Paul Jewer - CFO and EVP Scott Medhurst - President and CEO

Michael Doumet - Scotiabank Cherilyn Radbourne - TD Securities Sara O'Brien - RBC Ben Cherniavsky - Raymond James Jacob Bout - CIBC World Maxim Sytchev - National Bank Financial

Thank you, Shannon, and good morning, everyone. Thank you for joining us today to discuss the results of Toromont Industries Ltd.

for the first quarter 2017. Also on the call with me is Scott Medhurst, President and Chief Executive Officer.

Before we continue, 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. For a complete discussion of the factors, risks and uncertainties that may lead to actual results or events differing materially from those expected, refer to Toromont's press release from yesterday, which is available on our website.

We assume that you had an opportunity to review our press release from yesterday, and as such, we'll focus on key highlights. Scott will begin with a few remarks and some comments on our outlook, after which I'll review the operating group results and financial position.

Then we'll be more than happy to answer your questions. Scott?

Thank you, Paul. Good morning, everyone.

We delivered growth in the first quarter on solid execution across the business. The Equipment Group performed well on strength in mining, power systems and rentals despite broad challenges with tight pricing conditions.

CIMCO delivered solid results with excellent activity in Canada. Across both groups, product support continues to provide a strong foundation.

Consolidated top line grew 6% in the quarter and contributed to solid bottom line growth of 12%. In the Equipment Group, the long-term outlook for infrastructure spending remains positive following the federal budget.

However, we're awaiting clarity on the timing and nature of the spend. We also remain cautiously optimistic on various provincial spending initiatives and expect to get better visibility to projects in the coming months.

The parts and service business continues to be active and provides a measure of stability and opportunity for future growth. Our shops remain busy, and we continue to hire technicians in anticipation of increase in demand, including the opportunity for increased equipment rebuilds and readying used iron.

In the mining sector, we are beginning to see increased activity, but challenges such as capital spending restraints and cost reduction initiatives are still evident. Production continues, which is good for our product support business.

Opportunities also exist for sales in support of new mine development, mine expansion and equipment replacement. In the agricultural sector, end markets are currently very weak.

Much work remains or be incurred with the integration of broader product lines and improved market coverage. Focus will remain on sales participation rates and operational processes to generate longer-term financial returns.

At CIMCO, performance continues to be positive and reflects the result of our focused strategies over the last number of years. Strong booking activity and record backlogs bode well for future prospects.

Across all of our businesses, diversity and expanding product offerings and services, a solid financial position and a disciplined operating culture remain our strengths and position us for continued success. I will now turn the call over to Paul to take you through highlights of the financial results.

Paul?

Thanks, Scott. Let's dive right into the group results, starting with the Equipment Group.

Revenues in the quarter were up 6% with higher equipment sales and rentals along with continued product support growth. New equipment sales increased 11% while used decreased 5%.

We've previously described the interplay we see between new and used equipment sales. On a combined basis, equipment sales were up 5%.

Rental revenues increased 18% on a larger fleet and improved time utilization across all rental segments. We continue to invest in this very important market segment to address expected demand, increasing our net rental investment to $281.7 million at the end of March 2017.

Product support revenues increased 5% over the quarter. Both parts and service were up, benefiting from a larger installed base of equipment in our territory, good equipment utilization levels and higher rebuild activities.

Margins were relatively unchanged versus last year as higher product support margins were offset by lower equipment margins and an unfavorable sales mix of product support revenues to total. Extremely competitive market conditions have continued to dampen these equipment and rental margins.

Selling and administrative expenses were up 4% in the quarter but lower as a percentage of revenues. Higher compensation costs, bad debt expenses and information technology costs accounted for the majority of the increase.

Operating income was up 10% on a higher revenues and lower relative expense levels. Bookings increased 2% in the quarter with strong mining and power systems orders, partially offset by lower construction orders.

Backlogs of $176 million were 40% higher than last year and represented the highest level at March 31, over the last 5 years. Backlogs can vary significantly from period to period on large project activities, especially in mining and power, the timing of orders and deliveries and the availability of equipment from inventory.

Now let's turn to CIMCO. CIMCO delivered solid results for the first quarter.

