Toromont Industries Ltd.

Good morning. Today is Wednesday, July 30, 2025. Welcome to the Torremont Industries Limited Second Quarter 2025 Results Conference Call. Please be advised that this call is being recorded and all lines have been placed on mute to prevent any backer noise. Your host for today will be Mr. John Doolittle, Executive Vice President and Chief Financial Officer. Please go ahead, Mr. Doolittle.

Okay. Thank you, Ludi. Good morning, everyone. Thank you for joining us today to discuss our month's results for the second quarter of 2025. Also on the call with me this morning is Mike McMillan, President and Chief Executive Officer. Mike and I will be referring to the presentation that is available on our website. 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'll be more than happy to answer questions. Let's get started and move to slide three. And Mike, over to you to start us off.

Great, thanks very much, John. Good morning, everyone, and thanks for joining us. Our team delivered resilient second quarter results while continuing to navigate macroeconomic and international trade uncertainties. Our disciplined approach remains unchanged, and we continue to invest in our people and capabilities to support our customers today and for the future. Revenue increased overall while net income was slightly lower reflecting reduced interest income and short-term non-cash costs related to the AVL acquisition. The equipment group performed well with growth in rental and product support and new equipment deliveries in the construction and power segments. These were offset by lower deliveries in the mining segment as expected, which tends to be more variable due to the nature of this segment. Revenue was stable as contributions from the acquired business and higher rental and product support volumes were balanced by lower anticipated mining equipment sales. Rental revenue rose driven by a larger fleet, while used equipment sales declined. Product support revenue increased due to higher parts and service volumes. Operating income declined year over year, mainly reflecting the addition of the acquired business expenses and lower interest income on cash balances. Simcoe posted higher revenue and earnings, reflecting healthy market demand and effective execution in both Canada and the U.S. Growth in package revenue was supported by a strong order backlog, while product support activity continued to improve, aided by our growing technician workforce. Operating income rose on higher revenue and solid execution, partially offset by a less favorable sales mix, and slightly higher expenses to support activity and growth. We continue to work closely with our new partners at AVL, focusing on this promising market. Production in Hamilton has ramped up since the acquisition, supporting a healthy order backlog and building demand. Hiring is progressing at a quick pace. Revenues for the three- and six-month periods ended June 30, 2025, were $57 million and $79 million, respectively. While the business is performing well, the bottom line contribution on a year-to-date basis reduced EPS by approximately $0.04 per share related to various non-cash related purchase price accounting items. There's more detail available in our financial statements as well. During the quarter, we acquired a facility in Charlotte, North Carolina to expand production capacity and better serve the eastern market in the U.S. We expect the initial phase of production to begin in the fourth quarter. Let's turn to slide four, our key financial highlights. Investment in non-cash working capital rose 4% year over year with higher accounts receivable more than offset by lower inventory and accounts payable balances due to equipment delivery timing. Accounts receivable increased reflecting higher revenue and the addition of AVL receivables. DSO rose by one day to 42 days. Our team continues to manage receivables aging and customer credit metrics effectively. Inventory levels declined, primarily due to the executed deliveries against order backlog, inventory reduction initiatives, and lower work in process at Simcoe, reflecting project and service timing. We ended the quarter with ample liquidity, including approximately $1 billion in cash and an additional $456 million available under existing credit facilities. After quarter end, we also completed the early redemption of our 2025 debentures at par as previously announced. Our net debt to total capitalization ratio was negative 3%. Overall, our balance sheet remains well positioned to support operations and navigate evolving economic and business conditions. We will continue to apply operational and financial discipline as we support customer needs and evaluate future investment opportunities. Paramount targets a return on equity of 18% over the business cycle. ROE was slightly below this at 17.6% in Q2. Return on capital employed was 23.1%, also lower year-over-year, reflecting increased capital investment and comparatively lower earnings. Finally, as announced yesterday, the Board of Directors approved a regular quarterly dividend of 52 cents per share, payable on October 3rd, 2025, to shareholders of record on September 5th, 2025. John, I'll turn it back over to you for more detailed commentary on the results.

