Wajax Corp

TSX:WJX

Earnings Call Transcript 2021-Q2

[Operator]

Thank you for attending Wajax Corporation 2021 Second Quarter Results Webcast. On today's webcast will be Mark Foote, Wajax' 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]

Thanks very much, and good afternoon, everyone. Thanks for joining us on our call today. This afternoon, we'll be following a webcast, which includes a summary presentation of our second quarter 2021 financial results. You can find the presentation on our website under Investor Relations Events and Presentations. I'll provide you with some general commentary, and then I'll turn the call over to Stu for comments on backlog, inventory, cash and the balance sheet. And to begin with, 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 in Slides 19 through 21 for your reference. If you turn to Slide 4., Wajax has consistently adhered to 4 objectives in response to the pandemic. First, to protect the health, safety and well-being of our employees. Second, to continue to provide strong service to our customers. Third, to protect the financial health of our company. And finally, and consistent with our strategy, growing our company as conditions continue to improve. Our decisions in the second quarter and going forward will be made according to these objectives, and a summary of our actions is included in the MD&A and news release that was issued on August 5. If you turn to Slide 5, revenue of $446 million was up $89 million or approximately 25% in the quarter. The increase in revenue resulted from increases in the sales of equipment, product support, industrial parts and ERS, including the effect of the addition of Tundra. Excluding Tundra, total sales increased approximately 15%, and also excluding Tundra, total revenue in the second quarter of 2021 was comparable to pre-pandemic levels of the second quarter of 2019. EBIT of $30.1 million was up $10.1 million or approximately 50% in the quarter. EBIT benefited from year-over-year increases in revenue, stronger relative margins, and the effective management of costs. With respect to the 19.9% gross profit margin rate, margins were clearly stronger than the second quarter of last year and were also improved over the first quarter slightly. Cost control continued to be excellent in the second quarter. Adjusted net earnings of $0.77 was up $0.29 or approximately 60% in the quarter, noting the adjustments that are recorded on the chart. And at the end of the second quarter, year-to-date TRIF rate of 1.67 declined 33% as business volumes increased. I want to thank everyone on our team for their ongoing dedication to workplace safety. The entire Wajax team is committed to lowering the uncharacteristic increase in injury count we experienced to this point in the year. Our team understands the most important priority in our company is that everyone goes home safe at the end of every shift. Turning to Slide 6, the company qualified for $2.1 million in wage subsidies in the quarter and allocated the gross amounts of $0.9 million and $1.2 million to cost of sales and SG&A, respectively. It is important to note that the net positive effect of the subsidies in the second quarter was not material, approximately $0.02 a share, due to the allocation of $1.5 million of the funds received to future employee compensation programs. Turning to Slide 7, the revenue increase of 25% in the second quarter resulted from growth in all regions. Central Canada sales of $80 million increased 8% in the quarter due primarily to strength in forestry, industrial parts and ERS. Eastern Canada sales of $170 million increased 12% in the quarter due to strength in construction and forestry, industrial parts and ERS that more than offset reductions in mining that was related to a large shovel delivery in the second quarter of last year. Western Canada sales of $195 million increased 49% in the quarter due to volume from Tundra and organic growth in industrial parts, construction and mining, which included improved product support in the oil sands. Excluding Tundra, growth in Western Canada was approximately 20%. Wajax continues to expect oil sands related activity to strengthen as the year progresses. If you turn to Slide 8, an update on equipment and product support sales and year-over-year variances is shown on this page. Equipment sales of $141 million increased $5 million or 3%. Strength in construction, forestry and engines and transmissions offset lower sales in mining, material handling and power generation. The effect of supply issues and project timing affected equipment sales in the quarter. Lower mining equipment sales resulted from the large shovel deliveries in the second quarter of last year. Customer activity related to quoting for mining is currently strong. Product support sales of $113 million increased $22 million or 25% due to strength in all regions. Eastern Canada increased 29%, Central improved 10%, and Western Canada increased 29%, including stronger oil sands related volumes. Turning to Slide 9, an update on industrial parts and ERS sales and year-over-year variances are shown on this page. Industrial parts sales of approximately $114 million increased $33 million or 40%. Excluding Tundra, organic growth in industrial parts was strong at 20% in the quarter. ERS sales of $68 million increased $29 million or 72% due primarily to the inclusion of Tundra. Excluding Tundra, organic growth in ERS was 19% in the quarter. Turning to Slide 10, this slide summarizes sales at a category level for the quarter and year-to-date for our company's overall groupings of heavy equipment and industrial parts and services. And in the second quarter, total growth in heavy equipment categories of $28 million or 12% was driven primarily by continued strength in construction and forestry. And total growth in industrial parts and services categories of approximately $61 million or 50% was driven by the inclusion of Tundra and by organic increases in both industrial parts and ERS. Excluding Tundra, total industrial parts and services revenue increased 20%. Let me turn the call over to Stu.

