Toromont Industries Ltd. (TIH) Earnings Call Transcript

Thank you, Caroline. May I have a seconder?

Mr. Chair, I second the motion.

Thank you, Lynn. Is there any discussion of this motion? If you have not already done so, please type your questions now relating to the resolution authorizing the continuation, amendment and restatement of Toromont's shareholder rights plan.

Mr. Chair, we have not received any questions at this time.

Thank you. I now call for a vote on the motion before the meeting. Would all registered shareholders and appointed proxy holders, please enter your votes in Lumi, if you have not already done so. [Voting]

The next item of business is to vote on the amendments of the long-term incentive plan. The amendments to the plan are described in detail in our Management Information Circular beginning on Page 67. The full text of the resolution to adopt the amendments to the long-term incentive plan is on Page 75 of the Management Information Circular. Shareholders are asked to vote for the resolution. In order to be effective, this resolution must be approved by a majority of the votes cast at the meeting in person or by proxy. May I have a motion with respect to this resolution.

Mr. Chair, I move to approve the resolution to adopt the amendments to the long-term incentive plan, the full text of which is set out on Page 75 of Toromont's Management Information Circular delivered in advance of its 2024 Annual and Special Meeting of Shareholders.

Thank you. May I have a seconder?

Mr. Chair, I second the motion.

Thank you. Is there any discussion of this motion? If you have not already done so, please type your questions now if you have a question relating to the resolution to amend the long-term incentive plan.

Mr. Chair, we have not received any questions.

Thank you. I now call for a vote on the motion before the meeting. Would all registered shareholders and appointed proxy holders, please enter your votes in Lumi, if you have not already done so. [Voting]

I will also give an additional moment for those casting votes to submit their votes for all other motions that have been brought before the meeting today, if they have not already done so. The polls will then close. After the polls close, I will invite any further business to be brought before the meeting, please also use this moment to identify any further business. [Voting]

The polls are now closed. The scrutineers have presented their report and advised that all resolutions have been approved by at least a majority of votes cast at the meeting in person or by proxy as required. Accordingly, I declare all resolutions carried. The final voting results will be released after the meeting in the usual format and will be available on our website and under our profile on SEDAR. Lynn, is there any further business for this meeting?

Mr. Chair, we have not received any request for further business.

Thank you, Lynn. Since there is no further business, I will now ask for a motion to terminate the meeting and for the motion to be seconded.

Mr. Chair, I move that the meeting be terminated.

Thank you. And the seconder?

I second the motion.

Thank you. I declare the meeting formally closed. We will now continue with some brief words from Mike McMillan, our President and Chief Executive Officer; and John Doolittle, our Executive Vice President and Chief Financial Officer. Then we will open the meeting to general questions. Mike?

