Q4 2022 Toromont Industries Ltd Earnings Call
Good morning.
Today is Wednesday February 15, 2023 wells.
Welcome to the Tor <unk> industries limited full year and fourth quarter 2022 results conference call.
Please be advised that this call is being recorded and all lines have been placed on mute to prevent any background noise.
Your host for today will be Mr. Michael Mcmillan Executive Vice President and Chief Financial Officer. Please go ahead Mr. Mcmillan.
Great. Thank you Michele good morning, everyone.
Thank you for joining us today to discuss 12 months results for the fourth quarter and full year of 2022.
On the call with me. This morning is Scott <unk>, President and Chief Executive Officer.
Scott and I will be referring to the presentation that is available on our website.
Start I'd like to refer our listeners to slide two which contains our advisory regarding forward looking information and statements.
After our prepared remarks, we'll be more than happy to answer questions.
Let's get started we can move to slide three and Scott who will start us off.
Thank you, Mike and good morning, everyone.
The team delivered solid operating and financial performance in the fourth quarter and throughout the year ending in a strong position.
We continue to monitor supply and.
And other uncertain market and economic variables.
The equipment group continued to execute well delivering strong rental and product support results, while optimizing equipment and parts sales.
Supply chain challenges persist it, albeit some product lines have shown recent improvement.
Simple revenue improved in the quarter on project construction and higher product support activity.
Across our organization our team remains committed to the disciplined execution of our operational model adapting to changes in the business environment, while remaining focused on executing our customer deliverables.
In the fourth quarter of 2022, Quebec property was sold resulting in a pretax gain of $17 7 million $15 4 million after tax or approximately <unk> 19 per share.
This facility was previously a battlefield branch acquired in the 2017 QM acquisition.
The disposition is an example of how our battlefield equipment rental team continues to execute our QM rental integration and operational excellence footprint focused on generating operating efficiencies and improved customer deliverables.
2022 has had its share of challenges however over the last couple of years. We have made some key organizational changes, which has enabled our team to manage well through pandemic challenges and a variety of economic dynamics, we have not seen for some time.
Our <unk> team has executed reasonably well and although there is always room to cautiously to continuously improve I am extremely proud of our team and how they are supporting our customers and building our business for the future.
Turning now to our financial results highlighted on slide four.
Company ended the year with solid fourth quarter results on strong execution from our teams.
Net earnings in the fourth quarter of 2022 included the aforementioned.
Property disposition gain.
Higher revenue and good expense control drove positive results in the equipment group.
<unk> simko were up modestly from the similar period last year with higher revenue, partially offset by higher expenses, resulting in a 3% improvement to operating income.
On a full year basis for 2022, the company delivered strong bottom line results, reflecting a favorable sales mix higher rentals and product support revenue to total revenue.
The gross margins and higher interest income rental and product support revenue increased on good market activity.
<unk> revenue increased after a slow start to the year, mainly caused by delays in the product deliveries supply chain constraints and general macroeconomic factors such as inflation high interest rates and lingering pandemic concerns have challenged the business in 2022, as well as disruptive to historical trends and seasonality patterns.
And are expected to continue to do so for the near to midterm as we progress into 2023.
Backlog was healthy and relatively unchanged year over year at $1 3 billion at year end with an increase in the equipment with a decrease in the equipment group down, 4% and an increase at Semco up 23%.
Backlog is supportive and reflect strong order activity over the past year, coupled with tight but improving inflow of product.
That said ongoing supply constraints still persist for many product groups.
On a consolidated basis revenue increased 20% in the quarter and was up 9% for the year equipment and packaged sales increased in both the quarter and on a year to date basis with good increases in both groups in the quarter.
Although year to date revenue improved.
Revenue across the business has continued to experience delays in deliveries and construction project schedules due to supply chain constraints throughout the year, which will continue into 2023.
Product support and rental revenue increased in both the quarter and on a year to date basis, <unk> support increased and stronger demand and technician availability with work in process levels remaining high while rental revenue increased on larger fleet and higher utilization.
Operating income was up 43% in the quarter and up 31% year to date on higher revenue the gain on the property disposal and improved gross margins in part due to a favorable sales mix with a higher percentage of rentals and product support revenues to total revenue.
Q4 expense levels decreased to nine 7% of revenue year to date, reflecting the property disposition in 2022.
Expense management continues to be an area of focus and discipline given the economic environment.
Net earnings increased 51% in the quarter and 37% year to date versus 2021 basic earnings per share was $1 90 for the quarter $5 52 for the year.
We are proud of our team as they remain committed to disciplined execution of our diverse operational model adapting to changes in the business environment, while remaining focused on executing customer deliverables.
Activity remains sound with a healthy backlog levels supportive of future results, we continue to monitor specific product availability.
Inflationary and interest rate pressures and dynamics in the business as the economic environment continues to evolve and change.
