Wajax Q3 2024 Earnings Call Transcript

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November 5, 2024

There are 7 speakers on the call.

Operator

Thank you for attending Wajax Corporation's 2024 Third Quarter Financial Results Webcast. On today's webcast will be Mr. Igi Domagalski, President and Chief Executive Officer Mr. Stuart Alt, Chief Financial Officer and Ms. Tanya Casadino, VP, Corporate Controller.

Operator

Please be advised that this webcast is being recorded. Please note that this webcast contains forward looking statements. Actual future results may differ from expected results. I will now turn the call over to Tanya Casadino.

Speaker 1

Thank you, operator. Good afternoon, and thank you for participating in our Q3 results call. This afternoon, we will be following a webcast, which includes a summary presentation of Wajax's Q3 2024 Financial Results. The presentation can be found on our website under Investor Relations, Events and Presentations. To begin, I would like to draw your attention to our cautionary statement regarding forward looking information on Slide 2 and the non GAAP and other financial measures on Slide 3.

Speaker 1

Please turn to Slide 4. And at this point, I'll turn the call over to Igi.

Speaker 2

Thank you, Tanya. I will provide highlights on our Q3 before turning it over to Stu for commentary on backlog, inventory and the balance sheet. Slide provides an overview of Wajax. The corporation has 166 years of Canadian operating history and operates across 116 branches with a team of more than 3,100 employees. During the quarter, our heavy equipment categories and revenue sources made up approximately 55% of our total revenue, while industrial parts and ERS generated approximately 45%.

Speaker 2

Turning to slide 5. Slide provides an overview of our purpose and values. Wajax's purpose statement is empowering people to build a better tomorrow, which we strive to achieve by living our values and delivering an exceptional experience for our people, customers, suppliers and the communities we serve. By living our purpose and values, we'll continue to build a people first company that is strong, resilient and profitable. Our purpose and values guide our decision making and allow us to execute on our strategic priorities.

Speaker 2

Turning to slide 6. Slide provides an overview of our strategic priorities, which were refreshed and enhanced in 2023. Management is completely focused on executing against these priorities between our purpose and values and these six priorities. We have the foundation to continue growing our company for many years to come. Turning to slide 7.

Speaker 2

In the Q3, Wajax saw lower revenues and gross profit margins, which were offset partially by lower selling and administrative expenses. Revenue of $481,000,000 decreased $28,700,000 in the quarter. The decrease resulted primarily from lower mining equipment sales in Western Canada, driven largely by the sale of a large mining shovel in the Q3 of the prior year with no such sale in the current year. Lower product support sales in Western Canada, lower ERS sales in Eastern Canada and lower industrial parts sales in all regions. These decreases were offset partially by higher equipment sales in construction and forestry category in Western and Eastern Canada.

Speaker 2

Gross profit margin of 19.2% decreased 300 basis points compared to the same period of 2023, driven primarily by a higher proportion of equipment sales relative to product support, industrial parts and ERS sales. In addition, increased market pressures resulted in lower margins realized on product support and industrial part sales. These decreases were partially offset by higher margins on ERS sales. Selling and administrative expenses as a percentage of revenue decreased to 14.7% in the Q3 of 2024 from 14.9% in the Q3 of 2023. Selling and administrative expenses in the Q3 of 2024 decreased $5,000,000 or 6.6 percent compared to the Q3 of 2023, due primarily to lower personnel costs driven largely by cost saving initiatives implemented in the quarter.

Speaker 2

Adjusted EBITDA of $37,400,000 decreased $12,600,000 or 25.3 percent from the Q3 of 2023, noting the adjustments recorded on this chart. Decrease resulted primarily from lower sales volumes and lower gross profit margins, offset partially by lower selling and administrative expenses. Adjusted net earnings of $0.44 per share decreased 54.2 percent or $0.52 per share from the Q3 of 2023, noting the adjustments recorded on this chart. At the end of Q3, the TRIF rate was 0.91, a decrease of 13% from the Q3 of 2023. The Q3 TRIF rate was up 12% from the Q2 of 2024.

