Q3 2020 Toromont Industries Ltd Earnings Call
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[music].
Good morning today is Friday November six Twentytwenty welcome to the <unk> third quarter Twentytwenty results Conference call. Please be advised that this call is being recorded.
Your host for today will be Mr., Michael Mcmillan. Please go ahead Mr. Mcmillan.
Great. Thanks, a lot.
Good morning, everyone. Thank you for joining us this morning to discuss the results of term on industries limited for the third quarter and nine months ended September Thirtyth 2020.
Also on the call with me today is Scott net Hurst, President and Chief Executive Officer.
As noted in the press release issued yesterday, we will be referring to a package posted to our website, we encourage listeners to download and follow up.
At this time.
And as noted on slide two of our presentation I'd like to advise listeners that this presentation may contain forward looking statements and information that are subject to certain risks uncertainties and assumptions that may lead to actual results or events differing materially from those expected.
For a complete discussion of these factors refer to our press release from yesterday, which is available on our website.
As is our practice, we will focus on key highlights for the current quarter Scott will begin with a few general remarks, followed by comments on our overall results after which I will provide some highlights on our divisional results and financial position.
After our prepared remarks, we will be more than happy to answer questions over to you Scott.
Thank you, Mike and good morning, everyone.
Before I begin I would ask that you move to slide three of the package.
We're pleased with the gradual improvement experienced last quarter.
However, the operating environment is complex, it's still quite fluid.
Our customers are understandably cautious and as a result overall business activities are still below last year's levels.
From the start of the pandemic or teams have shown the resilience and the ability to adapt to an ever changing environment.
We are proud to continue to support our customers keeping our employees safe providing.
Providing a central services and protecting the business for the future.
During the quarter, we completed the transition of our operating system at our cut back dealership branches.
This was a significant undertaking and we're very pleased with the outcome. Thanks to the team's incredible effort.
Security unique landscape.
With one common platform, we are now able to align our operations at the ground level and continue to leverage best practices go to market approaches and efficiencies across our territory.
We continue to closely manage and de risk our balance sheet. She.
With a sharp focus on inventory turns collection or they are in on each assets, our financial position remains strong with ample sources of liquidity.
Bench reduction as a priority we remain ultra careful not to negatively impact our ability to meet future market demand.
Well, we have seen sequential improvement in our markets.
There remains considerable uncertainty in the marketplace and we expect a cautious tone to persist leading into Q4.
Turning now to our financial results highlighted on slide four.
Backlogs were 472 million at September Thirtyth, 2020, Kimco backlogs were at near record levels strong industrial booking activity in early 2020 equipment.
[laughter] backlogs were lower on reduced activity levels, reflecting the cautious tone throughout the quarter.
Overall revenues decreased 5% in the quarter versus last year.
This improvement over the lines experienced Q2 revenues were still below that of Q3 of 2019.
<unk> revenue was down 6% to 2.5 billion.
Operating income was 1% lower in the third quarter on lower revenues, partially offset by lower expenses.
Cost containment strategies continued sales related expenses, such as travel and other discretionary variables were lower.
Continue to incur some additional cost to protect our employees and customers such as additional safety supplies.
Benefit succession cost work from home practices facility in field sanitation procedures.
Definitely.
We expect to receive 7.3 million under the clean emergency we'd subsidy program, which is based on revenue declines in the quarter.
CEW EPS was helpful, adding to our focus on protecting our skilled labor and salary positions in the best possible managing with a balanced approach in the short term as well as not taking our eye off the long term needs.
Net earnings decreased 3% in the quarter versus a year ago.
EPS tracking the reduced earnings was 94 cents per share or four cents below 2019.
Moving to slide five.
Given the challenging environment. We've included a look at the sequential quarter performance Q3 results have improved from the second quarter as economic activity gradually phased in.
Revenues improved however, new equipment sales remain relatively low for rentals used equipment and product support showed the most improvement.
Rental fleet utilization improve would translates into higher margin operating income and earnings.
Right support activity is a function of customer activity was better this quarter as customers were able to go back to work and insight restrictions east.
Mike I'll turn it over to you for some detailed comments on the group results.
Thanks Scott.