Thank you, Mr. Chair, and good morning, everyone. It's my privilege and pleasure to address our shareholders today, including our employee share owners whose participation is welcomed and encouraged. As you know, last fall, I officially assumed my current role and compared to many of our team members who have served in many cases for several decades, relatively new to Toromont having joined a little more than 4 years ago. Since my appointment, the Board, our leadership group and our former CEO, Scott Medhurst, have been more than generous in sharing their time and insights. I'd like to begin by thanking them for their support and ongoing guidance. To Scott specifically, thank you for guiding us through a challenging but uniquely productive 11-year period as our CEO. You left Toromont in great shape with scope and scale and expanded territories and a talented, deeply experienced team. Scott's dedication to Toromont is evidenced by the transition he provided after announcing his retirement. The time he spent as my executive adviser speaks well to his commitment and possible succession planning. In taking on this new role, I am reminded of the adage, "if it ain't broke, don't fix it," meaning I'm in the enviable position of leading a company with a well-developed business model and culture that is empowered to perform. However, that in no way absolves me of the responsibility for helping the team find ways to continuously improve. And as we often say, it's part of our DNA. We must always move our yardsticks forward. That's a tall order given the success of Toromont that has enjoyed over the past 10 years, when return on shareholders' equity averaged 21% and earnings grew at a compounded annual rate of almost 16% in the same period, which included accretion from our largest acquisition completed in 2017. However, we have identified many opportunities to grow organically and improve holistically, and these are detailed in our Connect26, our new 3-year business plan. Today, I'll give you insight into Connect26 and in doing so profile recent business accomplishments that have positioned Toromont well to move ahead with our plans. John will then follow with his financial report. Before we begin, I'll remind you that our remarks and answers to your questions may contain forward-looking statements, and you are so cautioned on this slide. Connect26 starts from the premise that we need to connect people, ideas and solutions together to realize exceptional performance. One of the ways we can do this is to continuously improve how we use technology, starting with solutions that leverage data to drive better business outcomes, our own and our customers. Here, Toromont have built an advantage because of our largest partner, Caterpillar, long ago recognized the value of machine level data. Telematics-driven information across thousands of CAT machines in our territories allows algorithms to proactively predict customer needs for maintenance, parts, rebuilds and replacements. As dealers that can anticipate customer requirements is in a favorable position to respond with the right inventory and resources, ultimately helping to optimize our customers' productivity. We are in that position today as 86% of Toromont's CAT installed base consists of connected assets that our team monitors for our customers. In the future, we believe many customers will choose to manage their interactions with Toromont primarily through digital channels. To address this expectation, Toromont CAT recently launched the Toromont Solutions Toolbox, a suite of applications designed to enable efficient and comprehensive online connections. At the center was Toromont Hub, a web portal where customers can access information about their equipment, request connectivity and service 24/7, view and pay invoices and launch other web-based tools, including CAT Central, Parts.cat.com, VisionLink and CAT Inspect. These solutions complement our other traditional connection systems known as parts counters and telephone lines, although these 2 continue to evolve as we leverage technology. Not just Toromont CAT data employees customer-facing technology. For example, Battlefield's InsideTRAC serves as a customizable online business management platform that enables customers to view rates, track rental assets in real time, request pickups and service, extend rentals, customize rent reports, view invoice status, and historical billing data and download equipment safety inspections, all from their smartphones or desktops. InsideTRAC is a homegrown innovation using Toromont's IP and have a broad range of our customers with 1,000 or more units on rent at a time will attest it's a useful efficiency and optimization tool that saves customers time and money. Much of the digital capability we need is now in place and advancing. Our task is to embed this capability more deeply into our processes, which will enhance how we use data to identify, qualify, initiate and support interactions with our customers. Connect26 provides the road map and action plan for that journey. These initiatives and performance metrics cascade throughout our organization. Expanding the products, we offer online platforms is another way that we can better connect with customers. Recently, we launched Toromont Equip, our e-commerce marketplace for used and restored equipment and parts sourced by Toromont CAT, Battlefield and Toromont Material Handling. Our focus is now on optimizing the website and refining our go-to-market strategies, including streamlining our underlying operational processes with the goal