U.S. Markets closed

Edited Transcript of TIH.TO earnings conference call or presentation 5-Nov-19 1:00pm GMT

Q3 2019 Toromont Industries Ltd Earnings Call

Concord Nov 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Toromont Industries Ltd earnings conference call or presentation Tuesday, November 5, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Paul R. Jewer

Toromont Industries Ltd. - CFO & Executive VP

* Scott J. Medhurst

Toromont Industries Ltd. - CEO, President & Director

================================================================================

Conference Call Participants

================================================================================

* Ben Cherniavsky

Raymond James Ltd., Research Division - MD & Head of Industrial Research

* Cherilyn Radbourne

TD Securities Equity Research - Analyst

* Derek Spronck

RBC Capital Markets, Research Division - Analyst

* Devin Dodge

BMO Capital Markets Equity Research - Analyst

* Jacob Jonathan Bout

CIBC Capital Markets, Research Division - MD of Institutional Equity Research

* Maxim Sytchev

National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst

* Michael Doumet

Scotiabank Global Banking and Markets, Research Division - Analyst

* Yuri Lynk

Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning. Today is Tuesday, November 5, 2019. Welcome to the Toromont to Announce the Third Quarter 2019 Results Conference Call. Please be advised that this call is being recorded. Your host for today will be Mr. Paul R. Jewer. Please go ahead, Mr. Jewer.

--------------------------------------------------------------------------------

Paul R. Jewer, Toromont Industries Ltd. - CFO & Executive VP [2]

--------------------------------------------------------------------------------

Thank you, Lori, and good morning, everyone. Thank you for joining us today to discuss the results of Toromont Industries Limited for the third quarter of 2019. Also on the call with me is Scott Medhurst, President and Chief Executive Officer. Before we continue, I'd like to advise listeners that this presentation may contain forward-looking statements and information that are subject to certain risks, uncertainties and assumptions. For a complete discussion of the factors, risks and uncertainties that may lead to actual results or events differing materially from those expected, refer to Toromont's press release and MD&A from yesterday, which is available on our website. We assume you've had the opportunity to review our press release and related financial information, and as such, we'll focus on key highlights. Scott will begin with a few general remarks and some comments on our outlook and for which I'll provide some highlights on the financial results. Then we'll be more than happy to answer your questions. Scott?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Thank you, Paul, and good morning, everyone. Last week marked the 2-year anniversary of the acquisition of the Québec and Maritime operations, and we are pleased with the progress to date. The new Eastern Canada equipment team came together during this period to execute a complex and demanding integration while maintaining focus on business deliverables, including Battlefield's transition to a common system platform this past June. We thank the entire team for their level of commitment and contributions. We continue on the path to leverage the strengths of the larger geographic footprint and standardized best practices across the organization, all while delivering uncompromising quality and standards that our key stakeholders expect. Now, much work still remains on the integration, but we are well underway and continue to believe that this expansion presents a great opportunity for the long-term performance and success of our company. Our financial results for the quarter reflect solid execution and a disciplined expense management. This increasing proportion of product support and rental revenues to total revenues across the enterprise continues to contribute positively to the higher earnings.

Consolidated revenues increased 8% in the quarter and 5% year-to-date with growth in most revenue streams in the equipment group and on product support revenues at CIMCO.

Net earnings were up 16% in the quarter and 15% year-to-date after adjusting for a nonrecurring gain recorded in the first quarter of this year.

In the Equipment Group, investment in infrastructure projects and broader construction activity continued to present opportunities, although market activity has softened on a year-over-year basis. The parts and service business has realized significant growth in recent years driven by the larger installed base of equipment and provides opportunity for further growth, together with increased stability and predictability in the variable business environment.

Our shops and technicians remain busy, and we continue to hire and invest in infrastructure to address growing demand signals. Developing technology, supporting remote diagnostics and telematics, is very exciting for us and also present opportunities for long-term growth. We continue to assess our rental footprint with a disciplined investment approach, which includes a balanced, diversified fleet and strategic go-to-market strategies to stabilize seasonality. We are pleased with the results to date. This recognizing it takes time to absorb the recent investments and build the proper infrastructure. We are very cognizant of the return curve and stand by our analogy of the orchard versus the wheat field. And in the mining sector, activity has been slower to date versus a strong year in 2018, which included large deliveries. Production, however, continues at existing mine sites and is generating meaningful product support opportunities with the potential for incremental equipment sales to facilitate mine expansion.

CIMCO's project execution continued to improve in the quarter, but markets remained competitive with tight operating environments. Strong product support growth continued to bode well for the long-term success. Booking activity and backlog levels were good and in line with expectations. Across all our businesses, the diversity of our regions, the markets served, extensive product support and service offerings and financial strength, combined with the disciplined operating culture, position us well for the long term. I will now turn the call over to Paul to take you through highlights of the financial results. Paul?