Okay. Thanks a lot, Mike. Let's turn to slide five for a few additional comments on the consolidated results. As Mike noted, profitability for the second quarter of 2025 was lower than the second quarter of 2024. as expected given the current economic environment, lower interest income, and ABL-related non-cash expenses. As uncertain market conditions persist and customer purchasing decisions remain cautious, and activity is lower in some cases. The equipment group performed well on the top line with good equipment deliveries, including the acquired business and improving rental utilization. Construction and power systems market activity has been solid, partially offset by declines in mining, which is coming off a large capital investment cycle. Simcoe revenue increased on continuing strong demand for its products and services. Gross profit margins improved compared to the prior year on mixed good execution and improved efficiencies. Expense levels reflect continued support for key operational focus areas. On a consolidated basis, operating income was down 4% compared to last year as the higher top line revenue and improved gross margins were offset by higher expenses. Net interest expense was significantly higher than the prior period, reflecting both higher interest expense as a result of the new debenture listing, as well as lower interest income earned on cash on hand due to lower interest rates. Bookings for the second quarter increased 14% compared to 2024 and increased 1% on a year-to-date basis in both the equipment group and Simcoe in both periods. We saw good order intake in construction, power systems, and material handling offset by lower mining orders. Backlog remains healthy at $1.4 billion, up 1% year-over-year, with a slight decrease in the equipment group down 4% and an increase at Simcoe up 21%. Backlog is supportive of our plans and reflects deliveries and progress on construction schedules, good new booking activity, and backlog related to the acquired business. On a consolidated basis, revenue increased 1% in the second quarter, with the equipment group remaining unchanged and an increase of 13% at Simcoe. For the first half of the year, revenue increased 4%, with the equipment group up 3%, and Simcoe up 11%. Expenses increased 11% in the quarter, reflecting the acquisition, including related amortization expenses. Excluding AVL, expenses were up slightly at 3%. Compensation costs were marginally higher year over year, reflective of regular salary increases, partially offset by lower profit sharing accruals on the lower income. Salary headcount is largely unchanged year over year. Sales-related expenses increased year over year, reflecting continued investment in resources. All other expenses, such as travel, training, occupancy, and information technology costs, have increased slightly on continued investment for future growth and inflationary effects. Allowance for double accounts decreased $2.9 million compared to the similar period last year on improvements in certain exposures and good collections. Higher DSU mark-to-market adjustments increased expense $2.8 million as a result of the higher relative share price in the current period. On a year-to-date basis, expenses increased $18.2 million, or 6% compared to a similar period last year. AVL expenditure added $16.9 million, including expenses related to the acquisition accounting. Excluding AVL, selling and administrative expenses increased just $1.3 million compared to the same period last year, on a good focus on cost controls. Expenses for the first half of 2025 represent similar trends as noted for the second quarter. Expenses increased slightly to 12.7% of revenue compared to 12.4% last year. Operating income decreased 4% in the quarter as the higher revenue and improved gross margins were more than offset by the higher expense levels. On a year-to-date basis, operating income was down 5% as the higher revenue was offset by lower gross margins and higher expense levels. as the percentage of revenue operating income was 10.9% on a year-to-date basis compared to 12% last year. Net interest expense was up $8.7 million in the quarter and $13.7 million in the first half, reflecting interest expense on the recent debenture issue, as well as lower interest income on lower interest rates. Net earnings decreased 8% or $11 million in the quarter compared to last year and decreased 9% or $20.5 million for the first half of the year. Basic earnings per share was $1.53 in the quarter and $2.45 year-to-date, reflecting the change in net earnings. Turning to the equipment group on slide six, revenue was relatively unchanged in the quarter as revenues from the acquired company were largely offset by lower mining sales as expected and up 3% for the first half of the year. Equipment sales, including both new and used equipment, were down 5% in the quarter and up 3% year-to-date. New equipment sales decreased 5% in the quarter with decreases in mining against a strong comparable, partially offset by higher power system markets, which include revenue at the acquired business. On a year-to-date basis, new equipment sales increased 3%, with increases in construction and power system markets partially offset by decreases in mining as expected due to the mining investment cycle. Used equipment sales decreased 6% in the quarter, was down 12% year-to-date, predominantly in the construction market with lower rental fleet dispositions on fleet management decisions and lower sales of used equipment from trades and purchases, reflecting supply and demand dynamics. In the quarter, total equipment revenue increased 1% in construction, 40% in material handling, 73% in power, while mining was down 54%. Rental revenue was up 15% in the quarter and 13% year-to-date. While market conditions remain choppy, revenues increased compared to the prior year, reflecting a larger fleet and improved utilization in certain areas. Revenue improved in most areas for the quarter as follows. Light equipment rentals were up 13%, heavy equipment rentals up 18%, material handling up 29%, offset by a decrease in power rentals down 10%. The RPO fleet was 101.4 million versus 64.1 million a year ago, and rental revenue was up 54% for the quarter and 52% year-to-date compared to similar periods last year. Product support revenue increased 4% in the quarter and 1% year-to-date with an increase in both parts and service. Activity was higher across most markets and regions reflecting end-user demand and activity levels, as well as the higher technician workforce. Looking at specific markets for the quarter, change in revenue was as follows. Construction was down 2%, mining up 7%, power up 18% and material handling down 9%. Gross profit margins increased 40 basis points in the quarter compared to Q2 2024 and decreased 90 basis points on a year-to-date basis. Equipment margins were up 40 basis points in the quarter, relatively unchanged year-to-date, reflecting market dynamics play in both periods. Rental margins were down 50 basis points in the quarter and down 40 basis points year-to-date on a higher cost of fleet additions. Product support margins decreased 10 basis points in the quarter, down 30 basis points year-to-date, reflecting the nature of the work and sales mix. Sales mix was favorable in the quarter and unfavorable year-to-date, reflecting the relative proportion of product support revenue to the total in each period. Selling administrative expenses were up 12% in the quarter, 6% year-to-date, compared to the same period last year. The acquisition of ABL increased expenses $12.9 million. which is inclusive of non-cash expenses related to purchase price accounting items. Compensation costs were higher in both periods, reflecting staffing levels and regular salary increases, partially offset by lower profit sharing accruals on the lower income. Other expenses, such as training, travel, and occupancy, have increased in light of sales levels, planned investments, and inflation. As a percentage of revenues, selling and administrative expenses increased 12.4%, to 12.4% in the first half of the year versus 12% in a similar period last year. Operating income decreased 7% for the quarter and 8% for the first half of the year, reflecting lower activity levels, margin pressures, and higher expenses. The acquired business continues to increase production, however, did not contribute meaningfully to operating income given expenses arising from purchase price accounting, including such as amortization of intangibles. Bookings increased 5% in the quarter, Construction markets were higher, with bookings up 17%, reflecting more normal supply dynamics. Power systems, which includes the acquired business, saw strong order activity, up 133% on good demand for our products. Material handling order intake was 49% higher in the quarter. And mining markets, which are lumpy or cyclical due to the nature of the business, were down 51%, as expected from the second quarter last year, which was a strong comparable. Backlogs. Of a billion at June 30th, remains at healthy levels. Backlog includes approximately $246 million from AVL, which has a delivery schedule over the next two years. Excluding this, backlog was 28% lower compared to the same time last year, reflecting good deliveries against customer orders over the last 12 months, along with good new order intake over the same period. Approximately 70% of the backlog is expected to be delivered over the next 12 months, The course is subject to timing differences depending upon vendor supply, customer activity, and delivery schedules. So turning to Simcoe, revenue is up 13% in the quarter and 11% for the first half of the year. Package revenue increased 22% in the quarter and 20% year-to-date with good execution on equipment delivery and progress on customer schedules. Recreational activity increased 84%. with higher revenue in both Canada and the U.S., and the industrial market revenue was down slightly at 5% with lower activity in Canada against a strong comparable and higher activity in the U.S. Product support revenue increased 1% in the quarter and 3% on a year-to-date basis with higher market activity in Canada in both periods. Activity in the U.S. was down in the quarter over up year-to-date with a stronger start to the year. Activity levels continue continue to improve on good customer demand and the increased technician base. Gross profit margins increased 60 basis points in the quarter and 70 basis points on a year-to-date basis versus the comparable periods, respectively. Package margins improved on good operational execution and the nature of projects and process for both periods, driving a 60 basis point increase in the quarter, 90 basis point increase year-to-date. Product support margins increased 50 basis points in the quarter, and 20 basis points year-to-date on approved execution, and efficiency continues to be the focus of theirs. An unfavorable sales mix with a lower proportion of product support revenue to total revenue dampened margins in both periods, resulting in 50 basis point and 40 basis point reduction gross margin, respectively. Selling and administrative expenses increased 2% in the quarter and 5% for the first half of the year. Compensation costs increased, reflected, Selecting staffing levels, annual salary increases, and higher profit-sharing accruals on the higher earnings. Other expenditures, such as travel and training, increased as more activity in staffing levels. As a percentage of revenue, selling and administrative expenses increased at 15.2% in the first half of the year versus 16.2% in a similar period last year. Operating income was up 4.4 million, or 36%, per the quarter, and 6.1 million, or 30%, for the first half of the year, largely reflecting the higher revenue and improved gross margins. Operating income as a percentage of revenue increased 160 basis points to 11.1% on a year-to-date basis compared to the similar period last year. Bookings increased 185% or $60.4 million in the quarter, where 4% are up $5 million on a year-to-date basis. Industrial orders were up $53.4 million on stronger bookings represented by several large projects in Canada, slightly offset by weaker activity in the U.S. Recreational orders were up 27%, with stronger orders in the U.S. and lower activity in Canada. Generally, activity is continuing with good strategic capital investment levels. However, the current economic uncertainty has delayed customer buying decisions. Backlog at $351 million was 21% higher versus last year, with higher backlog in both recreational and industrial markets. Backlog in the U.S. was strong, up 46% from this time last year, and backlog in Canada was up 10%. Approximately 70% of the backlog is expected to be realized over the next 12 months. However, again, this is subject to construction schedules. And with that, we can move to slide eight, turn it back to Mike to highlight some key takeaways as we look forward to Q3 and beyond. Thank you.

