Q4 2024 Toromont Industries Ltd Earnings Call
Man, I'm honored to be among the presenters. It is quite a lot.
Speaker Change: I'd like to note before I get started that John and I will be commenting largely on continued on a continuing operations basis. This excludes the results of egg West which was a business we sold in Q2 of 2023.
Speaker Change: We do exclude egg west as we believe this provides a better basis for comparability and of course comparisons between Q4 of 23 and 'twenty four exclude take west altogether.
Speaker Change: Results in 'twenty 'twenty, four and in particular Q4 reflect good execution across most markets against a solid order backlog for.
Speaker Change: For the year bottom line results were below the strong comparator last year in part due to reduced activity in the residential sector overall the team performed well in Q4.
Speaker Change: Moving on last year's bottom line.
Speaker Change: The equipment group reported solid new equipment deliveries in both the construction and mining segments rental markets remain constrained however utilization levels improved towards the end of 'twenty 'twenty four.
Speaker Change: Simcoe revenue and bottom line improvements demonstrated the team's strong execution, while they continue to build their backlog throughout the year.
Speaker Change: Our solid financial position was maintained while we continued to exercise disciplined capital allocation investing in the business to support organic growth initiatives. In addition to our heavy rents Tri City business acquisition this year.
Speaker Change: Our team is committed to strengthening our partnerships with our supply partners and customers well executing and allocating our resources with discipline in order to deliver high quality products and services. This results in sustainable growth over the long term.
Speaker Change: We are proud of our team and their commitment to disciplined execution of our decentralized operating model adapting to changes in the business environment, while remaining focused on executing customer deliverables.
Speaker Change: Additional efforts continue to consistently and effectively manage our discretionary spend well actively recruiting technicians to execute our critical aftermarket service strategies.
Speaker Change: You added product offering over the long term.
Our disciplined attention to our financial position and solid order backlog position us well as we enter 2025.
On slide four I'd like to touch on a few key financial highlights.
Speaker Change: Investment in noncash working capital increased 32% versus a year ago. We are comfortable with this increase it was mainly driven by higher inventory levels reflective of the higher new equipment sales levels improved product availability and normalizing supply conditions.
Speaker Change: Inventory levels are higher than the prior year, driven by a number of factors, including delivery timing inflation foreign exchange rates on U S source supplies.
Speaker Change: Proving availability through the supply chain seasonality and general activity levels accounts.
Speaker Change: Accounts receivable was unchanged year over year with higher revenue and lower days sales outstanding.
Speaker Change: Our team continues to closely manage the aging of our receivables.
Speaker Change: Monitoring monitor credit levels and metrics.
Speaker Change: We ended the year with ample liquidity, including cash of $891 million, an additional $459 million available to us under our existing credit facilities, our net debt to total capitalization ratio was negative 9%.
Speaker Change: We purchased and canceled 1 million 321500 shares for approximately 164 million to date for the year under our N C. I V program.
Speaker Change: Our purchases are intended to practice good capital hygiene and to mitigate option exercise dilution, we increased our level of purchases moderately through Q4 in light of our cash position and market fundamentals.
Speaker Change: 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.
Speaker Change: We will continue to exercise the operational and financial discipline and one would expect as we evaluate investment opportunities that may develop over time.
Speaker Change: Thomas targets are return on equity of 18% over a business cycle return on equity was lower at 19, 2% compared to 23, 1% for 2023, reflecting higher equity levels alongside lower annual earnings comparatively for fiscal period 2024.
Speaker Change: Return on capital employed was 25, 7% lower than 34% last year, largely reflecting the same factors.
And finally as announced yesterday the board of directors increased the quarterly dividend by four cents per share or eight 3% to 52 cents per share or $2.08 per share annually.
Speaker Change: Thomas has paid dividends every year since 1968, and this is our 36th consecutive year of dividend increases we continue to be proud of this track record and our disciplined approach to capital allocation.
Speaker Change: John I'll turn it back to you for some more detailed comments on our results. Okay. Great. Thanks, a lot Mike, let's turn to slide five for a few additional comments on the consolidated numbers. We were pleased with our team's performance in 2024, given the changing market dynamics, we're mindful of the uncertain economic and political environment and continue to monitor and focus on what we can.
Speaker Change: Control the recent announcements from tariffs between the U S. Canada has created additional economic turbulence for every company engaged engaged in cross border trade. Our team is engaged monitoring and developing an appropriate action plan to navigate the potential impact over the short and longer term when details become available.
Speaker Change: Maintaining our focus on operating and financial discipline to manage our cost structure, while we invest in capacity and capabilities to provide exceptional service to our customers today and in the future.
Speaker Change: Strong order backlog and improved operating disciplines, along with our strong financial position.
Speaker Change: <unk> as well for the future.
Speaker Change: Fourth quarter results reflected good growth in revenue across most areas solid equipment deliveries and execution against the order backlog and project schedules operating income was up 3% compared to last year, mainly reflecting the higher revenue levels and increased gross margins slightly dampened by higher expense levels and lower property games.