--------------------------------------------------------------------------------

Paul R. Jewer, Toromont Industries Ltd. - CFO & Executive VP [4]

--------------------------------------------------------------------------------

Thanks, Scott. Let's put some color on the operating results, starting with the Equipment Group. Revenues were up 10% in the quarter and 5% year-to-date. New equipment sales rebounded following a slow start to the first half of the year with good sales in the construction and agriculture markets, offsetting the softer mining and power system sales.

Used equipment sales were up on higher fleet dispositions as source and good used iron remain challenging. As a result, total new and used equipment sales were up 14% in the quarter but were unchanged as a percentage year-to-date.

Construction sales increased 30% in the quarter and 8% year-to-date. Activity levels and good market penetration was good in Québec, while road activity ramped up in Ontario and Manitoba in the quarter. In mining, sales were down 32% in the quarter and 29% year-to-date partially reflecting a tough prior year comparator, which included large deliveries.

Power systems sales were down 11% in the quarter and 10% year-to-date, largely reflecting deferrals in customer construction schedules and limited availability of certain models.

Agriculture sales increased 31% in the quarter but were down 4% year-to-date. Material handling sales were down 3% in the quarter and 11% year-to-date.

Rental revenues were up 3% in the quarter and 10% year-to-date. Battlefield reported good growth in most regions with Québec accounting for approximately half of their increase in the quarter and 60% on a year-to-date basis.

Heavy rentals were down in the quarter and year-to-date with only Québec reporting growth on a larger fleet. Power rentals increased in Québec and Atlantic Canada but were offset by lower activity in Ontario in both the quarter and year-to-date.

RPO revenues were up 17% in the quarter and 33% year-to-date with the fleet growing at $17 million to $96 million versus this time last year.

Product support revenues grew 9% in the quarter and 10% year-to-date on growth in both parts and service in most markets.

Gross profit margins decreased 110 basis points in the quarter and 10 basis points year-to-date, largely on lower equipment rentals and product support margins. The sales mix of product support revenues to total revenues dampened margins in the quarter but had a favorable impact year-to-date. Selling and administrative expenses in the first quarter -- in the third quarter included -- in the first quarter included a nonrecurring gain, which I will exclude and not reference for the remainder of the year-to-date remarks.

For the quarter and year-to-date, expenses were relatively unchanged as a percentage, which translated into lower expense to sales ratios. Operating income increased 12% in both the quarter and year-to-date. As a percentage of revenues, operating income increased 10 basis points in the quarter and 60 basis points year-to-date. Bookings increased 4% in the quarter but were down 5% year-to-date. Construction activity levels have been healthy throughout the 3 quarters and served to offset softness in other segments, although we did see higher mining and material handling orders come through in the quarter.

Backlogs of $325 million were 11% lower than this time last year. 75% of which we expect to be delivered over the remainder of this year.

Now let's turn to CIMCO. Revenues were down 6% in the quarter and 3% year-to-date. Package revenues decreased 18% in the quarter and 16% year-to-date. In Canada and the U.S., lower industrial sales more than offset increases in recreational activity in both quarter and year-to-date. Product support revenues were up 13% in the quarter and 16% year-to-date with growth in both Canada and the U.S. Gross profit margins increased 530 basis points in the quarter and 190 basis points year-to-date on significantly improved project execution in the third quarter versus the cost overruns on 1 U.S. project in 2018.

A favorable sales mix of product support revenues to total revenues also lifted margins. Selling and administrative expenses were relatively unchanged as a percentage of both the quarter and year-to-date but were up 70 basis points and 50 basis points, respectively, as a percentage of revenues.

Operating income increased 62% in the quarter and 21% year-to-date on the higher gross profit margins. Bookings in the quarter increased 34% with higher Canadian orders offsetting lower U.S. orders. Year-to-date, bookings were up 1% with increases in both Canada and the U.S. Backlogs of $129 million were up $3 million or 2%, and we expect approximately half to be realized as revenue over the remainder of the year.

On a consolidated basis, net earnings increased 16% to $79.7 million in the quarter and 15% to $192.7 million. Basic EPS was up $0.14 to $0.98 for the quarter and up $0.31 to $2.37 year-to-date. Investments in noncash working capital were up $98 million to $476 million versus a year ago, largely as a result of strategically increasing inventory levels given improved availability and aggressive positioning for better penetration of the expanded markets and in light of transitional terms from suppliers.

We expect to return to more normal levels as these terms end mid-year 2020. As of September 30, we maintained our very strong financial position with cash of $226 million and a strong balance sheet. Leverage as a percentage, as represented by the net debt to total capitalization ratio, was 22% compared to 25% at this time last year. We're also pleased to continue our long track record of superior shareholder returns, delivering increased dividends, at 21% -- 21.9% trailing 12-month return on opening shareholders' equity and a 22.9% trailing 12-month pretax return on capital employed.

