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

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

Thank you, Ruth, and good morning, everyone. [Foreign Language] Thank you for joining us today to discuss the results of Toromont Industries Ltd.

for the third quarter and first nine months of 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 you've 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?

As previously announced, we are pleased to have completed the largest acquisition in our company's history on October 27, just subsequent to the end of the third quarter. The acquisition of the Hewitt Group of Companies marks a very important milestone for Toromont and we expect it to be beneficial to our customers, employees, suppliers and shareholders on many levels.

We appreciate the confidence that our partner Caterpillar has shown in endorsing this opportunity and once again extend a warm and sincere welcome to our new team members. We had a very successful first week of transition.

A number of our senior leaders including Paul and I were fortunate to have spent the last week in our new offices across Quebec in the maritimes, engaged with local leadership teams. We're delighted with the level of positivity on the ground.

There will be more information to follow on the weeks and months ahead as these two great organizations come together. While the negotiation and acquisition activities occupied much time over the last year, we are very pleased that it was business as usual across the rest of our organization.

Our management's philosophy of decentralization empowerment of our leaders stood us in good stead. As result, we reported very strong results in both the equipment, group and CIMCO.

Paul will take you through the numbers later. In the equipment group, long term outlet for infrastructure spending remains positive from both provincial and federal governance.

We continue to see increased activity in the mining and power system sector. The parts and service business continues to be active and provides to measure stability and opportunity for further growth.

Our shops remained busy and we continue to hire technicians in anticipation of an increase in demand including the opportunity for increased equipment rebuilds in ready and used iron. In the mining sector, activity levels have been good and we continue to see increased inquiries falling a period of capital constraint.

We are consciously optimistic that there is opportunity for continued growth in this area. Our increased bookings in backlog leveled bodes well for continued product support growth.

Opportunities also exist for sales in support of new mine development, mine expansion and equipment replacement. The addition of the Hewitt business is expected to be transformative to long term performance of Toromont.

However, effective execution will be required to realize on the significant potential of a large contiguous operating platform, allowing for a greater combined presence in a Canadian economic sector such as mining, construction and power systems. At CIMCO, performance continues to be positive and recent booking activity and record backlogs bode well for future prospects.

Across all our businesses, growth in bookings and good backlog levels together with long term product support growth trends and the diversity of markets in our new and significantly expanded territory provide exceptional opportunities for continued success. Before I turn the call over to Paul, I'd like to take a few moments to acknowledge the tragic events that recently occurred in Fernie BC.

We want to remember those who are lost including one of our valued colleagues. Our hearts go out to their families.

Safety continues to be our top priority. We remain dedicated to ensuring events of this nature to never occur again.

I will now turn the call over to Paul to take you through the highlights of the financial results. Paul?

Thanks, Scott. Let's look at the operations results in more detail starting with the equipment group.

Revenues were up 16% in the quarter and 8% year-to-date on strong equipment sales and good rental and product support growth. Equipment sales were up 29% in the quarter and 12% year-to-date.

Deliveries into mining and power systems markets were strong in both the quarter and year-to-date. Construction in agricultural sales increased in the quarter, but were lower on the year-to-date basis on challenging market conditions.

Rental revenues were up 6% in the quarter and 9% year-to-date. We continue to invest heavily in this very important market segment to address expected demand, increasing our net rental investment to $309.4 million at the end of September 2017.

Product support revenues were up 5% in the quarter and 2% year-to-date with the increases in those market segments. Margins decreased 100 basis points in the quarter and 50 basis points year-to-date principally due to a higher proportion of lower margin equipment sales versus higher margin product support revenues.

On the equipment side, we continue to see a very tight pricing environment, combined with reduced rental conversions. Selling and administrative expenses as in percentage of revenues were down 70 basis points in the quarter and 50 basis points on a year-to-date basis.

Operating income increased 3% in the quarter and 4% year-to-date. Bookings increased 2% in the quarter on higher construction and agricultural orders, partially offset by lower mining and power systems orders.

Year-to-date, bookings were up 16%. Backlogs of $197 million represented the highest level for this time of the year since 2012 and were up 63% versus last year with the increases across all market segments.