Let's put a bit more color on the operating results starting with the equipment group on slide six.
Revenues were down 5% in the quarter versus a year ago, and 6% year to date on reduced economic activity new equipment sales products supporting rental activity were lower across all geographic markets and product groups. As Scott noted, we did see some improved activity during the quarter.
The tone of caution was evident and activity was still below last year's levels cost containment strategies continued to be employed including human resource initiatives and reduced travel and discretionary spend.
New equipment revenues were down 16% were used was up 37% in the quarter down, 9% and 18% respectively on a year to date basis.
Demonstrating the cautious tone that we have emphasized.
Construction sales were down 10% in the quarter and down 3% year to date.
Sales into mining markets were down 16% in the quarter, 25% year to date across most regions material handling sales were down 17% in the quarter, 5% year to date again, mainly due to general to lower general economic activity.
Two bright spots included power system sales, which were up 36% in the quarter and 12% year to date, reflecting progress on Prime power project sales into agricultural markets were also up 7% for the strong harvest year to date was relatively unchanged.
Rental revenues were down 11% in the quarter, 15% year to date, most markets and segments were lower reflecting the gradual phase in of market activity.
Light equipment rentals were lower 7% power, 31% material handling 60%.
Our PEO rentals, 43% in the quarter.
That said heavy rental in the construction market increased 10%.
Product support revenues declined 3% in the quarter and 6% year to date with improvement as Scott noted in the third quarter EPS compared to Q2 has restrictions east.
Gross profit margins decreased 50 basis points in the quarter as lower product support activity levels dampen margins down 70 basis points.
Partially offset by improved sales mix up 20 basis points.
With a larger proportion of product support revenues to total revenues.
For the first nine months of 2020 gross margins decreased 90 basis points, reflecting challenging markets in the second quarter of the year on.
On the year to date basis.
Margins were down 30 basis points, mainly due to sales mix.
Rental margins, while improved from Q2 are still lower by 50 basis points.
Then last year on a lower average utilization in the quarter, which is a drag on earnings against our straight line depreciation model.
Selling and administration expenses decreased 100 basis points to 12.1% of total revenues were down 13% in the quarter and 6% year to date, reflecting lower activity levels as well as cost containment initiatives that phased in from Q2.
Governmental subsidies under Cws program.
Reduced expenses by six and a half million for the group during the quarter until.
Totaling 7.3 million year to date, however, excluding these subsidies selling and administration expenses were down downward trending in both the quarter and year to date, reflecting lower compensation costs.
Discretionary spending travel and training.
Bad debt expense was also lower in the quarter, but up prudently on a year to date basis, reflecting the current economic environment into.
Information technology related costs also increased in both the quarter and on a year to date basis, 1.1 million and 2.1 million respectively.
A system enhancements and support for integration efforts at the dealership continued.
Let's turn to Simco on slide seven.
Revenues were down 7% quarter, and 10% year to date, our lower construction activity stemming in part from construction site restrictions in closures related to the pandemic timing of receipt of orders and customer specific construction construction schedules also affect timing of revenue recognition.
Package revenues were down 5% in the quarter in Canada.
Revenues remained relatively flat during the quarter as an increase in industrial revenues were offset by a decrease in recreational revenues.
In the U.S. package sales decreased mainly due to weaker recreational activity.
Product support revenues decreased 10% for the quarter and 4% year to date with SEC restrictions and recreational activities limited usual site maintenance and full started activities have not been possible and were factors in the quarter.
Gross profit margins increased in both the quarter and year to date on good project execution.
Operating income decreased 8% in the quarter and 20% year to date, largely reflecting the lower revenues.
Selling and administrative expenses were down 3% in the quarter, including the government cws subsidy, reducing expenses by <unk> point Eightmillion. Some additional costs are being incurred in this business to support the substantial backlog of orders well other expenses, such as travel and discretionary were lower.
Bookings were up 15% to $40 million in the quarter and 37% primarily on good activity in the industrial segment.
Backlogs were healthy.
216 million at the end of September.
With industrial being higher in Canada, and recreational higher in both Canada and the U.S. approximately 35% of this backlog is expected to be realized in Q4 subject to construction schedules.
On slide eight I'd like to touch on a few key financial highlights.
Management of our working capital continues to be a focus area accounts receivable aging is monitored daily and trending well dsos consistent with prior years inventory levels are closely closely monitored.
In our order boards have been adjusted in light of market activity.
Accounts payable reflects the timing of purchasing and lower extended terms balances.
As upset as of September Thirtyth, we maintained our strong financial position with cash on hand of 471 million.
Available liquidity of 714 million.
Good cash flow allowed us to repay our 100 million draw on the term facility as well.
Our returns remain strong and although impacted by contribution in Q2, and Q3, resulting from the pandemic they benefit from the actions taken by our team to control spending and manage capital employed.
The board also approved the regular dividends at a rate of 31 cents per share consistent with last quarter.
On slide nine we conclude with some key takeaways as we look forward to Q4.
We will continue to focus on our three key priorities as we have done from the start protecting our employees, serving our customers and protecting our business for the future.
We continue to monitor the situation closely to evolve our business practices appropriately.
Our disciplined operating culture combined with the diversity of our customers and installed base expanding product in certain service offerings and financial strength position us well to respond to business requirements and execute on our long term business plan.
We appreciate our entire team's efforts and commitment to supporting our valued customers. During this challenging time and thank our customers supply partners and shareholders for their continued support.
That continues our prepared remarks, we'll be pleased to take questions Atlanta back over to you to set up the first.
Thank you.
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The first question is from a share then radbourne TD Securities. Please go ahead.
Thanks, very much and good morning.
Sure.
With respect to future the convention on the Street had been to your excludes Hughes and look at results that way, but the issue with that is that high performing organizations would have made other cost the jets adjustment the absence of the students program. So.
You talk about how you're thinking about that internally and how you've been a person not in discussions with your board.
Sure, let me start with that Phil and I think like you say, we tried to be very transparent and disclose you know what we're seeing there and I think Scott made in his prepared remarks.
We you know we are very conscious of prepare of protecting our secured and skilled labor.
In managing that balance right between what we need short term being cost effective but also you know not taking our EPS at ball for the long term needs of the business right and so you know I think again I think we have incurred you know other incremental costs, which I think are notable too.
I mentioned, some mighty cost, which we accelerated which is a pull forward, but we have incurred things such as incremental PPD. You know, we've bridged benefits for employees and temporary lay off and you know, we advanced training and and we've done a number of things you know.
Sanitization and so forth that.
We're also very mindful, which are embedded in our results right.
Yeah, just surely.
I mean, it was helpful. Helping us continue to focus on protecting our skilled labor and other other.
Personnel in our business, but.
They are trying to stay disciplined to our operating practices.
And.
Sure, it's a it's a balance between making.
Making sure we're we're operating in a very tight control environment.
Conscious of our variable costs, but also we're we're very attentive to protecting ourselves when when an upturn starts and we're just trying to be required conscious of that.
Great and.
We don't have a lot of history with the expanded caterpillar territory, but bookings of 371 million looks pretty healthy to me was that your take on it.
I think it's a it's acceptable I mean part of her upgrading and team did a nice job and I think we're proud of the team and this is a unique landscape, but as Mike said I think the team should be applauded because we also.
Went live with our integration and come back with the ERP transition and that that was no easy feat and I'm really.
Please.
We had no hiccups interfacing with customers.
A lot of effort into their we're still a lot of effort and dynamics in play, but so far we're pleased with that and I think the team should be commended with everything going on coal that impact plus an ERP.
I think that was a decent a decent results with and combined with the bookings.
And then last one for me your used equipment sales were quite strong is there any perspective, you can give us there on how much of that which is treating disposals in the rental fleet or or packages that your t. main source opportunistically.
Yeah. Good good observation sure Lynch you know we were.
We are fortunate how the team positioned us with our used and having options for customers again, I think it's reflective of the cautious environment and the focus on customers cash flows and things that we had some good value offerings with demo class I mean, our demo class was up over 35% quarter sales we were.
For.
We you know the teams were more opportunistic with the U.S purchased.
