Toromont Industries Ltd. (TMTNF) CEO Scott Medhurst on Q2 2018 Results - Earnings Call Transcript

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About: Toromont Industries Ltd. (TMTNF)
by: SA Transcripts

Toromont Industries Ltd. (OTCPK:TMTNF) Q2 2018 Results Earnings Conference Call July 25, 2018 8:00 AM ET

Executives

Paul Jewer - EVP & CFO

Scott Medhurst - President & CEO

Analysts

Jacob Bout - CIBC

Cherilyn Radbourne - TD Securities

Yuri Lynk - Canaccord Genuity

Derek Spronck - RBC

Michael Doumet - Deutsche Bank

Devin Dodge - BMO Capital Markets

Ben Cherniavsky - Raymond James

Maxim Sytchev - NBF

Operator

Good morning. Today is July 25, 2018. Welcome to the Toromont to announce the Second Quarter 2018 Results Conference Call. Please be advised that this call is being recorded. Your host for today will be Mr. Paul R. Jewer. Please go ahead, Mr. Jewer.

Paul Jewer

Thank you, Marie, and good morning, everyone. Thank you for joining us today to discuss the results of Toromont Industries Limited for the second quarter 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 or 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, please refer to Toromont’s press release from yesterday, which is available on our website.

We assume you've had an opportunity to review our press release from yesterday and, as such, we’ll focus on the key highlights. Scott will begin with a few remarks, some comments on our outlook, and an update on the integration, after which I’ll review the operating group results and financial position. Then we’ll be more than happy to answer your questions. Scott?

Scott Medhurst

Thank you, Paul, and good morning, everyone.

The company delivered solid results in the second quarter on organic growth at the legacy operations together with a growing contribution from the acquired businesses. We are still in the early days of realizing the growth that opportunities presented by the substantially expanded business, and we are pleased with the progress so far.

Revenues at our legacy businesses increased 15% in the quarter and 11% year-to-date while Toromont QM contributed 348.7 million in the quarter and 590.1 million year-to-date. Net earnings were up 67% in the quarter and 46% year-to-date on a year-over-year comparable basis. Net earnings at the legacy businesses grew 32% in the quarter and 27% year-to-date.

In the Equipment Group, the expansion of our territories to include Québec in the Maritimes is expected to be transformative to the long-term performance of our company. Effective execution will be required to realize on the significant potential of the combined presence in key Canadian economic sectors and the growing rental services market.

Infrastructure projects and a broader construction activity continued to present opportunities and the long-term outlook remains positive across most territories.

The parts and service business continues to provide a measure of stability and opportunity for further growth. Our shops remain busy, and we continue to hire technicians in anticipation of an increase in demand.

In the mining space, we have experienced good growth and product support so far 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.

On the integration front, we continue to work through an orderly approach that I described during our last call. I'm pleased to report the following developments during the second quarter. There was heightened focus on improving safety practices, customer experience, operational excellence processes, and market coverage and position. Complementing these initiatives was the introduction of key strategic organizational goals helping align the new enterprise.

Deployment of capital investments was strategic and broad-based including uploads to the rental fleets, parts inventory optimization, and upgrades and enhancements to facilities, IT infrastructure, and service vehicles.

Toromont QM embraced the pursuit of growth, experiencing increased revenues as a result. The team has been encouraged by the business with new customers through the sale of GCI and BCP products and accelerated growth in our component rebuild centers.

There has been considerable focus on increasing the QM technician headcounts, and traction has taken place in the first half of the year. We continue to actively pursue various avenues to track the hiring of technicians and other key revenue producing positions.

The rollout of our Battlefield for rental services model continued with the integration of broader product lines taking hold. The footprint has already begun to expand, positioning the business to provide products and services over the full 12-month cycle to our clients.

This business model takes time to reach full potential, but the initial phases of capital infrastructure investment have begun. Undoubtedly, much work remains and we continue to ask our people for patience and support as we continue our journey. Our backlogs are solid. Our shops are busy. And thanks to the effort of our people, we are focused on building a strong sustainable platform with the goal of leading in the markets we serve.

Over at CIMCO, weaker project execution in the U.S. dampened the year-over-year bottom line comparison. However, Canada continued the strong performance. Across our organization, recent tariff increases have not had an immediate direct impact on our business. However, it is expected the cost increases could ensue as tariff changes work through the supply chain and as suppliers deal with less predictable environments.

Overall, the diversity of markets in the new and significantly expanded territory, a strong management group, and solid financial underpinning provide substantial opportunities for continued success over the long term.

I will now turn the call over to Paul to take you through the highlights of the financial results. Paul?

Paul Jewer

Thanks Scott.

Let's look at the operating results in more detail starting with the Equipment Group. Toromont QM’s total revenue contributions that Scott mentioned earlier represented a 19% increase in revenues generated from both periods last year under the former ownership.

For legacy businesses, total revenues increased 15% in the quarter and 10% year-to-date with higher total equipment sales, rentals and product support.

New equipment sales in the legacy businesses increased 19% in the quarter and 17% year-to-date. Sales in the construction markets were up in both the quarter and year-to-date with good growth reported across most of the territory. Mining sales were relatively unchanged in the quarter and down 2% year-to-date.

Power system sales decreased 6% in the quarter and 14% year-to-date from the record levels generated last year, mainly on softer demand for electrical power generator sets.

In Manitoba, agricultural sales grew 56% in the quarter and were up 16% for the year. Used equipment sales increased 1% in the quarter, but were down 16% year-to-date following a slow start to the year. Sourcing used gears has been challenging with U.S. buyers pursuing these inventories given the weaker Canadian dollar.

Total new and used equipment sales at Toromont QM were up 28% in the quarter and 21% year-to-date driven by strong new equipment sales, while used equipment sales remained relatively unchanged.

Rental revenues in the legacy businesses increased 16% in the quarter and 14% year-to-date. All areas of the rental businesses reported good growth in the quarter on improved utilization. On a year-to-date basis with the exception of heavy rents, all lines were up.

At Toromont QM, rental revenues increased 25% in the quarter and 17% year-to-date, approximately two-thirds of which were generated from the light equipment fleet and lift trucks. At the end of June 2018, our net investment in the rental fleets was $522.1 million. During the quarter, we invested $63.5 million into the rental fleets, net of dispositions, which is $24.7 million higher than last year.

Product support revenues of the legacy businesses increased 15% in the quarter and 11% year-to-date with growth on both parts and service across most market segments. At Toromont QM, product support revenues increased 8% in the quarter and 12% year-to-date.

Gross profit margins increased 110 basis points in the quarter and 100 basis points year-to-date buoyed by improved margins across most revenue streams at the legacy businesses. Despite revenue margin improvements at Toromont QM versus a year ago, the margin gap still had a dilutive impact of approximately 40 basis points in the quarter and 50 basis points year-to-date.

Selling and administrative expenses increased mainly due to the expenses related to the acquired operations and certain integration-related costs. Excluding these, expense ratio was 80 basis points lower in the quarter and 30 basis points lower year-to-date.

Operating income increased 43.9 million in the quarter and 54.7 million year-to-date. Toromont QM contributed 24.9 million in the quarter and CAD 30.8 million net of integration-related costs. At the legacy businesses, operating income increased 38% in the quarter and 28% year-to-date, which translates to an increase in operating income margin of 220 basis points in the quarter and 180 basis points on a year-to-date basis.

Bookings increased in the quarter and year-to-date on the incremental orders at Toromont QM. Bookings at the legacy businesses were comparable in the quarters, building a large mining order in the second quarter of last year.

Year-to-date, legacy orders were up across all market segments except mining. Backlogs increased to 407 million including 175 million at Toromont QM, most of which is expected to be delivered over the remainder of this year.

Let's turn now to CIMCO where revenues increased 20% in both the quarter and year-to-date on strong package sales growth in Canada and the U.S. In Canada, all regions, except Atlantic Canada, reported growth in the quarter and year-to-date on higher industrial activity, while recreational levels were somewhat softer. In the U.S., the same market trends were experienced in both the quarter and year-to-date.

