DBRS Confirms Toromont Industries Ltd. at BBB (high) with a Stable Trend

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Toromont Industries Ltd. (Toromont or the Company) at BBB (high) with Stable trends. The ratings are supported by Toromont’s robust business risk profile as an exclusive Caterpillar equipment dealer in all of Eastern Canada and the Company’s solid market position across its sales territories. The confirmation also reflects the fact that the Company has maintained a strong financial profile following the acquisition of the Hewitt Group of companies (the Acquisition), which closed in October 2017. The Company’s credit metrics have improved considerably since the last review, mainly as a result of deleveraging and increased earnings from both the legacy businesses (defined as all continuing businesses operating prior to the Acquisition) and the acquired Hewitt operations (Toromont QM).

Toromont’s operating performance improved meaningfully in 2018, benefiting from the integration of a full year of results from Toromont QM (versus two months of results included in 2017). Toromont’s top line grew 49.1% to $3.5 billion, of which $1.3 billion was contributed by Toromont QM. The combined businesses generated $511 million in EBITDA, which is an increase of 50.6% from 2017. Both the legacy businesses and Toromont QM achieved strong growth, benefitting from strong construction markets across major territories and growing product support business across most territories. Concurrently, the Company repaid the $250 million term credit facility used to fund the Acquisition with internally generated cash. Through the first six months of 2019, Toromont continued its integration efforts across all business segments, further growing revenues by 2.4% to $1,678 million ($1638 million in H1 2018). Adjusted EBITDA excluding non-recurring items increased to $245 million in H1 2019 from $218 million in H1 2018, reflecting improved product mix.

Going forward, the main drivers for Toromont’s revenue growth continue to be infrastructure spending and strong construction in its key territories, with mining being a more volatile factor. Toromont will continue to focus on expanding its equipment rental business in Québec and the Atlantic provinces over the next few years, applying its expertise and success with its Battlefield operations. As such, net investments in rental fleet and facilities are projected to remain substantial for 2019 and 2020, funded primarily from the Company’s strong operating cash flow.

DBRS notes that Toromont’s current ratings are well commensurate with its business risk profile; therefore, a positive rating action would only take place if the Company improves its overall credit metrics to the higher end of the “A” rating range on a sustainable basis. DBRS also acknowledges that Toromont has built up a considerable cushion in its financial risk profile; however, a sharp deterioration in the Company’s operating performance could cause a negative rating action.

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

The principal methodology is Rating Companies in the Capital Goods Dealership Industry, which can be found on dbrs.com under Methodologies & Criteria.

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@dbrs.com.

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

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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

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