Wajax Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 2, 2024

There are 7 speakers on the call.

Operator

Thank you for attending Wajax Corporation's 2024 First Quarter Financial Results Webcast. On today's webcast will be Mr. Iky Domagalski, President and Chief Executive Officer Mr. Stuart Earle, Chief Financial Officer and Ms. Tanya Casadino, VP, Corporate Controller.

Operator

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 conference over to Tanya Casadino.

Speaker 1

Thank you, operator. Good afternoon, and thank you for participating in our Q1 results call. This afternoon, we will be following a webcast, which includes a summary presentation of Wajax's Q1 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 information on Slide 2 and non GAAP and other financial measures on Slide 3.

Speaker 1

Please turn to Slide 4. And at this point, I'll turn the call over to Eddie.

Speaker 2

Thank you, Tanya. I will provide highlights on our Q1 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 50% of our total revenue, while industrial parts and ERS generated approximately 50%.

Speaker 2

Turning to slide 5. This slide 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 to our people, customers, suppliers and the communities we serve. By living our purpose and values, we will continue to build a 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.

Speaker 2

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 six priorities, we have the foundation to continue growing our company for many years to come. Turning to Slide 7.

Speaker 2

In the Q1, Wajax saw higher gross profit margins, which helped to offset the decline in revenue. Revenue of $482,300,000 decreased $33,700,000 in the quarter. The decrease resulted from lower equipment sales in construction and forestry in Western and Eastern Canada and lower material handling sales in Eastern Canada. These decreases were offset partially by higher industrial parts sales in Western Canada and higher ERS sales in Central Canada. In the current high interest rate environment, some customers are electing to rent prior to purchasing, although historically these types of arrangements have a very high conversion rate to sales.

Speaker 2

Gross profit margin of 22% increased 150 basis points compared to the same period of 2023, driven primarily by a higher proportion of and higher margins on product support, industrial parts and ERS sales. Selling and administrative expenses as a percentage of revenue increased to 16.4% in the Q1 of 2024 from 14.7% in the Q1 of 2023. Selling and administrative expenses in the Q1 of 2024 increased $3,300,000 or 4.3 percent compared to the Q1 of 2023 due primarily to higher personnel costs. Adjusted EBITDA of $40,700,000 decreased $2,300,000 or 5.3 percent from the Q1 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.

Speaker 2

Adjusted net earnings of $0.59 per share decreased 28.5 percent or $0.24 per share from the Q1 of 2023, knowing the adjustments recorded on this chart. At the end of Q1, the TRIF rate was 0.54%, a decrease of 54% from the Q1 of 2023. The Q1 TRIF rate was down 47% from the Q4 of 2023. Safety continues to be Wajax's number one priority and management is committed to continuously improving our safety programs to improve on this result. We thank everyone on our team for their ongoing dedication to workplace safety.

Speaker 2

Turning to Slide 8. Revenue decrease of 6.5% in the Q1 resulted in lower revenue in the Western and Eastern regions. Western Canada sales of $220,000,000 decreased 7.7% in the quarter, mainly due to lower equipment sales in construction and forestry. These decreases were offset partially by higher industrial parts sales. Central Canada sales of $90,000,000 increased 3.7% in the quarter due primarily to higher ERS sales.

Speaker 2

Central Canada has experienced 6 consecutive quarters of year over year growth. Eastern Canada sales of $172,000,000 decreased 9.8% in the quarter due primarily to lower equipment sales in construction and forestry and lower material handling 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 $98,000,000 decreased $34,000,000 or 26% compared to last year due primarily to lower construction and forestry sales in Western and Eastern Canada.

Speaker 2

Product support sales of $134,000,000 were essentially flat year over year. 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 $155,000,000 increased $2,000,000 or 1%, while ERS sales of $84,000,000 decreased $1,000,000 or 0.9%. Turning to Slide 11.

Speaker 2

This slide summarizes sales at a category level for our company's overall groupings of heavy equipment and industrial parts and services. In the Q1, heavy equipment categories decreased $35,000,000 or 12% driven primarily by lower construction and forestry sales in Western and Eastern Canada. In the Industrial Parts and Services categories, strong Industrial Parts sales in Western Canada were partially offset by lower ERS 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.

