Q2 2023 Toromont Industries Ltd Earnings Call
Okay.
Good morning, Joe.
It is Thursday July 27, 2023, welcome to you to each of our main Industries Ltd. Second quarter 2023 results Conference call. Please be advised that this call is being recorded 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.
Initial officer. Please go ahead Mr. Mcmillan.
Thank you Anna good morning, everyone. Thank you for joining us today to discuss <unk> results for the second quarter of 2023.
Also on the call with me. This morning is Scott met Hurst, President and Chief Executive Officer.
Scott and I will be referring to the presentation that is available on our website.
To start I'd like to refer our listeners to slide two which contains our customary advisory regarding forward looking information and statements.
After our prepared remarks, we'll be more than happy to answer questions. So let's get started we can move to slide three and Scott will kick us off.
Thank you, Mike and good morning, everyone.
We are pleased with the operating and financial performance through the first half of the year.
Our discussion today will focus on continuing operations and therefore exclude the AG West results, which is shown as a discontinued operation unless otherwise noted.
The equipment group executed well delivering on several large customer orders combined with growth in rental and product support.
Typical revenue and bottom line improved in the quarter and on project construction and higher product support activity.
Across the organization.
Continued to navigate through economic conditions and remain committed to our operating disciplines, driving our aftermarket and digital strategy and delivering customer solutions.
Turning now to our financial results highlighted on slide four.
Results for the second quarter of 2023 were healthy, reflecting solid execution on new equipment deliveries against our order backlog as well as favorable operating leverage.
Revenue increased 12% in the second quarter and 17% through the first half with increases in both the equipment group and Simco.
Rental and product support revenue increased on customer activity.
While gross margins remained unchanged lower relative expenses and higher interest income on cash balances both contributed to higher net earnings versus Q2 last year.
Net earnings from continuing operations increased 20% in the quarter compared to last year, reflecting revenue growth expense management and higher interest income.
Through the first half of the year that earnings increased 34% from last year to $229 million or $2 79 per share.
Which was $2 86 per share when including the <unk> gain and contribution.
Bookings for the second quarter increased 69% compared to last year and increased 10% on a year to date basis.
The equipment group and Simco reported increased bookings.
Good demand for our products, however, certain markets remain cautious given the current economic climate.
Backlog remains healthy at $1 3 billion.
Down slightly from last year, However, historically solid.
Backlog is supportive and reflects progress on construction and delivery schedules as well as some improvement in general equipment flow through the supply chain.
General macro economic factors, such as inflation higher interest rates in Canadian dollar movements continue to challenge the business as well as disrupt historical seasonality and are expected to continue to do so for the near term.
Looking forward our teams remain focused on executing customer deliverables key strategies, while adhering to our operational model and disciplined execution.
We are mindful of the uncertain economic environment continue to monitor key metrics in supply demand dynamics.
While focused on managing discretionary spend we continued to recruit technicians to support our critical aftermarket service strategies and value added product offerings over the long term.
Mike I'll turn it over to you for some more detailed comments on the group results.
Thanks Scott.
Let's get started with the equipment group on slide five.
Revenue was up 11% in the quarter with higher activity across all revenue streams, except used equipment sales.
Taken together, the new and used equipment sales were up 10% in the quarter.
New equipment sales increased 16% in the quarter across all market segments and regions predominantly reflecting the delivery of equipment against order backlog interim reflecting improvement improving inventory supply and also customer delivery schedules.
Used equipment sales decreased 9% in the quarter, partly offset by slightly higher fleet dispositions.
In the quarter total new and used equipment sales increased in mining up 64% power systems up 39%.
<unk> handling up 91%.
This was partly offset by a 2% decrease in construction markets.
Rental revenue was up 7% in the quarter.
Reflecting higher market activity strong execution, and an expanded heavy and light equipment fleet.
Growth was experienced in most areas for the quarter with a following increases.
Light equipment rentals up 6%.