[Stuart H. Auld, Chief Financial Officer]

Thanks, Mark. Please turn to Slide 11 for my comments on backlog. Our Q2 backlog increased $40.3 million or 15% sequentially from the previous quarter, and increased 91.6% -- $91.6 million or 41% on a year-over-year basis. The sequential increase was driven primarily by higher orders in most categories, partially offset by lower mining orders. The year-over-year increase relates to higher orders in construction and forestry, material handling and power system categories and higher orders in the industrial parts and ERS categories with the addition of Tundra's backlog. These increases were partially offset by lower mining orders. Overall backlog reflects improved 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 12 for an update on our current inventory levels. Inventory, including net consignment, decreased $13.3 million compared to Q1 2021, due primarily to a decrease in net consignment inventory of $11.1 million. Inventory, including net consignment, decreased $106.6 million compared to Q2 2020 as a result of lower equipment inventory in most categories, partially offset by higher parts inventory due primarily to the acquisition of Tundra. Net consignment inventory decreased $69.3 million compared to Q2 2020. We continue to work with major suppliers with a focus on construction, forestry and material handling equipment to attempt to secure additional inventory to meet customer demand in the second half of 2021. Please turn to Slide 13, where I'll provide an update on cash flow and leverage. Cash flow from operating activities in the current quarter have decreased $40.6 million from Q1 2021, due primarily to a decrease in cash generated from changes in noncash operating working capital, offset partially by higher net earnings. Our Q2 leverage ratio decreased compared to Q1 from 2.04x to 1.73x due primarily to the lower debt level in the current period. Cash flow results in the current quarter were positive, which contributed to a material reduction in debt and has allowed total leverage to be within the target range of 1.5x to 2x at the end of Q2. Our available credit capacity at the end of Q2 was $286 million, which is sufficient to meet the short-term normal course working capital and maintenance capital requirements and certain strategic investments. Please turn to Slide 14, where I will 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 the high trailing 12-month average sales and 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 real estate. In the second quarter, we entered into a sale and leaseback transaction for one of our owned properties for proceeds net of transaction costs of $8.5 million. 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 to repay debt. The earnings impact from any sale and leaseback transaction 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 third quarter dividend of $0.25 per share payable on October 5, 2021, to shareholders of record on September 15, 2021. Please turn to Slide 15. 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, Stuart. I'm going to read directly from our outlook in the presentation. Recognizing that the challenges Wajax faced in 2020 persisted into 2021, the corporation is proceeding with confidence, expecting that it is positioned to succeed over the long term. In 2021, Wajax has remained focused on the same priorities that guided us last year. Protecting the health, safety and wellbeing of our team, providing excellent customer service, protecting the corporation's financial health and driving our long-term growth strategy. The corporation expects revenue associated with the acquisition of Tundra to be a significant contributor to total revenue growth in 2021. In the first and second quarters, general market conditions affecting organic growth were better than the corporation's expectations, which resulted in advanced sales, most significantly in equipment volumes. Wajax will work closely with major suppliers to manage supply chain disruptions, including specific efforts with construction, forestry and material handling equipment suppliers to attempt to secure additional inventory to meet customer demand. 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 its supplier partners to prudently grow market share and capture aftermarket sales. In mining, the corporation has continued to experience strong customer quoting activity and is seeing improvements in oil sand related mining equipment product support. 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. Finally, the corporation's infrastructure programs are expected to continue in 2021, including branch network consolidation and technology. Following the COVID-19 related delay in 2020, phased implementation of the corporation's new ERP system began in the second quarter of 2021. Full implementation is expected to occur over an approximate 24-month period to reduce the associated risks. And we'll now turn the call over to questions.

[Operator]

Thank you. [Operator Instructions] Your first question comes from Michael Doumet with Scotiabank.

[Michael Doumet, Analyst]

Great quarter. First question, could you comment as to why there was a change in the consignment program associated with a major supplier of excavators? And just for us, should we view that as sort of a first and last adjustment to the supplier agreement?

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

Michael, can you just repeat the second part of your question? I just don't want to misunderstand that last part there.

[Michael Doumet, Analyst]

So I guess the question is, why the change? And should we expect other changes going forward?

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

Why the change? I think in that particular case, the supplier opted to terminate the program. It really has nothing to do with Wajax, it's a choice that the supplier made. I think that said, we work pretty closely with the supplier on looking at how that transition occurs and so it's not expected to have a negative implication on cash flow for the company, certainly for the next call it 16, 18 months. It will start showing up on our inventory line on the balance sheet. But that said, we've been reporting consignment inventory for quite some time, so there's a fair amount of transparency there. As far as other changes in supplier agreements, at this point in time, certainly not aware of anything material. That is something that would go supplier to supplier from time to time, but the company is not aware of any material changes that are expected in major supplier agreements at this point.

[Michael Doumet, Analyst]

And then maybe just going to the sales, you indicated that equipment deliveries may have gotten a little bit of a lift from pull forward of customer orders. But on the other hand, it does sound like you've changed the language to be somewhat more optimistic in the medium term. I mean, is that the right read? And do you expect equipment sales to remain strong in the second half?

