Q1 2024 Wajax Corp Earnings Call
Achy Doughnut Koski, President and Chief Executive Officer, Mr. Stuart <unk>, Chief Financial Officer, and MS. Tania cause the Dino VP corporate controller. Please be advised that this webcast is being recorded.
Please note that this webcast contains forward looking statements.
Speaker Change: As Joe Fisher results may differ from expecting results I will now turn the conference over to Tonya Casino.
Thank you operator, good afternoon, and thank you for participating in our first quarter results call. This afternoon, we will be following a webcast, which includes a summary presentation of <unk> Q1, 2024 financial results. The presentation can be found on our website under investor relations events and.
<unk>.
Speaker Change: To begin I would like to draw your attention to our cautionary statement regarding forward looking information on slide two.
Speaker Change: non-GAAP and other financial measures on slide three.
Speaker Change: Please turn to slide four.
Speaker Change: At this point I will turn the call over to <unk>.
Speaker Change: Thank you Tanya I'll provide highlights on our first quarter before turning it over to Stu for commentary on backlog inventory and the balance sheet.
Speaker Change: It provides an overview of <unk> Corporation has 166 years of Canadian operating history and operates across a 119 branches with a team of more than 3250 employees during the quarter, our heavy equipment categories and revenue sources made up approximately 50% of our total revenue, while industrial parts and IRS generated approximately 50%.
Speaker Change: Turning to slide five.
This slide provides an overview of our purpose and values hijack. This purpose statement is empowering people to build a better tomorrow, which we strive to achieve by living our values and delivering an exceptional experience where people customers suppliers and the communities we serve.
Speaker Change: Our purpose and values will continue to build the people first company that has strong resilient and profitable.
Speaker Change: Our purpose and values guide, our decision, making and allow us to execute on our strategic priorities.
Speaker Change: Two six 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.
Speaker Change: Turning to slide seven.
Speaker Change: In the first quarter way Jack saw higher gross profit margins, which helped to offset the decline in revenue revenue of $482 3 million decreased $33 7 million in the quarter. The decrease resulted from lower equipment sales and construction and forestry and western and Eastern Canada, and lower material handling sales in eastern Canada. These decreases were offset partially.
Speaker Change: By higher industrial part sales in Western Canada, and higher Euro sales in Central Canada, and the current high interest rate environment. Some customers are electing to rent prior to purchasing although historically these types of arrangements or a very high conversion rate to sales.
Speaker Change: 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 part and IRS sales selling.
Speaker Change: Selling and administrative expenses as a percentage of revenue increased to 16, 4% in the first quarter of 2024 from 14, 7% in the first quarter of 2023, selling and administrative expenses in the first quarter of 2024 increased $3 3 million or four 3% compared to the first quarter of 2023, due primarily to higher personnel costs adjusted.
Speaker Change: EBITDA of $40 7 million decreased $2 3 million or five 3% from the first 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 improved gross profit margin.
Speaker Change: Adjusted net earnings of 59 per share decreased 28, 5% or <unk> 24 per share from the first quarter of 2023, noting the adjustments recorded on this chart.
Speaker Change: At the end of Q1, the drift rate was zero point 504, a decrease of 54% from the first quarter of 2023, the first quarter trip rate was down 47% from the fourth quarter of 2023 safety continues to be way Jack is 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 <unk>.
Speaker Change: <unk> dedication to workplace safety.
Speaker Change: Turning to slide eight.
Speaker Change: Revenue decrease of six 5% in the first quarter resulted in lower revenue in the western and.
Speaker Change: In eastern regions, Western Canada sales of $220 million decreased seven 7% in the quarter, mainly due to lower equipment sales and construction and forestry. These decreases were offset partially by higher industrial parts sales Central Canada sales of $90 million increased three 7% in the quarter due primarily to higher ore sales Central Canada is <unk>.
Speaker Change: Spirit six consecutive quarters of year over year growth Eastern Canada sales of $172 million decreased nine 8% in the quarter due primarily to lower equipment sales and construction and forestry and lower material handling sales.
Speaker Change: Please turn to slide nine.
Speaker Change: An update on equipment and product support sales and year over year variances are shown on this page equipment sales of $98 million decreased $34 million or 26% compared to last year due primarily to lower construction and forestry sales in western and Eastern Canada product support sales of $134 million were essentially flat year over year. Please.
Speaker Change: Please turn to slide 10.
Speaker Change: An update on industrial parts in euro sales and year over year variances are shown on this page industrial part sales of approximately $155 million increased $2 million or 1%, while <unk> sales of $84 million decreased $1 million or is there a 0.9%.