Mike? Thanks again, John. We remain focused on our key priorities, ensuring safe and efficient operations, supporting our customers with excellence in applying the discipline and rigor that underpin our long-term growth strategy. We continue to anticipate that the business environment will be shaped by several evolving factors. Ongoing trade negotiations between Canada and the U.S. are contributing to uncertainty. Our team is actively engaged and has developed a comprehensive action plan to manage potential impacts as the situation continues to evolve. Foreign exchange volatility, particularly the variability of the Canadian dollar, is being closely monitored given that a significant portion of our equipment and parts are sourced in U.S. dollars. Hedging strategies remain in place to help mitigate bottom line exposure to currency fluctuations, though broader economic impacts may present additional challenges. Macroeconomic conditions, including inflation and interest rates, are being tracked closely. Our backlog remains healthy, and the equipment supply chain is well positioned to meet customer needs. We continue to invest in our technician workforce, a critical long-term initiative that supports our aftermarket services and enhances the value we deliver through our product and service offerings. From both an operational and financial standpoint, we are well positioned. With ample liquidity, strong leadership, a disciplined culture, and focused operating models, we are prepared to navigate near-term challenges while building for the future. We are actively monitoring key performance indicators, supply dynamics, and global trade developments. As always, our long-term commitment to growth and returns is anchored in maintaining cost discipline while investing in capacity and capabilities to deliver exceptional service to our customers. We sincerely appreciate the dedication of our entire team in supporting our customers and creating value for our stakeholders. That concludes our prepared remarks. We'd now be pleased to take your questions over to you, Ludi, to set up the first call. Question, please. Thank you.

