Toromont Industries Ltd.

Good morning. Today is Wednesday, February 12, 2025. Welcome to the Torremont Industries Limited 2024 Fourth Quarter and Full Year Results Conference Call. Please be advised that this call is being recorded and all lines have been placed on mute to prevent any background noise. Your host for today will be Mr. John Doolittle, Executive Vice President and Chief Financial Officer. Please go ahead, Mr. Doolittle.

Thank you very much, Joelle. Good morning, everyone. Thank you for joining us today to discuss Torremont's results for the fourth quarter and full year of 2024. Also on the call with me this morning is Mike McMillan, President and CEO. Mike and I will be referring to the presentation that is available on our website. And to start, I would like to refer our listeners to slide two, which contains our advisory regarding forward-looking information and statements. After our prepared remarks, we will take your questions, and let's begin by moving to slide three. I'll pass it over to you, Mike.

Great. Thanks very much, John. Good morning, everyone. Thanks for joining us. I'd like to note before I get started that John and I will be commenting largely on a continuing operations basis. This excludes the results of AgWest, which was a business we sold in Q2 of 2023. We do exclude AgWest as we believe it. This provides a better basis for comparability and, of course, comparisons between Q4 of 23 and 24. exclude Pegwest altogether. Results in 2024, and in particular Q4, reflect good execution across most markets against a solid order backlog. For the year, bottom line results were below the strong comparator last year, in part due to reduced activity in the residential sector. Overall, the team performed well in Q4, improving on last year's bottom line. The equipment group reported solid new equipment deliveries in both the construction and mining segments. Rental markets remain constrained, however utilization levels improved toward the end of 2024. Simcoe revenue and bottom line improvements demonstrated the team's strong execution while they continue to build their backlog throughout the year. Our solid financial position was maintained while we continue to exercise disciplined capital allocation, investing in the business to support organic growth initiatives, in addition to our heavy rents tri-city business acquisition this year. Our team is committed to strengthening our partnerships with our supply partners and customers while executing and allocating our resources with discipline in order to deliver high quality products and services. This results in sustainable growth over the long term. We are proud of our team and their commitment to disciplined execution of our decentralized operating model, adapting to changes in the business environment while remaining focused on executing customer deliverables. Additional efforts continue to consistently and effectively manage our discretionary spend while actively recruiting technicians to execute our critical aftermarket service strategies and value-added product offering over the long term. Our disciplined attention to our financial position and solid order backlog position as well as we enter 2025. On slide four, I'd like to touch on a few key financial highlights. Investment in non-cash working capital increased 32% versus a year ago. We are comfortable with this increase, as it was mainly driven by higher inventory levels, reflective of the higher new equipment sales levels, improved product availability, and normalizing supply conditions. Inventory levels are higher than the prior year, driven by a number of factors, including delivery timing, inflation, foreign exchange rates on U.S. source supplies, improving availability through the supply chain, seasonality, and general activity levels. Accounts receivable was unchanged year over year, with higher revenue and lower day sales outstanding. Our team continues to closely manage the aging of our receivables, monitor credit levels, and metrics. We ended the year with ample liquidity, including cash of $891 million an additional $459 million available to us under our existing credit facilities. Our net debt to total capitalization ratio was negative 9%. We purchased and canceled 1,321,500 shares for approximately $160.4 million to date for the year under our NCIB program. Our purchases are intended to practice good capital hygiene and to mitigate auction exercise dilution. We increased our level of purchases moderately through Q4 in light of our cash position and market fundamentals. Overall, our balance sheet remains well positioned to support operational needs, and we are prepared to manage challenges related to the economic variables and business conditions. We will continue to exercise the operational and financial discipline one would expect as we evaluate investment opportunities that may develop over time. Torremont targets a return on equity of 18% over a business cycle. Return on equity was lower at 19.2% compared to 23.1% for 2023, reflecting higher equity levels alongside lower annual earnings comparatively for fiscal period 2024. Return on capital employed was 25.7%, lower than 30.4% last year, largely reflecting the same factors. And finally, as announced yesterday, the Board of Directors increased the quarterly dividend by $0.04 per share, or 8.3% to $0.52 per share, or $2.08 per share annually. Torremont has paid dividends every year since 1968, and this is our 36th consecutive year of dividend increases. We continue to be proud of this track record and our disciplined approach to capital allocation. John, I'll turn it back to you for some more detailed comments on the results.

