Q3 2024 Toromont Industries Ltd Earnings Call
Good morning today is Tuesday November five 2024 welcomed to the tournament Industries Ltd third quarter 2024 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. John Doolittle, Executive Vice President and Chief Financial Officer.
Please go ahead Mr Doolittle.
John Doolittle: Thank you Elvis good morning, everyone.
John Doolittle: A lot for joining us today to discuss four months third quarter results and also on the call with me. This morning is Mike Mcmillan, President and Chief Executive Officer, Mike.
Mike and I'll be referring to the presentation that is available on our website and to start I would like you to refer to slide two which contains our advisory regarding forward looking information and statements. After our prepared remarks, we're more than happy to answer questions and let's begin by moving to slide three and I'll pass it over to Mike.
Mike: Great. Thanks, very much John.
Mike: Good morning, everyone. Thanks for joining us.
Mike: Before we get started we are extremely pleased to welcome Aussie left less bridge and pardon me the das to our board of directors.
Mike: Are they in per meter bring substantial business acumen and expertise in their respective fields and are important additions that expand the depth and breadth of our team the.
John Doolittle: In addition to our package on slide three we have provided a brief summary of their respective backgrounds in our quarterly news release as well.
John Doolittle: With these additions the company's board of directors will consist of 11 members of whom tenor independent please join us in welcoming are they in Parramatta.
John Doolittle: Now, let's get started and move to slide four.
John Doolittle: On September 19, 2024, the company completed the acquisition of the business and net operating assets of Tri City equipment rentals.
John Doolittle: The city is an industry leader in heavy equipment rentals with operations in southwestern Ontario, The acquisition expands towards my cats heavy rents business to better serve our customer base and aligns with our positive longer term view of the rental market.
John Doolittle: We are very pleased to welcome to the Tri City team to the tour them on family.
John Doolittle: As we move to slide five I'd like.
I'd like to note that John and I will be commenting largely on a continuing operations basis, which excludes the results of AG west.
John Doolittle: It was sold in Q2 of 2023.
John Doolittle: We exclude egg west as we believe this provides a better a better basis for comparability.
John Doolittle: Results for the third quarter of 2024 reflect good growth in revenue across most market segments as well as continued execution I guess, a strong order backlog with revenue up 14% and net income lower by 10% from Q3 2023.
John Doolittle: Margins and bottom line results have been dampened as expected with the more normalized product availability against a strong comparator reflective of tight tighter market conditions in play last year.
John Doolittle: The equipment group executed well with solid new equipment deliveries.
John Doolittle: Rental market, specifically light equipment picked up in the quarter, while used equipment sales declined primarily due to lower rental dispositions.
John Doolittle: Product support activity levels remain healthy and we continue to increase technician head count.
John Doolittle: Improving equipment availability good bookings over the first nine months of the year and a healthy or opening order backlog remain supportive.
John Doolittle: Simcoe continued to deliver solid results for the third quarter driven by good execution in both Canada and the U S coupled with healthy activity levels.
John Doolittle: Package revenue in the quarter reflects the advancement of construction schedules in the execution of the strong order backlog.
John Doolittle: <unk> support activity continued to demonstrate strong growth in Canada supported by larger technician workforce. However was slightly dampened by the U S region.
John Doolittle: Our financial position remains strong as we continue to invest in the business in Q3, and you're on a year to date basis through working capital and the Tri City acquisition noted earlier.
John Doolittle: Although residential related activities are experiencing a slower part of the business cycle.
John Doolittle: This is partly offset by strong equipment deliveries and mining related to mine development and expansion in our territory.
John Doolittle: As we look out over the next cycle, we anticipate a more balanced revenue mix with a focus on product support as recent equipment deliveries are utilized.
John Doolittle: Across the organization.
John Doolittle: We continue to focus on our long term investment strategies and remain committed to our operating disciplines, driving our aftermarket strategies and delivering customer solutions today and for the future our strong financial position and order backlog position as well.
John Doolittle: On slide six.
John Doolittle: I'd like to touch on a few key financial highlights.
Investment in noncash working capital increased 29% versus a year ago. We are comfortable with this increase it was mainly driven by higher inventory levels and accounts receivable balances reflective of the higher new equipment sales levels and normalizing supply conditions.
John Doolittle: Inventory levels are higher than they than the prior year, driven by a number of factors, including delivery timing inflation.
John Doolittle: Foreign exchange on U S source supplies.
John Doolittle: Improving availability through the supply chain.
John Doolittle: As analogy and general activity levels.
John Doolittle: Accounts receivable increased in light.
John Doolittle: The higher revenue in the quarter days sales outstanding were unchanged from this time last year.
John Doolittle: Our team continues to closely manage the aging of our receivables and monitor credit levels and metrics.
John Doolittle: We ended the third quarter with ample liquidity, including cash of $671 million.
John Doolittle: Additional 461 million available to us under our existing credit facilities, our net debt to total capitalization ratio was negative 1%.
John Doolittle: We purchased and canceled 673000 shares for approximately $83 million on a year to date basis under a N CIB program.
John Doolittle: These purchases are mainly reflective of good capital of hygiene and help to mitigate option exercise dilution.
