DBRS Morningstar Confirms Toromont Industries Ltd. at A (low) with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Toromont Industries Ltd. (Toromont or the Company) at A (low) with Stable trends. The rating confirmations reflect Toromont’s strong operating results in 2022 that were in line with DBRS Morningstar's expectations. The Stable trends reflect DBRS Morningstar’s expectations that operating results and credit metrics will remain well positioned in the current rating category in the near-to-medium term. Toromont's ratings are supported by the Company's robust business risk profile as the exclusive Caterpillar equipment dealer with full-service capability in all of Eastern Canada, the Company’s solid market position across its sales territories, as well as strong credit metrics.

Toromont's operating results for the full year 2022 were in line with DBRS Morningstar's expectations, with revenues rising 8.9% year over year to $4.2 billion. The increase was primarily driven by strong performance in the Equipment group, supported by higher product support revenue, strong rental activity, and equipment sales in the Mining sector. EBITDA increased to $787 million in 2022 from $634 million in 2021, representing an EBITDA margin increase from 16.3% to 18.6%, despite continued supply chain challenges, which have delayed some deliveries and project completion into 2023. Toromont's credit metrics remained strong in 2022 as gross profit margin improved and financial leverage further decreased to 2.5 times (x) from 2.8 times in 2021. The financial profile remains supportive of the current rating.

DBRS Morningstar forecasts Toromont’s revenues will increase in F2023, albeit at a slower rate than in F2022. Growth is expected to be driven primarily by the Mining, Power Systems, and Material Handling segments, while deliveries in the construction market are expected to partially offset consolidated growth as a result of continued inventory supply constraints. CIMCO’s revenues are expected to be supported by the Company's large installed base, which provides a more consistent revenue stream. DBRS Morningstar's forecast also considers the near-term headwinds associated with supply chain constraints, tight labour pool of qualified technicians, inflationary pressures, and uncertainties surrounding the macroeconomic outlook. EBITDA margins are expected to soften slightly compared with those of F2022, and be in the 16% range (compared with 19% in F2022). In the medium-to-long term, DBRS Morningstar expects Toromont to benefit from continued infrastructure spending and elevated mining activity (driven by the electrification trend), easing supply chain constraints, as well as from its large installed base of equipment that drives high-margin product support sales. Further, the Company is well positioned to gain additional market share from expanding its rental operations.

In terms of financial profile, DBRS Morningstar expects that Toromont will generate slightly lower cash flow from operations in F2023 versus F2022, primarily as a result of softening EBITDA margin performance and anticipated continued elevated investments in inventory and rental equipment to support sales growth and rental operation expansion. Dividend payments in F2023 are estimated to be approximately $138 million. DBRS Morningstar anticipates that the Company's ample cash-on-hand and operating cash flow will be sufficient to cover all the cash usage, and no additional borrowings will be needed. DBRS Morningstar expects Toromont to continue to invest in the business, mostly through expanding rental operations and adding complementary products and services, and simultaneously adhere to its conservative financial policy and disciplined cash management as displayed in the past. Overall, leverage is expected to be less than 1.0x over the near-to-medium term.

DBRS Morningstar notes that Toromont’s current ratings are well positioned within the rating category. Given the recent upgrade from BBB (high) to A (low), a positive rating action is unlikely in the near-to-medium term. DBRS Morningstar also acknowledges that Toromont has built up a considerable cushion in its financial risk profile; however, a sharp deterioration in the Company’s operating performance could cause a negative rating action.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Capital Goods Dealership Industry (April 12, 2023). https://www.dbrsmorningstar.com/research/412586/global-methodology-for-rating-companies-in-the-capital-goods-dealership-industry

The credit rating methodologies used in the analysis of this transaction can be found at:: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions

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 under Related Documents or by contacting us at [email protected].

The rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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