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Toromont Industries Ltd
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Good morning. Today is February 15, 2019. Welcome to the Toromont Industries' Conference to announce the fourth quarter and full year 2018 results. Please be advised that this call is being recorded. Your host for today will be Mr. Paul R. Jewer. Please go ahead, sir.
Thank you, operator, and good morning, everyone. Thank you for joining us today to discuss the results of Toromont Industries Limited for the fourth quarter and full year of 2018. Also, on the call with me is Scott Medhurst, President and Chief Executive Officer. Before we continue, I'd like to advise listeners that this presentation may contain forward-looking statements and information that are subject to certain risks, uncertainties and assumptions. For a complete discussion of the factors, risks and uncertainties that may lead to actual results or events differing materially from those expected, refer to Toromont's press release and MDA from yesterday, which is available on our website.We assume you've had the opportunity to review our press release and related financial information from yesterday and as such, we'll focus on key highlights. Scott will begin with an update on the integration and a few general remarks and comments on our outlook. After which, I'll review the operating group results and financial position. Then we'll be more than happy to answer your questions. Scott?
Thank you, Paul, and good morning, everyone. We are pleased with our results, which included a full year of operations at our expanded dealership territory, spanning from Manitoba on the Western front through to Newfoundland in the east and north to Nunavut. This contiguous territory represents one of the larger Caterpillar dealers in the world. As I reflect on this integration journey, that began a year ago, I'm proud of the progress the team has made in such a short amount of time relative to the scope of the undertaking.I would like to thank our people across the entire Toromont enterprise for their commitment, dedication and contributions.I applaud their focus on safety customers and our suppliers, given the multiple actions that were in play.The integration process continues and much work remains. We have now completed some of the core items, including organizational changes and leadership appointments. The teams remain engaged and understanding the importance we place on the decentralized branch model, delegating authority, but demanding accountability and alignment. This is the core foundation of Toromont model.We have also aligned our branding across the territory for our key operations, Toromont CAT, Battlefield, the CAT rental store and Toromont Material Handling, ensuring we have one consistent message to our end customers. The go-to-market strategies are now more robust and aligned in our power systems, mining, used equipment, heavy rentals and material handling divisions.At Battlefield, we are focusing on the full-service rental model and rolling out broader product lines to address demand signals year-round. Since acquisition, we've invested $42 million net in this light equipment fleet. The team continues to embrace the proven rental model strategy, focused on sustainability for the longer term. In addition, the Battlefield team continued to expand the footprint with the opening of new locations across Eastern Canada. We know that this model takes time, patience and commitment as we understand we are building for the long term.The front-end investment levels, of course, mean lower rate of returns until the model matures. The heavy and power rental teams are going through similar return challenges as we expand and diversify those fleets and invest for long-term sustainable returns.On the product support side, we've been working on a shared service structure to drive productivity and efficiencies through common operational excellence practices.Our corporate product support team was divided into 2 Pan-regional groups. First is focused on the service departments and operational excellence, combined with the leveraging of our strength and reinvent portfolio and the second focused on parts and logistics, including a full evaluation of supply chain efficiency.And most importantly, we continue to invest heavily in growing our technician base at Toromont QM, with a net increase of 53 from this time a year ago. Our people continue to align on safety training and practices, and I cannot stress enough the importance of safety in our organization.We continue to add resources to promote this culture. We, as an entire leadership team, know that it is our responsibility to return everyone to their families at the end of the day. We've also rolled out a consistent marketing plan to the new Eastern Canada marketing team. Several management training programs were focused on business fundamentals and cross-pollination of core Toromont operating principles.All in all, we are pleased with the progress made to date. The runway ahead is long, and we acknowledge that there remains a lot of heavy lifting to fully unlock significant value that is before us.Returning back now to the results. Consolidated revenues grew 17% in the quarter and 49% in the year. Toromont QM contributed $357 million in the quarter and $1.3 billion for the year versus $243 million for the 2 months in 2017.Net earnings were up 44% in the quarter and were 43% higher than last year. On a year-over-year comparable basis, adjusting for certain items consistent with our press release disclosures, the legacy businesses grew in line 18% in the quarter and 17% for the year.Looking forward, effective execution will be required to realize on the significant potential that is before us.Infrastructure projects and broader construction activity continue to present opportunities for equipment sales, product support and the rental businesses. Parts and service business continues to provide a measure of stability and opportunity for future growth. Shops and technicians remain busy, and we continue to hire to support demand levels.In the mining sector, we experienced good growth in product support this year. Production continues at existing mine sites, which is good for future product support business and incremental equipment sales to support the growth and expansion.Over at CIMCO, the revenue base continues to grow, setting another record this year. Specific challenges dampened the results. These have been addressed and the team enters 2019 with a solid backlog. Together, we enter 2019 a much stronger and cohesive team than this time last year. Supported by a strong balance sheet, we remain well positioned to continue building shareholder value. Recognizing the company's solid financial position and positive long-term outlook, I'm pleased to announce that the board of directors yesterday approved a 17.4% increase in the quarterly dividend to $0.27 per share per quarter. This marks the 30th consecutive year in which the company has increased dividends. I'll now turn the call over to Paul to take you through the highlights of the financial results. Paul?