John Doolittle: Overall, our balance sheet remains well positioned to support operational needs and we're prepared to manage challenges related to the economic variables and business conditions. We will continue to exercise of the operational financial discipline. One would expect as we evaluate investment opportunities that may develop over time.
John Doolittle: Tore month targets of return on equity of 18% over a business cycle.
John Doolittle: Return on equity was lower at 19, 4% compared to 24, 7% for Q3 of 2023 and lower than our five year average of 28% return on capital employed was 26, 3% down from 31 six for Q3 of 2023.
John Doolittle: Both of these metrics were driven by lower earnings in our higher capital investment coupled with the increase in working capital as well as our excess cash on hand.
John Doolittle: And finally as announced yesterday the board of directors approved a regular quarterly dividend of 48 cents per share payable on January six 2025 to shareholders on record on December six 2024.
John Doolittle: John I'll turn it back to you for some more detailed comments on the results. Okay. Thank you very much Mike, let's turn to slide seven for a few additional comments on our consolidated results.
John Doolittle: Mike noted results for the third quarter reflected good revenue growth with new equipment deliveries and execution against the order backlog and project schedules gross profit margins were lower compared to the prior year on sales mix with a lower percentage of product support revenue to total and against a tough comparator in the equipment group last year given market dynamics in play at that time.
John Doolittle: Operating income was down 9% compared to the strong results last year.
John Doolittle: Bookings for the third quarter increased 4% compared to a year ago with higher bookings in the equipment group being offset by lower bookings in simcoe against the strong comparable on a year to date basis bookings increased 11% quickly group.
John Doolittle: Group <unk> group is up 12% in central up 1%.
John Doolittle: Backlog remains healthy at $1 1 billion at the end of September slightly down from $1 2 billion reported this time last year with the decrease in the equipment group down, 17% and an increase of 12%.
John Doolittle: On a consolidated basis revenue increased 14% in the third quarter and 9% through the first nine months of the year with increases in both the equipment group.
John Doolittle: Expense levels increased 7% in the quarter increased 8% year to date to 12, 1% of revenue increases reflect higher activity levels, along with staffing levels and general inflation and as usual discretionary spend is being monitored carefully.
John Doolittle: Operating income decreased 9% in the quarter and 8% year to date as the higher revenue was more than offset by lower gross margins and higher expenses as a percentage of revenue operating income was 12, 4% on a year to date basis compared to 14, 7% last year.
John Doolittle: Net earnings on a continuing operations basis decreased 10% or $14 7 million in the.
John Doolittle: In the quarter compared to last year and decreased 7% or $24 8 million on a year to date basis.
John Doolittle: Basic earnings per share on a continuing operations basis was $1 60 in the quarter and $4 27 year to date.
Speaker Change: Let's look at the equipment group in more detail and turn to slide eight revenue was up 14% in the quarter and 9% year to date.
Speaker Change: <unk> sales, including both new and used equipment were up 29% in the quarter and 18% year to date, reflecting good inflow and delivery of equipment, new equipment sales increased 36% in the quarter and 22% year to date with good activity across all market segments, except for material handling.
Speaker Change: Used equipment sales decreased 6% during the quarter and decreased 2% year to date, both rental fleet dispositions and sales of used equipment from trades and purchases of decreased reflecting shipping supply.
Speaker Change: Demand dynamics in the quarter, Tony equipment revenue increased 2% in construction of 118% and mining 17% in power systems and were down 9% in material handling another strong quarter for mining.
John Doolittle: Rental revenue was 3% higher in the quarter and 1% lower year to date, except for the light equipment fleet, which saw some improvement for the quarter most market sectors and regions were down for the quarter and on a year to date basis, generally, reflecting persisting softer market conditions principally in residential construction.
John Doolittle: ERP old fleet was $81 million at the end of September versus $55 million, a year ago and rental revenue was up 24% year to date compared to last year, and we think of <unk> as a financing tool that normally results in an eventual sale.
John Doolittle: Product support revenues grew 1% in the quarter and 2% year to date parts revenue decreased 1% in the quarter and was relatively unchanged year to date on market activity and product support sales mix.
John Doolittle: Service revenue increase in both the quarter and year to date on the higher technician workforce looking at specific markets for the quarter change in revenue, whereas follows construction was down 4% mining up 7% power systems up 3% in material handling down 3%.
John Doolittle: Gross profit margins decreased 440 basis points in the quarter compared to last year and decreased 290 basis points on a year to date basis sales mix was unfavorable with a lower proportion of product support revenue to total dampening margins by 140 basis points in the quarter equipment margins decreased 190 basis points.
John Doolittle: As expected given market dynamics in play in the prior year rental margins were down 120 basis points on lower fleet utilization product support margins increased 10 basis points, reflecting nature work and sales mix.
John Doolittle: Selling and administrative expenses increased 7%.
John Doolittle: The quarter year to date and supported the higher revenue compensation costs were higher year over year on head count and regular salary increases partially offset by lower profit sharing accruals on the lower income other expenses, such as training travel and occupancy cost of increase in light of activity levels planned investment in general.
John Doolittle: Inflation, we're comfortable with the increases as we largely represent investments in our team and resources.
