Morningstar DBRS Confirms Credit Ratings of Toromont Industries Ltd. at A (low), Stable

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of Toromont Industries Ltd. (Toromont or the Company) and the credit rating on the Company's Senior Unsecured Debentures at A (low) with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect Toromont's continued solid execution across its core markets and strong cash flow generation, notwithstanding a challenging operating environment in the last 12 months (LTM) ended March 31, 2025. The Stable trends affirm Morningstar DBRS' expectation that the Company's credit risk profile, supported by strong profitability, solid operating cash flow and disciplined capital allocation, will remain strong. Toromont has over the years built up a cushion in its financial risk assessment to absorb market headwinds and any brief deterioration in the Company's operating performance.

On June 7, 2024, Morningstar DBRS confirmed Toromont's credit ratings at A (low) with Stable trends. Since then, the Company reported annual results for the full year ended December 2024. Toromont's 2024 revenue grew by 9.1% year over year (YOY) to $5 billion, driven by strong demand for new equipment across construction and mining end markets. The Company's CIMCO segment (which accounts for 9% of total revenue) also reported 16% YOY growth on the back of a solid backlog and active industrial and construction markets. Morningstar DBRS-calculated EBITDA contracted by 1.3% to approximately $875 million, EBITDA margins contracted to 17.4% from 19.2% in 2023, affected by an unfavourable revenue mix, offset by the Company's strong control over selling, general, and administrative costs. Cash flow from operations (before changes in working capital) grew by 3.1% YOY to $696 million, supported by interest earned on cash balances. Toromont maintained a free cash flow (FCF) surplus of $73 million after net investments in working capital of $188 million, net capital expenditure (capex) of $282 million, and common shareholder dividends of $154 million. Revenue and EBITDA continued to improve YOY, reaching $1.1 billion and $162 million, respectively, in Q1 2025 versus $1.0 billion and $154 million, respectively, in Q1 2024. Overall credit metrics remained strong in 2024 and through the LTM ended March 31, 2025, with adjusted Debt-to-EBITDA at 0.79 times (x) and 1.1x, respectively, the latter reflecting the impact of the $300 million issuance of debentures in March 2025.

CREDIT RATING DRIVERS
Toromont's current credit ratings are well positioned within the credit rating category. A positive credit rating action could be considered if there were a material transformative change in the current business risk profile, achieved, for example, through improved geographic diversification of earnings.

Morningstar DBRS may take a negative credit rating action if weaker-than-expected earnings and/or more aggressive financial policies result in a weaker financial risk assessment (for example, if gross debt-to-EBITDA were to increase above 2.0x for a sustained period.

EARNINGS OUTLOOK
The uncertainty across capital goods markets will likely persist for most of 2025 because of changing trade policies and import tariffs in the U.S. and the resultant global trade war and slower economic growth. These conditions could potentially result in softer or delayed capital spending as some customers adopt belt-tightening measures. That said, Toromont's revenue growth is expected to be moderately flat, supported by base demand from steady construction activities linked to infrastructure in Ontario and Québec. Mining capital spending is expected to be maintained on the back of supportive metals commodity prices, particularly gold. Morningstar DBRS' moderate revenue growth rate expectations reflect some normalization in the order backlog following strong sales in the past four years for both the Equipment Group and CIMCO. EBITDA is expected to decline moderately or at best flatten, affected by pressure on the gross margins linked to wide inventory availability, original equipment manufacturers' (OEM) price increases, and operating cost inflation partially offset by a more favourable revenue mix with stronger rental and product support components. Toromont is expected to pass some of the price increases linked to tariffs on inventory and parts sourced in the U.S. to its industrial customers. EBITDA margins are expected to moderate at approximately 16% to 16.5%.

In the medium to long term, Morningstar DBRS expects Toromont to benefit from continued infrastructure and mine expansion spending in Eastern Canada, as well as from its large installed base of equipment that drives high-margin product support sales. Furthermore, the Company is well positioned to grow its market share through its Battlefield rental expansion. Morningstar DBRS expects the Company to make small, strategic tuck-in acquisitions in growing sectors, such as power generation and refrigeration, funded in most part through operational cash flows.

FINANCIAL OUTLOOK
Morningstar DBRS expects that Toromont's cash flow from operations before changes in working capital will be affected by moderately weaker earnings and higher interest expenses for part of 2025. Capex is expected to be consistent with 2024 as the Company continues to add capacity and improve its branch network. Investments in equipment inventories (both for sale and rental) are expected to normalize relative to the past two years as supply chain constraints have largely eased. Dividend payments are expected to grow in line with the Company's earnings performance. The Company is expected to maintain a moderate FCF surplus. In the medium term, Toromont is anticipated to continue to invest in its rental operations; expand CIMCO and other complementary services; acquire small, tuck-in businesses; and increase its storefronts while remaining committed to a disciplined financial policy and cash management.

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): BBB (high)
-- Toromont's CBRA reflect the Company's market leadership as an exclusive distributor and dealer of Caterpillar (CAT) equipment across half of Canada, from Manitoba through to the Atlantic provinces and most of the territory of Nunavut. The Company has full-service capability to service capital goods needs for customers in construction, logistics, mining, energy, and other heavy industries. The CBRA acknowledges growing competition, concentration on a single OEM, and cyclicality in some end markets.

Comprehensive Financial Risk Assessment (CFRA): AA/AA (low)
-- Toromont's CFRA is strong, driven by a combination of operating profit growth and a healthy conversion of earnings to operational cash flows. Leverage as measured by debt-to-EBITDA is expected to remain at or below 1x in the medium term. The Company has built up a considerable cushion in its financial risk assessment to absorb a temporary drop in earnings.

Intrinsic Assessment (IA): A (low)
-- Toromont's Intrinsic Assessment is determined based on forward-looking assessment of the CBRA and CFRA while also taking into consideration industry peers, among other factors.

Additional Considerations: None
-- The credit ratings include no further negative or positive adjustments resulting from additional considerations.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) at https://dbrs.morningstar.com/research/454196.

Further details on the Issuer's Intrinsic Assessment can be found at https://dbrs.morningstar.com/research/455876.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in Services Industries (February 3, 2025), https://dbrs.morningstar.com/research/447184.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (February 3, 2025), https://dbrs.morningstar.com/research/447186

-- Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (May 16, 2025), https://dbrs.morningstar.com/research/454196

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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