Toromont Industries Ltd (OTCPK:TMTNF) Q3 2022 Results Conference Call November 2, 2022 8:00 AM ET
Company Participants
Scott Medhurst – CEO
Michael McMillan – CFO
Conference Call Participants
Jacob Bout – CIBC
Michael Doumet – Scotiabank
Yuri Lynk – Canaccord Genuity
Bryan Fast – Raymond James
Sabahat Khan – RBC Capital Markets
Maxim Sytchev – National Bank Financial
Operator
Good morning, ladies and gentlemen. Today is Wednesday, November 2nd, 2022, and I would like to welcome you all to the Toromont Industries Third Quarter 2022 Results Conference Call. Please be advised that this call is being recorded. [Operator Instructions]
Your host for today will be Mr. Michael McMillan, Executive Vice President and Chief Financial Officer. Please go ahead, Mr. McMillan.
Michael McMillan
Great. Thank you very much, Michelle. Good morning, everyone. Thank you for joining us today to discuss Toromont’s results for the third quarter and the first 9 months of 2022. On the call with me this morning is Scott Medhurst, President and Chief Executive Officer. Scott and I will be referring to the presentation that is available on our website. To start, I’d like to refer our listeners to Slide 2, which contains our advisory regarding forward-looking information and statements. After our prepared remarks, we’ll be more than happy to answer some questions.
So let’s get started. We can move to Slide 3, and Scott will start us off.
Scott Medhurst
Thank you, Mike, and good morning, everyone. Team delivered solid operating and financial performance in the third quarter. Persistent supply constraint pressures, market and economic variables continue to contribute to a fluid and complex operating environment. Equipment Group reported good utilization activity in rental and positive product support demand, while uncertainties persist in timing of equipment and parts deliveries. CIMCO revenues improved in the quarter on project construction and higher product support activity. Across our organization, our team remains committed to the disciplined execution of our operational model, adapting to changes in the business environment while remaining focused on executing customer deliverables and solutions as we manage through these uncertain conditions.
The company implemented a revised employee compensation, long-term incentive program during the quarter, introducing performance share units, restricted share units and equity settled deferred share units. The program continues to encourage employee share ownership and now also adds performance metrics, namely ROCE and relative TSR. We are proud of our culture of performance and ownership, and we believe these changes will continue to motivate our team to drive long-term sustainable and industry-leading results.
Turning now to our financial results highlighted on Slide 4. The company delivered strong bottom line results in the third quarter and first 9 months of 2022, reflecting a favorable sales mix, higher rentals and product support revenues, total revenues, improved gross margins and lower net interest costs. Rental and Product support revenues increased in both the quarter and year-to-date on good market activity. Equipment revenues increased in the quarter after a slow start to the year. As mentioned, we continue to be challenged by the ongoing supply constraints and general macroeconomic factors such as inflation, interest rate changes and lingering pandemic concerns. Backlogs were $1.4 billion at quarter end, up 31% versus Q3 2021 with increases in both the Equipment Group and CIMCO. Backlogs are supportive and reflects strong order activity over the past year, coupled with ongoing supply chain constraints.
On a consolidated basis, revenues increased 14% in the quarter and were up 5% on a year-to-date basis. Equipment and package sales were up 11% compared to the prior year with good increases in both groups. Year-to-date, equipment sales were down 5%. Both groups continue to experience delays in deliveries and construction project schedules due to supply chain constraints in the current year. Product support and rental revenues increased in both the quarter and on a year-to-date basis. Product support increased on stronger demand and technician availability with work in process levels remaining high, while rental revenues increased on a larger fleet and higher utilization. Operating income was up 26% in both the quarter and year-to-date on higher revenues and improved gross margins in part due to a favorable sales mix with a higher percentage of rentals and product support revenues to total revenues.
Expense levels increased slightly to 12.9% of revenue year-to-date, reflecting some planned increase in spend to support higher activity in staffing levels as well as inflationary pressures. Defence management continues to be an area of focus and discipline given the economic environment. Net earnings increased 31% in the quarter and 30% year-to-date versus 2021. Basic earnings per share increased to $1.15 in the quarter, $3.57 for the year-to-date basis.