Speaker Change: Bookings for the fourth quarter increased 3% compared to a year ago with higher bookings simcoe being offset by lower bookings in the equipment group against a strong comparator on a year to date basis bookings increased 9% in the equipment group.
Speaker Change: <unk> increased 9% with your equipment group up six and <unk>.
Speaker Change: 30%.
Backlog remains healthy at $1 1 billion as of December 31 down slightly from $1 2 billion last year with a decrease in the equipment group and an increase in some growth on a consolidated basis revenue increased 7% in the fourth quarter and 9% year to date with increases in both the equipment group and syndrome.
Speaker Change: Expense levels increased 16% in the quarter and increased 10% year to date.
Speaker Change: Creases reflect higher activity levels, along with staffing levels and general inflation.
Speaker Change: Our allowance for doubtful accounts reflects certain exposures well good focus on collections continue in 2023, a property disposition decreased expenses by $5 million.
Speaker Change: Operating income increased 3% in the quarter decreased 5% year to date for the quarter higher revenue gross margins were partially offset by the higher expense levels as a percentage of revenue operating income was 13, 3% on a year to date basis compared to 15, 2% last year.
Speaker Change: Net earnings on a continuing basis increased 1% or $2 2 million in the quarter compared to last year and decreased 4% or $22 6 million on a year to date basis.
Speaker Change: Basic earnings per share on a continuing basis was a darn 91 in the quarter and $6 an 18 year to date.
Speaker Change: Let's look at the equipment group in more detail, let's turn to slide six.
Speaker Change: Revenue was up 5% in the quarter and 8% year to date equipment sales, including both new and used equipment were up 6% in the quarter and 15% year to date, reflecting good inflow in delivery of equipment against order backlog.
Speaker Change: New equipment sales increased 7% in the quarter on good deliveries in the construction mining and material handling slightly dampened by lower power systems deliveries year to date, new equipment sales increased 18% with good activity across all market segments, except for material handling marginally down from 2023.
Speaker Change: Used equipment sales decreased 3% during the quarter, a lower fleet dispositions and decreased 2% year to date predominantly in the construction market, both rental fleet dispositions and sales of used equipment from trades and purchases have decreased reflecting shifting supply and demand dynamics.
Speaker Change: In the quarter total equipment revenue increased 6% in construction, 4% and mining, 44% in material handling and down 1% in power.
Speaker Change: Revenue was 6% higher in the quarter largely due to a higher RPM fleet revenues, reflecting a larger fleet heavy equipment rentals increased 11% in the quarter largely due to the Tri City acquisition, while material handling increased on a smaller base offset by lower light equipment rentals on a year to date basis rental revenue was up 1%.
Speaker Change: <unk>.
Speaker Change: Product support revenue grew 4% in the quarter and 3% year to date parts revenue increased 2% in the quarter and 1% year to date on market activity service revenue increased in both the quarter, 8% and year to date, 9% on higher on the higher technician base looking at specific markets for the quarter change in revenue was as follows.
Speaker Change: Construction was up 5% mining, a 2% power systems up eight and material handling down 1%.
Speaker Change: Profit margins increased 60 basis points in the quarter compared to the fourth quarter of last year and decreased 200 basis points. So any year to date basis for the quarter higher equipment and product support margins were dampened by unfavorable sales mix of higher proportion of equipment sales to total revenue on a year to date basis sales mix at a higher proportion of equipment revenue to tow.
Speaker Change: Total dampening margins 70 basis points.
Speaker Change: Equipment margins decreased 30 basis points as expected given market dynamics in play in the prior year rental margins were down 100 basis points on lower fleet.
Speaker Change: <unk> and higher recent acquisition costs product support margins were unchanged year over year.
Speaker Change: Selling and administrative expenses increased 20% in the quarter, 10% year to date in support of higher revenue compensation costs were higher year over year on head count and regular salary increases and other expenses such a training travel and occupancy cost of increase in light of activity levels planned investments and general inflation.
Speaker Change: Allowance for doubtful accounts increased $4 7 million in the quarter and $6 5 million year to date on certain exposures offset by good collections and other areas in 2023 property disposition reduced expenses by $5 million, we're comfortable with the increase is largely represent investments in our team and resources.
Speaker Change: Selling and administrative expenses were consistent at 11, 5% as a percentage of revenue compared to 11, 3% last year.
Speaker Change: Operating income was relatively unchanged for the quarter and down 7% year to date as the higher revenue was offset by the lower gross margins and higher expenses.
Speaker Change: Bookings decreased 9% in the quarter to $487 million and year to date increased 6% to $1 9 billion for the quarter improved bookings in construction up 6% power systems up 18% material handling of 67% were offset by lower mining orders down 65% against a tough comparator of large customer.
Speaker Change: Orders in the fourth quarter of 2023.
Speaker Change: For the full year bookings were as follows construction markets were active up 17% with a continuing improvement to more towards more normalized supply and demand dynamics material handling order intake was up 18% mining markets were lower down 8% from last year against a strong comparison.
Speaker Change: <unk> comparable as well as power systems order activity was down 15%.
Speaker Change: Backlog of $708 million remains at healthy levels down 26% 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. This is subject to timing differences, depending on what depending upon vendor supply cuts.
Speaker Change: Productivity and delivery schedules.
Speaker Change: So, let's turn to Cinco on slide seven.
Speaker Change: Revenue was up 23% in the quarter and 16% year to date package revenue increased 47% in the quarter and 28% year to date in both the recreational and industrial markets with advancement of the construction schedules in the execution strong order backlog and improvements in equipment delivery schedules. The U S industrial market was down.
Speaker Change: 15% in the quarter and 52% on a year to date basis versus stronger comparator comparator.
Speaker Change: Product support revenue increased 4% in the quarter and 6% on a year to date basis with higher market activity in Canada.
Both periods activity in the U S was down 12% for the quarter.
Speaker Change: For both the quarter and on a year to date basis and activity levels are reflective of market conditions and increased labor capacity.
Speaker Change: Gross profit margins decreased 200, and 210 basis points in the quarter, resulting largely from the timing of stage of completion construction projects improving execution and efficiency continues to be a focus for the year gross profit margins increased 40 basis points versus last year package market margins were up 20 basis points on good execution.
Speaker Change: Fusion product support margins increased 60 basis points on improved execution and higher volume and unfavorable sales mix with a lower proportion of product support the total revenue dampen margins by 40 basis points.
Speaker Change: Selling and administration administrative expenses decreased 10% in the quarter and increased 7% year to date.
Speaker Change: As a percentage of revenue selling and admin administrative expenses decreased to 14, 8% for the year versus 16% last year.
Speaker Change: Miniature control measures on discretionary spend remain a key focus area for the Syncrude team operating income was up $5 8 million or 47% for the quarter, largely reflecting the higher revenue and lower expense levels slightly dampened by the lower gross margins on a year to date basis operating income was up $13 9 million or <unk> 35.
Speaker Change: <unk> on higher revenue and improved gross margins, partially offset by higher expenses operating income as a percentage of revenue improved 160 basis points compared to last year to 11, 6%.
Bookings were up 124% to 126 million in the quarter in both Canada and the U S markets and were 30% higher for the year to date period recreational bookings were 146% higher for the year with excellent activity in both Canada and the U S. Industrial orders were down 12% year to date as Canadian orders.
Speaker Change: Were lower against a strong comparable while the U S was higher.
Speaker Change: Backlog of $342 million was 34% higher than last year with higher backlog than the recreational industrial markets industrial backlog decreased 10% with a decrease in Canada, largely offset by strong increase in the U S. On good order intake over the trailing 12 months.
Speaker Change: Recreational backlog was up 78%, reflecting a strong increase in both Canada and the U S. Approximately 70% of the backlog is expected to be realized over the next 12 months, but we're again this is subject to construction schedules and potential changes stemming from supply chain dynamics and with that I'll turn it back over to Mike and we can move to <unk>.
Speaker Change: Got it.
Mike: Great. Thanks, John.
Speaker Change: As announced last week, we acquired a 60% ownership of ABL manufacturing, Inc. A leader in the design and fabrication of power generation and closures.
Speaker Change: <unk> operates in Hamilton, Ontario, with approximately 300 employees and primarily serves the datacenter market across Eastern North America.
Speaker Change: We're excited to welcome the <unk> team to the <unk> family and look forward to leveraging our combined resources to build this business together.
John: We held a conference call John and I last Monday February 3rd where we noted the uniqueness of this partnership.
Christopher: Christopher other president of the business brings industry, leading design capabilities and strong production skills to our team here.
Christopher: He also retained 40% ownership in <unk>, all along with this partner and took a portion of his share of the initial initial purchase and turn them on shares.
Christopher: This unique acquisition structure was designed to strongly align our interests to grow this business and to sharing the performance for.
Christopher: Vermont is committed to purchase the remainder of the outstanding ownership over a predefined schedule through 2031.
Christopher: The acquisition, while accretive is not expected to have an overall material impact on tour months combined revenue and earnings in the near term.
Christopher: We also plan to invest further to expand capacity more information will be provided as we progress. Please stay tuned.
Christopher: Moving to slide nine I'd like to highlight some key takeaways as we look forward to the first quarter of 2025.
Christopher: As one would expect we consistently focus on key priority areas, including safe operational execution, serving and supporting our customer requirements and our disciplined focus on building our business for the future.
Christopher: We expect the business environment to be influenced by a number of factors that are at play.
Christopher: The recent announcements on potential tariffs between the U S and Canada has created additional economic turbulence. Our team is highly engaged developing an appropriate action plan to navigate the potential impacts.
Christopher: Foreign exchange rate volatility and a weaker Canadian dollar also being monitored given the majority of our supply equipment.
Christopher: Supply of equipment and parts is sourced in U S dollars hedging.
Christopher: Hedging practices and policies will continue to be used to manage the bottom line exposure to changing exchange rates. However, the impact on the economy as a whole may present further challenges.
Christopher: Their general economic and macroeconomic factors, such as inflation and interest rates continued to be monitored as well.
