Wajax Corp

TSX:WJX

Earnings Call Transcript 2021-Q1

[Operator]

Thank you for attending Wajax Corporation's 2021 First Quarter Results Webcast. On today's webcast will be Mark Foote, Wajax's President and Chief Executive Officer; and Mr. Stuart Auld, Chief Financial Officer.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 Mr. Mark Foote. Mr. Foote, please go ahead.

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

So good afternoon, everyone. Thanks for participating in the first quarter results call. This afternoon, we're going to be following a webcast, which includes the summary presentation of our first quarter financial results. Presentation can be found on our website under Investor Relations, Events and Presentations.I'll provide you with a general update and turn it over to Stu for comments on backlog, inventory, cash and the balance sheet. And to begin, I'd like to draw your attention to our cautionary statement regarding forward-looking information on Slides 2 and 3. And additionally, non-GAAP and additional GAAP measures are summarized on Slides 20 through 22 for your reference.If you turn to Slide 4, please. Wajax introduced our first sustainability report as an inclusion in our recently released 2020 Annual Report. The sustainability report covers key components of our ESG program, a summary of which appears on this chart. We encourage investors to visit wajax.com to more fully review the details. Our ESG program builds on our long-standing strength in employee health, safety and well-being, with additional programs in diversity and equal opportunity, sustainable products and services, environmental responsibility and community service. Our customers, our investors and, most importantly, our employees consider these programs the important attributes of our performance as a company, and we look forward to reporting on our progress as we go forward.If you turn to Slide 5. Wajax has consistently adhered to 4 objectives in response to the pandemic: first, to protect the health, safety and well-being of our team; second, to continue to provide strong service to our customers; third, to protect the financial health of our company; and fourth, positioning ourselves to focus on growing the business as conditions improve. Our decisions in the first quarter and going forward will be made according to these objectives.A summary of our actions is included in the MD&A and news release that was issued May 3. And on behalf of the management team and the Board of Directors, I again want to thank our employees for their dedication, commitment and flexibility during this very difficult period. The entire team continued to do an excellent job in the first quarter, including adhering to enhanced safety protocols and demonstrating their commitment to serving our customers every day.Turning to Slide 6. Revenue of $387 million was up $43 million or approximately 13% in the quarter. The increase in revenue was due primarily to higher equipment sales and benefited from the inclusion of Tundra, which contributed $18 million based on partial quarter -- a partial quarter of operations.EBIT of $22.2 million was up $10.8 million or approximately 95% in the quarter, and adjusted net earnings of $0.59 was up $0.30 in the quarter, noting the adjustments recorded on this chart. Excluding the net effect of the wage subsidies, adjusted net earnings were $0.47.The first quarter TRIF rate was 1.16, which is 26% better year-over-year. We are very proud that the team has continued to improve workplace safety despite the obvious challenges of 2021.If you turn to Slide 7. The company qualified for $6.3 million in wage subsidies in the quarter and allocated the gross amounts of $2.8 million and $3.5 million to cost of sales and SG&A, respectively. It's important to note that the net positive effect of the subsidies in the first quarter was approximately $3.8 million due to the redirection of $2.5 million to temporary supplemental compensation programs directed at Wajax's frontline employees, who continue to provide excellent and essential support to our customers across Canada.If you turn to Slide 8. The revenue increase of 13% in the first quarter resulted from growth in all regions. Central Canada sales of $81 million, increased 11% in the quarter, due primarily to strength in construction and forestry and assisted by increases in ERS. Eastern Canada sales of $150 million increased 12% in the quarter, due primarily to strength in construction and forestry, assisted by increases in material handling, power systems and in industrial parts.While the ERS market continues to be strong, sales declined in the East due to operational restrictions related to safety protocols. In the shops, which have constrained production, we fully expect sales to catch up to demand as COVID-19 conditions improve. In Western Canada, sales of $156 million increased 14% in the quarter due primarily to construction and forestry and the inclusion of Tundra, which positively affected both industrial parts and ERS. Excluding Tundra, sales in Western Canada were flat in the quarter, as construction and forestry offset weakness in parts and service associated with the oil sands that negatively affected both mining and power system sales. Parts and service demand in the oil sands appears to be improving, and fleet utilization is now greater than 90%.If you turn to Slide 9. An update on equipment and product support sales and year-over-year variances are shown on this page. Equipment sales of approximately $119 million increased $35 million or 42% due to higher construction and forestry equipment sales in all regions. In product support, sales of approximately $107 million declined $10.7 million or 9% due primarily to weakness in Western Canada and lower parts and service demand from oil sands customers. As previously stated, demand from oil sands customers appears to be improving. Product support volumes in Central and Eastern Canada were strong, increasing 8% and 18%, respectively, in the quarter.If you turn to Slide 10. An update on industrial parts and ERS sales and year-over-year variances are shown on this page. Industrial parts sales of approximately $104 million, increased $12.4 million or 13% due primarily to the inclusion of Tundra. Excluding Tundra, organic growth in industrial parts was 3% in the quarter. ERS sales of approximately $49 million increased $7 million or 16% due primarily to the inclusion of Tundra. Excluding Tundra, ERS sales declined slightly due to lower volumes in Eastern Canada related to COVID-19 restrictions.If you turn to Slide 11. The slide summarizes our sales at a category level for the quarter. This chart has been simplified from previous quarterly calls to focus attention on overall groupings of heavy equipment categories and industrial parts and services. In the first quarter, total growth in heavy equipment categories of approximately $24 million or 11% was driven by total sales in construction and forestry that offset weaknesses primarily in mining and power systems related to Western Canada. Total growth in industrial parts and services categories of approximately $19 million or 14% was driven primarily by the inclusion of Tundra. Excluding Tundra, total sales in industrial parts and services was roughly flat year-over-year in the quarter.And let me now turn the call over to Stu.