Speaker 3

Thanks, Ziggy. Please turn to Slide 12 for my comments on backlog and inventory. Backlog, our Q1 backlog of of $587,100,000 increased $33,100,000 or 6% compared to backlog of $554,000,000 at the end of Q4 and increased CAD56,400,000 or 10.6 percent on a year over year basis. The sequential increase was due primarily to higher construction and forestry orders. The year over year increase was due to higher mining and material handling orders offset partially by lower construction and forestry and industrial parts orders.

Speaker 3

Overall, our strong backlog reflects continued momentum in our heavy equipment, industrial parts and ERS categories. Inventory. Inventory increased $116,400,000 compared to Q4 20 24, due primarily from higher equipment inventory in the construction, forestry, mining and material handling categories and lower sales activity in the quarter. A significant contributor to the increase in inventory was the early delivery of selected heavy equipment in exchange for more favorable payment terms. Given the increased backlog in the new Hitachi Construction Machinery Americas financing program, inventory is expected to decline over the next two quarters.

Speaker 3

Please turn to Slide 13, where I'll provide an update on cash flow, leverage and working capital. Cash flows used in operating activities the current quarter of $7,300,000 compared with cash flows used in operating activities of $69,600,000 in the same quarter of the prior year. The increase in cash generated of $62,200,000 was mainly attributed both to the decrease in cash used in non cash operating working capital and lowering income taxes paid. Leverage ratio. Our leverage ratio increased to 2.2 times from 1.8 times in Q4 due to the higher debt level in the current period, driven largely by the corporation's investment in inventory and lower trailing 12 month pro form a adjusted EBITDA.

Speaker 3

The corporation's leverage ratio is currently outside our target range of 1.5 to 2 times at the end of Q1 due to the investment in inventory during the year. Our available credit capacity at the end of Q1 was $197,500,000 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 Q1 working capital efficiency was 25.6 percent, an increase of 180 basis points from December 31, 2023 due to the higher trailing 4 quarter average working capital and the lower trailing 12 month revenue. Finally, the Board has approved our Q2 2024 dividend of $0.35 per share payable on July 3, 2024 to shareholders of record on June 14, 2024.

Speaker 3

Please turn to Slide 14. And at this point, I will now turn it back to

Speaker 2

Thank you very much, Stu. Our 2024 outlook is summarized on slide 14. In the Q1 of 2024, Wajax delivered revenue of $482,300,000 down 6.5% from the Q1 of 2023. Gross profit margin increased to 22% in the Q1 of 2024 versus 20.4% in the Q1 of 2023, primarily due to a larger proportion of and higher margins on product support, industrial parts and ERS sales. We continue to see solid fundamentals in many of the markets we serve, particularly in mining and energy, supported by relatively elevated commodity prices and sustained customer budgeting for capital projects.

Speaker 2

Effective March 1, 2024, Hitachi Construction Machinery America introduced a new financing program with competitive rates that will benefit Wajax customers and is expected to result in stronger equipment sales in the near term. The majority of recent increases in short term equipment rental arrangements are also expected to convert to equipment sales within 6 to 12 months. Given the corporation's increased backlog and the new HCMA financing program, inventory is expected to decline over the next two quarters. Management continues to monitor end markets and customer purchasing patterns, while being prudent with costs and continuing to focus on the execution of its 6 strategic priorities, which were set out on Slide 6. So I'll now turn the line over to the operator and open for questions.

Operator

Thank you. Your first question comes from Devin Dodge from BMO Capital Markets. Please go ahead.

Speaker 4

All right. Thanks. Good afternoon, guys. Hi, Devin. I wanted to start with the weakness that you saw in the equipment sales in Q1.

Speaker 4

Just wondering, do you think this is largely just timing related? Or have you seen some customers pulling back or either deferring or canceling orders?

Speaker 2

Hi, Devin. Thanks for the question. We have not seen any meaningful order cancellations. We did see some deferrals from Q1 to Q2 just based on certain projects starting in Q2 instead of Q1. And we're still seeing reasonable demand in the end markets.

Speaker 2

We just we didn't have a financing program and that was a big deal for us. All of our competitors have 0% and now we do too.

Speaker 4

Okay. Okay. And then for that influx of equipment inventory that was received during Q1, can you talk a little bit about those favorable payment terms? Was it just a lower price point or were there extended payment terms? Just any color that you can provide there?