Christopher: Our backlog levels remain healthy.
Christopher: And the equipment supply chain has improved over time.
Christopher: As noted earlier, we continued to hire technicians to support our operations and this remains in a central focus for our aftermarket and value added product and service offerings.
Christopher: Operationally and financially we remain well positioned with ample liquidity and a 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 the changes in the business environment, while remaining focused on execute.
Christopher: <unk> customer deliverables are long term focus on growth and returns means we will remain committed to our operating and financial discipline to manage our cost structure, while we invest in capacity and capabilities to provide exceptional service to our customers today and in the future.
Christopher: With a solid order backlog and balance sheet, we're well positioned and will continue to support the business through thoughtful capital deployment.
Christopher: We appreciate the entire team's exceptional effort and commitment to support our customers and deliver value for our stakeholders. Thanks.
Christopher: Thanks also to our valued customers supply partners and shareholders for their continued support.
Christopher: That concludes our prepared remarks and at this time, we'll be pleased to take questions joelle over to your place to set up the first call.
Christopher: Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone you will hear prompt that your hand has been raised.
Christopher: Did decline from the polling process. Please press star followed by the Q.
Christopher: If you are using a speaker phone please lift the handset before pressing any keys.
Speaker Change: Your first question comes from Devin Dodge with BMO capital markets. Your line is now open.
Thanks, Good morning.
Christopher: I just wanted to start.
Speaker Change: With the macro uncertainties that we're seeing.
Speaker Change: The weaker Canadian dollar it just seems that the value proposition for used <unk> and rebuilds should look more attractive, but just wondering if you're starting to see that see greater interest there from your customers for those categories Mhm, Yeah, maybe that's thanks, Devin maybe I'll start with that and John can add in as well you know we haven't seen a gradual inc.
John: Kris and interest in the <unk> model, especially as you mentioned, it's we tend to look at it in a sense as a financing vehicle and so I think we reported about $97 million or so of RP O activity and it was about low eighty's last year and when you look at that it's really again it gives our customers some flexibility.
To manage their cash flows and then time purchases and around.
John: Other projects out there they are operating under and so yeah again.
John: I do think interest rates play a strong factor because it is in a sense a bit of a financing vehicle for us, but nice to see that interest recovering its taken several years for that to happen.
Speaker Change: Yeah, as Mike said it gives the customer flexibility in terms of the timing of the purchase because most of most if not all of the <unk> fleet will convert into a sale eventually doesn't so.
John: Like I said the.
John: The numbers were $98 million at the end of December compared to 81 last year.
Speaker Change: Okay got it. Thank you for that and then I guess switching over to Simcoe.
Speaker Change: Bookings continue to be really strong for that business. Thank earnings have doubled from two years ago. I'm. Just wondering if you could speak to some of the successes that you've achieved last couple of years and then looking ahead, where do you see the most meaningful growth opportunities for that business over the next call. It two to five years.
Yeah, Let me start and then Mike can add in I mean, we're really pleased with the financial performance of Simco.
Speaker Change: This year and couple of factors there I would point to one is theres a great team in place.
Speaker Change: Secondly, they put in a.
Speaker Change: Our project monitoring system. So every project is now in the system, they're monitoring it monthly it's a very detailed process diligent process. The whole team is involved and I think you see that coming through in the margins.
Speaker Change: In terms of growth, we have great brand presence in Canada.
Speaker Change: The real growth opportunity for us for <unk> in the U S market and Youre starting to see some traction there, but but that will be what we aim to grow in the future like any other thoughts yeah. The only other thing I'd say Devin is again when you look at the sales level and the performance of that business, it's pretty balanced between recreational and commercial.
Speaker Change: Industrial activities.
Which is nice to see because it does tend to be a little bit lumpy in nature, and we've had some larger projects say in the U S and so forth. So it's nice to see that but.
Speaker Change: Although that we've had wonderful execution of the backlog is at levels, we haven't seen before as well and so that team is.
Speaker Change: Doing a really nice job not only in executing on what we had going into 2024, but it also sets us up with a nice position as we look at 25.
Speaker Change: Okay, great Congrats on the good quarter I'll turn it over.
Speaker Change: Thank you Devon.
Speaker Change: Your next question comes from Cherilyn Radbourne with TD Cowen Your line is now open.
Speaker Change: Good morning, Thanks status is Patrick Sullivan underline per Cherilyn.
Speaker Change: On the product support side.
Speaker Change: On the product support side Caterpillar's disclosed service revenue about $24 billion on the way to a target of $28 billion in 2026, I guess in light of that are there things cat will be doing in concert with dealers to incent product support growth, including rebuilds for next year.
Speaker Change: Yeah.
Speaker Change: I think Patrick and product support is as you're aware as there is a keen focus for us and it's a big part of our value proposition. When we think of the equipment in the fleet in service and in our aftermarket support and so they come in I would say we're number one we're strongly aligned with caterpillar and how important that is to serve our customers and make sure that we have.