Technician hiring improved throughout the year and remains a priority in order to support our aftermarket strategy and value added product offerings to meet and exceed our clients' long term needs.
The diversity of our geographic landscape and market share extensive product and service offerings technology investments and financial strength together with our disciplined operating culture continues to position us reasonably well.
Mike I'll turn it over to you for some more detailed comments on the group results.
Thanks Scott.
Let's start with the equipment group on slide five.
Revenue was up 22% in the quarter and 10% year to date taken.
Taken together total new and used equipment sales were up 27% in the quarter and 4% for the year.
New equipment sales increased 32% in the quarter on good deliveries in the mining power systems material handling and agricultural markets, while ongoing inventory supply constraints continued to dampen deliveries in the construction market.
Year to date, new equipment sales increased 5%, reflecting the slow start to the year again, primarily due to supply chain dynamics.
Used equipment sales increased 8% in the quarter and 2% year to date, mainly due to lower rental fleet dispositions.
Used equipment demand has been relatively strong given product availability and economic conditions during the pandemic timeframe in.
In the quarter.
Total new and used equipment sales increased 275% and mining 27% in power systems, 38% in material handling and 24% in our agricultural market, while being lower in construction markets by approximately 2%.
Rental revenue was up 10% in the quarter and 17% for the year, reflecting improved utilization on solid market activity.
Growth was experienced in most areas for the year.
With the following increases light equipment rentals were up 17% heavy equipment rentals up 20% power rentals up 15% and material handling up 10%.
The <unk> fleet, our rental with a purchase option was at $44 7 million versus $46 1 million a year ago, reflecting the slightly lower demand and continuing to trend at below pre pandemic levels.
Product support revenue grew 19% in the quarter and 15% in the year with increases in both parts and service revenue across all markets in most regions.
Looking at specific markets for the year growth was as follows construction up 16% mining up 17% material handling up 9% power systems up 8% and agricultural activity up 12%.
Gross profit margins increased 10 basis points in the quarter and 180 basis points in the year compared to 2021.
Rental margins have improved on the higher activity, which increases utilization product support margins have also improved with continued focus on efficiency as well as higher activity levels.
Equipment margins continue to be competitive, but also reflects strong demand and tight supply sales mix. It was a bit of a swing factor being favorable in the year and unfavorable in the quarter. This is mainly reflective of timing of equipment delivery, which impacts the proportion of rental and product support revenue relative to total revenue.
Selling and administrative expenses were down 9% in the quarter and were up 3% for the year as Scott previously mentioned during the quarter, our Quebec based property was disposed of leading to a pre tax gain of $17 7 million.
Expenses in 2021 also included a $5 million charge for the settlement of defined benefit pension obligations for certain retirees.
Excluding these two items expenses increased 15% in the quarter and 7% year over year.
Compensation costs were higher in both the quarter and for the year, reflecting staffing levels regular salary increases and increased profit sharing accruals on the higher income, which was partially offset by the mark to market adjustment on Dsos.
Other expenses, such as training travel market and occupancy costs have increased in light of activity levels and inflationary effects.
Bad debt expense increased $2 5 million in the quarter and $5 six on a year to date basis, reflecting higher volume and an increase in age receivables selling and administrative expenses were lower at 11, 7% as a percentage of revenue versus 12, 5% last year.
Operating income increased 47% for the quarter and 33% year to date, mainly reflecting the higher revenue gross margin improvements property distributed and the property disposition gain partially offset by higher expenses.
Bookings decreased 34% in the quarter and 29% year to date <unk>.
Construction bookings were down 60% in the quarter, reflecting a strong prior year comparable that included several large orders power systems bookings were also down 25% higher orders were received in mining up 45% agriculture up 17% and material handling up 6%.
Backlog of $1 1 billion was 4% lower than last year, reflecting improved equipment delivery for manufacturers in the latter part of the year approximately 90% of the backlog is expected to be delivered in 2023, but of course is subject to timing differences, depending on vendor supply customer activity.
And delivery schedules.
Turning now to <unk> on slide six.
Revenue was seven was up 7% in the quarter, but lower 3% on a full year basis against a tough comparable last year.
Supply chain dynamics and construction schedules have also dampened results in 'twenty two.
Package revenue increased 2% in the quarter on the advancement of construction projects, how off however, also reflecting lower industrial and recreational activity in Canada.
U S activity was higher in the quarter in both markets. However varies due to the smaller base.
For the year package revenue was down 17% on lower industrial activity with several large industrial projects in the prior year, making for the tough comparable recreational activity remained relatively unchanged.
Alex support improved 14% in Q4, and 17% for the year with increases in both Canada and the U S activity levels have improved slowly with the easing of the pandemic restrictions and reopening of recreational centers after the prolonged pandemic closure period.
The increased technician base continues to be supported.
Continues to support activity levels.
Gross profit margins were down 70 basis points in the quarter versus the comparable period last year as lower package and product support margins more than offset the favorable sales mix on a year to date basis gross profit margins increased 180 basis points versus last year, good project execution and.
