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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debentures rating of Toromont Industries Ltd. (Toromont or the Company) at BBB (high) with Stable trends. Toromont has a moderate business profile and a superior financial profile. The business profile continues to be supported by the Company’s strong market position in its covered territories, its stable and higher-margin product support business, its privileged position as exclusive distributor of original equipment manufacturer Caterpillar Inc.’s (CAT, rated “A,” Stable by DBRS) world-class products, 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 improved in 2014 as earnings and cash flows rose, while debt remained stable.

In 2014 Equipment Group revenues, which make up over 85% of the Company’s total, rose by 6%, despite a contraction in sales of new equipment due to the continued cyclical downturn in the mining sector. Used and Rental equipment sales grew well, as did demand for product support services. EBITDA margin rose by 50 basis points to 15.1%, overall a very strong result compared to historical levels, which drove a year-over-year increase in EBITDA of 7%, and a gain in core net income of 8%. Key credit metrics improved in 2014 due to improved earnings and cash flows. While total debt remained largely unchanged, the cash generation led to a decrease in net debt.

DBRS recognizes the Company’s ability to deliver steady revenue growth over the past five years after exhibiting some resiliency through the financial crisis. While the Company will continue to be buffeted by the impact of cyclical commodity-cycle downturns, DBRS expects that Toromont’s efforts to expand its exposure to the agricultural sector in Manitoba will assist with diversifying its earnings streams. Furthermore, increasing the proportion of higher-margin and more stable product support services would also be supportive. However, Toromont’s rating remains constrained by its limited geographic reach within its designated Caterpillar regions, although its refrigeration business is not similarly limited. Significant expansion of the agricultural sector exposure and an increase in the proportion of sales and earnings from product support services will be required to bolster the business risk profile. Should these goals be achieved while maintaining the financial risk profile at its superior level compared to the current overall rating category, a rating upgrade may be considered.

Earnings improvement in 2015 should translate into another increase in operating cash flow in 2015. The Company’s intention is to continue to invest heavily in its rental fleet ($80 million), and in Q1 Toromont announced that dividends for the 2014 fiscal year (paid in 2015) would be at the upper end of its 30% to 40% payout guidance range. The Company is assessing its options for its $125 million debenture due in October 2015, but DBRS does not anticipate any refinancing difficulties. Modest acquisitions in the Agricultural space would not be surprising in 2015. Given a projected free cash flow break-even position (i.e., before acquisitions), this would be manageable as the Company’s financial risk assessment is strong for the current rating, with a reasonable buffer.

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.