Wajax Corp

TSX:WJX

Earnings Call Transcript 2022-Q4

[Operator]

Thank you for attending Wajax Corporation's 2022 Fourth Quarter and Year-End Financial Results Webcast. On today's webcast will be Mr. Ignacy Domagalski, 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 Ignacy Domagalski.

[Ignacy Domagalski, President, CEO]

Thank you, operator. Good afternoon, and thank you for participating in our fourth quarter call. This afternoon, we will be following a webcast, which includes a summary presentation of Wajax's Q4 2022 financial results. The presentation can be found on our website under Investor Relations and Events and Presentations.

I will provide you with a general update and then turn it over to Stu for comments on backlog, inventory, cash and balance sheet. To begin, I would like to draw your attention to the cautionary statement regarding forward-looking information on Slides 2 and 3. Additionally, non-GAAP and additional GAAP measures are summarized on Slides 18 and 19 for your reference.

Turning to Slide 4. In the fourth quarter, Wajax saw a significant improvement in key financial metrics and TRIF. Revenue of $541.3 million was up $138.5 million or approximately 34% in the quarter. The increase in revenue resulted from higher construction and mining equipment and product support sales in Western Canada and higher material handling, industrial parts and ERS sales in all regions.

EBIT of $26.7 million was up $11.4 million or approximately 74% in the quarter. The improved EBIT resulted from higher sales volumes and equipment margins offset partially by lower product support margins, a higher proportion of equipment sales and increased selling and administrative expenses. Gross profit margin of 18.1% decreased 220 basis points compared to the same period of 2021 due to lower product support margins and a higher proportion of equipment sales largely due to the sale of several large mining shovels in the fourth quarter of 2022 without any similar sales in the same period of the prior year.

These decreases were partially offset by higher equipment margins. Gross profit margin of 19.9% year-to-date is in line with expectations. Selling and administrative expenses as a percentage of revenue decreased to 13.2% in the fourth quarter of 2022 from 16.5% in the fourth quarter of 2021. Selling and administrative expenses in the fourth quarter of 2022 increased $4.9 million or 7.4% compared to the fourth quarter of 2021 due primarily to higher personnel costs as the volume of business increased over the prior year.

Management remains committed to ongoing cost productivity. Adjusted net earnings of $0.83 per share was up approximately 154% or $0.50 in the quarter, noting the adjustments recorded on the charts. At the end of Q4, the year-to-date TRIF rate was 0.84, a decrease of 18%. This represents our safest year on record. Wajax -- Safety continues to be Wajax's #1 priority, and management is committed to continuously improving our safety programs to improve on these results.

We thank everyone on our team for their ongoing dedication to workplace safety.

Turning to Slide 5. Revenue increase of 34% in the fourth quarter resulted from growth in all regions. Western Canada sales of $279 million increased 64% in the quarter mainly due to robust growth in equipment and product support sales in the mining and construction and forestry categories with strength in the ERS and industrial parts categories. Central Canada sales of $87 million increased 14% in the quarter due primarily to organic growth in Industrial Parts sales.

Eastern Canada sales of $176 million increased 12% in the quarter due to organic industrial parts growth driven by higher bearing sales and higher equipment sales in the construction and forestry and material handling categories.

Please turn to Slide 6. An update on equipment and product support sales and year-over-year variances are shown on this page. Equipment sales of $202 million increased $83 million or 69% compared to last year, due mainly to higher mining and construction and forestry sales in Western Canada and the strength of our new expanded relationship with Hitachi. Product support sales of $118 million increased $16 million or 15% due primarily to strength in construction and forestry and mining revenue in Western Canada and higher Power Systems revenue in Eastern Canada.

Please turn to Slide 7. An update on industrial parts and ERS sales and year-over-year variances are shown on this page. Industrial parts sales of approximately $138 million increased $29 million or 27%, due mainly to organic strength in industrial parts sales in all regions, led by higher bearing sales. ERS sales of $73 million increased $11 million or 17% due to strength in Western Canada. Turning to Slide 8.