Package revenues were up 2% in the quarter with strong Canadian activity levels offsetting lower sales in the U.S. Growth in Ontario and Atlantic Canada has been good while soft market conditions continued in Western Canada and Quebec.

In the U.S., growth in recreational activity was strong but not enough to offset the impact of a large industrial package delivered last year that was not repeated. Product support revenues increased 8% in the quarter on higher Canadian activity levels.

Margins improved 520 basis points on higher package margins and a favorable sales mix of product support revenues to total. The higher package margins were mainly as a result of lower warranty costs and improved execution.

Selling and administrative expenses increased 21%, reflecting investments made to support the growth of the business. Operating income increased 76% on the higher gross margins and revenues, partially offset by the higher relative expense levels.

Bookings were up 37% with increases in both Canada and the U.S. Recreational activity levels increased in both Canada and the U.S.

while industrial activity was up in Canada only. Consequently, backlog of $138 million were at record levels for the start of the year, with most expected to be delivered over the remainder of the year.

On a consolidated basis, net earnings increased 12% to $27 million, and EPS was up 10% or $0.03 to $0.34 per share. At March 31, our overall financial position remained strong evidenced by a strong balance sheet and cash marginally exceeding all long-term debt.

This concludes our prepared remarks, and we'll be pleased to take your questions. Shannon?

So you'd strong deliveries in the mining space this quarter, I think same as last quarter. Were there any large one-time deliveries?

Or are we seeing a real pickup in activity here?

It's still early, I'd say, in the first quarter, but we're pleased with the shift in new sales. It was a mix of underground and surface.

We're still monitoring this closely. As I've said in the comments, still a very intense environment for capital restraint and operating efficiencies.

A lot of focus on costs, so it's highly competitive, but the team did a nice job securing some business in the first quarter.

Okay. [indiscernible] time there.

And maybe switching over, you recorded a pretty solid increase in service, in the Equipment Group. There's been a lot of in-sourcing of work recently.

I mean, is it possible that we're seeing trends reverse or at the least ease in that segment?

Once we get too far ahead after our first quarter, what we saw was there was actually more of an increase in the labor, which was good. And that's why we continue to be focused on hiring.

We get lumpy on the parts side a bit with rebuild activity and things. And we continue to see strong quoting activity.

In the first quarter, our quoting activity was up about 3x on rebuild, although our invoicing wasn't at the same level, but that's the timing, and you still have to go earn it. So it's - it was positive on product support, and we'll see how it plays out.

The other thing I wanted to add, Michael is, as we've said on previous calls, that trends in-sourcing that I understand is existing in some other markets wasn't really a trend that we've seen substantially in our marketplace. So it wouldn't be a reversal of that trend because it's really just a matter of continued, steady growth basically in the service opportunities we have more [indiscernible] I mean, we could add more.

I appreciate that Q1 is kind of a seasonally weak period. So it's a little difficult to get a read on business conditions, but would just be interested in your thoughts as to how you feel about the outlook today versus at the time of your Q4 conference call?

I'll provide comments on what we saw, Cherilyn. Again, we don't want to get too far ahead of ourselves here with [indiscernible] based upon our first quarter.

But the product support remained active on all components of [indiscernible] special activity, but we're really pleased with the utilization on all components of our [indiscernible]

And in terms of the mining orders that you booked during the quarter, were those primarily replacement demand? Or is that in fact new line expansion or even new line developments?

There's a mix in there. But our minds are focused on production.

And then I wanted to ask on CIMCO. Historically, that business has been unprofitable in the first quarter just in terms of seasonality.

It hasn't been for the last couple of years, and I'm curious whether you think as you roll out your new strategies whether we can sustainably see a profit from CIMCO in Q1?

It really depends upon total business levels as a percent of the cash flow. It does have a fairly significant fixed cost side.

It has engineering, which is one of the key strengths. As a consequence, the lower business levels that have been traditionally seen in the first quarter and fixed costs that basically come to the surface [indiscernible] with the increase in total business levels or stay in the plus side of that, which is operating leverage.

So should we have the opportunity to be able to [indiscernible] continue to grow this business at a multiple [indiscernible] a little, we're still going to see Q1 as being just only the weakest quarter, that's the nature of that industry.

