DBRS Morningstar Confirms Finning International Inc.’s Issuer Rating at BBB (high)

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating, 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 trends are Stable. The confirmations reflect Finning's robust business and financial risk profiles, which remain commensurate with the current ratings. While the global economic outlook is poised to soften further in the near term, and could outweigh equipment expenditure plans across mining, energy and construction industries, DBRS Morningstar expects Finning to maintain modest growth from increased demand for product support, strong fundamentals supporting copper mining and public sector infrastructure spending in Western Canada.

Finning, a full-service dealer in Caterpillar Inc.’s equipment, is the market leader in its sales territories, diversified by geographies, end markets and customer base. In F2022, the Company delivered net revenue growth of 23% to a record $8.2 billion, driven by strong demand for equipment and services following the Coronavirus Disease (COVID-19) pandemic and related supply chain constraints. Adjusted EBITDA grew by 29%, supported by the high margin product support business and the payoffs from ongoing cost management programs. Both F2022 revenue and EBITDA considerably exceeded DBRS Morningstar’s expectations. Free cash flow after capital expenditure, dividends, and working capital was negative $314 million, driven by a material investment in inventory of $715 million, which is expected to unwind in F2023. Despite strong operational performance, Finning’s leverage position remained within the BBB (high) range because of additional short-term debt acquired in F2022.

DBRS Morningstar forecasts Finning’s revenues to grow in F2023, however at a moderate, single digit rate compared with the last two years, given a weak global economy. The moderate growth expectations are supported by a strong order book from infrastructure, mining and energy verticals, as well as resilient commodity prices. Finning benefits from its stable equipment service support business during an economic downturn, and higher equipment sales in expansionary cycles. DBRS Morningstar forecasts Finning’s F2023 adjusted EBITDA to remain relatively flat vis-a-vis F2022, owing to inflationary pressures on operating costs, partially offset by the Company’s increasingly variable cost structure and supply chain efficiencies.

Finning has committed to prioritize debt repayment in the near-term. The company may also scale back on capital expenditure to boost liquidity. As such, DBRS Morningstar forecast debt reduction in F2023 is moderate and thus align with the current credit ratings.

DBRS Morningstar could consider a positive rating action if Finning sustainably improved its financial risk profile, with gross debt-to-EBITDA less than 2 times and cash flow-to-debt maintained above 30%. Conversely, while not anticipated, a negative rating action could occur if there is a structural deterioration in Finning’s earnings profile and/or credit metrics weaken considerably.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/Governance factor(s) 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 (May 17, 2022).

DBRS Morningstar notes that this press release was amended on May 3, 2023, to correct the amount of free cash flow.

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

DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Capital Goods Dealership Industry (April 12, 2023; https://www.dbrsmorningstar.com/research/412586).
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196).

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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:

The last rating action on this transaction took place on August 9, 2022.

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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see: https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Azande Ntanzi Ndlovu, Assistant Vice President, Diversified Industrials
Rating Committee Chair: Timothy O’Brien, Managing Director, Diversified Industrials, Global Corporates
Initial Rating Date: June 30, 1978

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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