A favorable sales mix offset inflationary factors and supply chain constraints.
Selling and administrative expenses were up 7% in the quarter and 5% in the year bad debt expense decreased $2 million in the quarter and $1 1 million for the year reflected reflecting focused collection activities.
Travel and training expenses increase to support activity in staffing levels expenses in the fourth quarter of 2021 were also comparatively lower.
Which reflected non recurring accrual adjustments following the implementation of the new payroll and HRS system last year.
Occupancy costs increased.
In 2022 as a result of the relocation of the Canadian head office to Burlington, along with other related branch changes as a percentage of revenue selling and administrative expenses were unchanged at 15, 9% expenditure control measures on discretionary spend remain a key focus area for the Simco team opt.
Operating income was up 3% for the quarter, reflecting higher revenue dampened by lower gross margins and higher selling and administrative expenses operating income was up 6% year to date, reflecting a favorable sales mix and improved gross margins.
Bookings decreased 19% in the quarter on lower orders in both Canada and the U S. However, timing of decisions by customers and receipt of orders can vary from period to period.
On a full year basis bookings were up 10% at just over $200 million with a 3% increase in Canada, and a 31% increase in the U S.
Both markets were higher with industrial bookings up 10% and recreational orders up 9%.
Backlog of $198 4 million was 23% higher versus last year, both recreational industrial backlog increased in part, reflecting recent order activity and the deferral or delay of construction schedules, resulting from supply chain constraints.
Substantially all of the backlog is expected to be realized in revenue in 2023. However, again this is subject to construction schedules and potential changes stemming from the supply chain dynamics.
On slide seven we'd like to touch on a few key financial highlights.
Investment in noncash working capital increased 55%.
Versus a year ago, mainly driven by higher accounts receivable and inventory levels reflective of higher activity levels.
Clearly, we're still not experiencing normal seasonal trends.
As one would expect however, our operating teams are keenly focused on allocating capital effectively and proactively managing working capital to respond to customer requirements evolving market conditions activity levels and delivery timing.
Accounts receivable continue to receive focused and while DSO increased up six days compared to last year. We are closely managing the aging of our receivables.
Inventory levels are higher than prior year, driven by a number of factors, including our strong backlog delivery timing, where can progress completion, driven mainly by parts availability, coupled with strong demand and inflation. We ended the year with ample liquidity, including cash of $928 million and an additional 471.
Million available to us under our existing credit facilities.
Our net debt to total capitalization ratio was negative 14%.
Under our NCI program the company purchased and canceled 473100 common shares for approximately $48 5 million for the year, which supports good capital hygiene by mitigating option exercise dilution overall, our balance sheet remains well positioned to support operational needs.
And we are prepared to manage challenges related to the economic variables. We are all experiencing we continue to exercise the operational and financial discipline. One would expect as we evaluate investment opportunities that may develop within this dynamic environment.
[noise] tournament targets return on equity of 18% over a business cycle.
Return on equity improved to 23, 5% compared to 19, 6% for 2021 and exceeds our five year average of 19, 8%.
Return on capital employed was 32, 3% up from 26, 6% last year.
Improvement in both of these metrics reflect improved earnings and continued capital discipline.
And finally as announced yesterday the board of directors increased the quarterly dividend by 10, 3% to <unk> 43 per share.
Hormone has paid dividends every year since 1968, and this is our 34th consecutive year of dividend increases we continue to be proud of this track record and our disciplined approach to capital allocation.
On slide eight we conclude with some key takeaways as we look forward into 2023.
We expect the business environment to remain uncertain with a number of macro and industry factors at play.
While industry activity levels have improved as pandemic restrictions have eased in most markets dynamics of the global supply chain inflationary pressures customer credit risk higher interest rates and other global factors are exerting pressures that overshadow normal seasonality and patterns, we continue to proactively monitor developments closely.
We are prepared to respond appropriately.
As one would expect we continue to focus on our three key priorities, leveraging our learnings and focusing on protecting and building our business for the future our.
Our backlog levels are supportive, but subject to global supply challenges.
And related to delivery schedules.
Technician hiring also remains a top priority support our aftermarket and value added product and service offerings to meet and exceed client needs and build our team for the future.
Operational operationally and financially we are well positioned to effectively support our customer requirements and evaluate market opportunities leveraging our operating disciplines and culture.
It has been another year of perseverance through unique and challenging conditions and we appreciate our entire team's exceptional effort and commitment to continue to support our customers. During this unique and challenging time. Thanks also to our valued customers supply partners and shareholders for their continued support.
That concludes our prepared remarks at this time, we will be pleased to take questions. Michelle back to you to set up the first caller. Please.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
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Your first question will come from Jacob bout CIBC.
CIBC. Please go ahead.
Good morning.
Good morning Jacob.