of enhancing the customer experience and simply making it easier to do business with us. Not to be lost in this discussion is the technology-enabled machines we do -- we sell to do more. A great example is CAT Command 793F autonomous haul trucks equipped with CAT MineStar solutions. We recently worked together with Caterpillar and IAMGOLD to deploy a number of these units at the Cote Gold project. In December, John and I had the opportunity to visit the mine north of Sudbury and see these incredible haul trucks in action. At first it sets a real experience sitting in a pickup followed by a haul truck carrying 200 tonnes of material that does not have a driver in the CAT. But the level of precision and maneuverability on display quickly changed our perspective. It was impressive to observe the operations, including the 2 control room operators that monitor the activity and dictated the pickup and drop locations. With this configuration as many as 50 autonomous trucks can be coordinated. Given the shortage of skilled labor, the operational advantages are obvious, but benefits also include fuel efficiency and safety. Our goal is to bring these advantages to more customers in our territories. In Southern Ontario, the Toromont Power Systems team is using technology to connect the customer to what's known as a peak shaving opportunity. More precisely, Toromont is working alongside Caterpillar and an Ontario utility to enable an advanced manufacturer to instantly shift power sources from electricity grid to CAT generators during peak grid demand at 11 locations. This capability helps to optimize and balance the provincial electrical system during peak loads and benefits the customers' cost of operation. This is just one example of how our team is implementing engineered solutions tailored to unique business and energy requirements. Product technology advancement is also helping Toromont and our customers realize lower emissions by using cleaner alternative energy solutions by training our product specialists and technicians in fully electric machine applications and maintenance. We help customers assess, commission and operate advanced machines like the CAT R1700 XE Loader. This fully electric model is powered by lithium-ion batteries and provide the same or better loading capacity of equivalent diesel machines. However, with 0 exhaust emissions. In our territories, the R1700 XE has already successfully accumulated over 15,000 fleet operating hours. We're sometimes asked if the use of alternative and clean energy will threaten the product support connections with customers. In response, I would point out that our Stony Creek Toromont CAT branch recently completed our first-ever certified rebuild of a CAT 988KXE electric drive wheel loader. In doing so, we replaced or reconditioned approximately 3,000 parts including batteries, generator, engine and drivetrains. We are committed to investing in new capabilities and technologies to ensure we continue to provide value-added products and services for long-term success. Similarly, demand is growing for Battlefield recently launched green leaf lineup that brings hybrid and battery-powered tools and machine choices to market. Battlefield rents a broad range of products that, of course, includes Caterpillar's compact construction line, but also includes tools and equipment from over 250 supply partners. Toromont's new sustainability report is a helpful resource for shareholders, which needs to understand our ESG strategies and actions, which are informed by risk and opportunity assessments and stakeholder engagement. Please visit our website to [indiscernible]. For this part, CIMCO has done a great job of translating ideas and technologies into thermal management solutions that address the environmental sustainability needs of our customers. Thermal management means seeing end cooling systems for ice rinks and industrial plants and heat pumps for district heating and cooling applications. In these applications, CIMCO has devolved products that utilize natural refrigerants significantly reducing emissions, optimize energy consumption, harness clean power and adhere to evolving government environmental regulations. Connect26 foresees good growth opportunities for CIMCO Thermal Solutions on both sides of the Canada and U.S. order. Recently, CIMCO unveiled its Green Series brand that includes the Thermal Force One heat pump technology. This system eliminates the need for fossil fuels, converts waste heat to energy and provide thermal storage. The first of several TF1 systems was recently purchased in the Edmonton area in Blatchford, Alberta to support that community's decarbonization mission. The installation of this system is in phases, however, it currently provides 0 combustion heating and cooling for approximately 2,500 homes and townhomes. To expand markets CIMCO recently formed a thermal decarbonization team. Connect with potential customers, including over 100 Canadian municipalities who are now leveraging our expertise to go green. Another performer that is sometimes overlooked, is Toromont Material Handling or TMH. This business offers a broad range of equipment from pallet jacks to electric and internal combustion based forklift of all sizes, including those large enough to handle shipping containers and railcar movers, such as our shuttle wagon line. This is a whole service business selling new and used equipment, renting units and providing aftermarket support at our branch locations and field service units. The TMH team continues to grow their presence and has