Heavy equipment rentals up 17% power rentals up 5% in material handling up 4%.
Product support revenue grew 12% in the quarter with increases in both parts up 12% and service up 15%.
Most markets and regions were higher in the quarter construction up 11% mining up 13% power systems up 21%, while material handling was largely unchanged.
Gross profit margins decreased 20 basis points in the quarter compared to Q2 of 2022 with lower margins on new equipment sales.
Rental margins were largely unchanged, while product support margins increased slightly on good activity levels and execution.
Selling and administrative expenses increased 8% in the quarter.
On an 11% increase in revenue.
Compensation costs increased with higher head count higher salary increases and higher profit sharing on the increased earnings.
Certain expenses, such as travel and training have increased compared to the prior year with greater levels of in person interaction and some inflationary effects allowance for doubtful accounts decreased $5 3 million on good collections and improved AG.
As a percentage of revenue selling and administrative expenses improved to 12% in Q2 of 2023 compared to 13% for the same period last year.
Operating income increased 12% for the quarter, reflecting the higher revenue, partially offset by lower gross margins and higher expenses.
Bookings increased 74% in the quarter.
After a softer start to the year and reflecting in part several large mining customer orders through the first half of 2023 bookings were 9% higher than the similar period last year.
Backlog was $1 1 billion at the end of June 2023, reflecting good bookings as well as improving equipment delivery for manufacturers and planned deliveries against customer orders.
Approximately 55% of the backlog is expected to be delivered in the remainder of 2023, but of course. This is subject to timing differences, depending on vendor supply customer activity and delivery schedules.
Now, let's turn to <unk> on slide six.
Revenue was up 19% in the quarter, reflecting good progress on package execution and increased product support activity.
<unk> revenue increased 18% in the quarter on good activity in industrial markets in both Canada and the U S.
Recreational markets were lower in both markets.
Product support revenue improved 21% in the quarter with increases in both Canada and the U S.
<unk> levels continue to improve reflective of market conditions and increased labor capacity.
Gross profit margins increased 200 basis points in the quarter versus the comparable period last year, largely due to package margins on improved execution and the nature of projects in process product support margins increased slightly on good market activity.
Selling and administrative expenses were up 8% in the quarter allowance for doubtful accounts increased 600000.
On a large balance of aged receivables.
Compensation costs increased due to an increase in headcount annual salary increases and higher profit sharing accruals related to the higher earnings levels.
Other expenditures such as travel and training expenses increased to support activity and staffing levels as a percentage of revenue.
Selling and administrative expenses were lower at 15, 3% through the first half of the year versus 16, 8% for the similar period last year.
Operating income was not quite double that of last year at $9 8 million for the quarter, reflecting improved gross margins and higher revenue.
Bookings increased 30% in the quarter industrial orders increased 70% compared to last year with increases in both Canada and the U S. Recreational bookings were lower in both markets.
Backlog of $207 million was 19% higher versus last year, reflecting continued good order intake and some deferral or delay in construction schedules, mainly resulting from supply chain constraints.
Approximately 555% of the backlog is to be realized as revenue over the remainder of 2023. However, again this is subject to construction schedules and potential supply chain constraints.
On slide five I'd like to touch on a few key financial highlights.
Investment in noncash working capital increased 52% versus a year ago, mainly driven by higher inventory levels.
Inventory levels are higher than the prior year, driven by a number of factors, including our strong backlog delivery timing.
<unk> ability in the supply chain for both equipment and parts higher activity levels, coupled with foreign exchange and inflation.
Accounts receivable continued to receive focus while DSO improved slightly we are closely managing the aging of our receivables and credit metrics.
We ended the first quarter with ample liquidity, including cash of $734 million and an additional $471 million available to us under our existing credit facilities, our net debt to total capitalization ratio was at negative 4%.
We purchased and canceled 238000 common shares for $25 million during the quarter under our NCI program.
