Q3 2024 Wajax Corp Earnings Call
Penske, President and Chief Executive Officer, Mr. Stuart <unk>, Chief Financial Officer, and Mr. Tanaka D&O VP corporate controller. Please be advised that this webcast is being recorded.
Please note that this webcast contains forward looking statements.
Actual future results may differ from expected results I will now turn the call over to Tania Cassidy.
Tania Cassidy: Thank you operator, good afternoon, and thank you for participating in our third quarter results call.
Tania Cassidy: This afternoon, we will be following a webcast, which includes a summary presentation of wage axis Q3, 2024 financial results.
Tania Cassidy: Presentation can be found on our website under investor relations events and presentations.
Again, I would like to draw your attention to our cautionary statement regarding forward looking information on slide two.
Tania Cassidy: The non-GAAP and other financial measures on slide three.
Tania Cassidy: Please turn to slide four and at this point I'll turn the call over to <unk>.
Speaker Change: Thank you Tanya I will provide highlights on our third quarter and before turning it over to sue for commentary on backlog inventory and the balance sheet.
Speaker Change: Before I provide an overview of where Jack's corporation of 166 years of Canadian operating history and operates across 116 branches with a team of more than 3100 employees during the quarter, our heavy equipment categories and revenue sources made up approximately 55% of our total revenue, while industrial parts and air S generated approximately 45%.
Speaker Change: Turning to slide five.
Speaker Change: Slide provides an overview of our purpose and values, which access purpose statement is empowering people to build a better tomorrow, which we strive to achieve by living our values and delivering an exceptional experience for our people customers suppliers and the communities we serve.
Speaker Change: My living our purpose and values will continue to build the people first company that has strong resilient and profitable.
Speaker Change: Purpose and values guide, our decision, making and allow us to execute on our strategic priorities.
Speaker Change: Turning to slide six.
Speaker Change: Before I provide 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 third quarter, we just saw lower revenues and gross profit margins, which were offset partially by lower selling and administrative expenses revenue of $481 million decreased $28 7 million in the quarter. The decrease resulted primarily from lower mining equipment sales in Western Canada, driven largely by the sale of a large mining shovel in the third quarter of the prior year with no such sale.
Speaker Change: In the current year lower product support sales in Western Canada, lower ear cells in eastern Canada, and lower industrial part sales in all regions. These decreases were offset partially by higher equipment sales and construction and forestry category in western and Eastern Canada.
Speaker Change: Gross profit margin of 19, 2% decreased 300 basis points compared to the same period of 2023, driven primarily by a higher proportion of equipment sales relative to product support industrial parts and ear cells.
Speaker Change: In addition increased market pressures resulted in lower margins realized on product support and industrial part sales. These decreases were partially offset by higher margins on air sales.
Speaker Change: Selling and administrative expenses as a percentage of revenue decreased to 14, 7% in the third quarter of 2024 from 14, 9% in the third quarter of 2023.
Speaker Change: Selling and administrative expenses in the third quarter of 2024 decreased $5 million or six 6% compared to the third quarter of 2023, due primarily to lower personnel costs, driven largely by cost saving initiatives implemented in the quarter.
Speaker Change: Adjusted EBITDA of $37 4 million decreased $12 6 million or 25, 3% from the third quarter of 2023, noting the adjustments recorded on this chart.
Speaker Change: Decrease resulted primarily from lower sales volumes and lower gross profit margins offset partially by lower selling and administrative expenses.
Speaker Change: <unk> net earnings of 44 cents per share decreased 54, 2% or <unk> 52 per share from the third quarter of 2023, noting the adjustments recorded on this chart.
Speaker Change: At the end of Q3, the drift rate was 0.91, a decrease of 13% from the third quarter of 2023, the third quarter trip rate was up 12% from the second quarter of 2024.
Speaker Change: It continues to be wage acts as the number one priority and managers is committed to continuously improving our safety program to improve on this result, we thank everyone on our team for their ongoing dedication to workplace safe.
Speaker Change: Turning to slide eight.
Speaker Change: Revenue decrease of five 6% in the third quarter resulted from lower revenue in all regions Western Canada sales of $210 million decreased 10% in the quarter due primarily to lower mining equipment sales driven largely by the sale of a large mining shovel in the third quarter of the prior year with no such sales in the current year lower industrial parts sales and lower product supports.