[Stuart H. Auld, Chief Financial Officer]

Thanks, Mark. Please turn to Slide 12 for my comments on backlog. Our Q1 backlog increased $94.8 million or 52% sequentially from the previous quarter and increased $9.8 million or 4% on a year-over-year basis. Sequential increase was driven primarily by higher orders in most categories, most notably the construction and forestry category and the ERS and industrial parts categories with the addition of Tundra's backlog.The year-over-year increase relates to higher orders in the construction and forestry category and with the addition of Tundra's backlog, higher orders in the industrial parts and ERS categories. These increases were partially offset by lower mining orders. Overall, backlog reflects improving momentum and increasing mix to higher relative margins in backlog due to increasing mix of industrial parts and services backlog, including Tundra.Please turn to Slide 13 for an update on our current inventory levels. Inventory, including net consignment, decreased $2.9 million compared to Q4 2020 as a result of lower equipment inventory in the construction and forestry categories and a decrease in the net consignment inventory of $24.1 million. These decreases were partially offset by higher balance sheet inventory, which increased $21.2 million due primarily to the acquisition of Tundra and higher mining equipment inventory.Inventory, including net consignment, decreased $145 million compared to Q1 2020 as a result of lower equipment and parts inventory in most categories. Net consignment inventory decreased $80.9 million compared to Q1 2020. Overall, we are managing inventory with suppliers to manage supply chain risks due to demand and to secure appropriate levels of inventory to support our customers.Please turn to Slide 14, where I will provide an update on cash flow and leverage. Cash flow and operating activities. Cash flow from operating activities in the current quarter have increased $29.1 million from Q4 2020, due primarily to an increase in cash generated from changes in noncash operating working capital and higher net earnings.Leverage ratio. Our Q1 leverage ratio decreased compared to Q4 from 2.28x to 2.04x due to the higher trailing 12-month pro forma adjusted EBITDA.Cash flow results in the current quarter were positive and allowed a material reduction in debt when considering the $73.4 million in cash used to acquire Tundra in January 2021 and has allowed total leverage to be close to the target range of 1.5 to 2x at the end of Q1. Our available credit capacity at the end of Q1 was $195.4 million, which is sufficient to meet short-term normal course working capital and maintenance capital requirements and certain strategic investments.Please turn to Slide 15, where I'll provide an update on financial position. We continue to focus on working capital efficiency, which is a key component in managing our overall leverage targets. The improvement in inventory turns from Q1 2020 is due to lower average inventory levels. As previously disclosed, we continue to evaluate ways to unlock cash from the business and, as such, have completed a market value assessment of our own real estate holdings. Further opportunities to sell redundant real estate as well as sale and leaseback opportunities have been identified and are being pursued in 2021.Proceeds from any real estate sales will be used primarily for debt repayment. The earnings impact from any sale and leaseback transactions is not expected to be material as any gains are expected to be approximately offset by the incremental lease costs over the term of the lease. Finally, the Board has approved our second quarter dividend of $0.25 per share payable on July 6, 2021, to shareholders of record on June 15, 2021.Please turn to Slide 16. And at this point, I'll hand the call back to Mark to provide a brief update on our 2021 financial outlook and concluding remarks.