Speaker Change: The parts and service available to manage their business you know really critical I would say fundamentals to that whole businesses is availability of mechanical uptime and availability of parts fulfillment and so forth to make sure our customers keep operating when they need to so I'd say again cat has some some are so strong.
Speaker Change: Targets as we look forward as we do as well and so you know when we look at our other investment areas like our rebuilding.
Speaker Change: Capabilities, our Bradford re manufacturing location and so forth I think those strategies, we're committed to and align nicely with caterpillars intent to drive parts volume and of course, we want to drive both parts and service volume as we go forward.
Speaker Change: Okay, Great that's very helpful I.
Speaker Change: I guess any any NDA you guys safety you've had several years of significant deliveries of the mining industry.
Speaker Change: Is it possible to give us a constant color on how much the mining base. The installed base has increased over the last few years and I guess, what current quoting activity is like in that area.
Speaker Change: Sure.
Patrick: Maybe just to start off on that Patrick you know one of the ways. You can you can sort of monitor that activity is to look at our bookings and backlog and you'll see John noted in his prepared comments, but also in our MD&A you'll notice.
Patrick: Mining does tend to be dependent on you know mine expansion Greenfield and brownfield expansions fleet replacement and so forth and so you know it is a little bit lumpy in nature. When you look at the equipment the new equipment delivery.
Patrick: <unk> and so you'll see that I think clearly as you look as you look even historically in the last few years and what we have sitting in the books today in their backlog as far as the breakdown between mining and construction today. If you look at December 31.
Patrick: You know our backlog is about evenly split when you look at construction and mining, it's about 27%, 26%, respectively, and so that gives you a good indication as to where that goes.
Patrick: And then of course in behind all of this is when you look at the mining industry investment profile commodity pricing.
Patrick: It's at a all time high currently for example, and you know.
Patrick: Capital investment seems to continue and so were looking our team has done a really nice job of earning their way into mining opportunities and.
Patrick: We're committed to investing in parts and service to support the aftermarket for that segment.
Patrick: Okay. Thank you very much.
Speaker Change: Great. Thank you Patrick.
Speaker Change: Your next question comes from Yuri Lynk with Canaccord. Your line is now.
Yuri Lynk: Good morning, Gary.
Speaker Change: Hey, good morning, guys.
Yuri Lynk: Hey, Eric.
Yuri Lynk: Yeah, just thinking about some of the.
Yuri Lynk: The <unk> and the macro situation I'll start with the weaker dollar.
Yuri Lynk: <unk>.
Yuri Lynk: Canadian dollar.
Yuri Lynk: Has anything changed on the competitive front like because it is it still true that most of your competitors that are that are selling equipment are also.
Yuri Lynk: Having to bring it in from from the United States as well are there more to.
Yuri Lynk: You have more competitors today than say, a few years ago that might be bringing it in from from other regions.
Yuri Lynk: Yeah, maybe maybe just to start on that area I think a couple of things I'd note is a lot of equipment coming into Canada is as U S. <unk> U S dollar price when you think of.
Yuri Lynk: Supply points, and so forth, whether that's overseas or it's coming out of the out of the U S and I'd say, it's pretty consistent in some of our competitive products, including even some of the comox commensurate products are manufactured in the U S. Here of course, and our caterpillar supply in many locations.
Yuri Lynk: So I would say fundamentally though when we look at currency and we look at the lead times, we work with their customers and their requirements. We hedge we have a hedging policy, we'd like to provide certainty around.
Yuri Lynk: Pricing and Timeframes and so forth and that's really critical and I think that's pretty consistent you know.
Yuri Lynk: Where we do see I guess, some other product coming into the marketplace.
Yuri Lynk: Information sources and stuff is in the is in the lower tier products. When we look at some of the BCP products are lower our utilization areas and you do see you do see some of that coming in and that could be denominated in other currencies, but I would say broadly when we look at our our GCI product line or you know in our mining.
Portfolio largely those are those are pieces that tend to be priced.
Yuri Lynk: Consistent U S currency.
Yuri Lynk: Okay.
Yuri Lynk: And then just thinking about.
Yuri Lynk: Tariffs I mean, I know <unk>.
Yuri Lynk: Changing every every day, but would you be.
Yuri Lynk: Bringing in additional inventory today.
Yuri Lynk: Ahead of potential Canadian tariffs on U S products, perhaps next month or less.
Yuri Lynk: If they ever come to fruition.
Yuri Lynk: Yeah, I think just to maybe just start on that year I think.
Yuri Lynk: The extent, it's practical I mean, there are lead times naturally on a new equipment deliveries into the extent, we can try to get ahead of that I think what's really important is that we're monitoring it carefully parts. For example is a little easier to do that but again, it's a short term that's a very short term response and.
Yuri Lynk: We would look to optimize that as best we can especially as we go into the spring season here, which we would be building some inventory in any of that 10, so to the extent possible sure I think that longer term view is what's really important.
Yuri Lynk: We tend to turn will turn our inventories are parts inventories over three or four times a year or so.
Yuri Lynk: You know to the extent, we can do that we'd certainly look to optimize.
Yuri Lynk: In whatever way, we can but I think right now it's really just monitoring.
