DBRS Morningstar Confirms Toromont Industries Ltd. at BBB (high) with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Toromont Industries Ltd. (Toromont or the Company) at BBB (high) with Stable trends. The confirmation reflects DBRS Morningstar's expectation that Toromont will maintain strong credit metrics amid the challenging market condition caused by the ongoing Coronavirus Disease (COVID-19) pandemic. The ratings continued to be underpinned by Toromont’s robust business risk profile as the exclusive Caterpillar equipment dealer with full-service capability in all of Eastern Canada and the Company’s solid market position across its sales territories.

Toromont’s Q2 2020 revenues declined 13% compared with the same period last year due to depressed economic activities in all of its sales territories. Demand in substantially all product segments fell as a result of temporary shutdowns at construction and mine sites during the second quarter. In response to the declining sales, Toromont took cost control measures, including layoffs and salary reduction, which partially alleviated the negative impact on margins. Equipment group operating margins contracted to 9.3% in Q2 2020 from 11.7% in Q2 2019, and the CIMCO group (the refrigeration solution business) margin contracted to 6.4% from 7.9%. DBRS Morningstar expects economic activity in Toromont's sales territories to recover gradually in Q3 and Q4; however, a full recovery to the pre-pandemic level will likely take more than 18 months.

Toromont's financial risk profile is expected to remain very strong for its current ratings, despite the anticipated weaker operating results (relative to F2019) in F2020 and F2021. Toromont's resilient credit metrics are a function of its strong operating performance and cash generation capability coupled with its deleveraging effort since the acquisition of Hewitt Group of Companies in 2017. Debt-to-EBITDA ratio is projected to weaken modestly in 2020 and 2021, albeit remaining within the “A” range. Free cash flow before working capital is anticipated to be materially positive over the next two years. With the ramp-up of the rental operation in Québec largely completed in 2019, capital expenditure spending is expected to return to a relatively normalized level in 2020 and onward. Toromont's liquidity position remains strong, with $537 million of cash on the balance sheet and $650 million available under credit facilities as at June 30, 2020.

While DBRS Morningstar believes that Toromont is well positioned to navigate the current situation, uncertainties related to the duration of the pandemic (or a potential second wave of outbreaks) and the macroeconomic aftermath may pressure the Company's short- to medium-term profitability. However, should the Company demonstrate its ability to maintain credit metrics in the high “A” range post-pandemic, a positive rating action may take place. Conversely, in the event that Toromont’s operating performance deteriorates dramatically over the next 12 to 24 months, a negative rating action may take place, although DBRS Morningstar does not anticipate this at this time.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Rating Companies in the Capital Goods Dealership Industry (May 6, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities participated in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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