That concludes our prepared remarks, and we'll be pleased to take your questions. Laurie?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And the first question is from Jacob Bout from CIBC.

--------------------------------------------------------------------------------

Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [2]

--------------------------------------------------------------------------------

So equipment backlog down quarter-on-quarter, year-on-year. And from what we're seeing, the lowest levels since you added Hewitt. Is this just lower mining activity? Or is there something structural we should be thinking about?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Yes, there's many variables impacting that right now. One, obviously, is the availability has improved on a year-over-year comparison. Our inventory levels are up. We went into the year. When we started -- you start ordering in Q4 for the current year. And at that time, we were still operating in a tighter availability market, and we wanted to be aggressive, continuing with our market penetration strategies. And then we've seen market softening throughout the year, particularly in the third quarter. So that's a combination of availability impacting backlog. And the big factors of backlog usually are the mining and the Power Systems business. And that's been a bit softer over the year. So those are the variables that are really impacting things.

--------------------------------------------------------------------------------

Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [4]

--------------------------------------------------------------------------------

Okay. Like, construction markets, I think you saw some quite -- some nice growth there, up 30%?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [5]

--------------------------------------------------------------------------------

Yes. We're -- one of the highlights for the quarter was the construction team and the execution and the penetration of the markets. The markets were softer. We saw heavy construction down about 13% year-to-date. So -- but we're getting good market penetration. So that was a very favorable outcome for the team with the execution, with our strategies in that area.

--------------------------------------------------------------------------------

Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [6]

--------------------------------------------------------------------------------

And on those construction sales numbers, what was the growth in Ontario versus Québec?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [7]

--------------------------------------------------------------------------------

We had good growth throughout. But Québec, in particular, we saw some great strides being made in the Québec markets.

--------------------------------------------------------------------------------

Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [8]

--------------------------------------------------------------------------------

And how are you feeling about the Ontario market right now? I know last quarter, you were commenting on some weakness, but it sounds like...

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [9]

--------------------------------------------------------------------------------

Softer. It's softer.

--------------------------------------------------------------------------------

Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [10]

--------------------------------------------------------------------------------

Yes. Road activity, though, was better?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [11]

--------------------------------------------------------------------------------

It's a little better in there, but it's a softer market overall on a year-over-year comparison. But again, the team is executing with the opportunities that are being presented.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

Our next question is from Cherilyn Radbourne from TD Securities.

--------------------------------------------------------------------------------

Cherilyn Radbourne, TD Securities Equity Research - Analyst [13]

--------------------------------------------------------------------------------

Maybe I could just pick up on some of Jacob's questions to start and ask if you could give us a bit more detail in terms of industry sales trends in the quarter and year-to-date.

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [14]

--------------------------------------------------------------------------------

Well, where your -- on a year-to-date -- and when I -- I'll talk more. The smaller iron is -- it's only down slightly. It's in the -- these other markets, the mining, the heavy construction. And so you've got some declines going on in there on a year-over-year, around the 13%. Overall, with the larger iron down about 7% on a year-to-date. So it's softer markets, but there's -- the smaller iron is holding up. But we're pleased with how the team is executing and delivering those value propositions in the market.

--------------------------------------------------------------------------------

Cherilyn Radbourne, TD Securities Equity Research - Analyst [15]

--------------------------------------------------------------------------------

And then on the rental side. We were a little surprised to see the growth rate decelerate to 3% in the quarter versus 15% in the first half of the year. Maybe you can just give us a bit more color on that?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [16]

--------------------------------------------------------------------------------

Yes. Heavy -- I mean heavy rental was down in the quarter. And what that -- there was -- again, it's mainly in the Ontario market because we had some large projects that the rental group was able to capitalize on last year, and that wasn't repeated this year.

--------------------------------------------------------------------------------

Cherilyn Radbourne, TD Securities Equity Research - Analyst [17]

--------------------------------------------------------------------------------

Okay. And is there any change to your planned net rental CapEx for the year? I think you've been talking about $170 million to $180 million.

--------------------------------------------------------------------------------

Paul R. Jewer, Toromont Industries Ltd. - CFO & Executive VP [18]

--------------------------------------------------------------------------------

I think it will be a bit light of that at this point in time. We've had heavier dispositions. The numbers we always quote are on a net basis, Cherilyn. So I think we're probably maxed out at about the $135 million where we are year-to-date.

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [19]

--------------------------------------------------------------------------------

That's where we are year-to-date.

What's going on there is we've got some very good growth going on in Québec, but we're continuing to build the infrastructure, right, to execute, and that's an area of focus right now.