Yuri Lynk: And getting a good understanding of the Timeframes and what the potential impacts would be in alternatives around the supply point.
Yuri Lynk: Okay.
Yuri Lynk: Just try to squeeze a quick one on just on how to model.
Yuri Lynk: L a I'm assuming.
Yuri Lynk: It's going to be fully consolidated.
Yuri Lynk: And is that going to be reported in.
Yuri Lynk: Within the equipment group.
Yuri Lynk: In equipment sales are.
Yuri Lynk: How are you going to report that you're correct on both of those.
Yuri Lynk: Yes.
Your next question comes from Jonathan Goldman with Scotiabank. Your line is now open.
Jonathan Goldman: Hi, Good morning, guys, Hey, gentlemen, quick question Yeah.
Jonathan Goldman: Yes, I guess my first question is on the equipment margins. If you were to strip out the impacts mix within mix can you discuss how margins trended on a sequential basis and not to get into forward guidance, but with some Oems, calling up pricing as a headwind.
Jonathan Goldman: Next year do you think the current level of equipment margins are sustainable.
Speaker Change: Well I think we always would direct you I think Jonathan to really the factors like you mentioned mix and I think you have to keep that in mind in terms of even just product support to equipment, but also I'd say within equipment you know when we look at our at our numbers. For example, we have been John and I have been talking about normalization of of March.
Speaker Change: <unk> on equipment, especially as availability is normalized for the most part you know theres still a few things like engines and things are tight supply, but I would say you can expect that that's a.
Speaker Change: A fairly normalized availability and supply market and so if you look at equipment margins there.
Speaker Change: Sequentially from Q3 to Q4 is a little bit better.
Speaker Change: We've worked really closely with with our supplier partners to make sure that we're competitive in programming and things like that and so.
Speaker Change: You can expect that that's going to continue.
Speaker Change: But I would I would say the other piece to keep in mind on our margin forecast is the rental side and so we made some comments there earlier.
Speaker Change: We have seen a little bit lower utilization higher acquisition cost of that fleet that affects our margin as well and so when you blend that in.
Speaker Change: And activity levels in <unk>.
Speaker Change: Over time, I think you can see that there can be a little bit of a tailwind on that side, but I would expect new and used equipment to be very competitive going forward.
Speaker Change: Mhm.
Speaker Change: That's helpful color and I guess my second question is on <unk>.
Speaker Change: Can you provide some more color around the opportunity set for that business and end market and whether you see that business, having a more organic growth or strategic opportunity.
Speaker Change: Yes, I think so ABL, we're quite excited about that I would say you know again outside of the initial acquisition as we described in her comments you know I think it really is organic in the sense that you know they.
Speaker Change: They have a I would say an industry leading design.
Speaker Change: It's accepted within the industry and you know packaging in general I'd say enclosures are one of the constrained components in the supply chain for for data centers and basically any application, where you look at backup power or prime power generation.
Speaker Change: And so you know.
Speaker Change: I would say our focus now would be organic as we look at it investing I had made a brief comment and then a.
Speaker Change: A few minutes ago about you know our intention is to increase capacity.
Speaker Change: With ABL and we see that as a growing market segment that we'd like to participate in both directly with our customers, but also supporting them.
Speaker Change: Other dealers and so forth.
Speaker Change: Thanks for the color guys I'll get back in queue.
Speaker Change: Thank you.
Speaker Change: Your next question comes from Chris <unk> with CIBC. Your line is now.
Chris: Hi, Thanks for taking the question. Good morning, I was wondering if you could just.
Speaker Change: Good morning, if you could provide.
Speaker Change: Maybe just some commentary on what you're hearing from your customers right now as it relates to tariffs.
And I guess, just the broader economic environment is there a heightened level of caution.
Speaker Change: Maybe a pause on some investments at this time.
Speaker Change: Yes.
Yes.
Speaker Change: I think we're seeing that I think everybody is cautious at the moment I don't think were seeing a direct link right now to customer behavior Christa, but.
Speaker Change: We're all looking at the situation and we're cautious because we just don't know know what's around the corner. It is changing day by day.
Speaker Change: We're as we said we're monitoring it we're being proactive in terms of subs. We think we can take to mitigate if tariffs do come in.
Speaker Change: And I think everybody is doing doing the same thing, but in terms of customer behavior, but we haven't seen that link as yet.
Speaker Change: Okay, Great and then maybe just one more from me.
Speaker Change: You spoke earlier.
Speaker Change: In our comments in the MD&A about the recent mining deliveries over the past couple of years not translating into product support activity can you provide any additional color there maybe around timeframe or cadence, how you expect that to play out.
Speaker Change: Yeah keep in mind I think it's a good question, Chris I think as you look at some of the mining deliveries that we have a pretty decent.
Speaker Change: Footprint, if you will or fleet out there with customers that's been in place for some time and that continues the new equipment deliveries not uncommon to have really for the first year to two years are really more or less preventative maintenance type programming and then after that you start to get to.
Speaker Change: Component replacement and repair and different things like that as you get some aging keeping in mind that you know mining environments.