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

Thanks, Stu. Recognizing that the challenges Wajax faced in 2020 have persisted into 2021, the corporation nonetheless enters 2021 with confidence, expecting that it's positioned to succeed over the longer term. In 2021, Wajax remains focused on the same priorities that guided it in 2020, namely protecting the health and safety and well-being of our team, providing excellent customer service, protecting the corporation's financial health and driving its long-term growth strategy.The company expects revenue associated with the acquisition of Tundra to be a significant contributor to total revenue growth in 2021. In the first quarter, general market conditions affecting organic growth were better than the corporation's expectations. Wajax will continue to work with our supplier partners to manage 2021 supply chain service levels. Inventory and working capital investments will be managed accordingly, pending a clear indication of a sustained recovery.In the corporation's heavy equipment categories, Wajax will continue to focus on success in construction and forestry, mining, material handling and power systems, including improvements in product support volumes. Wajax has excellent growth opportunities in these categories, and we'll continue to work closely with our supplier partners to prudently grow market share and capture aftermarket sales.In industrial parts and ERS, Wajax expects strong growth, including the contribution from Tundra. ERS continues to be one of the corporation's most significant opportunities capable of growth at each point in the economic cycle.Corporation's infrastructure programs are expected to continue in 2021, including investments in the branch network consolidation and technology. And following the COVID-19-related delay in 2020, the phased implementation of the corporation's new ERP system has begun in the second quarter of 2021, and will continue over an approximately 24-month time frame to -- in order to reduce the associated implementation risks.Operator, we'll turn the call open for questions now.

[Operator]

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

[Michael Doumet, Analyst]

Nice quarter. The first question, just on the outlook. You commented that you saw better-than-expected organic growth in the quarter and that you were managing inventories, pending a clear indication of a sustained recovery. I mean for clarity, are you suggesting that there could have been particular strength in Q1 that maybe is less repeatable in subsequent quarters?

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

I think right now, to be perfectly honest with it, Michael, the growth, we think, to some extent, is a wee bit of a pull forward on demand. I don't think that the growth we saw in the market would necessarily continue at the same rates for the balance of the year.So while the market conditions are, as we said, generally more positive than we expect it to start the year and we've gone into the second quarter with similar conditions, at least in the early portions of the quarter, we suspect that those types of conditions won't really be the case for the entire year.

[Michael Doumet, Analyst]

Got you. Okay. And how do you feel about the current inventory levels and that's the ability to secure additional inventories to meet demand at this point? I mean any comments on lead times or anything like that would be helpful.

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

Yes. There's a variety of issues, I think, that we're managing upstream with supplier partners right now. On the industrial parts and the -- what you might call the mobile equipment parts side of the world, there -- the lead times and service levels are fine. There's a couple of pockets of issues, but nothing significant.On the heavy equipment side of things, construction activators, the lead time has stretched out a bit. We're still running with inventory on the ground. So we've got a wee bit of cushion there. But construction excavator lead times are stretched out and forestry lead times are stretched out, which shouldn't be too surprising just because of the volume of business that occurred in the first quarter.So there's some degree of engine lead time issues, I think, that you would have read about, all sorts of things affecting engine deliveries and things like that. But I think the bigger issue for us right now is trying to manage the inbound flow of construction and forestry equipment to try and take advantage of the market conditions while they exist.