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

I think in our case, Michael, we are expecting the market not to have the same momentum in the second half of the year that it had in the first half. And I think in addition, for Wajax, we have had such a strong first half, inventory shortages in the second half of the year are expected to hurt the momentum in our equipment sales line. So I do think that the year has definitely started stronger than we thought. It's possible that there's a bit more positive momentum in the second half of the year than we would have originally anticipated. Although we do expect the momentum in equipment sales to decline in the second half of the year simply due to inventory, lack of inventory availability in some categories, particularly construction, material handling, and not necessarily as significant, but continuing to manage the inventory levels in our forestry equipment.

[Michael Doumet, Analyst]

That's great. That's helpful. And then maybe just one last one on gross margins. I think that was the strongest Q2 gross margin performance in 5 years. Obviously, a lot of moving parts, and I'm sure availability is part of it, but it also -- I'm assuming mix also helped drive some of that improvement. Any way you can break out the drivers and maybe just discuss the sustainability of that, of the margin levels?

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

We're feeling reasonably comfortable with margin strength continuing for the rest of the year, Michael. It may bounce up and down 20 or 30 points. To the extent that equipment momentum declines, that obviously has a positive effect on margin from a mix standpoint. And to your point, inventory shortages have transferred to some degree of margin accretion. But we're expecting the second half of the year from a margin standpoint to be reasonably comparable to the first half.

[Operator]

Your next question comes from Michael Tupholme with TD Securities.

[Michael Tupholme, Research Analyst]

Appreciate all the detail, Mark, that you provided around Tundra's contribution to revenue in the quarter. Looks like it contributed around $35 million, $36 million. I'm just wondering if that's a reasonable way to think about upcoming quarters or if there's much seasonality that we need to think about in this business?

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

I would say that it's difficult to say, Michael. We're trying not to kind of forecast sales for the second half of the year, but perhaps what we could tell you is that the Tundra revenue in the second quarter, and the first quarter for that matter, was pretty much bang on our expectations. And the conditions for the folks at Tundra with respect to bookings and backlog and sales activity continues to be reasonably strong. So we're optimistic that at least as we go forward, we'll actually be able to do a little bit better than that.

[Michael Tupholme, Research Analyst]

Okay. And without asking you to necessarily forecast what that business is going to do, is there much seasonality? Or is that not a factor in that business?

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

That's a good question, Michael. I think there is some seasonality with respect to shutdown season and turnarounds that are a bit different from our kind of core oil sands business because the folks at Tundra sell much more into the conventional oil and gas business. So it's a wee bit, but I can't really quote it for you right now, but perhaps we can get back to you with that.

[Michael Tupholme, Research Analyst]

Okay. That's fair. In terms of the backlog, strong quarter-over-quarter increase, and obviously year-over-year as well. It sounds like from your comments you saw gains in most categories. So in that regard, it sounds fairly broad-based. But I'm just wondering if, in terms of the contribution to the increase specifically quarter-over-quarter, was that driven more so by any particular category? Or was it truly sort of very evenly or broadly based and very evenly distributed in terms of what actually drove the increase?

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

I think it's probably safe to say that it's a good general increase across a number of categories. We got a very lopsided year in power generation, so there's a bunch of backlog in there for projects coming in the second half. We continue to have some pretty good forestry backlog. I think the most exciting piece of news for us from a backlog standpoint is the composition of the industrial parts and ERS portion. As you can see from the diagram, it's become roughly speaking, call it half of that backlog number and the margin on that part of the backlog is obviously materially higher from a rate standpoint than it would be on the equipment backlog, which is the other part of it. So we had some good general success across a number of categories. There are a couple of standouts, which are more timing issues. But the bigger news for us, I think, on backlog is the dollar number is nice, but the margin contribution is actually getting to the point where it's pretty exciting.

[Michael Tupholme, Research Analyst]

Okay. That's helpful. Thank you. In your comments, when speaking about equipment sales, you did note that there were I think it was 2 large mining shovels delivered in Q2 2020. Was there anything delivered in this quarter? And then also, what is the expectation for large shovel deliveries over the balance of the year?

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

We have a couple of shovels underway right now. That said, one of them is a rental purchase shovel, so it's not going to turn into a sale until next year. And there's a more moderately sized shovel that will deliver in the third quarter. There are not additional large shovels in the balance of this year currently in the plan. Although, as I said earlier, the quoting activity on mining equipment right now is generally pretty healthy out of the oil sands and out of metallurgical coal. So hopefully, we'll have some additional news on shovel deliveries by the time we close the third quarter.

[Michael Tupholme, Research Analyst]

Okay. And sorry, just to be clear, did I understand then that as far as the balance of the year, there is 1 to go in the third quarter at this point, but it's on the smaller side?

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

Yes. It's a moderately sized one, it's like half the size, it's a 3600, so it's half the size of a big say 8000. And there's a 5600 which is going to a customer on a rental purchase deal, as I said, so that will convert to a sale next year.

[Michael Tupholme, Research Analyst]

Okay. And nothing in Q2 2021?

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

I don't believe so, no. I'm sorry, Michael, that 3600 was in Q2. So call that about $8 million or so, I think.

[Operator]

[Operator Instructions] There are no further questions at this time. Mr. Foote, you may proceed.

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

Well, that's it for us today. Thank you very much for your time, and we look forward to talking to you at the end of the third quarter.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines.