Wajax Corp

TSX:WJX

Earnings Call Transcript 2018-Q1

[Operator]

Thank you for attending Wajax Corporation's 2018 First Quarter Results Webcast. On today's webcast will be Mark Foote, Wajax's President and Chief Executive Officer; Mr. Darren Yaworsky, Senior Vice President, Finance and Chief Financial Officer; and Mr. Trevor Carson, Vice President, Financial Planning and Risk Management. 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 Trevor Carson.

[Trevor Carson]

Good afternoon, everyone, and thanks for participating in our first quarter results call. This afternoon, we'll be following a webcast, which includes a summary presentation of Wajax's Q1 2018 financial results. The presentation can be found on our website under Investor Relations, Events and Presentations, Webcasts. To begin, I'd like to draw your attention to our cautionary statement regarding forward-looking information on Slide 2. Additionally, non-GAAP and additional GAAP measures are summarized on Slides 12 through 15 for your reference. Please turn to Slide 3, and at this point, I'll turn the call over to Mark.

[A. Mark Foote, President, CEO & Director]

Thank you, Trevor. I'll cover some highlights and some revenue notes and then I'll turn the call over to Darren. So looking at Page 3, a few, I think, pretty positive messages. So we saw a 7% increase in revenue that's being driven by Eastern and Western Canada, and I'll get to the Central Canada performance in just a moment, but we're pleased with the total top line growth. EBIT saw an increase of 36%, we saw some improvement in gross margin on a year-over-year basis and we saw some decent leverage on the SG&A line, 14.3%, if you don't x out the gain on real estate, and 14.6% if you do. And that's obviously a pretty nice improvement over the leverage -- the operating leverage in the first quarter last year. Adjusted basic EPS was up 66%. You can see in the notes what the adjustments were between restructuring and the gain on sale, but on an adjusted basis and on an unadjusted basis, a healthy increase over prior year. And we're really pleased with the safety performance in the business. We had a TRIF that was just over 1.0 in the first quarter, saw a 33% reduction in recordable injuries, which took us from 9 injuries to 6. So anything over 0 is obviously not what we want to see but we appreciate the effort of everyone on the team to get that safety number continuing to improve.I'm turning to Page 4, which is a summary of the revenue by region. So as I said a moment ago, a 7% increase in total revenue. The vast majority of our revenue increase nationally was driven by equipment sales and so that was pretty healthy, particularly -- specifically in Western and Eastern Canada. And I'll get to the categories in a second but as you'll note from this page, healthy increases in both our construction and material handling increase -- categories and in Engineered Repair Services, which is where the focus of the business is.I'm going to turn to Page 5, which is sales by type, which deals with equipment sales, industrial parts and product support. But as I mentioned, a good increase in equipment sales. We would have picked up market share in both construction, material handling nationally in the first quarter, both sequentially and on a year-over-year basis. So that, we're very pleased with that performance. Industrial Parts pulled in generally flat on a year-over-year basis. The backlog is pretty healthy in that business and we're suspecting that the organic growth rate in Industrial Parts will improve as the year progresses. And in product support, we saw a year-over-year decline, about 4.5%. We're not particularly concerned with that. Some of that is simply a comp over issue, with us exiting the JCB product line. That's a bigger issue in the first half of this year than the second. Then we did have some major service jobs that occurred last year that didn't repeat this year. But I think, if we look at the full year, we think the product support trends will improve.Just before turning it over to Darren, we're looking at Page 6, which is the revenue by category. So 3 things on this chart to note, we've rearranged the chart from a sequencing standpoint, so you can see the targeted growth, core strength and the cyclical categories, which is consistent with our investor presentation on our strategy. So that's one message. The second message is when you look at the results of the targeted growth categories, you can see that they're pretty positive and they definitely carried the weight of the sales increase in the first quarter. So as I said earlier, Equipment was the driver. Equipment sales was the driver of Construction Material Handling. And to repeat myself, did see market share improvements, both sequentially and on a year-over-year basis in large construction excavators and in the broader kind of Material Handling category. The third message on the page, which we note is the performance in Central Canada, so that's the arrows that you can see off to the far right-hand side of the page. We saw decent growth in the targeted growth categories in Ontario, but we did see declines in a number of other businesses. That's a mix of, in some cases, market conditions, and in other cases, timing. The bigger factors in the sales performance at Ontario, if you scan down the page, were Forestry, Power and Marine, and Crane and Utility. Forestry is up to a wee bit of a slow start, so we're expecting to see a bit of improvement there, but that was off to a slow start. The Power and Marine business is generally a function of timing, some projects, which from a backlog standpoint, Power and Marine has contributed significantly to improvements in backlog, so we're expecting to see some sales increases throughout the balance of the year in Central, coming out of the -- particularly the Power-Gen business. In Crane and Utility, that's a market conditions this year, I think. Not a huge business, but a very important -- nationally, but a very important business for the Ontario market, and some of our larger utility customers with lower capital budgets has constrained the growth in that business. I think, net-net, while the Central performance in the targeted growth categories is good and we saw some spotty performance in the other areas, we feel pretty comfortable with how Central will play out as the year progresses. Okay? Darren?