Speaker 2

Yes. Maybe just to elaborate on what happened. We actually took early delivery of orders that were already placed. So the orders were intended to arrive in Q2 and our manufacturer had their year end at the end of March and gave us some really favorable terms take it a bit early. So we were happy to do that.

Speaker 2

I can't really get into the details, but it was very favorable for us to accept the inventory early.

Speaker 4

Okay. Makes sense. Okay. And then maybe just one last one for Stu. Working capital efficiency, there's lots of moving parts, obviously with supply chain, parts availability, the change with Hitachi.

Speaker 4

Just is there a targeted level of working capital efficiency that we should be thinking about as these trends kind of normalize?

Speaker 3

Devin, not that we would disclose, at this point.

Speaker 4

Okay, fair enough. I'll turn it over.

Speaker 2

Thanks very much, Devin.

Operator

Your next question comes from Michael Tupholme from TD Securities. Please go ahead.

Speaker 5

Thank you. Good afternoon.

Speaker 2

Hey, Mike.

Speaker 5

Hey. So in the release, you talked about a few reasons that you expect to see stronger equipment sales going forward, increase in the backlog sequentially, the Hitachi financing program, etcetera, how quickly would you expect those factors to drive stronger equipment sales? Is this a Q2 event or do you think this is more of a back half event?

Speaker 2

Thanks for the question. There's a few factors at play. We've got about $54,000,000 of equipment available on rental purchase orders, on rental purchase options or RPOs and all of those are expected to convert within 6 to 12 months, some earlier. As you know, our bookings are up about $33,000,000 in construction and forestry and this Hitachi financing program has really right out of the gate created a lot of excitement for our frontline sales and our customers. And in addition to that, we do have a lot of gear in the lots at our branches.

Speaker 2

So we do have a lot of inventory available for selection for our customers and it's all good new stuff that's not aged. To answer your specific question, we expect it to be both. We expect positive momentum in Q2 and beyond.

Speaker 5

Okay. Maybe just to drill into a few of those things a little bit more. The rental purchase options that you discussed, this roughly $54,000,000 can we put that into context? Like how would that compare to where you were a year ago and how much converted over the last 6 to 12 months?

Speaker 3

So if the rental purchase option maybe to go back, Mike, is probably more in line with pre COVID levels, When interest rates were a little higher, when interest rates kind of dropped through COVID, customers could immediately get financing at lower rates. As interest rates went up, we've seen a gradual increase in the rental purchase option. And what we have seen and we call it the rental purchase option. I refer to it more as a rent to own, because we see 95% convert just over a period of time. So, the longest we would want to go would be 12 months, but typical would be 6 to 12 months.

Speaker 5

Okay. I guess where I'm kind of trying to go with this is, it sounds like you're pointing to that as a source of potential demand or source of sales. I'm just trying to understand if that actually drives growth relative to what you would have seen in terms of sales coming through from similar arrangements in the year ago period, like not really trying to go back to where we were pre COVID, but just trying to look year over year, is this a source of revenue growth year over year? Or are we kind of just flat with what you would have done on that basis last year?

Speaker 2

These contracts, the ones that we have $54,000,000 of today, a year ago, it would have been about half of that.

Speaker 5

Okay. That's helpful. Thank you. And then in the terms of the construction and forestry markets, that was the source of weakness on the equipment sales side in Q1, but it also sounds like that was a driver to the backlog growth you saw sequentially in Q1. So what changed in your mind between there were some weakness from a sales perspective in the Q1, but then you got this demand that drove the backlog.

Speaker 5

So what sort of flip there, if you can comment on that?

Speaker 2

I think one of the big pieces there is this financing program, which was announced on March 1. So we didn't have a whole lot of time to book and ship orders in Q1 due to that program, but we're starting to see some great momentum.

Speaker 5

Okay. That's helpful. I think there's a lot of focus obviously on the fact that equipment sales were down as much as they are. And I think in the release you talked about some of the reasons you maybe see some strength going forward. But if we look at some of the other parts of the business or really all the other parts of the business, industrial parts, CRS, product support, you've been seeing very good growth in those areas for some time now.

