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

Cherilyn Radbourne - TD Securities Yuri Lynk - Canaccord Genuity Jacob Bout - CIBC Michael Doumet - Scotiabank Derek Spronck - RBC Devin Dodge - BMO Capital Markets

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

for the fourth quarter and full-year 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 that you’ve had an opportunity to review our press release and financial statements 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.

I am pleased to be reporting on our results for the fourth quarter and full-year of 2017. This was a transformative year in which we significantly increased our scope and depth of operations through the acquisition of the acquired businesses and net operating assets of Hewitt.

The acquisition expands the Company’s eastern operations into a contiguous territory, covering all of eastern and central Canada, extending into the far north. We successfully completed the dealer day one plan on October 27, 2017, operating safely and transacting business with clients under a new leadership structure.

We certainly appreciate the efforts put forth by the entire team, ensuring a positive outcome throughout the entire territory. The integration plan continues to move forward in an early manner focusing on the customer interface, communication systems and restructuring of our expanded mining, power, material handling and rental services divisions, all as we position the business for future success.

The team continues to outline opportunities relating to customer value offerings, operational efficiencies and best practices, technology integration, and most importantly, integration of Toromont decentralized business model which incorporates alignment, authority and accountability. Changed management remains at the forefront as does the focus on execution of the 2018 strategies and actions.

We are proud of the team’s accomplishments with an understanding that much work is ahead. We are focused on continuous improvement through a smooth and orderly transition.

Now, turning to the results. We delivered strong results for the fourth quarter and full-year of 2017, with solid organic growth in Equipment Group and CIMCO coupled with two months of operations at our acquired businesses which we’ll refer to as Toromont QM for the remainder of the call.

The Equipment Group executed well and CIMCO had another record year, a testament to the team’s dedication and commitment to excellence during a period of elevated focus on completing the Hewitt acquisition. Consolidated revenues included $243 million generated at Toromont QM since the date of acquisition and as a result were up 67% in the quarter and 23% year-to-date.

Operating income grew 38% in the quarter and 15% year-to-date, mainly on the higher revenues. Margins were lower as we consolidated the lower average Toromont QM margins together with tight pricing environment on the equipment side of the business and unfavorable sales mix of product support revenues to total revenues.

Net earnings were up 30% in the quarter, rounding out the year at a $176 million, which was a 13% increase over last year. In the Equipment Group, the expansion of our territories to include Quebec in Atlantic Canada is expected to be transformative to long-term performance of our Company.

Effective execution will be required to realize on the significant potential of a combined presence in key Canadian economic sectors. We are further encouraged by the long-term outlook for infrastructure spending across all territories from both the federal and provisional governments.

The parts and service business continues to be active and provides the measured stability and opportunity for future growth. Our shops remain busy and we continue to hire technicians in anticipation of an increase in demand.

Increased activity in the mining space has translated to increased bookings and sales, and we are cautiously optimistic there is an opportunity for continued growth. In the meantime, production continues, which is good for our product support business and consequently incremental equipment sales to support the growth and expansion.

At CIMCO growth in Canada and the U.S. has been a byproduct of the key strategic decisions.

We are especially pleased with the results thus far. Expanding our footprint and growing our technician base in the U.S.

remains a priority. Record bookings and backlogs bode well for future prospects.

Across the enterprise, diversity of markets in the new and significantly expanded territories together with the long-term product support growth trends and a disciplined operating culture remain our strengths. Entering 2018, we are well-positioned, supported by a strong balance sheet to continue to build value for our shareholders.

Recognizing the Company’s solid financial position and positive long-term outlook, I’m pleased to announce that the Board of Directors yesterday approved a 21% increase in the quarterly dividend to $0.23 per share per quarter. This marks the 29th consecutive year in which the Company has increased dividends.

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 operating results in more detail, starting with the Equipment Group.

Toromont QM reported revenues of $243 million for the two months since acquisition, comprising of $137 million in equipment sales, $19 million in rentals and $87 million in product support revenues. For the legacy businesses, revenues increased 15% at quarter-end and 10% year-to-date with the good growth in equipment sales, rentals and product support.