Thank you. And ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press the star followed by the number one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press the star followed by the number two. With that, our first question comes from the line of Devin Dodge with BMO Capital Markets. Please go ahead.

Yeah, thanks. Good morning. I wanted to start with a question on AVL. It seems like the business is performing really well. I believe you mentioned revenue in the quarter was around $57 million. Just wondering if you could provide some context on how that compared to the year-ago period before it was acquired by Tormont. And then secondly, that new facility in Charlotte, Just can you speak to how much capacity that will add and how quickly that could ramp up?

Yeah, thanks for the question, Devin. Yeah, you're right in terms of the quarter and the year-to-date number of 79. You know, I would say, again, we're trying to provide you with a little bit of color on that. It is, keep in mind, the business is ramping production. We haven't disclosed the prior period because the ownership took effect at the end of January. However, yeah, you can consider that that is a pretty significant increase in production. And so, you know, we're adding to production capacity, and that's all been driven through the Hamilton facility, as I mentioned. Like, we won't be in production in our Charlotte location until later in the fourth quarter.

Yeah, let me just add there, Devin, a couple comments. We're really pleased with the way the team executed in the quarter. We had solid top line growth. We had positive cash earnings that were offset by this intangible accounting. And we've broken out the purchase price accounting in the MD&A, so you can see how we did that. And the bulk of that is related to the acquisition of backlog. And most of that will flush out during 2025, but there may be some that trickle into 2026. So that's kind of the accounting on AVL.

Yeah. And you mentioned just directionally, again, we don't provide guidance, as you know. I think best indication is the backlog that you see. We reported $246 million in backlog. And, you know, that, again, that is related to the Canadian operation at this point in time until we see production pick up in the U.S. over time. you know, sort of phased approach. So that'll give you some direction.

Thanks, David. Yeah, that's great. Great context there. Okay. And then maybe just a second question for me. We've seen reports about a strike at your facility in Bradford. Just wondering if you could provide some context for how disruptive this has been to your remanufacturing network and maybe comment on your ability to minimize the impact to your customers.

Yeah, thanks again, Devin. Yeah, again, we want to be very respectful of the process that we're going through. However, I would say, as always, as you know, we have a number of operations and we certainly want to make sure that it's seamless for our customers. And so we've done what we can to make sure that we've minimized the impact in the near term. And so, again, it's still fairly recent, about a month in duration so far, and we're hopeful that we'll get back to operations quickly.

Okay, great. I'll turn it over. Thank you. Great. Thank you.

Your next question comes from the line of Cheryl in Radbourne with TD Calendly. Please go ahead.

Thanks very much, and good morning. Good morning, Cheryl. I wanted to touch a little bit on the broader data center opportunity and, you know, what, if any, progress you've made to present a more coordinated offering to that market, including the engine, the enclosure, and possibly also Simcoe's cooling technology?

Yeah, maybe just to start on that, Sherilyn, appreciate the question. You know, I think largely our focus at the moment has been around the AVL business. And as you can imagine, you know, the engines, basically what we're doing is, for example, is receiving an engine from one of our caterpillar relationships where they're looking for the packaging to be done by our business, and then we bring it back and help commission that at the location that it's being developed. And so that's been the extent of it. There is some activity in Canada, but I would say the majority of the activity is certainly in the U.S. at present in terms of that type of support. We continue to look at opportunities with Simcoe in terms of the cooling aspect, of data centers. However, we haven't seen a lot of activity there at present. We've certainly been working our way into those opportunities. But keep in mind, a lot of these data centers are moving at a rapid pace, and getting designed into that solution is also a challenge and so forth. So I would say yet to be determined, but certainly an opportunity we're looking forward to over time.