--------------------------------------------------------------------------------

Cherilyn Radbourne, TD Securities Equity Research - Analyst [20]

--------------------------------------------------------------------------------

And then I did want to also touch on the rental fleet dispositions because I think you were holding back on those last year. So should I interpret that, that your rental fleet dispositions are starting to normalize based on better supplier availability of new equipment?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [21]

--------------------------------------------------------------------------------

Yes. That's one of the factors. You're absolutely right. Last year, we had to hold on a little longer than we wanted to. And this year, we're trying to come into and get into a normal state in there with the disposition relative to the uploads.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Your next question is from Michael Doumet from Scotiabank.

--------------------------------------------------------------------------------

Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [23]

--------------------------------------------------------------------------------

I just wanted to talk about the product support. So parts growth exceeded service growth, I think, for the second consecutive quarter. I'm just wondering whether there's anything driving a trend here and whether it's possible that demand for service is exceeding the ability to hire technicians? Or if this is Toromont gaining share in parts?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [24]

--------------------------------------------------------------------------------

We continue to be very focused on that opportunity on the product support and parts in particular, that's a key benchmark for us, and we are improving. The team is doing a nice job in there. The other thing that we continue to see nice trends on is these rebuilds. We're up about 18% in there on the unit rebuilds, which is -- continues to be good trends, and that can -- those are some large components being integrated into that process. So that's a bit of a shift too. And you get some swings in there with these rebuilds and component demands in the mining sector. So those are the variables in play, but we're pleased with the product support growth.

--------------------------------------------------------------------------------

Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [25]

--------------------------------------------------------------------------------

And just as it relates to labor. I mean, do you feel like you've got enough technicians given, some of the labor markets are pretty tight?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [26]

--------------------------------------------------------------------------------

We continue to increase our headcounts and technicians. Again, we're satisfied with the uptick there. And we got to make sure we're -- training is another key focus with the inflow of the apprentices. So I think we're doing a decent job in there. And like our service numbers are up. And our -- when you look at our revenue, labor hours, we're pleased with that. So I think we're satisfied with what's going in there, and it continues to be an area that we need to execute.

--------------------------------------------------------------------------------

Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [27]

--------------------------------------------------------------------------------

Okay. Great. And then just turning to CIMCO. Just another good quarter. Could you discuss whether the execution challenges of recent quarters are fully behind and whether some of those growing pains have maybe changed your operating philosophy or growth expectations for that business going forward?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [28]

--------------------------------------------------------------------------------

So we are pleased with the second quarter in a row where there was improvement in the execution. We're -- I don't think we should get too far ahead of us. So we're pleased, we're progressing. We've addressed a lot of areas. We continue to focus on areas like project coordination estimating. That's improving. Obviously, the execution of the interface with our supply chain. So there's good progress, and we will continue to focus on those areas. And that's -- but we're satisfied with the progress so far.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

Our next question is from Yuri Lynk from Canaccord Genuity.

--------------------------------------------------------------------------------

Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [30]

--------------------------------------------------------------------------------

Can you talk about the return profile of your heavy and power rental fleet compared to this time last year when you were really in an investment mode and compare it to where you ultimately want to get those returns?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [31]

--------------------------------------------------------------------------------

Well, we're still in investment mode. And -- but the utilization came off a bit, but part of that is the denominator with these uploads. And so that puts a little pressure. But long term, we feel we're doing the right thing. I mean we're expanding here in the rental services as well, same thing. And it's getting that infrastructure investment to meet those uploads, but we're satisfied with the progress and realize that there's a bit of a drag in there right now. But that's how you build this model for the long term.

--------------------------------------------------------------------------------

Paul R. Jewer, Toromont Industries Ltd. - CFO & Executive VP [32]

--------------------------------------------------------------------------------

We're very focused on the long-term with this thing, right? And I now have overused the orchard and wheatfields analogy, but it is apt. One of the things that we certainly find and continue to find, as Scott said, we're in investment mode. And what that means is, as we ramp up the fleets, we have to be focused on the ability for both the company and the markets to absorb these fleets. We're making meaningful investments. And obviously, you have to have the people and infrastructure and processes in place to make sure that, that gets absorbed, and we increased the amount of capital that's allocated into a specific market, and that has to be absorbed. So I think we just find that normal at this point in time as we ramp this up.

--------------------------------------------------------------------------------

Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [33]

--------------------------------------------------------------------------------

Right. But Paul, how do you think about making those investments when -- based on the MD&A and your comments on the call, it looked like activity softened in the third quarter, and I understand the long-term thinking, but just this is a capital-intensive part of the business that is tougher -- much tougher to manage when the demand is not there, as you know?