Speaker Change: Turning to slide 11.
Speaker Change: This slide summarizes sales at a category level for our company's overall groupings of heavy equipment and industrial parts and services in the first quarter heavy equipment category decreased $35 million or 12% driven primarily by lower construction and forestry sales in western and Eastern Canada, and the industrial parts and services categories strong industrial part sales in Western Canada were partially offset.
Speaker Change: Set by lower <unk> sales in Western Canada, the less cyclical categories remain a core element of our broader growth strategy I will now turn the call over to Sue.
Sue: Thanks, Lee Please turn to slide 12 for my comments on backlog and inventory backlog, our Q1 backlog of $587 1 million increased $33 1 million or 6% compared to backlog of $554 million at the end of Q4 and <unk>.
Sue: <unk> $656 4 million or 10, 6% on a year over year basis.
Sue: 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 overall, our strong backlog reflects continued momentum in our heavy equipment.
Sue: Industrial parts and IRS categories.
Sue: Inventory.
Sue: Inventory increased $116 4 million compared to Q4, 2024, due primarily from higher equipment inventory in the construction and forestry mining and material handling categories and lower sales activity in the quarter.
Significant contributors to the increase in inventory was the early delivery of selected heavy equipment in exchange for more favorable payment terms, given the increased backlog and the new Hitachi construction machinery America displacing program inventory is expected to decline over the next two quarters. Please turn to slide 13.
Sue: Where I'll provide an update on cash flow leverage in working cap.
Sue: Cash flows used in operating activities in the current quarter of $7 3 million compared with cash flows used in operating activities was $69 6 million in the same quarter of the prior year.
Sue: The issue the increase in cash generated of $62 2 million was mainly attributed to the decrease in cash used in noncash operating working capital and lower income taxes paid.
Sue: Leverage ratio our leverage ratio increased to two two times from one eight times in Q4 due to the higher debt level in the current period, driven largely by the corporations and the investment in inventory and lower trailing 12 month pro forma adjusted EBITDA.
Sue: The corporation's leverage ratio is currently outside our target range of one five to two times at the end of Q1 due to the investment in inventory during the year.
Sue: Our available credit capacity at the end of Q1 was $197 $5 million, which is sufficient to meet short term normal course, working capital and maintenance capital requirements and fund our acquisition program and planned strategic initiatives.
Sue: 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% an increase of 180 basis points from December 31, 2023, due to the higher trailing four quarter average working capital in the law.
Sue: Our trailing 12 month revenue finally, the board has approved our second quarter 2024 dividend of <unk> 35 per share payable on July three 2024.
Sue: To shareholders of record on June 14th 2020.
Speaker Change: Turn to slide 14, and at this point I will now turn it back.
Sue: Yeah.
Speaker Change: Thank you very much to our 2020 for outlook are summarized on slide 14 in the first quarter of 2024, we delivered revenue of $482 3 million down six 5% from the first quarter of 2023 gross profit margin.
Speaker Change: Increased to 22% in the first quarter of 2024 versus 24% in the first quarter of 2023, primarily due to a larger proportion of and higher margins on product support industrial parts and ear cells. We.
Speaker Change: 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 Change: March one 2020 for Hitachi construction machinery America introduced a new financing program with competitive rates that will benefit <unk> customers and is expected to result in stronger equipment sales in the near term.
Speaker Change: The majority of recent increases in short term equipment rental arrangements are also expected to convert to equipment sales within six to 12 months given.
Speaker Change: Given the corporation's increased backlog and the new HCM a financing program inventory is expected to decline over the next two quarters management continues to market monitor end markets and customer purchasing patterns, while being prudent with costs and continuing to focus on the execution of its six strategic priorities, which were set out on slide six.
Speaker Change: I will now turn the line.
Speaker Change: The line over to the operator and open for questions.
Speaker Change: Thank you, ladies and gentlemen, if you would like to ask a question. Please press star one if you'd like to withdraw your question. Please press Star Q1 moment. Please for your first question.
Speaker Change: Your first question comes from Devin Dodge from BMO capital markets. Please go ahead.
Devin Dodge: Alright, Thanks, Good afternoon, guys Hi, Devin.
Speaker Change: I wanted to start with the weakness that you saw in the.
Speaker Change: In the equipment sales in Q1, 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 Change: Hi, Kevin Thanks for the question.
We have not seen any meaningful order cancellations, we did see some deferrals from Q1 to Q2 just based on a.
Certain projects starting in Q2 instead of Q1.
And we're still seeing reasonable demand in the end markets. We just.