[Darren Julian Yaworsky, Senior VP of Finance & CFO]

Thanks, Mark. Please turn to Slide 7. As Mark mentioned, we experienced a strong improvement in our EPS year-over-year. In the first quarter of 2018, adjusted basic EPS improved to $0.53 from $0.32 for the same quarter of the prior year, representing a 66% increase. As noted, please note that we reported Q1 adjusted basic earnings for 2017 as an adjustment of 31 -- or to $0.31 from $0.32, and this is a result of restatement to reflect the adoption of IFRS 15, and there's a fulsome note in the financial statements. The earnings improvement relates primarily to higher revenue, modestly higher gross margin and lower finance costs. To note, our finance costs decreased $800,000 year-over-year as a result of lower interest rates from calling our senior notes. I just want to remind everybody, we've entered into interest rate hedges, which have locked in the rates for approximately half of our outstanding debt. SG&A as a percentage of revenue declined 120 basis points to 14.3% from 15.5% in the prior year. And for further clarity and further to Mark's point, earlier points, we improved property sales and SG&A. After adjusting out the gain in property sales in Q1, SG&A as a percentage of revenue was 14.6%. Additionally, in the first quarter of 2018, we began the redesign of our finance organization to better align with the One Wajax operating model. The redesign is expected to cost roughly $5.6 million in severance, project management and duplicate labor costs. We have established a $1.7 million provision in Q1 to cover the anticipated severances for the balance of '18, and the remaining $3.9 million anticipated costs will be expensed as incurred over the project period. We anticipate the majority of the project will be completed by the first half of 2019. Additionally, during the quarter, we also commenced a leadership realignment within the Engineered Repair Services function, which is also intended to better align with the One Wajax model. The costs of the realignment are estimated at $500,000, of which $300,000 has been included in the provision established in Q1 2018. Management anticipates that the majority of the cost, the remaining costs, will be incurred by the end of Q2 of this year. Please move to Slide 8. Our Q1 2018 backlog increased approximately $45 million year-over-year and $27 million from Q4 of 2017. The year-over-year increase relates primarily to new power generation, industrial parts and construction and material handling orders. Since Q4 2016, we've experienced increasing backlog in Equipment, Industrial Parts and ERS. We remain encouraged by the strength and breadth of our sales pipeline as we enter 2018. Excuse me, it was Q4 2017, not '16. This increase in backlog is also tied to our higher inventory levels, which I will discuss in the following slides.Please turn to Slide 9. Inventory, including consignment, increased $100 million -- $105 million compared to Q1 2017, or $22 million compared to Q4 2017, and is higher across all product categories as results of improving market conditions. Of note, this reflects our higher revenue expectation for 2018 relative to 2017. We have also been more proactive with respect to equipment orders as manufacturing slots are becoming scarce due to improving market conditions globally. We continue to see lead time issues in some areas, including construction equipment, forestry equipment, engines for power generation and off-highway use, and more broadly in parts. We do not see these lead times negatively impacting our 2018 sales plan in any material way, however, we may end up sacrificing incremental sales opportunities in some instances. We do not have any concerns with our current inventory levels, which align with our growth objectives for the year, although we don't anticipate a material increase in our inventories from this point forward. We'd like to build -- however, we'd like to build on our parts inventories where possible.Please slide -- move to Slide 10, please. Our Q1 leverage ratio increased slightly compared to Q4 from 2.08 to 2.12, primarily related to higher debt levels offset by higher trailing 12-month EBITDA. While we are marginally above our target range of 1.5 to 2x, we're not concerned as this is largely a result of continuing investment in inventory and CapEx, which have been expected to drive growth and higher cash flows in the balance of 2018. We're also continuing to focus on our working capital efficiency, which is a key component in managing our overall leverage targets. As you can see, our working capital as -- to sales ratio and inventory turns have remained stable over the past 12 months. We expect to lower our leverage over the balance of the year as we focus on releasing working capital from the system. We are also -- we also introduced reporting on adjusted return on net assets, or RONA, this quarter. This is an important tool as we use this internally to evaluate our performance and it plays a key role in determining the payout of long-term incentive compensation for management. All details of the program can be found in our management information circular, which is available on SEDAR. Consistent with the growth in our adjusted EBIT, adjusted RONA has increased over a year-over-year and sequential basis. The supporting calculations can be found in the non-GAAP measures section of the appendix of this presentation. Finally, the board has approved our second quarter dividend at $0.25 per share, payable on July 4 to shareholders of record on July 15. We remain confident in the stability of our dividend at this level across the business cycle. With that, I'll turn it back over to Mark and Slide 11.