Backlogs can vary significantly from period to period on large project activities, especially the mining and power, the timing of orders and deliveries and the availability of equipment for an inventory. Now turning to CIMCO.

Package revenues increased 11% in the quarter and 5% year-to-date. In Canada, package revenues were up 20% in the quarter and 10% year-to-date.

Activity levels in Quebec continue to be lower while most other regions were higher. In the U.S., package revenues decreased 11% in the quarter and 8% year-to-date.

In both Canada and the U.S., recreational markets have been stronger while industrial markets have been softer. Product support revenues increased 7% in the quarter and 9% year-to-date.

In Canada, all regions' reported growth for the quarter and year-to-date. In the U.S., product support was down 6% in the quarter and relatively unchanged year-to-date.

Focus remains on technician recruitment to further expand and penetrate the U.S. market.

Margins increased 140 basis points in the quarter and 280 basis points year-to-date on higher package margins resulting from improved execution and lower warranty costs. Selling and administrative expenses increased 22% in the quarter and 16% year-to-date.

Bad debt expenses were $0.8 million higher in the quarter and $0.6 million higher in the year-to-date. Excluding bad debt, selling and administrative expenses increased 14% in the quarter and year-to-date, mainly inflecting investments made to support the maritime business.

Operating income increased 10% in the quarter and 31% year-to-date reflecting the higher revenues and gross profit margins. Bookings were at record levels increasing 200% in the quarter and 52% year-to-date.

Consequently backlogs of $176 million were also at record levels, reflecting increases in both Canada and the U.S. and across both market segments.

Just under half of the backlog is expected revenue over the remainder of this year. On a consolidated basis, net earnings increased 4% in the quarter to $49.4 million and 6% year-to-date to $116.8 million.

Results in both years were impacted by a significant non-routine transactions. In the third quarter last year, we recognized a $4.9 million pretax gain on the sale of certain internally developed software.

In the third quarter this year, we incurred $1.8 million in acquisition-related expenses for a total of $2.6 million year-to-date. Additionally, the significant increase in our share price immediately follow in the announcement of the acquisition contributed to higher mark to market adjustments of $4.1 million.

Excluding these non-routine items, net earnings would have increased 24% in the quarter and 15% year-to-date. Basic EPS increased 3% or $0.02 to $0.63 in the quarter and 6% or $0.08 to $1.49 year-to-date.

Excluding the non-routine items, basic EPS was increased 23% in the quarter and 14% year-to-date. Working capital management remains critical to the operations.

The higher accounts receivable balances largely reflected the higher sales volume compared to last year. Inventory was higher, mainly on parts and service work in progress.

That concludes our prepared remarks and we'll now be pleased to take your questions. Ruth?

Just bookings in your Equipment group were pretty strongly year-to-date, I believe were around 16%. When you look at the pipeline of opportunities that you currently are expecting to be bidding on, do you think this level of growth in bookings is to be sustainable?

It's a good question. What we've seen so far is solid activity in the markets.

We don't speculate going forward. I think you get some lumpiness going on particularly in power in mining.

In the last quarter, we did see continued solid activity.

Okay. When sales growth into construction markets turn positive this quarter, do you think this reflects a change in construction customers becoming somewhat less cautious than the recent path?

Or is it a bit too soon to tell?

I think we need to continue to monitor that. We're pleased with the level of activity we've seen particularly in the last quarter.

We'll see how it goes going forward.

Okay, thank you. Congrats on a good quarter.

Thank you very much.

Good morning, guys.

Good morning, Ben.

Paul, can you just elaborate a little bit on what's going on in the rent approaches market? It looks like your RPO fleet or inventory -- however you want to plant it is down and you made some remarks about how conversion activity is a little less than normal.

Is there anything that you can you elaborate on that, that would explain that? Like is there any influence in the end market or what's driving that trend?

I'll pass it back to Scott, Ben.

What we're seeing there, Ben, is you got some shifts going out at times in the market. It's the RPO activity, end of the quarter was down.

I think it's about 18% on the fleet. But I think what we're seeing a bit is we're seeing solid rental activity and the markets are little more active on the smaller end products where you don't see the RPO.