[Michael Doumet, Analyst]

Got you. And I guess the other side of that question is on the working capital improvement. That's been quite significant in the last 4 quarters. What should we expect for the balance of the year?

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

We'll continue to see positive improvements, albeit not at the rate that we saw in the first quarter.

[Operator]

Your next question comes from the line of Michael Tupholme from TD Securities.

[Michael Tupholme, Research Analyst]

Mark, just on the comment that general market conditions affecting organic growth were better-than-expected to start the year. And I appreciate that you think that may be some pull forward. But I'm wondering if you can comment on what areas, whether it'd be product categories, end markets or regions, did you see that additional strength?

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

It's most pronounced, Michael. And I wouldn't say it's regionally specific because it was -- we saw growth in all regions in construction and forestry. I think it's most pronounced in construction and forestry.And typically, the second quarter is the biggest quarter, I think, as you know, in particularly the construction business. And we saw a unit count in the first quarter, which was higher than we've seen in quite a while. So that being the case, we're up against some soft comparables from last year. So that's noted.But I suspect that the maintenance -- I'm sorry, the sustainability of market conditions in construction and forestry is probably where we think the market got off to a very hot start and probably won't stay that way for the entire year. The general market conditions affecting other businesses are probably a bit more balanced. The industrial parts market has been continuing to gather some momentum, and we do -- that we think that is sustainable.The ERS market is excellent right now. We think that's sustainable. There's been some additions in mining quoting activity. So that market appears to be improving more so than we might have expected as we closed last year. And as we mentioned, our oil sands product support business, we expected that to improve also.So the comment on the sustainability of market conditions is more specific to construction and forestry. The other markets are a bit more balanced and there's more likelihood that those levels of more positive conditions can be sustained.

[Michael Tupholme, Research Analyst]

Okay. No, that's very helpful. And maybe just this next question kind of ties into what everything you just sort of spoke about. But if we go back to your Q4 results release, you noted in your outlook at that time that organic revenue growth in 2021 was expected to be modest. And you didn't expect heavy equipment markets to fully recover to 2019 levels this year. I'm just wondering if you can talk about how your views on that thinking may have evolved given the better start to the year.

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

I think it is more likely than we would have originally expected that the recovery in heavy equipment markets to 2019 levels can be achieved in 2021. Obviously, that's an estimate on our part. But the heavy equipment markets have started the year considerably stronger than we would have expected. And it's possible that we -- that the 2-year cycle we were originally expecting may be shorter than we originally estimated.

[Michael Tupholme, Research Analyst]

Okay. That's helpful. Just in terms of the -- in terms of procurement of inventory and supply chain, some of the areas where you've seen lead times become a little more extended, is there anything you're doing, any particular strategies you're employing to sort of mitigate that or to position yourselves where you do see strength in the market and you want to have -- you want to get more product?

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

Other than saying we work day-to-day with supplier partners, Michael, I'm not sure we have a different strategy than that. I think we're in daily contact with major suppliers and the extent to which we can get our hands on additional inventory, we definitely action that. It's a day-to-day issue. I'm not sure we have any particular strategy other than continuing to work really closely with them on where we see the market going, what their lead times are and how quickly we can secure inventory.

[Michael Tupholme, Research Analyst]

Okay. Makes sense. In terms of the backlog, the quarter-over-quarter improvement, $94.8 million, I know a portion of that -- a meaningful portion was Tundra. But are you able to break that down in terms of how much was Tundra versus how much was organic, the quarter-over-quarter backlog improvement?

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

Yes. On a sequential basis, the quarter-to-quarter backlog increase, if you ex-Tundra out, was 36%. So Tundra was $28 million in backlog in the first quarter. We saw generally pretty strong backlog in construction and forestry, some power systems, particularly power generation. And we saw some pretty solid backlog in ERS. So the organic growth in backlog was respectable. Tundra was helpful. But the growth absent Tundra was still 36%.

