DBRS Morningstar Confirms Finning International Inc. at BBB (high) and R-2 (high), Trend Remains Stable

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 (CP) rating at R-2 (high), all with Stable trends. The confirmations reflect Finning's strong business risk assessment as a full-service dealer primarily of Caterpillar Inc.'s (CAT) equipment with a sizeable parts and service business and strong market position in all of its territories and diversified operations. The Company's financial risk assessment (FRA) remains commensurate with the assigned rating as Finning's financial profile has remained fairly robust despite industry-wide challenges in the form of the Coronavirus Disease (COVID-19) pandemic and ongoing supply chain challenges. In 2021, Finning established a strategic plan to deliver structural improvements to its operations. The Company has already achieved meaningful progress on this plan through operational cost savings, increased customer engagement, and acquisitive growth.

Finning's operating earnings for 2021 were markedly higher in comparison with 2020 (which was affected by the pandemic). The strong earnings performance was driven by revenue growth as a result of higher demand for new equipment and product support, in particular from the construction and mining sectors, and cost efficiencies as a result of productivity improvements. These were partly offset by unfavourable foreign exchange translation effects because of the strengthening of the Canadian dollar relative to the U.S. dollar (Finning's functional currency for South American operations). The operating margin, as defined by DBRS Morningstar and adjusted for nonrecurring expenses, of 7.3% for 2021 (compared with 5.2% for 2020) was a result of favourable selling general and administrative (SG&A) performance and a lower depreciation rate, partially offset by a higher proportion of new equipment in the sales mix, which typically generates weaker margins.

In H1 2022, Finning's earnings increased over the prior year period as a result of revenue growth, which reflected increased market activity in all regions and SG&A savings. The operating margin for H1 2022 increased moderately over H1 2021, as the impact of productivity gains was offset by a weaker product mix because of high demand for new equipment. Looking ahead, DBRS Morningstar expects Finning's earnings growth to be supported by strong equipment backlog and ongoing product support demand, which, for the time being, are estimated to more than offset the ongoing headwinds in the form of inflation and interest rates and their impact on economic activity.

Consistent with the Stable trend, DBRS Morningstar deems it unlikely that Finning will be subject to a negative rating action in the near to medium term because of its FRA, which has proved resilient to economic headwinds. However, DBRS Morningstar notes that strengthening of Finning's financial metrics to the "A" rating range on a sustained basis could lead to a positive rating action.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance (ESG) factors that had a significant or relevant effect on the credit analysis.

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/396929.

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

The principal methodologies are Rating Companies in the Capital Goods Dealership Industry (April 19, 2022; https://www.dbrsmorningstar.com/research/395413) and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 01, 2022; https://www.dbrsmorningstar.com/research/393065), 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 (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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 asset class 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 Dealership Industry (April 19, 2022) was applied in determining the rating of Finning International Inc. DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 01, 2022) 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 9, 2021.

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: https://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: Robert Streda, Senior Vice President, Diversified Industries
Rating Committee Chair: Charles Halam-Andres, Managing Director, Diversified Industries & Sports Finance
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].

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

-- Capital Goods Dealership Industry (April 19, 2022); https://www.dbrsmorningstar.com/research/395413
-- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 01, 2022); https://www.dbrsmorningstar.com/research/393065