John Doolittle: Operating income decreased 12% for the quarter and 10% year to date as higher revenue was offset by lower gross margins and higher expenses bookings.
John Doolittle: Bookings increased 14% in the quarter to $368 million with strong bookings in construction power systems and material handling being partially offset with lower mining orders construction markets were active up 15% with a continuing evolution towards more normalized supply and demand dynamics mining markets also.
John Doolittle: Strong with good orders received through the first nine months of the year, but were down 26% from last year's Q3, which was a strong comparable.
John Doolittle: Power systems order activity was strong up 81% and material handling order intake was up 55% in the quarter.
John Doolittle: Backlog of $804 million remains at healthy levels down 17% versus last year, reflecting deliveries against customer orders from the opening backlog offset by new bookings approximately 90% of the backlog is expected to be delivered over the next 12 months, but of course, it's subject to timing differences depending on vendor supply.
John Doolittle: Activity vendor supply customer activity and delivery schedules turning to Simcoe on slide nine.
John Doolittle: Revenue was up 17% in the quarter and 14% year to date package revenue increased 41% in the quarter and 21% year to date with advancement of construction schedules and the execution of strong order backlog industrial market revenue was up 26% and recreational market exit activity was up 57.
John Doolittle: Percent.
John Doolittle: Product support revenue increased 2% in the quarter and 6% on a year to date basis with higher market activity in Canada in both periods activity in the U S was down 34% for the quarter and down 12% year to date activity levels are reflective of market conditions and increased labor capacity.
John Doolittle: Gross profit margins decreased 40 basis points in the quarter, reflecting an unfavorable sales mix, reducing margin 100 basis points on a lower proportion of product support revenue to total revenue.
John Doolittle: Package margins improved on good execution and the nature of the projects in process driving a 60 basis point increase in the quarter product support margins were unchanged in the quarter on a year to date basis gross profit margins increased 110 basis points with higher margins in both packages and product support margins.
John Doolittle: Selling and administrative expenses increased 11% in the quarter and 12% year to date compensation costs were higher reflecting staffing levels annual salary increases and higher profit sharing accruals on the higher earnings other expenditures such as travel and training expenses increased to support activity as a percentage of revenue.
John Doolittle: And administrative expenses decreased to 15, 6% in the first nine months of 2024 versus 15, 8% in the similar period last year expenditure control measures on discretionary spend remain a key focus area for the Cinco team.
John Doolittle: Operating income was up $2 7 million or 21% for the quarter, largely reflecting the higher revenue slightly dampened by the lower gross margins and higher expenses on a year to date basis operating income was $8 1 million or 30% year to date.
John Doolittle: On higher revenue higher gross margins, partially offset by higher expenses operating income as a percentage of revenue improved 130 basis points compared to last year to 10, 4%.
John Doolittle: Bookings decreased 34% to $56 8 million in the quarter against a strong comparator last year and were 1% higher for the year to date period recreational bookings were 109% higher than the first nine months of last year with excellent activity in both Canada and the U S. Industrial orders were down 42% year to date, the Canadian orders for Lora.
John Doolittle: <unk> strong comparative while the U S was higher.
John Doolittle: Backlog of $275 8 million was 12% higher than last year with higher backlog in the recreational market, partially offset by lower industrial backlog industrial backlog decreased 2% with a decrease in Canada, largely offset by a strong increase in the U S. On good order intake over the trailing 12 months recreational backlog.
John Doolittle: Was up 32%.
John Doolittle: Selecting a strong increase in Canada.
John Doolittle: Modest decrease in the U S. Approximately 75% of the backlog is expected to be realized over the next 12 months. However, again this is subject to construction schedules and potential changes stemming from supply chain dynamics.
Speaker Change: That we can move to slide 10, I'll turn it back to Mike to highlight some key takeaways as we look forward to the last quarter of the year.
Mike Mcmillan: Thanks, John as one would expect we consistently focus on our key priority areas, including safe operational execution, serving and supporting our customer requirements and our disciplined focus on building our business for the future.
Speaker Change: Our backlog levels remained solid at $1 2 billion overall and bookings for the first nine months of the year remained solid as well we continue to hire technicians to support our operations and this remains in a central focus for our aftermarket and value added products service product and service offerings.
John Doolittle: Operationally and financially.
John Doolittle: We remain well positioned with ample liquidity and our strong leadership teams disciplined culture and focused operating models. Our team remains committed to disciplined execution with our decentralized and empowered operating model adapting to changes in the business environment. While we remain focused on executing customer deliverables, we continue to <unk>.
Our key metrics, including supply and demand dynamics.
John Doolittle: As noted our long term focus on growth and returns means we remain committed to our operating financial disciplines to manage our cost structure, while we invest in capacity and capabilities to provide exceptional service to our customers today and then the future additional efforts continue to focus on managing our discretionary spend.
John Doolittle: And actively recruiting technicians to effectively support our critical aftermarket service strategies and value add product offering over the long term.
John Doolittle: With our solid order backlog and balance sheet, we're well positioned and will continue to support the business through thoughtful capital deployment.