been recognized for 14 consecutive years as a dealer of distinction from MLA or Mitsubishi Logisnext, our largest lift truck supply partner. Congrats to the TMH team. In all of these examples, innovations and service expansions are guided by the voice of the customer. That voice must be always heard and heeded in our plans, and I believe it is. At its heart, Connect26 recognizes that even in a digital world, our most meaningful connections are formed by and for people. For that reason, you should expect Toromont to continue to bring considerable focus to employee recruitment, development, engagement and succession planning. Here are a few 2023 statistics that showcase the emphasis we placed on Toromont people activities. Last year, our workforce expanded by 5% to more than 7,000 in support of business growth. More than 3,000 technicians call Toromont home, including 565 apprentices and efforts to recruit from underrepresented groups and internationally are ongoing to address a shortage of skilled labor and do so from new talent sources. Our people participated in over 110,000 hours of safety, technical and professional development with safety training being a cultural imperative and a contributor to a 25% reduction in total recordable injury rates. And as a sign of engagement and alignment more than 47% of our workforce participate in the Toromont employee share purchase plan. Connect26 ambitions to enhance our value proposition and an employer will be assisted by Stephanie Hardman, who recently joined in the newly created position of Vice President, People & Culture. Stephanie previously served as Deputy Chief Transformation Officer at McDonald's, and prior to that, in senior organizational development role at Walmart, Tim Hortons and McCain Foods. Today, Toromont people connect with customers in over 160 locations from St. John's to Victoria, Windsor to [ Caraquet ] and throughout the United States. You may find them deep underground in a customer mind in the engine room of a Great Lakes vessel, a food processor in Texas, a construction site in Toronto or Battlefield store in Baldor and many points in between. In every case, Toromont's results, reputation and potential rest in the -- in their capable hands. Our job as managers is to ensure our team has the tools including advanced analysis systems to perform. More than this, it is our duty to preserve our culture, but might be otherwise called our connective tissue that brings us all together as Toromont. Technology like online team rooms, keep us connected across vast distances since our it's our shared values that unify us and form the foundation for our future. Often said is you reap what you sow, we couldn't agree more, which is why Connect26 will see us deploy capital in alignment with Toromont invest in resources strategy. Growth in our rental fleet, heavy and light will feature prominently as well facility and field service investments that will strengthen market coverage and product support. 2023 investments of note include our new remanufacturing center in Bradford, Ontario opening this quarter. Not only will it increase our capacity to remanufacture used engines, drivetrains, suspension groups and other components. They will do so efficiently with a purpose-built layout in a variety of environmental controls. Other recent facility investments include opening 5 new job site locations in Western Canada in support of its plan to achieve a profitable nationwide presence as a provider of industrial rental tools. A 17,000 square foot Battlefield store in Sherbrooke, Quebec. 40,000 square foot CIMCO prefabrication facility in South Carolina to serve growing U.S. demand for thermal products and a branch for Toromont Material Handling and Woodstock to raise its presence in Ontario and match the brand recognition it enjoys in Quebec. Recently, we formed a dedicated team to focus on the development of our corporate strategy led by Toromont, Vice President, CIO and Head of Corporate Strategy, Mike Cuddy and supported by Eddie Ho, VP of Strategy and Development. This team, small team is partnering with our business leaders to develop aggressive long-term growth plans. Building on Toromont's past success, these plans consider our substantial organic growth opportunities as well as complementary development initiatives. As we look through the 3-year planning horizon, covered by Connect26 26, we see many opportunities to grow and improve. Beyond those I've mentioned here today, and in every case, we intend to pursue our ambitions for fiscal prudence, consistent with Toromont's long-standing approach of generating return on equity above 18% over a business cycle, while maintaining a strong financial position. Since we cannot control interest rates, commodity cycles or other externalities that influence our markets, we've also built flexibility into our plans to ensure our thinking is always connected to economic reality. In summary, connecting together with our customers, team members and business partners is how Toromont will move forward to create long-term sustainable value for all stakeholders. I am honored to have the chance to connect with you today, and I look forward to deepening our connection in the years to come. Thank you for your support of Toromont. Now it's my pleasure to invite John Doolittle to address. As you know, John joined as Executive Vice President and Chief Financial Officer of Toromont in October and brings substantial leadership experience earned while serving several leading public and private companies. Welcome, John, and over to you.