Okay. That's helpful. And then in terms of the strength that you're seeing in RPO demand in the equipment group, what do you think that signals in terms of customer confidence and customer activity levels?

Yeah, it's a really good question, Sherilyn. I think right now, as we all know, the market activity is somewhat subdued. There's uncertainty with trade activity and investment. It certainly feels like both federally, provincially, especially in Ontario and Quebec, there's good support for infrastructure development and resource development over time. And yet I think with the uncertainty between, you know, on the trade dynamic and so forth, I think, you know, that's continuing to be evident in the activity levels that we see in our key markets. I think the RPO, as you mentioned, you know, we're in sort of the peak construction cycle up here. And, you know, I think it's, we always think of RPO as a great solution for customers to give them flexibility, allow them to peak shave and manage cash flow as they continue to settle on some of their investments and projects and secure projects. And so nice to see it picking up. Again, it tends to be, as you know, more of a sort of a financing vehicle and we tend to see some conversions and we haven't seen this level of RPO activity probably for about three years, and so nice to see that coming back. But really, given the activity levels, it's not uncommon for us to see a higher level of rental broadly, but that's obviously based on the activity in the marketplace.

Great. Thank you for the detail. I'll pass it over to someone else.

Thanks, Cheryl. Thanks, Cheryl.

Next question comes from the line of Sabhat Khan with RBC Capital. Please go ahead.

Great. Thanks and good morning. If we just dig a little bit into maybe what you're seeing on the mining front across your business, I guess, you know, as we observe some of the commodity prices running up here, just trying to understand, you know, when you see those commodity prices at those levels, is your backlog at this point sort of reflecting the volume and the scale of orders that might kind of go hand in hand with those? Just trying to understand that. how much more runway there might be in your backlog given this operating backdrop and if you see kind of more runway there. So any other details would help, thanks.

Sure. Yeah, thanks, Seb. Maybe just to start on that. I think one of the things, and you touch on backlog, which is a great indication, we talked a little bit in our commentary about the fact that, you know, we had a pretty strong year last year in terms of equipment deliveries and some new mine opportunities. As most know, we're well diversified in terms of the commodity space of But say roughly 40% or half of our customers are in the precious metal space, mainly gold. But we do have a number that are in the iron ore range and in nickel and other commodities. And so I think the backdrop is, especially in the precious site, good support and investment going in. However, it is lumpy. And if you look at our backlog, as you mentioned, mining is about 16%, I think, of our backlog today. And if you reflect back on last year, that's considerably lower. And that's just a reflection of each of the unique mining operations and their fleet requirements and so forth. And so we've had a number of deliveries there. And so we tend to see that over time, like that'll be lumpier because of the investment cycle. And again, it's a lower number of opportunities, but larger value. And so that tends to be reflected in the backlog. And if you compare over the last several quarters or a couple of years, you'll see that that disclosure has a fairly significant amount.

Thanks for that. Maybe just continuing that, presumably with the higher commodity prices, maybe the hours you're tracking on the machines have probably trended higher. Are you able to get visibility into how those hours are trending and then maybe ensure you have the technicians in place for the subsequent product support that may come? How do you feel about the level of staffing on that front? Thanks.

Yeah, no, that's a great indication, especially in the mining side. You know, our customers tend to run their equipment fairly hard. You know, it's a 24-hour operation, and so we do work very closely with customers on the telematics, and a lot of information comes off the units that we can track and we can do preventative maintenance and work with them. So, you know, in terms of our technician and capacity, I mean, we feel pretty comfortable with where we're at today. We continue to hire. in this market. Especially specific to the mining locations, we have dedicated on-site staff. We also have others that fly in and fly out and provide flux capacity for customers. I would say our capacity is pretty solid at the moment. We continue, though, to look to increase our capability there and support our customers, especially as the deliveries I just mentioned a little while ago As we get some hours and get utilization, we move beyond preventative maintenance to more component activity. We want to be prepared to support our customers and make sure their productivity is where it should be.

And then if I could maybe just squeeze in one more. There's a lot of headlines around infrastructure in Canada and things like that. Just wondering, have you gotten any early indications or discussions picking up with your construction segment customers? I know that that segment is probably more just in time, maybe not as much on the advanced order side, but just curious what you're hearing from that customer base. Thanks very much.

Maybe just to start on that, again, I'd sort of reflect back on our comments earlier about a little bit of uncertainty and the cautious tone in the marketplace. Certainly, there's good intentions around investment and infrastructure. However, we're not seeing as much activity as we'd like to see at this stage, partly just because of the trade negotiations and things like that that are ongoing. And so, you know, having said that, certainly what we are seeing is some projects are starting to develop, but they do take time to get the engineering and the bid processes in place before shovels hit the ground. And so, you know, I would say that we're cautiously optimistic for the longer term.