Thanks, Scott. Let's put a little -- a bit more color on the operating results, starting with the Equipment Group. For the legacy Equipment Group, total revenues increased 7% in the quarter and 6% for the year. New and used equipment sales combined were up 6% in the quarter and 2% for the year against the tough prior year comparative, which included the delivery of large mining packages. Rental revenues were at record levels, increasing 9% in the quarter and 12% for the year with growth in all segments. Product support revenues grew 7% in the quarter and 8% for the year on good parts and service activity in most segments, most notably construction and mining. For Toromont QM, as I've done in the previous quarters, aim to provide some context of the results of these businesses, given only 2 months of operations in 2017, the ensuing comparatives will include results at previous ownership together with our 2 months of last year. On this basis, revenues at Toromont QM were 1% lower in the fourth quarter, but 13% higher versus the prior year. Combined new and used equipment sales of these businesses were down 4% in the quarter, but up 16% for the year. Sales in the mining markets were lower, coming off of a record 2017, while sales into construction, power systems and material handling markets were higher.Rental revenues in this patch were down 16% for the fourth quarter, but up 6% for the year. Rentals in the fourth quarter last year benefited from good construction projects and power systems activity. Higher rental revenues for the year reflect the benefits of the diverse and larger fleet offerings, especially of the light equipment fleet. Product support revenues grew 6% for the quarter and 10% for the year on higher parts and service activity levels. Overall, gross profit margins increased 250 basis points in the quarter and 160 basis points for the year.The legacy businesses reported good margin growth in both the quarter and the year. Selling and administrative expenses increased both in the quarter and year-to-date, largely due to the incremental expenses at Toromont QM. At the legacy businesses, increased expenses largely reflect higher compensation costs, allowance for doubtful accounts and general increases in support of revenue growth.Operating income was up $40 million in the quarter and $129 million for the year. The legacy businesses reported a 20% growth in both the quarter and the year with strong operating margin growth of 170 and 160 basis points, respectively. Bookings at the legacy businesses were up 6% in the quarter on higher mining construction and agricultural orders, partially offset by lower power systems orders.For the year, the large power systems order together with higher construction and ag orders offset the impact of the large mining order last year.Bookings, which were not previously tracked at the predecessor organization, were $166 million for the quarter and $594 million for the year. Last year, we recorded $86 million in bookings for the 2 months. Approximately 60% of the orders in 2018 at Toromont QM were construction related, with the remainder split somewhat evenly between mining and power systems and lift truck orders. Backlogs increased $15 million or 5% to $342 million, most of which is expected to be delivered in 2019.Let's turn now to CIMCO. Revenues in the quarter were down 5% against the record fourth quarter experience last year. For the year, however, revenues grew 8% and surpassed the 2017 full year record. Package revenues were down 21% in the quarter, approximately 2/3 of which related to lower U.S. sales of both market segments. Canadian revenues were down 10% as higher industrial sales were more than offset by lower recreational sales. For the year, package revenues increased 7% with higher sales in Canada, offsetting lower sales into the U.S. Product support growth continued and we're up 28% in the quarter and 9% for the year with higher activity in both Canada and the U.S. In the fourth quarter, we recorded a $6 million inventory write-down, which stem from a review of work-in-process costing and aging. Apart from this, margins were under pressure in Canada and the U.S. for most of the year, exacerbated by problems encountered on one U.S. project earlier in the year, which resulted in a charge of $2.9 million for the year. We're focused on ensuring good project management disciplines and execution are consistently applied. The growing product support proportion of total sales had a positive impact on margins in both the quarter and year. Selling and administrative expenses were relatively unchanged in the fourth quarter and year, but were down 40 basis points in the quarter and 100 basis points, respectively, as a percentage of revenues. The group continues to focus on expense management to mitigate the margin compression. Operating income decreased 47% in the quarter and 30% for the year, principally due to the specific item. Bookings were up 44% in the quarter with strong ordering in