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Edited Transcript of TIH.TO earnings conference call or presentation 29-Jul-20 12:00pm GMT

Q2 2020 Toromont Industries Ltd Earnings Call

Concord Jul 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Toromont Industries Ltd earnings conference call or presentation Wednesday, July 29, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Stanley Howie McMillan

Toromont Industries Ltd. - Executive VP & CFO

* Scott J. Medhurst

Toromont Industries Ltd. - CEO, President & Director

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Conference Call Participants

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* Ben Cherniavsky

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

* Cherilyn Radbourne

TD Securities 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

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Presentation

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Operator [1]

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Good morning. Today is Wednesday, July 29, 2020. Welcome to the Toromont to announce the second quarter 2020 results conference call. Please be advised that this call is being recorded.

Your host for today will be Mr. Michael McMillan. Please go ahead.

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Michael Stanley Howie McMillan, Toromont Industries Ltd. - Executive VP & CFO [2]

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Great. Thanks, Melanie. Good morning, everyone. Thank you for joining us this morning to discuss the results of Toromont Industries for the second quarter and first half of 2020. Also on the call with me today is Scott Medhurst, President and Chief Executive Officer.

As noted in the press release issued yesterday, we will be referring to a package posted on our website, similar to that provided last quarter. We encourage listeners to download and follow along. At this time, and as on -- as noted on Slide 2 of our presentation, 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 that may lead to actual results or events differing materially from those expected. For a complete discussion of these factors, refer to our press release from yesterday, which is available on our website.

As is our practice, we will focus on key highlights. Scott will begin with a few general remarks and some comments on our outlook, after which I'll provide some highlights on the financial results. Then we'll be more than happy to answer your questions. Over to you, Scott.

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

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Thank you, Mike, and good morning, everyone. Before I begin, I would ask that you move to Slide 3 of the package.

From the start of COVID-19 pandemic, we've continued to focus our efforts on 3 main areas: safeguarding our employees, servicing our customer needs, and protecting our business for the future. Our critical incident executive response team was activated at an early stage and continues to meet regularly. We are monitoring developing trends and pronouncements, assessing our best course of action, and responding appropriately. We are very proud and appreciative of our team's efforts and recognition that this has been a challenging time for all.

As a result of reduced economic activity, we experienced lower earnings and net income in the quarter. However, strong financial position was maintained. April experienced the lowest activity levels. Some recovery began to phase in through May and June. However, caution is warranted, as activity was still below prior-year levels.

COVID-19 continues to put us in an unprecedented environment, as outlined on Slide 4. We are proud of our team and suppliers' ability to navigate through this pandemic and support our customers through the provision of essential services. In addition to our critical incident response team, our management and leadership teams continue to monitor the evolving situation closely and are taking responsible measures to manage and protect the interests of our people and customers, while managing the long-term health of the business. The diversity of our geographical landscape and market served, extensive products and service offerings, and financial strength, together with a disciplined operating culture, position us well to weather this situation for the long term.

Turning now to our financial results, highlighted on Slide 5, consolidated revenues decreased 13% in the quarter due to lower economic activity caused by response to COVID-19. Product support and rental revenues were lower by 16% and 31%, respectively. Equipment sales were lower by 6%, reflecting lower new equipment sales across most markets.

Year-to-date revenue was down 7% to $1.6 billion, after a somewhat positive start to the year in the first quarter. Operating income was 31% lower on reduced gross margins. This was mainly due to lower rental fleet utilization and sales mix, combined with higher expenses as a percentage of revenues, due to fixed costs. Government subsidies were not significant factors in the quarter.

Although savings were realized in the quarter due to actions by the management team, along with things like travel restrictions, other incremental costs were incurred to protect our employees, keeping our customers safe, and protecting the company through the long term. These costs included safety supplies, facility sanitization requirements, plexiglass installed -- installations, combined with finance costs associated with the additional liquidity.

Operating income was 22% lower year-to-date for similar reasons for the quarter. Operating income margin decreased 160 basis points to 8.5%. Net earnings decreased 34% in the quarter versus a year ago. Earnings per share tracking reduced earnings was $0.62 per share. Year-to-date, net earnings were also down year-over-year by 24% at $1.08 per share.

Backlogs were $496.5 million at June 30, 2020, compared to $551.5 million at June 30, 2019, this resulting from a cautionary business environment. However, CIMCO remains above last year.

We are proud to take part as an essential service. Toromont's businesses serve critical, essential services, including, but not limited to, food production, storage and distribution networks, power generation, including backup power, critical infrastructure, transportation, and emergency response. We continue to monitor the situation closely and evolve business practices and appropriate measures to manage and protect the long-term health of the business. The diversity of our geographic landscape and market served, extensive product and service offerings, and financial strength, together with the disciplined operating culture, position us well to weather the situation.

Moving to Slide 6, the Equipment group's parts and service business provides stability and benefits from a large and diversified installed base. Prior to the outbreak, the long-term outlook for infrastructure projects and other construction activity was positive across most territories. The company has a large base of mining customers, which, in some cases, temporarily reduced operating activity as a result of the COVID-19 implications. These customers and jurisdictions they operate in continue to evaluate appropriate activity levels on a daily, weekly basis. Longer-term, mine expansion continues to look positive, but of course, depends on global economic and financial conditions.

The company has taken actions to reduce expenses, participating in government programs such as Workshare. Human capital, including our technician workforce, is one of our most valuable assets, and we will protect that asset to the extent possible. In the quarter, we continue to move forward with our investment in information technology, aligning our dealership under one operating system as well as facilitating and securing remote access to our networks. This creates added expense during the integration.

Actions are being balanced between short-term adjustments, relative spend, while also being sensitive to long-term requirements, ensuring the business is positioned well for future growth opportunities. Broader product lines, investment in rental equipment and developing product support technologies supporting remote diagnostics and telematics are expected to contribute to long-term growth once economic, financial, and social environments return to a more normalized state.

CIMCO's installed base and product support levels are well positioned to support current and future operations and growth trends. The diversity of markets served, expanding product offerings and services, strong financial position, and disciplined operating culture position the company well for continued growth in the long term. Solid booking activity and backlogs positions the business well as economic conditions improve.

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

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Michael Stanley Howie McMillan, Toromont Industries Ltd. - Executive VP & CFO [4]

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Thanks, Scott. Let's put a bit more color on the operating results, starting with the equipment group on Slide 7.

Revenues were down 13% in the quarter versus a year ago and 6% year-to-date, reflecting the reduced economic activity resulting from the COVID-19 pandemic. Construction shutdowns and/or slowdowns in many markets resulted in lower equipment sales as well as lower product support and rental activity. As Scott noted, we did see some improved activity towards the end of the quarter, but a tone of caution was evident, and activity was still below last year's levels. Cost containment efforts, including human resource initiatives and reduced travel, partially offset the impact of lower revenue.

Total new and used equipment sales were down 6% in the quarter and 2% year-to-date. Sales in construction markets were down 3% in the quarter and up 1% year-to-date. Most significantly impacted were sales to mining markets, which were down 45% in the quarter and 32% year-to-date. Power Systems sales were up 10% in the quarter and 2% year-to-date, reflecting progress on projects already underway. Material handling equipment sales were down 2% in the quarter and up 3% on a year-to-date basis, while agriculture markets were lower, down in the quarter and on a year-to-date basis by 10%.

Rental revenues were down 31% in the quarter and 18% year-to-date. All markets and segments were lower, reflecting the familiar theme of reduced market activity. Revenue declines in each market for the quarter were as follows: light equipment rentals, 23%; power, 41%; construction, 41%; material handling 28%. Rental revenues from equipment on rent with a purchase option, or RPO, were down 55% in the quarter, as lower market activity also resulted in lower demand for RPO equipment.

Product support revenues declined 16% in the quarter and 7% year-to-date. Construction and mining equipment in territory was idle or operating at reduced rates for much of the quarter, leading to reduced product support activity, which was down 17% and 11%, respectively, in the second quarter, down 8% and 5%, respectively, for the first half of 2020.

Material handling activity was 27% lower in the quarter and 15% lower in the first half of 2020. Agricultural markets reported increases in the quarter and the first half of 2020, up 15% and 8%, respectively, reflective of the team's efforts in a challenging market and weak comparative results in 2019. Power Systems product support activity was down 13% in the second quarter, but was up 2% year-to-date on good activity at the beginning of the year.

Gross profit margins decreased 150 basis points in the quarter and 120 basis points year-to-date. Equipment margins were low in the quarter and year-to-date, mainly due to sales mix. Rental margins were lower in both periods on lower fleet utilization, coupled with straight-line depreciation expenses. Product support margins were higher in both periods on higher parts margins.

Sales mix was unfavorable in both periods, with a lower percentage of product support activity to total revenues. Selling and administrative expenses were down 7% in the quarter and 3% for the first half, reflecting lower activity levels as well as cost containment initiatives that phased in during this period of uncertainty. Compensation cost decreases -- decreased as initiatives such as vacation planning, salary reductions, governmental workshare programs, and layoffs were implemented. Travel was restricted throughout the quarter, where training increased early in the quarter and then declined with the lower staffing levels.

Bad debt expense increased in both the quarter and first half of the year, in consideration of the potential increased collection risk in the current economic environment. Information technology-related costs also increased in both the quarter and the first half of the year, as system integration efforts at the dealership continued.

Operating income decreased in both the quarter and year-to-date on lower revenues and gross profit margins, also leading to a higher expense ratio. Bookings were down 30% in the quarter to $298 million. Lower orders resulted, reflecting lower underlying economic activity and the cautious tone within the market. On a year-to-date basis, bookings were down 12% to $636 million, as higher power and material orders were more than offset by decreases in other areas. Backlogs of $269 million were $135 million lower than this time last year.

Now let's turn to CIMCO on Slide 8. Revenues were down 12% in both the quarter and year-to-date on reduced construction activity, stemming primarily from slower economic activity and temporary shutdowns related to the pandemic. Timing of receipt of orders and customer-specific construction schedules also affect the timing of revenue recognition.

Product support activity continued, given the essential nature of the business, albeit at a slightly lower level. Package revenues were down 20% in the quarter on lower construction activity due to site restrictions and against a tough comparable last year. Revenues in Canada were down 32%, with declines in both industrial and recreational markets. In the U.S., package sales were up 51%, as lower industrial sales were offset by higher recreational revenues.

Product support revenues decreased 3% for the quarter and 1% for the first half of the year. Revenues in Canada decreased on lower economic activity resulting from site restrictions. In the U.S., revenues increased on the higher technician base and continued activity in the industrial sector.

Gross profit margins decreased 70 basis points in the quarter on lower package margins, partially offset by a favorable sales mix of product support revenues to total revenues. Year-to-date gross profit margins increased 120 basis points, with higher package margin combined with a favorable sales mix of product support revenue to total revenues.

Selling and administrative expenses were down 7% in the quarter. Bad debt expense improved on strong collection activity. Travel and training costs were lower, reflective of restrictions in place for most of the quarter. On a year-to-date basis, selling and administrative expenses increased 3%, largely on compensation related to increased headcount, offset by cost reductions in other areas related to reduced activity.

Operating income decreased 29% in the quarter and 37% year-to-date, largely on lower revenue, related mainly to the timing of project activities. Bookings were up 15% to $52 million in the quarter. Industrial orders were 53% higher, with increases in both Canada and the U.S., while recreational orders were down 22%, with lower orders in the U.S., only partially offset by an increase in Canada. On a year-to-date basis, bookings were up 43%, reflecting strong industrial order activity in Canada, offset by a decrease in the U.S. Recreational orders decreased in both Canada and the U.S. Backlogs of $228 million were up 54% versus June last year on strong industrial backlogs in Canada. Ultimately, approximately 70% of the backlog is expected to be realized as revenue this year. However, this is subject to construction schedules and potential changes stemming from the COVID-19 pandemic.