John Doolittle: We appreciate our entire team's effort and commitment to support our customers and deliver value for our stakeholders. Thanks also to our valued customers supply partners and shareholders for their continued support.
John Doolittle: That concludes our prepared remarks at this time, we'd be pleased to take questions.
John Doolittle: Thank you.
John Doolittle: Yes.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session should you ask a question. Please press the star followed by the one on your Touchtone phone you will hear a prompt to indicate that your hand has been raised should you wish to decline from the polling process. Please press the star followed by the two if you are using a speaker phone. Please lift the handset before pressing any keys.
Speaker Change: One moment. Please for your first question.
Speaker Change: Yuri Lynk from Canaccord Genuity. Please go ahead.
John Doolittle: Okay.
Yuri Lynk: Good morning, guys. Thanks for taking my question.
Yuri Lynk: Wanted to dig in a little bit on <unk>.
Yuri Lynk: Product support, particularly the part sales flat year to date.
John Doolittle: Just wondering if thats in line with with the market or has your market share changed at all.
John Doolittle: And as a follow on to that I mean, you are putting.
John Doolittle: I mean, the last two quarters, almost 40% growth in new equipment sales.
John Doolittle: When would we expect that to start hitting our.
Speaker Change: Parts and service.
Speaker Change: Yeah. Thanks, Gary It's a great question. So I think what we are seeing and you get the you get the <unk>.
Speaker Change: It seems that we're reporting.
John Doolittle: Strong new equipment sales and I think if you roll back a couple of years you'll notice.
John Doolittle: There was a lack of availability, especially on models, where you know that we refer to as parts bias models that consume a lot of parts activity as we see the renewal of our customer fleets and we see good new equipment sales, but lower activity I think it stands to reason we should expect.
John Doolittle: Flatters, our small growth in part sales, we're seeing good service.
John Doolittle: Revenue and so forth and that's driving some of our product support activity and a little bit of growth.
John Doolittle: Albeit modest and so I think what we should be thinking about is as we see activity levels improve over time, we see the new product in the marketplace being utilized.
John Doolittle: That naturally should help us.
John Doolittle: C products important part sales in particular consumption.
John Doolittle: Returning back to a different part of the cycle itself.
John Doolittle: But theres no change in terms of.
John Doolittle: Your market share or competition on the parts side, yes.
John Doolittle: Yes, I would say availabilities, there like everything else in the marketplace here I would say that we certainly.
John Doolittle: We have an extensive network of operations and services and so forth and I think it's really more a function of what I mentioned earlier activity levels generally.
John Doolittle: And then the modernization of the fleet and so we're pretty comfortable with where we are and prepared and that's why we're continuing to invest in technicians and build for the future as we see demand pick up.
John Doolittle: Yes.
John Doolittle: Okay.
Speaker Change: Second one for me just on.
Speaker Change: Tri City.
Speaker Change: I'm wondering if you're willing to provide any.
<unk> profile in terms of revenue at least of that acquisition.
John Doolittle: And a follow on to that were there any any significant costs associated with that acquisition and the SG&A for the third quarter.
Speaker Change: Yeah, No I would say a little bit of a little bit of cost on the second part of your question you know naturally as we as we put together agreements purchase agreement step, but I wouldn't say, it's overly material at our SG&A in that regard we intend to expense those costs and that is as much of that is we can internally and have built that some of that capability.
John Doolittle: I think in terms that we did not disclose the revenue contribution there, but what I would refer you to is like no three does have.
John Doolittle: And our disclosure some good breakdown in terms of the purchase price allocation and I think you can kind of back into some numbers and estimates based on the purchase price in a reasonable range.
John Doolittle: The multiple that we didnt provide further commentary on that.
Speaker Change: Yeah, I'd just add on <unk>, just given the acquisition of general weakness.
John Doolittle: To have a very disciplined approach to tour acquisition acquisitions.
John Doolittle: We have a playbook, it's can we add value is it a great team there.
John Doolittle: Doesn't meet our hurdle rates doesn't help our customers and those sorts of things and the answer to that was yes on all fronts with Tri City.
Speaker Change: Okay, and a better turn it over there guys. Thanks very much. Thanks, Rick Thank you though.
Speaker Change: Your next question comes from <unk> Khan from RBC capital markets. Please go ahead.
Khan: Great. Thanks, and good morning, just maybe starting off with a bit of a higher level question I think some puts and takes in the backlog with new orders, we've got rate cuts.
John Doolittle: And initial want to start.
John Doolittle: How are your customers feeling or what kind of feedback are you getting in terms of how they feel about the macro the cats commentary. The other day. It was a bit tempered just trying to get understanding of.
John Doolittle: We're in the cycle you feel your customers might be and that obviously reflects into our backlog et cetera, but just curious how you feel about the overall operating environment right now.
Speaker Change: Yeah. Thanks, So maybe I'll start with that and John can add a little bit of commentary as well.
John Doolittle: I would say we've been talking for the last several quarters about a tone of caution I would say with our customer, especially when you think of the residential segment of our business and you know customers involved in supporting that side. So there hasnt been a lower activity level in the residential side and so I think you know interest.
