. You gave some guidance as far as CapEx. But what are the priorities between share buyback and M&A? I know you talked also about small tuck-ins, but how aggressive should we expect you to get on M&A?

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

Yes, sure. So I think it will continue to be a balanced approach. Look at the dividend continue to improve. We've been buying back about 1% of our float per quarter. I think that's something we'll continue to review and look to. And from there, yes, we're working through M&A pipeline. Like I said, it's small to medium size, but there's some interesting opportunities in the product support growth area, particularly in the kind of 24/7 service operations. So we're looking at those as well. And so I think it's going to be a balanced approach of each of those.

[Operator]

Our next question comes from Cherilyn Radbourne of TD Securities.

[Cherilyn Radbourne, Analyst]

In terms of the extended lead times that you're seeing on equipment and parts, I was just hoping you could characterize those versus what the company has seen in prior cycles and talk about how confident you feel about being able to supplement with new rental and rebuilds if necessary?

[Greg Palaschuk, Executive VP & CFO]

Yes. And that's exactly what we've been doing, Cherilyn. So I think we'll keep on with that. Some elements feel a little bit like 2018. There's probably a little bit more given some of the COVID risks that you worry about, but it feels kind of similar. So we've managed that fairly well. We're managing through the last 3 quarters really well. As you probably heard on the CAT call, it's going to be another year where it's pretty tough for dealers to get inventory because customers are pulling hard when it arrives and the supply chain is working as fast as it can. And so I think we'll continue doing what we've done. We'll supplement with used. The rental fleet is quite busy. We'll make some additions there. So where we see gaps emerging, we've been filling it really well. And so I think we'll just keep on with that.

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

And I guess, Cherilyn -- it's Scott -- a couple of other things to add. I mean I think we were early in the ordering process here based on some of the data. We've talked to you about that a lot. And so we have built inventory, which I think differentiates us. I think our inventory is up about $200 million. And we've got a lot of that is parts as well, which is helpful because it's important to keep our customers up and running right now. Up time is extremely important to them. So that part still will be helpful as well. So I'm feeling good about our relative position in obviously a constrained environment that we're not immune from.

[Cherilyn Radbourne, Analyst]

Given, I guess just [Technical difficulty] supply environment and maybe some residual uncertainty in South America, what do you think is the prospect for rebuilds to take hold down there where customers have traditionally bought new? And what's Finning's capacity to accommodate that if you saw that in 2022?

[Greg Palaschuk, Executive VP & CFO]

Yes, that's definitely top of mind, something we've been talking to customers quite a bit about. It would be more typical in South America towards the end of first life to send things over to Africa. We're certainly having active conversations with customers about getting a second life similar to the oil sands. We've actually had our VP of Mining from Canada for the last 4 years, moved back down to South America and very familiar with that dynamic and the rebuilds we do. So that's something we're pushing and we're seeing some interest from customers.

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

And then on the capacity side, I mean, you're very familiar with OEM here in Western Canada, which is obviously a competitive advantage for us here. We have a similar called the CRC in Antofagasta, and so the same capability is in South America that we have in Western Canada from a capability capacity perspective.

[Operator]

Our next question comes from Michael Doumet of Scotiabank.

[Michael Doumet, Analyst]

Great quarter. That goes without saying. So product support was particularly strong in Canada. And typically, there's a little bit of a slowdown at the end of the year as productivity wanes during the holidays, and it doesn't look like that'll necessarily happen. So I'm wondering if this kind of unexpected strength is something you're seeing and expect to continue to see through the first half of '21 despite potential headwinds from Omicron?

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

Yes. Thank you, Michael. I'll take that one. So one, I guess it wasn't unexpected strength for us. We've been talking a lot about the construction aftermarket opportunity. It's aligned with CAT's initiative to double services growth, and we feel like we've been on this now for 3 or 4 years, starting with connected machines, customer value agreements and coming up with great value propositions for our customers. And so when you think about that construction aftermarket and Greg, correct me I'm wrong, I think the 30% growth year-over-year on the construction side. And so we said at Investor Day, we thought that that was going to grow at outsized rates relative to mining, and that's what's happening. And so as you think about the runway, we've got significant runway because the market share is at a significantly different level than on the mining side. So we're going to expect our mining product support to continue to grow and with capital budgets releasing here, I think that's very positive for 2022. But the momentum in our construction aftermarket is really positive and will continue for multiple years.

