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Edited Transcript of TIH.TO earnings conference call or presentation 27-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Toromont Industries Ltd Earnings Call

Concord May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Toromont Industries Ltd earnings conference call or presentation Thursday, April 27, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Paul R. Jewer

Toromont Industries Ltd. - CFO and EVP

* Scott J. Medhurst

Toromont Industries Ltd. - CEO, President and Director

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Conference Call Participants

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* Ben Cherniavsky

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

* Cherilyn Radbourne

TD Securities Equity Research - Analyst

* Jacob Bout

CIBC World Markets Inc., Research Division - Research Analyst

* Maxim Sytchev

National Bank Financial, Inc., Research Division - Analyst

* Michael Doumet

Scotiabank Global Banking and Markets, Research Division - Analyst

* Sara O'Brien

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. My name is Shannon, and I will be your conference operator today. At this time I would like to welcome everyone to the Toromont to announce first quarter 2017 results conference call. (Operator Instructions)

It is now my pleasure to turn today's conference over to Mr. Paul Jewer. Mr. Jewer, you may begin your conference.

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Paul R. Jewer, Toromont Industries Ltd. - CFO and EVP [2]

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Thank you, Shannon, and good morning, everyone. Thank you for joining us today to discuss the results of Toromont Industries Ltd. for the first quarter 2017. 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 from yesterday, which is available on our website.

We assume that you had an opportunity to review our press release from yesterday, and as such, we'll focus on key highlights. Scott will begin with a few remarks and some comments on our outlook, after which I'll review the operating group results and financial position. Then we'll be more than happy to answer your questions. Scott?

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

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Thank you, Paul. Good morning, everyone. We delivered growth in the first quarter on solid execution across the business. The Equipment Group performed well on strength in mining, power systems and rentals despite broad challenges with tight pricing conditions. CIMCO delivered solid results with excellent activity in Canada. Across both groups, product support continues to provide a strong foundation. Consolidated top line grew 6% in the quarter and contributed to solid bottom line growth of 12%. In the Equipment Group, the long-term outlook for infrastructure spending remains positive following the federal budget. However, we're awaiting clarity on the timing and nature of the spend. We also remain cautiously optimistic on various provincial spending initiatives and expect to get better visibility to projects in the coming months. The parts and service business continues to be active and provides a measure of stability and opportunity for future growth. Our shops remain busy, and we continue to hire technicians in anticipation of increase in demand, including the opportunity for increased equipment rebuilds and readying used iron. In the mining sector, we are beginning to see increased activity, but challenges such as capital spending restraints and cost reduction initiatives are still evident. Production continues, which is good for our product support business. Opportunities also exist for sales and support of new mine development, mine expansion and equipment replacement.

In the agricultural sector, end markets are currently very weak. Much work remains or be incurred with the integration of broader product lines and improved market coverage. Focus will remain on sales participation rates and operational processes to generate longer-term financial returns. At CIMCO, performance continues to be positive and reflects the result of our focused strategies over the last number of years. Strong booking activity and record backlogs bode well for future prospects. Across all of our businesses, diversity and expanding product offerings and services, a solid financial position and a disciplined operating culture remain our strengths and position us for continued success.

I will now turn the call over to Paul to take you through highlights of the financial results. Paul?

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Paul R. Jewer, Toromont Industries Ltd. - CFO and EVP [4]

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Thanks, Scott. Let's dive right into the group results, starting with the Equipment Group. Revenues in the quarter were up 6% with higher equipment sales and rentals along with continued product support growth. New equipment sales increased 11% while used decreased 5%. We've previously described the interplay we see between new and used equipment sales. On a combined basis, equipment sales were up 5%. Rental revenues increased 18% on a larger fleet and improved time utilization across all rental segments. We continue to invest in this very important market segment to address expected demand, increasing our net rental investment to $281.7 million at the end of March 2017. Product support revenues increased 5% over the quarter. Both parts and service were up, benefiting from a larger installed base of equipment in our territory, good equipment utilization levels and higher rebuild activities. Margins were relatively unchanged versus last year as higher product support margins were offset by lower equipment margins and an unfavorable sales mix of product support revenues to total. Extremely competitive market conditions have continued to dampen these equipment and rental margins.