Speaker Change: These decreases were partially offset by higher equipment sales in the construction and forestry category.
Speaker Change: Canada sales of $88 million decreased three 9% in the quarter due primarily to lower industrial parts sales.
Speaker Change: Eastern Canada sales of $183 million decreased one 1% in the quarter due primarily to lower industrial parts and <unk> sales, partially offset by higher equipment sales in the construction and forestry category.
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 $132 million increased $6 million or 5% compared to last year due primarily to higher construction and forestry equipment sales in western and eastern Canada and higher material handling sales in central Canada. These increases were partially offset by lower mining sales in western Canada.
Speaker Change: Driven largely by the sale of a large mining shovel in the third quarter of the prior year with no such stay on the current year.
Speaker Change: Product support of $123 million decreased $12 million or 9% compared to last year due to lower sales in most categories and regions.
Let's turn to slide 10.
Speaker Change: An update on industrial parts, an ear of sales and year over year variances are shown on this page industrial parts sales of approximately $136 million decreased $25 million or 15% due to market conditions that were less favorable than expected.
Speaker Change: Turning to slide 11.
Speaker Change: Slide summarizes sales at a category level for our company's overall groupings of heavy equipment and industrial parts and services in the third quarter, the heavy equipment categories decreased $6 million or 2% driven primarily by lower mining equipment sales in western Canada, driven largely by the sale of a large mining shovel in the third quarter of the prior year with no such sale in the current year. The decrease was offset partially.
A higher construction and forestry equipment sales in Western Canada, and Eastern Canada, and higher material handling sales in central Canada.
Industrial parts and service categories decreased 23 million or 10% driven by lower industrial part sales in all regions due to market conditions that were less favorable than expected. He loves the cyclical categories remain a core element of our broader growth strategy I will now.
Speaker Change: I'll turn the call over to Steve.
Speaker Change: Please turn to slide 12 for my comments on backlog of inventory.
Steve: Our Q3 backlog of $588 1 million increased $43 $3 million or some some 0.9% compared to backlog of $544 million at Q2 and decreased $11 1 million on a year over year basis. The sequential increase was due primarily to higher construction and forest.
Steve: And mining orders offset partially by lower material handling and the IRS orders a.
Steve: The year over year decrease was due to lower construction and forestry material handling Urs and industrial parts orders offset partially by higher mining orders.
Steve: Currently the corporation has seven large mining shovels in backlog to be delivered over the next seven quarters.
Inventory.
Steve: Inventory decreased <unk> 8 million compared to Q2 2024 as management continues to focus on reducing and managing the corporations inventory levels at the end of the quarter. The Corporation had a large mining shovel in inventory that is expected to be delivered in the fourth quarter of 2024.
Steve: Inventory decreased 60 increased to $65 1 million compared to Q3 2023 due to increases in most categories.
Offset partially by lower forestry equipment inventory.
Speaker Change: Please turn to slide 13, where I'll provide an update on our cash flow levels and working capital.
Speaker Change: Cash flows used in operating activities in the quarter of $34 5 million compared with cash flows used in operating activities of $62 million in the same quarter of the prior year. The increase in cash generated a 27 5 million was mainly attributable to a decrease in cash used in noncash operating working capital.
Speaker Change: Offset partially by lower earnings.
Speaker Change: Our Q3 leverage ratio increased to $2 seven to eight times from two seven times in Q2 due to the higher debt level and lower trailing 12 month pro forma adjusted EBITDA.
Speaker Change: Operations leverage ratio is currently outside our target range of one five to two times at the end of Q3, primarily due to investment in working capital during the year and acquisitions completed in 'twenty two.
Speaker Change: Our available credit capacity at the end of Q3 was $167 1 million, which is sufficient to meet short term normal course, working capital and maintenance capital requirements and fund our acquisition program and planned strategic initiative.
Speaker Change: We continue to focus on working capital efficiency was a key component of managing our overall leverage ratio leverage targets. The Q3 working capital efficiency was 26, 6% an increase of 10 basis points from June 32024, due to the lower trailing 12 month revenue.
Speaker Change: Building, the debentures, which are classified within current liabilities working capital efficiency. It was 28, 7% an increase of 80 basis points from June 32024.
Finally, the board has approved our fourth quarter 2024 dividend of 35 per share payable on January seven 2025 to shareholders of record on December 16 2024.
