Q4 2020 Toromont Industries Ltd Earnings Call
All participants please standby your conference is ready to begin.
Good morning today is February 11th 'twenty 'twenty one.
Welcome to the Tor month fourth quarter and full year 'twenty 'twenty results conference call.
Please be advised that this call is being recorded.
Your host for today wasn't be Mr. Michael Mcmillan. Please go ahead Mr. Mcmillan.
Great. Thank you Murray.
Good morning, everyone and thank you for joining us this morning to discuss the results of term on industries for the fourth quarter and full year of 2020.
Also on the call with me today is Scott met Hurst, President and Chief Executive Officer.
As noted in the press release issued yesterday, we will be referring to a package posted on our website and we encourage listeners to download it and follow along at this time.
And as noted on slide two of our presentation I would 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 <unk>.
S release from yesterday, which is available on our website.
As is our practice, we will focus on key highlights for the 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 of course, it 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 are pleased the gradual sequential improvement continued in Q4, however, the operating environment is still quite fluid.
Customers remain understandably cautious in this environment and as a result overall business activity were below 2019 levels.
From the start of the pandemic for teams have shown their commitment and high performance during a year of many unique challenges and opportunities.
Through it all we have been proud and honored to produce central service and support to our customers who in turn provided essential services to general market on economy.
Well we did this we also maintained our focus on the safety of our employees on the protection of the business for the future all while facilitating the move up on it came back and Atlantic businesses onto a common ERP system.
With one common platform, we are now able to align our operations at the ground level and continued to leverage best practices go to market approaches and efficiencies across our territory.
While early days, we are already seeing the benefit that comes with increased visibility and enhanced alignment.
We continue to exercise our disciplined focus on our balance sheet, keeping inventory turns type improving collection or they are in DSO on our fleet uploads.
Our liquidity and overall financial position remains strong.
As we commented in Q3 expense reduction as a priority, but remain very careful not to adversely impact our ability to meet future market demands.
We saw sequential improvement in most markets in the third quarter from the sharp decline seen early this year and we saw sequential improvement again on the fourth quarter, although activity and returns are still below last year's levels.
Despite strong order levels in Q4, there remains uncertainty in the marketplace and we expect the cautious tone to persist into 2021.
Turning now to our financial results highlighted on slide four.
Backlog for $558 million at year end up 40% from 2019.
Simcoe backlogs for 51% higher than 2019 on strong industrial booking activity in early 2020.
Equipment group backlogs were higher with good order increases in most market segments.
Equipment group Q4 bookings were up 34% over Q4 2019.
Overall revenues increased 3% in the quarter versus last year decreased 3% in a quarter versus last year, which was an improvement from the declines experienced a 13% from Q2 and 5% in Q3.
However, revenues were still below that of 2019.
Year to date revenue was down 5%.
Operating income was 1% lower than the fourth quarter from the lower revenues largely offset by lower expenses.
Certain expenses, such as freight and delivery were lower reflecting the activity levels for expenses, such as travel and entertainment were lower due to restrictions stemming from the pandemic.
Have and continued to incur some additional cost to protect our employees and customers such as additional safety supplies.
Benefits sanction costs work from home practices facility in field standardization procedures.
Additionally, based upon our lower revenue in the quarter, we estimate will be.
Receive we will receive approximately $4 7 million under the Canadian emergency wage subsidy program.
The subsidies were helpful in allowing us to focus on protecting our skilled labor and salary positions as 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 2% quarter versus a year ago and was down 11% for the full year, reflecting the sharp impact of the pandemic earlier this year.
Moving to slide five given the challenging environment. We've included a look at the sequential quarter performance starting in Q2.
While we have seen improvement most line lineups through the year.
On what reflective of the normal seasonality.
Year over year declines have reduced economic activity gradually phased in quarter over quarter.
Revenues improved however, our new equipment sales remain relatively low where rentals used equipment and product support showed some improvement.
Rental fleet utilization improve which translates into higher margin operating income and earnings.
As we mentioned in Q3 product support activity is a function of customer activity and continued to improve as customers were able to increase machine use as site restrictions east.
Mike I'll turn it over to you for some more detailed comments on the group results.
Thanks, Scott, let's dig a little deeper on our operating results starting with the equipment group found on slide six.
Revenues were down 4% in the quarter versus a year ago and 5% for the year on reduced economic activity equipment sales product support and rental activity were lower across most geographic markets and product groups.
As Scott noted, we did see some improvement improved activity during the quarter, but the cautious tone, we have experienced in prior quarters was evident in Q4 and activity remained below last year levels.
During Q for new equipment revenues were down 8%, while used was up 12% <unk>.
Demonstrating a mix that reflects the cautious tone, we've emphasized through the year.
Construction sales improved in the fourth quarter up 8%, bringing the full year increased to 1%.
Sales into mining markets were down 28 per cent in the quarter and 26 per cent for the year empower was down 30% in the quarter and eight per cent for the year.
However sales were good throughout the year, however, faced a tough comparable with a large project in 2019 that did not repeat material handling and egg west sales were both lower on the quarter and.
And year reflective of lower general economic activity.
Rental revenues were down 12% in the quarter and 14% in the year, respectively, reflecting lower activity versus 2019.
P. O fleet was intentionally tightened up at $35 1 million versus $47 3 million a year prior.
Product support revenues declined 1% in the quarter and five per cent for the year again, reflecting sequential improvement as restrictions eased in queue for lower revenues in power and mining segments were partially offset by increases in construction and agriculture.
Gross profit margins for slightly lower in the quarter down 10 basis points as rental margins improved but were partly offset by slight reductions in equipment margins attributable to mix and a higher product support ratio of revenue.
For the year gross margins decreased 70 basis points, reflecting unfavorable sales mix with a higher proportion of smaller equipment models lower lower rental fleet utilization during the year and a higher mix of parts versus service and the product support side.
Selling and administrative expenses decreased 7% in the quarter and 6% for the year, reflecting lower activity levels and cost containment initiatives that begin to phase in since Q2 expenses were lower in areas, such as compensation, where various initiatives where employees, including senior management pay reductions work share program.
And the use of governmental subsidies.
In addition to the reductions in discretionary spending of course such.
Such as travel and training.
Let's turn now to simple on slide seven.
Revenues were up 3% in the quarter, primarily driven by stronger package sales were product support was consistent with 2019 for.
For the year.
Revenues were down 7% as pandemic related site restrictions initially slowed activity in both construction and product support.
Package revenues were up 6% in the quarter, but were down 9% for the year.
For the quarter Canadian package sales were up in both industrial and recreational segment, where in the U S. Recreational sales were up while industrial sales were lower relative to Q4 of 2019.
On a full year basis, both markets experienced lower midyear activities as noted in prior conference calls, which impacted overall sales adversely on a year to date basis.
It is also notable that in the U S. Recreational sales were slightly above last year due to the completion of projects booked in the prior year.
Product support revenues were at the same level as last year for the quarter, but were 3% lower than 2019 for the year.
Seth restrictions, particularly on the recreational segment resulted in the lower full year results.
Gross profit margins were lower in the quarter, but improved for the year due mainly to higher <unk>.
Of product support and improved execution.
Operating income was higher in the quarter, However was lower for the year.
Largely reflecting gross profit drivers on expense control.
Selling and administrative expenses were down 13% in the quarter and three per cent for the year.
Collecting cost containment strategies and reduced compensation costs. Some additional costs are being incurred to ensure staffing is in place to support the substantial backlog of orders, while other expenses such as travel and discretionary spending were lower.
Backlogs were up 51% to $184 million well positioned for the year ahead.
On slide eight.
Like to touch on a few key financial highlights.
Management of our working capital as one would expect continues to be a focus area as we position the company for the future.
Accounts receivable aging is monitored daily and continues to trend well with DSO slightly below prior periods.
Inventory levels continue to be adjusted in light of market activity. However, certain certainly below prior year levels accounts payable reflects volume the timing of purchasing and lower extended terms balances.
We maintained our strong financial position throughout the year ending with cash on hand of approximately $591 million in.
And unutilized lines of credit of about $720 million.
Our returns reflect income levels due mainly to lower activity levels, resulting from the pandemic, but remains strong our key metrics and benefit from our operating model and the decisive actions taken by our team to adapt to the business environment customer needs and manage capital investment efficiently.
The board also approved a regular quarterly dividend of 31 cents per share consistent with the prior quarter.
On slide nine we conclude with some key takeaways as we look forward to 2021.
As one would expect we continue to focus on our three key priorities protect.
Protecting our employees, serving our customers and protecting our business for the future. The pandemic continues to evolve and we continue to proactively monitor developments closely and refine our business practices appropriately.
We are well positioned to effectively respond to both customer requirements and market opportunities leveraging our disciplined operating model culture and strong financial position.
Isn't been an incredibly unique and challenging year and we appreciate our entire team's exceptional effort and commitment to support our customers. During this time and the year ahead. Thanks also to our valued customers supply partners and shareholders for their continued support.
That concludes our prepared remarks, and we will be pleased to take questions Maria over to you to set up the first call. Please.
Thank you.
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The first question is from Yuri Lynk from Canaccord Genuity. Please go ahead. Your line is now open.
Good morning, everyone.
Good morning, Gary.
Morning, guys.
Nice quarter.
What was surprised a little bit by by the double digit decline in mining products for.
The headlines kind of suggests that that's a that's a pretty robust market in your territory. So maybe just a bit more color on.
Whether that's a reflection of some difficulty getting on on site or <unk>.
Customer specific issues.
Yeah, I'm just interested in as losses there.
Yeah. So it was a we saw the the service components of it come off a bit but.
I think you got to be careful in there.
Brexit book can be lumpy, particularly in mining.
These comparative, particularly you get into some rebuild work and we can see.
Continued throughout the year I mean customers.
When we had those shutdowns earlier in the year, we react.
Yes.
On the 21 mines and shut down so they focused on their production and so we're monitoring things closely there in terms of.
Demand signals for for a major we work and things, but you've got to be careful on a quarter over quarter comps.
Yes, I think you also mentioned area yeah, if you're in our notes and so forth you know in our backlog we did see some some improved backlog activity at the end of the year as well you know across across the equipment group, but in mining as well, we've we've noted on over 100% versus the prior year.
Okay.
And just second one for me just wanted to switch to the balance sheet obviously.
Extremely healthy.
Can you just outline our capital allocation priorities as we as we move forward here and if you could within that give me some color on.
Capex expectations, including the rental fleet for for 2021.
Sure. Yeah, you know I think it goes without saying that our our capital priorities have really not changed.
First and foremost.
Funding operations and growth, we anticipate as activity and demand changes over the course of the year that we will be investing in working capital and you'll note our inventory for examples about $180 million below what it was last year and will continue to to invest to support business demand and requirements and in addition to that organic growth opportunities and so forth.
So the primary use I think will be.
Two investing in the operations for the business I think obviously debt.
It is in a good position, but we would consider that next and then.
Look at distributions I think you mentioned capex that we did pull back on Capex fairly.
Strategically I think in and surgically and in 2020, and so our rentals were significantly below the year prior and the investments, we're making especially in Quebec and the Maritimes markets.
So you know we of course, we don't provide guidance, but I would suggest that what we've directed before as you know we expect to be somewhere between what we would have been running at in the prior year, and 19, and where we throttled back a little bit here in 2020, So directionally that's.
That's likely where we'll be and as demand warrants of course will mature that capital is available to support the business requirement.
Okay.
Okay, That's fair I'll turn it over there and those things.
Great. Thank you. Thank you.
Thank you.
The next question is from Michael <unk> from Scotiabank. Please go ahead. Your line is now open.
Hey, good morning, guys.
One of them on.
Share it looks like the size of the rental fleet is smaller exiting 'twenty 'twenty.
And I'm, assuming the market conditions are have a lot to do with that.
You mentioned the RP O. So I'm wondering if that essentially you know.
<unk> accounts for all of that but just you know maybe elaborate on the right sizing and I'm you know.
Whether it was focus on the new territories or broad based.
Yeah, a couple of factors in there Michael so on.