Speaker 5

And if we look this quarter, Q1, year over year revenue growth was pretty much flat year over year in all those areas. So is this sort of a slowdown that's likely to persist or is there something going on that was unique to the quarter? Just trying to get a sense of how we think about those areas going forward because I think you were fairly upbeat about the prospects for those areas in 2024 when we last talked and wasn't necessarily expecting this kind of a slowdown?

Speaker 2

Yes, when we look at our IP and ERS backlog, it remains quite strong. So we do have some near term visibility to some decent revenues. And yes, I mean revenues were flat year over year. But when we look at some of our publicly traded peers that are in the United States who report on this too, we seem to be doing better than them.

Speaker 5

And what about going forward? Like how do you see things playing out going forward for the rest of the year in those areas?

Speaker 2

I mean beyond the commentary on the markets that I don't think we have too much to add. Energy, oil and gas still seems to be strong and lots of activity. Our mining customers are still buying. Forestry is still down. But if you look at oil and gas and mining, that's a pretty good chunk of our business and we do see positive momentum in those areas.

Speaker 5

Okay. I will get back in the queue. Thanks.

Speaker 2

Thanks, Mike.

Operator

Your next question comes from Michael Doumet from Scotia Bank. Please go ahead.

Speaker 6

Hey, good afternoon, guys. Just on the equipment sales, look similar question to the other 2 analysts, but maybe wanted to drive it home. It sounds like there were a few headwinds in Q1. It feels like they mostly go away in Q2. I mean, can we assume that by Q2 equipment sales should be normal, whatever that normal is?

Speaker 2

Yes. I mean, we're certainly optimistic with the new financing program and the visibility that we have into our backlog that increased quite a bit. If you look at our year over year decline, it's essentially equal to our backlog increase. So we got the orders, they just didn't go out the door. So we're feeling pretty good about the short term, which is why we use that specific wording in the release that in the near term we see some momentum.

Speaker 6

Okay. That's pretty clear actually. Thanks, Ziggy. And then maybe on the financing program, could you talk a little bit more about it? How competitive is it versus what you previously had versus what your peers have?

Speaker 6

Maybe talk about the attachment rate that you are currently seeing maybe versus what you expect going forward? Just a little bit more color to unpack that.

Speaker 2

If we rewind 2 years, which is when we first started doing this arrangement with Hitachi, we didn't have any financing program. We have a few people inside of our company who help our customers with financing. We used to do Deer Finance and essentially for a year, we were acting as brokers and just helping our customers get into financing through the big banks and through other third party lenders. So that lasted about a year and then Hitachi's Zacks' Finance program was launched, but it wasn't anything that resembled what was launched on March 1. It was basically equivalent to bank rates, which was quite a bit different than what our competitors were offering.

Speaker 2

And if you look at all the big competitors across the country, they have manufacturer sponsored generally 0% rates or very similar super attractive very low rates and we just didn't have that. But as of March 1, we do. And so when you go to our website, wajax.com, that's the first thing that pops up, 0% Zacks' Finance on quite a few models going up to 4 years. So we're I think we're in a pretty good spot now where We're now, I think, generally equal with our competitors, whereas before everyone had something and we really didn't.

Speaker 3

And I might just add that the program that they put in place was really similar to what they launched in the U. S. So, Zaxis has started really doing stuff in the U. S. Versus coming to Canada.

Speaker 3

It's a little more complicated for them. But we had to we saw what the U. S. Program was. We basically said we want that too.

Speaker 3

It took them a few months to get there, but we finally got it.

Speaker 6

That's really helpful guys to understand what's going on. But so maybe just last question on inventory. You talked about an expected decline over the next two quarters in the release, presumably over the Q4 as well. But I wonder if what you're suggesting by the 2 quarter period is specifically in regards to the potentially reversing the Q1 increase?

Speaker 2

The 2 quarter period is one that we felt pretty comfortable with. As part of the build in Q1, there was a good chunk in there that was units that were scheduled to arrive in Q2. So since we've taken them now, they're no longer coming in Q2. So we're pretty confident that that 6 month window is a good window for us to continue to bring our inventory down.

Speaker 6

Perfect. Thanks for the explanation guys.

Operator

Thanks, Michael. Excuse me. Your next question comes from Michael Tupholme from TD Securities. Please go ahead.

