Wajax Corp

TSX:WJX

Earnings Call Transcript 2019-Q4

[Operator]

Thank you for attending Wajax' 2019 Fourth Quarter and Year-end Results Webcast. On today's webcast will be Mark Foote, Wajax' President and Chief Executive Officer; Mr. Stuart Auld, Chief Financial Officer; Mr. Steve Deck, Chief Operating Officer; and Mr. Trevor Carson, VP, Supply Chain and Corporate Development.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'll now turn the call over to Trevor Carson.

[Trevor Carson]

Good afternoon, everyone, and thank you for participating in our fourth quarter results call. This afternoon, we will be following a webcast, which includes a summary presentation of Wajax' Q4 2019 financial results. The presentation can be found on our website under Investor Relations, Events and Presentation.Before I begin, I would 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 14 through 21 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]

Thanks, Trevor, and thanks for joining us today. I'll provide details on the fourth quarter before turning the call over to Stu for commentary on backlog, inventory and the balance sheet.So looking at the slide, revenue of $403.9 million increased 4% in the fourth quarter. Trend in the fourth quarter was consistent with prior periods in 2019 when improved volumes in Eastern Canada more than offset weaker results in the West and Central. Provide additional comments on regional performance in just a moment. EBIT improved $9.8 million in the fourth quarter to $21.4 million. Excluding the effect of restructuring and other related costs, the 4% revenue increase and a 40 basis point improvement in gross profit rate contributed $4.1 million of the EBIT dollar gain, with the balance resulting from $5.2 million in SG&A reductions, which included a property gain on sale of $2.3 million.Adjusted basic EPS of $0.51 in the fourth quarter was up 21% to last year. We'll have further comments on EPS in just a second.And finally, safety performance continues to be very strong in the fourth quarter based on a full year reduction of 8% in injuries and a TRIF rate of 0.93. 2019 was Wajax' safest year on record and an improvement over the excellent performance of last year.For our team members listening on the call, we want to thank you again for your daily dedication to workplace safety and working hard to ensure that everyone goes home safe at the end of every shift.Turning to Slide 4. Central Canada sales of $82 million declined 6% in the fourth quarter and full year sales of $311 million declined 4%. The sales pressure in the Ontario market continued to be in the Construction category. Excluding the loss of a road building line that was previously disclosed, sales on a full year basis were up approximately 2% in Ontario. The market remains a significant focus for Wajax, and we continue to focus our efforts on growing the business to volumes more comparable to our Eastern and Western Canada regions.Eastern Canada sales of $157 million increased 16% in the fourth quarter and full year sales of $618 million increased 23%. Sales momentum remained strong in many categories in the fourth quarter, helping us deliver growth despite comping over the acquisition of Delom in the fourth quarter of last year. The full year increase of $114 million in Eastern Canada revenue was comprised of approximately 50% from increased ERS sales and 50% from very strong performance in categories such as material handling, power generation, forestry, industrial parts and construction. On a 2-year basis, Eastern Canada revenue has now grown by approximately 40%. Western Canada sales of $164 million declined 1% in the fourth quarter, and full year sales of $624 million declined 5%. Fourth quarter sales in the West were assisted by a large shovel sale, material handling and ERS activity, but the gains were offset by weaknesses in other categories. On a full year basis, increases in product support and ERS were more than offset by weak equipment markets and industrial activity. As an indicator of market conditions, the construction class excavator market declined 23% for the full year and 15% in the fourth quarter in the West. While we recognize that conditions in the West may remain challenging, we're pleased with the increasing installed base of mining shovels, including 2 additional shovels, which are scheduled for delivery in the second half of 2020.Turning to Slide 5. Equipment sales of $156.5 million were up 12.5% in the fourth quarter, driven primarily by increased material handling, mining and forestry sales, offset by weaker construction sales. Full year equipment sales of $523.9 million were down 3.5%, due primarily to construction and secondarily to mining. Partially offsetting these areas, Wajax delivered a very strong year in material handling and forestry equipment sales.Industrial parts sales of $88.5 million were down 2.2% in the fourth quarter. And on a full year -- in the fourth -- in the quarter and on a full year basis, improvements in Eastern Canada served to offset weaker results in the West. Full year industrial part sales of $366.6 million were up 1.4%.Product support sales of $110.2 million were down 3.5% in the fourth quarter due to weak activity in Western Canada that was not fully offset by stronger results in the East. The trend in Western Canada product support volumes had improved to prior year levels by the end of the quarter. Full year product support sales of $476.1 million increased 4.1% compared to prior year based on increases in Western and Eastern Canada.Turning to Slide 6. I have a few brief comments on overall category level performance based on the growth classifications we've used in our strategic plan, which describe the majority of our growth coming from our targeted growth categories. So our targeted growth categories, those of construction, material handling and ERS, grew 9% on a consolidated basis for the full year and consistent with our plan delivered most of our growth in 2019 despite weakness in construction. We expect positive results in 2020 in both material handling and ERS, where the recent acquisition of NorthPoint will add to our scale. Our core strength categories of industrial parts, forestry, on-highway and power and Marine grew 4% on a consolidated basis and contributed meaningfully to our results, including a very strong year in forestry.And finally, our cyclical and major project categories, mining engines and transmissions and crane utility, grew 1% on a consolidated basis. We expect improved results in mining equipment sales in 2020 with 3 large shovel deliveries scheduled in the second half of the year, that being 2 that I mentioned previously in the West and 1 large shovel going into Eastern Canada.If you turn to Slide 7. Adjusted net earnings of $10.1 million or $0.51 a share increased 21% in the fourth quarter and were $2.10, up 4% for the full year. Note that the adjusted full year EPS result includes the overall negative effect of IFRS 16, which would be worth approximately $0.07 a share. EPS growth was negatively impacted by higher finance cost, which excluding the effect of IFRS 16 increased approximately $5.9 million on a pretax basis due to higher debt levels, which resulted primarily from increased working capital due to high levels of construction inventory and due to the acquisition of Delom in late 2018.We'll have further comments on the balance sheet as we progress through the call. And if you'll turn to Slide 8, I'll turn the call over to Stu.