That's probably another factor going on here and we've seen go to right sales as well. As a combination a lot of moving parts in there, we're monitoring it closely, but we've seen these shifts before over the past years.

Good thing is the overall revenues are improving, but it is an area that is down.

Could you help us within a ballpark conversion rate? What's a good number of conversions versus where you might be now in percentage?

I wouldn't want to speculate right now. You don't get consistent trends going in the first three quarters relative to workloads and things like that.

But we'll see how it goes. It's still a good level of RPO activity.

It's just down from last year. But that could be relative to some of the activity going on.

So does that mean if something doesn't convert, it ends up in your inventory; correct?

That's correct. Sometimes that's not a bad thing either.

There are two possible outcomes. If something doesn't convert, it could extend.

So contracts can extend. In a given period you can deal with contracts that don't convert, but they just continue on as a rental.

It's either that or it comes back and it becomes available as good used equipment which is well. You may recall in past years, in recent years as well that there was a level of caution that was creeping in and folks were unwilling to actually exercise on their RPOs and we would have comment on that in past years, Ben, where we saw that people had a higher predisposition to actually enter into RPO contracts.

The other thing, Ben, is right now, if a couple of those units came back, good news is iron is a little tight right now. That's what I mean by -- it's not as troubling maybe as it would be in other times.

Right. My recollection is that typically or historically in the fourth quarter, that's where a lot of people make their decision to purchase or return the equipment and that can influence.

You can have a bit of a lumpy fourth quarter as a result depending on those trends now.

Historically, that was very strong, Ben, but at recent years, that has actually dissipated.

Yes. It's changing a bit now.

Folks have reflected a predisposition to actually exercise a variety of times throughout the year.

Weather has been driving a bit of that as well. We're seeing interesting working seasons now that seem to transition a bit more than the past years.

What kind of equipment would this typically be? This is smaller stuff, right?

This thing, usually you're getting into your core products there.

Okay. That's helpful.

Yes, that's good to know because I wanted to just line up what might happen in the fourth there. But on CIMCO, I think you noted that in the review in the bookings or the backlog or both, there was a strong level of activity in the U.S.

particularly in industrial and I know that's been a market you've been trying to break into. Does that represent just some lumpiness, or does that represent any meaningful market developments where you guys feel like you've established good foothold there in that particular segment.

Well, that's a key strategic area that we're focused on, Ben, as you know and we were pleased in the quarter with the industrial bookings. Our win ratio is relative to our quotes, were very strong because we got off to a slow start.

In terms of how we see it, we still think -- we know we still have tremendous opportunity there and we have to continue to work at our coverage strategically. We're not where we want to be on that front.

So it's still we don't have a full pulse because of the size of the market, but we were pleased with the win ratios in the quarter on industrial side.

Okay. If I could just squeeze one last one in.

I have been asking a number of the equipment companies this. I'm just wondering what your perspective is on what appears to be a bit of an inconsistency between the tightness of the market that's been sighted, the longer lead times, the growing backlogs et cetera and the ongoing competitiveness of the market and pricing.

From your perspective, what explains that? Because obviously, normally when demand goes up and supply goes down, you'd expect some kind of pricing power that doesn't seem to be materializing here.

We're monitoring things in terms of availabilities and I would say what we're seeing so far, they're still competitive markets, but I think that's becoming a norm now and that's why you have to really focus on your value propositions and your efficiencies in order to win the business today. A lot of moving parts in there right now with the rental as well as some shifts to new.

We're seeing some shifts into the new again from our used was down, but I think that's the shift into the new buying environment right now, which could paint a little bit of the story going on.

I think also when you look at the competitive dynamics of a market, these are certainly something that we've learned -- I've learned that doesn't turn on a dime. As you lead into those sort of pricing dynamics, they would expect the changes imminently.

We've had some general improvement in perspectives on the market over the course of this year. As per tightness of the equipment, it varies substantially.

So certainly there hasn't been enough to see a shift in that pricing dynamic.

You still have some sibling [ph] parts in there on Tier 3, Tier 4 as well.

Right. That's another thing I've heard.

Okay. That's great color.

Thanks, guys.

Thank you.

Thanks very much and good morning.

Good morning, Cherilyn.

Congratulations on your deal and also on a very strong quarter.