Just wondering if you could expand on the opportunities in ag and expanding the product line just given the balance sheet and the comments in your outlook.

So what we saw in ag was - we continue to see weakness in the industry opportunities. We got the preliminary numbers just early this week.

And again there was some decline, but we're pleased with the progress, still a long way to go. We did have some improvement in new sales activity and product support.

We continued to look at our coverage in terms of sales, getting closer supply to customers, and that's where our focus is right now. We're making progress, but certainly still ways to go.

And in terms of just expanding through acquisition, are there - is there any meaningful kind of add-on that you can see at this point? Or is it more organic initiative?

Well, it's more organic right now. I mean, we continue to keep our eyes open up, but we won't speculate on any new, right.

Now, the focus is on the operational and sales coverage.

Okay. And then similarly just on the product expansion.

What type of complementary products could you see in your business?

Well, we did. Are you focused on the ag side there?

No, on - just a general outlook comment, which I think talks about broader product offering.

Yes, we continue to - that's regular part of our strategy as long as it complements the core products, and doesn't conflict with some of our partners like Caterpillar. So it's a key strategy for us over the last few years, we continued a lot of products [indiscernible] power and equipment like the crushing and screening and pumps, things of that nature.

And that'll continue. We'll continue to work hard at securing complementary products and solutions.

I wonder - I mean, when you combine those sort of the organic initiatives that you have, do you feel that that's a prudent use of the balance sheet? Or do you feel that it's time to deploy capital another way at this point, whether it's through M&A or larger dividend or share buyback?

Well, certainly we're looking at all potential avenues. But in terms of the broader product lines, we like that approach because then we get closer and broader with our customers.

We've got a pretty excited approach, Sara, that you've seen, right? So we have continued to invest in our business and will over the long haul, and that's evidenced in things like ramp-up of rental fleets and business expansion in a number of other areas, investment in technologies, investment in people.

But still, our cash position grows. So we're mindful of that, and it is something that we consider and evaluate with our board.

Okay. And I wondered - I did notice that the rental gain was quite large year-over-year this quarter.

I just wondered, is that more of a normal run rate? Or should we expect this is a bit of a one-off contribution to the EBIT in the Equipment Group?

Well, we continue to invest because we see this as a strong long-term strategy. We see there is trend there, that there's more equipment going into the rental channel.

We did - and then it can get lumpy, and there are specific projects now, construction projects, in particular, and we were pleased that our utilization improved relative to some of those projects.

We had quite good time utilization increases year-over-year. Unfortunately, that's suppressed somewhat by somewhat a decrease in financial utilization just due to pressures on rates.

Okay. I guess I was referring to the sale of the used equipment though within rental.

Is that gain on sale with higher year-over-year?

We did have an increase in disposition on the heavy rentals.

Is that more of a normal run rate now?

And that - when you get into the normal flow, that starts to become another entry point into the customer base with another offered - another value proposition.

Okay. So it's more - I mean, you can see more of that going forward?

Well, we're trying to position ourselves for that. It's all about execution, right?

It depends on where the demand is, right? So we've been pretty open the whole length through that managing rental is a full cycle of business, right?

So you have to get the right equipment, make sure it's utilized appropriately, maintain the stuff properly and sell it at the right time. So that sale at the right time has for us led to an increasing opportunity for used equipment sales, which is quite fortunate.

[indiscernible] Lower our use and demand that was evidence over the course of the past year. We saw a little bit of a tick down in event for use this year as we talk about the interplay between new and used.

It really comes down to customer demand at the end of the day. We have flexibility in how we maintain that fully circle within months.

I was actually going to ask about your financial utilization, so you answered that question for me. But let me just - just let me clarify the - both the backlog and bookings in the Equipment Group.

I know - I believe in CIMCO, everything goes, all the bookings go through backlog. On the equipment side, that's different, I believe, because you carry some inventory.

So the discrepancy between the 2% increase in bookings and 40% increase in backlog, how much of that is just a function of inventory? Is it maybe a tightening in the supply chain, that actually now it's sort of harder to get stuff to the customer?

Is there any indication that's happening yet?