Okay, great. Thanks a lot, Mike. Let's turn to slide five for a few additional comments on the consolidated numbers. We were pleased with our team's performance in 2024 given the changing market dynamics. We're mindful of the uncertain economic and political environment and continue to monitor and focus on what we can control. The recent announcements on tariffs between the U.S. and Canada has created additional economic turbulence for every company engaged in cross-border trade. Our team is engaged, monitoring, and developing an appropriate action plan to navigate the potential impacts over the short and longer term when details become available. We will maintain our focus on operating and financial disciplines to manage our cost structure while we invest in capacity and capabilities to provide exceptional service to our customers today and in the future. The strong order backlog and approved operating disciplines along with our strong financial position position as well for the future. Fourth quarter results reflected good growth in revenue across most areas with solid equipment deliveries and execution against order backlog and project schedules. Operating income was up 3% compared to last year, mainly reflecting the higher revenue levels and increased gross margins, slightly dampened by higher expense levels and lower property gains. Bookings for the fourth quarter increased 3% compared to a year ago, with higher bookings at Simcoe being offset by lower bookings in the equipment group against a strong comparator. On a year-to-date basis, bookings increased 9% with the equipment group up 6% and Simcoe up 30%. Backlog remained healthy at $1.1 billion as at December 31st, down slightly from $1.2 billion last year with a decrease in the equipment group and an increase in Simcoe. On a consolidated basis, revenue increased 7% in the fourth quarter and 9% year-to-date, with increases in both the equipment group and Simcoe. Expense levels increased 16% in the quarter and increased 10% year-to-date. Increases reflect higher activity levels along with staffing levels and general inflation. Higher allowance for doubtful accounts reflect certain exposures, while good focus on collections continue. In 2023, a property disposition decreased expenses by $5 million. Operating income increased 3% in the quarter and decreased 5% year-to-date. For the quarter, higher revenue and gross margins were partially offset by the higher expense levels. As a percentage of revenue, operating income was 13.3% on a year-to-date basis compared to 15.2% last year. Net earnings on a continuing basis increased 1% or $2.2 million in the quarter compared to last year and decreased 4% or $22.6 million on a year-to-date basis. Basic earning per share on a continuing basis was $1.91 in the quarter and $6.18 year to date. Let's look at the equipment group in more detail and turn to slide six. Revenue was up 5% in the quarter and 8% year to date. Equipment sales including both new and used equipment were up 6% in the quarter and 15% year to date, reflecting good inflow and delivery of equipment against order backlog. New equipment sales increased 7% in the quarter on good deliveries in the construction, mining, and material handling, slightly dampened by lower power systems deliveries. Year-to-date new equipment sales increased 18% with good activity across all market segments, except for material handling marginally down from 2023. Used equipment sales decreased 3% during the quarter on lower fleet dispositions and decreased 2% year-to-date, predominantly in the construction market. Both rental fleet dispositions and sales of used equipment from trades and purchases decreased had decreased reflecting shifting supply and demand dynamics. In the quarter, total equipment revenue increased 6% in construction, 4% in mining, 44% in material handling, and down 1% in power. Rental revenue was 6% higher in the quarter, largely due to higher RPO fleet revenues reflecting a larger fleet. Heavy equipment rentals increased 11% in the quarter, largely due to the Tri-City acquisition. While material handling increased on a smaller base offset by lower light equipment rentals. On a year-to-date basis, rental revenue was up 1%. Product support revenue grew 4% in the quarter and 3% year-to-date. Parts revenue increased 2% in the quarter and 1% year-to-date on market activity. Service revenue increased in both the quarter 8% and year-to-date 9% on the higher technician base. Looking at specific markets for the quarter, change in revenue was as follows. Construction was up 5%. mining up 2%, power systems up 8%, and material handling down 1%. Gross profit margins increased 60 basis points in the quarter compared to the fourth quarter of last year and decreased 200 basis points on a year-to-date basis. For the quarter, higher equipment and product support margins were dampened by unfavorable sales mix of higher proportion of equipment sales to total revenue. On a year-to-date basis, sales mix had a higher proportion of equipment revenue to total, dampening margins 70 basis points. Equipment margins decreased 30 basis points as expected given market dynamics in play in the prior year. Rental margins were down 100 basis points on lower fleet utilization and higher recent acquisition costs. Product support margins were unchanged year-over-year. Selling and administrative expenses increased 20% in the quarter, 10% year-to-date in support of higher revenue. Compensation costs were higher year-over-year on headcount and regular salary increases. and other expenses such as training, travel, and occupancy costs have increased in light of activity levels, planned investments, and general inflation. Allowance for doubtful accounts increased $4.7 million in the quarter and $6.5 million year-to-date on certain exposures, offset by good collections in other areas. In 2023, a property disposition reduced expenses by $5 million. We are comfortable with the increases as they largely represent investments in our team and resources. Selling and administrative expenses were consistent at 11.5% as a percentage of revenue compared to 11.3% last year. Operating income was relatively unchanged for the quarter and down 7% year-to-date as the higher revenue was offset by the lower gross margins and higher expenses. Bookings decreased 9% in the quarter to $487 million and year-to-date increased 6% to $1.9 billion. For the quarter, improved bookings and construction up 6%, Power systems up 18%. Material handling up 67%. We're offset by lower mining orders down 65% against a tough comparator of large customer orders in the fourth quarter of 2023. For the full year, bookings were as follows. Construction markets were active up 17% with a continuing improvement towards more normalized supply and demand dynamics. Material handling order intake was up 18%. Mining markets were lower down 8% from last year against a strong comparison strong comparable, as well as power systems order activity was down 15%. Backlog of $708 million remains at healthy levels, down 26% versus last year, reflecting deliveries against customer orders from the opening backlog offset by new bookings. Approximately 90% of the backlog is expected to be delivered over the next 12 months, but of course this is subject to timing differences depending upon vendor supply, customer activity, and delivery schedules. Let's turn to Simcoe on slide seven. Revenue was up 23% in the quarter and 16% year-to-date. Package revenue increased 47% in the quarter and 28% year-to-date in both the recreational and industrial markets, with advancement of construction schedules in the execution of strong order backlog and improvements in equipment delivery schedules. The U.S. industrial market was down 15% in the quarter and 52% on a year-to-date basis versus stronger comparators. Product support revenue increased 4% in the quarter and 6% on a year-to-date basis with higher market activity in Canada in both periods. Activity in the U.S. was down 12% for both the quarter and on a year-to-date basis, and activity levels are reflective of market conditions and increased labor capacity. Gross profit margins decreased 210 basis points in the quarter, resulting largely from the timing of stage of completion construction projects. Improving execution and efficiency continues to be a focus. For the year, gross profit margins increased 40 basis points versus last year. Package margins were up 20 basis points on good execution. Product support margins increased 60 basis points on improved execution and higher volume. An unfavorable sales mix with a lower proportion of product support to total revenue dampened margins by 40 basis points. Selling and administrative expenses decreased 10% in the quarter and increased 7% year-to-date. as a percentage of revenue selling in administrative expenses decreased to 14.8% for the year versus 16% last year. Expenditure control measures on discretionary spend remain a key focus area for the Simcoe team. Operating income was up $5.8 million or 47% for the quarter, largely reflecting the higher revenue and lower expense levels, slightly dampened by the lower gross margins. On a year-to-date basis, operating income was up $13.9 million or 35%, on higher revenue and improved gross margins, partially offset by higher expenses. Operating income as a percentage of revenue improved 160 basis points compared to last year to 11.6%. Bookings were up 124% to 126 million in the quarter in both Canada and the U.S. markets and were 30% higher for the year-to-date period. Recreational bookings were 146% higher for the year with excellent activity in both Canada and the U.S. Industrial orders were down 12% year-to-date as Canadian orders were lower against a strong comparable while the U.S. was higher. Backlog of $342 million was 34% higher than last year with higher backlog in the recreational and industrial markets. Industrial backlog decreased 10% with a decrease in Canada, largely offset by a strong increase in the U.S. on good order intake over the trailing 12 months. Recreational backlog was up 78%, reflecting a strong increase in both Canada and and the U.S. Approximately 70% of the backlog is expected to be realized over the next 12 months. However, again, this is subject to construction schedules and potential changes stemming from supply chain dynamics. And with that, I'll turn it back over to Mike, and we can move to slide A. Great.