Selling and administrative expenses were up 4% in the quarter but lower as a percentage of revenues. Higher compensation costs, bad debt expenses and information technology costs accounted for the majority of the increase. Operating income was up 10% on a higher revenues and lower relative expense levels. Bookings increased 2% in the quarter with strong mining and power systems orders, partially offset by lower construction orders. Backlogs of $176 million were 40% higher than last year and represented the highest level at March 31, over the last 5 years. Backlogs can vary significantly from period to period on large project activities, especially in mining and power, the timing of orders and deliveries and the availability of equipment from inventory.

Now let's turn to CIMCO. CIMCO delivered solid results for the first quarter. Package revenues were up 2% in the quarter with strong Canadian activity levels offsetting lower sales in the U.S. Growth in Ontario and Atlantic Canada has been good while soft market conditions continued in Western Canada and Quebec. In the U.S., growth in recreational activity was strong but not enough to offset the impact of a large industrial package delivered last year that was not repeated. Product support revenues increased 8% in the quarter on higher Canadian activity levels. Margins improved 520 basis points on higher package margins and a favorable sales mix of product support revenues to total. The higher package margins were mainly as a result of lower warranty costs and improved execution.

Selling and administrative expenses increased 21%, reflecting investments made to support the growth of the business. Operating income increased 76% on the higher gross margins and revenues, partially offset by the higher relative expense levels. Bookings were up 37% with increases in both Canada and the U.S. Recreational activity levels increased in both Canada and the U.S. while industrial activity was up in Canada only. Consequently, backlog of $138 million were at record levels for the start of the year, with most expected to be delivered over the remainder of the year. On a consolidated basis, net earnings increased 12% to $27 million, and EPS was up 10% or $0.03 to $0.34 per share. At March 31, our overall financial position remained strong evidenced by a strong balance sheet and cash marginally exceeding all long-term debt.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Michael Doumet from Scotiabank.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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So you'd strong deliveries in the mining space this quarter, I think same as last quarter. Were there any large one-time deliveries? Or are we seeing a real pickup in activity here?

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

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It's still early, I'd say, in the first quarter, but we're pleased with the shift in new sales. It was a mix of underground and surface. We're still monitoring this closely. As I've said in the comments, still a very intense environment for capital restraint and operating efficiencies. A lot of focus on costs, so it's highly competitive, but the team did a nice job securing some business in the first quarter.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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Okay. (inaudible) time there. And maybe switching over, you recorded a pretty solid increase in service, in the Equipment Group. There's been a lot of insourcing of work recently. I mean, is it possible that we're seeing trends reverse or at least ease in that segment?

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

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Once we get too far ahead after our first quarter, what we saw was there was actually more of an increase in the labor, which was good. And that's why we continue to be focused on hiring. We get lumpy on the parts side a bit with rebuild activity and things. And we continue to see strong quoting activity. In the first quarter, our quoting activity was up about 3x on rebuild, although our invoicing wasn't at the same level, but that's the timing, and you still have to go earn it. So it's -- it was positive on product support, and we'll see how it plays out.

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Paul R. Jewer, Toromont Industries Ltd. - CFO and EVP [6]

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The other thing I wanted to add, Michael is, as we've said on previous calls, that trends in insourcing that I understand is existing in some other markets wasn't really a trend that we've seen substantially in our marketplace. So it wouldn't be a reversal of that trend because it's really just a matter of continued, steady growth basically in the service opportunities we have more effects, I mean, if we could add more.

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Operator [7]

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Your next question comes from the line of Cherilyn Radbourne from TD Securities.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [8]

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I appreciate that Q1 is kind of a seasonally weak period. So it's a little difficult to get a read on business conditions, but would just be interested in your thoughts as to how you feel about the outlook today versus at the time of your Q4 conference call?

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

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I'll provide comments on what we saw, Cherilyn. Again, we don't want to get too far ahead of ourselves here with what's based upon our first quarter. But the product support remained active on all components of (inaudible) special activity, but we're really pleased with the utilization on all components of our (inaudible)

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [10]

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And in terms of the mining orders that you booked during the quarter, were those primarily replacement demand? Or is that in fact new line expansion or even new line developments?