Thank you.

Clearly, your delivery into the mining sector were a highlight of the quarter. Just wondered if you could give us some color on whether there were fleet sales in there or whether that was pretty diversified across a bunch of customers?

There was a fair-sized transaction there. We did have some diversity and you know, this is the reflection of the lumpiness you get in that sector.

And in terms of your outlook commentary, Toromont is always cautiously optimistic at the best of times, but you do make the comments that you're optimistic that there's the opportunity for continued growth in mining. Can you just give us a little bit of color about what you're seeing in terms of coding and level of inquiries?

It's active, but again, we're coming off some pretty tough times. So we don't want to get too far ahead of ourselves in terms of the capital constraints that we're in play for a long time.

We're pleased with what we're seeing so far. We're going to learn a little bit more here in the weeks ahead on our expanded territory.

We're monitoring close, but from what we've seen, it was encouraging.

And then on the construction side, obviously we had a slow start to the year because of weather. It feels like customers have been in a bit of a wait-and-see mode around promised infrastructure spending.

In your dialog with customers, are we getting indications that any of that spending is closer to moving through the pipeline?

I think we're still getting a read on it actually. The industry numbers in our area there, the activity is up a bit, but I still think contractors are still monitoring things relative to what may be expectations work.

Great. That's helpful.

I'll pass it on. Thanks.

Hi. Good morning, guys.

Great quarter.

Good morning, Michael.

Good morning, Michael.

It seem like nearly all industry players that the recovering Canada is quite broad-based and I think that eastern Canada is seeing more than its fair share of that recovery. With the transaction close, is there a way you can provide us just an update on the current performance of Hewitt sales margins year-to-date?

Or additional color on the general trends over there?

Generally, they've improved year-over-year and what I would encourage, Michael, is pause on that until next week, at which point in time we expect to post our business acquisition report. That will at least give you some color for the first six months of the year and that can lead into a dialog at that point in time.

Okay, sure. Say, if I have other questions, should I hold off until then?

Just go ahead.

Go ahead.

I'm just curious, on the MD&A, you do comment on integration efforts that are well under way. Now maybe we can get into it a little bit more specifically a little bit later on.

But are there any items you could discuss in terms of what you're looking to tackle in near or medium term?

Let me grab this one, Michael. We called a Dealer Day 1.

Our Dealer Day 1 focus was certainly making sure that we're operating safely. We were very focused on the communication with our people and then we were focused on ensuring that our systems and processes were in place to transact, phase with the clients smoothly and we're pleased to report we had zero disruptions.

It was very positive start and I complement our new team as well as our existing team and the plan that was in place there. So that was good.

Now we flip into I'll call Dealer Day 2 and that's an extensive list that really focuses on our growth avenues which include the Rental Services business that's a real key starting point for us, as well as the power construction in mining. Product support is another area that we are tackling aggressively in the Material Handling business and then the other component that we're focused on is remed [ph] and rebuilds.

When we look at this, we're creating a plan to create growth, to leverage our strengths and really leverage value propositions that we can offer our customers. We're working through a lot of mapping and processes to improve our efficiencies.

It's going to take time. There's a lot of heavy-lifting in there, but we're putting the road map together and teams are working in a very positive frame of mind.

That's where we are.

Over the course of the past two weeks, I would characterize that we've had three core objectives: 1) completing the transaction -- so consider that done; 2) in terms of stability of operations -- consider that done. I think that was highly successful; and 3) setting the ground work basically to now put in place our business planning and strategic planning efforts.

Over the coming weeks, we'll begin to execute on those and with that, we'll be in a much better position to really understand and to build on and to articulate some of the opportunities we have to grow with this business.

There's heavy-lifting here, there's great opportunity. We want to do this in an orderly fashion.

That's the plan.

That's helpful, guys. Thanks a lot for that and obviously you're looking forward to the progress there.

Maybe just back on the legacy business -- one follow up to Ben's question. Can you give us a sense if at least on pricing if you're seeing the trend improve sequentially and if you're seeing any improvement from the rental rates as well?

We're actually seeing some tightness on rental rates. If you look at the actual rental rates on our year-over-year basis, we as having been down 2.2% versus a year ago.

