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

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and the Senior Unsecured Debentures credit rating of Toromont Industries Ltd. (Toromont or the Company) at A (low) with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect Toromont’s track record of strong operating performance and disciplined financial policies. The Stable trends reflect Morningstar DBRS’ expectation that the Company’s business and financial risk profile will remain well positioned in the current credit rating category in the near-to-medium term. Toromont's credit ratings are supported by the Company's strong execution capabilities as an exclusive distributor and dealer of Caterpillar (CAT) equipment across half of Canada, from Manitoba through to the Atlantic provinces, and most of the territory of Nunavut. The Company has solid market positions across its sales territories and has a good proportion of non-sales revenue in the business mix. The Company has delivered a progressively stronger earnings profile over the years and accumulated a sizeable liquidity cushion against potential cyclical downturns.

On June 7, 2023, Morningstar DBRS confirmed Toromont’s credit ratings at A (low) with Stable trends. Since then, the Company reported annual results for the full-year ended December 2023 (F2023). The Company’s F2023 revenue and EBITDA grew by 12.3% and 13.5% year-over-year (YOY) to approximately $4.62 billion and $887 million, respectively. The better-than-expected operating results were driven by strong performance in both the Equipment group and CIMCO and a lower ratio of operating expenses as a percentage of revenue. Free Cash Flow before changes in working capital (as determined by Morningstar DBRS) grew by 11% YOY as a result of strong growth in operating earnings, a positive net interest income earned on cash balances, and effective management of capital expenditure and distributions. Net investments in working capital of $177 million were substantial but adequately funded by cash generated from operations; consequently, there were no changes in Toromont’s debt obligations.

The Company also reported results for the first quarter of 2024 (Q1 2024) ended March 31, 2024. Revenue and EBITDA declined by 3% and 9% YOY, respectively, affected by a stronger comparable period in F2023; some customer-initiated delivery delays particularly in mining; and increases in labour and other operating costs. Toromont ‘s first quarter has historically been weaker than the rest of the year, reflecting the impact of seasonal factors and related lower construction activities. Revenue and EBITDA for the last 12 months ended March 31, 2024 (LTM 2024), were $4.59 billion and $871 million, respectively. The credit metrics for LTM 2024 remained strong, with debt-to-EBITDA at 0.79 times (x).

CREDIT RATING DRIVERS
Toromont’s current credit ratings are well positioned within the credit rating category. A positive credit rating action is unlikely in the medium term, unless there is a material transformative change in the current business risk profile.

Conversely, and although not likely in the medium term, Morningstar DBRS may take a negative credit rating action if weaker-than-expected earnings and/or more aggressive financial policies result in weaker credit metrics, such that gross debt-to-EBITDA increases to levels higher than 1.5x for a sustained period.

EARNINGS OUTLOOK
Morningstar DBRS expects that Toromont’s F2024 revenue growth will be positive but moderately subdued following strong equipment deliveries in the past three years. The growth expectations are supported by steady construction and mining activities across the core markets, as signaled by a solid growth in bookings in the first quarter, offset by persistently challenging macroeconomic conditions. EBITDA growth is expected to be flat or moderately negative, affected by some pressure on the gross margins linked to the easing of equipment availability and cost inflation; despite a more favorable revenue mix with a higher proportion of product support. In the medium-to-long term, Morningstar DBRS expects Toromont to benefit from large projects linked to public infrastructure spending and positive trends in the mining sector outlook across its markets in Eastern Canada. The easing of supply chain constraints is expected to drive normalization of order backlog and equipment sales. The Company is also growing its product support footprint (43% of total revenue in F2023) on the back of a large installed base of new and used equipment.

FINANCIAL OUTLOOK
Morningstar DBRS expects that Toromont’s cash flow from operations before changes in working capital will trend in line with EBITDA growth. Capital expenditure is expected to be moderately lower than in F2023, as the Bradford remanufacturing facility comes to completion. Dividend payments are expected to grow in line with the Company’s earnings performance. Morningstar DBRS expects that the Company's positive free cash flow will be sufficient to cover the cash usage and therefore no additional debt is anticipated in F2024. In the medium term, Toromont is anticipated to continue to invest in its rental operations across Eastern Canada and expand CIMCO and other complementary services, while remaining committed to its current financial policy and strict cash management. Overall, leverage as measured by debt-to-EBITDA is expected to remain at or less than 1.0x in the medium term.

CREDIT RATING RATIONALE
Toromont’s credit ratings are underpinned by its market leadership as one of the largest dealerships of CAT equipment by revenue and geographic territory. Toromont’s growth is supported by its diverse business segments and a growing share of parts and services that generate recurring revenues. The credit ratings are constrained by exposure to cyclical end-markets, particularly for new equipment sales, higher reliance on a single brand of equipment and a moderate geographic diversification profile.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030, (January 23, 2024).

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Toromont, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Toromont, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Toromont, the BRA carries greater weight than the FRA.

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

Toromont concluded the sale of a subsidiary, AgWest Ltd. for a cash consideration $42 million in May 2023, therefore prior period comparable figures are restated and reflect continuing operations after the sale.

Morningstar DBRS applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Capital Goods Dealership Industry (April 15, 2024), https://www.dbrsmorningstar.com/research/431166.

Morningstar DBRS credit ratings may use of one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024, https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology and criteria have also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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

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

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

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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