[Stuart H. Auld, Chief Financial Officer]

Thanks, Mark. I am on Slide 8. Our Q4 backlog decreased $69.9 million or 24% sequentially from the previous quarter and increased $11.2 million or 5% on a year-over-year basis. The sequential decrease relates to lower mining, forestry, power generation and material handling orders. The year-over-year increase relates to higher mining orders, offset partially by lower power generation, material handling and construction orders. The sequential drop in backlog was impacted by seasonality and further reduced by the removal of a large mining shovel that was delivered at the end of the fourth quarter.Please turn to Slide 9 for an update on our current inventory levels. Inventory including consignment decreased $37.2 million compared to Q3 2019 due to lower equipment and parts inventory in most categories, partially offset by higher mining equipment and parts inventory. Consignment inventory decreased $17 million from the previous quarter. Inventory including consignment increased $43.2 million compared to Q4 2018 as a result of higher construction, equipment and mining equipment and parts inventory. Consignment inventory decreased $5.7 million compared to Q4 2018.As stated previously, we are adjusting our incoming inventory orders based on market conditions and are focused on reducing equipment levels. We continue to expect that as inventory levels decrease during 2020, as anticipated, there will be a positive net impact on working capital, cash flow and leverage.Please turn to Slide 10, where I will provide an update on financial position. Our Q4 leverage ratio decreased compared to Q3 from 2.81x to 2.6x as a function of both lower debt levels and higher trailing 12-month pro forma adjusted EBITDA. We continue to focus on working capital efficiency, which is a key component in managing our overall leverage targets, and we expect the ratio to improve in 2020. All actions aimed at lowering working capital are expected to increase RONA over time, which will have the additional benefit of lowering our working capital to sales ratio and increasing inventory turns. As previously disclosed, we continue to evaluate ways to unlock cash from the business and as such have completed the market value assessment of our own real estate holdings. In the fourth quarter, we entered into 2 sale and leaseback transactions for 2 of our wholly owned properties for proceeds net of transaction costs of $9.4 million. Further opportunities to sell redundant real estate as well as sale and leaseback opportunities have been identified. 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 fourth quarter dividend of $0.25 per share payable on April 2, 2020, to shareholders of record on March 16, 2020. We remain confident in the sustainability of our dividend at this level across the business cycle.Please turn to Slide 11. And at this point, I'll hand the call back to Mark to provide a brief update on our 2020 financial outlook and concluding remarks.

