Wajax Corp

TSX:WJX

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for attending Wajax Corporation's 2024 Second Quarter Financial Results Webcast. On today's webcast will be Mr. Iggy Domagalski, President and Chief Executive Officer; Mr. Stuart Auld, Chief Financial Officer; and Miss Tania Casadinho, VP, Corporate Controller. 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 to call over to Tania Casadinho. Please go ahead.

[Tania Casadinho, executive]

Thank you, operator. Good afternoon, and thank you for participating in our second quarter results call. This afternoon, we will be following a webcast, which includes a summary presentation of Wajax's Q2 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 inflation on Slide 2 and the non-GAAP and other financial measures on Slide 3. Please turn to Slide 4.

And at this point, I'll turn the call over to Iggy.

[Ignacy Domagalski, executive]

Thank you very much, Tania. I will provide highlights on our second quarter before turning it over to Stu for commentary on backlog, inventory and the balance sheet. This slide provides an overview of Wajax. The corporation has 166 years of Canadian operating history and operates across 119 branches with a team of more than 3,250 employees. During the quarter, our heavy equipment categories and revenue sources made up approximately 59% of our total revenue, while industrial parts and ERS generated approximately 41%.

Turning to Slide 5. I'll 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 will continue to build the 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. Turning to Slide 6. This 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 6 priorities, we have the foundation to continue growing our company for many years to come.

Turning to Slide 7. In the second quarter, Wajax saw higher gross profit margins, which helped offset the decline in revenue. Revenue of $568.3 million decreased $17.9 million in the quarter, the decrease resulted primarily from lower construction and forestry equipment sales in Western Canada and Central Canada and lower mining sales in Western Canada due primarily to the delivery of a large mining shovel in Q2 of 2023 with no such delivery in Q2 of 2024.

These decreases were offset partially by higher equipment sales in the Construction and Forestry category and higher overall sales in the Power Systems category in Eastern Canada. Gross profit margin of 20.9% increased 100 basis points compared to the same period of 2023, driven primarily by higher margins on ERS sales and a higher proportion of and higher margins on product support sales.

Selling and administrative expenses as a percentage of revenue increased to 14.4% in the second quarter of 2024 from 12.8% in the second quarter of 2023. And selling and administrative expenses in the second quarter of 2024 increased $6.8 million or 9.1% compared to the second quarter of 2023 due primarily to higher personnel costs. Adjusted EBITDA of $54.7 million decreased $2.5 million or 4.3% from the second quarter of 2023, noting the adjustments recorded on this chart.

The decrease resulted primarily from lower sales volumes, and higher personnel expenses, offset partially by an improved gross profit margin. Adjusted net earnings of $1.06 per share decreased 16.3% or $0.20 per share from the second quarter of 2023, noting the adjustments recorded on this chart. At the end of Q2, the TRIF rate was 0.81, a decrease of 28% from the second quarter of 2023. The second quarter, TRIF rate was up 50% from the first quarter of 2024. Safety continues to be Wajax's #1 priority, and management is committed to continuously improving our safety programs to improve on its results.

We thank everyone on our team for their ongoing dedication to workplace safety. Turning to Slide 8. Revenue decrease of 3.1% in the second quarter resulted from lower revenue in the Western and Central regions. Western Canada sales of $240 million decreased 10.8% in the quarter due primarily to lower construction and forestry equipment sales and lower mining equipment sales, driven largely by the delivery of a large mining shovel in the second quarter of the prior year with no such delivery in the current year.

Central Canada sales of $97 million decreased 6.4% in the quarter, due primarily to lower equipment sales in the Construction and Forestry category and lower industrial parts sales. And Eastern Canada sales of $231 million increased $8.3 million or [ 8.2 ]% in the quarter due primarily to higher equipment sales in the Construction and Forestry category and higher overall sales in the Power Systems category, partially offset by lower industrial parts sales.

Please 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 $180 million decreased $10 million or 5% compared to last year due primarily to lower construction and forestry equipment sales in Western Canada and lower mining equipment sales in Western Canada driven by the previously mentioned large mining shovel.

The decreases were offset partially by higher construction and forestry sales in Eastern Canada. Please 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 $147 million decreased $8 million or 5% primarily due to lower sales in Central and Eastern Canada, offset partially by higher sales in Western Canada.