[Michael Doumet, Analyst]

That's great color, Scott. And that 30% growth is obviously very impressive. With South America and the U.K. and Ireland revenues, essentially back to pre-pandemic levels, and Canada so far lagging. What are the prospects for Canada to now become the largest source of earnings growth in 2022? And I guess given the backdrop, how do you feel about the region getting back to pre-pandemic levels in terms of revenues in the short term, I guess, despite supply constraints.?

[Greg Palaschuk, Executive VP & CFO]

Yes. And we're optimistic about Canada. There's quite a lot of good things going on between government spend programs, GDP growth, commodity growth, CapEx budget. So I think across the energy space, CapEx budgets on average are up 33% this year, probably a little lighter for some of the miners, but heavier for those drilling wells. So that's helpful for us. That's a trend that we haven't seen in quite some time, and that provides a pretty good backdrop and there's lots of spending that goes in and around that. But it's also in precious metals and pretty broad-based. So Canada certainly feels like it's got quite a bit of momentum headed into this year. And I can't see any reason why we wouldn't be able to get back to previous levels as that recovers. I think supply, well, throughout the year we'll build. And we've secured more in backlog now, so that helps underpin a piece as well.

[Operator]

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

[Ross Paul Gilardi, Managing Director in Equity Research]

And yes, Scott, congrats on getting to the right targets, I know that's return on invested capital. And improving return on invested capital has been your goal from the day you joined Finning many years ago. So it must be very gratifying to finally get there. Question on your gross margins. Your gross margin finished 2021 at 26.9%. You had a positive comp in the fourth quarter for the first time of the year. And back at the prior peak, you did roughly 30% gross margin. So as we enter this up cycle, as you're calling it, I mean, is that 30% level in play? I mean is it realistic to see, say, 100 basis points of gross margin expansion for the next couple of years?

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

So why don't I take that, Ross. So, one, thanks for the comments on the ROIC. I mean, it's been a journey, as you know, and it's really pleasing to see South America get back to the historical peaks. On a revenue basis, not quite there yet. So thank you for those comments. Comment on gross margin. So we have seen gross margin expansion. I think it's been driven by a couple of things. One is an inventory situation that's been very good relative to other kind of ups and downs in the cycles. And so that, we haven't had any -- that's helped in terms of the quality of the inventory. I think the second piece, obviously, is what we're doing on value-add for the customer, which has helped. And CUBIQ is the example of that, but there's more of the customer value agreements have been very helpful in that regard. And then the third, obviously, is a supply-constrained environment, which -- it also takes away some of that pressure. As we look forward, I think there's more opportunity on gross profit margin, to be honest. As our capabilities around pricing and optimization, elasticity improve, as our value-added services, which has been a huge focus over a multiyear period continue, and we deliver more value to the customers, then I think we still have some opportunity on the gross profit margin side.

[Ross Paul Gilardi, Managing Director in Equity Research]

Okay. Got it. And then I had more of a technology-related question. CAT's very excited about their dynamic gas blended engine. And wondering if you could talk about that a little bit. Can you get that engine for a mining truck, like an ultra-series mining truck? Or is it really only available for oil and gas applications? And I'm just wondering if your mining customers are looking at the dynamic gas blended engine as a legitimate alternative for reaching their 2030 emission objectives?