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. In the third quarter, the Heavy Equipment Group increased $99 million or 42%, driven by higher sales in all categories. Total growth in industrial parts and services categories of approximately $39 million or 22% was driven by increases in both Industrial Parts and ERS.

I will now turn the call over to Stu.

[Stuart Auld, CFO]

Thanks, Iggy. Please turn to Slide 9 for my comments on backlog. Our Q4 backlog of $468.8 million decreased $90 million or 16.1% compared to backlog of $558.8 million in Q3 and increased $44.5 million or 10.5% on a year-over-year basis. The sequential decrease was due primarily to deliveries of multiple mining shovels that were in last year's backlog, along with most of other categories experienced more deliveries in the quarter versus new orders added to backlog, most notably in the construction and forestry category. These decreases were partially offset by higher ERS orders.

The year-over-year increase was due to higher orders in the construction and forestry, industrial parts and ERS categories, offset partially by lower mining material handling and power systems orders. Overall, strong backlog reflects continued momentum in our heavy equipment industrial parts and ERS businesses. Please turn to Slide 10 for an update on our current inventory levels. Inventory increased $15.5 million compared to Q3 2022 and due largely to higher parts inventory driven by an investment in certain key part stock levels as part of our efforts to improve availability of core SKUs to drive enhanced customer full rates even with ongoing supply challenges. Inventory increased $72.9 million compared to Q4 2021 for the reasons just noted above.

We continue to work with major suppliers with a focus on construction, forestry, material handling and power systems equipment to secure inventory to meet customer demand.

Please turn to Slide 11, where I'll provide an update on cash flow and leverage. Cash generated from operating activities in the current quarter of $19.1 million increased $22.5 million from cash used in operating activities of $3.4 million in Q3 2022, mainly due to a decrease in cash used in noncash operating working capital and lower finance costs paid on debt. Our Q4 leverage ratio decreased from 1.28x in Q3 to 1.13x due to the combination of lower debt level in the current period, driven by cash generated from operating activities and the higher trailing 12-month pro forma adjusted EBITDA.

Corporation's leverage ratio is currently below our target range of 1.5x to 2.5x at the end of Q4 due primarily to strengthen the trailing 12-month pro forma adjusted EBITDA. Our available credit capacity at the end of Q4 was $308.9 million, which is sufficient to meet our short-term normal course working capital and maintenance capital requirements, our acquisition program and strategic initiatives.

Please turn to Slide 12, 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 Q4 working capital efficiency of 16.8% has been consistently improving over the last 5 quarters as a result of lower 4-quarter average working capital and higher trailing 12-month revenue.

Please turn to Slide 13. And at this point, I'll turn it over to Iggy.

[Ignacy Domagalski, President, CEO]

Thanks very much, Stu. Our Board has approved a 32% increase in the corporation's quarterly dividend, and the corporation has declared a first quarter 2023 dividend of $0.33 per share payable on April 4, 2023, to shareholders of record on March 15, 2023. The increase in our quarterly dividend, representing an additional outlay of approximately $6.9 million reflects growing confidence in both our near and long-term outlooks, which are being driven by our expanded relationship with Hitachi as well as solid demand for the full suite of products and services we offer across our business.

Our strong ability to generate cash flow, coupled with over $300 million available on our bank credit facility allows us to invest in organic growth and acquisition opportunities, while supporting this increased distribution to our shareholders.

Please turn to Slide 14. Rather than reading the outlook verbatim, I'll highlight a few important points.

As we move into 2023, we continue to see solid fundamentals in many of our key markets, particularly mining, energy and construction, supported by relatively elevated key commodity prices and sustained budgeting for capital projects. Further, we expect the challenges of 2023 to be similar to those of 2022, ongoing supply chain volatility, higher interest rates, inflation and a tight labor market.

We continue to manage these challenges through frequent dialogue with suppliers and customers as well as through a combination of initiatives designed to help us hire, train and retain our key teammates. Overall, we are very pleased with our Q4 performance as it represents a significant improvement over Q4 last year, including strong top line growth in our less cyclical industrial parts and engineered repaired services businesses.

We started 2023 with a strong backlog of $468.8 million, up 10.5% from a year ago, which further supports our confidence in the near-term future. In 2023, our core strategic priorities remain unchanged, and we are focused on continuing to invest in our people and their overall health and well-being, delivering exceptional customer value, organically growing our business, transacting on a robust acquisition pipeline, leveraging our enhanced relationship with Hitachi, prudently managing our balance sheet, continuing to develop our ERP system, which has now been fully deployed to all of our power and equipment locations and entrenching sustainability into our business.

Thank you, and I'll turn it now over to the operator.

[Operator]

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

[Michael Doumet, Scotiabank]

You've put together a very solid year. So congrats to the team. First question is on Hitachi. It's been a year since the transition. It looks to have gone [smoothly], but I wonder here if the idea is now to go on the offensive. So maybe can you discuss how much has been achieved to date? And then going forward, what you think are the best near-term and medium-term opportunities?

[Ignacy Domagalski, President, CEO]

Michael, nice to hear from you. Thanks for dialing in. Thanks for the question. We continue to be quite excited about Hitachi. Our first year -- well, not quite first full year, we started on March 1

So it's been 10 months to the end of 2022, it was a great transition period. We fully separated our relationship with Deere and Hitachi is -- they're learning a lot, but they've been delivering their units and their parts as promised. They continue to invest in technology. The Construction Expo is coming up in Las Vegas this month in March where Hitachi will be releasing their new Dash 7 unit, which has a number of new technological changes that we're all excited to see and that will be coming into the market shortly thereafter.

And another piece that we're quite excited about, just in the last couple of months, Hitachi launched their own proprietary branded financing solution. So that was really one of the last pieces that we were missing in the puzzle. Our customers, most of whom finance their machines when they buy them. We're needing to go to third-party financing solutions, and today, they can go and do that through Hitachi.

[Michael Doumet, Scotiabank]

Awesome. So making a pivot here to the dividend, fully understanding that it's a Board decision. I was wondering if you could contextualize the sizable increase. Wajax today I think is the largest dividend yield amongst its peers. That's both equipment dealers and industrial parts peers.

But you also want to be acquisitive. So I'm looking at the dividend increase today, and I'm wondering if it's kind of like a one and done [bump] or if dividend growth should be part of the capital allocation strategy going forward?

[Ignacy Domagalski, President, CEO]

That's a great question, Michael. Thank you for that. I've been here a little over a year now. I had a really good opportunity just to get an understanding of the strength of this business and how solid the business is. And the increase in dividend is really a signal about how we feel about the future of this company.

It's got strong cash flow generating ability. The business is as solid as it's ever been. We have this new enhanced relationship with Hitachi. And our less cyclical IP and ERS business continues to grow. So we just feel very, very strongly about the future of the business, which is why we opted for a large dividend increase to send that message to the market that we are confident about the future.

And in terms of capital priorities, we believe we can do this additional distribution to shareholders and at the same time, invest in all the acquisitions that we can find and at the same time, continue to invest in the organic growth of our business. So it wasn't a question of ore for us, we can do both based on the solid fundamentals of our business.

[Michael Doumet, Scotiabank]

And just a follow-up, if you Q1 become a dividend grower. Is that how the board views that? Or is it -- you're happy with your level of dividend today?

[Ignacy Domagalski, President, CEO]

Good question, Michael. The dividend is something that the Board looks at every quarter and we'll continue to look at it on a quarterly basis.

[Operator]

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

[Devin Dodge, BMO Capital Markets]

Demand has been pretty strong in the last couple of years, but we've seen SG&A costs grow roughly in line with revenue, which I think has muted some of the margin expansion at the operating income line. Can you help us understand what's been driving those SG&A costs? And how we should be thinking about operating leverage in 2023?

[Stuart Auld, CFO]

Yes. I mean if you look at our cost structure, one of the biggest costs that we have is people. So as revenue goes up, our people costs go up. There is some level of productivity, but we still think that we'll still fit in the range of somewhere in the 14.5% to 15.5% range is still our target, albeit we'd like to continue to manage that down as we go forward.

[Devin Dodge, BMO Capital Markets]

Okay. And then working capital efficiency, look at was also really strong in 2022, much better than the historical average. Do you feel that this is sustainable at these levels? And how should we be thinking about overall working capital in 2023?

[Ignacy Domagalski, President, CEO]

Yes. Thanks for the question, Devin. When we think about working capital, if we look at where we are today in terms of inventory and receivables and payables, we feel pretty good about where we are today. I think we were a little low in the beginning of the year. But we're pretty happy with the amounts as I said, at the end of December.

[Devin Dodge, BMO Capital Markets]

Okay. Okay. And maybe just 1 last one. Just coming back to one of the earlier questions on capital allocation. I noticed that share buybacks really weren't part of the one of the outlets mentioned. Was that intentional? Is that something that you guys can look to do in the next little, while just seems like it should be an attractive use of capital given where the stock is trading?

[Ignacy Domagalski, President, CEO]

Yes. Thanks for the question, Devin. Our stock is fairly illiquid and not traded as much as we hoped it would be. So an NCIB today is something that we're opting not to do just because of the low trading volumes.

[Operator]

Your next question comes from Michael Tupholme from TD Securities.

[Michael Tupholme, TD Securities]

So obviously, strong, very strong revenue growth in the fourth quarter really across the business, but in particular, very strong revenue growth in equipment sales. I know you'd expect it to deliver some large mining shovels in the fourth quarter and appears you did. Are you able to provide a little bit more detail around what the contribution from those was in the fourth quarter?

[Stuart Auld, CFO]

In terms of revenue, Michael?

[Michael Tupholme, TD Securities]

Yes.

[Stuart Auld, CFO]

Yes. I mean I'd say the revenue growth was a good chunk of it was mining. We delivered a number of larger shovels. There was still construction and forestry in there, but the biggest proportion of that growth was in mining.

[Michael Tupholme, TD Securities]

Okay. And as we look ahead to 2023, the outlook commentary you provided sounds fairly positive, really sort of across multiple areas. I guess as we look at the equipment business, it sounds like you feel there's an opportunity to grow notwithstanding some of the large shovel deliveries you had in 2022. So can you talk a little bit about that, I suppose, just in terms of the growth outlook you see there and also, if possible, to kind of remind the other quarters in 2022 when we're looking back for prior year comp purposes, what came through in 2022 and the other quarters as far as large shovels.

[Ignacy Domagalski, President, CEO]

Yes. Thanks for the question, Mike. So maybe let's talk about the past first. In 2022, we delivered a large shovel in Q3 and 2 in Q4. Looking forward, it's not in the December 2022 backlog. But since December 31, we've -- we've received an order for another large mining shovel, which we anticipate will be delivered in Q3 of this year. So that's what we have in backlog now. And then quoting activity is very robust with our customers, mining customers, oil sands customers, their activity is robust amongst them, and they're all doing quite well and still interested in mining shovels and other equipment. So while nothing in the backlog, we're working hard to add things to that backlog.

[Michael Tupholme, TD Securities]

Okay. That's helpful. You've got a couple of questions for you with the dividend increase. I guess the one additional question I would have is the 32% increase that the Board landed on, was that in any way tied to some type of a payout ratio or other particular metric? Just wondering if we can put the increase into context relative to earnings or some other metric?