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 second quarter, the heavy equipment category decreased $6 million or 2%, driven primarily by lower mining equipment sales in Western Canada. In the industrial parts and services categories, lower industrial part sales in Central and Eastern Canada were partially offset by higher industrial parts sales in Western Canada. These less cyclical categories remain a core element of our broader growth strategy.

I will now turn the call over to Stu.

[Stuart Auld, executive]

Thanks, Iggy. Please turn to Slide 12 for my comments on backlog and inventory. Our backlog of $544.9 million decreased $42.2 million or 7.2% compared to backlog of $587.1 million in Q1 and decreased $6.4 million or 1.2% on a year-over-year basis. The sequential decrease was due primarily to lower construction and forestry, material handling and ERS orders. The year-over-year decrease was due to lower construction and forestry, material handling, ERS and industrial parts offset partially by higher mining orders.

Inventory decreased $22.5 million compared to Q1 2024 due primarily from lower equipment inventory in the Construction and Forestry category and lower parts inventory as management focused on reducing inventory levels. Inventory increased $99.7 million compared to Q2 2023 due to increases in most categories. Please turn to Slide 13, where I will provide an update on cash flow, leverage and working capital.

Cash flows generated from operating activities in the quarter $35.8 million compared with cash flows used in operating activities of $6 million in the same quarter of last year. The increase in cash generated of $41.8 million was mainly attributable to decreases in inventory and trade and other receivables offset partially by a decrease in accounts payable and accrued liabilities. Our Q2 leverage ratio decreased to 2.17x from 2.2x in Q1 due to the lower debt level in the current period.

The corporation's leverage ratio is currently outside our target range of 1.5 to 2x at the end of Q2, primarily due to the investment in inventory during the year. Our available credit capacity at the end of Q2 was $214.9 million, which is sufficient to meet short-term normal course working capital and maintenance capital requirements, and fund our acquisition program and plan strategic initiatives. We continue to focus on working capital efficiency, which is a key component in managing our overall leverage targets.

The Q2 working capital efficiency was 26.5%, an increase of 80 basis points from March 31, 2024 due to the higher trailing 4-quarter average working capital and the lower trailing 12-month revenue. Excluding the debentures which are classified within current liabilities, working capital efficiency was 27.8%, an increase of 150 basis points from March 31, 2024.

Finally, the Board has approved our third quarter 2024 dividend of $0.35 per share payable on October 2 to shareholders of record on September 16, 2024.

Please turn to Slide 14. And at this point, I'll now turn it back to Iggy.

[Ignacy Domagalski, executive]

Thank you, Stu. Our outlook is summarized on Slide 14. In the second quarter of 2024, Wajax delivered revenue of $568.3 million, down 3.1% from the second quarter of 2023. The year-over-year decrease in revenue was primarily due to the delivery of a large mining shovel in the second quarter of 2023 with no such delivery in 2024.

Gross profit margin increased to 20.9% in the second quarter of 2024 versus 19.9% in the second quarter of 2023, primarily due to a larger proportion of and higher margins on product support, industrial parts and ERS sales. During the quarter, we rolled out our new ERP system to a further 57 industrial parts and ERS branches, some of which are colocations.

With this, we now have a total of 99 branch locations operating on our new ERP system, representing approximately 90% of 2023 annual revenue. We continue to see solid fundamentals in certain of the markets that we serve, particularly in mining and energy, but have observed reduced activity in industrial and forestry. Management is continuing to monitor end markets and customer purchasing patterns while being prudent with costs and maintaining focus on the execution of our 6 strategic priorities for 2024, which were set out on Slide 6.

Management continues to evaluate options to repay or refinance corporations $57 million in secured and senior unsecured debentures, which are maturing on January 15, 2025. Thank you very much. And I will now turn it back to the operator and open the line for questions.

[Operator]

[Operator Instructions]

First question comes from Devin Dodge of BMO Capital Markets.

[Devin Dodge, analyst]

Look, industrial parts, and ERS demand, they're both soft in Q2, something that we've seen from others as well. I think you touched on -- been on this in your opening comments, but just wondering if there are specific regions or end markets that are driving this? Or do you feel it's more broad based?

[Ignacy Domagalski, executive]

Yes. Where we're seeing it a little bit more is industrials and forestry, specifically pulp and paper for us. So we're seeing a bit of softness there. And a small part of our decrease this quarter was the rollout of our ERP. It usually takes us about a quarter to really get fully back up to speed and it was rolled out mid-quarter.