Product support revenues increased 2% in the quarter but were down 1% year-to-date. There is an inverse correlation between package sales and product support as increased package sales draw unlimited technician availability to facilitate installation and start-up.

Margins decreased 540 basis points in the quarter and 480 basis points year-to-date. Package margins were lower against the tough prior competitor which included good project close-outs and favorable one-time adjustments not repeated.

Additionally, weaker project execution on two projects in the U.S. and higher warranty costs further pressured margins downward. Higher product support margins in the quarter and year-to-date served to partially offset the lower package margins and an unfavorable sales mix of product support revenues to total revenues.

Selling and administrative expenses were relatively unchanged from both the quarter and year-to-date but 230 basis points and 310 basis points lower respectively as a percentage of revenues. Operating income decreased 23% in the quarter and 9% year-to-date.

Bookings were down 15% in the quarter and 10% year-to-date. In Canada, bookings were down 19% in the quarter and 4% year-to-date. While at the U.S., bookings increased 31% in the quarter but were down 35% on a year-to-date basis.

Backlogs of 163 million were lower than the record set last year, but still significantly higher than the previous five-year average. Approximately three quarters of the backlog is expected to be delivered over the remainder of this year. On a consolidated basis, basic EPS increased $0.31 in the quarter to $0.83 and were up $0.35 for the year to a $1.21. On a comparable basis year-over-year, this translates to a 31% increase in the quarter and 26% for the year.

As Scott pointed out earlier, we are pleased with the results from both the legacy and acquired businesses and remain focused on a long runway for growth. At June 30, our overall financial position remain strong. We ended the quarter with cash of 280 million, with a net debt to total capitalization ratio of just 28%.

That concludes our prepared remarks and we’ll be pleased no now take your questions. Marie?

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Jacob Bout from CIBC. Please go ahead. Your line is now open.

Jacob Bout

I think just starting off here, just comment on the sustainability of the revenue growth that you saw to Toromont Q1?

Scott Medhurst

Well, sustainability to us really is just focused on this continuous improvement. This is a long-term journey particularly with our integration right now. We were fortunate with some timing of business in the quarter relating to some movement from Q1 and the Q2. If you recall, we talked about Q1 a bit. And so we saw some deals moved into Q2.

We had very strong new RPO rental purchase conversions. The timing of our rebuilds was excellent for the quarter. But we really continue to focus on the long-term gains here and our performance over the long term.

Paul Jewer

So I think, Jacob, as we constantly point to folks, it wouldn’t be prudent to just take the quarter and extrapolate off of a quarter and obviously we’re focused on the long-term trends. And this thing won’t be linear on a quarter-over-quarter basis. So we’re absolutely confident in terms of value that we’ll be creating over the long term for our long-term shareholders and we’re pleased with the results that we’ve achieved so far this year.

Jacob Bout

Are you expecting to see a divergence in revenue growth in QM versus the legacy business?

Paul Jewer

Let’s see how that unfolds. I mean it really comes out to end markets and timing of projects and how that taps our demand.

Jacob Bout

Can you give any color on the performance of backlog and bookings year-on-year for Toromont QM?

Paul Jewer

We can’t really because the former organization really didn’t track backlog and bookings in the same way that we do. So we certainly can’t comment on the numbers that they would have generated. But certainly business levels will be broadly, but we’re pleased with the progress so far.

Jacob Bout

Maybe last question here. So you talked a bit about tariffs and possibly you’re having some impact in the second half of the year. How do you prepare for that and what are some of the consequences do you see coming down the pipe?

Scott Medhurst

Well, what we’ve seen so far is minimal impact both from behaviors and suppliers, as well as customer behaviors. So that’s what we’ve seen so far. However, when you look at the environment with steel, aluminum, the results of tariff change could impact our pricing. So we’re monitoring that closely and working with our supply chain on that to ensure we understand it fully.

Operator

We have a question from Cherilyn Radbourne from TD Securities. Please go ahead. Your line is now open.

Cherilyn Radbourne

I wanted to start by asking about the margin improvement that you saw in the legacy equipment group which seemed to have been quite broad-based against all types of business. Can you just comment on to what extent that was driven by what I’ll call market factors versus sort of internal initiative?

Scott Medhurst

I think it’s a combination of both. Certainly, we are focused really - tried to take hold in the quarter on operational excellence initiatives. We’re very focused on working with the teams on that front.

We also were very fortunate with some of the business activities obviously in new sales and product support which was we are pleased with that progress, and we started to see some progress in our rebuilt shops as well.

The timing of some of that rebuild work was favorable, both at the legacy and the QM businesses. Our rebuild activity for components and prime product was up significantly in the quarter.

Cherilyn Radbourne

And then, just shifting to the rental business, clearly, time utilization, I think, has been the driver of improvement for some time, and we’ve seen rates under pressure. Is there any sign that you're starting to kind of get lift on rental rates?

Scott Medhurst

Not at this point, Cherilyn. So we continue to see pressure in the quarter. Rate has been marginally down on a year-over-year basis in the light equipment rental plates. But as you said, the utilization was very encouraging in the quarter.

Paul Jewer

On larger plates.

Scott Medhurst

On larger plates, yes.

Cherilyn Radbourne

And can you update us on your progress just with respect to the rollout of the rental model at Toromont QM?

Paul Jewer

So in Q2, we really tried to move forward on some of those initiatives to bring in full rent services models into the QM businesses. So we've invested, broadened those product lines. And as you know, Cherilyn, this business philosophy takes time to take hold in terms of returns.

So, the investments are starting to take hold. We’re really focused on broadening our footprint as well. And so we’re encouraged. We’re moving forward on this front, but it will take time before you can really capture the full maturity of that business model. So it’s going to be a longer process, but we’re committed to it.

Cherilyn Radbourne

And in terms of the additions that you’ve been making to the rental fleet in that territory, are those largely on the lighter end of the spectrum?

Paul Jewer

Right now, I’d say it’s more weighted to the lighter. But still we are building on the heavy as well. That’s the focal point. What we've had to do in the quarter was our disposition was down because we’re holding on to these fleets due to the activity and due to the timing of uploads.

Operator

Our next question is from Yuri Lynk of Canaccord Genuity. Please go ahead.

Yuri Lynk

Just on the cash flow statement, what's driving the big inflow of non-cash working capital to around $195 million year-to-date, and would you hazard a guess as to where that number might end the year?

Paul Jewer

Also, referred to in the MD&A, basically we worked through a number of different factors as it relates to non-cash working capital and one of the factors is certainly related to various supplier terms. And it’s been a factor that we’re dealing with.

Yuri Lynk

And so this would be kind of the low hanging fruit on those initiatives and I mean, that’d probably not going to continue throughout the rest of the year, right?

Paul Jewer

We’d certainly expect that will continue through the year.

Yuri Lynk

I just want to go back on the legacy equipment group margin question. I wasn’t exactly clear how much of it was – I mean, mix looked neutral compared to last year when I look at product support and rental as a proportion of sales. So anymore color you can provide us to the sustainability of some of the changes you’ve made, anything special that might have boosted the margin in the quarter in the legacy group because it was a substantial step-up sequentially and year-on-year?

Paul Jewer

So before I turn it over to Scott just for broader discussion, just one point, you referred to mix but there’s also utilizations are more attractive, right? So certainly, improved utilization of rental fleets certainly contributed to those margins. Scott, anything to add?

Scott Medhurst

Yes. That was a key and as well as we have some uptick in legacy on the new rental conversions and as well as the rebuild closure of jobs was attributable in the quarter. So, some of those factors do increase. We even saw some improvement on the used purchase revenue streams which was helpful as well as the used trade revenue streams as well. That was an increase on a year-over-year basis.

Operator

Our next question is from Derek Spronck of RBC. Please go ahead.

Derek Spronck

Just on the hiring of additional technicians and front-end staff, should we expect a little bit higher SG&A as a percent of revenue in the back half of the year as - until those new hires kind of get rationalized into the business?

