DBRS Confirms Toromont Industries Ratings at BBB (high) with Stable Trends

DBRS today has confirmed the Issuer Rating and Senior Unsecured Debentures rating of Toromont Industries Ltd. (Toromont or the Company) at BBB (high) with Stable trends. The ratings continue to reflect the Company’s moderate business profile and superior financial profile. The business profile continues to be supported by the Company’s strong market position in its covered territories, by its original equipment manufacturer, Caterpillar Inc. (CAT, rated “A,” Stable by DBRS), and by the Company’s diversified mix of products and end-use markets. The ratings are further supported by the Company’s strong financial profile, which was further bolstered in 2013 as credit metrics improved as a result of stable earnings performance and debt reduction.

In 2013, Toromont’s revenue and earnings performance was in line with expectations, although the company faced headwinds from the slowing mining market and profitability pressures. CIMCO (refrigeration) sales expanded 17% as a result of higher deliveries (including a large order from Maple Leaf Foods) and increasing product support. Revenue for the Company’s Equipment Group expanded approximately 4% as a result of higher sales across the construction, agriculture and forestry segments and increasing market share. Equipment Group’s new equipment sales increased 5% backed by construction activity and infrastructure development in the underlying territories. Equipment rental revenues increased by approximately 5%, but parts and service revenues increased by only 1% because of slower sales in the mining sector, which is a substantial product support revenue driver because of its large installed base of equipment.

The Company did face some headwinds during the year and the Equipment Group revenue growth was generally below prior years’ levels primarily because of lower mining sales, although 2012 is a relatively strong comparable base because of the number of significant order deliveries which took place during that year. Additionally, the Equipment Group’s profitability declined slightly as the business faced a highly competitive equipment industry with continued pressure on pricing. Lastly, profitability was also negatively affected by the revenue mix, which experienced an unfavourable shift as a result of a larger share of sales coming from the lower-margin equipment sales and a smaller share of sales coming from the higher-margin parts and service businesses.

Despite these headwinds, the Company’s credit metrics were strong at the end of 2013 and its financial profile mapped above the current rating range. During 2013, cash flow from operations increased by approximately 10% and, combined with inflows from working capital, allowed for approximately $28 million of debt reduction, consisting of borrowings under the credit facilities. The financial profile had some cushion under the assigned rating at the end of 2013, with the Company’s credit metrics mapping to above the current rating range.

In Q1 2014, the business was faced with challenging winter conditions, which had a negative impact on construction activity, lowering sales by approximately 1% relative to Q1 2013. New equipment sales during Q1 2014 were sharply lower, although DBRS notes that gains in used equipment sales, product support and rentals continued to support overall sales levels. At the end of Q1 2014, however, credit metrics were softer compared with year-end 2013, but reflected first-quarter seasonality, similar to Q1 2013. At the end of Q1 2014, the financial profile remained well within the current rating, with further cushion persisting in the credit metrics.

Despite currently facing slowing mining sales conditions, Toromont benefits from substantial diversity in its business profile. On the whole, revenues continue to be well diversified, including a large proportion of revenues coming from outside of new equipment sales, including rentals, product support and CIMCO. Additionally, Toromont should also benefit from its exposure to multiple end-user industries, including the large construction segment, which has generally remained robust as it is supported by a number of long-term infrastructure projects.

The long-term outlook for Toromont, as an exclusive CAT dealer with a strong product offering, also remains favourable as it is strategically positioned throughout resource-rich territories to benefit from mining, construction, transportation and power systems growth. Although Toromont remains regionally constrained to a few provinces and territories for its revenues, it remains well positioned within its competitive markets to take advantage of robust growth and replacement-related infrastructure demands in its geographically vast territory.

In the near term (eight to 12 months), DBRS expects overall revenues will remain approximately flat. The majority of the negative impact is expected to come from new equipment sales, but it is likely to be offset by higher rental and product support revenues. Profitability, in terms of EBIT margin, is not expected to change as any improvement from its sales mix as a result of increased product support revenue is expected to be offset by competitive pressure. The credit metrics, nonetheless, are projected to remain steady in 2014 based on firm revenue and earnings, solid cash flow generation, as well as range-bound projected debt balances.

DBRS expects the rating to remain stable over the next 12 months, reflecting DBRS’s opinion that the Company’s business and financial profile will remain in line with the rating over this timeframe. The financial profile should remain above the current rating range and can withstand moderate performance deterioration, although a larger-than-expected deterioration in performance could cause a revision of the rating.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Capital Goods Dealership Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.