[Devin Dodge, analyst]

Okay. And has the demand trend continued into early Q3? And just wondering if there are indicators that you think would suggest there could be a turning point coming? Or should we be expecting kind of a similar revenue profile in the second half?

[Ignacy Domagalski, executive]

We're not expecting too many changes.

[Devin Dodge, analyst]

And then if you could back out the 2 acquisitions you did in 2023. So like Polyphase and Beta, do you have a sense for what the organic or same-store organic revenue growth decline would be in the ERS and industrial parts.

[Ignacy Domagalski, executive]

Yes, that's not a number that we would disclose, Devin.

[Devin Dodge, analyst]

Maybe just switching over, equipment inventories. Some improvement in Q2 and bringing that down, but it's still above early 2024 levels. Just wondering if we should be expecting the sell down of inventories to be at maybe a bit more gradual compared to that, I think it was mentioned of 2 quarters back in May? And just maybe just could you speak to the quality or age of inventory currently in the system?

[Ignacy Domagalski, executive]

Yes. We feel good about the quality of the inventory that we have and it's all good sellable equipment in our yards. We do definitely expect it to come down over the next 2 quarters, and we would hope to see a significant decline.

[Operator]

Next question comes from Michael Tupholme from TD Securities.

[Michael Tupholme, analyst]

I guess the first question would be, if I look at the description of what you saw in the various regions, you had sales down in both Western Canada and Central Canada, but saw some growth in Eastern Canada. I know there is the dynamic at least in Western Canada with respect to the lack of a large shovel this quarter versus the prior year. But can you maybe just talk about what you're seeing that may be different in the different regions because, again, we did see some strength in Eastern Canada there.

[Ignacy Domagalski, executive]

To be honest, Mike, I don't think there's any specific thing to call out. When we talk about the various end markets, mining continues to be strong. So Eastern Canada base metals, Western Canada, oil sands, coal, those markets are still looking pretty strong quoting activity remains strong. Forestry, as mentioned, is still soft and it has been for a few years. And industrials have started to soften up a little bit, which impacts our IP and ERS business. I wouldn't say that it's really specific to any region. But yes, I think it's -- I think I would leave it at that.

[Michael Tupholme, analyst]

Fair enough. I mean I guess one of the reasons I was wondering is because I think the strength in Eastern Canada was attributed to higher equipment sales in construction and forestry, which is not what you saw in the other regions. So I guess I was a little bit curious about the fact that it was a source of growth in Eastern Canada, but not representing for [ that ] or not, but that was kind of where it was coming from.

[Ignacy Domagalski, executive]

Yes. I don't think there would be anything specific that we would call out, Mike. When we talk about equipment, we did have a pretty good rebound from Q1. Q1, we were pretty slow on equipment sales, and equipment sales were up 84% in the second quarter versus Q1. And a lot of that -- a good chunk of that was due to the new financing program that Hitachi launched, which has been received very well by our customers as expected. And so some customers were quicker to jump on that than others.

[Michael Tupholme, analyst]

Fair enough. And then specifically, I guess, on the new financing program, if I'm not stake, I think that became available at the beginning of March. Is there still an incremental benefit or additional benefit that could be realized as a result of having that as we look to the third quarter results relative to second quarter or the fact that you had that in place at the beginning of March meant that kind of Q2 was the full benefit of that was realized in Q2?

[Ignacy Domagalski, executive]

I would say that most of the benefit was realized in Q2. It was introduced in March 1. So it takes a few weeks for the salespeople to really get that out to the customers. And then once they place the orders, it can take between 1 and 3 weeks for us to get a machine to the customer. So there's -- I would say, the first few weeks of the second quarter, probably didn't have the full benefit of it. But after that, it was -- it's baked in there.

So I would say the incremental from Q3 to Q2 would not be that large based on -- specifically on the financing program.

[Michael Tupholme, analyst]

That's helpful. Gross margin was quite strong on a year-over-year basis, up 100 basis points. How should we think about gross margin here in the second half of the year and the sustainability of this kind of level?

[Ignacy Domagalski, executive]

I would characterize it as stable. I think over the past year, we've been working really hard on a number of margin improvement activities in our company, and some of those are starting to bear fruit, which is excellent. And you really thought come through in product support in ERS, which is where we've been doing a lot of that focus.

[Michael Tupholme, analyst]

And then I know you asked about inventory coming down further earlier. But if we think about changes in noncash working capital as a whole, can you talk about where you would expect that to or how we should expect that to trend over the next couple of quarters here?