--------------------------------------------------------------------------------

Paul R. Jewer, Toromont Industries Ltd. - CFO & Executive VP [34]

--------------------------------------------------------------------------------

Yes and no. As it relates into our ability to manage this. And we certainly -- as we saw a downturn in 2009, which is not the circumstance that we're currently in. We certainly manage fleets at that point in time by stretching [age.] So you have that ability, basically, to manage that fleet over time, certainly not on a dime change but certainly over time. As it relates into what we've seen so far. We've seen some decent performance in rental fleets. And largely, what we're finding is this absorption factor is the key element that we're dealing with. And just giving you basic stats in terms of tossing it out. At Battlefield, in the quarter, rental revenues were up 11%, but depreciation charges were up 20%, right? So as you ramp these things up, we simply have our depreciation on a straight-line basis, and those are one of the elements that get reflected in this absorption comment that I'm referring to.

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [35]

--------------------------------------------------------------------------------

Just a little more color there. One of the things we're really focused on here, as Paul said, we're getting -- in some areas, this revenue growth, which is excellent, and it reflects the long-term investment here than the demands in the market. But we have to improve our turnarounds. When they come off rent, we got to get quick turnarounds. So it's building that infrastructure with this inflow that's going on, it takes time. So we're satisfied with how we're progressing there.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

The next question is from Derek Spronck from RBC.

--------------------------------------------------------------------------------

Derek Spronck, RBC Capital Markets, Research Division - Analyst [37]

--------------------------------------------------------------------------------

Just wanted to get a -- I just wanted to get an overall sense of how you're feeling about general market trends heading into 2020?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [38]

--------------------------------------------------------------------------------

So it's a cost -- you saw our RPO is up about 25% on a year-over-year basis. So that -- we're pleased that we're capturing that opportunity. We'll see how that plays out, what the conversion rates are going to be, but I think it also reflects there's some caution out there with our customers.

--------------------------------------------------------------------------------

Derek Spronck, RBC Capital Markets, Research Division - Analyst [39]

--------------------------------------------------------------------------------

Any particular markets or segments that you're feeling more optimistic or less optimistic?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [40]

--------------------------------------------------------------------------------

Well, let me frame it a different way. We're really pleased that after 2 years, with the progress we've made and mining markets have been down, and we're still able to generate growth. And I think that's reflective of the expanded territories and the diversity that we have in there. And so we're pretty pleased with that. It's helping through some softness, right? Which is the power of this new operating world we're in.

--------------------------------------------------------------------------------

Derek Spronck, RBC Capital Markets, Research Division - Analyst [41]

--------------------------------------------------------------------------------

There's been a little bit of a fairly volatile shift between new sales and rental growth. Is that just general quarterly variance? Or is there anything from a trend perspective that we should be thinking about there?

--------------------------------------------------------------------------------

Paul R. Jewer, Toromont Industries Ltd. - CFO & Executive VP [42]

--------------------------------------------------------------------------------

The core factors that you're looking at in terms of new equipment sales on a year-over-year basis would be the impact of mining sales year-over-year largely, right? So that would certainly be curtailing it a little bit. So I wouldn't look at it as anything more than typical quarterly lumpiness.

--------------------------------------------------------------------------------

Derek Spronck, RBC Capital Markets, Research Division - Analyst [43]

--------------------------------------------------------------------------------

Okay. And the -- you mentioned pricing pressure just on the gross margins. Is that just the competitive pressures, competitors trying to underprice or where is that comment stemming from?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [44]

--------------------------------------------------------------------------------

It's a tight operating environment. But that's -- it's not something we haven't seen before. And you've also got some drag in there with the rental uploads that are going on, as Paul outlined. And so those are key areas impacting some of the margins.

And then some of the mix in there as well in the product support revenue streams.

--------------------------------------------------------------------------------

Derek Spronck, RBC Capital Markets, Research Division - Analyst [45]

--------------------------------------------------------------------------------

Okay. And maybe just one more for myself. The SG&A costs as a percent of revenue came in nicely. It looked like there was a couple of nonrecurring or less recurring items. How should we think about SG&A costs kind of going forward here?

--------------------------------------------------------------------------------

Paul R. Jewer, Toromont Industries Ltd. - CFO & Executive VP [46]

--------------------------------------------------------------------------------

Well, there really wouldn't be nonrecurring items. I mean there are always puts and takes that we're dealing with in terms of the quarter. We would have drawn attention to those elements. But I'd largely look at our SG&A cost trends as being largely related to inflationary growth basically at this point in time. And one of the largest components that we have is compensation. And as an underlying factor, and that continues to track inflation, basically.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

The next question is from Ben Cherniavsky from Raymond James.