R P O inventory.
<unk> was down I think about 35 per cent that just reflects the cautious environment, we're operating in throughout the year.
That impacted our appeal revenue as well.
I think that was down over 40% for for the quarter. So some items in there to be attentive to but.
In terms of rental fleet, we were very aggressive on the.
With the integration in Quebec, and the Atlantic Maritimes with those fleet uploads and then of course.
Does this environment hit.
So we were very attentive to continuing to work on our processes.
And that we needed to and we think that.
It was really address that but we also did a.
A real good assessment of the activity levels in there. So you know really let that that fleet settle in there. It was aggressive offload in the first two years. So so that impact how we allocated some of the capital as well.
Yeah that makes sense and I'm just curious maybe given the macro conditions, whether you know theres a slight alteration in the rental growth strategy here, whereby maybe growing from acquisitions right.
Right now look more attractive at any any thoughts there.
Well you know right now we're focused on the execution. We were very we remain committed to that strategy and as Mike said, we will book.
The circle on that this year.
As we start to see some improvement quarter over quarter on the utilization, which we're pleased about.
We're always keeping our eyes open for opportunities but.
Right now we're focused on the disciplines of maximizing that utilization and efficiency of operating our fleet.
<unk>.
It's starting to age a little more but we.
The model slowed down obviously in 2012.
That's okay.
Committed over the long term.
Certainly a tough year.
And maybe on the second question on your construction sales and product support that was up nicely on the quarter.
You know can you discuss how much that has to do with a comp or maybe whether this increased activity is a trend that we can expect at the end of 'twenty one.
Just sticking to Q4, we were we were pleased we saw some improvement if you look at the industry activity levels quarter over quarter.
Solid.
But again, we saw more activity the industry numbers were up a bit more on the smaller end iron right.
That larger equipment was still down in the quarter on them on a comparative but.
We were pleased the team did a nice job executing on the construction side <unk> for activity was better and but still a lot to do with used I think our approach on multi offers to customers paid off and our team's ability to execute in the used space where they are.
Purchases or how the.
We built up some demo class providing good options for our customers. So very we're pleased with that and we're very pleased with debt backlog.
Both in construction and mining the backlog improve with mining, which.
That was nice to see.
But we're not getting too far ahead of ourselves, but we're very pleased.
Pleased with that backlog as we enter the new year.
Okay, great. Thanks for that.
Great. Thanks, Michael Thanks for that.
Thank you. The next question is from <unk> Khan from RBC Capital markets. Please go ahead. Your line is now open.
Okay, great. Thanks, and good morning, just a question I guess on some of the follow up a bit on the commentary on construction and mining that you. Just made earlier you know directionally. It seems like someone for bills out there on the mining data points seem to be trending in the right direction. I was just noticing that given that the pandemic is still alive and well.
Customers are just being cautious before making commitments or what are some of the things. We're hearing from those two end markets as you look out to the next 12 months.
Yeah, I think customers were cautious and that's we saw actually some of that activity.
In December because I think customers, we're reflecting on the year and I guess in some ways, we're satisfied but still very disciplined on how they're handling things.
You know, we're just we're monitoring infrastructure spend very closely and so our customers as well.
We remain in a very fluid environment.
In Q4.
You know what it was it was pleasing to see the activity levels.
Bookings.
And the backlog that was that was built backlog part of it.
We had some slippage on.
On.
Some quarters would be availability, but thats, okay for solid bookings.
Okay, and then the commentary around some of the Iron go on a construction being smaller is that just the nature of the projects or again, just some caution before people come at a larger equipment.
Yeah I think.
And generally we saw with our.
With our full service rentals and in the Cte product those markets for strong throughout the year I think quite true.
Five through the major cities.
You saw a lot of landscape projects things of that nature.
And so that really drove our code activity on the lower end products.
Now, let's hang on just one last one for me I think your comment on reducing the our appeal fleet and that kind of business line being down about 40% was that we.
We think it's going to be down that much uptake or no.
Bleed down to that level or do you think maybe you are maybe a little short in the quarter on its probably better just by way of working capital conservatism.