Paul Jewer

Well, just what we’re focused on is the hiring of revenue-producing positions. That’s our key point there in terms of our model that we want to create. There is a cost associated with that as you integrate. And the other thing that we have to be attentive to is we are investing in those rental fleets and that takes time before it comes to full maturity and you’re really reaching the full potential of that model.

Derek Spronck

I think you stated that QM was a 40-basis-point drag to margins for the quarter. Is that generally the drag that we should anticipate over the next two quarters, or could it be a little bit lumpy, I guess, depending on the revenue growth there?

Paul Jewer

So certainly, as I said earlier, meaning you cannot - and as I consistently say, we don’t extrapolate off a quarter, right? So this is not going to be linear as we continue to implement processes and seek opportunities for the complete integration of these two businesses. So I certainly wouldn’t take a quarter. I’d roll it, the closer you can get to a year is better.

Derek Spronck

Do you think you can eventually achieve the margin profile that you had in the legacy business overtime? And just finally, from a comparable perspective, has QM or the Hewitt group, have they embraced the change and culturally, how has that - the integration process has gone so far from a cultural perspective?

Paul Jewer

So far, we’re pleased. A lot of work remains in there. Obviously, we’re building a new team, and it takes time. But we’re working towards that and it’s all about continuous improvement right now and it’s – again, I know there’s focus on the margins. But it’s also both ensuring we’re building a platform for growth – sustainable growth.

And that’s what we’re really focused on with the team as we embrace these opportunities and making sure we have the right infrastructure and we’re allocating the capital appropriately. That’s where the focus is, and we’re very pleased at how the team is embracing these initiatives.

Derek Spronck

Relative to your expectations coming into the - after buying Hewitt, has the integration and the overall platform relative to your prior expectations – how would you comment on that in terms of - is it tracking better than you anticipated, kind of where you expect it?

Paul Jewer

We’re satisfied with the integration so far. And we've got a lot of initiatives on the plate on all aspect from safety to the customer experience, from the operational perspective, how we’re deploying capital. It’s all about the pursuit of growth here and making sure we have the right infrastructure. So I would say we’re satisfied with the progress so far.

Operator

Our next question is from Michael Doumet of Deutsche Bank. Please go ahead.

Michael Doumet

So on the gross margins, just want to follow up on that, the legacy equipment business; again, nice expansion; no real benefits from mix. Any way you guys can break the gross margin expansion, say into buckets; new equipments, rentals and products? I just want to get a sense for the magnitude of the improvement from each of the businesses.

Scott Medhurst

We wouldn’t be prepared to part it to that level, Michael. Maybe just - we would say that the development that we saw certainly was broad-based.

Michael Doumet

Is there any way you can rank them, Paul? I mean, did the improvement come from one of the businesses in particular?

Paul Jewer

Yes. It was pretty even actually across the business.

Michael Doumet

And maybe on the rental margin, any way you can provide some historical context? Just wondering if there’s a potential decent margin recovery story there just given the rental rates and the trend there.

Paul Jewer

Well, the key on the rental was the utilization in the quarter. And then we realized it both on the heavy, the light and the power. We saw all areas improving on the utilization which certainly helps.

Scott Medhurst

So certainly, from a financial utilization perspective, we are down a bit from where we were a couple of years ago. And that’s largely a great pressure but it’s also some cost inputs. As you think about rental, I mean, think of it like a hotel room - managing a hotel room. And if you get an additional night rental, then obviously that flows the margins. So clearly improve utilization rental fleets is a margin expansion opportunity.

Paul Jewer

But that takes time as well, Michael. And that’s what – we’re ramping up our fleets. Doing it orderly but we do want to upload these fleets. It’s taking time to upload them and you have to make sure you have the right infrastructure, and then it takes time to realize the gains and as you interface with your customer base.

Michael Doumet

Here’s another analogy, think of rentals as being planting an orchard not a wheat field. Part of the profitability in terms of total rental fleet is keeping the fleets for the right duration and then selling it at the right time, right. So the gross margin on this position of rental fees is important part of the profitability of that total model and that’s what takes a number of years to work at…

Scott Medhurst

It’s going to take time.