Thanks, John. As announced last week, we acquired a 60% ownership of AVL Manufacturing Inc., a leader in the design and fabrication of power generation enclosures. AVL operates in Hamilton, Ontario with approximately 300 employees and primarily serves the data center market across Eastern North America. We're excited to welcome the AVL team to the Torremont family and look forward to leveraging our combined resources to build this business together. We held a conference call, John and I, last Monday, February 3rd, where we noted the uniqueness of this partnership. Vince DiCristofaro, the president of the business, brings industry-leading design capabilities and strong production skills to our team. He also retained 40% ownership in AVL along with his partner and took a portion of his share of the initial purchase in Toramon shares. This unique acquisition structure was designed to strongly align our interests to grow this business and to share in the performance. Toramon is committed to purchase the remainder of the outstanding ownership over our predefined schedule through 2031. The acquisition, while accretive, is not expected to have an overall material impact on Torremont's combined revenue and earnings in the near term. We also plan to invest further to expand capacity. More information will be provided as we progress. Please stay tuned. Moving to slide 9, I'd like to highlight some key takeaways as we look forward to the first quarter of 2025. As one would expect, we consistently focus on key priority areas, including safe operational execution, serving and supporting our customer requirements, and our disciplined focus on building our business for the future. We expect the business environment to be influenced by a number of factors that are at play. The recent announcements on potential tariffs between the US and Canada has created additional economic turbulence. Our team is highly engaged, developing an appropriate action plan to navigate the potential impacts. Foreign exchange rate volatility and a weaker Canadian dollar are also being monitored given the majority of our supply of equipment and parts is sourced in U.S. dollars. Hedging practices and policies will continue to be used to manage the bottom line exposure to changing exchange rates. However, the impact on the economy as a whole may present further challenges. Other general economic and macroeconomic factors, such as inflation and interest rates, continue to be monitored as well. Our backlog levels remain healthy, and the equipment supply chain has improved over time. As noted earlier, we continue to hire technicians to support our operations, and this remains an essential focus for our aftermarket and value-added product and service offerings. Operationally and financially, we remain well-positioned with ample liquidity and our strong leadership teams, disciplined culture, and focused operating models. Our team remains committed to disciplined execution with our decentralized and empowered operating model adapting to the changes in the business environment while remaining focused on executing customer deliverables. Our long-term focus on growth and returns means we will remain committed to our operating and financial disciplines to manage our cost structure while we invest in capacity and capabilities to provide exceptional service to our customers today and in the future. With our solid order backlog and balance sheet, we are well positioned and we will continue to support the business through thoughtful capital deployment. We appreciate the entire team's exceptional effort and commitment to support our customers and deliver value for our stakeholders. Thanks also to our valued customers, supply partners, and shareholders for their continued support. That concludes our prepared remarks, and at this time, We'll be pleased to take questions. Joelle, over to you, please, to set up the first call.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star, followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Devin Dodge with BMO Capital Markets. Your line is now open.