These purchases are reflective of good capital hygiene by mitigating option exercise dilution overall.
Overall, our balance sheet remains well positioned to support operational needs and we are prepared to manage challenges related to the economic variables and business conditions. We continued to exercise the operational and financial discipline. One would expect as we evaluate investment opportunities that may develop over time.
<unk> targets are return on equity of 18% over a business cycle return on equity improved to 24, 6% compared to 25% for Q2 of 'twenty two.
And exceeds our five year average of 27% as well.
Return on capital employed was 31, 9% up from 29, 4% for Q2 of 2022 improvement of both of these metrics reflect improved earnings and continued capital discipline.
And finally as announced yesterday the board of directors approved the regular quarterly dividend of <unk> 43 per share payable on October 4th 2023 to shareholders on record on September eight 2023.
On slide eight we conclude with some key takeaways as we look forward to the second half of the year.
We expect the business environment to gradually improve however, a number of factors are in play.
Some of which include the evolving dynamics of the global supply chain and improving availability.
Inflation.
Inflationary and macro economic trends and managing customer credit risk along with growth opportunities all of which can overshadow normal seasonality and customer buying patterns.
We continue to proactively monitor developments and are taking actions.
We believe to be appropriate.
As one would expect we consistently focus on key priority areas, including safe operational execution, serving and supporting our customer requirements.
Our disciplined approach to capital allocation as we focus on building our business for the long term our.
Our backlog levels remain well positioned however, as noted care must be taken to monitor customer buying patterns and preferences.
In terms of technician hiring we continue to make good progress and this remains an essential focus to support our growth in our aftermarket and value added product and service offerings.
Operationally and financially we are well positioned with ample liquidity and a strong leadership team's disciplined culture and focused operating models. We appreciate our entire team's effort and commitment to continue to support our customers and deliver value for our stakeholders.
Also to our valued customers supply partners and shareholders for their ongoing support.
That concludes our prepared remarks at this time, we will be pleased to take questions.
<unk> over to you please to set up the first call.
Thank you, Sir ladies and gentlemen, we will now begin the question and answer session. If you'd like to ask a question. Please press star followed by the number one on your telephone keypad.
If your question has been answered and you would like to withdraw from the queue. Please press star followed by the number two and you start using a speaker phone. Please lift the handset peripheral briskin any fees.
Please while we compile the roster. Your first question will come from Julian Radbourne with TD. Please go ahead.
Thanks, very much and good morning, Mike good.
Good morning.
You had some strong additions to the rental fleet in the first half. So I'm curious what your spending plans are for the second half and whether due to supply chain constraints, you're still having to choose carefully between adding to the rental fleet versus satisfying retail demand.
Yes, Thanks Cherilyn.
Good question, so what Youll note in our.
In our disclosure is we did a we did add significantly to our our heavy and light fleet.
And probably a little ahead of pace for the balance of year and so what.
What we are seeing in terms of availability at certain units are more available. If you think of the light fleet. We've talked about a few a few units such as excavators and so forth, but there's still some constraints in other areas and so.
There is still some optimization going on for certain units.
But we are seeing we are seeing better availability and.
When you look at our Capex spend in their disclosures you'll note that we.
Our pacing.
Above on a net on a net addition basis, we are pacing above by about 60 million versus last year.
Alright, so we're we're moving through.
Flow better.
What I think was we're pleased with as you see some strong service numbers in there that's reflective of we've been we've been executing the hiring of the techs. So we're getting better throughput. There again. So you you you're dealing with some interesting cops, but we were.
Really satisfied with the parts and service growth in the quarter in the first half and <unk>.
Pleased with those labor sales.
[laughter], it's generally because there's better flow through work in progress that is part of it yeah and there was some.
Or rebuild programs in the first half were up again.
So so that that strategy continues but you know, we're we're monitoring things closely but.
We were we were pleased with what we saw an aftermarket activity in our penetration there too capitalising on the opportunities.