Just a question here on equipment backlog. This is a third quarter that we're seeing quarterly sequential declines and just wondering how this translates into how we should be thinking about 2023.
Is the expectation here that.
Equipment sales could be somewhat softer.
Versus 'twenty, two but still higher than 2021 and 2020.
Yes. Thanks for the question Jacob I think in context, a couple of things to consider there.
It is down sequentially what are the benchmarks that we tend to look at it we did mentioned in our commentary that you know the economic factors and pandemic.
Sort of path that we've been through has really overridden normal seasonality.
And so you know the backlog and the orders coming in in Q4 that looks at strong levels certainly.
Probably three times, what it normally would be seasonally which is a function of all the factors I mentioned I think.
When you look at what we would normally see seasonally in order input pre pandemic like 2019, it is down a little bit and so that's a good context as well and it just demonstrates that where we are in different conditions at this moment I think.
And if you look at it.
Some of the commentary some of the disclosure we provide in terms of the composition Youll see.
Construction's down, but we are seeing reasonable order flows in the mining sector and agriculture in material handling and so forth and so.
I wouldn't speculate on how that's going to transpire throughout the course of the year, but I think its supportive as we enter into 'twenty three at this stage.
Yes.
Okay and then maybe just my second question here just on the.
Rental market.
It looks like there was good growth in the quarter, but <unk> was down substantially in.
Training below pre pandemic levels I'm just wondering why.
Yes.
Jacob in terms of the rental the rental activity remains very strong we're really pleased with how our our teams both on the light heavy in the power and material handling of executed we allocated fairly significant capital in there last year and so we're pleased with the market performance on the rental, particularly we're starting to get the traction.
Our team has been working on in Quebec, Maritimes, we saw some nice.
Growth in there with our change in go to market strategies. So that was a pause on the rental in regards to our appeal I mean, the our appeal.
Portfolio was slightly down again, you are at historically low levels. When you when you compared preterm met and then it gets a reflection of I think availability customer shifts in.
And their buying patterns.
We've been operating in a bit of a unique environment and so it sort of is what it is in terms of the market.
You are.
It's just a reflection of buying patterns really.
Okay and are you seeing any difference between how battlefield is performing versus your heavy runs.
Both are performing reasonably well placed you saw that the rental numbers for the quarter and the full year.
Rental equipment group.
It was up 10% and utilization I mean, the light the light rental.
Utilization, we gained 2% with fairly significant from the utilization.
In the marketplace.
Again, I think the teams have executed relative to capital allocation and really pleased all along still ways to go and pleased with how we've shifted with our Quebec and maritime go to market approach and.
Started to execute.
Better in that environment.
We'd be better thank you.
Thanks, Jamie.
Your next question comes from Michael <unk> at Scotiabank.
Please go ahead.
Hey, good morning, Scott.
Good morning.
Hey, obviously a.
Fantastic quarter, and a fantastic year I wanted to focus on.
The gross margin improvement.
At about 220 basis points versus 19, I think the equipment group's even higher and I think we're all trying to parse out how much of this expansion is driven by the improvements in the business, which.
You guys are really good at and then the favorable market conditions.
That may have played out on the margin front for 2022, I mean any way you can.
Break that down for us maybe at a high level, maybe just comment on some of the work.
One of the largest gains came from in terms of gross margins.
Well, maybe just maybe just to start.
Michael as you look at our gross margins I think a couple of underlying factors certainly like we continue to see as you know strong like although on a year over year basis used equipment still remains a very strong contributor.
Two our equipment sales are starting to see a little better traction on new equipment and deliveries.
But we're seeing we're continuing to see strong results in terms of the used equipment segment, given the tightness of the market.
Is there I think when you look at the mix of the business as well product support we're seeing good growth there.
Year over year, both both in our <unk> business and our equipment group and so the mix contributes to that and I think you know we've been able to manage.
The pricing and so and so forth throughout the year.
And so forth I think we just touched on rental as an example, when you look at rental I mean, the utilization rates the way the team has executed.
And the contribution there has been has been quite strong as well and so I think those factors all contribute to a stronger gross margin I think we are getting we continue to see some operating leverage to right, where we're seeing inflationary factors creeping into certain areas, but I would say that.
The team is doing a very good job at managing discretionary areas right.
I'll provide a little more color on that.
The team did it.
Originally good job in there and the execution, we call. It operational excellence strategy, we had improvement in our material handling business. We had some improvement in AG. It also Faneuil Hall Park truly.
We had some unfortunate scenario, but giving a little more color on used I mean, you've got rental disposition is down right.
Significantly on the heavy and.
Overall on the full year on the light.
And that's because of the availability, we had even though we've allocated a lot of capital in there we've had to.
Go outside our normal operating practices because of the demand which is good. So when you get an increase there in utilization thats reflected in the margin.
But also on the used so you used.
We're pleased that the team shifted a few years ago with some of our strategies unused.
Opportunistic on the buying or used purchased.