[A. Mark Foote, President, CEO & Director]

Thanks, Darren. Our outlook for the year remains essentially unchanged. We're expecting higher adjusted net earnings this year on a full year basis versus 2017. While we didn't see the effect of Equipment margin pressures as much as we had expected in the first quarter, we do believe that over the course of the year, that those margin pressures will occur and we'll continue to focus on cost productivity in order to mitigate those pressures. Market conditions in Western Canada, I'm skipping to the last point, I'm going to come back to Central and Eastern in just a second here, market conditions in Western Canada did improve a bit in the first quarter of this year, but certainly, the gain compared to the first quarter of last year versus 2016 was not as material. So I think our expectations with Western Canada conditions continue to improve, but being -- the trajectory being lower, from an improvement standpoint, is going to play out. And we continue to be pretty comfortable that albeit on a full year basis, our performance in Central and Eastern Canada will be reasonably strong by the end of this year. We're very pleased with our performance in the East. And I think recognize we've got some work to do in Central, but I think, when the clock turns over at the end of the year, I think, we'll be satisfied with where we're at. And I think, with that, I'm going to turn it back to you, Trevor, and we're going to go straight to questions. We're going to go straight to questions, please.

[Operator]

[Operator Instructions] Your first question comes from Michael Doumet of Scotiabank.

[Michael Doumet, Analyst]

Nice quarter. So your SG&A rate in the quarter was quite impressive, even after excluding the gain on the sale. So you're effectively at the lower end of your SG&A rate guidance. And that's in a seasonally we quarter. So as we think of the balance of the year, I mean, how should we think about the incremental efficiencies maybe offsetting planned investments when we're modeling SG&A?

[A. Mark Foote, President, CEO & Director]

Michael, it's Mark. You should probably think about it staying pretty close to the low end of that range based on our internal forecast. I don't think it would be right to expect it to drop any material level below the range just simply because of some of the programs we have coming through the balance of the year. So close to the bottom of the range is probably the right forecasting assumption.

[Michael Doumet, Analyst]

Okay. That's helpful. And maybe just to follow up on the announced restructuring, could you provide any specifics there? Any sense of eventual cost savings?

[Darren Julian Yaworsky, Senior VP of Finance & CFO]

Anticipate that we'll be able to save approximately $2 million a year. Over a 10-year period, the NPV on that trade will be somewhere in the neighborhood of $5.5 million. But I want to emphasize that we're not making this change for solely cost savings. That's a peripheral benefit. It's really to align our financial reporting and financial operations with Mark's vision for the One Wajax.