both Canada and the U.S. Higher recreational orders were received in both Canada and the U.S., while industrial orders increased only in the U.S. For the year, bookings were down 21% versus the all-time achieved last year. Industrial orders were lower in both Canada and the U.S., while recreational orders were lower in Canada and relatively unchanged in the U.S. As a result, backlogs of $113 million were lower than the record 2017 levels, but still higher than the previous 5-year average. We expect most of this backlog to be delivered in 2019. On a consolidated basis, the basic EPS increased $0.31 in the quarter to $1.4 (sic) [ $1.04 ] and were up $0.88 for the year to $3.10.On a comparable legacy Toromont basis, this translates to an 18% increase in the quarter and 14% increase for the year.At December 31, our overall financial position remained strong. We continued to invest heavily in our revenue-producing assets. For the year, we invested a total of $165 million in rental fleet and other additions, almost half related to our new territories in Toromont QM. We are pleased to continue to produce good shareholder returns, evidenced by a 22.3% return on opening shareholders' equity and a 21% -- 21.7% pretax return on capital employed.And finally, to reiterate what Scott said earlier, we are pleased with the integration and transition efforts to date. We truly believe in the opportunities which lie ahead, and again, caution you do not place undue reliance on any single quarter as a basis for modeling your expectations. This concludes our prepared remarks. And we'll be pleased to take your questions. Operator?
[Operator Instructions] Our first question now comes from Michael Doumet from Scotiabank.
So on the strong margin performance at QM, any way you can help us with the read through there, I mean, how much of that in your view is -- you would attribute to sequential improvement, maybe due to seasonality? Or how much due to step up in the underlying performance of the business?
We're very -- we continue to be very focused on some of the operational disciplines. And I think, some of it's starting to take hold. Still ways to go there. We had solid product support business there. We had nice upticks in the product support throughout the year and that's -- we really need to look at this as how did we improve throughout the year on a continuous journey here that we're on less than in the quarter. But we had very favorable sales mix in there on the product support, which contributed to some of the outcomes, and we had some good rental conversions as well, which turns out to be favorable. So when you combine a lot of these factors, it led to some positive outcomes.
Okay, that's helpful. And then maybe just segueing off to product support. I mean, in your prepared remarks you discussed the integration efforts there across geographies. Any way you could give us a sense on whether that was a meaningful contributor to the gross margin expansion in that business line this quarter? And maybe just provide us with a status update on the integration there?
Sorry, could you go over that again, Michael? I want to make sure I understand your question here.
No, no problem. So in your prepared remarks, you discussed the integration efforts on product support across the geographies there. I just want to get a sense for whether that was a meaningful contributor to the gross margin expansion in that line of business?
Yes, so we've got a group that's focused on the service operational side, and that's starting -- we're starting to get some different disciplines in there that we believe will lead to a positive outcome on the long term. We are also assessing our logistics and things of that nature. That's going to take time. That's early stage. And we did start to get some traction in the consolidation of the rebuild centers and to try and improve our throughput there, but that still has a ways to go, but there is some progress being made there.
Okay. So progress, but still early stages is the way I should think about it?
Yes, I think this is long term, and again, but when we look at it on the full year, we're very pleased with the growth in the product support and particularly, we were fortunate to get higher uptick in the labor sales. And that was due to our -- we're pleased with our recruitment strategies, and we saw some positive net outcomes there with increases in the skilled labor headcounts.
Mix is also a key issue, Michael. So obviously, we had an increase in proportion of product support in the quarter versus the fourth quarter of last year, so that would be a contributing element as well.
We will now take our next question from Jacob Bout from CIBC.
Yes, just a question, another question here on the product support in the quarter. So -- and specifically on the service side, so QM, I think, was up 17%, legacy up 15%. That mix in the product support that we saw in the quarter, how much should we read into this? And what should we expect going forward?