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

So yes, so the first, the 3500 dual gas blending engine is a great product that CAT has, and I think it is a differentiator. And just for everyone else on the call, it has the ability to displace 80% of diesel with natural gas and also has the ability to have 20% hydrogen without a re-rate. So I mean, it's a great product. It's a win-win. It's win for the emissions. It's win for costs, et cetera. And we're starting to see a pretty big uptick with our customer base. I think we've talked about some of the demonstrations we've had, and we've got quite a number of those engines in the backlog. And a couple of customers, as the capital budgets are freed up, have indicated a real desire to replace fleets with these engines. So that's point one, great product, great uptick with customers. As you think about your question about mining trucks, I do think a debate needs to be had on alternative fuels. I don't think it's just a battery or hydrogen solution that is in the multiyear. I think there is an opportunity for alternative fuels to play a role here to drive down emissions and CAT's product is capable of doing that. And so to be frank, not a lot of customers have picked that up yet on the big mining trucks, but some have. If you've noticed that Imperial has talked a little bit about alternative fuels, as an example. And I know some of our other mining customers were in that discussion as well. So I think more to come on that, Ross. And I do agree with you, I think there's an opportunity to push that harder in the years to come.

[Ross Paul Gilardi, Managing Director in Equity Research]

But is it offered now, Scott? Like could you buy a mining truck with the DGB engine in it today?

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

So there's an actual mine site in Mexico that's fully natural gas run. And so it is technically possible. The question is you have to have the combination of the application, the customer desire. And a lot of the customers right now are really focused on hydrogen and battery, which is kind of the path to 0 emissions. And one of the things that I think we need to do with our customers is educate them on the possibilities of reducing emissions in a shorter time line to the -- 30% to 40% with the technology that is capable today. And so yes, it is technically feasible, but there hasn't been a lot of uptake on it yet, which is somewhat surprising to me.

[Operator]

Our next question comes from Bryan Fast of Raymond James.

[Bryan Fast, Equity Research Analyst]

Greg, just on your commentary surrounding inflationary headwinds. Could we get some more color on just where you're seeing that?

[Greg Palaschuk, Executive VP & CFO]

Sure. Well, as you can tell from CPI, it's fairly broad-based, but certainly in things like energy inputs to fleet, some on insurance. On labor, we'll expect in the future, too. Salaried employees, after a couple of years where we haven't had increases, we'll have an increase this spring, whereas hourly have had wage increase each way along. So we'll see some additional costs on the labor side. And then just on the procurement initiatives, we continue to make progress in a lot of areas. So maybe not with some of the savings that we thought a year or 2 ago. So some of it's broad-based. But -- so I think it's across the board, everybody is seeing pressures. But of course, energy, insurance would be a couple of hotspots.

[Bryan Fast, Equity Research Analyst]

Okay. And then just in South America, do you sense there's been a shift in tone from customers since the presidential election in Chile, now that we have clarity on that front? Or do you still see some tentativeness given the constitutional reform is still up in the air?

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

Yes, Bryan, it's Scott. So one, I have seen a change in tone, and it's interesting. Certainty is better than uncertainty, right? And so you have a new president that you have selected by a significant majority. And he obviously comes from left leaning, but he's actually brought some certainty to the situation. And I think the fact that he has put in place a Minister of Finance that comes from the Central Bank, that is very well regarded as very good news. And as I said, prior having the Congress, the lower house have a majority of Central right is great news as well. So yes, I have seen a shift in tone over the last couple of months, which is good news. And I think that is driving a lot of optimism for the next couple of years. That all being said, there still is uncertainty around the constitutional reform. And I think we're going to see customers hesitate to put big new fleet renewals in place until there's -- that certainty is resolved. So step in the right direction, but I think more to come to completely get rid of the uncertainty.

[Operator]

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

[Maxim Sytchev, MD & AEC]

Greg and maybe Scott, if you want to add to this. Just kind of building on the whole Chilean dynamic. Obviously, if some of the clients are, let's say, reluctant to make long-term decisions on new fleets. And you mentioned that potentially rebuild opportunity in that geography. Do you have the capacity to do this internally? Or would you have to contemplate adding capacity via either hiring M&A? How should we think about this just in terms of being able to capture that potential opportunity?