Speaker 2

Safety continues to be Wajax's number one priority and management is committed to continuously improving our safety program to improve on this result. We thank everyone on our team for their ongoing dedication to workplace safety. Turning to Slide 8. Revenue decrease of 5.6% in the 3rd quarter resulted from lower revenue in all regions. Western Canada sales of $210,000,000 decreased 10% in the quarter due primarily to lower mining equipment sales driven largely by the sale of a large mining shovel in the Q3 of the prior year with no such sales in the current year, lower industrial parts sales and lower product support sales.

Speaker 2

These decreases were partially offset by higher equipment sales in the construction and forestry category. Central Canada sales of $88,000,000 decreased 3.9% in the quarter due primarily to lower industrial parts sales. Eastern Canada sales of $183,000,000 decreased 1.1% in the quarter due primarily to lower industrial parts and ERS sales partially offset by higher equipment sales in the construction and forestry category. Please turn to slide 9. An update on equipment and product support sales and year over year variances are shown on this page.

Speaker 2

Equipment sales of $132,000,000 increased $6,000,000 or 5% compared to last year, due primarily to higher construction and forestry equipment sales in Western and Eastern Canada and higher material handling sales in Central Canada. These increases were partially offset by lower mining sales in Western Canada, driven largely by the sale of a large mining shovel in the Q3 of the prior year with no such sale in the current year. Product support of $123,000,000 decreased $12,000,000 or 9% compared to last year due to lower sales in most categories and regions. Please turn to Slide 10. An update on industrial parts and ERS sales and year over year variances are shown on this page.

Speaker 2

Industrial Parts sales of approximately $136,000,000 decreased $25,000,000 or 15% due to market conditions that were less favorable than expected. Turning to slide 11. This slide summarizes sales at a category level for our company's overall groupings of heavy equipment and industrial parts and services. In the Q3, the heavy equipment categories decreased $6,000,000 or 2%, driven primarily by lower mining equipment sales in Western Canada driven largely by the sale of a large mining shovel in the Q3 of the prior year with no such sale in the current year. The decrease was offset partially by higher construction and forestry equipment sales in Western Canada and Eastern Canada and higher material handling sales in Central Canada.

Speaker 2

Industrial parts and service categories decreased $23,000,000 or 10% driven by lower industrial parts sales in all regions due to market conditions that were less favorable than expected. These less cyclical categories remain a core element of our broader growth strategy. I'll now turn the call over to Stu.

Speaker 3

Thanks, Ziggy. Please turn to Slide 12 for my comments on backlog and inventory. Our Q3 backlog of $588,100,000 increased $43,300,000 or 7.9 percent compared to backlog of $544,000,000 at Q2 and decreased $11,100,000 on a year over year basis. The sequential increase was due primarily to higher construction and forestry and mining orders offset partially by lower material handling and ERS orders. The year over year decrease was due to lower construction and forestry, material handling, ERS and industrial parts orders offset partially by higher mining orders.

Speaker 3

Currently, the corporation has 7 large mining shovels and backlog to be delivered over the next 7 quarters. Inventory. Inventory decreased $800,000 compared to Q2 2024 as management continues to focus on reducing and managing the corporation's inventory levels. At the end of the quarter, the corporation had a large mining shovel in inventory that is expected to be delivered in the Q4 of 2024. Inventory decreased to $65,100,000 compared to Q3 2023 due to increases in most categories offset partially by lower forestry equipment inventory.

Speaker 3

Please turn to Slide 13, where I'll provide an update on cash flow leverage and working capital. Cash flows used in operating activities in the quarter of $34,500,000 compared with cash flows used in operating activities of $62,000,000 in the same quarter of the prior year. The increase in cash generated of $27,500,000 was mainly attributable to a decrease in cash used in non cash operating working capital offset partially by lower earnings. Our Q3 leverage ratio increased to 2.78 times from 2.17 times in Q2 due to the higher debt level and lower trailing 12 month pro form a adjusted EBITDA. Corporation's leverage ratio is currently outside our target range of 1.5 to 2 times at the end of Q3, primarily due to the investment in working capital during the year and acquisitions completed in 2020.

