Toromont Industries Ltd. (TIH) Earnings Call Transcript & Summary

Good morning. Today is Wednesday, February 12, 2025. Welcome to the Toromont 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 Toromont'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 2, 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 3. And 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 this provides a better basis for comparability and of course, comparisons between Q4 of '23 and '24 exclude AgWest 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. CIMCO, 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 us well as we enter 2025. On Slide 4, I'd like to touch on a few key financial highlights. Investment in noncash 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. store supplies, improving availability through the supply chain, seasonality and general activity levels. Accounts receivable was unchanged year-over-year with higher revenue and lower days 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 option 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. Toromont 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. Toromont 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 5 for a few additional comments on the consolidated numbers. We are 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 improved operating disciplines, along with our strong financial position, position us 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 CIMCO being offset by lower bookings in the equipment group against a strong comparator. On a year-to-date basis, bookings increased 9% in the Equipment Group -- increased 9% with the Equipment Group up 6% and CIMCO up 30%. Backlog remained healthy at $1.1 billion as at December 31, down slightly from $1.2 billion last year. with a decrease in the equipment group and an increase in CIMCO. On a consolidated basis, revenue increased 7% in the fourth quarter and 9% year-to-date, with increases in both the Equipment Group and CIMCO. 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 reflects certain exposures, while good focus on collections continue. In 2023, our 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 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 earnings 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 6. 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 have 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%. The 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. The 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 head count 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 in construction, up 6%; Power Systems up 18%, material handling up 67% were 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 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. So let's turn to CIMCO on Slide 7. 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 and 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 the quarter -- 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 the 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 and 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 CIMCO 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 increased 10% with the 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 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 coming from the supply chain dynamics. And with that, I'll turn it back over to Mike, and we can move to Slide 8.

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 Toromont 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 3, where we noted the uniqueness of this partnership. Vince DeCristofaro, 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 this partner and took a portion of his share of the initial purchase in Toromont shares. This unique acquisition structure was designed to strongly align our interests to grow this business and to share in the performance. Toromont 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 Toromont'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. First, 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 U.S. 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 equipment -- 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 in 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 a 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.

[Operator Instructions] Your first question comes from Devin Dodge with BMO Capital Markets.

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

Yes. Maybe it's -- thanks, Devin. Maybe I'll start with that, and John can add in as well. We have seen a gradual increase in interest in the RPO model, especially as you mentioned, it's -- we tend to look at it in a sense as a financing vehicle. And so I think we reported 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. And so 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 has taken several years for that to happen.

Yes. As Mike said, it gives the customer flexibility in terms of the timing of the purchase because most of, 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 million last year.

Okay. Got it. And then I got to switch over to CIMCO, bookings continue to be really strong for the business. I think earnings have doubled from 2 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, 2 to 5 years? .

Yes. Let me start, and then Mike can add in. I mean we're really pleased with the financial performance of CIMCO this year. And a couple of factors that 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 on 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 a great brand presence in Canada, a real growth opportunity for us for CIMCO'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?

Yes. 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 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 on what we had going into 2024, but it also sets us up with a nice position as we look at '25.

Your next question comes from Cherilyn Radbourne with TD Cowen.

This is Patrick Sullivan on the line for Cherilyn. On the Product Support side, Caterpillar 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?

Yes. I think, Patrick, on 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 in service and our aftermarket support and so big comment. I would say we're -- number one, we're strongly aligned with Caterpillar and how important that is to serve our customers and make sure that we have the parts and services available to manage their business. Really critical, I would say, fundamental to that whole business 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, Cat 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've stated that you had several years of significant deliveries in the mining industry. Is it possible to give us some color on how much the mining base -- 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. One of the ways you can sort of monitor that activity is to look at our bookings and backlog. And you'll see, as John noted in his prepared comments, but also in our MD&A, you'll notice that mining does tend to be dependent on mine expansion, greenfield and brownfield expansions, fleet replacement and so forth. And so 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 and our backlog as far as the breakdown between mining and construction. Today, if you look at December 31, our backlog is about evenly split when you look at construction and mining, it's about 27% to 26%, respectively. And so that gives you a good indication as to where that goes. And then of course, behind all of this is when you look at the mining industry investment profile, commodity pricing. Gold is 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.

Your next question comes from Yuri Lynk with Canaccord.

Yes. Just thinking about some of the dynamics in the macro situation, I'll start with the weaker dollar, Canadian dollar. Has anything changed on the competitive front? Like 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 are there more -- 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 of things I'd note is a lot of equipment coming into Canada is U.S. dollar priced. 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 in some of our competitive products, including even some of the [ Komatsu ] products are manufactured in the U.S.D. of course, in our Caterpillar supply in many locations. So I would say, fundamentally, though, when we look at currency and we look at the lead times, we work with our customers and their requirements, we have a hedging policy. We'd like to provide certainty around pricing and time frames and so forth. And that's really critical. And I think that's pretty consistent. Where we do see, I guess, some other product coming into the marketplace 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 on our mining portfolio, I mean, largely, those are pieces that tend to be priced in consistent U.S. currency.