Let me jump in first with just a little bit. I mean, part of it is just the nature of the orders, right?

So as I said in the past, the backlog is a function of 3 things, either increase or opportunities for large mining orders, opportunities for large power systems orders or - and an ability to get equipment basically on a regular basis. So we find availability is quite good, our inventories are quite good.

The - we basically saw a bit of a softening as we indicated in the quarter with constructions. So that was reflected in the backlog as well.

So an increasing proportion of the backlog is related to the longer lead time resource in power systems. So it's just a natural function of the interplay in those segments.

Right, so it's sort of a mix thing. Like if you sell market - more mining, that tends to be not an inventory and more backlog driven.

For sure. And we are monitoring availability very closely right now.

And so - and because you think it might be getting tight?

We're just monitoring it closely. We'll see how things develop and...

And on the financial utilization and the rates. What is the direction of those rates?

Like they're still challenging? Are they getting less challenging?

Are you seeing...

They're getting more challenging.

So they're getting more challenging, really?

So on average, the rates were down 1.5% or so from a year ago, so further tightening.

So what would explain that, if you're on the other hand, you're seeing maybe - just trying to monitor supply chain and your bookings are going up or your backlog at least is going up and order activity, what's the disconnect there on rental...

Between rental and backlog are you referring to?

No, just the over - like the 2 markets are obviously, like there are different kinds of customer needs, but they're related to that same - to some degree?

There is a little bit of difference, right? So as you deal with the rental market, you're basically dealing with more fully in terms of the equipment that has been moving into the space from other geographies.

It's one of the factors coming into play. There are several players in the marketplace that have been ramping up their fleets, ourselves included.

And we have to be mindful of our own influence in that area. And as comp ends, you're still dealing with a number of customers that are sitting in the wayside just monitoring what's going on.

So all of that's led to bit of a supply-demand [indiscernible] and that's pressured rates.

I think it's a reflection of the competitiveness in the construction segment right now.

Yes. And when you talk about that, I mean obviously, there's a lot of moving parts to your business and you guys have been juggling the balls very well.

But it would be - if an investor opened up a page on Toromont today, it would be hard to convince him that your markets are depressed, because you're - you had record earnings and your margin is going up and those sorts of things. On a consolidated basis and, obviously, CIMCO has been a big part of - bigger part of the business, but what do you think explains the way you've managed the cycle at this point relative to some of the others in the space ?

Is it - are you managing - are you getting more market share? Or is it just that you are more responsive to cost, you didn't get that cost get out of control?

What can you say about that?

Well, I think we've been fortunate in a lot of areas. We continued to have production going on in mining and coal.

We did invest aggressively in rental, which I think certainly help. It provided us to be a little more nimble as you saw last year shipping into used, when the demand signal started coming through.

We've been very fortunate than what some of the execution on the products support side. So I would say we had some things go right, that our teams did a good job executing but let's not get ahead of ourselves.

It's still very competitive. I mean, in the first quarter we saw more activity on the small iron.

There is - and then your larger iron was still soft in there, so - which was interesting. So right now, it's just kind of execute where we see our growth avenues, but not get too far ahead of ourselves in this environment.

But your shift into rental has been at a time when you got markets been I don't know if decimated is the right word, but as you say, been very, very competitive. So I would have thought that would actually depressed your numbers to some degree.

Well, it's challenging on the financial utilization, but we've been fortunate to execute in some areas that we invested in, but it's highly competitive.

I'm just trying - sorry to belabor it, but this has been execution is the word that gets used often with you guys, and I use it too, but it can mean so many different things. What in particular would you be doing there?

And when you talk about executing on parts and service, I mean, I know I'm totally oversimplifying it, but you have guys turning wrenches. So what is it that you're doing so well that other guys aren't doing.

Is it just managing those quotes and managing the flow of parts and getting machines out of the base as fast as you can. Is that what solid execution comes down to?

Well. Yes, it's having the activity.

You got to have the production there. We've been fortunate that we have continued to work.

You've got to earn through your value propositions, and we continue to be very focused with some technology advancements. We're still, I would say, still early-stage there but we have been executing a bit on monitoring the fleets and capturing some data, capitalizing the opportunity.