Speaker Change: Tend to operate 24, seven and you can build up some hours, but realistically I would look at deliveries.
Speaker Change: And product support.
Speaker Change: Cadence what would really be you know 18 months 24 months that type of thing where you start to see component replacement and then through the duration of the life with rebuilds up to two or three times, depending on the on the equipment and service.
Speaker Change: Great. Thank you I'll jump back in the queue great. Thank you.
<unk> Khan: Your next question comes from <unk> Khan with RBC capital markets. Your line is now open.
Speaker Change: Hi.
Speaker Change: Hi, there this is eddie on for <unk>.
Speaker Change: Great.
Speaker Change: Like can you just maybe provide some color on where you're seeing today in terms of pricing discussions and customer incentives. Thank you.
Speaker Change: Yeah, I think again, where we don't provide a lot of commentary in that area given the competitive nature of the market rate and so no I would just say or the comments. We made earlier when you look at our margins you look at the programming.
Speaker Change: The team has done a really terrific job of execution.
Speaker Change: And delivering product and you see it in the new equipment sales and so forth and so one would expect that you know I would step back also and look at the entire value proposition I think.
Speaker Change: We like to work with their customers in terms of what their unique requirements are either includes the financing element with say cat finance in some cases.
Speaker Change: Product support C V A's and pricing plays a part in that as well depending on their financial condition and what they're looking for and so I wouldn't I wouldn't want to provide any more.
Speaker Change: <unk>.
Speaker Change: Data on that but I'd say those are the factors that I would consider as you look at the market.
Speaker Change: Yeah.
Speaker Change: Alright, great. Thank you hey.
Speaker Change: Hey, good thank you.
Speaker Change: Your next question comes from Steve Hansen with Raymond James Your line is now.
Steve Hansen: Good morning, Steve good.
Steve Hansen: Morning, guys. Thanks for the time.
Steve Hansen: I want to go back to this equipment margin. If you just for a moment if I may.
Steve Hansen: If I looked at three quarters of the year they were arguably relatively subdued.
Steve Hansen: Year over year basis now in the fourth quarter, we've got a 300 basis point increase or more sequentially than I don't think I actually understand exactly why that big pop happened I think you describe maybe a little bit of mix, but the other comments raw largely year over year. So it's hard to understand what shifted from <unk> to <unk> and 'twenty forward any color there would be helpful.
Steve Hansen: Yes, I think maybe just to start on that Steve. Thanks for the question you know I think again, if you we did give a little bit of color there in terms of.
Steve Hansen: In terms of mix and so forth and so keep it keep in mind based on earlier comments you know theres. The factors, we always direct you to our.
Steve Hansen: New equipment margins and depending on the mix like if we look at for example, even within mining versus construction you know sometimes.
Steve Hansen: Mining side will have a higher value a little tighter margin product going through so as that mix shifts a little bit more towards construction, there's a variety of different products, obviously, they're it's pretty diversified but also rental.
Steve Hansen: We mentioned I think in our comments and so forth.
Steve Hansen: You know gross margins for example, and there's some commentary that we provided in our MD&A about rental margin, saying you know that we were down 70 basis points, which is a factor of both utilization rates at this stage given you know the activity levels in the market, but also higher acquisition costs. So that can shift a little bit over time and so it has improved.
Steve Hansen: The utilization rates in Q4.
Steve Hansen: Improved.
Steve Hansen: With heavy in the battlefield side. So that's helpful.
Steve Hansen: And I think you know just the distribution or the.
Steve Hansen: New equipment activity levels, and so forth that helped as well product support was.
Steve Hansen: Also slightly favorable on margin just given at a little higher activity levels in that in that side of the business. So yes, I think you have to take into account all of those things when you look sequentially.
Steve Hansen: Okay very helpful.
Steve Hansen: And if I look at the backlog composition I think he described it boosting quite a shift year over the past year mining is down to sort of construction base levels, but product support sorry. The power systems has increased fairly markedly or north of 40% now how do we think about that in terms of margin impacts over the next 12 months as you work through this backlog is that beneficial.
Steve Hansen: Is it neutral or we think about that.
Steve Hansen: Yeah, and I think between draw that we look at it a little bit, but I would say again, we can get to.
Steve Hansen: Two focused on quarter to quarter, and so forth, but I think you're touching on the mix really broadly and I would just point back to the comments you made earlier about you know.
Mix within the equipment side of things.
Steve Hansen: Just covered on construction versus mining.
Alex: Alex Apart mix too is as we see more activity our activity in the marketplace higher utilization of our customers' equipment product support increase and that can support you know improving margins along with rental.
Alex: Yeah I'd just go back maybe to the question on mining and the fact that we've deployed a lot of money.
Alex: Very active year in the mining sector revenues were hired we've brought down the backlog there, which over the longer term will bode well for product support growth and margins.
Alex: So that's another way to think about it.
Alex: Okay. That's helpful. And then just one last thing on the chemical side I mean outstanding results arguably.