Alright, that's my two small <unk>. Thank you.
Sure.
Your next question will come from Michael do May with Scotiabank. Please go ahead.
Hey, good morning, guys.
Learning.
First question on on products for you know, we've seen for five quarters strong double digit growth and I'm, assuming price realization <unk>. So maybe two part question is the year on year price realisation expected to moderate in the second half of 23.
And on the volumes.
Is there an element of normalization that we should consider going forward or is the volume grocery stay animal there.
Yeah. So maybe just to start that when Michael I think we did see that as as we spoke about over the last probably the last four or five quarters. We did see some inflationary effects right across the board as everybody did and so you know again, we monitor that pretty carefully and and I do think there is although we don't break it out.
There is an effect there in terms of Ah nominal growth.
Should be reflective of some of the inflationary effects right I think we do see as we mentioned in the call. We do see some higher activity and flow through is Scott just touched on as well, which is driving real growth in that area and I'm happy to see those activity levels increase and so you know we're just monitoring the environment right now in terms of.
Inflationary effects they have seem to have broadly tapered across you know the economy. If you will but you have to be determined how we see that.
Materialize over the second half the I'm going into next year.
Perfect. Thanks, that's helpful. And then maybe just to to the backlog you know a nice to see an increase there.
After what it looked like you were seeing some some normalization so on the mining and power system orders would you characterize.
You know those of several large wins or is there you know potentially part of a trend there because you know we didn't necessarily see that dynamic in construction and material in line.
Yeah, I think a couple of things I mean, we did book as we mentioned we did book some orders and you'll see like I think it's it's important also just to reflect on the backlog itself or the book into the book into a stronger in the quarters. We've mentioned money was up quite a bit and and power systems as well isn't there was up lately as well and so where can.
Struction was pretty pretty flat in the quarter in terms of actual bookings on the backlog side, you'll see about a third of the backlog in the equipment group relates to mining and so there's some a couple of nice orders book, there and I think.
You know again the team does a nice job of contained to work hard to earn their way into some opportunities and and continue to deliver on you know some of the other activity that we were awarded for the last year and a half or so.
Perfect for your next quarter guys. Those are my two great.
Great Thanks to Michael.
Your next question will come from Steve Hanson with Raymond James. Please go ahead.
Yeah, it's good for anyone picks with them.
Uhm just a broader question about your inventory your working capital levels at this point, how do you feel about them, you've obviously got a deep backlog to deliver against your but with a supply chain blue screen pretty quickly. We are hearing some indications that firms are reassessing the safety stock levels. It might've had been place through the pandemic just curious how you feel about that <unk>.
Yeah. Thanks to you. That's a good question I think if you look at her again looking at our inventory levels.
Relative depends how you measure it if you left the measured relative to the end of the year, we're up about almost $90 million in overall inventory, but about 200 comparatively to Q2 of last year.
You know we as we mentioned there are still some constraints uncertain units in terms of availability, but we are seeing better flow of of inventory and in other areas and so forth you see that as we mentioned broadly speaking their sales numbers when we talk about mixed between new and used.
We're seeing growth into new areas, new equipment sales and we're being very targeted unused and so that's an indication and so as we look at the inventory that was I wouldn't say, it's normalized I wouldn't say that we're back to where we would we would expect to be under ideal conditions, but it is improving and we continue to to.
We continue to see some some improvement in each of our OEM areas.
Throughout the year, so far, but but we still have a little ways to go and the teams working pretty hard to optimize areas, especially like I mentioned on the us side of things.
I think we've noticed Steve you've been out of sync there have been regular normal yeah relative to pipeline forecasting and things of that nature, and we're getting into more normalised states. So that working capital as an area of focus ooh.
Okay that hopefully just wouldn't follow up.
Maybe a bit premature, but there's some very large linear projects in Canada to Mexico gasoline consider up they were winding towards completion here they've consumed an incredible amount equipment over the past five years, particularly in western Canada any thoughts on what these completions might mean for the broader use market in Canada and in the rental market in particular.