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

Thanks, Stu. Before proceeding to the outlook comments, we've revised the description of our leverage language, our target range for leverage and a summary of which is shown on Slide 11. Our normal -- and I'll just go through the basic points for you. Our normal course target range for total leverage remains 1.5 to 2x. Consistent with our prior description, we may operate outside of that range during changes in economic cycles, such as what we are currently experiencing, primarily in Western Canada. And the revised description clarifies that we may also operate outside of that range due to the effect of acquisitions, which as explained are an important aspect of our strategy particularly in engineered repair services. Very important that despite the changes in the language, that the corporation's overall risk tolerance is unchanged. We expect to operate the base business within the target range considering the effect of where we are in the cycle. And for acquisitions, we will assess the effect on total leverage considering the targets fit to our strategy and its expected future cash flows.Turning to the next page for the outlook. This is our first discussion with you for this year, so we'll spend just a minute on just making sure that we've properly described our outlook for 2020. So we expect that the more challenging market conditions that are emerged in 2019 will continue in 2020, resulting in pressure on capital equipment demand. Equipment utilization rates, however, are expected to be generally stable on a full year basis, which will support parts and service volumes. And based on manufacturer discussions and industry information, we do expect market conditions to improve later in 2020.Our objective for the year is to manage our business and capital conservatively until trends in the market improve. Market-oriented pressure on revenue is expected to be at least partially offset by higher volumes in engineered repair services and industrial parts and expected mining deliveries in the second half of 2020. Wajax has also identified opportunities to improve gross margin, drive additional cost productivity and lower finance cost based on reductions in inventory.We welcome our new friends from NorthPoint, whose approximately $50 million in annual revenue is expected to add to our scale in engineered repair services in 2020. We plan to move forward with the implementation of our new ERP system beginning in the second quarter of 2020. Implementation is expected to occur over an 18- to 24-month time frame in order to minimize the risks associated with the change. Our branch network optimization program will also continue, including the previously disclosed efforts to monetize selected real estate assets through their sale and leaseback or site closure due to the colocation of branches. Proceeds, as Stu mentioned, from the real estate programs are expected to be applied against our credit facility.And Wajax will continue to strive for an appropriate balance between the pace of change and market conditions while continuing to track toward our strategic plan goals and targets. The strength of our strategy continues to be demonstrating the ability to consistently improve our performance in both high and low points in the business cycle.Before turning over to questions, I want to welcome Steve to our quarterly call. Steve joined Wajax in 2014 as our President of what was then Industrial Components and has been a very important contributor to our strategy and management team from day 1. When we eliminated the previous segments and reorganized the company in 2016, Steve became our Senior Vice President of Business Development, managing our overall sales teams, marketing, our industrial and ERS teams. And effective the fourth quarter of last year, Steve became our Chief Operating Officer, which added product support and branch operations to his responsibilities. Steve will be available today and in future calls to help you with any questions you have.I'll turn it back to the operator.

[Operator]

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

[Michael Doumet, Analyst]

So maybe I'll start with a quick question on gross margins. That was up modestly but a relatively easy comp last year. So just on a sequential basis, maybe if you can get into the decline there. I mean was that largely mix? Or did you see pressure in certain categories?

[Steven C. Deck, Chief Operating Officer]

Yes, Michael, it's Steve Deck here. We did pretty well in our margins both quarter-over-quarter and over the year. We saw the improvement mostly in our equipment, our service and our parts area. We had a little bit of softness in our margins in our industrial business, both quarter-over-quarter and over the year. We also had a little bit of softness because of -- as you just said in the mix, we had a greater equipment sales than we thought we were to part sales.

[Michael Doumet, Analyst]

Okay. And then maybe just flipping to inventories and the expected decline there throughout the year. I think last call, you talked about having excess inventories in the range of $20 million to $40 million. Is that the range that we should expect in terms of a decline for 2020? Or have you identified additional opportunities given maybe the softer macro?

