DBRS Confirms Toromont Industries Senior Unsecured Debentures Rating at BBB (high) with Stable Trend

DBRS has today confirmed the Senior Unsecured Debentures rating of Toromont Industries Ltd. (Toromont or the Company) at BBB (high) with a Stable trend. The rating reflects the Company’s strong financial profile, which has seen solid improvement in revenues and earnings year-over-year and a significant decline in debt levels with the conclusion of the spinoff of Toromont’s compression business on June 1, 2011 (See DBRS press release dated June 1, 2011, for additional details). The Company’s solid business profile continues to be underpinned by (1) a strong product support business that helps reduce the impact of cyclical industry downturns, (2) revenue diversification by end-market, and (3) its countercyclical nature and ability to generate cash during a downturn. Going forward, we expect that the business profile will improve, as the Company will be able to offer an enhanced product line once it completes the purchase of distribution rights of Bucyrus International (Bucyrus) for its territories from Caterpillar Inc. (CAT), likely to be completed in 2012. DBRS expects this, along with other CAT purchases, i.e. Motoren-Werke Mannheim Holding GmbH (MWM), to keep the financial profile strong and help boost equipment sales in the mining and power sectors in the near-to-medium term. The Company’s liquidity is solid, given significant availability under credit lines and no major maturities until 2015. Toromont is well-positioned in its markets to take advantage of robust investment spending in mining and infrastructure (especially in Ontario) over the longer term, keeping the credit rating stable.

Toromont’s overall revenues and EBITDA had solid increases in 2011 relative to 2010, with growth continuing into Q1 2012. The Equipment Group and overall product support had a strong year, driving most of the year-over-year growth in earnings. Robust demand for new, used and rental equipment was bolstered by increased activity in mining and heavy construction related to infrastructure.

At the end of 2011, 21% of Toromont’s equipment sales were driven by the mining sector, compared to approximately 5% in 2005. Overall margins also increased year over year; as the installed base of equipment grows, so do revenues from product support, yielding substantially higher margins than equipment sales. A strong Canadian dollar also helped partially offset operating results.

Despite increased investment in rental fleet and the greater working capital requirements needed to support higher sales levels, the Company generated positive net free cash flow during 2011, albeit lower than 2010 levels. Toromont was able to significantly reduce debt levels with proceeds received from its Enerflex Ltd. spinoff. With significantly lower outstanding debt, the Company’s financial profile is strong for this rating.

In the near term, DBRS expects the Company’s revenues and EBITDA will improve. Demand for new and used equipment and rentals are expected to be supported by continued strong investment levels in mining and infrastructure throughout Toromont’s territories. With CAT’s recent purchase of Bucyrus and MWM, the Company’s product offering will increase, which is also expected to bolster earnings. The Company’s margins are expected to remain strong, given efficiencies on the selling, general and administrative (SG&A) side, as well as a good product mix. DBRS expects the Company to achieve some improvement in the product support business, given its strong installed base of equipment. Key challenges facing Toromont include shortages of skilled labour, delivery delays for certain types of CAT equipment and a strong Canadian dollar.

DBRS expects that Toromont will generate sufficient cash flows to cover slightly higher levels of capex, net investments in rental fleet and dividends. With the increase in demand for equipment, Toromont’s working capital requirements are likely to rise to support higher sales. As such, DBRS expects that the Company will likely generate break-even levels of net free cash flow.

Given the absence of upcoming maturities, debt levels are expected to remain relatively constant in 2012 in comparison to 2011 levels. The Company is in the midst of negotiations regarding the purchase of the Bucyrus distribution business from CAT, and given Toromont’s strong financial profile, the Company has room to accommodate a debt-financed acquisition. Notwithstanding the Bucyrus transaction, Toromont’s financial profile is expected to remain strong for the rating.

While the Company’s financial profile is strong, Toromont’s rating is partially constrained by its business profile, i.e., its geographic concentration. Toromont’s performance in the Equipment Group is closely tied to economic conditions in its defined territories, particularly Ontario. A significant downturn in general economic conditions, or in multiple end-user markets within its territories, could potentially have a significant impact on the Company’s credit profile.

Note:
The applicable methodology is Rating Capital Goods Dealers, which can be found on our website under Methodologies.