[Michael Tupholme, Research Analyst]

Okay. That's definitely good growth ex-Tundra. And then lastly, just in terms of the qualifying for CEWS in the quarter, how should we think about that going forward? You're now back in Q1 to a situation where you had positive year-over-year revenue growth and, in fact, across all of your regions. Now part of that was obviously a function of the acquisition. But what does CEWS look like going forward? And I think it goes into the third quarter, if I'm not mistaken, the program right now?

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

Yes. We'd expect something in the second quarter, albeit very modest at this point, just given the improvement in revenues.

[Operator]

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

[Devin Dodge, Analyst]

All right. Maybe just to start with, for the categories where you saw some demand strength, so I guess, construction and forestry, does it seem like inventory levels are lean across the industry? And has this started to translate into better gross margins on those sales?

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

I don't know if we can really comment on inventory across the industry. We really only know ours. Margins in the equipment categories are generally pretty positive. We did take advantage of some staged equipment disposals into the U.S. market, which were dilutive to some of our construction margins. But that being the case, if you ex that out, margins on whole goods sales are fairly positive right now.

[Devin Dodge, Analyst]

Okay. Okay. Just maybe ties back to one of your earlier answers, Mark. But can you talk about what you're seeing with regards to RFPs for new mining shovels? And can you remind us how many are currently in the backlog and the timing of the deliveries?

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

There is only one major shovel that's in backlog right now and that's effectively delivering in the second quarter. So backlog on mining is, I think, at the end of the first quarter, really reflects that main shovel and a couple of smaller pieces, so it's not significant.Quoting activity on mining equipment is broadly good. There's activity in the oil sands. There's activity in coal and there's activity in gold in Ontario. So I would say that we're cautiously optimistic that the mining business will be -- maybe a bit better this year than we had expected, given that we have some pieces in inventory. But the extent to which customers are looking for things we don't have in inventory, they're unlikely to fall into 2021.

[Devin Dodge, Analyst]

Okay. That's helpful. Maybe just one last one for Stu. I think in your prepared remarks, you talked about the real estate monetization program. Any -- is there any way for you to kind of size -- potentially size that, how meaningful that could be in 2021? And when you expect those transactions to kind of flow through?

[Stuart H. Auld, Chief Financial Officer]

At this point, I can't size them.

[Operator]

[Operator Instructions] Your next question comes from the line of Bryan Fast from Raymond James.

[Bryan Fast, Senior Associate]

Just in the forestry segment, I know we saw strength in equipment sales and that sector has shot out the lights. Do you sense a different tone from customers and their comfort level regarding the durability of this cycle just relative to prior peaks that we've seen in that sector?

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

Can you just do that a little slower from here? Sorry, I just want to make sure I completely understand the question. Just do that again, please.

[Bryan Fast, Senior Associate]

Yes. So just in the forestry segment, I know we've seen strength there. Do you sense a different tone from customers and their comfort regarding the durability of this cycle relative to prior peaks?

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

Yes. I guess it depends how far out you might consider the cycle to have a duration from a customer's perspective. But I would say that there's a fair degree of optimism that the current conditions are going to be with us for a while on the part of customers. And that's obviously been a catalyst for their purchase of equipment.

[Bryan Fast, Senior Associate]

Okay. And then just regarding ERS, I think you mentioned a decline organically in that segment on the quarter. As we turn to a more normalized environment, what would be an appropriate organic growth rate for the ERS side of the business?

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

I don't think we've really established an organic growth rate. But I think if we achieve less than a 5% to 10% organic growth rate in the base ERS business, I think we'd be disappointed. So we typically plan our ERS organic growth rates higher than the other categories, just simply because the amount of work that's out there that we can get at.Really the issue right now for us has nothing to do with the market and has nothing to do with the company. It has to do with the fact that we get a lot of physical distancing requirements to keep employees safe in a bunch of the shops and that's constraining production. But I would say that if we achieve less than 5% to 10% organic growth rate in ERS, we'd be pretty disappointed on a kind of a post-COVID circumstance.

[Operator]

[Operator Instructions] I show no further questions at this time. Are there any closing remarks?

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

Just saying thank you very much for your time today, and we're looking forward to talking to you again in August. Thanks a lot.

[Operator]

Ladies and gentlemen, this does conclude today's conference. Thank you again for your participation. You may now all disconnect.