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

So Matt, it's Scott. I'll start and then, Greg, you add on. So one, I do think that dynamic is real. And when you have copper prices at this level, production uptime becomes so critical. And so the product support opportunity has got a lot of momentum behind it. And back to my answer to Cherilyn's question, we have the capabilities and capacity to deal with that. So we have a component rebuild center in Antofagasta, very high-quality center, and it has more capacity to be able to take on this activity. And we -- and frankly, we have some self-help opportunities here to increase the velocity through which we put products through that facility, which will help even more. So I'm really encouraged about the outlook for 2022 on the product support side in South America.

[Maxim Sytchev, MD & AEC]

Okay. Super helpful. And just in terms of the ability to hire technicians in that geography, do you mind just adding a couple of points in terms of sort of the game plan there?

[Greg Palaschuk, Executive VP & CFO]

Yes. So we have hired approximately, I think, 400 technicians during the year. So that's about -- I don't want to say -- it's a little bit more than 15% of our technical workforce. I think we've made some great strides with some of our large customers, particularly on diversity and inclusion agenda, which has been fantastic. We've partnered with BHP, and we've been partnering with them in the last couple of years to build out that technical workforce, and that's been a huge, huge win for us. And as I said, I think to a lot of you, I think we're an employer of choice in South America. We come up high in all of the employee surveys and all of the ratings. And so we got a great value proposition for employees. And people want to work for us there. So it's been a lot of hiring going on the back of QB2 and Codelco and the uptick in demand, and that probably will continue throughout 2022. I think what's really encouraging is they've been able to grow that revenue base though, and do that hiring and keep the SG&A consistent, right? I mean, the SG&A hasn't increased. And so they've been hiring on the technical front, but they've been taking costs out in other areas, which has been really encouraging as well.

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

And Max, one other dynamic I'll highlight reviewing as to what the team is, the last time we really added a lot of people in 2012, 2013, brought a lot of new people into the company. And so it's now 8, 9 years later, so those people are a lot more senior. And so they've had a really good time promoting internally and then hiring more junior people into the mix, and it's worked really well and that timing has been really strong.

[Maxim Sytchev, MD & AEC]

Okay. Super helpful. And just one brief question, if I may. Greg, in terms of noncash working capital, how should we think about that investment in 2022? Maybe if you can contrast this versus, I think it was $277 million investment in 2021?

[Greg Palaschuk, Executive VP & CFO]

Yes. So we'll continue to add working capital to normalize some of the new equipment balance. We've probably got some safety stock in parts right now that we can probably offset. So I think there'll be some net adds, but I think equipment turns will probably normalize as we get access to more new. And then parts, I think there's some efficiency opportunities when supply normalizes a bit. So they can kind of offset. But of course, in a growing up cycle environment, we think we'd be adding net working capital.

[Operator]

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

[Sabahat Khan, Analyst]

Just a question on the '22 commentary, I guess the earlier comments around product support being a bit more of a factor in H1 and then new equipment in H2. Should we expect margins to kind of follow that trajectory with better margins in H1? Or do you think margin will be more like your traditional seasonality?

[Greg Palaschuk, Executive VP & CFO]

Yes. I think it will be more traditional seasonality, which is really builds into a strong Q2 and Q3. And -- but you have more product support in the first half and then new equipment in the second, and there's always a mix dynamic there. And mining will be a large contributor to the second half. So I think higher volumes, but a little bit of a mix shift there.

[Sabahat Khan, Analyst]

Okay. Great. And then on the HS2 commentary earlier, it sounds like you've secured about $200 million of the orders. But I guess if you think about the $500 million broader opportunity, how much of that has already been issued? And how much more is still left to, I guess, source by the project owners?

[Greg Palaschuk, Executive VP & CFO]

Yes, there's still about a 1/3 left thereabouts. So still a lot to do after.

[Sabahat Khan, Analyst]

Okay. And then just one quick one on the U.K. I think there was some timing called out for the Power Systems deliveries. Was that a material amount? And should we expect that to come back maybe in the early part of this year on the revenue side?

[Greg Palaschuk, Executive VP & CFO]

Yes. There's quite a bit in backlog. Most of it is pure timing. Some of it was customers having some delays in their time lines. And so it did move into the first half, but pretty evenly through the year. Yes, that was certainly slower on a year-over-year comparison, but it's a lot in backlog.