[Ignacy Domagalski, President, CEO]

No, it wasn't related to a payout ratio. Where it stands now at $1.32, it is within the payout ratio that we're comfortable with and somewhat comparable to our peers. The reason for a large increase was simply to show the strength of our business. And if you -- I mean if you look at this year, and compare the last 6 years before that, I mean we're up quite a bit. The trend is very strong.

In the last year, revenue was up 20%, EPS up 35%, the developing relationship with Hitachi continues to get better, our industrial parts and ERS business continues to get bigger and is less cyclical. Our customers are cautiously optimistic about the future. We've got our lowest leverage in a decade and plenty of dry powder. And so we're just -- we're feeling really confident about the mid-, short- and long-term future of this company, and that's the message that we wanted to send.

[Michael Tupholme, TD Securities]

Okay. That makes sense. Just a clarification. You said that the dividend increase puts you at a place where you're within your -- within a target payout ratio range you'd be comfortable with it. Can you remind me, have you articulated that range publicly?

[Ignacy Domagalski, President, CEO]

No, we have not.

[Michael Tupholme, TD Securities]

Okay. And then just last question, as far as capital allocation. You mentioned in the release, one of the objectives here is to transact on a robust acquisition pipeline. Can you provide an update on what that pipeline looks like right now and your confidence that you'll be able to complete some transactions over the coming year?

[Ignacy Domagalski, President, CEO]

Yes. Good question, and thank you. As mentioned on some previous calls, we've got a full-time person and a couple of helpers in this area that are devoted to finding and acquiring companies. So we're really continuing to build our skill set in this area. We've deployed nearly $200 million of acquisition capital over the last 5, 6 years, and we did 2 small tuck-ins over the last year.

We've got a robust pipeline of tuck-in acquisitions. None are huge nor do we think they need to be. There are some larger ones in there as well. But we're quite confident that we'll be able to close on some of these deals. And we've had a few that were at the 1-yard line and unfortunately fell apart because we're not -- we're not intent on buying companies just to buy companies. We want to make sure we buy the right ones.

[Operator]

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

[Bryan Fast, Raymond James]

Just on Central Canada, I mean, you saw a nice year-over-year gain in the region. I know that you made some leadership changes there last year. Could you just talk about maybe the progress you've made there and then some of the opportunities you're seeing?

[Ignacy Domagalski, President, CEO]

Yes, thanks for the question. So we've talked about this one at the last few calls. And we figured it would take about a year, maybe 1.5 years or 2 years to really start seeing the positive results from those changes. And it seems to have started happening here in the fourth quarter. Year-over-year, it's up only year-over-year whole year over whole year is up only 2%.

But this last quarter, we really saw a meaningful improvement in the region. Most of that was driven by our Industrial Products business, which is a strength in that region. But when we think about Ontario, compared to the rest of the country, it is our lowest market share and our biggest opportunity. So I think we've just started to scratch the surface of what we can do there, but it's great to see that those leadership changes that we made about a year ago are -- they're working.

[Bryan Fast, Raymond James]

That's helpful. And then just maybe on the backlog, it looks like the weighting has increased to industrial parts and ERS just compared to this time last year. It sounds like you gave a little bit of color there with the last answer. But maybe just some more color on where that strength is being driven from regionally?

[Ignacy Domagalski, President, CEO]

The strengths for our industrial products and U.S. backlog is being driven by all regions. That business for us is -- it's really firing on all cylinders everywhere. And the decrease in the equipment backlog, as Stu mentioned earlier in the call, a large chunk of that was due to those large mining shipments that happened in the fourth quarter.

[Stuart Auld, CFO]

Sorry, and the ERS 1 is predominantly in Quebec.

[Operator]

Presenters, there are no further questions at this time. Please proceed with your closing remarks.

[Ignacy Domagalski, President, CEO]

Thank you, everyone, for joining us today. Have a wonderful day.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. You may now disconnect your lines.