Speaker 3

Our available credit capacity at the end of Q3 was $167,100,000 which is sufficient to meet short term normal course working capital and maintenance capital requirements and fund our acquisition program and planned strategic initiatives. We continue to focus on working capital efficiency was a key component managing our overall leverage ratio leverage targets. The Q3 working capital efficiency was 26.6 percent, an increase of 10 basis points from June 30, 2024 due to the lower trailing 12 month revenue. Including the debentures, which are classified within current liabilities, working capital efficiency was 28 point 7 percent, an increase of 80 basis points from June 30, 2024. Finally, the Board has approved our Q4 2024 dividend of $0.35 per share payable on January 7, 2025 to shareholders of record on December 16, 20 24.

Speaker 3

Please turn to Slide 14. At this point, I will turn the call back to Igi.

Speaker 2

Thanks, Stu. Our outlook is summarized on Slide 14. During the Q3 of 2024, Wajax delivered revenue of 481,000,000

Operator

dollars down

Speaker 2

$28,700,000 or 5.6 percent from the Q3 of 2023. The year over year decrease in revenue was primarily due to the delivery of a large mining shovel in the Q3 of 2023 with no such delivery in 2024 and lower product support and industrial parts revenue due to softer than anticipated market conditions. Gross profit margin decreased to 19.2% in the Q3 of 2024 versus 22.2% in the Q3 of 2023, driven by a higher proportion of equipment sales relative to product support, industrial parts and ERS sales. In addition, increased market pressures resulted in lower margins realized on product support and industrial parts sales, partially offset by higher margins on ERS sales. We continue to see strong customer demand in the mining and energy sectors and reduced activity in industrial and forestry.

Speaker 2

Given softer than expected market conditions and year to date results, management has implemented a number of cost savings initiatives and is actively pursuing further cost reduction measures. Management is continuing to focus on the execution of our 6 strategic priorities for 2024, which were set out on Slide 6. Management also continues to evaluate options to repay or refinance the corporation's 57,000,000 dollars and senior unsecured debentures that are maturing on January 15, 2025. On November 4, 2024, Wajax announced the planned retirement of Chief Financial Officer, Stuart Auld, to be effective March 4, 2025. Tanya Casadino, Vice President and Corporate Controller, has been appointed to succeed Mr.

Speaker 2

Auld as Chief Financial Officer effective March 5 March 4, 2025. Stuart will remain as CFO for the next 4 months. And during that time, Stuart, Tonya and myself will work closely to ensure a smooth transition. On behalf of the Board and management team, I want to express my appreciation to Stuart for his exceptional contributions over the past decade. Among many things, Stuart played a key leadership role in unifying Wajax's operational structure, significantly growing our business and has most recently led the successful implementation of our new ERP system.

Speaker 2

He has also provided crucial advice and guidance to me since I joined Wajax in 2021 for which I'm very grateful. I'll now turn it over to Stu.

Speaker 3

Thank you, Igi. And I just want to say thanks to the entire Wajax team, but more specifically my direct reports and my team. It's been a privilege to be part of Wajax for the past 10 years, seeing the company evolve and work alongside such talented people. I'm very proud of what we have accomplished together. I'm also very pleased that Tanya will be stepping into the CFO role.

Speaker 3

I'm incredibly confident that she will do an outstanding job and continue supporting the company's success in every way. I'll now turn it over to Tanya.

Speaker 1

Thank you, Stu. And thank you, Igi, for the confidence that you and the Board have placed in me. I am both humbled and excited to step into this role and committed to building on the strong financial foundation that Stu has created. I am also extremely excited to continue to focus on the execution of our long term strategic priorities and vision for Wajax. I look forward to engaging with the investment community and sharing the Wajax story as we continue to drive our goals forward.

Speaker 1

With that, I will turn it back to the operator and open the line for questions. Thank you.

Operator

Thank you. And your first question will be from Jonathan Goldman at Scotiabank. Please go ahead.