Strategy I believe it's been a good story and that added up a bit on the margin a bit in terms of buying a car.
<unk> rebuilding equipment. We've also really started to develop our offering a value proposition to customers on being an outlet for them on selling their equipment. That's up you've got you've got some big shifts there on a full year basis about $6, 56% plus improvement there.
This used purchasing environment. So that's really really solid execution, which all adds up to what you are talking about there and our rebuilds. We had in Q4, our rebuilt we're up another 120%. This all starts to add up in terms of the aftermarket strategy.
Even though.
So.
We're fortunate how it teams have executed there but.
We never get ahead of ourselves.
That's what we saw in the quarter and the full year.
There is some uncertainty in there.
We gotta continues to execute and prove it out and again that Quebec and Maritimes rental model did improve.
But we have to continue on that front as well. So so it's sort of the sum of all parts in there.
Okay.
Yes that totally makes sense and I appreciate the color guys.
Maybe the second question on the construction piece and I'm trying to square some of the movements.
From a construction end market as it relates to kind of your backlog in your revenue. So you did comment that there was some slippage.
Product support trend it was strong but it did slow down sequentially.
<unk> were a little bit softer on the construction side.
And I'm, assuming you know like in the back of all of our heads here, we're seeing higher rates and we're assuming that that will eventually have an impact to the construction end market. So.
And maybe just to kind of comment on what you saw through the quarter and maybe what we could expect early in 'twenty three just in terms of the construction market.
Well I'm not going to predict on 'twenty three with all the <unk>.
I don't know, how one would do that but we won't do that but what we saw in the quarter the west slippage.
And that showed a bit in the backlog.
All of those availability constraints impacted our execution.
And there was some softening in the industry activities, Okay, and so that's what we saw but still reasonably and when you look at it historically still reasonably solid numbers.
There was some softening in that C&I.
C&I industry activity levels, which you know you are coming off some high yield coming off some tough comps in there on that construction site. So that's what it is that's what we saw in the quarter, we'll see yes.
And there were some there were some larger orders in Q4 of last year or two and particularly in that segment. So sometimes you see a little bit of Lumpiness, there, but I think it's more of the former discussion thats got niche and where monarch I mean, I think right now with these market dynamics, and we're really shifting to monitor and get the pulse from our frontline our pipeline.
Forecasting just to say, we've got to stay very close to that with some of the diner.
Dynamics in play right now.
Perfect can't blame me for asking about 'twenty three but thanks, a lot for the details guys.
Youre welcome Thanks, Mike.
Your next question comes from Yuri Lynk at Canaccord Genuity. Please go ahead.
Good morning, gentlemen, good morning, good morning, good morning.
I wanted to talk a little bit about your real estate footprint.
The the monetization opportunity that you had in the quarter I mean, what made that that piece of real estate.
Yeah.
Available for sale do you have other opportunities like that.
And can you provide an opportune.
Date on the new re manufacturing facility that you've got planned in Ontario, maybe some.
Share with us maybe the budget and if that's going to allow for some growth or is it replacing the facility thats nearby.
I'll talk to the property that Mike can take the <unk> question how is that.
So.
This is al I'll classify this is all part of our.
The QM integration.
We got slowed down on that integration right and I'm really pleased with the team. So this was on the.
The rental services side.
And we examine that footprint.
We have a model, we like to operate within which.
Identifies with the market in terms of the footprint, we've worked hard, particularly in Quebec on expanding that footprint with operational size and efficiencies and how we run with broader lines. So the teams.
But that's fine.
Bit of a journey and there we said it would take time and.
So this was in our plans. This was a very large facility for rental services that didnt meet our scope and dynamics of how we go to market and where it was located so what the team was able to do was.
Actually expand the footprint and we added a store in a proximity where we needed to be we redeployed our people into some other areas or other locations and to improve the throughput there and the customer deliverables and.
I was delighted our people really identified with it it was in a bit of a congested area. So that worked out well and <unk> and then we crystallize the value of the property.
Nothing more nothing less and actually we lowered some fixed operating costs in there. So that's.
It was it was really I think we will execute it we were slowed down a bit with the pandemic, but that's what we do we were continuing to look at those operating efficiencies our go to market strategy or approach to the market.
In QM and so that's what it was.
Great way of reallocating some capital so on the Bradford question that you had on Raymond.
I think here it's.
Again, we mentioned I think it was last quarter, we had sort of we suggested that we're looking at we own the land there and so we're looking at an investment of about up to $70 million, it's progressing pretty well I would say, we're still targeting mid 24 to be in the building and as far as capacity goes as we look at that facility.
It does provide us with great access off the 400.
Access to the northern territories, I think access to employment as well, but operationally really importantly, we have a number of facilities, where this is going to provide us with better flow of material and product and so you know in flexibility and capacity both in square footage I think more modern facility.
Yes, so more efficiency just generally when you think can flow, but also.