On Slide 9, I'd like to touch on a few corporate highlights. Noncash working capital was $17 million lower, at $468 million versus a year ago. Strong focus has been placed on managing accounts receivable, aging, and inventory levels. Lower accounts payable reflect the timing of receipt and terms on inventory purchases.

As of June 30, we maintained our strong financial position, with cash of $537 million, available liquidity of $616 million, and a strong balance sheet. As announced, the Board of Directors yesterday approved the regular quarterly dividend at a rate of $0.31 per share, consistent with the last quarterly dividend, when it was increased by 15%. The company is also very pleased to announce that, subject to annual shareholder approval, Mr. Robert Ogilvie, Chair, and Mr. Wayne Hill, have agreed to serve on the Board until 2023. The extension of their services will balance the board renewal process with their depth of knowledge and experience, ensuring a smooth transition of roles with new directors. That concludes our prepared remarks. And we'll be pleased to take questions.

Operator, please set up the first call. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Jacob Bout.

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

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Yes, I wanted to start off on the equipment backlog, down quarter-on-quarter and year-on-year. And I know it can be a bit lumpy, but maybe just some comments on what you're seeing in backlog for construction versus mining.

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

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Yes. It was -- the backlog is on a comparative basis, it's obviously down and softer. It's reflective of the environment. Usually in Q2, you get a bit of a build, but it's also reflective of our inventory and availability that we experienced in Q2. So -- and then as you mentioned, Jacob, there is some lumpiness in there, really due to the power comparatives quarter-over-quarter. And of course, the mining environment that we experienced in Q2. I mean, the equipment sales were down almost 50% in Q2. So -- and usually, that helps build your backlog in there on the equipment side of the business.

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

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Okay. And has that improved at all here in July or on the mining side?

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

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I think right now, what we saw in the quarter was soft, a cautious environment on the customer side throughout all the industries we're operating in.

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

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Okay. And maybe my second question here, just interested in hearing how things progressed through the quarter and into July as far as the ramp of revenue growth. I mean, obviously, the world was quite a bit different in April versus June versus today. What was that ramp like, say, for new equipment, product support, rental revenues?

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

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Okay. I'll start with rental. Rental was a -- we started to experience, as we noted in March, and then rental continue to be a real drag on our earnings through the quarter. We have fairly large rental fleets relative to our strategic approach. So utilization was much lower on a month-by-month basis when you compare to the previous quarter. It did improve as the quarter progressed, but still below last year, and I'm talking ranging from anywhere from 3% to high 8%, 9%. So these are -- these were shifts that took place in there on the rental fleet activity.

The other thing we saw reflecting the cautious environment, our rental conversions were down significantly on new RPO. So we were single digit, and that's usually you get -- last year in the quarter, we had a very active environment there, again, reflective of the cautious environment. Product support was down. It had started to improve, but as you saw, our WIP levels at the end of the quarter were still below previous year.

What we saw was, in the quarter, it was quite interesting. As [June] activity, if you look at it holistically, the industry numbers improved, but it was all driven by the by the compact construction equipment. So if you look at the large equipment being sold in the quarter, those segments, that was down 26%. And these are industry numbers. And even in June, it was down 21%. Where the activity really started to improve was on the CCE compact construction side. So I think that's reflective of segments like landscaping. I think there was a lot of people started working on their back yards and so -- things of that nature. So there was some, in various areas, as I outlined, some improvements, but still below last year when you look at it on a month-by-month basis.

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Operator [8]

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The following question is from Cherilyn Radbourne.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [9]

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Just wanted to ask relative to the equipment group, we were a little surprised, I guess, that rental and product support seemed to be hit a little harder than equipment sales in the quarter, so maybe you can help us understand that dynamic. And I guess I'm curious whether that just reflects deliveries of equipment that would have been ordered previously. And maybe if I look at bookings activity and equipment, that sort of circles, circles with square, so to speak.