Speaker 4

Hi, good afternoon. Stu, I want to congratulate you on your career and your retirement in Tanya. Congratulations on your new appointment. My first question, I wanted to dig into the decline in product support and industrial products margins. I was wondering if you could elaborate on the increased competitive pressures you experienced.

Speaker 4

How did those evolve in the quarter? And how should we think about the margin trajectory for those two product lines for the balance of 2024 and into 2025?

Speaker 2

Yes. Thanks for the question, Jonathan. I think we've just started to see the economy slow and a lot of the external metrics that we look at have slowed. It's certainly gotten more pronounced as we've gotten further into the year. And essentially, we're just seeing our customers slow down and defer their spending on CapEx and even on maintenance.

Speaker 2

So just generally slower with some of our customers. And as we look to the rest of the year, Q4 looks to be a solid quarter for mining. We've got 28,000 shovels shipping in the quarter. And but generally, we're still seeing a little bit of uncertainty as we go into the rest of the year, especially there's a U. S.

Speaker 2

Election that's happening today. And regardless of the results, I think once that is settled and works its way through the system, I think we'll start seeing just a little bit more calmness in the market and a return to customers making buying decisions in the New Year.

Speaker 4

That makes sense. And I guess relatedly then, the product support and the industrial products revenues were softer, I think a little softer than you anticipated. But the new equipment sales were actually relatively strong, especially considering you were lapping a tough comp with the mining shovel delivery last year. So how do I square those two trends?

Speaker 2

Yes. I think our teams have been doing a really great job on the sales front. We've got some great manufacturing partners. Some of our larger ones would be Hitachi, Hyster, Tiger Cat. All of them have great programs to help us get equipment out to our customers.

Speaker 2

And the supply chains have also really for the most part gotten back to normal. And we have a lot of we've got a lot of gear on the shelf right now. Our inventory is still higher than we'd like it to be. And because of that, we've got a lot of equipment that's available for sale.

Speaker 4

Okay. That's good color. Thanks, Nikhil. I'll get back in queue. Thank

Operator

you. Thank you. Next question will be from Devin Dodge at BMO. Please go ahead.

Speaker 5

Thanks. Good afternoon. Just before getting any questions, I wanted to wish Stu good luck on his pending retirement and congrats to Tanya on the new role. Thank you. Maybe just to start with, just wondering if you could speak to the increase in competitive market pressures for industrial parts and product support.

Speaker 5

I'm just trying to get a sense that this concentrated in certain regions or end markets and if these intensified through the quarter, if it was relatively consistent through the summer months?

Speaker 2

That's a good question. I mean, we're just seeing a bit more competitive pressure in a bunch of places. We have a number of U. S. Publicly traded industrial products peers who also operate a very significant business in Canada.

Speaker 2

They're all calling everything down for both this year and next year and also calling out competitive market pressure. So we're all kind of feeling it and I think just mostly due to customers pulling back on the spending. So I don't think it's not really allocated to specific markets or specific areas. We do generally still see that energy and mining is pretty strong and the pressures there are not quite as large in other areas. But there's competitive pressure across the board, I would say.

Speaker 5

Okay. And when we look at Industrial Parts and Product Support, I guess, how do those gross margins compare like now versus, we'll say, pre pandemic, let's say, in more normal times? Like I'm just trying to understand if this is, let's say, a return to normal or if this is more a transient kind of compression of that gross margin?

Speaker 2

I think they're similar to what we saw pre COVID.

Speaker 4

Okay.

Speaker 5

And then let's see, can you help us to better understand the working capital investment in the quarter? It seems like it was almost entirely from accounts payable. Just trying to understand what was driving that? And if you expect this to reverse in the coming quarters?

Speaker 3

Yes. Devin, more just timing of AP payments, nothing out of the ordinary.

Speaker 4

Okay. Got it.

Speaker 5

And then just maybe one last one here. Just one of the notes of the financial statements, There was mention of Wajax use of a supplier or supplier financing programs. I think there was a new one in Q3 as well. It looks like the use of these programs has increased pretty meaningfully this year. Just can you provide some context what's behind that?