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

Yes. That's probably a good walking around range, Michael. It's Mark speaking. I think we're -- obviously, our plan is based on the reductions in inventory, particularly in construction. That's really the only area of the business where we're carrying excess beyond our historical amounts. So really, the focus is on driving down construction inventory, so that included halting a lot of the inbound and focusing on sales of the equipment that we have in the yards right now. So where that actually goes and how quickly it goes, it's just -- it's going to be a function of the market. We're working pretty hard to see those numbers decline. Although just given noise in the market right now, it's a bit difficult to tell you exactly when that's going to happen, but our budgets are definitely based on it coming down materially before the end of this year.

[Michael Doumet, Analyst]

Okay. And maybe I just want to carry that comment into your outlook for 2020. I think you talked about gross margin opportunities. So I guess, first, can you elaborate on that a little bit? And second, as you manage your inventory down in construction, again, given the current macro condition, do you expect potentially softening equipment margins as an offset into next year?

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

It's certainly possible. We've managed to drive some share increase in 2019 and our equipment margins were pretty healthy. So we may choose to accelerate the disposition of some used equipment, which may be negative to margin. But that's within kind of how we built our budget. So at this point in time, we continue to think that a good gross profit rate assumption people can make about the company is about '19. As far as the improvements in gross profit are concerned, there's a number of blocking and tackling things, which will -- the team did a pretty good job in 2019. We can do a bit better, and that has to do with basic things like freight recoveries and warranty costs and things like that. So we've got a wee bit of contingency just in some of the action plans we have to try and maintain the margin even if we do see a wee bit of pressure on the capital equipment sales side.

[Operator]

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

[Jun Chuah, Research Analyst]

This is Jun Chuah calling in for Devin. [Technical Difficulty] check in. Hyster-Yale provided some commentary regarding your market share growth plans.

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

Sorry, Devin. Devin?

[Jun Chuah, Research Analyst]

Yes. Can you hear me?

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

Yes. You may have to speak up. You may -- we're having a lot of trouble speaking. If you're on a speaker, you may pick up your handset.

[Jun Chuah, Research Analyst]

Sorry, is this better?

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

Yes. That's much better.

[Jun Chuah, Research Analyst]

Perfect. Again, this is Jun Chuah calling in for Devin. Wanted to check in, the Hyster-Yale provided some commentary regarding your market share growth plans through expanding your offerings and improving your dealer capabilities. Do you guys have any thoughts on how this might benefit Wajax?

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

Sorry, were you asking can we comment on what Hyster-Yale said about their market share growth plans?

[Jun Chuah, Research Analyst]

Yes. On how it could benefit your material handling business?

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

Well, Hyster is our primary partner in the business. So I'll let Steve add some color, but they're our primary partner. So anything they do to expand their product offering or improve the price competitiveness of their product is going to be accretive to us. I'm not sure, Steve, if you have any other comments about that? Or so do you have any specific part of what they said that you may want to ask us about? Or was it more of a general question?

[Jun Chuah, Research Analyst]

No. It's more of a general question. That's fair.

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

They're a very important partner to us. So we had a very good year in material handling, and we're looking forward to how their business improves in the future because that will help ours.

[Jun Chuah, Research Analyst]

Perfect. And just maybe a second question. Your receivables, they seem to be currently elevated. Do you have any concerns around the quality of the receivables?

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

No. We don't.

[Operator]

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

[Michael Tupholme, Research Analyst]

Just looking at your outlook commentary, given the market challenges you talked about, sounds like equipment sales expected to be under some pressure in 2020, but there are some offsets in the form of ERS, and you talked about parts and service volumes being supported by utilization rates. Just as we try to put all that together on a net basis, any further thoughts about how we can think about the overall top line in 2020?