--------------------------------------------------------------------------------

Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [48]

--------------------------------------------------------------------------------

Most of my questions have been asked already. If I could -- not to get too granular, but if I could ask you maybe just to comment on the ag side. Pretty significant growth. I know it's a small business. So you're sort of -- a lot of small numbers on that. But even year-to-date, down 4%. That's pretty good in the context of what we're seeing in the ag markets, generally. What's happening there for you guys?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [49]

--------------------------------------------------------------------------------

It's a tough market, Ben. We were fortunate. What happened was we had some slippage into the quarter, particularly on our combined sales. So the team, I think, did a decent job capturing some of the market penetration. And we had -- probably we're going to get those pre books. So we were pretty solid with the pre books coming into the year. And so, well, the team executed in there, but it is a tough operating environment. You've heard it throughout Western Canada, and it's consistent in our area of Manitoba. But we're satisfied with those deliveries in the quarter, but it is a challenging environment.

--------------------------------------------------------------------------------

Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [50]

--------------------------------------------------------------------------------

Are these -- aren't these challenging environments, in some ways, what you guys thrive on? Like does this present opportunities to try to grow the business and acquire some of the operators out there that might be struggling? And if you're not doing that, what does that say about your long term commitment? Like how -- I guess, just to ask it another way, I think, you're into this experiment 4 or 5 years, maybe longer now, I've lost track. But how satisfied have you been with the business in general and your willingness to grow it?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [51]

--------------------------------------------------------------------------------

We're still very -- well, the markets are off significantly in there, in the ag segment in Manitoba. But we still have a ways to go in there on the operational side. I'd say, last year, we made some progress. And now the -- it's just a troubling environment, what's going on with many outside variables impacting it as we're hearing about weekly. But we're still focused on the operational side, and we're pleased with the market share, particularly with our combines. We've done -- the team has done a nice job in there, and we'll continue to focus on that. It's continued to perform, and we'll see where we go with it.

--------------------------------------------------------------------------------

Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [52]

--------------------------------------------------------------------------------

But you're not prepared at this point to expand it in any material way?

--------------------------------------------------------------------------------

Paul R. Jewer, Toromont Industries Ltd. - CFO & Executive VP [53]

--------------------------------------------------------------------------------

We are focused on improving the thesis before we look at any expansion opportunities.

--------------------------------------------------------------------------------

Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [54]

--------------------------------------------------------------------------------

Yes. Okay. And like I said, a few questions have been asked already, but if I could just maybe try to get you to elaborate a little more on CIMCO because of huge margin variability year-over-year and even just over the last few quarters. And I respect you don't want to do too much handholding with respect to margins. But we have to put something in our models. And what's -- what can we expect? Like this was a record number. Was there anything unusual in the quarter that produced this kind of a margin? Or have you made some changes that might make these kind of numbers, give or take some basis points, sustainable over the next few quarters or into next year?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [55]

--------------------------------------------------------------------------------

So Ben, it's, again, highly focused on the execution, the project coordination and the estimating and the interface with our suppliers. So that -- 2 quarters in a row, good progress obviously, we want a sustainable outcome here. And so that's where the focus is. But we -- the other thing that was impactful is we're very pleased, again, with the product support growth. Even in the U.S., the product support growth in the U.S. was very strong. I think it was up around 4% to 40% for the quarter. So good trends in there. We're hiring technicians. We're seeing good labor demands in there. So those are good signals. But on the project side, we continue to be focused on the execution and to build that sustainable model.

--------------------------------------------------------------------------------

Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [56]

--------------------------------------------------------------------------------

And that product support has been -- that's a delivered strategy, too, right? That's the result of focus that...

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [57]

--------------------------------------------------------------------------------

Yes. Absolutely. Yes. Absolutely.

--------------------------------------------------------------------------------

Paul R. Jewer, Toromont Industries Ltd. - CFO & Executive VP [58]

--------------------------------------------------------------------------------

Just to go back to add to the comments, Ben. I mean there's nothing unusual in the third quarter of 2019 related to project closeouts or anything of that nature. But certainly, just draw your attention back to Q3 of 2018. We had a $2.3 million charge, basically, that we disclosed in the MD&A last year related to 1 project, right? So if you're just comparing year-over-year. Obviously, that's a significant factor.

--------------------------------------------------------------------------------

Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [59]

--------------------------------------------------------------------------------

Yes, it was an easy comp. But yes, sometimes, you have some closeouts and things like that, that...

--------------------------------------------------------------------------------

Paul R. Jewer, Toromont Industries Ltd. - CFO & Executive VP [60]

--------------------------------------------------------------------------------

Yes. Absolutely.