Speaker 5

Thanks. Just a couple of follow ups. When we're looking at equipment sales, can you provide an update or reminder as to what you expect for large shovel deliveries in 2024 and when?

Speaker 2

Yes. Just as a reminder, in 2023, we had 2 large shovel deliveries. We had 1 in Q2 and 1 in Q3. And for this year, we have 2 shovels in backlog, 2 of our largest shovels EX8000s and those are scheduled for the second half.

Speaker 5

Sort of 1Q3, 1Q4, is that the right way to think about it?

Speaker 4

Probably,

Speaker 2

but those are a little bit of a moving target as well.

Speaker 5

Okay. And then if we look at SG and A expenses, as a percentage of revenue, when do you see yourself moving back into your target range of 14.5% to 15.5%?

Speaker 2

Our stated target hasn't changed. We're still 14.5% to 15.5%, which Q1 was outside that range, but that's when we talk about it, usually we talk about the full year. And so that's the guidance that we would give on that.

Speaker 5

And do you think you may need to look at implementing some cost savings Or do you think the cost structure right now is the right size for the company?

Speaker 3

Mike, I think we're always looking at cost structure opportunities. And our preference is not to do anything late in the year. So we're always looking at them and we'll look at them in concert with the 14.5 to 15.5. So, to the extent that we feel we're not necessarily going to get there, then we will put those processes in place to get there.

Speaker 5

Okay. And I think margin improvement was one of the themes that had been talked about in recent quarters. Certainly saw some gross margin improvement year over year in the Q1, but obviously gave a lot of that benefit back to the SG and A line. How do we think about margin improvement this year? Like is that still something you'd expect to see on an EBIT margin basis?

Speaker 5

Or does the way the Q1 started preclude you from being able to show EBIT margin performance improvement on a full year basis?

Speaker 2

Yes. I mean, Mike, I think we're as Stu said, we're constantly looking at our costs and we're always in looking at cost mode and making sure that we're doing the right things. And I do think we've had some success in our gross profit margin enhancements, which we saw a little bit this quarter due to mix, but a decent chunk of it was also just due to margin improvement activities and product support in IP and ERS. And so we'll continue to execute on those initiatives throughout the year.

Speaker 5

Okay. That's helpful. And then just lastly, in the release, when you talk about continuing to invest in future organic growth, can you talk a little bit about where you're focusing those efforts right now?

Speaker 2

Yes. If you look at our 6 strategic priorities which are in the deck are after building a people first company which ultimately reduces your attrition costs. The next one is growing the base business with a focus on parts, service and margin improvement. And so really that parts and service business, that's what we're most excited about, whether that's product support parts and service or whether that's industrial parts and engineered repaired service. We do see still plenty of room for organic growth in those areas.

Speaker 2

And from a geographic perspective, while we try to grow our business in all markets, we still see Ontario is pretty strong. We've had 6 quarters of positive year over year growth there. We think the leadership is quite stabilized there, which is leading to some of that. And if you look at however you want to measure it, our total revenue divided by the GDP of the provinces, we're still pretty underweight in terms of market share in Ontario and that's an area that we continue to push pretty hard.

Speaker 5

Okay, great. Thank you.

Operator

And there are no further questions at this time. I will turn the call back over to Igi for closing remarks.

Speaker 2

Thank you all for joining us today and thank you for your interest in Wajax. Have a great day.

Operator

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

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Key Takeaways

  • Revenue decreased 6.5% year-over-year to $482.3 million in Q1 2024 due to lower equipment and material handling sales, while gross profit margin improved 150 basis points to 22%.
  • Adjusted EBITDA fell 5.3% to $40.7 million and adjusted earnings per share declined 28.5% to $0.59, driven by lower volumes and higher personnel costs.
  • Order backlog rose 6% sequentially to $587.1 million and 10.6% year-over-year, reflecting strong demand in construction, forestry, mining and material handling.
  • Effective March 1, a new Hitachi Construction Machinery Americas 0% financing program is expected to accelerate equipment sales conversion in the near term.
  • The Board approved a Q2 2024 dividend of $0.35 per share payable on July 3, 2024, demonstrating continued shareholder returns.
AI Generated. May Contain Errors.
Earnings Conference Call
Wajax Q1 2024
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