Michael Doumet

No. Appreciate those comments. Thanks. And maybe just turning it to a comment made last quarter as it relates to slippage and some orders being pushed out related to extended lead times. Can you comment on whether you saw an improvement as it relates to lead times? And maybe secondly any thoughts, on whether the expectations for higher equipment prices due to higher steel prices may have pulled demand forward in the quarter?

Scott Medhurst

Well, we can’t speculate because we don’t have enough substance just yet. What we saw in the quarter was minimal impact. However, there’s these tariffs could equate to increases in prices and we’re monitoring it closely, but that’s all we understand so far. Okay.

Michael Doumet

And on lead times, any sense of if that's getting better?

Scott Medhurst

That’s rig fluid right now. We’re monitoring that closely that explains some of our reasoning behind holding on to our fleets and the disposition was down in the first half because these delivery times are moving right now, and we’re monitoring it closely. The ability is a focal point.

Operator

Our next question is from Devin Dodge of BMO Capital Markets. Please go ahead.

Devin Dodge

Just to go back on the pricing. So I’d some recent investor events, cad management Appear to be putting a greater emphasis on pushing through prices to offset some of the cost inflation that is either has experienced or expect to experience. I guess from your perspective, it’s been a bit more aggressive in pushing through maybe your price hikes, and do you think your markets are strong enough to absorb these price increases?

Scott Medhurst

What we do is we focus on the total value proposition and how we’re positioning our equipment and services. We've dealt with these things before. And these variables, I don’t think there's anything out of the ordinary. We’re all working on efficiencies to make sure we compete effectively with our customers.

Devin Dodge

And can you provide some color on your plans for the material handling business? I'm just trying to get a sense for this business is performing, how the margins compare to the overall equipment group and what's your focusing on to drive improvement?

Scott Medhurst

So, there's a lot of fundamentals in play there. We did see progress in the quarter. Sales were up. Where we’re focused there is on our market coverage or sales coverage particularly in the Ontario market and to look at your product support as a percentage. So we’re really focused on the fundamentals of that business, and there's great growth opportunities in there.

Paul Jewer

And historically as we've commented in the past, this business does not have the same sort of profitability profile as the balance of the business. One of the things that we’re heavily focused on right now in terms of looking at that business is to manage it in much the way that Toromont manages its other business unit.

So we’re looking at separating it, bringing the various components of the predecessor businesses together under a common leadership and the common IT platforms, and running it as a totally separate entity with targets that are autonomous to that I believe.

So we've achieved great success in our rental services business with that strategy. We’ll have to see how that unfolds in material handling.

Scott Medhurst

And that’s another strategic area that we’re looking at is the rental side of that business. We’re isolating it and we believe there could be opportunities there. But we want to understand it first, get the process in place before we’d start to allocate capital.

Operator

Our next question is from Ben Cherniavsky from Raymond James. Please go ahead. Your line is now open.

Ben Cherniavsky

Any further comments you can make on CIMCO and the margins that boost out this quarter, I think last quarter as well, were a little softer. I realize it’s a lumpy business. But I think it’s two quarters in a row now where you sort of called out the U.S. And I know that’s also been a big focus of the growth opportunity there. So anything we can read into that?

Paul Jewer

It can be a lumpy business. But as you pointed out and as you clearly understand, that was a great report that you did last year on the industry. The large part comes down to project execution, right?

So when you look at project execution, we did have some challenges that we encountered both in the first quarter and second quarter on a number of projects. I did spend some time in the U.S. visiting our mobile operations about a month or so ago to better understand it. I think we’ve made some improvements in terms of both how we’re monitoring the projects and how we’re managing the projects. So I’m hopeful on a go-forward more basis but it’s something that we need to continually monitor and manage.

Scott Medhurst

I’ll put a little more color. We’re not pleased with what's the trend started to develop in there in terms of our deal structure - our processes relating to estimating. And so we’re doing a full estimating. And so we’re doing a full review with the team and we've got to quickly identify these root causes and address them.

Ben Cherniavsky

I know we've talked a little bit about this offline. But just perhaps to make it a little clear. Is this in any way a reflection of maybe a strategy of trying to establish a foothold in the market where basically you compete on price to win some projects and prove your platform? Or is this really just missed execution on specific projects that were - should have been bidded or should have been executed higher margin?