Well you know, we don't like to speculate.
There's there's lots of talk going on in mining segments and infrastructure, but you know we don't you know we just comment on what we saw in the corner again in the corner.
There was solid quoting activity, we have some nice twins as you saw on the backlog, we're not getting too far ahead of ourselves here.
So for monitoring these things closely but.
You know there was some segments that we saw some softening, but the team executed welton built that those bookings that was that was we're pleased with that and so we'll see how things play out right.
Okay, great. Thanks for the call dressing.
Thanks.
Your next question comes from G come back with C. I B C. Please go ahead.
Good morning.
Digger Jeremy.
Uhm just a question here on the sustainability of margins going forward, you know I know, there's lots of moving parts <unk>.
Including next but I noticed in the MBNA, you're talking about new equipment margins being more yearned ear.
You know how do you see this trend continuing I was equipment availability improves.
Yeah, I think not surprisingly Jacob comment.
Comment it a little bit around you.
You know mix has helped us on an overall margins basis, when you think of equipment versus product support and the and the growth that we've seen in the product support side of new but as as we mentioned earlier, it's one of the things, we're certainly watching with availability.
You know we've been in a quite a different market both in new and used frankly for quite a considerable period of time, which is which is you know supported decent margins performance and so forth and we and we anticipate that we would see a little bit more normalization overtime as availability and it would be again it would go back to specific.
But we are seeing improvements there and and we're being conservative I think in terms of how we're thinking about it.
I think I think the the quarter also reflected the type of equipment that was being sold. So you you you get shifts in there on market and there were some softening in their minutes reflect some of the type of iron that was being sold but.
Getting the good thing was [noise] teams.
Teams secured some some solid business there.
We had some favorable outcomes there due to the product support is total percentage which was.
She was a nice to see and again, we're very focused on the park support strategy aftermarket and.
So that's a bit more color on what happened there in the corner.
Mmm My second question here in the last quarter, you talked about you know some customers even turning cautious it seems like you have a more positive tone coming up I would.
I'll I'll jump in there, where where monitoring we did see some softness in certain areas, but the team executed well. So I wouldn't say we've changed our tone in this type of economic climate. This is all about execution in delivering value proposition your customers and we're doing that.
Uh-huh.
What area are you, saying that phones changed [laughter], Okay, [laughter], what what area are you seeing some softness right now.
Well there were certain pockets in certain segments, and some housing and things but.
You know I think overall activity and you you know you gotta be careful here. This is why you're you're coming off some historical numbers friend, we've been talking about that for awhile. So these comps.
They're they're tough because you know some of these areas we were operating and had some historically high numbers. So I would say when you look at an overall in the first half in the corner, what we saw it's still solid activity and we're monitoring closely mhm.
Thank you and we were pleased with the book the book things in the quarter Mhm.
Your next question comes from David speaking with no capital markets. Please go ahead.
Hi, This is davis on for Duck and Dodge. So the balance sheet is in great shape and you have a lot of physical capability, where did you see the most of opportunities to invest in the organic grocery of the business over the next couple of years yeah.
Yeah. Thank thanks Davis, so a couple of things we've mentioned I think first and foremost it's.
It's managing is Scott mentioned earlier, the capital working capital and supporting serving our customers and so forth is our primary focus it's the care and feeding of the business and supporting customer requirements.
You know and we do see some investment there we see it both in the rental fleets, we see it and you know some of the inventory levels, but also.
Just making sure that we're prepared to respond to customer requirements, where it's new or used I think the second thing would be organic investment as a priority we've talked to a little bit for example, a re manufacturing build out we're investing considerable capex there this year and into the early part of next year and so you know contained to develop the re manufacturing product support capable.
<unk> for for our customers as it is area of focus you know and will continue to add again, it's more about growing our our our product offer our service offer whether that's in the rental business.