Total equipment sales increased 20% in the quarter and 14% year-to-date for the legacy businesses. Sales into most market segments were up in the quarter, while on a year-to-date basis, increases in mining, power systems and agricultural sales served to offset lower construction sales.

For the legacy businesses, rental revenues were up 11% on a quarter and 10% for the year with increases across all segments. The heavy fleet benefitted from improved utilization and a larger fleet while strong demand for light equipment rentals, led to increases in all regions.

At the end of 2017, our investment in rental fleet was $469 million including $170 million which was acquired as part of the transaction. For the legacy businesses, product support revenues increased 11% in the quarter and 4% year-to-date, surpassing previous records, set last year.

Both parts and service were up, benefitting from the larger installed base and equipment in our territory, good equipment utilization levels and a higher rebuild activity. Margins were down 340 basis points in the quarter and the 130 basis points year-to-date.

Lower average profitability experienced at Toromont QM accounted for approximately half of the decrease in the quarter and 50 basis points for the year. For the legacy businesses, equipment margins were lower for most of the year as the pricing environment remained tight, exacerbated by reduced rental conversions and a lower mix of used equipment sales.

A lower proportion of product support revenues to total revenues also contributed to margin compression. Selling and administrative expenses increased both on the quarter and year-to-date, largely due to the incremental expenses at Toromont QM for the two months, acquisition-related expenses, and higher compensation costs.

The mark to market impact of DSUs reduced expenses in the quarter but increased expenses on a year-to-date basis. A favorable change in the allowance for doubtful accounts on good year-end collections resulted in lower expenses for the quarter.

Offsetting expenses for the year was a gain on the sale of certain assets, excluding Toromont QM acquisition-related costs, expenses were 210 basis points lower as a percentage of revenues in the quarter and 80 basis points lower for the year. Operating income was up 33% in the quarter.

Excluding the impact of the acquisition, operating income was up 20% and was 60 basis points higher as a percentage of revenues. On a year-to-date basis, operating income increased 12%.

Excluding the items noted for the quarter together with the impact of a onetime software gain recorded last year, operating income increased 13% and was 30 basis points higher as a percentage of revenues. Bookings inclusive of $86 million at Toromont QM were up 24% in the quarter and 46% year-to-date.

Backlogs increased to $327 million including $128 million at Toromont QM. Now, let’s turn to CIMCO.

CIMCO reported record results for the quarter and the full-year. Package revenues were up 50% in the quarter and 17% year-to-date with growth in Canada and the U.S.

In Canada, sales in the recreational markets were strong and served to offset softness in industrial markets, both in the quarter and on a year-to-date basis. In the U.S., both market segments were up considerably in the quarter while on a year-to-date basis the increase was mainly driven by the growth in the recreational sector.

We’re encouraged by the results in the U.S. markets where we believe there’s significant growth potential.

Product support revenues increased 6% in the quarter and 9% year-to-date on higher Canadian activity levels as the U.S. remained relatively unchanged.

Margins were 70 basis points lower in the quarter but 180 basis points higher year-to-date. Package margins were higher in both the quarter and year-to-date on improved execution and lower warranty costs.

Product support margins were higher in the quarter but lower on a year-to-date basis. Overall, an unfavorable sales mix of product support revenues to total revenues, dampened margins in both the quarter and year-to-date.

Selling and administrative expenses were down 1% in the quarter as higher compensation costs were more than offset by decreases across most other expense categories. On a year-to-date basis, expenses were up 11% but 30 basis points lower as a percentage of revenues.

Operating income increased 79% in the quarter and was 300 basis points higher as a percentage of revenues. On a year-to-date basis, operating income was up 46% year-to-date and was 300 basis points higher as a percentage of revenues.

Bookings decreased 37% in the quarter against a tough prior comparator, which included record U.S. bookings.

For the year, bookings increased 31% and surpassed the previous record set last year. Backlogs of $134 million were 35% to a record levels of this time of year.

In Canada, both market segments were up with the opposite effect in the U.S. On a consolidated basis, net earnings for the quarter were $59.1 million or $0.73 per share.