Developments and so that was up over 35% I think show a combination of that with some rental fleet disposition and treat sales was a combined for a very positive outcome on the used revenue sales. So that was a good outcome.
Great. Thank you for the time.
That's great. Thanks, Sheryl Thank you.
Safe had a good day.
The next question is from your evening with Canaccord Genuity. Please go ahead.
Hi, good morning.
Good morning Bernie.
I'm just wondering on the when when the new territory will be fully leveraging the ERP.
And when or what that might look like in terms of the.
<unk> financial results and what are some of the goals that you want to see when once they are fully up and running I'm, assuming they have to be trained and whatnot on on the new system.
Yeah. It's a good question I'll start with that one year. So we did convert to our operating platform. The middle of September about the 14th we completed that and so as you mentioned I think you know getting them on one platform getting the whole company. We did just as a reminder, we did the Maritimes back in April and so this brings the new territory on.
Through our platform.
And you know we're in the process now of working through our or next quarter. As you can imagine there are lots of process changes and some change management as the teams get used to the new new environment, but what it does do is it does give us very consistent visibility into the different parts of the business. It aligns you know a lot of the data a lot of the accounting.
As well and things like that as we get through the close and so as we go forward. It's an advantage, but there are certainly there are processes and changes that we are working through with the team. So they get used to the new operating environment from their former one and.
And so you know again, that's in support of a.
Our <unk> cat business, we did convert the battlefield rental business a year ago June and so they've been well on that system and are starting to see some of those benefits to help us grow that business as well over the course of the last year.
Yes, just.
We've got a ways to go here.
And then.
Like weren't work for them.
Delighted with what took place there, but as you say there is a lot of training.
We had our branch model embedded.
Last year, so that was good but now we get to really focus on our operational excellence variables that we can.
Believe we can leverage more and some of our best practices.
With our go to market approaches I think we can improve on that and to improve on logistics and things of this nature. So.
There's also there's some heavy lifting to come but the great part is.
Presents opportunity now we have to execute but the great thing is that we're plugged in and we're on a common platform you still have one more events to go with material handling, but we'll get to that is material.
Next year.
We're pleased and.
Looking forward to executing on these opportunities from an operational and go to market approach.
My second one just on on mining lots of interest industrywide on on economists calling.
Not something that traditionally set the type of mining in your territories, but is that changing are you seeing any.
Increased interest and autonomous hauling.
Yeah, I think you know and we applaud caterpillar and how they're positioning us in the marketplace there.
Lots and lots of dialogue going on on that front, and we'll see how things materialize.
Okay, I'll turn it over there guys. Thanks.
Thanks Jerry.
Thank you.
The next question is from Jacob bout with Sidoti.
Please go ahead.
Good morning.
Yep.
We wanted to wanted to go back to the Qubec Maritimes and so you know the integration of the ERP systems is now complete can you just talk a bit about.
What is left as far as major steps and the Qubec maritime integration.
Well leveraging.
Operational side.
You know.
Look at our product support.
Excellent component, how we and now we have better visibility to the Cape <unk>.
Yes.
And when you're operating on two different platforms. There's some differences in there and how we are handling the flow data and how we are managing some of the caveat that we we zero in on so now we have consistency.
We'll have better visibility across the enterprise to to these keep your eyes on a consistent basis operationally also how we're how we're managing our assets right. It was a.
I'll use the word a little clunky at times now.
Working through that but I applaud the team.
Two.
Nuclear through those that but so we're in a better position.
With how we're going to.
Manage assets and a return on asset piece, the French levels, and and then you get into the interface with the customers I think will be.
But more consistency with our approaches there are logistics there's.
Some of the synergies, but so it sets us up but again, we can we can talk about it.
I think great progress, there's a ways to go even with our our heavy rents and power systems of fleets, we can manage those more effectively.
But now we've got to go execute.
Prove it out more but we're we're ready for that next phase.
And then activity levels in Qubec Maritimes versus and true you see much difference in the quarter.
It was well what we are encouraged with on the on the rental services side was correct. We saw great improvement actually the seat utilization improved touch.
Quarter over quarter, so that was encouraging I still have a ways to go because we want to get higher utilization in there.
But that was encouraging.