Well, from what we saw, and we saw it throughout the year, there continued to be strength in the product support demands and the demand signals for skilled labor remained fairly strong, and we were pleased that we could react with the increase in the headcounts, and that was throughout the enterprise. So you had actually a higher uptick in the labor demand sales. And parts was favorable as well. So that was good that we're reacting well to our customer needs, and when we closed off the year, the WIP levels were up. So we're pleased about that. We continue to monitor things here very closely. Rebuild activity, again, quoting activity in Q4 was strong on the rebuilds, and that's always favorable and the team executed a little uptick there in the revenue stream. So we're fortunate in the quarter with the product support activity, and let's hope it continues.
Okay. And then just on the rental revenues at QM, they were down year-on-year, just maybe talk a bit about how the rollout of Battlefield is going?
Yes, great question. So we're extremely focused and pleased with the progress because what we're doing there is we're basically building a new business model with the full rental services. So we're starting to get broader lines embedded in there. We're able to -- we're starting to be able to participate on larger projects, providing a broader line of products and services on the full rental services. So this is going to take time because you have to let those fleets mature and get the processes in place. So we're investing. There's infrastructure costs going in there. But we're pleased overall on the annualized basis on the revenue streams, but obviously, you've got some drag in there. It'll take place as we invest and as the demands hopefully continue.
Okay. And then just last question here on the -- not a small part of your business, but the agricultural equipment sales up 79%, pretty big number there, what's driving that?
Again, I applaud the team. We did a bit of a reset there, but the activity was decent and the sales, we're very fortunate with the sales activity both new and used in the quarter. So that was a positive step for our ag team on a year-over-year and quarter-over-quarter comparison, particularly.
How are you thinking for -- about 2019?
We're monitoring the ag industry. I wouldn't want to get too far ahead of ourselves there. We're back to getting into some disciplines there and some sales management processes that indicated there's progress, ways to go there, but we're pleased with what the team did in the fourth quarter.
We will now take our next question from Yuri Lynk from Canaccord.
Can you comment a little bit on market conditions in the Equipment Group, specifically pricing and if there's been any change in the availability of used gear?
So pricing, the market activity was up a tick again in the quarter. We were pleased with -- throughout on our penetration of the market in the quarter and it was up a bit. There was a little more activity which is good, particularly in Quebec. The -- overall, I mean, it's very competitive. We see -- continue to see pressures on the rental rates. On an overall basis, there was some downward pressure when we do our assessments on a year-over-year basis. So we've got to be very in tune with our operating efficiencies. So that's sort of what we saw. But we saw good conversions in the quarter and hopefully, that's a positive signal when you see that and the new and used buying, particularly on the construction side, was positive in the quarter.
And used gear, is it still tight?
Used was up, but, well, it's still tight, getting good, used gear. I mean, we're very -- trying to be very attentive to keeping our eye open for buying good used gear, and we feel very confident in our team and they know how to buy used. So we're -- and we're starting to get that philosophy going throughout Eastern Canada that we do like to keep an eye on the opportunities for buying good used iron. So that continues as well, and we'll hopefully continue to get some momentum there. Still a little tight, but we're monitoring that closely.
Okay. And just looking ahead, the composition of the Equipment Group backlog versus last year has shifted around quite a bit, dominated by power systems now where last year it was construction. Any meaningful margin difference between power, mining, construction that we should take note of heading into the rest of the year?
Now there's a lot of variables in there, based on the size and the value propositions you can bring forward. So I wouldn't -- there's nothing consistent in there, but -- again the bookings and billing in the quarter were fairly strong in the construction and then you get your lumpiness coming through with mining and power. So that's what -- where we are on that.
Okay. And lastly, one for Paul. Anything we should be preparing for in terms of IFRS 16 conversion?
No, we don't believe that there's a material impact at this point in time.
Our next question now comes from Cherilyn Radbourne from TD Securities.
In terms of the total revenue in Q4 at Toromont QM, it was flat year-over-year, and I was just curious whether that has any implications in terms of market conditions? Or would you just read that as normal business volatility?
I mean, the first thing to remember is Q4 of last year included the transition, right? So we're dealing with the transition of 1 month of the previous ownership, 2 months with us. So there's a little bit of noise related to that as well.
There was a big -- there was a tough comp in there on a big mining -- there was strong mining activity in Quebec last year in the quarter. So that's where you get that lumpiness in there.
Okay. And then in terms of the state of new equipment supply. Can you just give us a bit of an update there and comment on what that implies for your rental fleet additions in 2019 and for the cadence of dispositions from the rental fleet?