Thanks. Good morning. I just wanted to start with, you know, the macro uncertainties that we're seeing, the weaker Canadian dollar. It just seems that the value proposition for used RPOs and rebuilds should look more attractive. But just wondering if you're starting to see that, you know, see greater interest there from your customers for those categories.

Yeah, maybe it's, thanks, Devin. Maybe I'll start with that and John can add in as well. You know, we have seen a gradual increase in interest in the RPO model, especially as you mentioned. We tend to look at it, in a sense, as a financing vehicle, and so I think we report about $97 million or so of RPO activity, and it was about low 80s last year. And when you look at that, it's really, again, it gives our customers some flexibility to manage their cash flows and then time purchases and around the projects that they're operating under. Again, I do think interest rates play a strong factor because it is, in a sense, a bit of a financing vehicle for us. But nice to see that interest recovering. It's taken several years for that to happen.

Yeah, as Mike said, it gives the customer flexibility in terms of the timing of the purchase because most, if not all, of the RPO fleet will convert into a sale eventually, Devin. So as Mike said, the numbers were $98 million at the end of December compared to $81 last year.

Okay, got it. Thank you for that. And then let's switch over to Simcoe. Bookings continue to be really strong for the business. I think earnings have doubled from two years ago. Just wondering if you could speak to some of the successes that you've achieved the last couple of years and then looking ahead, where do you see the most meaningful growth opportunities for that business over the next, call it two to five years?

Yeah, let me start and then Mike can add in. I mean, we're really pleased with the financial performance of Simcoe. this year, and a couple of factors there I'd point to. One is there's a great team in place. Secondly, they put in a project monitoring system, so every project is now in the system. They're monitoring it monthly. It's a very detailed process, diligent process. The whole team is involved, and I think you see that coming through in the margins. In terms of growth, we have great brand presence in Canada. a real growth opportunity for us, for Simcoe's in the U.S. market, and you're starting to see some traction there. But that will be what we aim to grow in the future. Mike, any other thoughts?