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

I'm going to stop short, Michael, of giving you a number. We've been pretty conservative on our internal revenue planning, at least as far as we can tell today. Probably one way to think about it would be, you got roughly $50 million in mining shovels that deliver in the second half of the year. And you don't see a lot of risk of them slipping. It's always possible, but we don't see a lot of risk of them slipping right now, and we've got the additional volume from NorthPoint. So you're talking about $100 million in incremental, roughly speaking. I mean we did have some mining equipment sales this year, but it was generally a weaker year. So you've got between -- call it between $80 million and $100 million in incremental revenue. So we did a $1.55 billion this year. So right now, I mean we're -- we see the market decline in construction being somewhere between 5% and 10%. That's pretty consistent, we think, across the industry. And we planned our revenue reasonably conservatively because we weren't expecting it to be a big growth year just on a pure organic basis.

[Michael Tupholme, Research Analyst]

Okay. That's helpful. And then just in terms of the comment that some of your manufacturers have given you some confidence that there could be a rebound later in the year, is that specifically construction? Or what are the areas that, that potential rebound could benefit?

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

I think we're going off of feedback really from 2 types of sources. One is the number of capital equipment manufacturers. And secondly, it's just general industrial activity through industry associations that would help people in the industrial parts and services businesses. And most of the forecast would say that the front half of the year, generally speaking, is weaker and with some expectations of recovery in the second half. So obviously, your crystal ball would be just as good as ours, but that's the assumptions we're making in our own budgeting and how we're kind of thinking about allocation of capital, capital investments activities, generally speaking. But it's not just the construction business, it's a broader base of markets in that.

[Michael Tupholme, Research Analyst]

Okay. That's helpful. And then when we look at the ERS business, I know, as you just mentioned, that NorthPoint should add about $50 million of revenue in the year. But when we look at that business, can you just talk about the organic growth trends in ERS, either what you have been seeing and if possible what you expect to see from that business organically in 2020?

[Steven C. Deck, Chief Operating Officer]

Yes. It's Steve Deck here. I'll take that question. Our organic growth in our legacy ERS business has been very good. Delom has delivered. They said they would in [ sim ], and we're expecting the same from NorthPoint as well.

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

Organic probably better.

[Steven C. Deck, Chief Operating Officer]

Yes.

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

But 2019 is pretty healthy organic.

[Michael Tupholme, Research Analyst]

Okay. And then just in terms of the additional cost productivity that you see an opportunity to drive some additional cost efficiencies in 2020, can you elaborate on that, where you think those likely come from?

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

Our business is driven really by -- primarily by personnel costs. So it's that area, Michael. We've continued -- we try very hard not to starve the front end of our business from a sales and technical standpoint, but we continue to do what's necessary in the back side of our business. We're running with fewer people today than we were as we started last year. So the vast majority of the cost in our business come from personnel. So it's personnel productivity that we continue to focus on.

[Operator]

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

[Ben Cherniavsky, Managing Director & Head of Industrial Research]

I just wanted to go back to some of the targets that were set a couple of years ago with the One Wajax strategy and the -- in particular, some of the EBITDA metrics that you guys had put forward back then, which were a 3-year target. So I guess, we'd be sort of marking them to market this year. Just given the change in the accounting with IFRS and the impact that's had on your EBITDA, what's the right way to think about those targets now?

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

Ben, it's Mark. Last year in March, we recalculated all the targets considering IFRS 16 and the acquisition of Delom. So the targets we put out in March of last year, we haven't chosen to revise them when they relate to 2021.

[Ben Cherniavsky, Managing Director & Head of Industrial Research]

Yes. I recall that you pushed them out to 2021. And -- so those were the recalculated for IFRS.

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

Yes, they are.

[Ben Cherniavsky, Managing Director & Head of Industrial Research]

And you think they're still achievable at this point?

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

Well, the range is pretty broad. So if you look at the targets that were set up between a revenue and EBITDA dollar range, the range was fairly broad. If you look at where the business ended from an EBITDA standpoint, it's -- at the end of 2019, it's sneaking into the lower end of the range now. And the revenue on an adjusted basis for NorthPoint pro forma would be in the bottom end of that range pretty much also. So if the question is, do we think we can be inside of that range in 2021? The answer is yes. Where we sit specifically is going to depend on how the macro turns out this year because that's obviously going to establish the base for the year after. But the range is broad. We're almost inside of it already. And it's been recalculated for all the kind of accounting adjustments. So it's pretty straightforward at this point, and we haven't chosen to change it.