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

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There's a mix in there. But our minds are focused on production.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [12]

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And then I wanted to ask on CIMCO. Historically, that business has been unprofitable in the first quarter just in terms of seasonality. It hasn't been for the last couple of years, and I'm curious whether you think as you roll out your new strategies whether we can sustainably see a profit from CIMCO in Q1?

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Paul R. Jewer, Toromont Industries Ltd. - CFO and EVP [13]

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It really depends upon total business levels as a percent of the cash flow. It does have a fairly significant fixed cost side. It has engineering, which is one of the key strengths. As a consequence, the lower business levels that have been traditionally seen in the first quarter and fixed costs that basically come to the surface (inaudible) with the increase in total business levels or stay in the plus side of that, which is operating leverage. So should we have the opportunity to be able to transform and continue to grow this business at a multiple (inaudible) a little, we're still going to see Q1 as being just only the weakest quarter, that's the nature of that industry.

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Operator [14]

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Your next question comes from the line of Sara O'Brien from RBC.

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Sara O'Brien, RBC Capital Markets, LLC, Research Division - Analyst [15]

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Just wondering if you could expand on the opportunities in ag and expanding the product line just given the balance sheet and the comments in your outlook.

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

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So what we saw in ag was -- we continue to see weakness in the industry opportunities. We got the preliminary numbers just early this week. And again there was some decline, but we're pleased with the progress, still a long way to go. We did have some improvement in new sales activity and product support. We continued to look at our coverage in terms of sales, getting closer supply to customers, and that's where our focus is right now. We're making progress, but certainly still ways to go.

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Sara O'Brien, RBC Capital Markets, LLC, Research Division - Analyst [17]

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And in terms of just expanding through acquisition, are there -- is there any meaningful kind of add-on that you can see at this point? Or is it more organic initiative?

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President and Director [18]

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Well, it's more organic right now. I mean, we continue to keep our eyes open up, but we won't speculate on any new [M&A]. The focus is on the operational and sales coverage.

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Sara O'Brien, RBC Capital Markets, LLC, Research Division - Analyst [19]

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Okay. And then similarly just on the product expansion. What type of complementary products could you see in your business?

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President and Director [20]

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Well, we did. Are you focused on the ag side there?

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Sara O'Brien, RBC Capital Markets, LLC, Research Division - Analyst [21]

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No, on -- just a general outlook comment, which I think talks about broader product offering.

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President and Director [22]

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Yes, we continue to -- that's regular part of our strategy as long as it complements the core products, and doesn't conflict with some of our partners like Caterpillar. So it's a key strategy for us over the last few years, we continue to add a lot of products (inaudible) in power and equipment like the crushing and screening and pumps, things of that nature. And that'll continue. We'll continue to work hard at securing complementary products and solutions.

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Sara O'Brien, RBC Capital Markets, LLC, Research Division - Analyst [23]

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I wonder -- I mean, when you combine those sort of the organic initiatives that you have, do you feel that, that's a prudent use of the balance sheet? Or do you feel that it's time to deploy capital another way at this point, whether it's through M&A or larger dividend or share buyback?

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

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Well, certainly we're looking at all potential avenues. But in terms of the broader product lines, we like that approach because then we get closer and broader with our customers.

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Paul R. Jewer, Toromont Industries Ltd. - CFO and EVP [25]

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We've got a pretty [setted] approach, Sara, that you've seen, right? So we have continued to invest in our business and will over the long haul, and that's evidenced in things like ramp-up of rental fleets and business expansion in a number of other areas, investment in technologies, investment in people. But still, our cash position grows. So we're mindful of that, and it is something that we consider and evaluate with our board.

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Sara O'Brien, RBC Capital Markets, LLC, Research Division - Analyst [26]

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Okay. And I wondered -- I did notice that the rental gain was quite large year-over-year this quarter. I just wondered, is that more of a normal run rate? Or should we expect this is a bit of a one-off contribution to the EBIT in the Equipment Group?