I think what it showed was the cautious environment of customers. They were they were focused are unable to utilize their fleets.
You know we were attentive to the capital allocation, but we want to meet customer needs. So what we saw was just some slower activity on on RP OS.
Yes.
But.
That's an environment that will bode well for.
Marcus on and as we move into the coming year.
And you would see it you would see it as well so how about in terms of the mix in used equipment that we've commented on for most of the year since the pandemic kicked in rate. So you do see that cautious environment Scott mentioned.
The shift towards used and.
You know a little bit of a pullback on our appeal and then we'll monitor that as we go I mean, we usually see a lot more activity on our appeal conversions in the quarter right, but those inventory levels were lower coming in.
Great. Thanks, so much for the color.
Thank you.
Thank you.
The next question is from Bryan fast from Raymond James. Please go ahead. Your line is now open.
Thanks, Good morning, guys good.
Good morning, Brian.
Good morning.
Very early morning, yes.
I just wanted to get your thoughts on the material handling business understanding that the challenging.
Environment May have curbed plans for that side of the business, maybe just some updated thoughts on where it sits now.
Yes, the industry numbers were down.
And we were attentive to feed uploads we didn't.
Gross what we really focused on throughout last year. I mean, this is a business that we are.
We're very.
Granular on in terms of cleaning up.
On the fleets.
The team did a very good job last year.
Really assessing where the utilization was and so we've we did a lot of the narrowing.
Narrowing in there we think we're in a better spot now we want to manage that rental fleet and we really worked on our sales coverage last year or so.
Those were the focal areas.
But the industry activity was down and understandably right.
Thanks.
Just on supply channels right now are you able to source parts quickly or are you seeing some some delays there.
No.
We were very pleased with how well our partners.
Managed both prime product and parts.
We are monitoring very closely.
You know as we because we go forward and certainly.
Planning processes, we're monitoring machine hours very closely to make sure our pipelines are.
Attentive to those areas because we did see.
Hours used go up on machines in the fourth quarter, which was a good signal but.
Again part of that is we have more installed base on a quarter on a year over year basis, but.
So that is an area Brian that we are on.
Making sure that our teams are very disciplined on on the forecast on the pipelines.
Yes.
Okay. Thanks for the for me I appreciate the color.
Thank you Brent thanks for that.
Thank you once again, please press star one on your telephone keypad, if you have a question or comment.
We have a question from Matt Maxim that ship channel from National Bank Financial. Please go ahead. Your line is now open.
Hi, good morning, gentlemen.
Good morning Max.
I think in the beginning of the pandemic you were talking about.
E Commerce.
So the penetration was wondering if you don't mind, perhaps sharing you experienced throughout the year in terms of the uptake on that channel specifically in the plans on a going forward basis.
Yeah. So we continue to really work on increasing the connectivity of our machines and that's that was up again.
Our per point of sale interface.
We have to be careful with our with our comparisons because we do we have.
On a fairly significant percentage of online with our minds and so meet the minds went into shutdown so the data.
Is is.
You've got to be careful with those data points, just because of the shutdowns that we we felt so but overall that debt is an area that particularly in the construction continued to improve.
We think we think.
That theory of the future we can continue to invest in an interface for their customers on.
Okay. That's helpful. Thank you very much and then.
Another.
A question because.
Obviously the senior.
Senior management took some commendable voluntary.
Compression is from a compensation.
Sure.
What is the thought process.
In terms of sort of normalizing this on a going forward basis again, I don't want them to volume, but just maybe directionally if it's possible.
So.
I should point out the board did as well.
So we are monitoring that.
Closely.
Some of the executive office has remained on that.
In the quarter and we're just going to monitor things as we go on that front, we're in a very fluid environment still Mac. So we're we're continuing to just be attentive to our people on that front.
Just trying to do what's right.
Sure makes sense, okay. Thank you that's funny.
Thank you Matt Thanks, Mike.
Thank you we have no further questions registered at this time I would like to turn back the meeting over to Mr. Mcmillan.
Great. Thanks Marie.
Thanks, everyone for your participation early this morning that concludes our call have a great day and please stay safe.
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