Okay. And then just thinking about tariffs. I mean I know is 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 as they ever come to fruition?

Yes. I think just -- maybe to start on that, I think 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. But again, it's a short term -- 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. And so -- to the extent possible, sure. I think the longer-term view is what's really important. We tend to turn -- we'll turn our inventories, our parts inventories over 3 or 4 times a year. So 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 time frames and what the potential impacts would be in alternatives around the supply points.

Okay. And I'll just try to squeeze a quick one on -- 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?

You're correct on both of those.

Next question comes from Jonathan Goldman with Scotiabank.

Yes. 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 is a headwind next year, do you think the current level of equipment margins is sustainable?

Well, 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, we have been -- 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 there 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 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 color. And I guess my second question is on AVL. Can you provide some more color around the opportunity set for that business in end market and whether you see that business having a more organic growth or strategic opportunity?

Yes. I think -- so AVL, we're quite excited about that. I would say, again, outside of the initial acquisition, as we described in our comments, I think it really is organic in the sense that they have, I would say, an industry-leading design, 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. And so 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.

Your next question comes from Krista Friesen with CIBC.

I was wondering if you could just -- 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?

Yes. 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. We're -- 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 link as 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 may be around time frame or cadence of how you expect that to play out?

Yes. Keep in mind, I think it's a good question, Krista. 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 are 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 2 or 3x depending on the equipment and service.

Your next question comes from Sabahat Khan with RBC Capital Markets.

Eddie on for Sabahat. Can you just maybe provide some color on where you're seeing today in terms of pricing discussions and customer incentives?

Yes. I think, again, we're -- we don't provide a lot of commentary in that area given the competitive nature of the market, right? And so I'd just say for 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 we like to work with our customers in terms of what their unique requirements are, either it includes a financing element with say, CAT 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.

Your next question comes from Steve Hansen with Raymond James.

I want to go back to this equipment margin issue just for a moment, if I may. If I look at the front 3 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 in '24. Any color there would be helpful.

Yes. I think maybe just to start on that, Steve, thanks for the question. I think, again, if you -- we did give a little bit of color there in terms of mix and so forth. And so keep in mind, based on our earlier comments, there's the factors we always direct you to are new equipment margins. And depending on the mix, like if we look at, for example, even within mining versus construction, 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. We mentioned, I think, in our comments and so forth, gross margins, for example, and there's some commentary that we provided in our MD&A about rental margins saying that we're down, say, 70 basis points, which is a factor of both utilization rates at this stage given 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 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 that helped as well. Product support was also slightly favorable on margin, just given a little higher activity levels in that side of the business. So yes, I think you have to take into account all those things when you look sequentially.

Okay. Very helpful. And if I look at the backlog composition, I think you described it, but we've seen quite a shift here over the past year, mining is down to sort of construction base levels, but product support -- sorry, the power systems has increased fairly markedly 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?

Yes. I think between John and I, we look at a little bit. But I would say, again, we can get 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.

Yes, just go back maybe to the question on mining and the fact that we've deployed a lot of -- 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 CIMCO 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 that for a year, and it's clearly paying its dues. But is there also macro tailwinds that are benefiting in the space that you can see or specific drivers on either side of the border. It just strikes me at such an impressive performance.

Yes. I mean 1 of the things I call it is the technology innovation within CIMCO, the use of natural refrigerants as people think about the environment more and more versus synthetic. And I think CIMCO 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.

[Operator Instructions] Your next question comes from Maxim Sytchev with National Bank Financial.

Mike, I was wondering if you don't mind providing a little bit of color on the infrastructure space in general. And I guess, 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?

Yes. Thanks, Max. I think, again, I would say on the infrastructure side, I think we're seeing some interest in investments, both for 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, John, of about round numbers I've heard in excess of $100 billion to $150 billion of infrastructure going 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, right, 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 expectations around rentals, investments and disposition from 2025?

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

Yes. I guess the one consideration there to Max is with Tri-City, for example, we've acquired a nice fleet for Southwestern Ontario. And so there's -- over time, that will transition. But I mean we have assumed a nice sized fleet there in between the 2 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 level of investment now that we have both of those fleets in place, it will be dictated by activity levels.

Yes.

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

Yes. I mean it's -- as we talk about each quarter at the 4 priorities in terms of capital allocation, organic growth remains first, dividend, which we talk about increasing 36 years in a row. NCIB is also a priority and then M&A. And yes, you're right, Max, we were a little bit more active in the fourth quarter. Capital Hygiene's #1 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 CIMCO, like do you ship a lot of things crossborder to the U.S. or the projects that are being executed in the U.S. are done locally?

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

There are no further 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.