Speaker 5

I'm not sure if this is related to Hitachi or something else.

Speaker 3

A portion of it's related to Hitachi. We basically have the financing now is going through Zaxis versus when it was going through Hitachi before. So that's new to us.

Speaker 4

Okay, got it. I'll turn it over. Thank you.

Operator

Thank you. Next, we will hear from Michael Tupholme at TD Cowen. Please go ahead.

Speaker 6

Thank you. I'll just start by echoing the comments from others. All the best to you, Stu, and congratulations, Tanya. I just wanted to go back to, I guess, the subject that's been focused on so far in terms of industrial parts and product support. Iggy, you sounded like initially you sort of suggested that once we get through the uncertainty associated with the U.

Speaker 6

S. Election, you could see some improvement in those areas. But it also sounded like afterwards you suggested your competitors in those areas are particularly industrial parts are talking about weakness persisting into next year. So do you have a different view of the market than them or how do we reconcile those two comments?

Speaker 2

When we look at our U. S. Competitors, they're calling out their I mean, they're American, so they call it the entire U. S. Market, which we're only in Canada.

Speaker 2

In Canada, we do see 2025 as not being a terrible year.

Speaker 6

Okay. And so does that when you say not a terrible year, does that imply a pickup in terms of the run rate revenues you're doing in industrial parts, you think there's an improvement in a pickup in 2025? Is that what you mean by not a terrible year?

Speaker 2

I think it's hard to say at this point. Once we need this American election to work its way through and I think that will give us a little bit of a better view on what's happening going forward. I think interest rates coming down is positive. Bank of Canada has continued to say that they think that will keep coming down, which I think will allow our customers to keep spending a little bit more. But I think we'll really have a better understanding over the next couple of months.

Speaker 6

Okay. Fair enough. Can you talk a little bit about the gross margins, 19.2%, down 300 basis points. It sounded like you see a lot of that decline as being driven by mix, but then you also did call out the impact of the competitive and market pressures. So, I guess I'm just trying to understand to what extent that was mix driven versus the latter, if there's a way to sort of break that up and help us understand the 2 components.

Speaker 2

I would say it's balanced between those areas, where there's an element of mix in there. There's definitely an element of competitive pressure in IP and product support. And we're also working hard to move equipment out of our yards. We've got a decent amount of it. And so we're being a little bit more aggressive on price.

Speaker 6

Okay. And maybe on that front, can you or Stu help us think about the degree or the extent to which we should see inventories come down in the Q4 like relative to where you were at end of the 3rd, where you think it will land at the end of the year?

Speaker 2

I think where we are our peak inventory was at the end of Q1. So that was approximately $750,000,000 We brought that down by $28,000,000 over the next quarter. And throughout Q3, we're flat, but we also got a large shovel in there that's already pre sold. So it's kind of a timing issue and that one retails for about $20,000,000 So I think we've been bringing it down at a reasonable rate. We plan to continue bringing it down.

Speaker 2

It's just it's a little bit too high. And as we work through some of these sales in the Q4, we think we'll definitely see it come down.

Speaker 6

And then on the cost savings front, some have already been implemented. It sounds like you're working on others. Can you provide a little bit more detail? Is this primarily bringing down personnel costs? And I guess when you've accomplished what you'd like to do on that front, if we look out to next year, do you see yourself landing back in your 14.5% to 15.5% SG and A as a percentage of revenue target range?

Speaker 2

Yes. So as mentioned in our commentary, we implemented some meaningful cost savings in the Q3, plan to do a bunch more in the Q4. Our largest cost is people. So that's the biggest chunk of it. And then our next biggest cost is facilities and there's a little bit there too.

Speaker 2

But yes, when we're done everything, we expect to be within that range again.

Speaker 3

And arguably, there's some savings in terms of bringing your inventory down.

Speaker 5

Okay.

Speaker 6

I will get back in the queue. Thank you.

Operator

Thank you. And at this time, we have no other questions registered. Please proceed.

Speaker 2

Thank you very much for joining our call. Have a

Speaker 5

good day.

Operator

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your

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