When you think of the operations conducted there it'll be more efficient and newer equipment and so forth and then it allows us for capacity in terms of shift pattern management and things like that and so that's kind of where we stand for and al will provide similar updates as we progress through the year. We've done some initial site grading and so forth and so we'll be starting construction.
And we've done a bunch of tendering already so we expect to be making great progress here. This year. So it's all part of the again, the sort of east central and Eastern Canada.
<unk> for the aftermarket.
Hey.
Okay. That's helpful.
Maybe just my last question.
You're pushing almost $300 million.
Net cash.
Just wondering on the on the acquisition side I mean.
Would you consider adding to either.
The rental business or Simcoe.
M&A.
We always.
Keep our eyes and ears open.
But that's something that is I'll say.
Normal.
In terms of nothing to report minority.
Yeah, I mean, we've got lots of operational focus right now as.
As you can see but we certainly with market dynamics you keep your eyes open and.
That's what we do and we've done that historically.
Okay, that's where we are.
Yes.
Hey, guys. Thanks, I'll turn it over thank you.
Thank you Gary.
Your next question comes from Cherilyn Radbourne at TD Securities.
Please go ahead.
Thanks, very much and good morning, good morning Cherilyn.
I was wondering if you could.
A little bit about how you're thinking about net rental adds in 2023, just given improving equipment availability and an environment of some macro uncertainty where customers may pivot to rental over purchasing.
Sure, Yes, great question Cherilyn.
So maybe I'll start on that if you look at where we are last year. The team did a really terrific job of managing the rental fleets broadly the light and the heavy but if you think of battlefield. For example, I mean utilization managing the fleet as well as the retail component given the tightness, especially in <unk>.
And frankly, even the allied product was very tight and so we did that.
We did add significantly to the capital in that sense, and I think as availability improves.
And we look at the economic conditions, which are pretty uncertain at the moment.
The team is there.
Is prepared to invest in and add to that fleet. We've kind of held back if we go back a couple of years, especially in Quebec and Maritimes.
We did taper back capital over the last two years, we've been incrementally.
Creasing that but again trying to optimize.
Customer requirements and customer demand in that space and so.
We are prepared to invest there.
As demand warrants right as we see market activity demand and an uncertain conditions, you might you might see that business perform.
A little more consistently in that in that matter until.
Customers can make decisions on capital investment.
So just put a little color on their Charlotte I mean, we've been balancing rate with some of the tight supply and particularly on the rental service we did allocate.
Allocate more units over the last two years, we had two into the rental fleet. So we're balancing that retail to rental side on this on the smaller equipment and.
We chose to really allocate more into that room I think it was I think it was the right decision the team executed.
As you know we believe in this rental model.
We're going to continue to try and continue to make a difference for our customers here. So we will be as Mike said allocating capital and they're appropriately.
As aggressive as we think we can execute.
Great that's helpful.
I was wondering if you could also speak to the composition of your mining backlog, we're certainly reading a lot more about nickel activity in your territory and I'm just curious whether that has started to show up in your bookings.
Yes, we've got more diversity it now.
Relative to base and precious metals I think.
It's fairly balanced and theyre in the backlog certainly as you pointed out theres some drivers of nickel gold iron ore. So it's fairly balanced in there.
Okay, and then if I could sneak one last one in.
It just strikes me that in coping with the supply chain constraint the equipment group, that's probably embedded some related shop process efficiencies that you'll try to preserve.
As part of that and prime product availability improved and I was just hoping you could comment on that train of thought.
Well, that's something we always strive for as efficiencies in that product support area.
I'd say.
Our efficiencies haven't been where we want them. When you look at our ordering process relative to demand signals I think well that we've worked actually were better there sure and good point in terms of.
I think we're doing a better job analyzing our data talking to our customers to get the repair schedules. The problem has been we are ordering process hasnt always lined up with those repair schedules.
So you'd actually have create some inefficiencies and theyre just the way it's been working out.
You see that a bit in our width is high which shows the demand which is good but again, how we're scheduling those rebuilds, where I think we've improved our strategy there and our go to market approaches. So thats. Good lessons learned in there as you pointed out so there's there's a lot of dynamics in there. So I think we've improved in some areas reasonably well, but theres also.
Still not where we want to be in terms of the data lining up on how we do our ordering process because sometimes we're just we're taking as we can get even though it doesn't line up from a timing perfectly or waiting so.
How we've seen it so far.
Okay.
Great. Thank you I'll pass it over to someone else.
<unk>.
Your next question comes from Devin Dodge at BMO capital markets. Please go ahead.
Thanks, Good morning, guys good morning.
I wanted to come back to Michael's question on gross margin.
So look if you put aside mix.
Look at the individual lines of business within that equipment group look I think there has been some benefit from tight market conditions.
So do you think your youre in a position where you can retain the higher gross margins or should we expect some of at least some of that benefit to fade overtime as availability.