[Operator]

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

[Devin Dodge, Analyst]

Just wanted to pick up on that earlier thread on Chile. You've touched on some of this already, but there have been some early announcements coming out of the constitutional assembly that could be quite negative for the mining industry if they were in active, which is an important caveat. But is this just a case of some radical ideas coming out of the subcommittees, and should we be discounting them? Just wanted to get your kind of boots on the ground perspective.

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

Yes. So you're probably -- there was some commentary out of the Environment Committee, which you're probably referring to. And I think the thing to keep in mind, Devin, is that for that to become anywhere near to being part of the charter for the constitutional referendum later in 2022, you need 2/3 of the full assembly to be in support of that. So I don't think anyone is putting any real attention, honestly, to what just came out of the Environment Committee, I guess point 1. I think point 2, I think what to watch, because there are real issues there, is the mining royalty and tax review, which my expectation is it's going to be resolved in the first half of this year. And I continue to believe that it's going to be a moderate increase. Right now, the government take through royalties and taxes around 36%, 37%, 38%. And I suspect that goes up to 43%, 44%, 45%. And to me, getting that behind us helps on that certainty issue, right? And so that's the thing to watch if I were you.To-date, really good news, I think, coming out of Chile. When you see the lower house being center right, which makes it hard to have really polarized things come through the political environment. And then second, having the finance minister come from the Central Bank, I think is really good news as well. So all in all, I think we're in a much better shape than 3 months ago, but still a little bit of uncertainty that we have to navigate through until we see big new capital commitment in my mind.

[Devin Dodge, Analyst]

Okay. That's good color. Second question is, look, you've been asked this in various forms before, but it does come up occasionally. But in prior up cycles, we've seen some of that hard flat cost discipline that was achieved during the downturn kind of fade away and some expenses start to creep back into the business. What sort of things would you point to that give you confidence that the operational improvements that you've shown in 2021 are more sustainable?

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

Yes. So one, I think you have to take it in a longer context of kind of the 7- or 8-year journey we've been on. And when you look at the cost reductions and the way we've transformed this business, it's to the tune of 20% to 25% of the cost base, and that has been through a restructuring of the business primarily, right? And then you look at what we're doing from a RRR perspective, which is making sure the right work gets done in the right facilities with the right technical workforce, that's -- it's a game changer. When you think about the e-commerce going from 10% of parts delivered to 40% to 50% of parts delivered, that's a game changer. When you think of the initiatives to move support functions closer to the branch, which is great from a cultural perspective, great from an understanding the business perspective, but also really important from a cost perspective, that's a game changer. So I feel really good about the structural things that we've done to increase our competitiveness and which is helping on the market share side as well. And undoubtedly, we're facing some inflationary headwinds for sure, which Greg referenced. And that will be a little bit of a headwind. But the offset to that is I think there's a lot more structural changes, fixed cost structural changes to go after. And I look at our supply chain business as an example, right, our supply chain delivery and our supply chain business. But we have 3 warehouses right now in Edmonton, and we're going to move that into 1 in 2022. You think about the cost associated with that is pretty significant. When you think about running our component rebuild capabilities on not only a high quality but also focus on low-cost delivery. I think that's a big contributor as we go forward as well. So there are inflationary headwinds, but there are also significant opportunities for us to continue to take out fixed costs. And I think this whole team recognizes the importance of that SG&A initiative. That SG&A initiative allows us to not only be extremely competitive with our customers and capture more market share, it also allows us to generate free cash flow as to reinvest in the business and increase the earnings capacity of the business. And there's where my whole team is aligned around that objective. So we'll navigate through it, like we've navigated through the last 7 years, and we're going to come up the other side of this, getting to that 17% target. And then ultimately, I think there's more to go after that, to tell you the truth.

[Devin Dodge, Analyst]

Okay. That was really good color. And congrats on the results, not just in Q4, but really for all of last year, well done.

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

Thanks, Devin.

[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 VP & CFO]

Great. Thanks, operator. That concludes today's call. Thanks, everyone, for joining, and have a safe day.

[Operator]

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