Speaker Change: Please turn to slide 14 at this point I will turn the call back to weak.
Speaker Change: Thanks, Steve.
Speaker Change: Our outlook is summarized on slide 14 during the third quarter of 2020 for Wade Jaques delivered revenue of 481 million down $28 7 million or five 6% from the third quarter of 2023 the year over year decrease in revenue was primarily due to the delivery of a large mining shovel in the third quarter of 2023 with no such delivery in 2024.
The lower product support and industrial parts revenue due to softer than anticipated market conditions.
Speaker Change: Gross profit margin decreased to 19, 2% in the third quarter of 2024 versus 22, 2% in the third quarter of 23, driven by a higher proportion of equipment sales relative to product support industrial parts and ore sales.
Speaker Change: In addition increased market pressures resulted in lower margins realized in product support in industrial part sales, partially offset by higher margins on our sales.
Speaker Change: We continued to see strong customer demand in the mining and energy sectors and reduced activity in industrial and forestry.
Given softer than expected market conditions and year to date results management has implemented a number of cost savings initiatives and is actively pursuing further cost reduction measures management is continuing to focus on the execution of our strategic priorities for 2024, which were set out on slide six.
Speaker Change: And there's been also continues to evaluate options to repay or refinance the corporation's $57 million and senior unsecured debentures that are maturing on January 15th 2025.
Speaker Change: On November 4th 2020 for Wade Jaques announced the planned retirement of Chief Financial Officer, Stuart all to be effective March four 2025, tiny Cassidy now Vice President and corporate controller has been appointed to succeed Mr. <unk> as Chief Financial Officer effective March 5th March 4th 2025.
Speaker Change: Where it will remain as CFO for the next four months and during that time, Stuart Tonya and myself will work closely to ensure a smooth transition.
Speaker Change: On behalf of the board and management team I want to express my appreciation to Stuart for his exceptional contributions over the past decade, among many things Stuart played a key leadership role and unifying wage access operational structure.
Speaker Change: Significantly growing our business and is most recently led the successful implementation of our new ERP system. He has also provided crucial advice and guidance to me since I joined <unk> in 2021 for which I'm very grateful.
Steve: I'll now turn it over to Steve.
Steve: Thank you <unk> and I just wanted to say thanks to the entire way Jack's team, but more specifically my direct reports and my team.
Speaker Change: It's been a privilege to be part of <unk> for the past 10 years seeing the company evolve and work alongside such talented people.
Speaker Change: I'm very proud of what we have accomplished together.
Speaker Change: I'm also very pleased that Daniel will be stepping into the CFO role I'm incredibly confident that she will do an outstanding job and continue supporting the Companys success in every way I'll now turn it over to Daniel.
Daniel: Thank you Sue and thank you for the confidence that you and the board has placed in me I'm, both humbled and excited to step into this role and committed to building on our strong financial Foundation that still has created I am also extremely excited to continue to focus on the execution of our long term strategic priorities envision for like wage.
I look forward to engaging with the investment community and sharing the way Jack story as we continue to drive our goals forward.
Daniel: With that I will turn it back to the operator and open the line for questions. Thank you.
Speaker Change: Thank you, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone.
Speaker Change: Dan here, a three pronged acknowledging your request.
Speaker Change: I would like to withdraw please press star followed by two.
Speaker Change: You will need to lift the anthem first before pressing Andy gere.
Speaker Change: Please go ahead and restore one now if you have any questions.
Speaker Change: And your first question will be from Jonathan Goldman at Scotia Bank. Please go ahead.
Jonathan Goldman: Hi, Good afternoon, Steve I wanted to congratulate you on your career on your retirement and congratulations on your new appointment.
Jonathan Goldman: My first question I wanted to dig into the decline in product support in industrial products margins.
Jonathan Goldman: I was wondering if you could elaborate on the increased competitive pressures you experienced how did those evolve in the quarter and how should we think about the margin trajectory for those two product lines for the balance of 2024 and into 2025.
Speaker Change: Sure Yeah. Thanks for the question Jonathan.
Speaker Change: I think we've just started to see the economy slow and a lot of the external metrics that we look at have slowed.
Speaker Change: It's certainly gotten more pronounced as we've gotten further into the year and essentially we're just seeing our customers slowdown and defer their spending on on Capex and even on maintenance.