[Ben Cherniavsky, Managing Director & Head of Industrial Research]

Okay. I'll go back and I do recall you making those changes. So I'll go back and revisit them. But I guess, just on a related follow-up. Like what's the -- how do you think of the trade-off between those targets, achieving those targets and sort of the risk you assume in doing that, in particular, the financial risk like that you can get your EBITDA up, if you're going to be taking on more debt to do acquisitions and things like that, if you're going to take on more inventory to do sales, et cetera, which sort of seems to be what's happened. You're on track with those targets, albeit a year off and the lower end of them, but you’re stuck with them. But I think, as you pointed out, the leverage is above what your target would be. If we think just in terms of EBITDA, then relatively easy to get there by buying stuff because you're not accounting for the cost of the capital or the assets. So what -- how do you guys think about those targets relative to the financial risk you put into the company in getting there?

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

Well, I think that's one of the reasons we clarified the leverage language. So the base business leverage should run between 1.5 and 2x. So we're running -- if you ex out the Delom acquisition from our current leverage, you're running about 2.3. So our expectation is to be able to run our base business inside the 1.5 to 2x. And obviously, as businesses like Delom mature a little bit inside of the business, we'd expect to be able to absorb them inside of that leverage, too. So absent the material acquisition going forward, we would expect to operate within that leverage range. And the balance between the EBITDA and revenue numbers you see here and the leverage ranges, that's kind of the guardrails we work with. If we have an acquisition opportunity that we feel has good stable cash flow, it's consistent with our strategy and it's obviously a purchase price that we consider to be reasonable, then we would allow the leverage to creep up. But we would also adjust these targets. So we're quite sensitive to leverage right now. And we feel comfortable with these targets, but we do think that having the leverage inside of that range is also an important part of the contribution. I should also say that if you look at management compensation in Wajax, it's neither of these numbers, it's net earnings. So we're obviously pretty sensitive to finance costs and all the other things that go into the P&L and delivering proper value for shareholders.

[Ben Cherniavsky, Managing Director & Head of Industrial Research]

Right. I guess, I just -- I'd be -- I'm a bit reluctant to sort of start thinking about a different leverage ratio for the base business versus the whole business. I mean I think I recognize that you're adding debt to these acquisitions. But if the acquisitions don't work out or the market takes the turn for the worse, you still end up wearing them. You can't sort of just separate the base business from what you've acquired and the financial risk is what it is. So do you -- I guess, my question is do you, at some point, say we have to take our foot off the M&A strategy and the growth strategy to manage the financial risk that's building up in the business because the markets aren't going our way?

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

Yes. I think we're always sensitive to financial risk, Ben. But if we see acquisitions, which are good for our strategy, and as I said, provide stable cash flow, as such, we believe we can forecast the leverage implications of them. And they are available to us at a reasonable price, we will tolerate a leverage above 2 simply because it's the right thing to do. You can't -- I'm not sure how the math would work is, if you found an acquisition that you get for a reasonable multiple, anything material is going to cause that leverage to go up if you're inside of 1.5 to 2x, at least in our -- the size of our base business today. So I'm not -- as we said, we're not indicating a fundamental change in risk tolerance in the business. But acquisitions are an important part of our strategy, and we're comfortable with the leverage being above 2 if, in fact, the cash flows from the acquiring business are stable enough where we feel comfortable that we can predict the outcomes.

[Ben Cherniavsky, Managing Director & Head of Industrial Research]

Okay. Fair enough. Just one last thing on the inventories. How much do you think -- what would you like to get that down to? How much idle inventory, for lack of a better word, or aged inventory do you think you're sitting on right now?

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

We're not sitting on a lot of aged inventory at the moment. So the quality inventory is pretty high. But I think earlier in the call, 40 is probably a good walking around number for the excess inventory we're carrying, and it's essentially all in construction. So that's -- we're really focused on getting our construction equipment turns back to where we would like to see them within this fiscal year.

[Operator]

There are no further questions at this time.

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

Okay. Well, thank you very much for joining us today. We look forward to talking to you again in May.

[Operator]

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