Yeah, the only other thing I'd say, Devin, is, again, when you look at the sales level and the performance of the business, it's pretty balanced between recreational and commercial industrial activities, which is nice to see because it does tend to be a little bit lumpy in nature, and we've had some larger projects, say, in the U.S. and so forth. So it's nice to see that, but Although we've had wonderful execution, the backlog is at levels we haven't seen before as well. And so the team is doing a really nice job, not only in executing what we had going into 2024, but also sets us up with a nice position as we look at 2025.

Okay, great. Congrats on the good quarter. I'll turn it over.

Thank you, Doug.

Your next question comes from Sherri-Lynn Radborn with TD Cowan. Your line is now open.

Good morning. Thanks. This is Patrick Sullivan on the line for Sherilyn. On the product support side, Caterpillar's disclosed service revenue about $24 billion on the way to a target of $28 billion in 2026. I guess in light of that, are there things CAT will be doing in concert with dealers to incent product support growth, including rebuilds for next year?

Yeah, you know, I think, Patrick, product support, as you're aware, is a keen focus for us, and it's a big part of our value proposition when we think of the equipment and the fleet and service and our aftermarket support. And I would say, you know, number one, we're strongly aligned with Caterpillar in how important that is to serve our customers and make sure that we have the parts and service available to manage their business. You know, really critical, I would say fundamental to that whole business is is availability, mechanical uptime, and availability of parts, fulfillment, and so forth to make sure our customers keep operating when they need to. So I'd say, again, CAD has some strong targets as we look forward, as we do as well. And so when we look at our other investment areas, like our rebuilding capabilities or Bradford remanufacturing location and so forth, I think those strategies we're committed to and align nicely with Caterpillar's intent to drive parts volume.

And of course, we want to drive both parts and service volume as we go forward.

Okay, great. That's very helpful. I guess in the MDA, you guys state that you've had several years of significant deliveries in the mining industry. Is it possible to give us some color on how much the installed base has increased over the last few years? and I guess what current quoting activity is like in that area.

Maybe just to start off on that, Patrick, you know, one of the ways you can sort of monitor that activity is to look at our bookings and backlog, and you'll see John noted in his prepared comments, but also in our MD&A, you'll notice, you know, that mining does tend to be dependent on, you know, mine expansion, greenfield and brownfield expansions, fleet replacement, and so forth. And so, You know, it is a little bit lumpy in nature when you look at the equipment, the new equipment delivery scheduling. And so you'll see that, I think, clearly as you look even historically in the last few years and what we have sitting in the books today in our backlog as far as the breakdown between mining and construction. Today, if you look at December 31st, you know, our backlog, is about evenly split when you look at construction and mining. It's about 27% or 26% respectively. And so that gives you a good indication as to where that goes. And then, of course, behind all this is, when you look at the mining industry, investment profile, commodity pricing. Gold's at an all-time high currently, for example, and capital investment seems to continue. And so we're looking... Our team has done a really nice job of earning their way

into mining opportunities, and we're committed to investing in parts and service to support the aftermarket for that segment.

Okay, thank you very much. Great. Thank you, Patrick.

Your next question comes from Uri Link with Canaccord. Your line is now open.

Good morning, Uri. Hey, good morning, guys. Hey, Uri.

Yeah, just thinking about some of the... dynamics in the macro situation. I'll start with the weaker Canadian dollar. Has anything changed on the competitive front? Is it still true that most of your competitors that are selling equipment are also having to bring it in from the United States as well, or do you have more competitors today than say a few years ago that might be bringing it in from other regions?

Maybe just to start on that, Yuri, I think a couple things I'd note is, you know, a lot of equipment coming into Canada is U.S. dollar price. You know, when you think of supply points and so forth, either that's overseas or it's coming out of the U.S., and I'd say it's pretty consistent. And some of our competitive products, including even some of the Komatsu products, are manufactured in the U.S. deer, of course, in our caterpillar supply in many locations. You know, so I would say, you know, fundamentally, though, when we look at currency and we look at the lead times, we work with our customers and their requirements. You know, we hedge. We have a hedging policy. We like to provide certainty around pricing and timeframes and so forth. And that's really critical. And I think that's pretty consistent. You know, where we do see, I guess, some other product coming into the marketplace is from Asian sources and stuff is in the lower tier product when we look at some of the BCP products or lower hour utilization areas. And you do see some of that coming in, and that could be denominated in other currencies. But I would say broadly, when we look at our GCI product line or in our mining portfolio, I mean, largely those are pieces that tend to be priced in a consistent U.S.

currency. Okay.