Our conduct side and Maritimes.
The.
What we saw was the markets and improve in conducting the maritimes as the quarter progressed.
We've seen a shift and this isn't just think through though.
Real shift Inc.
Increase in a small product sales activity. So your call your building construction products and contact paper they were extremely active.
The 5% compared to previous quarter, so, but so that was.
Significant relative to the larger iron.
Activities, we saw.
And again I think it's just again numbers if you.
You know that landscaping area was very active things of that nature, but.
You know still cautious environment with some of the larger larger.
Last question for me just on the.
I see so equipment bookings, obviously quite strong.
But mining was down 4%.
Maybe just comment on levels of engagement and.
Expectations for.
You know through the next 612 months.
Yeah. So what I mean, you know mining can be lumpy.
You know on a quarter by quarter comparison, but.
It's I think there's a caution Bart we keep as you recall in Q2, there was a major shutdown. So Q3, I think it was about getting up and running which took place a production.
Improved activity levels improved but.
Still a cautious tone when it came to capex.
And we'll see how things.
Play out here.
In the coming months or in terms of activity on print products.
Thank you very much.
Thanks Dick.
Thank you.
Next question is from Michael <unk> with Scotiabank. Please go ahead.
Hey, good morning, Scott Good morning, Michael.
Okay.
If I should make gradual recovery and product support revenues through Q3, a quarter over quarter recovery going from minus 16 to minus 3% would imply that youd be maybe bags. It in the quarter in positive territory.
Anyway, you can confirm that if not maybe just discuss the overall cadence.
Well it improved.
Pleased with that but theres still caution in there and again our customer here. So we we've.
Interpret what's taken place. So there was obviously some hard stops in their Q2 and customers were very focused on getting back to work getting up and running and on all the segments. We operate in an understandably, that's where their focus was and with less so attention to repairs I mean, our our rebuild activity.
<unk>.
At basis was down in the quarter, but 10%, but that's understandable because customers were focused on executing.
Their jobs and getting back into production mode.
So you know you in our Wip is down you know at.
At the end of the quarter, which.
Turning going into.
Next to the next quarter show it but I think it's it's just a.
You know reflects the environment, we're operating in and.
We'll see how things progress were.
Gene Utilizations, improving and we'll see how things transcend, but you know were.
You know we're in a cautious mode here with with the width and.
See out but again, we're we're very focused on ultra focused I'll say on making sure that.
We are preparing for an uptick in the park sports site. So.
So actual stock buyback higher in Texas.
That's the mode, we're in but it's a fine line, you're walking right and.
We're we're focused on the future.
Great interesting commentary there. Thank Scott and then and then maybe just.
Well you called out product support is the main area of gross margin pressure in this quarter I don't think that was the case last quarter I'm wondering here I mean, if it's strictly volume related or if there's an element there.
No lower productivity due to social distancing or other measures just any sense of how to think about that going forward.
No I think it's it's combination of volume and the mix and.
What took place there I mean as I said, the rebuilds were down.
And but.
That's sort of sums it up there.
Yeah, Okay that makes sense.
And then just.
And maybe correct me, if I'm wrong, but I don't think you flagged lower rental as a driver for lower gross margins in the quarter I'm not sure. If I missed that but were you able to offset maybe some lower utilizations with higher rates are lower cost or mix. It just what played a factor there that we didn't see them in the gross margin pressure.
Well utilization improved but theres still rate pressures in there if you look at the the overall activities and the fleets and no power was down.
On the revenues.
We had some shifts and there was a bit lumpy on a quarter by quarter comparisons. So I mean, there's there's pressures in there, but we were we were pleased with the uptick in the utilization and the real schurz side, and but it's a competitive environment right now yeah, I think to add to that too. If I go just like we did speak to the phase.
And I think it's important to understand that.
Ligation rates on average right you know as it sort of phased in over time activity improved and so going into July you know, we have a straight line depreciation model EPS pressure on the margins for rental.
In you have to get to a certain point before you start to recover that fixed cost right and so you don't think of you know think of it as a bit of a blunt.
From that perspective, like we had a bit of pressure in the material handling as well.
Got you, okay, well, thanks, guys nice quarter. Thank.
