Q4 2024 Wajax Corp Earnings Call

Operator: Thank you for attending Wajax Corporation's 2024 4th Quarter and Year-End Financial Results Webcast.

Thank you for attending Wade Jaques Corporation's 2020 for fourth quarter and year end financial results webcast.

Operator: On today's webcast will be Mr. Iggy Domogolsky, President and Chief Executive Officer, Mr. Stuart Auld, Outgoing Chief Financial Officer, and Ms. Tanya Casadino, Incoming Chief Financial Officer. Please be advised that this webcast is being recorded. Please note that this webcast contains forward-looking statements.

Speaker Change: On today's webcast will be Mr. You gave them a golf ski President and Chief Executive Officer, Mr sort, all the outgoing Chief Financial Officer and Mr. Nick I said, you know incoming chief financial Officer.

Speaker Change: 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 Tony Cosentino.

Operator: Actual future results may differ from expected results.

Tanya Casadino: I will now turn the call over to Tanya Casadino. Thank you, Operator, and good afternoon. Thank you for participating in our fourth quarter results call. This afternoon, we will be following a webcast which includes a summary presentation of Wajax's Q4 2024 financial results. The presentation can be found on our website under Investor Relations, Events and Presentations.

Speaker Change: Thank you operator and good afternoon. Thank you for participating in our fourth quarter results call. This afternoon, we will be following a webcast, which includes a summary presentation of <unk> Q4, 2024 financial results. The presentation can be found on our website under investor relations events and presentations.

Tanya Casadino: To begin, I would like to draw your attention to our cautionary statement regarding forward-looking information on slide 2 and the non-GAAP and other financial measures on slide 3.

Speaker Change: To begin I would like to draw your attention to our cautionary statements regarding forward looking information on slide two.

Speaker Change: And the non-GAAP and other financial measures on slide three please.

Iggy Domogolsky: Please turn to slide four, and at this point I'll turn it over to Iggy. Thank you, Tonya. To start, I will provide highlights on our fourth quarter before turning it over to Stuart and Tonya for commentary on backlog, inventory, and the balance.

Ian: Please turn to slide four and at this point I'll turn it over to Ian.

Ian: Thank you Tanya.

Ian: I will provide highlights on our fourth quarter before turning it over to Stuart and Tania for commentary on backlog inventory on the balance sheet.

Iggy Domogolsky: This slide provides an overview of Wajax. Corporation has 167 years of Canadian operating history and operates across 114 branches with a team of more than 3,000 employees. During the quarter, our heavy equipment categories and revenue sources made up approximately 62% of our total revenue, while industrial products and ERS generated approximately 38%.

Ian: This slide provides an overview of <unk> Corporation has 167 years of Canadian operating history and operates across 114 branches with a team of more than 3000 employees during the quarter, our heavy equipment categories and revenue sources made up approximately 62% of our total revenue, while industrial products and <unk> generated approximately 38%.

Iggy Domogolsky: Turning to slide five. 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 for our people, customers, suppliers, and the community.

Ian: Turning to slide five.

Jack: This slide provides an overview of our purpose and values. We Jack. 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 for our people customers suppliers and the communities we serve by.

Iggy Domogolsky: 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.

Jack: By living our purpose and values, we will continue to build a people first company that has strong resilient and profitable.

Jack: Our purpose and values guide, our decision, making and allow us to execute on our strategic priorities.

Iggy Domogolsky: Turning to slide 6. The slide provides an overview of our strategic priorities, which have been refined for 2025. Management is completely focused on executing against these priorities. Between our purpose and values and these six priorities, we are the foundation to continue growing our company for many years.

Jack: Turning to slide six.

Jack: This slide provides an overview of our strategic priorities, which have been refined for 2025 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.

Iggy Domogolsky: Turning to slides. In the fourth quarter, Wajax saw higher revenues and lower selling and administrative expenses, which were offset by lower gross profit margins and restructuring and other related. Revenue of $565.9 million increased $23.3 million in the quarter. The increase resulted primarily from higher mining equipment sales in Western Canada from the delivery of two large mining shovels in the fourth quarter of 2024, with no such deliveries in the fourth quarter of the prior year. These increases were offset partially by lower ERS sales in Western and Central Canada. Gross profit margin of 17.1% decreased 420 basis points compared to the same period of 2023, driven primarily by lower margins realized on equipment, ERS, and rental revenue due to increased market pressures, as well as a lower proportion of ERS product support and industrial parts sales relative to.

Jack: Turning to slide seven.

Jack: The fourth quarter, we just saw higher revenues and lower selling and administrative expenses, which were offset by lower gross profit margins and restructuring and other related costs revenue of $565 9 million increased $23 3 million in the quarter. The increase resulted primarily from higher mining equipment sales in western Canada from the delivery of two large mining shovel.

Jack: In the fourth quarter of 2024 with no such deliveries in the fourth quarter of the prior year. These increases were offset partially by lower <unk> sales in western and Central Canada.

Jack: Gross profit margin of 17, 1% decreased 420 basis points compared to the same period of 2023, driven primarily by lower margins realized on equipment, Urs and rental revenue due to increased market pressures as well as a lower proportion of IRS product support industrial parts sales relative to equipment sales.

Iggy Domogolsky: Selling at administrative expenses as a percentage of revenue decreased to 14.1% in the 4th quarter of 2024 from 16.1% in the 4th quarter of 2026. Selling and administrative expenses in the fourth quarter of 2024 decreased $7.4 million, or 8.5%, compared to the fourth quarter of 2023, due primarily to lower spending in multiple areas, including personnel, bonuses, travel and entertainment, and supplies and marketing, driven largely by cost savings.

Jack: Administrative expenses as a percentage of revenue decreased to 14, 1% in the fourth quarter of 2024 from 16, 1% in the fourth quarter of 2023, selling and administrative expenses in the fourth quarter of 2024 decreased $7 4 million or eight 5% compared to the fourth quarter of 2023, due primarily to lower spending in multiple area.

Speaker Change: Is that including personnel bonuses travel and entertainment and supplies and marketing driven largely by cost savings initiatives.

Iggy Domogolsky: In the fourth quarter of 2024, the Corporation implemented workforce reductions in response to market conditions. A restructuring cost of $5.8 million was recognized in the fourth quarter, relating primarily to... Adjusted EBITDA of $35.1 million decreased $12.1 million or 25.6% from the fourth quarter of 2023, noting the adjustments recorded on this chart. The decrease resulted primarily from lower gross profit margins offset partially by reduced selling and administrative Adjusted net earnings of $0.35 per share decreased 58.2% or $0.48 per share from the fourth quarter of 2023, noting the adjustments recorded on this transfer. At the end of Q4, the TRF rate was 0.94, a decrease of 7% from the fourth quarter of 2020.

Speaker Change: In the fourth quarter of 2020 for the Corporation implemented work force reductions in response to market conditions, a restructuring cost of $5 8 million was recognized in the fourth quarter relating primarily to severance costs.

Speaker Change: Adjusted EBITDA of $35 1 million decreased $12 1 million or 25, 6% from the fourth quarter of 2023, noting the adjustments recorded on this chart. The decrease resulted primarily from lower gross profit margins offset partially by reduced selling and administrative expenses adjusted net earnings of <unk> 35 per share decreased 58, 2%.

Speaker Change: <unk> or <unk> 48 per share from the fourth quarter of 2023, noting the adjustments recorded on this journey.

Speaker Change: At the end of Q4, the drift rate was <unk> 94, a decrease of 7% from the fourth quarter of 2023, the fourth quarter drift rate was up 3% from the third quarter of 2020 for safety continues to be <unk> 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.