Speaker Change: We didn't have a financing program and that was a pretty big deal for us all of our competitors have zero percent and now we do too.
Speaker Change: Okay, Okay, and then for that that influx.
Speaker Change: <unk> inventory that was received during Q1 can you talk a little bit about those favorable payment terms or was it just a lower price point or where their extended payment terms just any color you can provide there.
Speaker Change: Yeah.
Speaker Change: Maybe just to.
Speaker Change: Elaborate on.
Speaker Change: On what happened we actually took early delivery of orders that were already placed so the orders were intended to arrive in Q2.
Speaker Change: Manufacturer.
Speaker Change: Had their year end at the end of March and gave us some really favorable terms to take it up ticking a bit early so we were happy to do that I can't really get into the details but it was.
Speaker Change: It was it was very favorable for us to accept the inventory early.
Okay makes sense, Okay, and then maybe just one last one for Stu.
Speaker Change: Working capital efficiency.
Speaker Change: Lots of moving parts, obviously with supply chain parts availability change with Hitachi just is there a targeted level of working capital efficiency that we should be thinking about as these trends kind of norm.
Speaker Change: <unk>.
Devin Dodge: Devin not that we would disclose them at.
Speaker Change: At this point.
Speaker Change: Okay fair enough I'll turn it over.
Speaker Change: Thanks, very much Kevin.
Speaker Change: Your next question comes from Michael Hall from TD Securities. Please go ahead.
Michael Hall: Thank you and good afternoon.
Speaker Change: Hey, Mike.
Speaker Change: So in the release you talked about a few reasons that you expect to see stronger equipment sales going forward, increasing the backlog sequentially, the Hitachi financing program et cetera.
Speaker Change: 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 Change: Thanks for the question.
Speaker Change: There's a few factors at play we've got about $54 million.
Speaker Change: Of equipment available.
Speaker Change: On rental purchase orders on a rental purchase options are <unk> and all of those are expected to convert within six months to 12 months.
Speaker Change: Some earlier.
Speaker Change: Uh huh.
Speaker Change: As you know our bookings are up about $33 million of construction and forestry and this Hitachi financing program has has really right out of the gate created a lot of excitement for our frontline sales and our customers.
And in addition to.
Speaker Change: To that we do have a lot of gear and the lots at our at our in our branches. So we do have a lot of inventory available for selection for customers and it's all good new stuff, that's that's not aged.
Speaker Change: To answer your specific question, we expected to be both we expect positive momentum in Q2 and beyond.
Yeah.
Speaker Change: Okay maybe.
Speaker Change: Maybe just to drill into a few of those things a little bit more.
Speaker Change: The rental.
Speaker Change: Purchase options that you that you discussed is 50, roughly $54 million 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 six to 12 months.
Speaker Change: So.
Speaker Change: The rental purchase option maybe to go back.
Speaker Change: Mike.
Speaker Change: It's probably more in line with pre Covid levels.
Speaker Change: When interest rates were a little higher when interest rates kind of drop through COVID-19.
Speaker Change: Customers could.
Speaker Change: Get financing at lower rates.
Speaker Change: As interest rates went up we've seen a gradual increase.
Speaker Change: In the rental purchase option.
And what we have seen and we call it the rental purchase option.
Speaker Change: Refer to it more as a rent to own.
Speaker Change: Because we see.
Speaker Change: 95% convert just over a period of time so.
Speaker Change: The longest we would want to go would be 12 months.
Speaker Change: But typical would be six to 12 months.
Speaker Change: Okay, I guess, where I'm kind of trying to go with this is it sounds like you are pointing to that as a source of potential.
Speaker Change: Demand or source of sales I'm, just trying to understand if that actually drives growth relative to what you would have.
Speaker Change: <unk> seen in terms of sales coming through from similar arrangements in the year ago period like not not really trying to go back to where we were pre COVID-19, 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 where you what you would've done on that basis last year.
Speaker Change: These contracts the ones that we have $54 million of today, a year ago. It would have been about half of that.
Okay. That's helpful. Thank you.
Speaker Change: And then in terms of the construction and forestry markets that was a source of weakness on the equipment sales side in Q1.
Speaker Change: But it also sounds like that was a driver to the backlog growth you saw sequentially in Q1, so what what changed.
Speaker Change: Your mind between.
Speaker Change: There were some weakness from a from a sales perspective in the first quarter, but then you got this demand that drove the backlog so what what sort of flip there. If you can comment on that.
Speaker Change: I think one of the big pieces. There is this financing program, which was.