That level of competitiveness continues.

Even though our utilization is improving.

Utilization is up, assets that we've put into a fleet have increased, revenues are definitely up, but that price of dynamic continues, too.

All right. Thanks for that, guys.

I appreciate it.

You're welcome.

Hi. Good morning, gentlemen.

Good morning, Max.

Good morning, Max.

Just following up on Hewitt's discussion. I was wondering if you have initial impressions from the other side in terms of the cultural acceptance to move to more, sort of decentralized model that Toromont is known for.

Just maybe if you can provide any additional color on that front?

It was a very positive last week. We're encouraged with that.

In terms of the modeling again, we're early stage here and certainly, we're being very attentive to change management, practices and culture. We're going to learn from each other here.

You know our approach, Max, but we want to do this in an orderly fashion. We're learning already.

So this is going to be a great environment to learn both ways here. We're encouraged by that.

For a lot of folks, this is a big deal. There's a big transaction and this is a big change, but [indiscernible] people haven't encountered before.

The normal human behavior is to resist that change. What I'm extremely pleased to report is that the attitude that I directly saw last weekend and participated in was extremely positive and actually more positive than I have expected going in.

So we got a lot of high-caliber people. We're extremely encouraged.

I think people are engaged and broadly looking forward to moving forward and advancing collectively our interests. I'm very optimistic on that front.

Okay, that's very helpful. And do you have maybe any sort of initial read-through as you look at Hewitt in terms of how the Quebec market is doing?

Some of the engineers reported the numbers. Recently, the numbers seem to be moving up in the right direction, I'm curious to see if we're seeing some sort of rethrow [ph] on the equipment side as well.

It's a little bit early to answer that effectively, Max. As I communicated a couple of questions ago.

Hewitt have seen a bit of an uptake year-over-year. It's early days for us.

We're only into really second week of operations here and we haven't kicked off that planning process. We really need that input guidance and challenge each other as teams as to understanding what that fall opportunity is going forward.

Okay, excellent. That's it for me and obviously, good luck with integration.

Thanks, Maxim.

Thank you.

Hi, good morning.

Good morning, Jacob.

I wanted to be back on the pricing side. You talked a bit about what you're seeing or comparing in contrast, but what you're seeing in the new versus used.

I noticed used was down sequentially year-on-year?

On the used, it is down and there was a bit of a significant swing in there on the quarter on the purchase side. We were fortunate to earn some business on news purchase from mining last year in the third quarter.

I think it reflects the lumpiness in this segment. So that was a big swing on a year-over-year basis, but year-to-date, used is down and I think it's getting a little tighter to buy a good used iron.

We were very aggressive on that still and will continue to do so. But there also has been a shift to new and that's why you're seeing some jump there on the new sales.

Those are a couple of key factors impacting used right now.

In the decline in power gen, should we read much into that?

No. That's a smaller segment of our business and that can be variable on a lot of [ph] basis.

Okay.

Power system was good.

Okay. And then acquisition-related cost in fourth quarter?

Sorry. Say that again, Jacob?

Can we expect any other one-time Hewitt cost...

We'll definitely have some additional transaction cost come through. As you know, we're not one to normalize, but we think in this circumstance, at least we'll identify for you folks to identify the cost that are certainly related specifically to these transactions.

And that will come out what, next week some time?

No. those will come out in our fourth quarter result.

All right. Thank you.

Thank you.

Thank you.

Thanks. Just one follow-up for me, related to the Hewitt deal.

My sense was that these four months, business had paused on decision in certain areas as you contemplated that deal such as component rebuild capacity and sort of an IT strategy going forward. I know it's still early, but are there any additional comments you can make about how to combine company will move forward in those areas?

Again, early stage, those are two areas that we're going to engage as a team and that's early stage, Cherilyn, right now.

When it comes in the component rebuild, we're quite excited that we massively expanded the portfolio. In addition to the two CRC centers that Toromont has for legacy basis, we now have expanded that with two additional CRC centers and we're quite excited about the opportunities that that can present.

Thank you for the time.

Thank you.

Thank you, Ruth, and I think everyone on the call for your interest and participation today. [Foreign Language] That concludes our call.

Have a safe day.