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [10]

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Yes. Well, the -- I think it's important when you look at these segments, and we had, particularly in Quebec and Ontario, I mean, there was major shutdowns that took place in the quarter, starting in April, and I think that's reflective of some of these outcomes. We had we had over 20 mines in care and maintenance at one point as well as pullback in other mines in their production, so that really impacts your product support and your overall equipment sales. And then, combine those construction sites shut down, right?

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Michael Stanley Howie McMillan, Toromont Industries Ltd. - Executive VP & CFO [11]

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Especially in Quebec.

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [12]

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Particularly in Quebec, and even though we were classified as essential services. So there were some fairly aggressive measures taken, understandably, and that created some of these outcomes. And then, of course, when customer fleets get parked, the demand for rental does not increase, so there's sort of how it outlined in the quarter. I don't know if you have anything else to add there, Mike.

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Michael Stanley Howie McMillan, Toromont Industries Ltd. - Executive VP & CFO [13]

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Yes, I think it's just natural that when you think of the idle equipment for periods of time and then, of course, things like parts and service dropped fairly significantly, right, which is what we talked to in terms of mix and so forth. And so you need to have the utilization up before we start getting that type of activity supporting the business as well.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [14]

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Okay. So that kind of ties into my other question, which is, do you think there's any pent-up demand for product support in the market? Or was the pressure on product support, simply a function of lower hours on machines during the quarter?

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [15]

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Well, that was a big part of it. You just -- the hours logged on those machines were down. So we'll see how things progress. I mean, we wouldn't want to speculate now. We did see improvements as the quarter progressed on the equipment utilization and the mines starting to come back on, so -- but we'll see how things evolve and how production develops here. But that -- even in June, we saw a very cautious. I mean, customers -- normally, in Q2, you've got customers that are highly productive. They were focused on getting those jobsites up and running, or mine sites, and they've got to get their fleets active, get organized, and that's really what took place in Q2. So we'll see how things develop here. It's a very cautious environment, obviously.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [16]

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And if I could sneak one last one in, can you just give us a bit of color on how rental rates held up relative to utilization there?

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [17]

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Yes. The rates, when we did our comparisons, they weren't too bad, Cherilyn, actually.

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Michael Stanley Howie McMillan, Toromont Industries Ltd. - Executive VP & CFO [18]

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It's really more utilization story, right?

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

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Yes. It was utilization more than anything.

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Operator [20]

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The following question is from Michael Doumet.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [21]

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I wanted to follow-up on Jacob's question, just in terms of getting the cadence of the rebound through the quarter. I mean, would it be possible for you guys, maybe just help us out and disclose what your June product support sales were compared with last year, just so we know what we're going into Q3 with?

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Michael Stanley Howie McMillan, Toromont Industries Ltd. - Executive VP & CFO [22]

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Well, if you look at it on a consolidated, it was still down, right? We even -- we've been talking quite a few quarters about our rebuild initiatives, and they were down even 13% through the quarter. So -- and again, it's just reflective of the cautious environment that's taking place. So -- and it was fairly equal when we look at the declines on parts and labor on a percentage basis. So -- but again, we did see improvement as things progressed. But I mean, customers are focused on getting those jobsites up and running and mine sites, and even in the power segment, and maybe not as focused on the repair schedules and plans, right.

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [23]

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But we did see improvement in our labor hours a bit as well.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [24]

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Okay. And just -- I mean, just for -- so that I understand correctly, so there was an improvement month-to-month, but the improvement from April to June wasn't significant, or it was significant, just for context?

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Michael Stanley Howie McMillan, Toromont Industries Ltd. - Executive VP & CFO [25]

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They were improving steadily, but still below last year's levels on a month-to-month basis.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [26]

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Got you. And then maybe just on SG&A, how should we think about SG&A ramping back up with revenues through the recovery? And I was just wondering if there are any cost reduction initiatives that you think could be considered to be structural?

