In last year’s letter to shareholders, I emphasized the importance of prudently managing our balance sheet while positioning the Company for future success and growth. Given the uncertain economic times, I also articulated that we would prioritize generating significant cash flow with an intense focus on working capital management, a further reduction in rental fleet additions and a disciplined approach to capital spending. At the same time, we were determined to continue to provide the same great service and support that our customers expect. Our decisions throughout 2009 were guided by these objectives and I am gratified to see our positive results.

Successful Execution
Briefly, these are the commitments we made and the results we achieved:

We committed to reduce our selling, general and administrative (SG&A) expenses by $150 million annually over 2008. We have since raised our target to over $200 million and are well on our way towards achieving this goal, having realized $110 million of SG&A cost savings in 2009. When business levels return, we expect 70 percent of this SG&A reduction to be permanent.

We targeted over $300 million in free cash flow generation during the year and achieved a record of $494 million. This accomplishment underscores the focused efforts of our people as well as the tremendous cash generation capability of our business model.

Our net debt to capital ratio was 49 percent at the end of 2008 and we committed to reducing it to the lower end of the 40-50 percent range. We reduced our net debt to capital ratio at the end of 2009 to 39 percent. We now expect it to be in the mid-30s by the end of the year and we continue to strengthen the balance sheet.

As part of our 2005 strategic plan, we had also committed to double product support revenues to $2.3 billion by 2010. Overall, product support remained flat at $1.9 billion compared to 2008 despite the severe economic downturn, thus demonstrating the resiliency of this part of our business. While our product support revenue target for 2010 is impacted by recessionary conditions, we remain confident that we will reach this objective in the near-term. The large machine population owned by our customers continues to hold promising product support growth prospects. In fact, during 2009, product support revenues from our mining customers grew significantly across all operations over the prior year. We did underestimate the impact of the recession on non-mining customers; however, we expect that we are building a backlog of product support business with these accounts.

Highlights from each of our regions included the following:

In Canada, all sectors showed significant weakness in 2009 and we restructured to operate our business with a lower fixed cost base and to drive greater efficiencies. In doing so, we have taken steps to ensure customers continue to receive the highest levels of service and we maintained capacity to support higher activity levels. Towards the end of the year, mining quotations and orders increased significantly. Once volumes return, our Canadian operation is well positioned to achieve higher earnings due to a leaner cost structure and productivity improvements.

South America continued to deliver strong results as the impact of the recession was not nearly as significant as in the other regions. Orders for new equipment eased off in all sectors, but product support continued to be robust. We opened a new parts distribution centre and a truck shop in Chile’s northern mining region as well as several other facilities to better support our customers and the growing machine population. Overall, the outlook for Finning South America remains strong. Customers are placing large mining orders and we expect ongoing product support growth resulting from mining service contracts.

In spite of significant headwinds in the U.K. during 2009, the dealership has been successful in building market share in the heavy construction segments, including waste & recycling, quarrying, mining, and power systems. The dealership reduced SG&A expenses and continued to contribute positive EBIT . In 2010, the U.K. dealership will remain focused on these key market segments and their ongoing efforts to improve operating efficiencies.

During 2009, we commenced a strategic review of our Hewden rental business in the U.K. with a view to assessing alternatives that optimize shareholder value. As part of our review, we have implemented a plan to reduce the size of the Hewden operation and we made progress toward improving operating efficiencies and profitability. Parallel to this restructuring process, we are exploring an outright sale of Hewden and have received a number of expressions of interest. We anticipate a decision by mid-2010.

Geared for Growth
In many ways, 2009 will likely be remembered as a transformative year for our business. As the global recession unfolded, our executive team was challenged to act quickly and decisively. We immediately determined that it was critical to right-size the business to align with decreased demand and we took action across our operations. At the same time, we focused on ensuring that we would be well-positioned to be a stronger company as we emerged from the recession. This translates into a fundamentally different approach to our business underlined by a new operating model in Canada, a significant reshaping of our U.K. business and a decision to contain our investment in rental. As the worst of the recession appears to be behind us and the recovery is underway, we are now well positioned to maximize our earnings potential.

Having been tried and tested during one of the most severe recessions in recent history, I can state with confidence that our business model has proven to be our greatest attribute. During a year in which customers in all industry segments significantly reduced their equipment orders, we were able to generate record cash flow and strengthen our balance sheet significantly.

Our business is capable of generating strong free cash flow. Cash flow from operations generally runs between $500 and $700 million per year. On a go forward basis, we would expect to invest a net amount of $100 - $150 million per year in our rental fleet, which is significantly lower than in past years. We also anticipate investing a net $100 million in fixed capital in an average year. After taking modest investments in rental fleet and fixed capital into account, as well as our enhanced focus on working capital management, we will continue to generate strong free cash flow to support dividend payments. As a result, significant cash will remain for debt reduction or growth opportunities. We see these growth opportunities in sectors which count on our considerable product support capabilities: mining, power systems and heavy construction.

We are continuing to invest in our business to take advantage of opportunities that support the implementation of our strategy. For instance:

This year, we will go live with our new information system in Canada. By improving management information and the speed of decision making, this system will support us in achieving our goal to become a world class distribution company and service provider. The system will be implemented in FIN SA and the UK next year.

We are proceeding with an investment in a shop at Fort McKay to support customers in the oil sands. The feasibility study is being completed and we will soon reach a decision on the size and functionality of this new facility.

The strengthening and sustainment of commodity prices has given mining customers the confidence to continue to invest in their operations. From our perspective, the recovery is being led by mining and significant new equipment orders from Kearl in Canada’s oil sands and Codelco’s Ministro Hales mine in Chile are a testament to this. We expect a much improved order flow for new equipment and ongoing growth of product support revenue in mining. Other sectors appear to be slower to recover, but we believe we have built a backlog of product support for these non-mining sectors.

Finning People
I would be amiss to convey our Company’s results without paying tribute to the extraordinary commitment of Finning employees. Our achievements are dependent on our employees’ dedicated service to our customers and I thank each and every Finning employee for their continued support and engagement. Under very challenging business conditions and the resulting impact on our workforce, Finning continued to build on its high employee engagement in 2009.

A further demonstration of our employees’ dedication comes in the form of continuous improvement in our safety performance. During 2009, our overall accident frequency rate continued its positive trend with a 37% decrease over prior year. Despite our commitment to upholding the highest safety standards, we are deeply saddened by the tragic fatality of an apprentice, Oliver Padget Sandoval, at our Concepción branch in Chile. In response, we initiated a thorough investigation and implemented all resultant safety recommendations. We remain firmly committed to achieving the highest environment, health and safety standards in all of our operations.

Subsequent to 2009, Chile suffered a severe earthquake with devastating consequences. We feel very fortunate that every one of our employees is safe and we thank them for the support they have given to each other, their families and their country as part of the ongoing recovery efforts.

I will also take this opportunity to acknowledge the insightful guidance of our Board of Directors who provided invaluable support towards our efforts to successfully navigate through the recession.

Building on our Strengths
In summary, Finning adeptly withstood the global economic downturn of 2009 both financially and operationally while continuing to invest in areas of strategic importance. We emerged from the past year with a tested management team, improved operating leverage and strong opportunities for future growth. Most importantly, we never lost sight of the key to our Company’s longstanding tradition of success: the Caterpillar quality product combined with Finning’s service commitment. Going forward, we will continue to deliver on our promise of unrivalled service in order to differentiate ourselves from our competitors and earn our customers’ loyalty.

Sincerely,
FINNING INTERNATIONAL INC.

Mike Waites
President & Chief Executive Officer