Right. So we were -- I'll give a little color on the rental fleet, so last year we held on to our rental fleet rather than dispose -- got outside our model a bit because there were some availability constraints, and we're shifting over to the retail demands. So -- but this year, we're starting to see some improvement in certain products on availability, and so we're hopeful we can be a little more attentive to our rental fleet uploads this year, but monitoring closely, but some improvement with certain product lines.
And in terms of rental fleet additions, Paul, can you give us sort of a range there?
Yes, I mean, last year, we invested net about $156 million. That was the total. Next year, we'll see some increased investment in Battlefield, so light equipment fleet could go up meaningfully. I think we'll -- we're satisfied with investment bubbles in the heavy equipment fleet so that net total should go up to somewhere between $170 million to $180 million.
That includes power as well.
Yes. Yes. That's everything.
And then in terms of the dynamic that you mentioned in the rental market where rates have been relatively stable year-over-year, but the average cost of the machines added to the fleet has been increasing. Do you think that we're near a tipping point in the market where rates need to move higher and if not, how do you otherwise mitigate the margin pressure?
Yes, so that's where you really have to focus on your operating efficiencies and bringing in technologies and how we interface with customers, and that's where we're very focused in order to get some positive outcomes. So that continues and that really is where we're trying to advance on the rollouts with the new rental model across Eastern Canada. Our utilization numbers were fairly decent last year and time utilizations improved throughout, so that was good. So we like the business, but you do have to run efficiently in a very competitive environment and invest in those technologies.
Okay. And then last one from me. Obviously, CIMCO struggled with a few issues throughout the year. Can you just expand a little bit more on what you've done there by way of remedial actions?
In terms of the actions by the business unit, I mean, basically, there's a heavy focus on project execution disciplines at this point in time, given a project that was challenging in the U.S. earlier in the year. That's near completion at this point in time, so everybody took that as an opportunity to go back, pause and reflect on the project execution disciplines and I believe those have led to improvements. Obviously, we have another challenge in the fourth quarter related to review processing and aging of WIP. So we felt it was appropriate to make an adjustment on that front, and we believe we've got that and we're driving on.
We now move to our next question. This question is from Derek Spronck from RBC.
Just around the organic growth environment in 2019. How should we be thinking about that now that you've fully lapped the Hewitt acquisition?
Well, we were pleased with our market penetration last year across Eastern Canada. And the industries were strong, I mean, overall they're up almost 10%. So we're pleased with that. Going forward, I mean, we're monitoring things closely. You've got some new -- you got changes in some governmental bodies, Quebec and Ontario. So early-stage monitoring what that might mean for infrastructure, but the shops are busy. So that's an indication of what levels are solid going into '19. But it's early to get a read on things and the rental revenues were good in the quarter. So we'll see how it plays out. But we're monitoring things closely here. There's some unrest out there so you got to be attentive to these signals.
Should we be thinking of it like a mid- or to high single-digit organic growth rate environment?
I wouldn't -- we never predict. I mean, we just look at it from what we've seen in the past year and in the quarter and try and get a tone from the customers. But -- I mean, you wouldn't want to predict that right now.
Yes, okay. Fair enough. You sounded incrementally more positive around mining. Is that correct? Are you seeing some positive tailwinds in that sector? And is it coming from the precious or base metal side or both?
No, I wouldn't speculate in there. I just say, right now, we've seen very strong activities in the product support. And so that's what we're focused on meeting those demands and again, with mining, it's lumpy. You can go up and down with these large opportunities, and then you got to go win them and demonstrate your value propositions. So wouldn't speculate in mining.
And then -- and just did -- it seemed like a seasonally warm winter in the fourth quarter. Do you think that helped at all in just from a trend perspective into Q1 now that we have about 1.5 months in Q1? How do you see the trends from Q4 and first part of Q1?
Well, our Q4, again, we saw very strong product support activity, strong sales, new and used on the construction. I -- you mentioned weather. I can't really comment on weather for November, December. I mean, everybody pushes hard to finish in that time frame. So we'll see how things play out here, but the quarter was active obviously, and we're pleased with how the team has executed.
Okay. And that activity so far is continuing in the first part of Q1 or is it...
Well, WIP levels were decent at the end of the quarter and the quoting activity at the end of the quarter was active, but you've got to go win the business and earn it.