John Doolittle: Interest rates as we all know it started to taper and come back off and you know you would expect that to drive a little bit more activity, but I think it's still a bit early in that regard and so.
John Doolittle: As you look at our bookings now the interesting thing is again we're.
John Doolittle: We're still in an interesting situation, but if you look at our disclosure in terms of our backlog and bookings you know still at a pretty reasonably high level our bookings in particular, if you look at construction.
John Doolittle: In the quarter and on a year to date basis.
John Doolittle: You know, where we are up in construction.
John Doolittle: We have a pretty solid balances in the backlog for both the power group in the mining side and of course mining is more lumpy and it's it's dictated on investment and development in the mining sector and so forth. So we continue to execute on that but.
John Doolittle: Generally speaking I'd say there is still a tone of caution just given the activity levels How's.
John Doolittle: However, I think that the interest rate environment.
John Doolittle: What we're seeing in the I'd say the backdrop, where we know that you know in our.
John Doolittle: Markets in particular, there is a shortage of affordable housing and that supply on that side needs to improve over time.
John Doolittle: Say that it's a little early to say that theres any trending there yet, but but you know I would say there's.
John Doolittle: Some I would say cautious optimism in that area, but I think it's going to be next year before we see too much activity.
Speaker Change: Okay, Great and then just on a related note I think in your comments as well as in Cat. There were some comments about just maybe pricing to some extent.
Speaker Change: And I think you alluded to that in your margin commentary.
Speaker Change: How are you feeling about just the pricing environment do you think it sort of settle down is it generally going to follow the demand environment, just some thoughts on the pricing side. Please.
Speaker Change: Yes, maybe just to start on that I think you know again, we've really come through an interesting transition period, if you will.
John Doolittle: And so when you look at where we were like several quarters back a year and a half.
John Doolittle: Restricted supply.
John Doolittle: And so forth and we were working our way through that and managing our customer requirements with both used and new equipment and so forth.
John Doolittle: So that you know that environment has shifted were more normalized in terms of supply of equipment. At this point in time you see it in our results when we do give you some pretty good breakdowns in terms of.
John Doolittle: Our gross profit margins and how you know on the equipment side.
John Doolittle: In the quarter product support rental mix and so forth and the contribution there and so you know I would say, we're returning back more to a more normalized supply.
John Doolittle: Conditions.
John Doolittle: Albeit availability broadly is much much stronger than it has been for quite a few quarters.
Speaker Change: Okay, and if I could just.
John Doolittle: Go ahead no go ahead Tom.
Speaker Change: Well just for you John I guess, given where I guess, we are in the cycle given the balance sheet. John If you can maybe just.
John Doolittle: What are your priorities in terms of capital allocation worries inventory seems to be getting better because if you can rank order maybe some of the uses of capital. Please.
John Doolittle: Yes.
John Doolittle: But really really hasnt changed in terms of our our priority.
John Doolittle:
Speaker Change: We really have four four priorities first is organic growth and we continue to see a number of organic growth opportunity to speed and rental beat in Simcoe.
John Doolittle: In the U S as examples.
John Doolittle: As you know we've increased our dividend for 35 years in a row and and that's really important to us and our investors.
John Doolittle: We have been buying back shares as Mike pointed out in his commentary $83 million with year to date.
John Doolittle: And that's largely capital hygiene, but that's an important part of our capital allocation playbook, and then lastly, M&A and you saw us execute on Tri City this quarter.
John Doolittle: We have a number of things that we're looking at a number of things in the pipeline will continue to be very disciplined as I mentioned before but those are those are really the four priorities on capital allocation.
Speaker Change: Thanks very much.
Speaker Change: Thanks Robert.
Speaker Change: Your next.
Speaker Change: Western comes from Cherilyn Radbourne from TD Cowen. Please go ahead.
Speaker Change: Yeah.
Cherilyn Radbourne: Thank you very much and good morning, good morning, Sean.
Cherilyn Radbourne: Wanted to pick up on that margin Congress.
Cherilyn Radbourne: If I look at 13, 2% for the equipment group in Q3.
Cherilyn Radbourne: Very strong Q3 result by historical standards, if we exclude the very tight.
Cherilyn Radbourne: So just curious how you would characterize margin by line of business. If you excluded that very unique post COVID-19 period.
Cherilyn Radbourne: Oh.
Speaker Change: Yes, I'd like to say I think we're still in this transition that I mentioned to earlier cherilyn like it's interesting in the sense that when you look at the environment and lower activity levels like I mentioned residential.
Cherilyn Radbourne: That related to residential activity, you know and one of the things that we broke down for you. There was say rental when you think of equipment margin as you noted.
Cherilyn Radbourne: You know reasonable levels, but more normalized trending that way and in particular rental margins were lower in part of that is just purely you know we have a higher valued fleet you know higher acquisition costs over the last several years and I think the utilization levels are a little bit lower and so.
Cherilyn Radbourne: I think those are those are significant contributors and as we had comments earlier when you think of the mix with product support you know again the renewal of the fleets. We're seeing customers you know our new equipment sales or.
Cherilyn Radbourne: A reasonably strong in the bookings continued to be strong given all of that.