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President and Director [27]

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Well, we continue to invest because we see this as a strong long-term strategy. We see there is trend there, that there's more equipment going into the rental channel. We did -- and then it can get lumpy, and there are specific projects now, construction projects, in particular, and we were pleased that our utilization improved relative to some of those projects.

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Paul R. Jewer, Toromont Industries Ltd. - CFO and EVP [28]

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We had quite good time utilization increases year-over-year. Unfortunately, that's suppressed somewhat by somewhat a decrease in financial utilization just due to pressures on rates.

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Sara O'Brien, RBC Capital Markets, LLC, Research Division - Analyst [29]

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Okay. I guess I was referring to the sale of the used equipment though within rental. Is that gain on sale with higher year-over-year?

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President and Director [30]

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We did have an increase in disposition on the heavy rentals.

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Sara O'Brien, RBC Capital Markets, LLC, Research Division - Analyst [31]

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Is that more of a normal run rate now?

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President and Director [32]

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And that -- when you get into the normal flow, that starts to become another entry point into the customer base with another offered -- another value proposition.

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Sara O'Brien, RBC Capital Markets, LLC, Research Division - Analyst [33]

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Okay. So it's more -- I mean, you can see more of that going forward?

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President and Director [34]

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Well, we're trying to position ourselves for that. It's all about execution, right?

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Paul R. Jewer, Toromont Industries Ltd. - CFO and EVP [35]

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It depends on where the demand is, right? So we've been pretty open the whole length through that managing rental is a full cycle of business, right? So you have to get the right equipment, make sure it's utilized appropriately, maintain the stuff properly and sell it at the right time. So that sale at the right time has for us led to an increasing opportunity for used equipment. (inaudible) lower our use and demand that was evidenced over the course of the past year. We saw a little bit of a tick down in demand for use this year as we talk about the interplay between new and used. It really comes down to customer demand at the end of the day. We have flexibility in how we maintain that fully circle within months.

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Operator [36]

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Your next question come from the line of Ben Cherniavsky from Raymond James.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD of Industrial Research [37]

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I was actually going to ask about your financial utilization, so you answered that question for me. But let me just -- just let me clarify the -- both the backlog and bookings in the Equipment Group. I know -- I believe in CIMCO, everything goes, all the bookings go through backlog. On the equipment side, that's different, I believe, because you carry some inventory. So the discrepancy between the 2% increase in bookings and 40% increase in backlog, how much of that is just a function of inventory? Is it maybe a tightening in the supply chain, that actually now it's sort of harder to get stuff to the customer? Is there any indication that's happening yet?

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Paul R. Jewer, Toromont Industries Ltd. - CFO and EVP [38]

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Let me jump in first with just a little bit. I mean, part of it is just the nature of the orders, right? So as I said in the past, the backlog is a function of 3 things, either increase or opportunities for large mining orders, opportunities for large power systems orders or -- and an ability to get equipment basically on a regular basis. So we find availability is quite good, our inventories are quite good. The -- we basically saw a bit of a softening as we indicated in the quarter with constructions. So that was reflected in the backlog as well. So an increasing proportion of the backlog is related to the longer lead time resource in power systems. So it's just a natural function of the interplay in those segments.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD of Industrial Research [39]

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Right, so it's sort of a mix thing. Like if you sell market -- more mining, that tends to be not an inventory and more backlog driven.

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

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For sure. And we are monitoring availability very closely right now.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD of Industrial Research [41]

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And so -- and because you think it might be getting tight?

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President and Director [42]

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We're just monitoring it closely. We'll see how things develop and...

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD of Industrial Research [43]

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And on the financial utilization and the rates. What is the direction of those rates? Like they're still challenging? Are they getting less challenging? Are you seeing...

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Paul R. Jewer, Toromont Industries Ltd. - CFO and EVP [44]

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They're getting more challenging.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD of Industrial Research [45]

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So they're getting more challenging, really?

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Paul R. Jewer, Toromont Industries Ltd. - CFO and EVP [46]

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So on average, the rates were down 1.5% or so from a year ago, so further tightening.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD of Industrial Research [47]

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So what would explain that, if you're on the other hand, you're seeing maybe -- just trying to monitor supply chain and your bookings are going up or your backlog at least is going up and order activity, what's the disconnect there on rental...