Okay.

And then just thinking about tariffs, I mean, I know it's changing every day, but would you be bringing in additional inventory today ahead of potential Canadian tariffs on U.S. products, perhaps next month or if they ever come to fruition?

Yeah, I think just maybe to start on that, I think, you know, to the extent it's practical, I mean, there are lead times naturally on new equipment deliveries, and to the extent we can try to get ahead of that. I think what's really important is that we're monitoring it carefully. Parts, for example, is a little easier to do that. But, again, that's a very short-term response, and we would look to optimize that as best we can, especially as we go into the spring season here, which we would be building some inventory in any event. To the extent possible, sure. I think the longer-term view is what's really important. We tend to turn, you know, we'll turn our inventories, say our parts inventories, over three or four times a year. So, you know, to the extent we can do that, we'd certainly look to optimize in whatever way we can. But I think right now it's really just monitoring and getting a good understanding of the timeframes and what the potential impacts would be in alternatives around the supply points.

Okay. I'll just try to squeeze a quick one just on how to model AVL. I'm assuming it's going to be fully consolidated, and is that going to be reported within the equipment group in equipment sales, or how are you going to report that?

Correct on both of those. Yeah. Thanks. Yeah.

Your next question comes from Jonathan Goldman with Scotiabank. Your line is now open.

Hi, good morning, guys. I guess my first question is on the equipment margins. If you were to strip out the impacts of mix within mix, can you discuss how margins trended on a sequential basis? And not to get into forward guidance, but with some OEMs calling out pricing as a headwind next year, do you think the current level of equipment margins is sustainable?

I think we always would direct you, I think, Jonathan, to really the factors. Like you mentioned mix, and I think you have to keep that in mind in terms of even just product support to equipment, but also I'd say within equipment. When we look at our numbers, for example, John and I have been talking about normalization of margins on equipment, especially as availability has normalized for the most part. There's still a few things like engines and things that are in tight supply, but I would say you can expect that that's... a fairly normalized availability and supply market. And so if you look at equipment margins, sequentially from Q3 to Q4 is a little bit better. We've worked really closely with our supply partners to make sure that we're competitive in programming and things like that. And so you can expect that that's going to continue. But I would say the other piece to keep in mind on our margin forecast is the rental side. And so we made some comments there earlier. that we have seen a little bit lower utilization, higher acquisition cost of that fleet. That affects our margin as well. And so when you blend that in, you know, and activity levels improve over time, I think you can see that there can be a little bit of a tailwind on that side. But I'd expect new and used equipment to be very competitive going forward.

That's helpful, Keller. And I guess my second question is on AVL. Can you provide some more color around the opportunity set for that business and that market, and whether you see that business having a more organic growth or strategic opportunity?

Yeah, I think, so AVL, we're quite excited about that. I would say, you know, again, outside of the initial acquisition, as we described in our comments, you know, I think it really is organic in the sense that, you know, they have a, I would say, an industry-leading design team It's accepted within the industry, and packaging in general, I'd say enclosures are one of the constrained components in the supply chain for data centers and basically any application where you look at backup power or prime power generation. I would say our focus now would be organic as we look at it. Investing, I had made a brief comment a few minutes ago about our intention is to increase capacity. with AVL, and we see that as a growing market segment that we'd like to participate in, both directly with our customers, but also supporting other dealers and so forth.

Thanks for the call, guys. I'll get back in queue.

Great. Thank you.

Your next question comes from Krista Friesen with CIBC. Your line is now open.

Hi. Thanks for taking the question.

Morning.

I was wondering if you could just... Good morning. If you could provide maybe just some commentary on what you're hearing from your customers right now as it relates to tariffs and I guess just the broader economic environment. Is there a heightened level of caution or maybe a pause on some investments at this time?

Yeah, I mean, I don't think we're seeing that.

I think everybody is cautious at the moment. I don't think we're seeing a direct link right now to customer behavior, Krista. But I think we're all looking at the situation and we're cautious because we just don't know what's around the corner. It is changing day by day. As we said, we're monitoring it. We're being proactive in terms of steps we think we can take to mitigate if tariffs do come in. And I think everybody is doing the same thing. But in terms of customer behavior, we haven't seen that linkage yet.

Okay, great. And then maybe just one more from me. You spoke earlier to this and the comments in the MD&A about the recent mining deliveries over the past couple of years and that translating into product support activity. Can you provide any additional color there maybe around timeframe or cadence of how you expect that to play out?