[Michael Doumet, Analyst]

Okay. And maybe just one more before I pass it on. On your gross margins, a decent improvement there year-over-year and sequentially, and that's despite the lower product support sales. And you already talked about that not likely being the case for the remainder of the year, but with longer lead times in certain categories, are we in a better spot, let's say, than what we were expecting a couple months ago?

[A. Mark Foote, President, CEO & Director]

We're assuming that's not the case, Michael. It may prove to be the case. We were pleased with the equipment margins because that's really the -- that was the swing factor in a slight margin improvement. We had decent parts and service margins, but as you know, the mix was a little bit lower. So our internal forecast don't assume that to be the case, but we were positively surprised by the first quarter.

[Operator]

Your next question comes from Michael Tupholme of TD Securities.

[Michael Tupholme, Research Analyst]

Mark, just to pick up on that last question regarding gross margins, what -- given that it sounds as though the Equipment margins maybe surprised you a little bit to the upside, what is it you see changing here over the next few quarters that's likely to result in the margin pressure you've been talking about?

[A. Mark Foote, President, CEO & Director]

I guess, we did see some share improvement in the first quarter, and that if you look at share historically for us, the increases were, in our business, noticeable. So I don't -- I guess, I'm not entirely confident that the margins we delivered in the first quarter are necessarily repeatable for the full year. I also think that the mix equipment may change a bit as the year progresses. And some of the stuff that I think will either have shown up in backlog or will find its way out onto the customers' hands may be slightly lower-margin products. So it's possible that we're wrong, but having said that, there are more indicators pointing to the spends in our original expectations than what happened in the first quarter.

[Michael Tupholme, Research Analyst]

And is the best -- I mean, I guess, there's some seasonality in the business, but is the best way to think about this is, from your perspective, talk about the gross margins as Q1 sort of being the high watermark for the year?

[A. Mark Foote, President, CEO & Director]

Yes, I think so. I mean, if you look at our internal forecast, our forecast for the full year don't look quite as high as the first quarter, for sure. And I think, using last year's margins, actually, I think, using a little bit less than last year's margins is probably the right walking around number. So I would suggest that the margins for the balance of the year are not expected, particularly in the third and fourth quarters, to be as high as they were in the first.

[Michael Tupholme, Research Analyst]

Just back on the -- related to this as well, the subject of market share gains and improvement. Can you talk a little bit more about where you've seen that, whether that's -- I guess, specifically by product category, I mean, is this -- have you started to see anything yet on the rental side? Or is this more on the -- sounds like it's more on the equipment sales side, but can you just dig into what you've seen so far, I realize it's early days, but in terms of the market share gains?

[A. Mark Foote, President, CEO & Director]

Yes. On the construction side, when we talk about share, we're talking about construction excavators as the proxy for market share. Our share in loaders is low enough for -- the number's not meaningful in the articulated dump truck share, it bounces around pretty good, depending on what's going on over at rental programs, et cetera. So we look at large excavators. And the large excavator market share, call it, up sequentially about 2%, and year-over-year, 1.4%. It's driven primarily by increases in Western Canada's market share, with some improvement in Québec and a very minor decline in Ontario. So it's strong in the West and it's strong in Eastern Canada. And again, the proxy for us is large construction excavators. In the Material Handling space, that market share is much more indicative of the full range of the material handling categories. And we saw some nice gains in Material Handling in a number of different regions, so there wasn't one that particularly outperformed another. And the year-over-year share gains were almost 2%. So that's -- in that business, that's a pretty good improvement. So I think that is a function of some pretty good sales effectiveness. We don't -- we did have some rental programs entering the market, but that was really at the end of the first quarter. So that wouldn't have fundamentally affected the material handling shares. So both construction and material handling, those were just raw sales. There's not a lot of rental that would have affected that.

[Michael Tupholme, Research Analyst]

Okay. That's helpful. And in terms of rental, when should we expect to sort of see an inflection point, I guess, as you focus more on that as an area you're trying to target?