We are proud of our team as they remain committed to a disciplined execution of our diverse operational model, adapting to changes in the business environment while remaining focused on executing the customer deliverables. Activity remains sound with healthy backlog levels supportive of future results, but supply chain challenges do persist. Product availability, including prime product, components, parts continue to be tight, resulting in shifts and delays in schedules. Endemic challenges are persisting while we continue to measure inflationary pressures, ongoing interest rate changes, price increases from suppliers, other global economic and geopolitical factors and supply-demand dynamics as the economic environment continues to evolve and change.
Technician hiring remains a priority to support our aftermarket and value-add product and service offerings in order to meet and exceed client needs. Collective of product support outcomes, progress has been made on the skilled labor hiring front as we continue to focus on our people strategies, including recruitment and retention. The diversity of our geographic landscape and market served, extensive product and service offerings, technology investments and financial strength, together with our disciplined operating culture continue to position us well for the long term.
Mike, I’ll turn it over to you for some more detailed comments on the group results.
Michael McMillan
Thanks, Scott. Let’s start with the Equipment Group on Slide 5. Revenues were up 14% in the quarter and 6% year-to-date. Taken together, total new and used equipment sales were up 10% in the quarter and lower 3% year-to-date. New equipment sales increased 13% in the quarter on good deliveries in the mining, power systems and agricultural markets, while ongoing inventory supply constraints continue to dampen deliveries in the construction and material handling markets. Year-to-date, new equipment sales decreased 3%, reflecting the slower start to the year, again, primarily due to supply chain constraints. Used equipment sales decreased 3% in the quarter and remained flat year-to-date, mainly due to lower fleet dispositions.
Also, one should keep in mind used equipment demand has been relatively strong given the availability constraints and economic conditions during the pandemic time frame. In the quarter, total new and used equipment sales increased 22% in mining, 48% in Power Systems, 28% in our agricultural market, while being lower in both construction markets by 1% and Material Handling by 8%. Rental revenues were up 13% in the quarter and 19% year-to-date.
All markets in most regions were up, reflecting improved utilization on solid market activity. In terms of the quarter and on a year-to-date basis, light equipment rentals were up 14% and 19%, respectively, and heavy equipment rentals were up 12% and 13%, respectively. In the same manner, Power rentals were up 18% and 28%. Material Handling rentals were up 2% and 11% for the quarter and year-to-date, respectively. The RPO fleet was at $38.7 million versus $37.3 million a year ago, reflecting slightly higher demand, however, continuing to trend below pre-pandemic levels. Product support revenues grew 20% in the quarter and 14% on a year-to-date basis with increases in both parts and service revenues across all markets and most regions. Likewise, on a quarter-to-date and year-to-date basis, activity within construction markets was up 23% and 17%, Mining was up 22% and 15%. Material Handling was up 13% and 8%, Power Systems up 5% and 2%, and agricultural activity was up 31% and 4%, again on a quarter-to-date and year-to-date basis, respectively.
Gross profit margins increased 130 basis points in the quarter and 230 basis points year-to-date compared to last year, largely driven by higher rental and product support margins, coupled with a favorable sales mix, which has higher product support and rental revenues to total revenues. Rental margins were up 80 basis points for the quarter and 90 basis points year-to-date, reflecting improved activity and fleet utilization. Product support margins increased 60 bps in the quarter and 10 bps year-to-date, reflecting supply chain challenges, inflationary factors and pandemic impacts. New and used equipment margins were down 60 basis points in the quarter and were up 40 basis points year-to-date, largely reflecting sales mix.
Selling and administrative expenses were up $14.7 million or 13% in the quarter and were up $22.7 million or 7% for the first 9 months of 2022. Compensation costs were higher in both periods, reflecting staffing levels, regular salary increases and increased profit-sharing accruals on the higher income. Other expenses such as training and travel and occupancy costs have increased in light of activity levels and inflationary effects. Bad debt expense increased $3.6 million in the quarter and $3.1 million on a year-to-date basis, mainly due to an increase in receivables. Selling and administrative expenses were 12.6% as a percentage of revenues, up slightly from 12.5% last year. Operating income increased 26% for both the quarter and year-to-date, mainly reflecting the higher revenues and gross margin improvements, partially offset by higher expenses.