Cherilyn Radbourne: There are a number of factors, we always try to think about the mix within the equipment side, but also the mix between product support and the equipment sales side and I think that's what we're seeing right now again.
Cherilyn Radbourne: Availability is pretty strong and.
Cherilyn Radbourne: We're looking to make sure that we maintain our market share and compete effectively in all segments.
Speaker Change: Yeah, I would just yeah I was just going to add.
Speaker Change: And Mike talked about this before but just to emphasize it over the course of the next cycle. Our plan continues to be to invest in technicians to support our customers and grow product support as an overall percentage of the revenue pie and the strong new equipment sales as you mentioned, Mike bode well for the future rental would be the same case too.
Speaker Change: We continue to invest, albeit where we optimize our capital and our teams are very good at managing the allocation of capital we provide but it's a long term view.
Speaker Change: That's the key message.
Speaker Change: Okay. So the mix is an important part of that.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: I wanted to ask something about power system.
Speaker Change: We think that business has been lapping a difficult prior year comp all year, but I was hoping you could give us some color on what you're seeing relative to data center activity and more distributed power and the like.
Speaker Change: And also comment to what extent tight availability at large engine.
Speaker Change: Not.
Speaker Change: Not at all.
Speaker Change: Yeah, you raised a couple of good points there.
Speaker Change: Just to start off last year, we had one large project in particular, which.
Speaker Change: For the first couple of quarters provides a tough comp as we completed that and so but having said that if you look at our booking areas you look at where we are with power again, a smaller business relative to mining.
Speaker Change: Mining and construction, but when you look at the activity level, there the bookings and the backlog.
Speaker Change: I would say broadly.
Speaker Change: You know good demand in the engine side, you mentioned restricted power plus I think certain certain engine engines are used in oil and gas.
Speaker Change: In the data centers as you mentioned.
Speaker Change: I think I think for prime power and other things as well and standby. So you know those engines continued to be unreasonably tight supply given the data center demand and I would say predominantly.
Speaker Change: The Caterpillar network in itself like in the U S markets at this point there is some building interest in data centers and Ken I'd say, it's still fairly early early days. However, we are prepared to respond and we have a lot of depth and experience when you think of.
Speaker Change: Whether it's time power standby power of peak shaving all of the above our team is prepared to respond to those areas and.
Speaker Change: And working with them opportunities.
Speaker Change: Opportunities and looking to earn our way into that as it develops in Canada.
Speaker Change: And then maybe just on the mining side. It looked like it was probably a relatively large food delivery at a backlog in the quarter.
Speaker Change: Maybe you can just comment on that and then I'd be interested to know what youre seeing in terms of the mix.
Speaker Change: Bursty base metals each of them.
Speaker Change: Your quoting activity bookings.
Speaker Change: Bookings and so forth.
Speaker Change: Yes.
Speaker Change: Good observation I mean, we often we often talk about mining in the sense that it's a bit lumpy in the last couple of years, we have seen a period with strong commodities pricing as we all know.
Speaker Change: Lots of decent investment going in new development, and so forth that has given our team the opportunity to earn our way into a number of opportunities and they've done a terrific job.
Speaker Change: Doing that and so we tend to see you know again in the backlog if you look at our backlog.
Speaker Change: About I think about 35% of the quarter end backlog is mining.
Speaker Change: And that those deliveries will continue.
Speaker Change: We do see a bit of a cycle ahead in terms of a shift from deliveries and our delivery and equipment to utilization of the equipment and then.
Speaker Change: Product support usually follows.
Speaker Change: I wouldn't at this stage I wouldn't speculate too much we continued to be a little bit surprised in terms of what's happening in gold prices are at pretty high levels and continuing to persist iron ore as you mentioned the base metal side as well is is a little depressed at the moment I mean, it's it's moved around quite a bit over time and so our ballots.
Speaker Change: Still pretty pretty even between call it precious metals and base metals broadly speaking.
Speaker Change: Thank you for the color I'll turn it over to someone else.
Speaker Change: Thank you.
Speaker Change: Your next question comes from Steve Hansen from Raymond James. Please go ahead.
Steve Hansen: Hey, guys. Good morning, Thanks for the time I wanted to go back on the margin issue again.
Steve Hansen: So I am not sure Lynne look I understand the product mix headwind is something that typically.
Steve Hansen: Typically shifts a little bit as the new equipment deliveries.
Steve Hansen: Scaled back a little bit, but just focusing specifically on the gross margin headwind you called out in the equipment market in our rental how should we think about those two dynamics playing out here.
Steve Hansen: For the next you know couple of quarters as it is the competitive environment and the pricing environment as maybe you described.
Steve Hansen: Leave us with some sustained headwinds on the gross margin side on that front, how should we think about that.
Speaker Change: Maybe just maybe just to start on that thanks, Steve for the question.
Speaker Change: Again, I would go back to some of the comments we had there in terms of when you think of even on the new equipment mix and we just talked a little bit about mining for example, generally youre seeing higher value and a little narrower margin product and so within the newest segment, we tend to see a better mix.
Speaker Change: In that area as well, we talked about availability and a more normalizing supply across most models again, that's you know.