[A. Mark Foote, President, CEO & Director]

In the Construction business, I think, as we've kind of talked about before, it's really a go slow to go fast kind of strategy. So I imagine it's going to be a weave at a time before you see any fundamental effect from rental. Certainly, it wouldn't swing the sheer numbers in a material way this year, particularly because we're starting the rental program generally in Southern Ontario, where A, market shares aren't big to begin with; and B, we're not starting with a fleet that's going to restructure the market in any way. So we really are focused on the operational side of that business, making sure that our customers are properly served and making sure that the fleets are managed correctly. So that is -- that continues to be a work in process. The fleets are gaining a little bit of girth and I think will be in business towards kind of the end of the second quarter into the third. But again, I wouldn't expect that to be a material effect on the share. And in Material Handling, I think, as you know, we've run rental programs for quite some time, so the effect of that, while the fleet's been renewed and we continue to drive on it, I'm not sure, it's the sales effectiveness for kind of first goods sold that really drives that share.

[Michael Tupholme, Research Analyst]

Okay. And then, last one for me. Over the last several months, I guess, there's been increased discussion and, in some cases, optimism about the potential for the LNG Canada project to move forward in B.C. Can you talk about whether or not that might represent an opportunity for Wajax if it goes ahead, either in terms of direct involvement with the project on some level or on the resource extraction side?

[A. Mark Foote, President, CEO & Director]

Yes. There's probably 3 potential positive outcomes for that. And I'll start with the well stem side. So any natural gas exploration increase drags a higher level of stimulation horsepower than an oil well would. So any increased amount of activity on gas really helps our frac service business. And to some extent, may help engine and transmissions sales, but I think, we think about it more today for the parts and service increase that it represents, so there's some possibility there. That shows up in our Engines and Transmissions business. And then, when it comes to any kind of transport, construction or any kind of site construction, obviously, anything good for a Western Canada contractor is going to be good for Wajax. So there's -- either in pipelines that may or may not happen in B.C. or in the LNG project, there's a number of different conversations underway with equipment rental programs. We typically wouldn't have participated in multiunit rental programs for heavy construction in the West. We may, in fact, decide to do that if the opportunities are there today. But it's definitely an upside. Not sure how material, but any kind of LNG activity is very positive for Wajax.

[Operator]

Your next question comes from Devin Dodge of BMO Capital Markets.

[Devin Dodge, Analyst]

Can you talk about the equipment pricing trends that you've seen in your markets? I'm just trying to get a sense for whether any price increases related to higher material costs weren't related in Q1? Or whether you expect that to pull through maybe later in the year?

[A. Mark Foote, President, CEO & Director]

I don't think we can say that there was anything material flowing through to the customer in the first quarter. We'll go back and make absolutely sure that, that's accurate but I'm pretty sure it is. And as far as cost increases are concerned, to the extent that we have been advised of them, we don't see any specific challenge in recovering that from the customer, but I would say there's not a ton of them being communicated to us right now.

[Devin Dodge, Analyst]

Okay. Now just to follow on that, Hyster-Yale talked about -- I mean, they had some pretty strong numbers, and they talked that some of that growth they saw on Q1 was from customers trying to get in ahead of any kind of price increases. Do you feel that, that commentary is consistent with your markets as well?

[A. Mark Foote, President, CEO & Director]

I don't think we would have said the same thing. There may be some issues in markets that we don't participate in, but I don't think we've seen any particular actions on the part of customers to accelerate orders because of an anticipation of a cost increase. But we'll go back and make absolutely sure that's accurate, but pretty sure that's true.

[Devin Dodge, Analyst]

Okay. And then, just to come back to the revenues in Central Canada, I apologize if I missed it, but just can you help us understand the revenue weakness that you saw there? Just wondering if there's common factors that kind of span across your different lines of business, just any color there would be helpful.