Bookings decreased 29% in the quarter and 28% year-to-date. Construction and mining bookings were down 19% and 71%, respectively, in the quarter, reflecting a strong prior year comparable that included several large orders. Power Systems bookings were down 27% and, along with agriculture, lower 13%. Backlogs of $1.2 billion were 31% higher than this time last year across all sectors. Approximately 40% of which are currently expected to be delivered this year and subject to timing differences depending on vendor supply, customer activity and delivery schedules.
Now let’s turn to CIMCO on Slide 6. Revenues were up 14% in the quarter. However, we’re lower 6% year-to-date on a tough comparable last year, coupled with ongoing supply chain challenges. Package revenues increased 19% in the quarter on the advancement of construction projects, largely reflecting an increase in both industrial and recreational activity in Canada. U.S. activity was lower in the quarter, however, it does vary due to the smaller base. On a year-to-date basis, package revenues were 23% lower than last year since 2021 included several large industrial projects that were underway and made for a tough comparable. Product support revenues improved by 9% in Q3 and 17% year-to-date, with increases in both Canada and the U.S. Activity levels have improved slowly with the easing of pandemic restrictions and a reopening of recreational centers after a prolonged pandemic closure period. The increased technician base continues to support activity levels.
Gross profit margins were unchanged in the quarter versus the comparable period last year as higher package margins were offset by lower product support margins and unfavorable sales mix. On a year-to-date basis, gross profit margins increased 240 basis points versus last year. Good project execution and favorable sales mix more than offset inflationary factors and supply chain constraints.
Selling and administrative expenses were up 9% in the quarter and 4% year-to-date. Bad debt expense increased by $0.5 million in the quarter and $0.9 million year-to-date, mainly due to increased aged receivables. Travel and training expenses increased to support activity and staffing levels. Occupancy costs increased on a year-to-date basis as a result of the relocation of the Canadian head office to Burlington, along with other related branch changes. As a percentage of revenues, selling and administrative expenses were higher at 16.5% for the first 9 months of 2022 versus 14.8% for a similar period last year. Expenditure control measures on discretionary spend remain a key focus area for the CIMCO team.
Operating income was up 26% for the quarter, reflecting higher revenue and lower relative expense levels. Operating income was up 9% year-to-date, reflecting improved gross margins, in part due to sales mix, partially offset by lower package revenues and a higher relative expense level. Bookings were up 50% in the quarter at $72.7 million. Industrial orders were higher in both Canada and the U.S. with general activity improving with the continued easing of pandemic restrictions and improving capital investment. Additionally, recreational orders were slightly higher with higher bookings in Canada, largely offset by lower bookings in the U.S.
On a year-to-date basis, bookings were up 22% at $161.5 million. Industrial orders were higher in both Canada and the U.S. after a slower start to the year. Recreational orders decreased 5% overall, mainly due to decreases in Canada. Backlogs of $202.6 million or 32% higher than this time last year. both recreational and industrial backlog increased, in part reflecting recent order activity and the deferral or delay in construction schedules resulting from supply constraints. We expect approximately 30% of this backlog to be realized as revenue in the year. However, again, this is subject to construction schedules and potential changes [Technical Difficulty] highlights.
Investment in noncash working capital increased 35% versus a year ago, mainly driven by higher accounts receivable and inventory levels, reflective of higher activity levels. As always, our operating teams focus on capital employed and continue to proactively manage working capital to respond to customer requirements, evolving market conditions, activity levels and supply chain challenges. Accounts receivable continued to receive focus. And while DSO improved down 1 day compared with last year, we are closely managing the aging of our receivables.
Inventory levels are higher than prior year, driven by a number of factors, including availability challenges, which hamper delivery timing, with completion with parts availability, coupled with solid demand and inflation. We ended the third quarter with ample liquidity, including cash of $771 million, an additional $465 million available to us under existing credit facilities. Our net debt to total capitalization ratio was at minus 6%. Under our NCIB program, the company purchased and cancelled 473,100 common shares for $48.5 million to date for the year, which is intended to exercise good capital hygiene by mitigating option exercise dilution. This program was also renewed in Q3 for another year.