Speaker Change: That's going to mean that we're gonna be working really hard to earn our way into deals and do what we need to do to manage margins and so you're going to see a little bit of a shift over time based on the execution of the backlog that we have mentioned earlier.
Speaker Change: I think the other piece again.
Speaker Change: On rental when you think of rental.
Speaker Change: We're seeing a slightly lower utilization and that's purely a function of utilization in the markets that we serve in a lot of it is related to that recreational segment, we've talked about and so you know I think all things considered we don't provide guidance as you know but.
Speaker Change: We're prepared to manage through the cycle and looking at the long term as we as things normalize activity levels improve and we see some projects kicked off I think we want to be well positioned to be a.
Speaker Change: Opportunistic to support our customers as things improve and the in the next year or two.
Speaker Change: Okay. That's helpful. Thank you and then just on the rental markets. It sounds like the pretty uneven out there to like market dramatically outperforming the other verticals I mean do you want to maybe comment on what Youre seeing out there and why that's the case and how do you think that sort of playbook going forward.
Speaker Change: Yes, I think like you mentioned, we saw some modest growth in the in the light market I think again we.
Speaker Change: You know we've been renewing our fleet over the last 18 months say with availability.
Speaker Change: But really it's a function of activity levels I think a couple of factors activity generally.
Speaker Change: You know and we continue to work our way through that in our markets I think the other piece there is on the renewal of our customer fleets and so forth combined with activity, we're not seeing as much demand for for rental its not bad.
Speaker Change: It was stronger later in the quarter, but but again I think what we're finding is where we would maybe participate in some peak shaving some of the things customers have been replacing their fleets and timing their purchases and that matching that with activity levels and so that's really what we're seeing in the in the heavy side of the marketplace.
Speaker Change: Okay, and just one last one as we can it's just on the opportunity for capital deployment into Simcoe that business does seem to be really performing exceptionally well in the last couple of quarters relative to prior years is there any reason you don't look to accelerate capital deployment and I know, we've talked about some consolidation opportunities perhaps down there in the U S. But how do you think about that pipeline.
Speaker Change: If you're examining at all thanks.
Speaker Change: Yeah, I mean, Steve.
Speaker Change: As we've talked about before we're really pleased with the progress the team at Suncor has been making over the last number of quarters.
Speaker Change: That's a really good team to have a disciplined approach to managing their projects and that is an area that we're looking to grow both organically.
Speaker Change: As you know we have good market share brand presence in Canada, and the U S is really an opportunity for growth. So we're looking at both growing organically.
Speaker Change: Region by region in the U S and also Oh, we'll look if something comes up on an M&A opportunity in either Canada or the US we'll take a look at it for sure.
Speaker Change: Thanks for the time.
Speaker Change: Thank you Steve.
Speaker Change: Your next question comes from Devin Dodge from BMO capital markets. Please go ahead.
Devin Dodge: Alright, Thanks, good morning, guys.
Devin Dodge: Morning.
Devin Dodge: So it's been a pretty significant buildup in working capital year to date.
Devin Dodge: Do you feel this is a return to more normal levels for the business or would you expect some recoveries in the coming quarters, just beyond normal seasonality.
Speaker Change: Yeah, I mean, if you break it into the two key components I mean receivables are up and that really is a reflection of the growth in the business and days sales outstanding are relatively stable and have been for a while so we obviously watch that pretty closely and then.
Devin Dodge: Inventory, it's a reflection of a return to normal in terms of supply and if you wind back the clock and look at.
Devin Dodge: Our inventory levels. This quarter, obviously, we have invested and that's reflected in and the growth in working capital, but the percentage of inventory over the trailing 12 12 months of revenue is roughly the same as it was pre COVID-19. So.
Devin Dodge: This business generates.
Devin Dodge: Generates earnings of caution and we would expect that to continue going forward.
Speaker Change: Okay. Okay makes sense and then just switching over to Simcoe.
Speaker Change: Can you help us to better understand the sharp decline in product support revenues in the U S.
Speaker Change: I'm sorry could you clarify your question there Kevin.
Speaker Change: Didn't quite I think product support.
Speaker Change: Product support revenues and Simco in the U S. I believe they were down.
Speaker Change: Year over year, just trying to better understand that.
Speaker Change: Yes, I think it is a little bit lumpy, depending on the nature of the work there and keep in mind, it's a smaller part of our business and so it doesn't take too much to move the needle there I think.
Speaker Change: What we've tended to see is.
Speaker Change: Some pretty good project opportunities there, especially in the commercial industrial side of things and so nothing really fundamentally different there to be honest with you. It's really just dependent on customer requirements and some of the new projects. We've put in place there is a lag between that and the product support given the you know the.
Speaker Change: The nature of the equipment and so forth Yeah, I would just say I agree Mike I mean, it's a pretty small and growing business right now and it doesn't take much to move the needle. So it's not reflective of finishing other than that.
Speaker Change: Yeah.
Speaker Change: Okay makes sense I'll turn it over thank you.
Speaker Change: Great. Thanks, Tim.
Speaker Change: Your next question comes from Maxim <unk> from National Bank Financial. Please go ahead.
Speaker Change: Hi, Good morning, gentlemen, good morning remarks.