--------------------------------------------------------------------------------

Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [61]

--------------------------------------------------------------------------------

Yes. Okay. So -- and if I could sneak in 1 more, again, sort of along the lines of what's been asked already with respect to the competition, but -- or the competitive pressures. But if you look at it another way, the last few years, Caterpillar has been reporting very material growth from price realization. I think the last quarter was not as material. But over the last few years, it's been a big contributor to their performance. And is it correct to assume that, that -- by and large, I know they do some stuff OEM direct, but by and large, that -- those are price increases they're passing on to the dealers? And how do you guys manage that when the market is as competitive as it's been? And how material has that been? Because you don't really disclose gross margins on -- just segmented by equipment group, but how material has that been as a challenge for you in the current environment?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [62]

--------------------------------------------------------------------------------

Well, Ben, I think it's -- there hasn't been anything totally unusual. We've been in this business a long time, and we work closely with Caterpillar on our value propositions, and they've been a good partner for us to help execute. We're seeing some decent market penetration. We're pleased. We don't want to get ahead of ourselves there. But we're pleased with our alignment with Caterpillar and how we're executing in the market on print product sales and parts sales. So I can't comment on how they're -- what's driving that for Caterpillar. They're a global company. I just -- we just focus on area and our value propositions to our customers. But I think we're satisfied so far.

--------------------------------------------------------------------------------

Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [63]

--------------------------------------------------------------------------------

Can you elaborate a little bit on the value proposition on what your -- like what is the pitch that you give to a customer that makes him consider the Cat product, even at the premium and maybe, at times, an increasing premium on the competition?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [64]

--------------------------------------------------------------------------------

I don't want to get in -- we're very careful here with our competitors. We -- here's what I'll say. We're focused on the building blocks of the model to deliver. The product support investments are very important for us. And that's what we're trying to continue. You're seeing that. I think we're talking about that openly. That's a key area strategically for us, and that's where we try and really make a difference for our customers on that side. And that's what we've been building up in Québec and Maritimes and focus on there. And then the same thing on the rental business, just looking at the fundamentals and making sure we can deliver for those customers.

--------------------------------------------------------------------------------

Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [65]

--------------------------------------------------------------------------------

So cost of ownership, uptime, all those...

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [66]

--------------------------------------------------------------------------------

Uptime availability, operating costs, all those variables, and they differ relative to some of the applications that you're operating in.

--------------------------------------------------------------------------------

Operator [67]

--------------------------------------------------------------------------------

The next question is from Maxim Sytchev from National Bank Financial.

--------------------------------------------------------------------------------

Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [68]

--------------------------------------------------------------------------------

I'm just -- again, not trying to beat a dead horse there, but in terms of kind of the overall macro commentary, it seems to be a bit softer. But at the same time, you guys are hiring technicians. You talk about demand signals being pretty positive on some of the markets. So is it much more of a market share penetration dynamic right now that you see an opportunity? How should we just think about that somewhat contradictory dynamic between industry and hiring?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [69]

--------------------------------------------------------------------------------

Yes. So good question, Max. Let me clarify that. So when we're talking about softening, we're talking about the new unit industry deliveries in the territories we're operating in, okay? And then when we shift over to the product support side. We continue to get good demand signals in there plus when we -- we're much better at quantifying our market opportunities in there, and that's why we're saying we're hiring technicians revenue-generating positions to strategically execute our plans. So that's what's going on there.

--------------------------------------------------------------------------------

Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [70]

--------------------------------------------------------------------------------

Right. Okay. I just wanted to clarify this. And then can you maybe talk about -- at all about the demand signals on mining? What you're seeing in both Ontario and Québec, maybe if you can delve into those 2 geographies, please?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [71]

--------------------------------------------------------------------------------

Product support continues to be solid in there. So that's good. The mines are producing. I think it's a cautious environment in terms of purchasing a prime product. There is opportunities, but it's a very cautious environment, but there's opportunities.

We have to win those opportunities, improve our value proposition, yes.

--------------------------------------------------------------------------------

Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [72]

--------------------------------------------------------------------------------

And here, you're talking about both on the new equipment side and product support, obviously?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [73]

--------------------------------------------------------------------------------

Yes, on the new side, yes.

--------------------------------------------------------------------------------

Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [74]

--------------------------------------------------------------------------------

On the new side. Okay. And then maybe just one last question for Paul, if I may. You made a reference to -- you had an agreement with suppliers ending by mid-2020. Can you maybe talk a little bit in terms of how that could potentially impact the noncash working capital inventory, sort of, all these things so that we can prepare ourselves psychologically for that? Any impact? Sorry.

--------------------------------------------------------------------------------

Paul R. Jewer, Toromont Industries Ltd. - CFO & Executive VP [75]

--------------------------------------------------------------------------------

Yes. So this goes back to something that has built up over the course past couple of years from the transaction time frame. And we'll -- as we say in the report, will start to unwind in the middle of next year and unwind through the balance of the next year without getting specific into specific numbers related to -- I mean, you can certainly, in your modeling, Yuri -- Max, you'd certainly see that inventories and payables would have a different trajectory, basically. So you could get some estimation on that front, but we'll see a slow unwinding as we go through the back half of last year. And we're certainly in a position to deal with that.

--------------------------------------------------------------------------------

Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [76]

--------------------------------------------------------------------------------

Right. And can you maybe comment on materiality at all? Or how do you feel about that?