And the product supported the natural one as well in different areas Ah and so that would be our focus I would say as we go into the second half. We think is about the economic climate.
You know the team is really focused on execution.
Supporting are working capital in our credit risk in areas working capital that we need to look at it carefully in terms of including inventory and then.
Looking longer term on investment in areas, we control like re manufacturing.
Okay. Thank you I'll turn it over.
[laughter].
Your next question comes from Supper had gone with RBC kept on my Kids. Please go ahead.
Hi, Thanks, So I just want to get some perspective on you to talk with some mixed demand signals out there.
I'm also obviously trying to build inventories environment, where supply chains are still a bit uncertain.
Could you maybe talk about how you're managing that the need to have the right inventory will still not kind of overstock in case, there's a significant macros slowdown just some perspective on how you're managing kind of the outlook.
Yeah, maybe just to start on that side of things for the question you know I think as we've been saying there there are a number of variables right and I think near touched on some of them I think as we look at the environment today.
You know there isn't better availability, we are fulfilling we had quite a considerable backlog going into the corner of the team did a nice job of executing well on that the softer areas. We touched on you know for example in the construction side was a little bit a little bit subdued compared to the other segments like mining and power or risk.
Awesome, great growth as well as some some nice order input and so.
Simcoe as well seem to be doing well on their side of the business and executing well both on the on the package side and the product support site and so again, we're monitoring that really carefully I would say that you know.
We're watching rental activity carefully we're watching the.
The RP old models are up a little bit, but still well below what we normally would see and so you know those patterns and behaviors have started to show some improvement, but I would say, we're still far from normal in that sense.
Just you know in terms of the next man signal that we're gonna I think we're gonna be able to get back to a better monitoring demand sick I'm traveling to the pipeline, how we manage that offer the parks and the prime products and then.
The same thing that semco, but I mean that backlog still very solid on a historical basis or were satisfied with that and you know we were pleased the rental demand signals remain.
Currently solid.
And then we we you know we we were able to.
Really start to address those fleets like we've been wanting to do for for Awhile now so.
Alright, and then just a second one and I think it might be just touched on the rental part I just a two part question one.
How does it demand for rentals trending as some of the new equipment available and ability improves are you seeing a bit of a shift back to that and then secondly I.
I think the company has been making some progress on driving rental margins higher part of that was kind of a full cycle part of that was <unk> integration, just maybe where are you on that <unk> rental margin potential for the terminal business at this point.
Sure. It may be just to start out a couple a couple of key points you touched on there I think when you look at a rental business. You know, we've we've invested pretty heavily as we talked about earlier and so we're starting to see better availability, but there are still certain units as I mentioned earlier that are constrained and we're still optimizing in terms of how that.
Turns over in the full cycle as you mentioned were not disposing of as many units in certain areas on the other hand, you'll see you'll see the additions to the fleet and and the activity levels are pretty good. We we mentioned the growth in the rental side overall, you know it's up nicely in the corner, but with a larger fleet larger invest.
<unk>.
You know again, the inflationary cost on new units and so forth you know I think again, that's that's that's why that when you look at our margins side of things you know you see it's relatively flat your.
Versus a quarter of go and so although activities Upgrowth is up we are also seeing that you know some of those costs start to come in and I think the other piece for US is Canadian monitor.
You know returned already or labor Ah component and technician availability and that's still still constraint in some areas right. So that's a little bit of a factor as well when you think of the overall rental picture.
Alright, thanks very much.
Thank you <unk>.
There are no further questions at this time I will turn the conference back to Mister Mcmillan for some closing remarks.
Great. Thanks, very much at us and to everyone for your participation today that concludes our call for Q2, I Hope you have a safe and enjoyable balance of your summer look forward to speaking to a Q3 take care.
Ladies and gentlemen, does conclude your conference, California date, we thank you D C painting and ask that you. Please disconnect your lines.