Overall, our balance sheet remains well positioned to support operational needs, and we are prepared to manage challenges related to the economic variables we are all experiencing. We will continue to exercise the operational and financial discipline one would expect as we evaluate investment opportunities that may develop within this dynamic environment. Pharma targets return on equity of 18% over the business cycle. Return on equity improved to 21.7% on a trailing 12-month basis compared to 19.3% for 2021 and exceeds our 5-year average of 19.8%. The return on capital employed was 30.1%, again on a 12-month trailing basis, up from 25.3% for the comparable period last year. Both metrics reflecting improved earnings and continued capital discipline. And finally, as announced, the Board of Directors yesterday approved the regular quarterly dividend of $0.39 per share payable on January 5, 2023, to shareholders on record on December 8, 2022.
On Slide 8, we continue with some key takeaways as we look forward to Q4 and next year. We expect the business environment to remain challenging with a number of macro and industry factors at play. While industry activity levels have improved as pandemic restrictions have eased in most markets, health of the global supply chain, inflationary pressures, customer credit risk, higher interest rates and other global factors are exerting pressure and presenting challenges that overshadow normal seasonality and patterns. We continue to proactively monitor developments closely, and we are prepared to respond appropriately. We’ll continue to focus on our 3 key priorities: keeping our employees safe, serving our customers and protecting our business for the future. Our backlog levels are supportive, but subject to global supply chain challenges and related delivery schedules.
As Scott mentioned, technician hiring remains a top priority to support our aftermarket and value-added product and service offerings to meet and exceed clients’ needs and build our team for the future. Additionally, operationally and financially, we are well positioned to effectively support our customer requirements and evaluate market opportunities, leveraging our operating disciplines and culture. We appreciate our team’s exceptional effort and commitment to continue to support our customers during this unique and challenging time. 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 some questions. Michelle, over to you, please, to set up the first call.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question will come from Jacob Bout of CIBC.
Jacob Bout
My first question is on bookings. They’re down in third quarter and quarter-on-quarter and down, I think, slightly in second quarter. How concerned are you about this? And what’s the messaging that you’re getting from your customers? Are you seeing any pause, cautiousness at all from them?
Michael McMillan
Yes. Maybe I’ll start, Jacob, it’s Mike. Thanks for the question. I think a couple of things to keep in mind, and we’ve been speaking about this for some time. I think there are so many macroeconomic and business factors in the environment today that are overriding normal seasonality. Like when we look at the bookings in the quarter that certainly are down versus 21′ Q3. We also look back into normal seasonal trends that were pre-pandemic, if you will. And we’re pretty comfortable, I guess, you’d say, on the surface of looking at the bookings as they are in Q3 and the backlog, of course, is quite supportive. That being said, I think we’re in an environment where we have escalating interest rates. We’re all aware of inflationary factors and so forth. And so it’s something that we’re monitoring very carefully. We did also see some improvement in the CIMCO business, which we saw some good order activity and pleased to see that as we lead into the new year.
Scott Medhurst
I’ll just maybe a little more color there, Jacob. As Mike said, I mean, these comps are tough because I think you’re reflective of some of the distorted outcomes since the onset of COVID, we’ve talked about that throughout. But there was some softening in there in the quarter. But overall, that’s a solid booking, I think, on a comparative to pre-COVID. But where we saw some softening in the quarter was in your large construction. That industry was down slightly by 8%. CCE, the very small equipment was also down, but you’re coming off historical levels there in terms of some of the activity levels. So it’s comparisons on a quarter-by-quarter because of what’s been going on due to the COVID situation and how the markets came back. So I think that frames it reasonably well. And you’ve got ops in there that are lumpy. You’ve got your normal lumpiness, right, in mining and power that impact us regularly, right? Because we had some executed some solid orders last year in those areas.
Jacob Bout
And then just on the customer side of things, any cautiousness at all from them? Anything changed there at all?
Michael McMillan
I would say the work on hand remains reasonably solid. I think they’re monitoring things closing. I mean what you have in the third quarter is they’re focused on the execution, right? So where you get a better read is in the November time frame, November, December and how they’re bringing in their years. But work on hands is solid. But I think some of them, there’s a little more cautious environment creeping in as the inflationary factors and the interest rates start to shift. So we’re monitoring that closely.
Jacob Bout
And my second question here just on this new inflationary world that we’re living in. What do you think is the weakest link here for Toromont? I think you’ve talked quite a bit about margin. Obviously, you got a concern about margin compression, but what is your exposure to residential construction? And how big of an end market is up for bottle field?
Michael McMillan
Well, maybe just to start on that, Jacob. I mean, we are quite fortunate in the sense that our customer base is pretty well diversified, as you know. And we do a lot of infrastructure and road works and things like that and support that type of industrial activity and commercial activity. Where we would see some residential sensitivity could be in the rental side, although that part of our business has continued to perform quite well, and the team has done a nice job balancing fleets and managing the utilization rates. And so I think over time, we’ll start to see that through our customer base in terms of project deferrals and so forth. But the balance we have with diversification does support, I suppose, some of the results you’re seeing today, right?
Inflation in general, I mean, I think we’ve sort of talked a little bit about orders in the order book. And I think that certainly is one of the factors we’ve talked about quite a bit in terms of customer behavior and buying patterns, trying to get ahead of anticipated increases and things like that. And so that, I think, is also an important factor to keep in mind, right?
Operator
Your next question comes from Michael Doumet of Scotiabank.
Michael Doumet
A fantastic quarter, guys. So first question is on rental. It looks like the margins there advanced in directed territory. So for several quarters, I think you’ve indicated that there’s been in the limited equipment supply, and that’s slowed down uploads. It looks like the uploads are increasing now. So maybe a little bit of a tie-in to the last question. For next year, how do you think about balancing growth in rental with the increasing risks of a recession?
Scott Medhurst
Okay. So we’ve been balancing this now, I’d say, for 2 years. And there’s been some real tough decision-making in there. I applaud the team on how they looked at this strategically. We did start to shift. I mean, as you know, we have a fairly large rental services business. Consciously, years ago, the team, a decision, we had to sacrifice retail a bit to make sure we got back to the rental model. And so the team did shift a bit and again at the beginning of 2022, allocated more capital to the rental fleet uploads versus retail. And because of the tightness of the availability, we had to make some tough decisions.
But I think we’re pleased the team is executing that decision, how we allocated some of that capital. And as you know, we allocated quite a bit of capital after the acquisition in 2017 into the Quebec and Maritimes markets. That was a drag for a while, but we’re very pleased with the team’s execution there and how customers are now gravitating towards the rental services model that we brought in the value proposition that’s been introduced. Year-to-date, that Quebec and Maritimes rental revenues are up 18% on a year-to-date basis. We’re very pleased with how the team and customers are responding to that broader rental services offering. So there were some delicate decisions in there and how we allocate the capital. But I think overall, we’re pleased with it, Michael. Going forward, we’re going to have to make some more, we’ll monitor it. Those decisions are pending.
Michael Doumet
Okay. Yes. Good performance, no doubt. Maybe transitioning to the product support growth. I’m wondering if you guys can comment on or give some color on price versus volume. And I’m asking because product support growth has accelerated through the year. I assume pricing here is happening through the year. And potentially, I would think about that as more transitory than the volume trends underneath. So that’s the first question. And then secondly, I noticed that the work in progress, that declined on a sequential basis. So I wonder if the bottlenecks and product support are easing.
Michael McMillan
Yes, lots to that question. So maybe just to start, I think when you break it apart to parts and service, to your point, I mean we’ve had some increases on parts pricing, for example. We’ve been working very carefully on the labor rate side of things. The shops, as you noticed, have been pretty busy. And so we don’t break it apart or disclose it in terms of price versus activity and so forth. But I think if you look at that, our goal is always to be very transparent and work our way through that with customers and make sure that they understand the pricing that we’re working through and they have some time to respond and plan work and so forth. And so on the parts side, we’ve experienced a few increases through time and again, been quite clear on how that’s expected to play out.
You mentioned WIP, I think, again, we’d be providing you with a little bit of caution on the WIP side because part of the reason that that has built is just availability of parts as well as just trying to stage work and work it through the shop and so forth. And that continues to be a challenge. It’s really more the persistent supply chain challenges we’ve been talking about for some time. And so as that eases over time, we’ll probably see that moderate or normalize. But we are seeing a lot of our inventory, as we commented on broadly, we’ve increased some of our working capital investment just to support the trends and we’re waiting on attachments. We’re waiting on add-ons. We’re waiting on parts to complete and deliver product. And so those are factors that we continue to be managing carefully.