Improves for equipment and parts.
Yes, I mean, there is no question when you're in a tight supply you get some some outcomes are relative to market dynamics market based pricing and.
As we've said the operating leverage and favorable.
That's played out really well we continue to work hard at that in terms of the lessons learned.
Yeah.
That's something we have to continue to work out, but it's a very.
Have to be in our view balanced because.
You still want to be attentive to your market, it's all about executing relative to the market and with your value proposition. So we will continue to work hard at that.
Certainly as we know historically these dynamics change is how you execute two dynamics in the market and your value propositions will continue to do our best at that.
That's that's where we are we were fortunate with some outcomes. There is no question.
<unk>.
That's how we thought.
Okay that makes sense, Okay, and then I was going to ask about AG.
AG West we saw that product support I think it was up pretty meaningfully in the second half of the year.
It seems like a generally positive backdrop for the AG sector.
Can you give an update on the on the AOS platform and your plans for this business over the next call. It two to three years.
What we saw last year with favorable market dynamics in the AG segment, our teams executed reasonably well, particularly with market penetration with our combines and some of our tractor lines.
Aftermarket as you saw we started to execute better in there and.
Yeah, I mean, it was favorable market dynamics in there that led to some favorable outcomes combined with some improvement in our operational operating efficiencies.
It's still a ways to go in there, but some improvement that we were pleased with them.
Yes, I think.
Sorry, Devin and the only other thing I mentioned like Scott mentioned like over the last couple of years. The team has done a really nice job managing inventories there.
That has positioned us well in terms of.
The aging and managing used and so forth they've done a really nice job. So we're starting to see some of those results and the backlog is very consistent with the other parts of our business right. We've got some some decent numbers there as we mentioned.
Yeah.
That business is at a point, where we can start to invest in growth in a more meaningful way.
We're monitoring our business activities and their closely and we're pleased with some of the progress.
I'd say, we're we've improved within the market dynamics that were presented.
Okay makes sense. Thanks.
Your next question comes from Bryan fast at Raymond James. Please go ahead.
Yeah. Thanks, good morning.
Right.
Just on mining I mean.
What led to the nearly a three fold increase in mining equipment sales year over year was that just reflective of growth off a low base or is there something else that looks up.
You are lumpy and Theyre right and part of it is the rebuild activities.
You get into those mining you get into tough comps. So it was favorable teams executed well in the aftermarket and we've been fortunate in there over the last year and a half with how the team has executed some some awards and through some of our key processes and so youre seeing some of that dynamics with the installed base.
But mining is lumpy right. So, but two is favorable and we're pleased with how the team executed.
Okay. Thanks, and then.
Have you seen an uptick in rebuild activity.
Equipment prices increase or take hold here couple of couple of things in there.
Really pleased with the execution of the strategy in the in the rebuilt again full year, we are on the.
Have you said were up over 80%.
Volume. These are some big shifts I think those value propositions really making sense for customers, particularly when you saw the dynamics in the market on the inflationary factors.
I mean, it's the customers are.
We like to think that's a value proposition with the way that iron is built you are able to rebuild that and we think thats a differentiation for us and we're starting to leverage it better with good data points on how how to take that proposition to market. So I mean, well I mean, the team execute it well last year and it's a key aftermarket strategy and will.
You need to do our best to.
Deliver good value propositions to our customers in there, but thats, what we saw last year good improvement.
Good sustainability model as well right.
Yeah.
Okay. That's it for me. Thank you thanks, Mike.
Your next question comes from Maxim.
Of National Bank financial Please go ahead.
Hi, good morning, gentlemen.
Right.
I was wondering if it'd be possible to get a bit of an update on the materials handling progress in that.
Thanks.
Yeah, So again continuous improvement and there is the way I'll frame it for the full year.
In the quarter.
We really felt tight.
Available on the new side, there last year, so improved a bit in the fourth quarter, but again, we were I think.
Acknowledge some operational excellence was in the rental side of the business, we've invested capital in there for the last two years and that rental we believe in that rental model and so the team started executing reasonably well in there with with the products. We were able to secure so that was a real positive and youre starting to see some.
Some of that those positive outcomes to the rental as well as we saw improvement in some of the parts of the aftermarket sales, we still got a ways to go in their Max we're not where we want to be on operational performance.
Performance in there, particularly on the service side.
Have improved with our technician head counts in their nerve deliverables with customers, but some of those operating practices, we still we need to do better in there as well, but I would say overall continuous improvement in material handling and as you know we expanded the footprint.
With the OEM was I think reasonably pleased with us. So we went up to sketch one and expanded that footprint to a bit more.
Okay.
Yes.
Like I don't know like a second third inning of kind of improvements or how should we just think about it.
<unk>.
I wouldn't want to frame it in innings al.
Okay.
Oh I'll frame it that we have a ways to go but we're on a continuous improvement basis. We were we were satisfied with last year.
And.