But that is still early stage as well. And we are, monitoring it closes.

We have better visibility than we did like 3, 4 years ago. So that helps.

Wanted to go back to your comments on AgWest. You talked a little bit about the markets there are quite weak.

But yet, if we you look at the macro environment, farming come - Canadian farmer is pretty good. Acreage planning is supposed to be up this year.

It seems like there is some optimism from the farmers. Is this a AgWest-specific issue?

[indiscernible] you're losing market share, or how do you think about that?

We have operated the problems in Manitoba. The numbers we saw, preliminary numbers though, last year, the market declined.

First quarter, it softened again, but we were pleased to actually our revenues increased on new tractor sales, so that was a positive. But it's been a tough operating market.

And - but we're - we've done a lot to focus on our operating efficiencies, and we're looking at continues improvement. That's what our focus is relative to the market opportunity market opportunity.

And our product support has improved there as well. Total revenues are up on a year-over-year basis in the face of market declines.

Really substantial, right, in terms of what the total equipment market year-over-year. But still early stage there and progress had a long way to go.

Maybe just turning to CIMCO. Recreation order is very strong.

You talked a bit about what's driving this and really the sustainability over say the next 2 or 3 years.

We have seen a quarter with strong recreational in both Canada and the U.S. We did see softness in the industrial side in the U.S., which were really focused on that strategically so that was a bit of a disappointment, we're monitoring that closely.

There was some signals of softness in the market, but we'll see how that develops. The team is doing a nice job there.

We're trying to be a very proactive in some growth strategies. But again, it comes down to execution.

So don't want to get too far ahead of ourselves on long-term speculation, but there's a lot of focus on operational side there as well as some growth strategies.

How lumpy is that recreational?

It can be. I mean, it depends sometimes on governmental funding, things of that nature.

Right now, we've been fortunate with the opportunities presented. We're getting some good wins there.

Okay. Maybe just last question here.

You talk about a tight pricing environment. Maybe just give us some historical reference here specifically in the mining and construction side.

Has there been any relief as far as that competitiveness in those 2 groups? Or is it just getting worse?

No, there has not been a relief in there. It continues to be very competitive in the price conscious environment on both construction and mining.

Just a quick follow-up on the rentals. I mean, for me, this product offering has always been sort of a [swing supplying] right now the fact that we are seeing pretty nice growth there doesn't mean that the market overall was tightening, or is that just an oversimplification of the dynamics?

Well, we'll just go up the data we saw, the utilization improved. We're pleased it improved actually on the leg equipment, the heavy and power.

And so that was - we're pleased with that, and I think our teams are executing quite nicely in the first quarter on that front. But the financial utilization continues to be an area of focus because it's the - I'll reference the rates that's continued to be depressed.

Right. And that's what you said, the rates were down 1.5% year-on-year?

Yes.

Okay. And then the comments that you made in relation to digital initiatives.

Can you maybe paint a picture for us in terms of where you could see the benefits maybe over the medium term on the cost side, preventative maintenance things, all those sort of positives, how they can manifest themselves on your P&L down the road?

Yes, I think it has a lot of do with improving our operational efficiency but also more so for customer solution. So we get the data coming off the machines now.

We are starting to learn more about being - getting into predictive analytics. We'll be able to provide solutions in advance of events as well as we think we can start to isolate some opportunities more effectively in terms of how we're going to market and go-to-market with various offerings.

So it's an exciting stage, early stage, but we're connecting more machines. We're monitoring that closely on a year-over-year basis.

Our connectivity with machines improved. So a lot of teams are making some progress there, which we're pleased with.

And do you feel that right now that it's more of a pull or a push strategy? I mean, I guess the question is, is it the clients who are demanding it?

Or - I'm just trying to understand the dynamic there.

You're seeing a shift there. Customers are identifying what's that more and more.

They're becoming more proactive with technology requests. So I think it's combination of both because we're certainly proactive on that strategy with Caterpillar.

Caterpillar is advancing on that front, and we are as well, both with CAT and developing some products on our own. Both up for rental and heavy equipment segments.

And who will own the data?

That's combination we worked with the customers on that, making sure they're in sync with how this data is processed.