[A. Mark Foote, President, CEO & Director]

Yes there were -- I noted 3 categories in the earlier part of the call, it was probably 4 we should call out. So forestry was a factor in Central Canada, that was off to a pretty slow start actually. So we're not entirely certain that gets recovered through the year, but it's -- and it's a very important category, but we're hoping we can offset any slowness in forestry with other businesses. Our Power-Gen is a very lumpy business, particularly in Ontario, because it's got a lot of project work in it. And we believe that the increased backlog that we're seeing through project work will help us reset that. The crane utility business is a very different business today because our largest utility customer does not have the capital program they would have had historically, so that's a structural change, we think, in the market, and something we're going to have to drive growth in Ontario through other categories. And we did have some weakness in the on-highway business, that was primarily a timing issue. It just had to do with a whole bunch of transmission and engine work that we would have been doing for municipalities, which didn't occur in the first quarter but is expected to in the second. So it's a bit of a mix of market conditions and timing. We feel pretty comfortable with what we're doing in the invest to grow categories in Ontario, and we see some optimism in some of the other areas too, so we're not particularly concerned with the trends in Ontario.

[Devin Dodge, Analyst]

Okay. That's helpful. And then, just maybe one last one from me. Can you give us a bit of an update on what you're seeing on the M&A side? Just wondering how or what opportunities you're looking at, and whether this kind of pushing forward in 2018 is still a possibility?

[A. Mark Foote, President, CEO & Director]

We're always pretty active with a couple, 3 files. I don't think we have anything specific to report to you right now, but our conversations in Canada remain ongoing and we've got a number of conversations going on in the U.S. But I wouldn't hold my breath waiting for something to happen in the next few months. But we've got 2 or 3 files that are reasonably active.

[Operator]

[Operator Instructions] Your next question comes from Ben Cherniavsky of Raymond James.

[Ben Cherniavsky, Managing Director of Industrial Research]

The -- it was good numbers there, by the way, so nice to see. The backlog, if you break it down into the various components that you've disclosed, I think, if I read it right, the Machinery backlog is flat to down, but the Machinery had the biggest growth in the quarter. So I'm just wondering if maybe some of the demand was pulled forward, is there a bit of a timing issue? Because I know that business can be lumpy.

[Darren Julian Yaworsky, Senior VP of Finance & CFO]

I don't think there's a timing issue. If anything, we're probably going to see the backlog roll into Q2.

[Ben Cherniavsky, Managing Director of Industrial Research]

Okay. But it's down at this point, isn't it? If I'm reading that correctly?

[A. Mark Foote, President, CEO & Director]

Are you talking about the Equipment backlog, Ben?

[Ben Cherniavsky, Managing Director of Industrial Research]

Yes.

[Darren Julian Yaworsky, Senior VP of Finance & CFO]

Yes. So we didn't pull anything forward to be able to satisfy the Q2 performance. So we anticipate, as we go out, that some of our pipeline will convert into backlog. We anticipate that the backlog in the Equipment space in Q2 as reported will grow.

[Ben Cherniavsky, Managing Director of Industrial Research]

I'm not suggesting you pull it forward to make numbers, I'm just saying the business can be lumpy. So you might have had some deliveries in the first quarter that came out of what might have shown up in the second quarter because the backlog is down. But anyway, I'm getting some feedback on, hang on a second. I'm going to try my headset. No I'm still getting some feedback. The rental platform, can you just elaborate a little bit on what your intentions are there, like is that a -- is that primarily a rent-to-own strategy you guys want to develop? Or are you talking about building out a complete and extensive rent-to-rent fleet?

[Darren Julian Yaworsky, Senior VP of Finance & CFO]

So just for completeness, Ben, we already have a rent-to-own program that is fairly robust. What we're looking to build out a rent-to-rent program, and a rent-to-rent program that's focused primarily on the construction heavy equipment, and then some expansion of our rent-to-rent program in Material Handling.

[Ben Cherniavsky, Managing Director of Industrial Research]

So a heavy rent program, you're suggesting?

[Darren Julian Yaworsky, Senior VP of Finance & CFO]

That's correct.

[Ben Cherniavsky, Managing Director of Industrial Research]

And that would be like to complement your existing customer base on the dealership side?

[Darren Julian Yaworsky, Senior VP of Finance & CFO]

Yes. So in -- most of our...

[Ben Cherniavsky, Managing Director of Industrial Research]

Like we're not talking about -- you're not talking about building out a rental platform like United Rentals or Battlefield Rentals or something like that, are you?