Scott Medhurst
Just a little more color there. So I mean, if you break it down, certainly, some of the inflationary factors are impacting in there. But overall, the product sport demand has been solid and across all areas of the businesses. And what we’re pleased with is that labor is up and that was through some pointed recruitment strategies and tactics. And so we’re pleased with that. The rebuild program strategy we’ve got going continues to be strong, I think dollar volume were up over 60% on the year-to-date. So these things are all contributing. But it’s an interesting environment out there. We’ll continue to monitor things, but that’s what we’ve seen so far.
Operator
Your next question comes from Yuri Lynk of Canaccord Genuity.
Yuri Lynk
EBIT margins very strong in the quarter, continuing a nice trend. They look to be higher than even what your mix might suggest at this point. And you have mentioned the different market dislocations introduced by the pandemic. Just wondering if you’re not seeing some favorable margin tailwinds in there due to these dislocations that we should be looking to maybe roll off in the coming quarters?
Michael McMillan
Yes. Maybe a little bit of color to start, Yuri. One of the things we’ve been seeing and we’ve been talking a little bit about on, broadly on margins, especially if you think of the equipment group is the mix of the rental activity utilization has been very strong. The team has done a really nice job, as Scott described. Product support also as a higher proportion of our revenue provides us with that favorable mix. And I think when you look at the equipment side, again, it’s been tight as we’ve talked about. I think even on the used side, although if we look at equipment, that continues to persist.
So while the new side is up, as we mentioned, like 10%, overall in the quarter. But new is up 13%. The used side was down a little bit. That’s really more around disposal of our rental side, but we’re seeing good activity when you look at purchase and trade and so forth. And so just sort of speaking through that, the tightness and availability in the mix has provided us with strong margin for several quarters. And I think as availability and things ease and maybe activity levels, we’ll see how things develop as we go into next year. With the slowdown and how that progresses, one would expect that there would be more normalization perhaps on that equipment side of things.
Scott Medhurst
I think I articulated fairly well. I mean again, you’ve got a lot of different moving parts in there. And I mean, the mix has been favorable, right? I mean you look at our equipment group. The team’s done a nice job executing the aftermarket. Aftermarket is a key strategy for us. That’s been outlined. And you’re pushing over 40% in there as a percentage of total. So that’s favorable along with those. I mean, you’re getting some real high time utilization in there. In some areas of our rental fleet, you’re seeing 70%, that’s very strong. So these are favorable. We’re fortunate in that we were allocating the capital for the team to drive these outcomes and demonstrate to our customers some solid value proposition. So we’ll see. I mean the key is, I think, the team can execute fairly well in the quarter and but a lot of variables in play. So we’ll see what happens.
Yuri Lynk
Yes. Understood. That’s helpful. Just my second and final question, maybe for Scott. Any update on the CEO search at the Board level? Any update on timing or if you’ve started to interview candidates, anything like that?
Scott Medhurst
Working through an orderly process as we try to always do.
Operator
Your next question comes from Bryan Fast of Raymond James.
Bryan Fast
Could you just talk a bit about inventory levels here? I mean are you comfortable with where inventory sits? I mean we’re still below pre-pandemic levels, but maybe just talk about your comfort level here.
Michael McMillan
Yes. Great lead-in. We spoke a little bit about it earlier, Brian. I think if you look, for example, we’re up over $200 million on a year-to-date basis, right? And the majority of that, if I is related, and it’s spread fairly evenly when you think of our equipment attachments, parts, WIP, for example. And so I would say the composition of that is, as I characterized earlier, we’re waiting on deliveries of certain things like parts to support with delivery and execution completion, some add-ons for the equipment and so forth, a little bit of timing on delivery schedules also brings that number up a little bit on the new equipment side.
And also, the team has been really active on the used side, like bringing in purchasing used and supporting our customer base with that activity. We’ve done a nice job there. And so composition, I think, would be a little bit different than you traditionally would see. But we had prepared for that. And so I would say that as we go into the new year, we continue to expect to invest in working capital to support the customer base and then the transition over time as availability improves. And so hopefully, that gives you a little bit of color on that.
Scott Medhurst
I’ll just add a few more comments there. I mean the working capital, we’re very focused on this. We’re certainly not in our normal flow of ordering process here for obvious reasons. Sometimes we take what we can get. So your parts are a little distorted there relative to normal flow and ordering disciplines. It is also reflective of that. WIP’s high. I know you said on a sequential basis, somebody said it’s not, but it’s still. It would have been smoother. Sometimes we’re stopping and starting in our activity levels and shops and readying equipment, waiting sometimes on parts and attachments things of that nature, even in our re-man centers we get slowed up waiting for components. So that creates a bit of a build in there. And as Mike said, I mean we’re very aggressive right now and continue to be on our execution. Even though use was down, the used purchase consignment strategy continues to be very… I think our team is doing a nice job in there, I think, pushing 30% increase in the quarter. So that’s where you’re seeing a build in there as well. So, we’re monitoring these inventory levels closely given the environment.
Bryan Fast
No, that’s very, very helpful. And then my other question here. You flagged customer credit risk as something you’re monitoring. I mean are you already starting to see some cracks there as interest rates tick higher?
Michael McMillan
I think it’s just a risk factor, Brian, as one would expect with higher cost of capital for our customer base as well as the environment we’re in, inflationary environment, some pressure on our customers. I would say that our team is very disciplined and worked very closely with our decentralized model. I would say that’s one of the advantages, our team is close to the customers, working with them very actively and managing that risk. But naturally, I think as we go into an economic slowdown, that puts a lot of pressure on all aspects of the business environment. And so it’s something we’re monitoring carefully. In some of our numbers, we did increase with that debt expense as I mentioned on the commentary. And that’s a systematic approach that we have. As I mentioned, we’re quite disciplined on that. But it is a risk factor that I think is going to be a broad-based experience that people, across all businesses, we’re going to start to see, right, especially if we continue to see the cost of capital and wage pressure utilizing cash flows for our customer base, right.
Operator
Your next question comes from Maxim Sachets of National Bank Financial.
Scott Medhurst
Michelle, We have an issue here. You may have lost Max.
Operator
Your next question will come from Sabahat Khan of RBC Capital Markets.
Sabahat Khan
Just I guess a question on the backlog. How should we think about maybe pricing that’s built into the backlog? Because I guess prices are going up, there’s obviously unit demand also going up. But I guess on the other side, as economic activity moderates, pricing likely also moderates and so do units. Just trying to get an understanding of, is there any perspective you can give on how much pricing might be in there? And also, maybe just overall in the market, are you still pricing to your customers at this point?
Scott Medhurst
In terms of the backlog, we’re working closely with our OEM partners and our customers to make sure that we’ve got this as tight as possible. Obviously, there’s moving parts in there, and it’s all going to come down to execution. And so far, as you saw in the quarter, we were starting to achieve some of that backlog. That’s why some of the new sales increased. And I think we did reasonably well. So that’s what we’re going to continue to do.
Sabahat Khan
Okay. Great. And then, I guess, just on the labor side, as the economic activity moderates, labor availability probably goes up. Is that something on your radar? Or is the skill set required for a technician, maybe not something where you can take somebody from a different industry and train relatively quickly. Just trying to understand because, in some industries, that might be a positive. How do you view that, I guess, in terms of labor availability through the cycle?
Michael McMillan
Yes. I think nothing’s really changed too dramatically there, Sabahat. We’ve been actively recruiting and trying to bring in some quality technicians. And Scott mentioned that we made some nice progress this year. I would say just broadly to your question, we’re always looking for good technicians. And we do have, for example, if we look at our rental business, the certifications and different things, they work on a different fleet, small hand tools and different things. That gives us a little more flexibility to look at other locations. We work very actively with the trade schools and so forth as well, recruiting apprentices. And then as the market frees up, certainly, we’d be looking to attract quality technicians in our heavy business as well. And so I’d say it’s a very broad-based program, and we’ll continue to be very active.