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Paul R. Jewer, Toromont Industries Ltd. - CFO and EVP [48]

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Between rental and backlog are you referring to?

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD of Industrial Research [49]

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No, just the over -- like the 2 markets are obviously, like there are different kinds of customer needs, but they're related to that same -- to some degree?

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Paul R. Jewer, Toromont Industries Ltd. - CFO and EVP [50]

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There is a little bit of difference, right? So as you deal with the rental market, you're basically dealing with more fluidity in terms of the equipment that has been moving into the space from other geographies. It's one of the factors coming into play. There are several players in the marketplace that have been ramping up their fleets, ourselves included. And we have to be mindful of our own influence in that area. And as comp ends, you're still dealing with a number of customers that are sitting in the wayside just monitoring what's going on. So all of that's led to bit of a supply-demand develops and that's pressured rates.

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

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I think it's a reflection of the competitiveness in the construction segment right now.

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

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Yes. And when you talk about that, I mean obviously, there's a lot of moving parts to your business and you guys have been juggling the balls very well. But it would be -- if an investor opened up a page on Toromont today, it would be hard to convince him that your markets are depressed, because you're -- you had record earnings and your margin is going up and those sorts of things. On a consolidated basis and, obviously, CIMCO has been a big part of -- bigger part of the business, but what do you think explains the way you've managed the cycle at this point relative to some of the others in the space ? Is it -- are you managing -- are you getting more market share? Or is it just that you are more responsive to cost, you didn't get that cost get out of control? What can you say about that?

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President and Director [53]

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Well, I think we've been fortunate in a lot of areas. We continued to have production going on in mining and coal. We did invest aggressively in rental, which I think certainly helped. It provided us to be a little more nimble as you saw last year shifting into used, when the demand signal started coming through. We've been very fortunate than what some of the execution on the products support side. So I would say we had some things go right, that our teams did a good job executing but let's not get ahead of ourselves. It's still very competitive. I mean, in the first quarter we saw more activity on the small iron. There is -- and then your larger iron was still soft in there, so -- which was interesting. So right now, it's just kind of execute where we see our growth avenues, but not get too far ahead of ourselves in this environment.

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

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But your shift into rental has been at a time when that market's been, I don't know if decimated is the right word, but as you say, been very, very competitive. So I would have thought that would actually depressed your numbers to some degree.

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

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Well, it's challenging on the financial utilization, but we've been fortunate to execute in some areas that we invested in, but it's highly competitive.

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

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I'm just trying -- sorry to belabor it, but this has been execution is the word that gets used often with you guys, and I use it too, but it can mean so many different things. What in particular would you be doing there? And when you talk about executing on parts and service, I mean, I know I'm totally oversimplifying it, but you have guys turning wrenches. So what is it that you're doing so well that other guys aren't doing. Is it just managing those quotes and managing the flow of parts and getting machines out of the base as fast as you can. Is that what solid execution comes down to?

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

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Well. Yes, it's having the activity. You got to have the production there. And again, we've been fortunate that fleets have continued to work. You've got to earn through your value propositions, and we continue to be very focused with some technology advancements. We're still, I would say, still early-stage there but we have been executing a bit on monitoring the fleets and capturing some data, capitalizing the opportunity. But that is still early stage as well. And we are monitoring it closely. We have better visibility than we did like 3, 4 years ago. So that helps.

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Operator [58]

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Your next question comes the line of Jacob Bout from CIBC.

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Jacob Bout, CIBC World Markets Inc., Research Division - Research Analyst [59]

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Wanted to go back to your comments on AgWest. You talked a little bit about the markets there are quite weak. But yet, if we look at the macro environment, farming income for Canadian farmer is pretty good. Acreage planting is supposed to be up this year. It seems like there is some optimism from the farmers. Is this a AgWest-specific issue? What is your sense of your losing market share, or how do you think about that?

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President and Director [60]

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We have operating problems in Manitoba. The numbers we saw, preliminary numbers though, last year, the market declined. First quarter, it softened again, but we were pleased to actually our revenues increased on new tractor sales, so that was a positive. But it's been a tough operating market. And -- but we're -- we've done a lot to focus on our operating efficiencies, and we're looking at continuous improvement. That's where our focus is relative to the market opportunity. And our product support has improved there as well. Total revenues are up on a year-over-year basis in the face of market declines. Really substantial, right, in terms of what the total equipment market year-over-year. But still early stage there and progress had a long way to go.

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Jacob Bout, CIBC World Markets Inc., Research Division - Research Analyst [61]

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Maybe just turning to CIMCO. Recreation order is very strong. You talked a bit about what's driving this and really the sustainability of this over say the next 2 or 3 years.

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

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We have seen this quarter with strong for recreational both Canada and the U.S. We did see softness in the industrial side in the U.S., which we're really focused on that strategically so that was a bit of a disappointment, we're monitoring that closely. There was some signals of softness in the market, but we'll see how that develops. The team is doing a nice job there. We're trying to be a very proactive in some growth strategies. But again, it comes down to execution. So don't want to get too far ahead of ourselves on long-term speculation, but there's a lot of focus on operational side there as well as some growth strategies.

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Jacob Bout, CIBC World Markets Inc., Research Division - Research Analyst [63]

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How lumpy is that recreational?

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

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It can be. I mean, it depends sometimes on governmental funding, things of that nature. Right now, we've been fortunate with the opportunities presented. We're getting some good wins there.

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Jacob Bout, CIBC World Markets Inc., Research Division - Research Analyst [65]

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Okay. Maybe just last question here. You talk about a tight pricing environment. Maybe just give us some historical reference here specifically in the mining and construction side. Has there been any relief as far as that competitiveness in those 2 groups? Or is it just getting worse?

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

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No, there has not been a relief in there. It continues to be very competitive in the price-conscious environment on both construction and mining.

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Operator [67]

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(Operator Instructions) Your next question comes from the line of Maxim Sytchev.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - Analyst [68]

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Just a quick follow-up on the rentals. I mean, for me, this product offering has always been sort of a [swing supplying] right now the fact that we are seeing pretty nice growth there, does that mean that the market overall was tightening, or is that just an oversimplification of the dynamics?

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

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Well, we'll just go up the data we saw, the utilization improved. We're pleased it improved actually on the leg equipment, the heavy and power. And so that was -- we're pleased with that, and I think our teams are executing quite nicely in the first quarter on that front. But the financial utilization continues to be an area of focus because it's the -- I'll reference the rates that's continued to be depressed.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - Analyst [70]

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Right. And that's what you said, the rates were down 1.5% year-on-year?

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Paul R. Jewer, Toromont Industries Ltd. - CFO and EVP [71]

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Yes.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - Analyst [72]

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Okay. And then the comments that you made in relation to digital initiatives. Can you maybe paint a picture for us in terms of where you could see the benefits maybe over the medium term on the cost side, preventive maintenance things, all those sort of positives, how they can manifest themselves on your P&L down the road?

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

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Yes, I think it has a lot of do with improving our operational efficiency but also more so for customer solution. So we get the data coming off the machines now. We are starting to learn more about being -- getting into predictive analytics. We'll be able to provide solutions in advance of events as well as we think we can start to isolate some opportunities more effectively in terms of how we're going to market and go-to-market with various offerings. So it's an exciting stage, early stage, but we're connecting more machines. We're monitoring that closely on a year-over-year basis. Our connectivity with machines improved. So a lot of teams are making some progress there, which we're pleased with.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - Analyst [74]

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And do you feel that right now that it's more of a pull or a push strategy? I mean, I guess the question is, is it the clients who are demanding it? Or -- I'm just trying to understand the dynamic there.

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President and Director [75]

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You're seeing a shift there. Customers are identifying what's that more and more. They're becoming more proactive with technology requests. So I think it's combination of both because we're certainly proactive on that strategy with Caterpillar. Caterpillar is advancing on that front, and we are as well, both with CAT and developing some products on our own. Both up for rental and heavy equipment segments.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - Analyst [76]

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And who will own the data?

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President and Director [77]

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That's combination we worked with the customers on that, making sure they're in sync with how this data is processed.

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Operator [78]

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Thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a great day.