DBRS Morningstar Changes Trend on Toromont Industries Ltd. to Positive from Stable, Confirms at BBB (high)

DBRS Limited (DBRS Morningstar) changed the trends on Toromont Industries Ltd.’s (Toromont or the Company) Issuer Rating and Senior Unsecured Debentures rating to Positive from Stable and confirmed both ratings at BBB (high). The trend change reflects Toromont’s proven track record of delivering a strong operating performance since the acquisition of the Hewitt Group of companies (Hewitt) in 2017 and its consistent conservative financial policy. DBRS Morningstar acknowledges that Toromont’s financial risk profile has migrated to a level exceeding the current ratings. The confirmation of the BBB (high) rating is supported by Toromont’s robust business risk profile as the exclusive Caterpillar equipment dealer with full-service capability in all of Eastern Canada and its strong market position in its sales territories.

Since the debt-financed acquisition of Hewitt in 2017, Toromont’s credit metrics swiftly improved to the “A” range in 2018–19 through both organic growth and integration of the Hewitt business, further aided by debt reduction. Furthermore, Toromont delivered a better-than-expected operating performance in F2020, demonstrating the resiliency of its operations and its strong cash generation capabilities, notwithstanding the global outbreak of the Coronavirus Disease (COVID-19). Subsequent to weaker profitability in H1 2020 because of government-mandated lockdowns and shutdowns, Toromont’s earnings rebounded strongly in H2 2020. Full-year revenues contracted 5.4% year over year to $3.48 billion, reflecting lower demand from most of Toromont’s end markets, with the exception of construction and agriculture. Toromont’s refrigeration business, CIMCO, also generated lower sales in F2020 compared with F2019. EBITDA decreased to $539 million in F2020 from $575 million because of lower sales, partially mitigated by the Company’s cost-containment measures. The overall EBITDA margin remained relatively stable at 15.5% in F2020 vis-à-vis 15.6% in F2019. The strong recovery momentum in both the Equipment Group and CIMCO persisted in Q1 2021, with total revenues increasing 13% and EBITDA improving 12% compared with Q1 2020. Demand across all markets and territories improved as business activities continued to rebound and customers resumed capital spending. Equipment Group backlogs at March 31, 2021, were $736 million, 108% higher compared with March 31, 2020. CIMCO backlogs at March 31, 2021, were $175.5 million, down 18% from March 31, 2020.

During F2020, the Company scaled back its capital expenditure and rental fleet investments and tightly managed its working capital, which contributed to achieving a net free cash flow surplus of $218 million (based on DBRS Morningstar’s calculation). DBRS Morningstar expects spending of this type to increase in F2021 as the Company ramps up inventory and to meet growing demand while maintaining a sizable net cash flow surplus. The Company is projected to reach a net cash position (cash and cash equivalent larger than total debt) over the next 12 to 18 months, hence boosting its liquidity position. For the last 12 months ended in March 31, 2021, adjusted debt-to-EBITDA ratio was at 1.20 times.

DBRS Morningstar forecasts Toromont’s revenues to reach $4 billion in F2021, based on the favourable market outlook and strong demand signals in its territories. EBITDA margin is expected to remain steady in the 15% range, driven by stable gross margins and well-controlled operating expenses. The overall credit metrics are expected to be maintained at the high end of the “A” range in the near to medium term, well commensurate with an A (low) rating.

Assuming Toromont’s operating performance remains relatively stable throughout F2021, DBRS Morningstar anticipates upgrading the ratings within the next 12 months. Conversely, the trend could be changed to Stable if Toromont’s operating performance deteriorates dramatically.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Companies in the Capital Goods Dealership Industry (April 30, 2021; https://www.dbrsmorningstar.com/research/377859), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262.)

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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577