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Michael Stanley Howie McMillan, Toromont Industries Ltd. - Executive VP & CFO [27]

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Yes, it's a great question. I think we're keeping a really tight rein on our costing and so forth and making sure that productivity levels are there and supporting the appropriate level of activity, and so I would say, a cautious phase-in that supports the business. Structurally, I would say, you hear a lot today about working from home and other things like that. And I would say there's -- we've learned a lot through the process in terms of what roles we can work -- we can perform more remotely than directly in branches and offices. But I would say still a lot to be done and a lot to be learned there before we would say there's a real structural shift in how you operate.

But I think overall, from a compensation perspective, we're still very focused managing -- travel is restricted. We did invest early in the quarter on training, as I mentioned in some of the comments. And so initially, as we assessed COVID, we did move our folks into some training initially, which I think will help us with some -- potentially some productivity later in the year because we've got that training a significant amount behind us. But it's going to be very, very surgical, I would say, from that perspective. And again, we have to be very mindful of the cautious environment and bring staffing back in at the appropriate time.

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

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Just a little -- like the team, I think, did a very good job on the discretionary expense, but we're also trying to be very sensitive to how we come out in the long term, right? I guess we could have -- Mike and I talked, we could have pulled [a little harder]. But we're being very conscious of protecting what we think are critical components of our business, whether it be skilled labor, and again, looking to that long term. Even our integration continued on our systems, which -- there's some onetime only expenses in there that we just believe we wanted to move -- continue to move forward on. And as well, with the COVID protocols and things, there was some expense associated with that to protect our people. And we just really look at that is that's what we had to do to manage the business, both protecting our people, customers, and the long-term health of the business.

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Operator [29]

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The following question is from Yuri Lynk.

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

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Wondering if you can put a little more color on the discussions you're having with your mining clients, particularly in the gold sector, given how the price of that commodity has moved up quite substantially. So are you getting any different signals from these customers than you might have had 6 to 9 months ago?

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

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Yes. Well, as you know, we're heavily engaged in this sector, and we're involved with discussions. We'll see how things evolve. As I always say, we've got to earn the business with our value propositions. But obviously, the -- some of the commodity prices are attractive, and we'll see how -- again, the quarter was really about over 20 mines going in care and maintenance and some pullbacks and restrictions on the operations side of it. But we're obviously heavily engaged here, and we'll see how things progress. Mining companies look at their plans going forward as they come out of the second quarter.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [32]

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Okay. Nothing you can give us on quoting activity or anything like that, that we're...

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [33]

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We're engaged, but we'll see how things evolve.

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Michael Stanley Howie McMillan, Toromont Industries Ltd. - Executive VP & CFO [34]

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Yes. It's still early.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [35]

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Understood. Maybe just on the staffing levels, how do you feel your shops are staffed? And I'm just asking in the context of some employees in some industries might be hesitant to return to a physical workplace. So just how do you feel you're staffed in dealing with those potential issues?

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [36]

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We're really pleased how our leaders have handled this very challenging and delicate situation, where we have people moving to layoffs and workshare programs. We are monitoring our skilled labor and supervisions very closely on, I'll call it, a daily basis with them. Because it is a unique environment, and we're trying to stay close to our people who are both active or [home layoff]. We did -- I'd say we peaked into May with those layoffs, or the workshare programs, and so we continue to be very focused on that at the end of the quarter with some improvements.

But we're pleased how our people are reacting and understanding the situation and because we want to retain, right? And I would say, so far, end of the quarter, we're really proud of the team and how our people have reacted to what's required as a -- and I'll call it a team-first approach, in the best interest of all. And I'm extremely proud of our people and leaders on that front.

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Operator [37]

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The following question is from Ben Cherniavsky.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [38]

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I'm just wondering if you can shed a little bit of light on the comment around product support margins increasing in the quarter. Is that just a mix issue in the type of parts that you are selling? Or what's behind that trend?

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Michael Stanley Howie McMillan, Toromont Industries Ltd. - Executive VP & CFO [39]

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Well, maybe I'll just start on that, Ben. There's a couple of comments that we did make in there. And I think one thing to keep in mind is, like when it comes to mix and the lower level of product support as a proportion of revenue, given the drop in activity that we've talked about quite extensively, we are seeing strong parts margins, but at a lower level, right? I think you see that also in our CIMCO business, where we spoke a bit about product support was tracking reasonably well. But again, it really comes down to the balance of activity in the other part of the business, right, and how that blends out over time. So it's a combination of activity in areas of our business where we have essential services and support, and I think of things like power and certainly on the CIMCO side. For example, you do see more resilience there, right?

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [40]

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But I think the disclosure -- pardon me?

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Michael Stanley Howie McMillan, Toromont Industries Ltd. - Executive VP & CFO [41]

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A lot to do with the mix in there, right, type of sales going on.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [42]

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Yes. Because I think the disclosure singled out the parts margins in the equipment group in those was just -- is that just mix of the types of prices that happen to sell?

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [43]

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Yes. It's just mix. I wouldn't read too much in that.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [44]

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Okay. And then on CIMCO side, just a very strong order intake in the backlog for [in site] at the end of the quarter. Maybe just a bit of a surprise, given the environment. How did you guys manage to get that kind of activity booked, confronting the lockdown? And where is it exactly coming from --not exactly, but generally, where is it coming from? What explains that significant increase?

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [45]

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Yes, the booking activity in the quarter really came from the Canadian industrial side of our business. We've been fortunate with some good wins in there that continued in the quarter. Team is doing a nice job in there in that space. There's some investments going on, whether it be food and beverage type environment, so -- which I guess adds up in this type of situation we're in. And so good work on behalf of the team.

I mean, that backlog is very strong, but there's been some softness on some of our service. I mean, you look at the recreational side, that was down, that was impactful in the quarter. And normally, then what we see when it starts early April and through the summer months, you get some really good service work on the recreational side. That obviously has not been at the same levels we're customed to and reflect it in there. But we're pleased with our team's progress and positioning going forward.

Even on the CIMCO side, some of our construction projects had to be shut down in Quebec, which impacted our progress here on some of the projects. So -- but sort of it is what it is, right? And -- but the good thing is that industrial side and quoting activity remained solid.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [46]

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Right. No, that's good to see. If I could just ask one more on the equipment group, with the mining sales being down as heavily as they were. I mean, I guess everyone was expecting overall your deliveries would be down, but it looks like mining took the brunt of it.

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [47]

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Yes.

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

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Was there any -- can you just remind me from a year ago? I know you often will reference a difficult comparable period when you're lapping a period previously that had big order deliveries. Was that a factor at all? I don't -- I didn't see any mention of it, but was [what’s the] second quarter last year look like?

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

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Yes, there was a little bit of a comp in terms of the -- what we described as the lumpiness of mining. But actually, the real comp, we had a good booking in there on the power side in the backlog last year, so that was maybe a larger impact. Although power activity on the sales side for prime product and electric power was very impressive in the quarter as well. We were pleased with the activity on the revenue streams for prime product and electric power.

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

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Yes, and that would probably make sense, given the environment as well, but...

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

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Right.

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

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Just back on mining, I mean, it had been sort of fits and starts in the mining sector, as I recall, prior to COVID. Did you find that the COVID just put a complete -- not complete, but is that primarily what explained that kind of a drop, you think? Or was the sector sort of already heading in this direction for the mining sales, specifically?

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

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Yes. I mean, I don't want to speculate, but because of the shift that took place in there on the production side with many of the mines we're involved with, certainly, there was a cautious environment start. But I think -- I mean, the commodity prices are variable in many areas. Maybe there's some sensitivity to being focused on their balance sheets, I don't know. That might have a little bit to do with it as well. But we'll see how things evolve here.

I mean gold certainly is at a favorable price. We like that sector. We have a lot of activity in there, and we'll see how things evolve.

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Operator [54]

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(Operator Instructions) The following question is from Maxim Sytchev.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [55]

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Just a very quick question on mining, if it's possible. I'm not sure if, in the past, you provided kind of a breakdown between gold versus non-gold exposure. But is it fair to say it's around sort of 60% on the mining side of your mining business? Or is that too much?

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Michael Stanley Howie McMillan, Toromont Industries Ltd. - Executive VP & CFO [56]

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Yes. I think you have to keep in mind, it does vary a bit, [Ben]. But generally speaking, we look at it as about 50%. About 50% is in the gold, and then the other base metals make up the rest, right?

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [57]

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Yes. Okay.

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Scott J. Medhurst, Toromont Industries Ltd. - CEO, President & Director [58]

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That shifted a bit with the integration, right? Right, Max?

[

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [59]

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Yes. Yes, yes. It sure makes sense. And then, correct me if I'm wrong, but obviously, it was last year, a very competitive environment for hiring technicians, and this is such a critical part of your business. Just curious to see how your sort of onboarding practices have changed, and is it easier to find people, obviously, as the economy opening up? Just maybe any comments there.

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

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Well, certainly, I mean, we were -- our aggressive strategy obviously came to a halt in Q2 because we were more concerned about protecting the existing team. I think it's really -- we were -- it was -- again, as I said on the previous call, we were very focused on making sure our retention was good as we worked through these layoffs and workshare programs.

In terms of the temperature externally for availability, I mean, we really -- I'd say we'll get a better pulse on that in the coming second half, because we were very focused just internally, right, on protecting our people as best we could.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [61]

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Right. Makes sense. And last, a bit of a clean-up question in relation to, how should we think about the noncash working capital? Obviously, a very strong and positive swing in Q2, but any comments you can provide for the back half of the year, if any?

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Michael Stanley Howie McMillan, Toromont Industries Ltd. - Executive VP & CFO [62]

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Yes. Great observation there, Max. I think, really proud of the way the team has responded and the way that our model functions with the distributive nature. The team has done a tremendous job on collection activity beyond inventory management from that perspective, right? And so as we look -- we're pretty conservative in terms of how we think forward.

I think, again, I would emphasize the cautionary environment. As we look into the second half, there's still a lot of variables there that we're -- I think we're all looking to understand as time progresses. And so I think we feel comfortable with where we're at. However, there are going to be a number of things that happen in the second half here, and the team is prepared to really keep tight controls on it.

So again, we're trying to balance having the availability of what we need, working very closely with our customer needs, but also their credit picture. And I don't see it changing dramatically, Max. I think it's just a matter of focus on that environment and trying to manage through what we see as a cautionary sort of landscape going forward, right? The government...

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [63]

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For sure. I guess...

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Michael Stanley Howie McMillan, Toromont Industries Ltd. - Executive VP & CFO [64]

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What's that?

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [65]

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Sorry, please go ahead.

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Michael Stanley Howie McMillan, Toromont Industries Ltd. - Executive VP & CFO [66]

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I was just going to say, the one thing we all have to keep in mind is also, with the incentives that the government stimulus the government has put in place, those things will come to an end. And so we all have to be mindful of how that also ripples through the economic environment and what that means from a working capital management perspective, right? So we're all emerging from the pandemic at this point, lots to be seen yet.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [67]

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For sure. And I guess, I mean, it's fair to say that we shouldn't expect these types of run rates kind of over the back half of the year is going to normalize. And I mean, hopefully, as things are opening up and the mining opportunity hopefully presents itself, we should see sort of normalization on the other side. Is that a fair assessment?

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Michael Stanley Howie McMillan, Toromont Industries Ltd. - Executive VP & CFO [68]

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Yes. I mean, that's difficult to say, right? It's very difficult to say at this point in time. I mean, I think we're going to just monitor it as we can and invest very prudently and very carefully in terms of inventory and so forth. Very difficult to comment on that as we look at the second half at this point.

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Operator [69]

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And there are no further questions registered at this time. I'll turn the meeting back over to Mr. McMillan.

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Michael Stanley Howie McMillan, Toromont Industries Ltd. - Executive VP & CFO [70]

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Great. Thanks, Melanie. Thank you, everyone, for participating on the call today. That concludes our call. We wish everybody a great day, and please stay safe

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Operator [71]

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The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.