Thank you. Thank you.
<unk>.
Thank you again, please press star one at this time if you have a question. The next question is from Maxim Sytchev with National Bank Financial. Please go ahead.
Hi, good morning, gentlemen.
Morning box.
I was wondering Scott maybe if you don't mind talking about how you feel about the rental opportunity over let's call. It. The medium term is coal that you know changing the behavior of the clients sort of permanently or you think that's going to be back to you.
You know a normal whatever whatever that means over Ah.
Let's call. It I don't know nine to 12 months what are your thoughts there.
Well, we're not in a normal environment.
But I think the Q3, we saw improvement.
But just as an overall rental even are we look at our new RPL rental purchase option I mean, there was a massive shift in there from year over year basis, where.
We had but we've got a decline there were almost 50% over $90 million on rent coming to.
At the end of Q3 2019, and this year were down significantly so just it just shows worthy.
The environment, we're operating in and.
But I'd say so overall, we're still very much committed to this strategically when we look at the dollar opportunity and the trends in rental.
You know, we're not going to.
Slow down there with our approach we're just I'd say, we're in a unique situation, where a new run through it it is a bit of a drag but we're we're still looking at this as strategically agreed opportunity.
Particularly with the expenses territory.
Right do you mind, maybe I don't know if you know over get done this work, but what are your thoughts in terms of kind of rental capex for 20 to 21 or was this just too early to contemplate goes.
Our teams are going through the planning process right now and we'll have a better read on that.
A weeks, but I mean, we.
Like we were down.
[music].
Yeah. If you look at the you look at our notes and so forth you'll see it's you know that's a big area for us in terms of how we curb their capital spend and just tried to manage the fleet through this period right and so you know indication would be that we you know we are going to increase our capex somewhat but it's going to be you know based on the business plan and what we see going into the year as we get closer.
So we'll look to optimize that Max as we get into the year.
They will come in.
In their Max relative to the some of the aging where you feel you have to stay committed to.
Level investment or you'll you'll hurt yourself over the long term.
Uh huh.
That's very helpful. And then I'm curious to see I mean, we've seen Ontario bunch. It yesterday it sounds you know pretty a pretty.
The positive from an input perspective, what are your kind of large construction.
Clients like what's the body language from from those guys or maybe any color on that end market if it's possible.
Well I think that our tomer customers right now they're focused on just getting some work done that they have Rick but I think.
It's all about timing and shovel ready and how quickly things can materialize here I mean, it's a it's encouraging but I think both sort of in a I think everybody's in a wait and see and see what type of work is released and the timing.
Okay fair enough and one last quick one.
Balance sheet has an extremely strong position and probably going to get stronger over the next 12 to 18 months I was wondering if you care to comment on our.
Capital deployment priorities.
Sure, Yes, great Great Segway I think you know keep in mind you know the team has done a tremendous job on working capital and Capex and you know we're not we're in a good position again, but we are preparing for is just to have liquidity and we're in a good position to help as activity picks up and warrants you know, we will see working capital investment.
You know as as things build and so we anticipate that certainly.
Certainly you know certainly on the inventory receivables side, we talked a little bit you know, our IP is down and and and that's just commensurate with timing of purchases and some terms we had but you know capex is the other variable. So we are I would say from a priority perspective, you know, we'll continue to manage our cash flow very carefully you know working capital.
We'll be the first draw we have a number of initiatives for organic growth that will take priority on capital you know if the returns are there we'll continue to push really hard on those metrics and challenged the team to drive those to those returns.
Debt repayment of course, you know we're in a good position at this point, we want to maintain that cash balance and liquidity, depending on demand and where things go.
And again, we're committed to our dividend and so forth.
And that sort of thing, but it would be you know really operational care and feeding of the business as priority and then have dry powder for for the future right. So.
Okay. That's fair enough. Thank you so much that's me.
Thank you Max.
Thank you.
This will conclude today's question and answer session I will now turn the meeting back over to Mr. Mcmillan.
Great. Thank you a lot of things.
Thanks, everybody for your participation today that does conclude our call. We wish you a great day and please stay safe. Thanks again.
Thank you.
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