Yes, okay. And then just one last one for myself. Accounts receivable was essentially flat year-over-year. The accounts payable side had a fairly significant increase. And I think pointed to the transitional terms from supplier is related to inventory purchases. Do you mind just providing a little bit more color on that? And then do we -- should we expect that to reverse a little bit in 2019?
So in terms of -- in terms of that we have identified that over the course of the quarter as transitional in terms of suppliers broadly related to some of the efforts that we've had with the integration. Those will continue through 2019 and should start to unwind as you approach the end and into early 2020.
Okay. And I wonder -- sorry, I don't know exactly what that is. Do you mind just providing a little color why there was a pickup there?
As I said, it's just transitional terms with suppliers, right, to help with the integration effort and obviously, as we invest in that business.
Our next question is from Devin Dodge from BMO Capital Markets.
So gross margin expansion seems like it was -- become a pretty key part of the earnings improvement this year at the legacy Equipment Group. Are you able to provide some color on the drivers behind this whether it's pricing or mix or internal efficiencies? I'm just trying to get a sense of these margin gains are sustainable or if there is more upside from here?
So product support, on an overall basis for the legacy, was up about 10%. We had very good conversions on the new and used equipment, particularly around the tractor business construction. So -- when you had a nice mix in there with some very strong labor demand, I mean, we were -- and both on construction and mining was -- the mining product support. Demand in legacy was very strong, and I think we're up over 16%. So those are -- we're very fortunate to execute on that. And the teams did a good job there and the sales were very good on the new and used for construction. And rental activity was good in power as well. That was up.
Okay. Okay, that's helpful. And maybe when we look at demand in the Toromont QM business, it's been really strong since you took the business over. These equipment sales were up 16%, do you think it's just reflective of the overall market growth, or do you think you've been able to capture some market share there? And maybe just related to that I believe one of the KPIs that CAT measures its stewards against its participation rate, just on this basis how does Toromont QM compare to the legacy Equipment Group?
That's a key area for us. We focus on across the ECAN enterprise is our participation levels and that's something that we track very closely, and we had some improvement. And specific to your focus on Quebec, we were very pleased with the teams. That was a very active market. That industry showed more uptick than others on a comparative basis and the team did a nice job, particularly on the some of the larger item segments, penetrating the market there fairly effectively, and so nice job on the teams front with that area.
Okay. At this point is there much of a gap in the participation rates between the 2 regions?
I wouldn't -- there's a little bit, but nothing dramatic, but that we continue to focus on that on a consolidated basis to improve in those areas. That's a opportunity.
Our next question comes from Ben Cherniavsky from Raymond James.
Most of my questions have been asked. I wouldn't mind, however, if you could provide an update on the materials handling business that you acquired with Hewitt. What's the -- what progress if any is there to report? I believe when it was acquired, it was sort of a breakeven kind of business and obviously, I think if you guys are going to stay committed to it, you'd like to see those numbers improve, so has there been any improvement? And if not, what's the plan to get the margins higher and sort of your level of commitment to that business that you're into it now?
So we were pleased with the progress on a year-over-year basis with the Toromont Material Handling. We continue to see improvement both in Ontario and Quebec. Quebec, in particular, team did a very nice job there on the market penetration and Ontario, we had improvements there on product support as well in both areas and that led to overall improvement on that contributions, which we're pleased about. So year 1, pleased with the progress, a long way to go particularly, then when we look at the rental side of that business. We've learned we can be more disciplined in there, bringing some platforms that would maybe reflect more of our rental model. So we're looking at that in the Toromont Material Handling area.
And with the improvements that you noted have been in any way a material contributor to the margins that we saw?
Well, they were not material, but they were -- I think, what's going on right now, we are very pleased and it demonstrates the power of this deal. The sum of all the parts if you show continuous improvement in a lot of these scenarios that helps, but -- so we're just looking for continuous improvement, and we got that in there and we're proud of the team for their contributions.
We're at early stages, Ben, as it relates to Toromont Material Handling and really we had 3 desperate business units, running on 3 separate platforms. We're advancing on IT solution to bring the whole thing together. We successfully transitioned leadership post-retirement. We implemented some organization structures, and we've marginally improved the profitability so far. So we're pleased with what we've seen to date, and we'll continue to work it.