Scott Medhurst
You raise a good point there in terms of working through cycles with your skilled labor. Yes. This is something we’re very attentive to. I hope it’s a bit of a differentiation in terms of recruitment that we hold on to the skilled labor. And we’ve demonstrated that before through downturns as best we can. And we’re very attentive also to the strategy relative to your percentage of apprentices to the experienced journey people. And so that’s something we monitor closely as well as the breakdowns there, its how we build and protect our skilled labor.
Operator
Your next question comes from Maxim Sytchev of National Bank Financial.
Maxim Sytchev
Hopefully, you can hear me now.
Scott Medhurst
Morning Max, you’re loud and clear now.
Maxim Sytchev
Okay. I just wanted to clarify one of the comments you made in your prepared remarks just around sort of the interplay between the typical seasonality and macro. Was that in relation to Q4? What exactly are you referring to?
Michael McMillan
A couple of things on that, Max. As you know, we don’t provide guidance or forward-looking direction to any large extent. I think it is, however, not unusual. We’ve been talking about how the macro factors as well as the pandemic as we’ve eased out the pandemic, connectivity levels have changed, behaviors have changed But when you combine that with an inflationary environment, higher rates and so forth, all those combined factors have overridden normal seasonality.
And so if we look at, for example, a good example was the bookings that we talked about, I think, in that context to say, Q3 of ’21 was a very strong period for bookings. Our bookings in this quarter were comfortable with, especially when you think back to ’19 or ’20. ’20 was already in the pandemic. But even ’19 levels, we’re pretty comfortable with what we’d see. But the macro factors have overridden a lot of the normal behaviors you’d see in Q3 and Q4 for that matter. So just in that context, there are so many moving parts right now that we would suggest that they’re more influential on the behaviors and patterns than you would normally see in a different environment, right?
Scott Medhurst
We’re just giving a couple tags on what we’re seeing so far.
Maxim Sytchev
Yes. That’s right. Right. And I guess, because you have a much higher installed base right now in terms of telematics, I mean, are you seeing any major shifts in terms of utilization of equipment? I presume no, but can you provide any color there?
Scott Medhurst
Nothing major at this time, but monitoring closely, right? And that’s basically where we are. But we do that’s something we’re seeing very close to.
Maxim Sytchev
Yes, yes, for sure. Makes sense. And just one last question. In terms of the rentals, kind of, competitive environment because I mean we’ve had a number of transactions in sort of your areas. Wondering if that sort of change of ownership is changing anything for you guys on the ground. So yes, maybe any color, please?
Scott Medhurst
Well, I think we we’re competing relatively well. When you see those numbers, the team is doing a nice job executing. We allocated capital accordingly, as we made it in regards to the shift and balance from rental to retail allocation of units. We’re pleased with those decisions the team has made on the capital allocation, and I think we continue to compete reasonably well in there. And we’ll continue to work on our value proposition. That’s the key area is that rental area for us.
Maxim Sytchev
And so maybe just one last point. In terms of the Reman sort of capacity, how is that project going? I mean, I know it’s obviously super early days, but maybe any color there.
Michael McMillan
You’re thinking of the announcement on Bradford next? So we just, as a matter of fact, about 2 weeks ago, we had a just a small event just to initiate this sautering. So we’re just at the early stages in Bradford of getting the site prepped and grading and so forth. And then I think what you’ll see is for the majority of ’23, we’ll be in the construction mode and getting that facility up so that we can have it prepared for, ideally, the first half of 24 and start to build, start to attract volume and start doing operations there maybe in Q2 of ’24. So I would say that’s at the early stages at this point, but we’re quite happy to get things started in that environment. And also, I think the other piece for that, I would suggest, is it’s given us opportunity to start to recruit for that in the long term. And so we’ve also been pretty active on the labor force side, just trying to prepare to staff and build some new jobs out there.
Operator
[Operator Instructions] At this time, there are no further questions. I will turn the conference back to Mr. McMillan for closing remarks.
Michael McMillan
Great. Thanks very much, Michelle, and thanks, everyone, for your participation today. That concludes our call. Please be safe, and have a great week.
Operator
Ladies and gentlemen, this does indeed conclude your conference call for this morning. We would like to thank everyone for their participation, and you may now disconnect your lines.
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