Full-year net earnings increased 13% to $176 million or $2.22 per share. Included in the 2017 results are Toromont QM’s results for the two months of operation, amortization related to intangible assets acquired, advisory and other consulting related expenses, and increased interest costs incurred to partially fund the transaction.

Included in the 2016 results was a onetime gain on the sale of internally developed software. Excluding these items, net earnings increased 25% in the quarter and 16% year-to-date.

At December 31, our overall financial position remains strong, evidenced by a strong balance sheet and net debt to total capitalization ratio of just 40%, market capitalization of $4.5 billion and the total enterprise value of $5.2 billion. We are pleased to continue to produce good shareholder returns, further evidenced by a 19.3% return on opening shareholders’ equity and a 21.5% pre-tax return on capital employed.

That concludes our prepared remarks, and we’ll be pleased to take your questions. Valery?

Thanks very much and good morning. Congratulations on that finish to the year.

I wanted to start by asking about rental. I think, you’d agree that deepening Hewitt’s rental penetration is one of the major opportunities ahead of you.

So, just wondered if you could talk about your plans for 2018 on that front in terms of new stores and what you’re contemplating in terms of rental CapEx?

Yes. It’s still early stage, Cherilyn, but that is a focal point for us, strategically.

There is lots of work to do in terms of how we’re analyzing the scope of the products to go through a 12-month cycle. And we’re accelerating on that front with our structure.

And our branding, and we are very pleased with the progress so far. That is an opportunity but we have to go prove it.

So, little bit adding on that. I would say that we’re looking at business and transformation somewhat and expanding that opportunity.

So, little bit less about at this early stage new store locations and more about utilizing what we have filling in with the battlefield model. To answer your question just in terms of CapEx expectations but again it’s early days, we’re still only four months into the acquisition.

But in 2017 our total rental CapEx on a net basis was around $70 million net of proceeds on disposition. As I look at 2018, I can see that anywhere between a $120 million and $140 million at this stage, and that could vary as we get deeper into the operation.

Okay. That’s helpful.

It sounds like you have pretty broad-based strength in terms of market conditions in the expanded Equipment Group business. I just wondered, if you could kind of compare and contrast what you’re seeing in the legacy territory versus the Hewitt territory.

My sense is, you have a little bit more strength in construction in the Hewitt territory?

Well, what we saw in the fourth quarter, both in legacy and the expanded, was active markets in construction, the new sales in particular. Used equipment sales is tight.

So, I think it was actually in the quarter, for the two months we saw it was fairly consistent across the enterprise on the level coding activity and business.

And then last one for me is, just what do you make of the pricing environment? You think now that the market has turned that eventually pricing discipline would start to kick in but we don’t seem to have seen that yet.

What are you anticipating as 2018 unfolds?

Couple of things. As we’ve been saying, there’s a lot of moving parts in there still and will continue to for a while in the tier 4 tier 3 component as well as FX gyrations on equipment.

That’s just timing while it comes in. So, you’ve got that, you’ve got a tight environment on used equipment in terms of the availability of good used iron.

So, there’s a lot of moving parts in there that you know that’ll take a little more time to unwind where you’re getting into true apples and apples comparisons in the market.

Good morning, guys. Nice quarter.

There were several million dollars, as you noted, of one-time acquisition-related costs in your numbers, and good on you for leaving them in there. But, what should we expect going forward?

I would think most of those acquisition-related costs have been expensed, but just wondering if anything crept into 2018.

Almost everything would have been captured last year, I mean that would be very little. I mean, in some continuing legal support, obviously as we look forward at our increased size and organization we’ll be modifying other professional services that we’ll be dealing with but those will be regular recurring costs.

We captured everything basically in 2017, most of it impacting Q4.

Right. That’s what I thought.

Okay.

It still will be -- the other thing to focus on little bit herein is that what we have in the results is two months, right. So, there still is noise that happens there and there will still be noise going forward.

So, we captured all advisory services for example. We identified those as being the one-time items.

We’re still going to be dealing with amortization of intangible assets, for example that will vary as we move forward those described in the notes of the financial statements. As an example, in Q4, we would have had about $2 million of amortization impact of just backlog alone.