--------------------------------------------------------------------------------

Paul R. Jewer, Toromont Industries Ltd. - CFO & Executive VP [77]

--------------------------------------------------------------------------------

It will be managed within the context of our current operating environment and operating lines.

--------------------------------------------------------------------------------

Operator [78]

--------------------------------------------------------------------------------

The next question is from Devin Dodge from BMO Capital Markets.

--------------------------------------------------------------------------------

Devin Dodge, BMO Capital Markets Equity Research - Analyst [79]

--------------------------------------------------------------------------------

Just wondering what we should be expecting for maybe net rental CapEx for the balance of 2019? And I know it's still early, but how should we be thinking about rental CapEx in 2020?

--------------------------------------------------------------------------------

Paul R. Jewer, Toromont Industries Ltd. - CFO & Executive VP [80]

--------------------------------------------------------------------------------

So for 2019, basically I'd expect that we're pretty much stable at this point in time. So we've had about a net of $135 million so far. So we'll have some more dispositions, and we'll have some more investments. But in total, it will probably be somewhere around that number. We're just kicking into our planning process at this point in time, Devin. So as we look into next year, starting point would be reasonably consistent with those numbers for next year, but we'll have to see and fine-tune that as we hear from our management teams.

--------------------------------------------------------------------------------

Devin Dodge, BMO Capital Markets Equity Research - Analyst [81]

--------------------------------------------------------------------------------

Okay. Yes, that makes sense. Okay. And maybe just a broader question, but you're about 24 months from closing the Hewitt deal. You've had a lot of successes, you demonstrated a lot of progress in rolling out that business, your business model, integrating Hewitt into your legacy operations. Just looking ahead, what do you see as the biggest remaining opportunities maybe over the next 12 months and then maybe over the medium to longer term?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [82]

--------------------------------------------------------------------------------

So yes, we're pleased with how the team has come together and how we've executed in some of these -- the first 2 years of the plans. Next phase, we've -- we talked about Battlefield. It was really a non-event with that ERP integration. So that's how we like it. We still have another move to make on that front on the Caterpillar business that we operate in. So that will be instrumental in helping us execute. We're very focused on the next phase with more disciplines in the operating side, more asset management focus. That's coming to the forefront. We've got our model in there with our branch managers, and we're starting to move forward with those initiatives and help train our managers on that front. So still ways to go. But so far, pleased with the integration and some of the outcomes.

--------------------------------------------------------------------------------

Operator [83]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is from Cherilyn Radbourne from TD Securities.

--------------------------------------------------------------------------------

Cherilyn Radbourne, TD Securities Equity Research - Analyst [84]

--------------------------------------------------------------------------------

Just a couple of quick follow-ups for me. Just in terms of Ontario, I guess what we were hearing anecdotally in the first half of the year anyway, is that there was some uncertainty related to the transition to a new provincial government. Is that still the primary driver? Or were there kind of other market developments during Q3?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [85]

--------------------------------------------------------------------------------

When you break out the segments, I mean, mining is down, the heavy construction is down. And overall, we saw a softness in the quarter. But I think there's a lot of variables in there. It's not just attributable to one thing, Cherilyn. I mean, there's still decent activity levels out there. I don't -- when you look at it on a historical basis. But it's just softened on a year-over-year, and I think it's just a cautious environment.

--------------------------------------------------------------------------------

Cherilyn Radbourne, TD Securities Equity Research - Analyst [86]

--------------------------------------------------------------------------------

Okay. And then in terms of the rollout of your IT system?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [87]

--------------------------------------------------------------------------------

Yes, Cherilyn. When I say that our -- the great thing is that our Québec industry numbers were pretty well flat, so that's good, right?

--------------------------------------------------------------------------------

Cherilyn Radbourne, TD Securities Equity Research - Analyst [88]

--------------------------------------------------------------------------------

Right. And just last one for me. As it relates to the rollout of your IT systems on the rental side into the acquired territory. Any sort of early data points on how that may be impacting the execution in the rental business?

--------------------------------------------------------------------------------

Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [89]

--------------------------------------------------------------------------------

No. If anything, that's giving us better visibility to run the business, that when we say non-event, it went as planned. We're very pleased with that. A lot of heavy lifting in there with some of our people, and we applaud them for their efforts and the execution. But this is just giving us better visibility.

--------------------------------------------------------------------------------

Operator [90]

--------------------------------------------------------------------------------

Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Paul Jewer.

--------------------------------------------------------------------------------

Paul R. Jewer, Toromont Industries Ltd. - CFO & Executive VP [91]

--------------------------------------------------------------------------------

Thank you, Laurie, and thanks, everyone, for their participation today. (foreign language) This concludes our call. Have a great day.

--------------------------------------------------------------------------------

Operator [92]

--------------------------------------------------------------------------------

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.