Good. That's great to hear. Maybe if I could try to drill down a little further on one of the previous questions on gross margins, and I think, you mentioned in the MD&A that the parts and service was a contributor to the improved margins. Was there any change in your processes or policies or cost structure that would account for an uptick in the product support profitability? And I'm just trying to understand if there was maybe some step up that sustainable contributor to the profitability of the Equipment Group business from your parts and services or was there any sort of wouldn't want to call onetime but any unusual events or mix issues or anything that just happened in this quarter on the service side or product side?
We're starting to see some improvements in some of our operational focus areas and as well as the rebuilt centers. Still early stage, but there's some improvement going on there in throughput and some changes in the -- some of our operating disciplines. But we're focused on the long term there. In terms of the contribution, so that did help a bit and the rebuild activity was favorable as well across Eastern Canada, Atlantic, Quebec and the legacy business. The other factor was the rental conversions. We're strong, we see that, Ben, you know the business really well. You see sometimes these shifts in the rental conversions and that was favorable in the quarter as well. But the product support was strong throughout. I mean, you had upside and they're ranging from 10% to 15% relative to different segments and powered tractor mining and overall, so it all added up and what was important, though, that the team executed on that front. Product support's competitive so you got to win on that front and demonstrate your value proposition. So that's how it all rolled up.
So without trying to pin you guys down on a commitment to your guidance or anything like that, but I mean, obviously, there's going to be a fair amount of questioning about the sustainability of the margins that you put up in the Equipment Group. There wasn't anything, in particular, then in the fourth quarter for that matter 2018 that would prevent you from achieving that level, again, assuming all the other parts of the business line up like there wasn't any sort of unusual profitability issues that helped you in the margins?
It's been broadly, obviously, profitability is directly related to volumes, right? So to the extent that we have volume opportunities and continued growth on that side, that's obviously a key factor. But beyond that, there was nothing truly unusual in Q4 that we point to.
I just -- we're starting to get some traction on the operating disciplines, but there's ways to go here and I just saw. We're lumpy in here right now, and I think we really have to look at this over the long term and less so on a quarter-by-quarter basis. It's been...
Right. For even for 2018 as a whole, it seems good.
Yes, it was a very -- we're very pleased with the progress continuous improvement throughout and that's what we're really doing. We're building new models in here particularly in the rental services, and so takes a little while for that to nature. So we're pleased with the progress and still a lot of heavy lifting to do there, but team did a nice job in Q4.
[Operator Instructions] We'll now move to our next question from Maxim Sytchev from National Bank Financial.
I just wanted to follow-up on the noncash working capital. I'm not sure if you addressed this question, I jumped on the line a little bit later. So Paul, how should we think about it in 2019? Is it going to be normalizing from that $236 million level, just any color there?
It should be continuing through 2019.
To the same quantum?
Depends on seasonality of timing and purchases, but roughly, yes.
And do you mind just explaining a little bit in terms of what's going on there? Why has it been such a big step up as a positive contribution?
I already addressed that in a previous question, but basically, it's broadly based on suppliers and their demand for investment in this business.
Okay. And then in terms of -- I'm -- obviously, appreciate the fact that you disclosed net income contribution from legacy Hewitt. In terms of -- I don't know if you can quantify it, but in terms of converging the margins between legacy QM and legacy Toromont operations, are we halfway there or 60% there, just any color on the EBITDA that maybe you can comment?
Well, it's not -- we've been clear from the outset that our goal is not to align emergence here. We're focused on operating disciplines, and we're focused on good profitable growth at the top line and the bottom line basis. So we continue to see improvements on that front. We've had some opportunities with respect to increase in contributions from product support that it certainly assisted us. Mix really can have an impact on that profitability element. So I'll be reticent to want to say in terms of which period we're currently in.
We're very focused on the market penetration in QM over the long term. And so that's a key strategic area, both in all segments, including the rental services.
Okay. So -- but it's fair to say that we are still, let's call it, in the early-ish innings of that transition/improvement/best practices transfer and so forth?
Yes, I don't know what inning we're in, but all I know is we were pleased with the progress over the last 12 months. We're marching with our plan and I believe, the team executed fairly well last year and we'll continue on that -- with that mantra going into '19.
[Operator Instructions] And it appears we have no further questions in the queue. So I'll turn the conference back for any additional remarks to our host, Mr. Jewer. Thank you, sir.
Thank you, operator, and thanks to everyone for your participation today. That concludes our call. Have a great day.
Ladies and gentlemen, that now concludes today's conference call. Thank you for your participation. You may now disconnect.