So, that’s a highly unusual item. We count for backlog acquired by basically taking out the GP.

So, that wouldn’t have been realized in our Quebec operations. And as we disclosed on the note, there’s about 4 million of that in total, so it’ll be other couple of million to come, but things will unfold.

That amortization of intangibles will obviously continue in the next couple of quarters but that would roll off fairly quickly. Right?

It’s amortized over the life of the backlog?

Yes. So, the backlog itself, that element of intangible assets will certainly roll off quickly.

So, it could be -- and I have specifically looked at it. The first quarter would probably mop up most of what’s there but there will be still little bit going forward.

Other elements of amortization of intangible assets, again as defined in the notes for the financial statements, have varying lives and will roll off at different schedules.

Okay. It looks like the margin for QM, and again, I know it was only two months but it was around 5%, wondering how representative or not that is of what we should be modeling on an annualized basis or just any comments on broad margin trends within that business from what was disclosed previously?

Again, I’d reflect, Yuri, to the fact it is only the first two months of operation. If you look just specifically at the numbers we disclosed, you’d only have about -- operating margin, EBIT margin about 4.5% or so.

Again, all of that amortization of backlog, 2 million that is in that number, so that weighs it is down. So, that is not indicative of the underlying GP performance of that business.

There are other items that are in there as well as we aligned accounting practices that would have an adverse impact of a perhaps a similar magnitude in total. And then, we basically -- you have to factor in seasonality as to what you’re doing as you look at those total results.

So, all that to say, I think, it’s a tough job to take two months and extrapolate it out into a model for you Hewitt going forward. Our focus is, as we talked about at the time that we announced the acquisition is we’re heavily focused on embedding the disciplines, operational focuses and moving forward practices and sharing best practices quite frankly from both organizations to advance this business.

I had a question on supply side. And are you seeing any constraints here from Cat as the global growth ramps?

It’s a tighter environment, and what we’re focused on to working closely with our partners is to ensure that -- it is something we’re very focused on with our expanded group, is our pipeline forecasting, getting our demand signals into Cat properly both on the prime product as well as the components and parts, and that’s where our focus is to work through these opportunities that we’re outlining.

And how good on the inventory side? How much more inventory you expect that to carry?

Well, that’s where we zero in on the pipeline forecasting and as Paul said, it’s really stage we’re getting those finalized now and working closely with our partners on that front. Our inventories are up a bit and we’re okay with that, based on the activity levels that we saw in the last quarter in the quoting activities.

And then maybe just going back to Q1, you talked a bit about seasonality here, what are your expectation as far as revenue and margin seasonality.

So, when you look at the broad seasonal factors, roughly from a revenue standpoint, the seasonality would be similar to ours. Again, both sides of equation have been affected over the that course of past couple of years by increasing lumpiness of mining deliveries.

So, that’s offset the traditional historic seasonal level a little bit. I would say from a bottom line basis, you will probably see enhanced seasonality in QM as opposed to Toromont little bit, just given scale of the and size of the operations.

A comment maybe just you’re talking your outlook division there about expanding your agricultural business. Maybe talk bit about that and your acquisition strategy in 2018.

Well, what we’re focused on there and the ag side, we’re pleased with the top line sales but we’re still very focused on the operational side. We’re not where we want to be on that front, still some heavy lifting in there to get into the -- some more efficiencies in how we are operating on product support side of the business.

And certainly, our focus is organic at this point in time, let’s prove out the model that we have. So, it’s not intended in the outlook to say that we’re expanding beyond that.

And then, last question here. As you think about the infrastructure spend, and you think where you are now versus what you were thinking three months ago, are you incrementally more positive?

Here’s what I’ll say. We’ve had a lot of interface with customers in last few weeks.

I’d say, it’s -- their pulse is solid, and they’re encouraged. I’d leave it at that.

We’ll see how things play out here.

So, just back to Toromont QM and the margin expansion story there. Could you help us frame the cadence of the potential margin improvement in the next couple of years?

And how we should think about some potential quick wins versus some other items that may take a few quarters to materialize?