Maxim: Most questions have been already asked but Mike I'm wondering.
Maxim: As of right now there are some discussions around some.
Speaker Change: Lower immigration intake and potentially seeing.
Maxim: Slot population growth or maybe a year or potentially to weather.
Maxim: How you would see that business evolving and that type of environment.
Maxim: Maybe any color from a sensitivity perspective.
Speaker Change: Yeah, My shop with us.
Speaker Change: Sure Yeah. Thanks, Max I think I think a good question I know I would suggest like again I think what we've seen is.
Speaker Change: Quite a lag in terms of affordable housing I mentioned earlier and you know when you think of you often hear quite a bit from our customers in terms of.
Speaker Change: It's been a lot quieter on the residential side I think with higher interest rate environments, we have yet to see an uptick and I think you know a lot of folks are being patient. So I would suggest that as we look at the residential market going forward, there's still there's quite a significant amount of a lack of availability for affordable housing.
Speaker Change: And I think the rates are weighing in quite heavily we haven't really seen that move and so we're trying to keep close with our customers in terms of their development plans and so forth.
Speaker Change: And keep in mind, when you think about our customers starting a project I mean, a lot of times. They may see some pre sales and things, but it could be.
Speaker Change: Now it could be shovels in the ground next year and it could be an 18 month development cycle and so I think no maybe we will see a little bit better activity as we get into the spring period here, where you know I think when you look at the infrastructure, the where our customers tend to spend their time.
Speaker Change: Sewer and water and infrastructure development to support residential requirements. Some of the highway projects that we've got plan for growth in our key markets. Those I think are positive tailwind for us over the longer term.
Speaker Change: Immigration I think it's going to take some time personally to work its way out because we had very significant immigration.
Speaker Change: In our key markets here in the last several years so.
Speaker Change: Okay No that's good.
Speaker Change: That's it for me. Thank you so much.
Speaker Change: Thank you.
Speaker Change: Your next question comes from Jonathan Goldman from Scotiabank. Please go ahead.
Jonathan Goldman: Hi, good morning, and thanks for taking my questions.
Speaker Change: John.
Jonathan Goldman: Good morning, I'm looking at the sequential decrease in the equipment group backlog, how much of that can we attribute to market dynamics or is it just being generally lumpy.
Speaker Change: Yeah, a couple of things I guess, we would probably direct you Jonathan to some of that disclosure I mean at 800 call. It $804 million I think in the equipment group for example, I mean, if you look at simple again, that's a different business. It is lumpy as we've mentioned, but very solid.
Jonathan Goldman: Backlog numbers in that business, but on the equipment side itself. When you break it down between construction mining power and material handling say, which is quite a small component.
Jonathan Goldman: But we're starting to see we should see.
Jonathan Goldman: Settlement of that backlog and delivery of units going into it with more free supply, which gives our customers.
Jonathan Goldman: More flexibility in terms of when they place the orders and so forth now the interesting thing is if you look at our bookings in the quarter and on a year to date basis in particular construction I think was up 15% in the quarter.
Jonathan Goldman: Still seeing an appetite.
Jonathan Goldman: Two to book equipment, and so forth.
Jonathan Goldman: So we're continuing to see some positive.
Jonathan Goldman: Support they're going into the second part of the last part of the year and into the spring. So keep that in mind I think it's it's not quite normalized if you go back historically you look at our disclosure mining will be lumpy lining is definitely lumpy power at times can have a little bit of that same theme based on projects that we mentioned earlier, if you have a large installation theirs.
Jonathan Goldman: <unk> power or something or peak shaving. So we try to provide you with a little guidance on those areas at times.
Speaker Change: No I appreciate that that's some good color and then I guess second question I was hoping you could give a progress update on the remaining sites staffing levels and sort of a pace do you expect to ramp utilization going forward.
Jonathan Goldman: Okay.
Speaker Change: Yeah I think.
Speaker Change: We're making very good progress at the site.
Speaker Change: There are a couple of weeks ago, Jonathan and it is state of the art a state of the art facility environmentally friendly.
Speaker Change: Think we're aiming to have approximately 150 <unk> hundred 50 technicians when we're at our peak and we're about two thirds of the way. There now we've had very good success, attracting talent in that area and we would expect that to continue but that's our that's where we stand in terms of hiring yeah.
Speaker Change: I think also just on that too just as a sense you know we're planning on having a more of a.
Speaker Change: Call it an official opening or broader opening.
Speaker Change: In the spring and we'll provide more information on that but I think some equipment still being put in place. We've you know we've got a robotic <unk>.
Speaker Change: The velocity that's in place today, we have a from the engine side of things with Dinos are going in as we speak and so those things are still in a little bit of transition, albeit we have.
Speaker Change: A very significant workforce up there deployed so far and continue to hire as we go into the spring.
Speaker Change: Okay perfect. Thanks for taking my questions. Thank you.
Speaker Change: There are no further questions at this time, so I'd now like to turn the call over to John Doolittle for final closing comments.
John Doolittle: Okay. Thank you almost for hosting us today and thanks, everyone for their participation great questions have a terrific day.
Speaker Change: Take care.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines. Thank you.
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