Speaker Change: So just just generally slower with the with.
Speaker Change: With some of our customers.
Speaker Change: And as we look to the rest of the year Q4 looks to be a solid quarter for mining are we've got to 8000 shovels shipping in the quarter and and adjourn generally we're still seeing a little bit of uncertainty as we go into the rest of the year, especially there's a.
Speaker Change: U S election, that's happening today and regardless of the result, I think once that is settled and works its way through the system I think we'll start seeing just a little bit more calmness in the market and are returned to customers, making buying decisions in the new year.
Speaker Change: Okay that makes sense and I guess Relatedly, then the product support and the industrial products revenues were softer I think a little softer than you anticipated, but the new equipment sales were actually relatively strong.
Speaker Change: Considering you are lapping a tough comp with the mining shovel delivery last year, So how do I square those two trends.
Speaker Change: Yeah, I think our I think our teams have been doing a really great job on the sales front. We've we've got some great manufacturing partners are some of our larger ones would be Hitachi Heister Tiger cat all of them are great programs to help us get equipment out to our customers.
Speaker Change: And in the supply chain have also really for the most part gotten back to normal and we have a lot of we've got a lot of gear on the shelf right now our inventory is still higher than we'd like it to be and and because of that we've we've got a lot of equipment that's available for sale.
Speaker Change: Okay. That's good color, thanks, I'll get back in queue.
Speaker Change: Keith.
Speaker Change: Thank you next question will be from Devin Dodge at BMO. Please go ahead.
Devin Dodge: Thanks, Good afternoon.
Devin Dodge: Just a few questions I wanted to wish us to.
Good luck on his pending retirement and congrats to the tenure on the new role.
Speaker Change: Got it.
Speaker Change: Maybe just to start with I was just wondering if you could speak to the increase in competitive market pressures for industrial parts and product support I'm just trying to get a sense. If this was concentrated in certain regions or end markets and if these intensified through the quarter or if it was relatively consistent through the summer months.
Speaker Change: That's a good question I mean, where we're at.
Speaker Change: We're seeing a bit more competitive pressure and a bunch of places we have a number.
Speaker Change: O U S publicly traded industrial products peers, who also operate a very significant business in Canada are there they are all calling everything down.
Speaker Change: For for both this year and next year and also calling out competitive market pressure, so where we're all we're all kind of feeling it and I think just mostly due to customers pulling back on the spending so I don't think it's it's not it's not really allocated to specific markets or specific areas. We do generally still see the energy and mining.
Speaker Change: It is pretty strong and the pressures there are not quite as large in other areas, but there's there's competitive pressure.
Speaker Change: Across the board I would say.
Speaker Change: Okay, and then when we look at industrial parks and product support.
I guess, how did those gross margins compare now versus let's say pre pandemic, let's say a more normal times I just trying to understand if this is returned.
Speaker Change: A return to normal or if this is more.
Speaker Change: Transient.
Speaker Change:
Speaker Change: Transient kind of compression is that gross margin.
Speaker Change: I think there are similar to what we saw pre COVID-19.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: And then.
Speaker Change: Let's see.
Can you help us to better understand the working capital investment in the quarter.
Speaker Change: Seems like it was almost entirely from accounts payable just trying to understand what was driving that.
Speaker Change: And if you expect this to reverse in the coming quarters.
Speaker Change: Yes, Devin more just timing of AP payments nothing out.
Speaker Change: Out of the ordinary.
Speaker Change: Okay got it and then just maybe one last one here just.
Speaker Change: One of the notes to the financial statements. There was mention of wage excuse of a supplier or a supplier financing programs. I think there is a new one in Q3 as well.
Speaker Change: It looks like they used to these programs has increased pretty meaningfully. This year just can you provide some context.
Speaker Change: What's behind that I'm not sure. If this is related to Hodge hitachi or something else.
Speaker Change: A portion of it is related to Hitachi.
We basically have.
Speaker Change: The financing now is going through throughs axis versus when it was going through Hitachi before so that's new to us.
Speaker Change: Okay got it I'll turn it over thank you.
Speaker Change: Thank you once again, ladies and gentlemen, please press star one if you have any questions.
Speaker Change: Next we will hear from Michael <unk> at <unk>.