Yeah, keep in mind, I think it's a good question, Chris. I think as you look at some of the mining deliveries, like we have a pretty decent footprint, if you will, or fleet out there with customers that's been in place for some time and that continues. The new equipment deliveries, you know, not uncommon to have really for the first year to two years, really more or less preventative maintenance type programming. And then after that, you start to get to component replacement and repair and different things like that as you get some aging, keeping in mind that mining environments tend to operate 24-7 and you can build up some hours. But realistically, I would look at deliveries and product support cadence would really be 18 months, 24 months, that type of thing where you start to see component replacement and then through the duration of the life with rebuilds up to two or three times depending on the on the equipment and service.

Great. Thank you. I'll jump back in the queue.

Great. Thank you.

Your next question comes from Sabaha Khan with RBC Capital Markets. Your line is now open.

Morning, Sabah. Hi there. This is Eddie on for Sabah. Hey, Eddie. Yeah. Can you just maybe provide some color on what you're seeing today in terms of pricing discussions and customer incentives? Thank you.

Yeah, I think, again, we don't provide a lot of commentary in that area, given the competitive nature of the market. And so I'd just say, per the comments we made earlier, when you look at our margins, you look at the programming, the team has done a really terrific job of execution and delivering product. And you see it in the new equipment sales and so forth. And so one would expect that. I would step back also and look at the entire value proposition, I think. You know, we like to work with our customers in terms of what their unique requirements are, whether it includes a financing element with, say, CAD Finance in some cases, product support, CVAs, and pricing plays a part in that as well, depending on their financial condition and what they're looking for. And so I wouldn't want to provide any more competitive data on that, but I'd say those are the factors that I would consider as you look at the market.

All right, great. Thank you. Thank you, Eddie.

Thank you. Your next question comes from Steve Hansen with Raymond James. Your line is now open.

Morning, Steve. Morning, guys. Thanks for the time. I want to go back to this equipment margin issue just for a moment, if I may. If I look at the front three quarters of the year, they were arguably relatively subdued on a year-over-year basis. Now, in the fourth quarter, we've got a 300 basis point increase or more sequentially, and I don't think I actually understand exactly why that big pop happened. I think you described maybe a little bit of mix, but the other comments were all largely year-over-year, so it's hard to understand what shifted from 3Q to 4Q and 24. Any color there would be helpful.

Yeah, I think maybe just to start on that, Steve, thanks for the question. You know, I think, again, we did give a little bit of color there in terms of in terms of mix and so forth. And so keeping in mind, based on our earlier comments, you know, there's the factors we always direct you to are, you know, new equipment margins. And depending on the mix, like if we look at, for example, even within mining versus construction, you know, sometimes in the mining side we'll have higher value, a little tighter margin product going through. So as that mix shifts a little bit more towards construction, there's a variety of different products obviously there. It's pretty diversified. But also rental. You know, we We mentioned, I think, in our comments and so forth, you know, gross margins, for example, and there's some commentary that we provide in our MD&A about rental margins saying, you know, that we're down, say, 70 basis points, which is a factor of both utilization rates at this stage given, you know, the activity levels in the market, but also higher acquisition costs. So that can shift a little bit over time. And so it has improved, like the utilization rates in Q4 have improved. in both heavy and the battlefield side, so that's helpful. And I think just the distribution or the new equipment activity levels and so forth have helped as well. Product support was also slightly favorable on margin, just given the little higher activity levels in that side of the business. So, yeah, I think you have to take into account all those things when you look sequentially.

Okay, very helpful. And if I look at the back well composition, I think you described it, but we've seen quite a shift year or the past year, mining is down to sort of construction-based levels, but product support, sorry, the power systems has increased fairly markedly or north of 40% now. How do we think about that in terms of margin impacts over the next 12 months as you work through this backlog? Is that beneficial? Is it neutral? How do we think about that?

Yeah, I think, you know, between John and I, we look at it a little bit, but I would say, again, we can get to to focus on quarter-to-quarter and so forth. But I think you're touching on the mix really broadly, and I would just point back to the comments we made earlier about mix within the equipment side of things, as I just covered on construction versus mining. Product support mix, too, as we see more activity in the marketplace, higher utilization of our customers' equipment, product support increase, and that can support improving margins, along with rental.

Yeah, just go back maybe to the question on mining and the fact that we've deployed a lot of money. It was a very active year in the mining sector. Revenues were high. We brought down the backlog there, which over the longer term will bode well for product support growth and margins. So that's another way to think about it.

Okay, that's helpful. And then just one last thing on the Simcoe side. I mean, outstanding results, arguably. I'm just trying to understand, is there a macro pattern that's helping benefit this division, or is it all execution? John, in your prepared remarks, you talked about the new project monitoring system. You've been talking about it for a year, and it's clearly paying its dues. But is there also macro tailwinds that are benefiting the space that you can see, or specific drivers on either side of the border? It just strikes me as such an impressive performance.

Yeah, I mean, one of the things I call is, you know, the technology innovation within Simcoe. the use of natural refrigerants as people think about the environment more and more versus synthetic. And I think Simcoe has an edge there. Obviously, we've got great brand presence and market share in Canada, and that really helps as well. So it's a combination of people, technology, and some good product development innovation as well.

Okay, very good. Thanks, Steve. Thanks, Steve.

Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Maxine Sitchev with National Bank Financial. Your line is now open.

Morning, Max. Hi, good morning, gentlemen.

Mike, I was wondering if you don't mind providing a little bit of color on the infrastructure space in general. And I guess, you know, like what Hydro-Quebec was thinking about doing, I'm just trying to think, sort of the drivers in the short to medium term in this vertical, if it's possible. Thanks.

Yeah, thanks, Max. I think, you know, again, I would say on the infrastructure side, I think we're seeing, you know, some interest in investment, both Ontario and Quebec, but like you mentioned, Hydro-Quebec has got a capital program, which we've heard about for over a year now, I think, eh, John? Yeah. Of about, you know, round numbers I've heard in excess of $100 to $150 billion of infrastructure going in, and that's over an extended period of time. And so... I would say it's certainly a tailwind for us longer term. I think both in the infrastructure development side, but also longer term potential for availability of energy. Again, I wouldn't want to get too far ahead of ourselves, Max, on this, but I think as you look at data center business, high consumption of energy to run the data center, temperature control, And then, of course, we enjoy the backup power supply and so forth, standby power. So those are things I think I would look at. But, again, I would say it's not a short-term. It's more of a medium- to long-term perspective that we consider a favorable tailwind down the road, but we still have to earn our way into those opportunities as well.

Sure. And then is it possible to get a bit of color on – um, expectations around rentals, uh, investments and dispositions in 2025?

Yeah, I think it'll be, um, based on what we're seeing now, Max, it'll be pretty similar to what we deployed in 2024. I'd say we're always looking at the mix within the spend. Um, and you know, that may shift a little bit, maybe more in light, less in heavy, who knows, but, um, But I would say it'll be pretty consistent what you saw in 2024.

Yeah. I guess the one consideration there, too, Max, is with Tri-City, for example, we required a nice fleet for southwestern Ontario. And so there's a, you know, over time that'll transition. But, I mean, we have assumed a nice size fleet there. And between the two businesses, that's where I think John and I are looking at it in terms of what the requirement will be. But you might not see as high a level of investment now that we have both of those fleets in place. it'll be dictated by activity levels.

Yeah. Okay. Makes sense. And then in terms of NCIB, you were obviously more active in Q4. So, and like, I mean, obviously that corresponded to a bit of a dip. So is that, I guess it went beyond your options of setting sort of, you know, hygiene. Is that how we should be thinking on a perspective basis? You sort of stepping in at certain levels?

Yeah, I mean, as we talk about each quarter, the four priorities in terms of capital allocation, organic growth remains first dividend, which we talked about increasing 36 years in a row. NCIB is also a priority and then M&A. And yeah, you're right, Max, we were a little bit more active in the fourth quarter. Capital hygiene's number one priority. But second, we were opportunistic. and that will remain a tool in the toolbox for sure.

Okay, makes sense. And then just one clarification. In terms of Simcoe, do you ship a lot of things cross-border to the U.S., or the projects that are being executed in the U.S. are done locally?

Yeah, I mean, there's some cross-border trade between Simcoe Canada and Simcoe U.S., but it's not significant, Max.

Okay, that's great. Thank you so much. That's it for me.

Great. Thanks.

I don't know for the questions at this time. I will now turn the call over to management for closing remarks.

Okay. Thanks a lot, Joelle. I really appreciate everybody joining this morning. Mike and I are thankful for your participation. And I think for those of us in Toronto, be safe today. We're expecting a nasty winter storm. So appreciate everybody joining and have a good day. Take care.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.