There are early days, Michael. We wouldn’t be prepared to get into a forecast or prediction at that point.

And obviously, we’re very focused on operating disciplines. As I said, there was some noise that happened in the two months that we have in the fourth quarter.

And beyond that I wouldn’t provide guidance.

Michael, maybe I’ll just put a little more color on bit of the integration plan here. What we’ve been heavily focused on obviously is safety, our people and getting the connectivity with the customers.

We have been working hard on the structure in the first few months. And then, now, we’re moving in the operational side of the business and really working hard in there on the rental services business, the mining, the power, and that’s where we are.

Our focus is an orderly transition here and do it right.

So, maybe if I look back to the business acquisition report published at the end of last year, there was a large margin improvement between the first half of ‘17 and the first half of ‘16, despite what looked to be a single-digit increase in sales. Could you help us understand what drove those margins significantly higher?

And if any of those drivers are still playing out?

What I would say is we said at that point in time is that past margins at Hewitt were substantially depressed, post-2013, after they had the confluence of both the [indiscernible] commission and the downturn in commodities markets. So, what you’re seeing there is somewhat is a different rebound.

Market-driven rebound, is that fair to say?

Yes.

Now that you’ve had a full access to Hewitt and just more broad-based, how would you classify the cost and revenue synergy opportunities, both in terms of magnitude and potential timing of realizing these synergies versus your expectation prior to completing the acquisition?

I’ll just jump in with a couple of comments first, before I flip it over to Scott. One of the things that we are heavily focused on as we announced this acquisition is this isn’t about cost rationalization.

We’re not about shrinking this for glory, we’re about the opportunities that we have to grow this on our business, and we do believe that there are those growth opportunities exist. There certainly would be some synergies as we integrate some processes, some of those have been realized, but those are they a level that would be relatively immaterial to what you’d look at in terms of predicting the total forecast of this business.

We’re focused on growth and we’re focused on operational efficiencies. Scott, anything to add?

Yes. Just as Paul said, we’re looking at this to on all fronts, not just from a cost perspective, because we’re getting pulses also on the activity levels and the market opportunities that exist.

That’s very important that we outline our market opportunities. And then what we have to do is getting on the operational side and analyze our coverage and things of that nature to ensure we can improve our position in market.

So, it is a growth initiatives as well as building efficiencies. We are still very early stage.

Our focus is on that -- the people, the structure and the customers and then we’re moving into the operational side of this business.

Okay. That makes sense.

When you -- I’ll just move on actually. Just looking at the your overall inventory, in order to realize those opportunities.

Do you feel like -- you’re in a fairly good place in terms of your existing inventory versus -- on a combined basis. And second to that, when you think of your -- clearly, there was a shift in sales mix from 2016 to 2017, more towards new equipment.

Are those trends -- do you predict or do you anticipate those trends to still be in place where it’s more weighted towards a new equipment sales for 2018?

Well, fourth quarter, we certainly indicate based on what we saw there, the shift continued to new. Used is getting tighter, just on the legacy business the used purchased was down over 30%; it’s just getting a little harder to buy good used iron but we’re certainly active in that space there.

And we’ll do it on a now with the larger size market, we will continue to zero in on those opportunities. So, shift to new we continue to see.

We are very focused right now understanding the activities, the pipeline forecasting and to get those disciplines in there. And that’s what we really have to do this quarter to ensure we’re prepared properly.

But again, early stage, we’ve only been at this couple of months. And we are very proud of the team and what they’ve accomplished in a very short period of time to get these structures in place and really start the initiatives on the operational side.

Okay, great. And just one last one for me -- for myself.

CIMCO had a great year. Are those trends still in place for 2018 as well or as far as you can...

Well, we’re pleased with the bookings throughout the year. The backlog is solid.

We continue to work hard in the U.S. We’re pleased with our -- on a full-year basis, the progress on the industrial.

That’s where we’re very focused strategically. We did have some upside there but still we’re not where we want to be in the U.S., both operationally and product support wise we need to continue our pursuit of technicians.