Speaker Change: Announced on March 1st So we didn't have a whole lot of time to book and ship orders in Q1.
Speaker Change: Due to that program, but we are starting to see some great momentum.
Speaker Change: Okay. That's helpful.
Speaker Change: I guess 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 you maybe see some strength going forward, but if we look at some of the other parts of the business are really all the other parts of the business industrial parts Crs product support <unk>.
Speaker Change: <unk> been seeing very good growth in those areas for some time now and if we look at this quarter Q1.
Year over year revenue growth was pretty much flat year over year in all those areas. So.
Speaker Change: Is this sort of a.
Speaker Change: 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.
Speaker Change: In 2024, and we last talked and wasn't necessarily expecting this kind of a slowdown.
Speaker Change: Yes, when we when we look at our our IP in <unk> backlog it remains quite strong.
Speaker Change: So we do have some near term visibility to some decent revenues.
And yes, I mean revenues were were flat year over year, but when we look at some of our publicly traded peers that are in the United States, who who report on this too.
Speaker Change: We seem to be doing better than them.
Speaker Change: And what about going forward, how do you how do you.
Speaker Change: You see things playing out going forward for the rest of the year in those areas.
Speaker Change: I mean beyond the commentary on the markets.
Speaker Change: I don't think we have to too much to add.
Speaker Change: Energy oil and gas still seems to be strong and lots of activity our mining customers are still buying them.
Speaker Change: Forrester is still down and but if you look at oil oil and gas and mining.
Speaker Change: Pretty good chunk of our business.
Speaker Change: And we do see some.
Still some positive momentum in those areas.
Speaker Change: Okay, I will get back in the queue. Thanks.
Speaker Change: Thanks, Mike.
Speaker Change: Ladies and gentlemen, as a reminder, should you have a question. Please press star one.
Speaker Change: Your next question comes from Michael <unk> from.
Speaker Change: Scotiabank. Please go ahead.
Speaker Change: Hey, good afternoon, guys just.
Speaker Change: On the equipment sales look similar question to the other two analysts maybe wanted to drive it home.
It sounds like there were a few headwinds in Q1, it feels like they've mostly go away in Q2, I mean can we assume that by Q2 equipment sales should be quote unquote normal whatever normal is.
Speaker Change: Yes.
Speaker Change: We're certainly optimistic with what the new financing program and the visibility that we have into our backlog that increased quite a bit.
Speaker Change: If you look at our our year over year decline, it's essentially equal to our backlog increase so we got the orders. They just they just didn't go out the door.
Speaker Change: So.
Speaker Change: So we're feeling pretty good about both the short term, which is why we use that specific wording in the release that in the near term we see some some momentum.
Okay, that's pretty clear thanks, and then maybe on the financing program.
Speaker Change: Could you talk a little bit more about how competitive is it versus what you previously had versus what your peers have maybe talk about the attachment rate.
Speaker Change: That you are currently seeing maybe versus what you expect going forward, just a little bit more color on bad debt.
Speaker Change: If we rewind two years, which is when we first started doing this new arrangement with Hitachi, we didn't have any financing program.
Speaker Change: We have a few people inside of our company, who help our customers with financing we used to do deer finance.
Speaker Change: And essentially for a year, we were acting as brokers and just helping our customers get into financing through through the big banks and through other third party lenders.
Speaker Change: So that lasted about a year and then.
Speaker Change: The Hitachi is axis Finance program was launched but it wasn't.
Speaker Change: <unk> that that resembled what was launched on March 1st It was it was basically equivalent to bank rate.
Speaker Change: Which was quite a bit different than what our competitors were offering and if you look at all the all the big competitors across the country. They are manufacturer sponsored generally zero percent rates.
Speaker Change: We're very similar super attractive very low rates and we just didn't have that.
Speaker Change: But as of March 1st we do and so when you when you go to our website <unk> Dot com. That's the first thing that Pops up zero percent.
Speaker Change: <unk> finance on quite a few models going out to up to four years. So we're I think we're in a we're in a pretty good spot now where we're now I think generally equal with our competitors, whereas before.
Speaker Change: Everyone had something and we really didnt.
Speaker Change: Okay.
Speaker Change: Just.
Speaker Change: Okay.
Speaker Change: The program that they put in place was really similar to what they launched in the U S. So.
Speaker Change: Zach. This is has started really doing stuff in the U S versus coming to Canada is a little more complicated for them.
Speaker Change: But we had we saw with the U S.
Speaker Change: Program was we basically said we want that too it took them a few months to get there, but we finally got it so.
Speaker Change: That's really helpful guys.
