DBRS Morningstar Confirms Finning International Inc. at BBB (high) and R-2 (high) With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Debentures and Medium-Term Notes rating of Finning International Inc. (Finning or the Company) at BBB (high) and the Company's Commercial Paper rating at R-2 (high), all with Stable trends. The confirmations reflect Finning's credit profile—a combination of its business and financial risk profiles—remaining commensurate with the current rating. Finning took prompt action to address the deteriorating market conditions caused by the Coronavirus Disease (COVID-19) pandemic, and the Company’s operating results in 2020, although weaker than in 2019, exceeded DBRS Morningstar's expectations. The outlook for the global economy is expected to be positive with the rollout of the coronavirus vaccines. DBRS Morningstar anticipates stronger customer demand for equipment and services, which will strengthen Finning's operating results and its financial risk profile and support the Stable trends on the current ratings.

Finning's strong business profile is a major support for the current ratings. Finning is the market leader in all its sales territories—diversified by geographies, end markets, and customer base—and it has a significant product support business that is higher margin and relatively stable. The Company is implementing a number of initiatives to strengthen its market position, increase productivity, and reduce costs, such as (1) the RRR Network Model to stream line its branch network configuration to maximize customer service, labour, and inventory efficiency; (2) the Digital Services (CUBIQ platform) to improve customer experience; and (3) a common enterprise resource planning system to generate efficiencies and reduce costs. Executing these initiatives would further strengthen Finning's business profile.

Restrictive actions by governments to control the spread of the coronavirus depressed economic activities globally. Finning reported weaker operating results in 2020 versus 2019 because of the lower demand for equipment and services caused by the pandemic. However, internal cash generation rose sharply, mostly because of tighter inventory control, and this enabled Finning to reduce debt and strengthen all key credit metrics despite weaker operating results. The global economy has improved with the rollout of the vaccines. DBRS Morningstar anticipates Finning's operating results to improve in line with market conditions in the medium term. However, the proliferation of coronavirus variants has created uncertainty in the positive economic outlook. Additionally, the disruption in the global supply chain is another headwind, although Finning has not yet been affected.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

RATING DRIVERS
DBRS Morningstar notes that further strengthening of Finning's key credit metrics to the "A" rating range on a sustained basis could lead to positive rating actions. Conversely, a sharp deterioration in Finning's key credit metrics to the BBB range on a sustained basis, although not anticipated at this time, could lead to negative rating actions.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Capital Goods Dealership Industry (April 30, 2021; https://www.dbrsmorningstar.com/research/377859) and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021; https://www.dbrsmorningstar.com/research/375001), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262.)

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, “Rating Companies in the Capital Goods Dealer Industry” (April 30, 2021) was the primary rating methodology applied in determining the rating of Finning International Inc. “DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers” (March 9, 2021) was applied to ensure that the provided liquidity in support of the Commercial Paper rating was consistent with DBRS Morningstar criteria.

The last rating action on this transaction took place on August 7, 2020.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Kam Hon, Managing Director, Global Corporates
Rating Committee Chair: Charles Halam-Andres, Managing Director, Global Corporates
Initial Rating Date: June 30, 1978

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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-- Rating Companies in the Capital Goods Dealer Industry (April 30, 2021) https://www.dbrsmorningstar.com/research/377859/rating-companies-in-the-capital-goods-dealership-industry.
-- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021) https://www.dbrsmorningstar.com/research/375001/dbrs-morningstar-criteria-commercial-paper-liquidity-support-for-nonbank-issuers