Thank you, Mike. Good morning, everyone. It's a pleasure to address this meeting, be part of the Toromont team. As a new addition to the team, I am often asked for my back story and first impressions. To oblige, I met Mike when we both worked at Nortel, has held several leadership roles there over a 22-year career, culminating in my appointment as CFO, to help skew the company's restructuring following its bankruptcy desperation. Not a pleasant experience, but certainly a character builder. Following that I started as CFO of Mattamy Homes, largest privately owned homebuilder in North America. And then as CFO at OpenText, the global leader in enterprise information technology. While Mike and I have not kept in close contact, we knew each other well enough that when the opportunity arose at Toromont, he asked me to consider it and I'm sure glad that I did. As for first impressions, Toromont has the most deeply entrenched capital allocation approach I've seen in my career and it shows in the financial results we've achieved. Every Toromont business has its own capital structure. Every leader has their balance sheet responsibilities and every leader intimately understands how to generate appropriate returns on assets and on the capital employed. This system of capital management, where all business leaders carefully manage their allocated equity and debt enables Toromont's decentralized approach to work well for shareholders. Beyond Toromont's substantial range of organic growth opportunities, what struck me most as the newcomer is the quality, dedication and experience with people. The average tenure of the leaders below Mike and I is approximately 20 years, management's bench strength makes a huge difference. Toromont has a wealth of management talent and ability in its present and next-generation leaders, which bodes well for our long-term future to say nothing of what it's done for consistency and continuity approach over the past few years. I'm also impressed by the culture despite being leaders in their fields, Toromont people are humble, open to wording and take great care to go the extra mile for customers. Not to be missed is the close to half of all employees are shareholders representing a strong alignment of connected interest. In short Toromont's organic growth potential, unique capital allocation method, focus on high hurdle rate returns and the presence of great people driving the business forward bode well for the future. Now to the part of my remarks. Today, I will briefly revisit performance in 2023 and describe first quarter 2024 results. While many of you may be familiar with these numbers, they do provide a baseline for our Connect26 business strategies. 2023 was another good year for Toromont with EPS growth of 18% on 12% growth in annual revenue. Revenue grew organically in both the Equipment Group and CIMCO based on diverse drivers. For equipment group, new and used equipment revenue increased 15% compared to 2022. This reflected growth of 7% in construction markets, 42% growth in mining, 17% in Power Systems and 39% growth in material handling. The only area where we experienced a decline was in used equipment sales, which were down 4% from 2022 as supply chain pressures ease, making it easier for customers to meet their needs with new machines. Rental revenue in the Equipment Group increased 8% and product export was higher by 10%. Once again, Toromont's business model principle of offering specialized equipment, along with comprehensive aftermarket support paid off. For CIMCO revenue was 13% higher than in 2022 on drivers and included an 8% increase in packaged sales across industrial and recreational markets and 18% growth in product support revenues. This business has been evolving its product offerings, strengthening people and processes, and we are very excited about its future. On a consolidated basis, revenue growth of 12% led to 14% growth in operating income with operating income margin up 20 basis points from 2022. On effective capital allocation, Toromont's return on capital employed was 30.5% and return on equity landed at 23.1%. Toromont's long-term goal is to generate at least 18% return on equity over the business cycle. So in that context as well, 2023 was a successful year. For shareholders, sustainable growth translated into growth in our common share dividend for the 35th consecutive year when counting the increase announced in February of this year. In the final accounting, Toromont left 2023 behind with a very strong balance sheet, good cash generation to support continued investment in the business and a sizable backlog of $1.2 billion. That brings us to the first quarter of 2024 ended March 31. Historically, this period reflects seasonality in areas of our business, including construction. This context is important as we evolve toward normalized supply and demand, and it reminds us to look over a cycle versus any one quarter. Looking at the results, revenue of $1 billion was down 3% for the quarter compared to the same period last year, which represents a strong comparable. Revenue decreased in the equipment group 3% and increased at CIMCO 3%. While new equipment deliveries and rentals were lower, product support revenues increased 4% across our enterprise. Operating income decreased 17% in the quarter, in part reflecting the lower revenue. Gross margins were lower as expected after a period of good market dynamics, while expenses have increased as we continue to invest in our operations for growth and performance over the longer cycle. Operating income as a percent of revenue at 10.5% compared to 12.2% in the similar period last year. Earnings of $83.9 million were 13% lower from last year while earnings per share on a basic basis where was $1.02. Backlog at the end of the quarter was $1.4 billion, up from both this time last year and from December 31, 2023. The increase reflects good order intake during the quarter, along with some delays in construction and customer delivery schedules. The balance sheet was strong with approximately $1 billion of cash on hand. Before I leave off, I amplify Mike's comments about our Connect26 business plans. We plan because every Toromont business has [indiscernible] set up what it intends to achieve between now and 2026, with a accompanying revenue expense investment, customer loyalty, safety, employee development, workforce growth and environmental goals. In every area, we seek to continuously improve, and I believe we have all the right ingredients in place to do that. And we're disciplined, often appears in our materials for a reason. We believe good intentions mean nothing without a committed followthrough. I can assure you that we will hold ourselves accountable, we're putting in the work to realize our objectives. I can also assure you that as we grow, we will stay true to Toromont's proven strategies and capital allocation and expense disciplines. And I look forward to doing my part to add value in the future. Thank you for listening and back to the Chair.

Thank you, Mike and John. We would be pleased to answer your questions at this time.

Mr. Chair, we have not received any questions at this time.

Thank you for joining us today, and thank you for your support during the past year. We wish you and your family's good health and are signing off.