Speaker Change: Understand what's going on so maybe just last question on inventory.
Speaker Change: You talked about an unexpected decline over the next two quarters and the release, presumably over the fourth quarter as well, but I wonder if what you're suggesting buy the two quarter period and specifically in regards to.
Potentially reversing the Q1 increase.
Speaker Change: The two quarter period is one that we felt pretty comfortable with.
Speaker Change:
Speaker Change: Ed.
As part of the build in Q1, there was a good chunk in there that was units that were that were scheduled to arrive in Q2. So since we've taken them and now they're no longer coming in Q2.
Speaker Change: So.
Speaker Change: We're pretty confident that.
Speaker Change: That six month window is a good window for us to continue to bring our inventory down.
Speaker Change: Perfect. Thanks for the explanation guys.
Speaker Change: Thanks, well go next.
Speaker Change: Excuse me. Your next question comes from Michael Hall from TD Securities. Please go ahead.
Michael Hall: Thanks, So just a couple of follow ups.
Michael Hall: When we're looking at equipment sales can you provide an update or a reminder, as to what you expect for a large shovel deliveries in 2024.
Michael Hall: When.
Michael Hall: Yeah.
Michael Hall: Yes.
Michael Hall: As a reminder in 2023.
We had two large shovel deliveries, we had one in Q2 and one in Q3.
Michael Hall: And for this year, we have two shovel is in backlog two of our largest shovels exa thousands and those are scheduled for the second half.
Speaker Change: I was sort of one 3% in Q4 is that the right way to think about it.
Speaker Change: Uh huh.
Speaker Change: Yes.
Speaker Change: Probably.
Speaker Change: But those are a little bit of a moving target as well.
Speaker Change: Okay.
Speaker Change: And then if we look at SG&A expenses.
Speaker Change: As a percentage of revenue.
Speaker Change: When do you see yourself moving back into your target range of 14, 5% to 15 15, 5%.
Speaker Change: Our our stated target hasn't changed we're still at 14, 5% to 15, <unk>, which are Q1 was outside that range, but that's when we talk about it usually we talk about the full year and so that's that's the guidance that we would.
Speaker Change: Give on that.
Speaker Change: And do you think you may need to look at.
Speaker Change: Implementing some cost savings to get you back into that range.
Do you think.
Speaker Change: The cost structure right now is the right size for the company.
Speaker Change: 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 will look at them in concert with the 14, 5% to 15 and a half so to the to the extent that we feel we're not necessarily going to get there then we will put those.
Speaker Change: Processes in place to get there.
Speaker Change: Okay.
Speaker Change: Margin improvement was one of the themes that had been talked about.
Speaker Change: In recent quarters.
Speaker Change: You certainly saw some gross margin improvement year over year in the first quarter, but but obviously gave a lot of that benefit back to the SG&A line.
How do we think about margin improvement.
Speaker Change: This year like is that still something you would expect to see on an EBIT margin basis or.
Speaker Change: Does the way in the first quarter started preclude you from being able to show EBIT margin performance improvement on a full year basis.
Speaker Change: Okay.
Speaker Change: Yes.
Mike I think we're <unk>, we're constantly looking at our at our costs and we're always in looking at cost mode, and making sure that we're that we're doing the right things in and I do think we've had some success in our 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.
Speaker Change: Due to margin improvement activities in product support in IP and Drs and so we'll continue to.
Speaker Change: To execute on those initiatives throughout the year.
Speaker Change: Okay. That's helpful. And then just lastly in the release.
Speaker Change: 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 Change: Yes.
Speaker Change: If you look at our six strategic priorities, which are in in the deck. Our after building a people first company, which which ultimately reduces your attrition costs. The next one is.
Speaker Change: 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 what we're most excited about whether that's product support parts and service or whether that's industrial parts and engineered repaired service.
Speaker Change: You see still plenty of room for organic growth in those areas and from a geographic perspective, while we while we try to grow our business in all markets. We still see Ontario was pretty strong we've had six quarters of positive year over year growth. There. We think the leadership is quite stabilized there, which is leading to some of that.
Speaker Change: And if you look at however, you want to measure it our total revenue divided by the GDP of the provinces were still pretty underweight in terms of market share in Ontario, and that's an area that we continue to push pretty hard.
Speaker Change: Okay, great. Thank you.
And there are no further questions at this time I will turn the call back over to <unk> for closing remarks.
Thank you all for joining us today and thank you for your interest in <unk> have a great day.
Speaker Change: Ladies and gentlemen. This concludes your conference call for today you may now disconnect. Thank you.