Paul Jewer

Unfortunately, it’s a lot of factor, Ben.

Ben Cherniavsky

Okay.

Scott Medhurst

Business fundamentals. Yes.

Ben Cherniavsky

Yes. But would you consider the former strategy as a way to get some more scale in the market?

Scott Medhurst

We continue to be focused on improving our penetration in industrial markets, and we certainly sharpen our pencils on that front. We're bidding aggressively to pursue those markets.

Ben Cherniavsky

And just also on rental. Again, something I think we've discussed in the past but maybe you can give us a little update on CapEx. What we might expect for this year and anything really into next year or beyond because obviously that’s a big focus for you guys in Québec. In particular, it’s a big change in the strategy for rental. So have you got any foot or clarity on what it might cost you to get where you want to be with that opportunity?

Paul Jewer

We certainly don't have this number in terms of what the opportunity is, but we are certainly investing aggressively in our Québec and Maritimes operations. I’d say we would invest about $40 million in QM so far this year. So that’s a fairly substantial.

Now, we’re probably looking at somewhere in the order of 65-or-something-million just there alone this year, so as supposed to, that would increase rental from roughly 70 million last year to somewhere 135 million, 140 million this year. It really depends upon the opportunities as we roll out that platform.

We’re quite pleased with how that platform has rolled out. We’re probably a little bit ahead in terms of the integration of those business units as compared to the integration of other business units.

Scott Medhurst

The other thing impacting this is the retail side - advanced signals from retail. So we’re monitoring that closely. So we are shifting a bit relative to those signals we’re getting in – from the customer base.

Ben Cherniavsky

And sorry, Paul, those numbers on rental, you quoted those are - sorry, the numbers on Québec that you quoted, those are just for rent for the rental fleet?

Paul Jewer

That’s just rental fleet.

Ben Cherniavsky

And is that net or gross CapEx?

Paul Jewer

That’s net CapEx.

Ben Cherniavsky

Yes.

Scott Medhurst

And the latter that are referred to in terms of the total expectation for the year would be total rental across the whole business.

Ben Cherniavsky

Total net rental for all of your equipment group?

Paul Jewer

All of equipment group. So somewhere in the 130 million, 140 million range. In Québec, it could be somewhere in the 60 million to 70 range.

Operator

[Operator Instructions] We have a question from Maxim Sytchev of NBF. Please go ahead. Your line is now open.

Maxim Sytchev

So now that you obviously have your feet wet in Québec for a couple of quarters, is there anything structural in the rental market in that geography specifically that would prevent the same level of penetration as you have with Battlefield in Ontario? Just besides the obvious duration of presence, but is there anything structural in the market that’s different?

Scott Medhurst

No. Fundamentals are there. It’s just we’re creating new business models. So it’s going to take time.

Maxim Sytchev

And then I think when you were looking at the acquisition originally, potential sharing their rebuild volumes between Ontario and Quebec, can you comment on some of the progress for that initiative, what’s going on there?

Scott Medhurst

Very early stage but starting to leverage that and that is the next phase where we start to look at these items like rebuild centers and how we can maximize capacity as well as expertise.

Maxim Sytchev

And so right now, I mean, across the entire platform, so is Ontario overutilized, Quebec is underutilized and you’re trying to figure out what’s - how to better manage that, is that an accurate assessment?

Scott Medhurst

I wouldn’t look at it as underutilized anywhere or overutilized. I’d look at it as we’re looking at it strategically of maximizing and improving on all fronts with the resources we have and that certainly staged in that assessment.

We have been moving resources around, mid the demand signals, particularly in QM and so that’s how we’re starting to leverage as a team now, Eastern Canada and Central Canada team.

Operator

Thank you. There are no further question registered at this time. I would like to turn back the meeting over to Mr. Jewer.

Paul Jewer

Thank you, Marie and thanks, everyone for their participation today. That concludes our call. Have a great day.

Operator

Thank you, Mr. Jewer. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.