[Stuart Auld, executive]

So I think Mike commented that we believe we'll continue to see and are working towards further reduction in inventory. I'd call it more gradual as we go into the third and fourth quarter, but we'd like to see it continue to come down.

[Michael Tupholme, analyst]

And then with respect to the ERP implementation and now being rolled out to a greater number of locations. Can you talk about what benefits that may provide for you? I mean I don't know if they begin to be realized in the second half, but maybe looking at even a little further sort of benefits that you guys will get from having this in place.

[Stuart Auld, executive]

Yes. So I think we've talked before about when we put this in place, we didn't sort of justify it based on kind of long-term efficiencies. We did it primarily because of the aged infrastructure and obviously wanted to have one system in place for all of our locations. So we're pretty much there. And now what we are seeing, not immediately, but I would expect, over time, we will see efficiencies a year from now, 2 years from now, as we start to follow standard processes, follow standard procedures, take advantage of -- I think I've given an example before of a location where I might share a location, but I have 2 warehouse people working and probably I only need one if we're on one system.

And also advantages of using things like mobile field service, where it's not paper-based anymore, so I can close off my work orders quicker, and turn that into a receivable much quicker than I would've if it was paper. So I don't think you'll see much this year, Mike, but I think we'll start to see some stuff next year. And I don't have a quantification right now.

[Michael Tupholme, analyst]

Fair enough. And then just lastly, when I think about the inorganic growth opportunities, and the tuck-in acquisition strategy, can you provide an update, just a general update on what you're seeing there right now, the pipeline. And also, I guess, I'd be curious to know if, with the softening that you've seen in industrial parts and it sounds like maybe also ERS, like what that means for the M&A landscape and the opportunity to continue to acquire?

[Ignacy Domagalski, executive]

Yes. The -- I would say the M&A pipeline continues to be quite full, and we're working hard on trying to get deals across the line. And so we're -- that continues to be a pretty important part of our strategy. In terms of the softness in the market, I think it's company-specific. Some companies are softer, some aren't. And all of that would obviously be considered in the price that we pay.

[Michael Tupholme, analyst]

But does that change the -- either the competitive dynamic or the willingness of different groups to look at a sale? Just curious if it's had any impact of that nature besides [ that you're ] a paper company.

[Ignacy Domagalski, executive]

I would say it's too early to tell. I mean it's really only been 1 or 2 quarters of softness. And in the public company world, we really think about quarter-to-quarter, but in the private company world, that's really thought of more year-to-year. And so it hasn't really made its way into those conversations yet.

[Operator]

The next question is a follow-up from Devin Dodge at BMO.

[Devin Dodge, analyst]

Just the outlook section was talking about, I think you mentioned in your remarks about an upcoming maturity of a senior unsecured debenture. Can you just talk us through some of the options that you're thinking about?

[Stuart Auld, executive]

So the immediate option is that we can basically pay it off with our line of credit. So that would be one option, but we're looking at what else might exist out there. As you probably know, Devin, the listed debenture market doesn't really exist anymore. So we'd have to look at potentially other vehicles if we wanted to do something similar.

[Devin Dodge, analyst]

And then the favorite question here, is this timing of deliveries of mining shovels in the second half of the year? And then what's currently in the backlog for 2025?

[Ignacy Domagalski, executive]

Sure. If you look at our Q2 financials in the backlog, we have 5 mining shovels. But since the quarter closed, we landed a sale for another 3 mining shovels. So we now have 8 large mining shovels in the backlog, which is definitely the most in recent history. The timing for those deliveries is we will likely have 3 of them delivering in Q4. Then we have 4 of them delivering throughout next year. And I would say that's fairly evenly throughout the year. I don't know if it will be exactly one per quarter, but that's a good estimate. And then we would have one delivering in early the following year.

[Operator]

We do have a follow-up from Michael Tupholme at TD.

[Michael Tupholme, analyst]

Just actually a follow-up on that last question. Sorry, are these all EX8000s? Or what -- can you help sort of explain in more detail what exactly the units are comprised of?

[Ignacy Domagalski, executive]

Yes, sure. Of those -- of the 87 are EX8000s and all on kind of regular sales and one is a EX5600, which is currently out on RPO, and we expect it to convert in Q4 of this year.

[Operator]

We have no further questions that you may proceed.

[Ignacy Domagalski, executive]

Thank you very much for tuning in, and for your interest in Wajax. Have a great day.

[Operator]

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