Thanks very much.

Thank you.

And your next question comes from the line of Yuri Link with Canaccord Genuity. Please go ahead.

Good morning, guys.

Good morning.

I'll circle back on AVL here. The monthly revenue, if you want to look at it that way, increased about 70% Q1 to Q2. Just wondering if you can kind of narrow that range a bit for what we should expect in H2 for the revenue contribution from AVL.

Yeah, I mean, we had, I think, two months of revenue in the first quarter versus three months of revenue in in second quarter. The team is ramping up, as Mike said, production in Hamilton, increasing footprint there. And then, of course, we've got the new facility that we purchased in South Carolina, which will ramp, you know, we've hired a number of employees there. We expect to start production in the fourth quarter. So we're on a growth pattern here without giving you the exact outlook, but we would expect it to continue to grow.

How does the revenue capacity in Charlotte compare to the existing facility?

I mean, when we get fully deployed, it'll about double the capacity in Hamilton.

And is that a, was that plant already making

enclosures or it's more of a no no it wasn't it was a it was a shell of a building fully built and now we need to build it out to uh to manufacture enclosures assemble enclosures there so that's why it's going to get it take a bit of time to ramp and and that will that will incur um additional capex i guess beyond the the purchase price of six yeah it's not uh not a big number but uh there definitely will be some CapEx to get it up and running, which is kind of built into our overall CapEx plan.

Okay. Last one. When you acquired AVL, you did mention that you expected it to be accretive. I think it's slightly negative, I don't know, a couple cents year-to-date, which is understandable on the non-cash. Intangibles amortization, just wondering if, like, does that... Is that the number we should look at for accretion? Is accretion expected in 25 or was that more of a 26 comment? Just any help on that would be appreciated.

Yeah, I mean, I really think of the cash contribution for now. As I said, there's growth on the top line. They're positive from a cash earnings point of view. And I mentioned that, you know, the bulk of this amortization is related to the backlog we acquired earlier. which will be amortized as we ship. And so, you know, I would expect a large part of that to amortize into the current year, depending upon production, with some trailing into next year. So that's kind of the way it will unfold.

Okay. Thanks, guys. I'll turn it over.

Yeah. Thanks, Sherry.

From the line of Jonathan Goldman with Scotiabank, please go ahead.

Hi. Can you provide some color on the trends you're seeing in construction and whether you're seeing any differences in either the type of construction or the regions?

Yeah, I think it's been pretty consistent, Jonathan. I mean, we are certainly this time of year, you tend to see a little bit more. And what we are seeing is a lot of our customers are keeping their direct crews active in some areas. And so you're seeing a lot of resurfacing and things like that. What we're not seeing is on the residential side, like large construction bids. pre-sales, things like that. And that's been something we've been talking about, I think, for quite a few quarters now. And so, you know, I would say pretty consistent, let's say for, you know, some of the resurfacing and some of the common types of work that you would see in the summer months where they're doing paving projects and so forth, right? Probably the best color we can give outside of, you know, outside of the residential side, we haven't seen anything change.

Okay, that's helpful. And Mike, you mentioned continuing technician hiring, but could you give us an update or maybe level set us on where we are today in terms of headcount versus where we were a year ago?

Yeah, I would say, I mean, we're up a little from this time last year, certainly. We continue to have, like as you know, even just in the dealership itself, over 2,000 technicians and over 3,000 on a corporate basis. And so, we continue to see a regular amount of retirement and that sort of thing and replacement. So I'd say our focus is really targeted at this point just to make sure that we're hiring technicians with the right skills in branches and regions that we see economic activity and we need to provide support. I mentioned mining earlier and making sure that we have the skilled trades supporting some of the new fleet implementations and things like that. So That's been our focus. I'd say it's a lower pace than we would have been hiring at the last few years, but we're still continuing to invest and secure trades and build for the future. So directionally, I mean, we will provide, again, annually we tend to provide updated numbers in terms of the total technician workforce, and we'll certainly do that at the end of the year as well.

Okay, that makes sense. And maybe just one more housekeeping one for me. Of the $17 million of expenses from AVL in the quarter, how much of that was considered one time, whether acquisition-related or something else?

Well, the amortization itself, I've talked about that a couple of times, that would be one time in a sense that it will flush itself out over the next number of quarters, and the rest of it is ongoing expense to support the business.

Okay, thanks. I'll get back to you. Great. Thanks, John.

And your next question comes from the line of Steve Hansen with Raymond James. Please go ahead.

Yeah, good morning, guys. Thanks for the time. In the equipment group, it was great to see product support move back into positive growth here. It looks like the sequential move was outsized, though, and I think you referenced product support, sorry, the power systems as being a key component of that. Is there anything in the numbers that are driving that big swing quarter over quarter? I think we're up roughly 70 million in the period. Is there something that sort of counters that shift from negative growth to positive growth that you call out?

Yeah, I think maybe, Steve, again, it's... You know, I think what we've been seeing in the marketplace broadly is just a lower activity level, especially the first part of the year. So we are starting to see a little better take up in terms of activity, parts and service. In the past couple of quarters, we talked specific to labor. You know, labor was having marginal growth and parts were pretty flat. And so we're starting to see a little better consumption and, you know, with slightly higher activity levels and so forth. But it's really, uh, it's more of a function of the activity in the marketplace and, uh, The team has also done a very good job of working through our work in progress and working with customers in terms of what their unique needs are. Rental is consuming a little bit there, but not a lot.

That's helpful. Thanks. And just on the margin profile here for equipment, I mean, how should we think about this? We've had a series of normalizing steps here, I think, in the equipment margin, like seven quarters in a row now. Are we in the later innings? Do you think of that as we settle out here from the supply pendulum that's really moved in the last little bit? Where do we think we stand on margins?

Yeah, I think on equipment margins, Steve, I think we've mentioned this, maybe it was last quarter, that margins seem to have stabilized. Every quarter, they're going to fluctuate a little bit depending upon mix. But just on an overall basis, I think the margins on equipment have pretty much stabilized.

Yeah. I think the backdrop, too, I think if you look at the supply of equipment supply chain, I mean, there's still readily available equipment in the marketplace broadly. And so I think there's probably still in certain areas, certain classes of equipment, especially on the smaller scale stuff, you know, great availability and, you know, I think there's still some inventories to work through there over time, especially as activity levels improve and get to more normalized investment cycles. But, you know, I think that's the only thing I would direct you to as you look forward.

Great. And just to squeeze one last one, just on the AVL, I know you don't give us too, too much, but just from a margin perspective, how should we think about the average margin profile for AVL at the gross margin level? Is it accretive to margins in the equipment group or how should we think about that?

Yeah, I would say just to start on that, Steve, you know, I think it's, again, it's an assembly business. You can imagine the demand in the cycle and it's going through an evolution to maturity, right? And so, You know, I'd say broadly, yes, it's certainly a creative. I think over time, you know, as capital continues to go into the data center space and the supply chains continue to adjust to the demand levels, we'll probably see some normalization, whatever that might look like, right? But certainly given the productive capacity and the capability of the team there, we're really pleasantly surprised with how they're able to produce And, you know, we would look at that and say it's an attractive opportunity for many reasons, but it should be accretive from a margin perspective and comparable to some of our power business.

Very helpful. Thank you. Thank you.

And once again, if you would like to ask a question, please press the star one on your telephone keypad. Your next question comes from the line of Krista Friesen with CIBC. Please go ahead.

Hi, thanks for taking my question. Maybe just on the mining side for product support, what are you thinking in terms of timing for the recent deliveries to transition from more preventative support to larger support projects?

Yeah, that's a great question, Krista. I think, you know, and I think you hit the nail on the head really when you think of you know, fleet deliveries and so forth, the first, you know, couple of years generally are largely preventative maintenance type items until we get, you know, up to the component replacement sort of cycle. And, you know, that generally can take somewhere between two and three years of active deployment of the equipment. And so, you know, that's what we would look at from over the last couple of years. We'd start to see some of that activity, but it wouldn't be until probably early part of next year.

Okay, great. Thanks. And then maybe just product support more broadly. Are there any comments just in the other end markets that you operate in? Are there any that are kind of in a unique cycle like the mining industry is right now where you're just working on preventative maintenance?

Yeah, again, another good question, because if you think back to where we were a couple of years ago, where we had limited supply of equipment and availability. One of the areas certainly in construction that we talk about periodically is the larger GCI products, so the larger shovels and the larger equipment, which tends to require more product support and parts consumption versus the compact gear. You know, I think over time we've seen equipment supply improve, especially as we entered into this year. As some of that equipment, you see our new sales have increased year over year, and the team has done a really nice job of selling into the marketplace, given what we're experiencing. So, again, it would be a longer cycle as we've sort of seen the return of availability, deployment of capital, and then product support tail should kick in. You know, the hour requirements on that equipment are lower than, say, mining, but some of that equipment will take a year to two years to start to consume parts and increase product support.

Okay, thank you for the color. I'll pass the line.

Yeah, just what we have a minute here to the next question. I got an email, an accounting question related to ABL, so just to be clear. If you go to... page seven of our disclosure, you can see the business combination section, specifically AVL. So we're treating this from an accounting point of view as a business combination. We consolidate the revenue. We consolidate the earnings. There's no minority interest in this case because we have a commitment to purchase the remaining 40% of the shares. And so as we pay dividends in the future, they will be treated as an expense. But just to be clear on how the accounting for AVL works, you can read it in the disclosure.

Okay.

And your next question comes from the line of Maxim Sychev with National Bank Financial. Please go ahead.

Hi, good morning, gentlemen.

Morning, Max.

Hey. I was wondering, is it possible to get a new color in terms of how much of the current capacity of AVL is being exported to the U.S.? Is that sort of the bulk of it? Just trying to gauge, I guess, how localizing that manufacturing process can potentially even more significantly lift the revenue generation.

Yeah, I mean, the vast majority of the current production max is sent to the U.S., As you know, the build-out there has been very, very significant compared to Canada. Hopefully, we see more build-out here in Canada. But the vast majority of their production is shipped to the U.S.

Okay. Thank you for that. And then, Mike, maybe the sort of the comment you made around the cooling opportunity and sort of the need to get, you know, designed into it. What are your thoughts on sort of, you know, build versus build? buy strategy and what do you think sort of is the right, I mean, first of all, like, is there an opportunity to buy? How is the market looking from that perspective? Maybe just any color. Thank you.

Yeah, as you know, Max, I mean, we're careful about talking about any potential acquisition side of things. I mean, I think, first of all, I would say our Simcoe team has got a considerable capability for cooling and especially industrial, commercial side of things, which could fit well. But it does take time to get designed in, and a lot of the data center side of things that we mentioned earlier, you know, they're standardized, and it does, hence my comment about getting designed in. So we are looking for those opportunities. As far as purchasing or build versus buy, I mean, our preference, I think, in that space is likely to do more of the organic side of things versus inorganic. And I think the other piece to keep in mind is, you know, because of the growth and development in the data center side of things, a lot of businesses are trading at a premium. And there's a lot of future uncertainty around, you know, not only the technologies, but also even just on the cooling. There's liquid cooling. There's traditional cooling. So there's a number of probably innovations that are going to occur over time. And so I think we would be very cautious about a purchase in this space, right? Okay, makes sense.

Yeah, for sure. And I guess, again, just because you do the, you know, the backup right now, the enclosure, potential cooling, it just, when you go see the potential clients, you're still offering more than one solution versus, you know, even three, four years ago. So the probability of getting penetration there seems to be improving, but still sort of TBD in terms of getting there. Okay. Thank you. Okay, that's great. That's it for me. Thank you so much.

Thanks, Max.

And your next question comes from the line of Steve Hansen with Raymond James. Please go ahead.

Oh, yeah. Thanks for the follow-up. I just want to circle back on the AVL here and push a bit, just since it seems to represent such an important piece of the business now. I think it's a quarter of the total backlog in the equipment space. Just, you know, how much of a sense... do you have for capacity expansion for enclosures in the broader industry right now? It strikes me that if you can double capacity over 12 months or six months, I guess, by buying a facility and ramping it quickly. I mean, how much broader capacity expansion are we seeing for these enclosures? Like, should we expect this normalization cycle to be 12 months, 24 months? I know the demand for data centers feels unlimited, but capacity can also catch up quickly. I just want to get a broader sense of your thoughts around the competitive landscape.

I think maybe just to start on that, Steve, as we mentioned, we've invested in a facility that's got about the same capacity as what we see in Hamilton, maybe slightly larger. But I would say we're cautious in that sense. That'll give us significant participation in the space for enclosures at this point. And I wouldn't get too far down the road. There is a lot of capital going into this marketplace. And I think as we get that facility up and running and the capacity, and secure all the build slots. We would look at some other opportunities based on demand, but I would say we wouldn't want to get too far ahead of ourselves and over our skis on future facilities. These two facilities will give us significant participation and should be able to support the Canadian market as it develops and then also the customers that we already have in the U.S.

Yeah, the other thing I would just add just on the doubling of capacity thing, Steve, just be careful in terms of your models, right? So we've purchased the facility. We're kitting it out. We'll have some production starting possibly in the fourth quarter, first quarter, and it'll ramp. So we're not going to double as soon as this thing opens, right? Phased approach.

Yeah. Yeah, no, that's a fair point. And just one last one on that, if I may, is I think one of the initial value propositions of the initial transaction, which seems to be playing out nicely, was the ability to maybe leverage your existing cat relationships and try and sell through them as well. Is that happening or is this still more of a direct sale process from your in-house ABL guys?

Yeah, no, you're exactly right there, Steve. I think You know, certainly the cat relationships. I mean, AVL does package for other equipment providers, but the majority would be through the cat network in North America here. And that's where we would look to establish our presence. And that's hence the reason why we went to the Charlotte area for the Eastern Seaboard.

Very good.

That's it for me. Thanks. Great. Thank you. Thanks, Steve.

And we have no further questions at this time. I would like to turn it back to Mr. John Doolittle for closing remarks.

Okay. Thank you, Ludi, for hosting us today. Thanks to everyone for joining. And the great questions concludes our call. Be safe, everyone. Try and stay cool and have a great day. Take care. Thank you.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you for attending. You may now disconnect.