Alex: I'm just trying to understand is there a macro pattern that's helping benefit. This this division or is it all execution join you in your prepared remarks, you talked about the new project monitoring system, you've been talking about for a year. It's clearly paying its dues, but is there also a macro tail winds that are benefiting the space that you can see are specific drivers on either side of the border. It just strikes me in.
Alex: That's right.
Alex: This impressive performance.
Speaker Change: Yeah, I mean, one of the things I'd call out is.
Speaker Change: The technology innovation within Simcoe, the use of natural refrigerants as people think about the environment more and more versus synthetic and I think central Hudson edge and edge. There, obviously, we've got great brand presence and market share in Canada.
Speaker Change: And that really helps as well so it's a combination of people.
Speaker Change: Technology.
Speaker Change: And you know some good product development innovation as well.
Speaker Change: Okay very good thanks, guys.
Steve Hansen: Thanks, Steve.
Speaker Change: Ladies and gentlemen, as a reminder, should you have a question. Please press star one.
Speaker Change: Next question comes from a vaccine <unk> with National Bank Financial Your line is now open.
Speaker Change: Good morning, Hi, good morning, gentlemen.
Speaker Change: I mean, Mike I was wondering if you don't mind, putting a little bit of color on the infrastructure.
Speaker Change: Space in general and I guess.
Speaker Change: Like what hydro, Quebec was thinking about doing I'm, just trying to think.
Speaker Change: Some of the drivers in the short to medium term.
This vertical is possible. Thanks.
Speaker Change: Yeah. Thanks, Thanks, Max I think you know again I would say on the infrastructure side I think we're seeing you know some interest in investment, both Ontario, and Quebec, but like you mentioned Hydro, Quebec has got a capital program, which we've heard about for.
Speaker Change: Over a year now I think hey, John.
Speaker Change: You know round numbers I've heard in excess of $150 billion of infrastructure going in and that's over an extended period of time and so.
Speaker Change: I would say, it's certainly a tailwind for us longer term I think both both on the infra.
Speaker Change: Infrastructure development side, but also longer term potential for availability of energy.
Speaker Change: You know again I wouldn't want to get too far ahead of ourselves Max on this but I think as you look at you know.
Speaker Change: Our data center business, a high consumption of energy right to run the data center temperature control and then and then of course, we enjoy the backup power supply and so forth standby power. So those are those are things I think I would I would look at it but again I would say, it's not a short term it's more of a medium to long term perspective.
Speaker Change: That we consider.
Speaker Change: You know a favorable tailwind down the road, but we still have to earn our way into those opportunities as well.
Speaker Change: Sure.
Speaker Change: And then is it possible to get a bit of color on them.
Speaker Change: Expectations around rentals.
Speaker Change: Some dispositions from 2025.
Yeah, I think it will be based on what we're seeing now so it'll be pretty similar to what we deployed in 2024, let's say, we're always looking at the mix within the spend and that may shift a little bit maybe more in light lessen heavy who knows but.
Speaker Change: But I would say is it'll be pretty consistent with what you saw in 2024, yeah. The I guess the one the one consideration there two matches with Tri City. For example, we've acquired a nice fleet for southwestern Ontario.
And so there's a you know over time that'll transition, but I mean, we have assumed a nice size fleet there and between the two businesses, that's where I think John Theyre looking at it in terms of what the requirement will be but you might not see as high level of investment now that we have both of those fleets in place it will be dictated by our activity levels.
Speaker Change: Okay makes sense and then in terms of fund.
Speaker Change: But you were obviously more active and in Q4.
Speaker Change: <unk> and <unk>.
Speaker Change: Obviously that corresponded to a bit of a desk.
Speaker Change: Is that.
Speaker Change: I guess, it's one beyond your auctions offsetting.
Speaker Change: Hygiene is that how we should be thinking on a perspective basis, you sort of stepping in at certain levels.
Speaker Change: Yes, I mean, it's.
As we talk about each.
Speaker Change: Each quarter, the four priorities in terms of capital allocation.
Speaker Change: Organic growth remains first dividend, which we talked about increasing 36 years in a row NCB and CIB is also a priority and then M&A and yes, you're right actually we were a little bit more active in the fourth quarter capital hygiene <unk> number one priority, but second we were opportunistic and.
Speaker Change: That will remain a tool in the toolbox for sure.
Speaker Change: Okay makes sense and then just one clarification in terms of Simco like do you ship a lot of things cross border between the U S for the portions that are being executed in the U S have done well.
Speaker Change: Oh, yes, yes.
Speaker Change: I mean, there is some cross border trade.
Speaker Change: Tween Simcoe, Canada, and some <unk>, but it's not it's not significant.
Speaker Change: Okay. That's great. Thank you so much that's it for me okay.
Speaker Change: Alright, thanks, guys.
Speaker Change: There are no further questions at this time I will now turn the call over to management for closing remarks.
Mike: Thanks, a lot you well I really appreciate everybody joining this morning, Mike.
Mike: Well for your participation and for those of us in Toronto be safe today, we're expecting.
Mike: The nasty winter storm, so I appreciate everybody joining and have a good day 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.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yeah.