Still more work and strategically smart work and there is a fall on them on that.
Okay helpful approach Okay.
Okay. Thank you and then just wanted to come back for a second.
Is there scope to.
<unk> leveraged our platform.
And grow it from an M&A perspective down the line.
What are maybe your thoughts.
Right now our focus is on improving on the operational side it's been.
That's a different segment.
And I think as Mike pointed out the team.
Got more discipline in there in terms of how we're managing the asset the asset.
Management.
And so I think that that showed there and that's where our focus is right now is really.
Customer deliverables in there and the operational excellence those are the key areas for us and that's where our focus is right now.
Okay makes sense and maybe just.
Just one quick one.
Do you mind, maybe commenting.
Terms of pricing any pushback.
From <unk>.
Potential customers on prime product, maybe just any color.
On that please.
I think that's all relative to the yes, that's something we're going to we are monitoring closely right. When you get into these economic uncertainties.
That's an ongoing pulse that we have to monitor closely relative to our value propositions and customer behavior. So what we saw in the quarter was.
You know the market dynamics are still reasonably good there was some softening so that scenario.
We can't speculate on it you just got to make sure you're staying focused on your value proposition is relative to the market dynamics and the customer deliverables. So it's up.
It's a delicate thing in there and where we.
We're monitoring things closely and that's why I wouldn't want to predict outcomes right now.
Okay. Okay Super helpful. Thank you so much.
Great. Thank you.
Ladies and gentlemen, once again, if you would like to ask a question. Please press star one at this time.
Your next question will come from <unk> Khan of RBC. Please go ahead.
Great Thanks, and good morning.
Comment Greg.
We made a comment earlier around some of the progress around the Quebec Maritimes integration is still going on obviously the pandemic can you maybe give some perspective on.
And I think rentals is a big focus on kind of improvement on that.
Can you talk about where you are on the journey towards rental margin improvement do you still see runway could that be.
Driver of improvement going forward over the next couple of years, whether it's across our entire platform and even in the QM region or maybe any of the big bucket.
Final integration things you still have left to do with that kind of QM here.
Yeah. So I mean, we don't want to get ahead of ourselves, but the team did execute favorably last year in terms of the execution of that strategy and relative to the capital that we allocated in there and our go to market approach, which was real shift on the rental both on the heavy.
Power as well as the <unk>.
Hit rate and particularly the.
The rental services concept.
That was a dramatic shift in there and we knew it would take time and we're still I would say, we're still not where we want to be.
But we've got to continue to prove it out so don't want to get ahead of ourselves we got some more work to do in there.
The disposition of that that facility was part of it.
So there's still more work to do there.
On many fronts and even on our service departments.
We saw some work to do in there with our customer deliverables, so still some work.
And.
We've got to prove it out but.
So far we're pleased with how things have been executed.
And particularly how we're operating in the marketplace.
Yeah.
Okay, and then just wondering I guess the product availability and supply.
Call out in the outlook commentary that it's still a bit uncertain could you maybe talk about why there is this kind of a broad availability and thats just a comment on the state of the environment or is there no maybe certain categories or certain products movies.
Machines versus parts et cetera that might be a bit of an issue where might you be seeing some of the gaps relative to where your backlog might be down some.
Some models in parts and components, so still very tight.
<unk>, we started to see some some improvement so you know we're going to monitor it closely.
These are things, we it's not like we haven't seen this before.
Been here before so you're just continuing to monitor work closely with your customers and the demand signals and then with our with our OEM partners.
Some slides there was some improvement with certain malls.
Some components, but still some tightness in there as well.
Yes, I think you'll see that a little bit in our commentary to save on the inventory side right. When you look at work in progress for example parts in certain parts.
Still some tightness, there and as Scott mentioned.
Equipment side and parts or both.
Both improving but there are still areas of focus that are.
We need to improve much further.
Okay, Great and then just one quick one I guess theres been some commentary from the Oems and I think you called out on the last quarter, just some softness in housing and infrastructure generally seems okay can you maybe parse out maybe the construction market a little bit on how many.
Infrastructure versus urban development might be trending for you.
Well.
There was some softening in the quarter and some of the construction activity.
So we're going to monitor that closely but overall I think infrastructure. The signal we have like it's done we'll have a better signal here in the next little while.
You're only in the beginning of February .
What we saw in the quarter was a bit of softening but.
When you are coming off some historically strong industry activities. So.
We're monitoring the infrastructure spend closely as well as the housing and.
Those dynamics.
Really just staying close to it.
Alright, thanks very much.
Okay. Thanks, Kevin.
At this time, we have no further questions. So I will turn the conference back to Michael Mcmillan for any closing remarks.
Thank you again, Michelle and thanks to everyone for your participation today that concludes our call. Please be safe and have a great day.
Ladies and gentlemen, this does indeed conclude your conference call for this morning, we would like to thank you all for participating and ask you to please disconnect your lines.
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