So, we’ll continue to work hard in there. And we’re pleased with our progress, and we’ll continue to focus on our strategic approach to the CIMCO business in Canada and the U.S.

Is that a pretty good run rate margin for CIMCO what you completed in 2017, if we were to look out into 2018, on the relative activity level?

Well, we were fortunate with the project execution overall, last year. So, that played out well.

We had good recoveries on the engineering side of the business. Warranties were in pretty good shape.

So, again, it’s not getting too far ahead of ourselves. We’ve worked hard in there.

The team has done a very nice job focusing on some areas of -- on the operational project side. But still some work to do, wouldn’t get too far ahead of ourselves there.

Hi. Good morning, guys.

Can you comment on where you are in terms of rolling out your decentralized model across the QM network and how we should think about the pace of this rollout going forward?

Yes. We -- early stage, very early stage; this is where we have to make sure that we can continue to work safely first, interface with our customers in a positive manner where we’ve focused on some structural change but now we’re into the operations.

And that’s when we get into the more of the decentralized and the alignment component. And that’s what we’re working on right now, and we want to do it right.

This isn’t about a race. This is about more doing it right in an orderly manner.

Okay. So, should we assume this kind of goes on like a branch by branch basis maybe starting in 2018?

I wouldn’t say it would go branch by branch, but there is different elements that have to move forward at the same time to implement decentralization. Decentralization means, providing the authority, making sure that you got the models and infrastructure to support accountability, making sure that compensation programs are aligned for alignment to organizational goals.

So, it’ll take time. As we align our IT practices, implement systems, increase accountabilities and move this thing forward.

We really looked at it as we said from the announcement timeframe and that’s a process; it will take us a year and a half to roll that whole little element out.

Yes. It’s not just branches, it’s consistency in our mining operations, our power, and then of course the rental services.

We’re very pleased on a legacy business with our utilization. But that model took time to build.

You can’t put the switch in building some of these models, like i.e. rental services.

You’ve got to have the right products to go to market. And then, it takes time to build the whole model with disposition and getting into the rental repair cost as a percentage of your revenues.

So, these are things that we are very early stage.

Okay. That makes sense.

And just when we think about gross margins of the QM business, they’re a fair bit lower than what you have in the legacy Equipment Group. If we take as a longer term view, do you think you can close this margin gap over the next several years obviously or are there structural differences that we should be thinking about that may prevent this gap from closing, whether it’s competitive price dynamics and their markets or sales mix?

Just any color that you have that would be helpful.

As we said earlier, we’re certainly focused on operational disciplines, and that’s really what it comes down to it at the end of the day is how do you execute, what are the resources that you have in place to make sure that you can maximize the efficiencies and execution, and what is your mix of products and services that you’re actually delivering through this whole piece. One of the things for example that’s contributed to Toromont over the course of the years versus some of the comparators is, improved profitability at rental services.

So, on a consolidated basis, that can certainly contribute to our overall result. That will take time to unfold.

So, I don’t have specific predictions. I can’t point to where the economy is going to be or where the market segments are going to be over the longer haul.

But certainly, the goal is to bring them together. As for structural differences, markets are broadly similar.

There are some differences in terms of the base of customer that you have. And certainly they are unique customer sets in these -- one of these marketplaces.

But broadly, I wouldn’t say that there is anything that’s embedded or systemic.

It is about the growth opportunities as well, not just operational efficiencies, it’s monitoring those markets which we’re sizing up now and where we’re positioned in these markets, and that’s another key component.

That’s helpful. And I guess the last one for me, when I look at the rental business, had really solid core there.

Can you provide some color on, maybe the utilization levels and rental rates that you saw, and have you seen these trends carry over into 2018?

Certainly seeing improvement in time utilization broadly across all rental fleets. So, the markets are quite active, we’re quite pleased.

And those increases in time utilization are on increased sizes of fleets. So, I think it’s an active market.

Our thesis stands in terms of this been growing an important element of our total business. And we’re quite excited about the opportunity that we have to roll that business model out through Quebec and the Maritimes.

Thank you, Valerie, and thanks to everyone for their participation today. [Foreign Language] Have a good day.

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