Speaker Change: PD Cowen. Please go ahead.
Speaker Change: Thank you I'll just start by echoing the comments from others all the best to you used to and congratulations tenure.
Speaker Change: I just wanted to go back to I guess, the the <unk>.
Speaker Change: Subject that's been focused on so far in terms of industrial parts and products supported EU south.
Speaker Change: It sounded like initially you sort of suggested that once we get through the.
Speaker Change: The uncertainty associated with the U S election, you could see some improvement in those areas.
Speaker Change: But it also sounded like afterwards, you suggested your competitors in those in those areas are particularly industrial parts are talking about weakness persisting into next year. So.
Speaker Change: Do you have a different view of the market than them or how do we how do we reconcile those two comments.
Speaker Change: When we look at our U S competitors are calling out there I mean, they're American so they call. It the entire U S market, which were only in Canada and in Canada. We do see 2025 is not being a terrible year.
Speaker Change: Okay, and so does that.
Speaker Change: When you say not a total year does that imply a pickup.
Speaker Change: In terms of the run rate revenues Youre doing in industrial parks do you think there is an improvement and a pickup in 2025 is that what you mean by not a terrible year.
Speaker Change: I think it's hard to say at this point.
Speaker Change: We need this.
Speaker Change: American election to work its way through and I think that'll give us a little bit of a better view on what's happening going forward I think interest rates coming down as positive a bank of Canada has continued to say that they think that will keep coming down, which I think will allow our customers to keep spending a little bit more.
Speaker Change: But I think we will we'll really have a better understanding over the next couple of months.
Speaker Change: Okay fair enough.
Speaker Change: Can you talk a little bit about the gross margins 19, 2% down 300 basis points. It sounded like you see a lot of that decline is being driven by mix. But then you also did call out the impact of the competitive and market pressures. So.
Speaker Change: I guess I'm, just trying to understand to what extent that was was mix driven versus the latter if theres a way to sort of break that up and help us understand the two components.
Speaker Change: I would say it's balanced between between those areas are where they are there is there.
Speaker Change: There's an element of mix in there.
Speaker Change: There there is definitely an element of competitive pressure in IP and product support and ER and we're also we're also working hard to to move equipment out of our yards, we've got a decent amount of it and so.
So we're so we're being a little bit more aggressive on price.
Speaker Change: Alright.
Speaker Change: So maybe on that on that front can you or Stu you help us think about.
Speaker Change: The degree or the extent to which we should see inventories coming down in the fourth quarter like relative to where you were at the end of the third where you think it will land at the end of the year.
Speaker Change: I think where we are our peak inventory was at the end of Q1. So that was approximately 750, we brought that down by 28 million over the next quarter.
Speaker Change: And throughout Q3 were flat, but we also got a large shovel in there that's already pre sold that so it's kind of a timing issue and not that one retails for about $20 million. So so we've I think we've been bringing it down at a as a at a reasonable rate we plan to continue bringing it down it's just it's a little bit too high and as we as we worked through.
Speaker Change: Some of these sales and in the fourth quarter, we think we'll definitely see it come down.
Speaker Change: Okay, and then on the cost savings front some have already been implemented it sounds like you are working on others.
Can you provide a little bit more details is primarily bringing on personnel costs and I guess.
When you when you've accomplished what you'd like to do on that front.
Speaker Change: If we look out to next year do you see yourself landing back in your 14, 5% to 15%.
Speaker Change: Percent SG&A as a percentage of revenue target range.
Speaker Change: Yeah, So as I've mentioned in our commentary, we implemented some meaningful cost savings and third quarter planned to do a bunch more in the fourth quarter. Our largest cost is people are so so that's that's the biggest chunk of it.
Speaker Change: And then our next biggest cost is facilities and theres a little bit there too.
Speaker Change: But yes, when as when we're when we're done everything we expect to be.
Speaker Change: Comfortably within that range again.
Speaker Change: Arguably there is some you know.
Speaker Change: Yes.
Speaker Change: Things in terms of bringing your inventory down.
Speaker Change: Okay.
Speaker Change: Okay, I will get back in the queue. Thank you.
Speaker Change: Thank you and at this time, we have no other questions registered please proceed.
Speaker Change: Thank you very much for joining our call.
Speaker Change: Good day.
Speaker Change: Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we ask that you. Please disconnect your line.