[Darren Julian Yaworsky, Senior VP of Finance & CFO]

No. We're looking at 3 primary product lines. One would be the excavators, the second would be the wheel loaders and the third would be the articulated dump trucks. And we wouldn't be getting into any other United Rental or Battlefield. We're just not equipped as a company to be able to manage that type of inventory.

[Ben Cherniavsky, Managing Director of Industrial Research]

On the M&A, Mark, can you just seize this opportunity to maybe elaborate on what parts of your business -- because you have quite a few different parts of the business, so Mark, so specifically, which areas -- I don't -- you don't have to go to product line, but can you just help to try and crystallize what you're looking at in the U.S. as to a complementary product with what you already distribute and represent in Canada?

[A. Mark Foote, President, CEO & Director]

Yes. If you look -- you don't have to look at this right now, but the investor presentation spells out that the primary businesses that we're interested in are the ones that have the best infrastructure that we can use to implement our model with multiple categories, et cetera. So what that suggests is it suggests it's either the powertrain type of business, which is either -- mostly on highway side of things, so that's engines and transmissions and on-highway business, or it's the construction and material handling business. They come with branch networks that are sizable enough that we can use the infrastructure to drive success in other categories. So those are the primary areas of focus. We would like to -- we'd very much like to focus on the construction and material handling side of the business because those are the growth categories for us in Canada that -- where we have some pretty strong relationships and feel pretty comfortable with that business and where it's going to go. Having said that, if the powertrain business was available to us and they brought infrastructure and we had other distribution opportunities in the market, so we're served by that business, then we would consider that also.

[Ben Cherniavsky, Managing Director of Industrial Research]

The Materials handling side, I could understand that with your position in Canada, there might be some opportunities there. I guess, what I'm struggling with is to understand the construction side, like in particular, Hitachi. I can't see how there would be -- like would this include opportunities to consolidate Hitachi dealers in the U.S.?

[A. Mark Foote, President, CEO & Director]

Conceivably, yes. Conceivably. I mean, Hitachi has very few independent dealers in the U.S. market. So admittedly, construction is a bit more of a complicated issue for us, just given the supplier base that we work with today in Canada. It's possible that we would enter into agreements with other manufacturers that -- outside of our defined area of responsibility with our Hitachi franchise. But our fundamental interest is in seeing what opportunities we may have to help the Hitachi brand in the U.S. market.

[Ben Cherniavsky, Managing Director of Industrial Research]

As you've pointed out, that's a bit of a mixed bag of different kinds of arrangements in the U.S. It's hard to see how you align yourself without, at the same time, conflicting yourself with some of the lines you represent.

[A. Mark Foote, President, CEO & Director]

Yes. And truthfully, we would prefer to avoid it. But there's no real restriction on us, outside of the Canadian market, to represent another construction manufacturer, although that's certainly not our first choice.

[Ben Cherniavsky, Managing Director of Industrial Research]

Okay. And just finally on -- speaking of some of the product lines, your working line, are you guys still representing that at this point?

[A. Mark Foote, President, CEO & Director]

Yes.

[Ben Cherniavsky, Managing Director of Industrial Research]

Is there any indication as to what the dealer wants to do with that line?

[A. Mark Foote, President, CEO & Director]

Guys who know the business reasonably well like yourself, I think, have a -- that's a pretty good assumption that at some point, that leaves Wajax's portfolio because that makes some sense. Our guys just got back from Germany and meetings with Wirtgen directly. And at this point in time, it's full steam ahead with the existing dealer networks. So we didn't anticipate having Wirtgen for the full year. I think, our internal forecast assume that, that would not be the case. But it certainly appears that, right now, we've been given no reason to believe that, that product would leave our portfolio. Wirtgen, if we were to lose it, which we sincerely would like not to see happen, but if we were to lose it, important to recognize it's not like a LeTourneau or something like that. It's an Ontario-specific distribution right for Wajax, and while a very profitable product in its own right, would not be a material effect to the company.

[Operator]

There are no further questions at this time. I now return the call to our presenters.

[A. Mark Foote, President, CEO & Director]

Okay. Well, thanks very much for joining us today. And we look forward to speaking to you again on August.

[Operator]

This concludes today's conference call. You may now disconnect.