Iggy Domogolsky: The fourth quarter triff rate was up 3% from the third quarter of 2024.

Iggy Domogolsky: 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 work.

Speaker Change: Vacations to work for safety.

Iggy Domogolsky: Turning to slide 8. Revenue increase of 4.3% in the fourth quarter resulted from higher revenue in Western Canada, offset partially by lower revenue in Central Asia. Western Canada sales of $275 million increased 16.7% in the quarter, due primarily to higher industrial parts sales and higher mining equipment sales, including the delivery of two large mining shovels in the fourth quarter of 2024, with no such deliveries in the fourth quarter of the prior year.

Speaker Change: Turning to slide eight.

Speaker Change: Revenue increase of four 3% in the fourth quarter resulted from higher revenue in Western Canada, offset partially by lower revenue in Central Asia.

Speaker Change: Okay.

Speaker Change: Western Canada sales of.

Speaker Change: $275 million increased 16, 7% in the quarter due primarily to higher industrial part sales and higher mining equipment sales, including the delivery of two large mining shovels in the fourth quarter of 2024 with no such deliveries in the fourth quarter of the prior year. These increases were offset partially by lower ore sales.

Iggy Domogolsky: These increases were offset partially by lower ERF. Central Canada sales of $100 million decreased 5.4% in the quarter, due primarily to lower equipment sales in the construction and forestry category, as well as lower ERS sales. The decrease was offset partially by higher equipment sales in the material handling category. Eastern Canada sales of $191 million decreased 5.1% in the quarter due primarily to lower equipment sales in the construction and forestry category, as well as lower industrial parts sales. The decrease was partially offset by higher equipment sales in the material handling category.

Speaker Change: Central Canada sales of $100 million.

Speaker Change: Decreased five 4% in the quarter due primarily to lower equipment sales in the construction and forestry category as well as lower <unk> sales. The decrease was offset partially by higher equipment sales in the material handling category.

Speaker Change: Eastern Canada sales of $191 million decreased five 1% in the quarter due primarily to lower equipment sales in the construction and forestry category as well as lower industrial part sales. The decrease was partially offset by higher equipment sales in the material handling category. Please.

Iggy Domogolsky: Please turn to the slide now. An update on equipment and product support sales and year-over-year variances are shown on this page. Equipment sales of $208 million increased $50 million, or 32% compared to last year, due primarily to higher mining sales in western Canada, including the delivery of two large mining shovels in the fourth quarter of 2024, with no such deliveries in the fourth quarter of the prior year, as well as higher material handling sales in all regions.

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 $208 million increased $50 million or <unk>, 32% compared to last year due primarily to higher mine mining sales in western Canada, including the delivery of two large mining shovels in the fourth quarter of 2024 with no such deliveries in the fourth quarter of the prior year as well as higher material handling sales in all reach.

Iggy Domogolsky: These increases were offset partially by lower construction and forestry sales.

Speaker Change: These increases were offset partially by lower construction and forestry sales in all regions product support sales of $133 million or essentially flat compared to last year. Please.

Iggy Domogolsky: Product support sales of 133 million were essentially flat compared Please turn to slide 10.

Speaker Change: Please turn to slide 10.

Iggy Domogolsky: An update on industrial parts and ERS sales and year-over-year variances are shown on this slide. Industrial parts sales of approximately $134 million decreased $2 million, or 2%. ERS sales of approximately $79 million decreased $25 million, or 24%, due to lower sales in all regions, particularly in Western Europe.

Speaker Change: An update on industrial parts of <unk> sales at year over year variances are shown on this page industrial part sales of approximately $134 million decreased $2 million or 2% <unk> sales.

Speaker Change: Sales of approximately $79 million decreased $25 million or 24% due to lower sales in all regions, particularly in Western Canada.

Iggy Domogolsky: Turning to slide 11. The slide summarizes sales at the category level for our company's overall groupings of heavy equipment and industrial parts.

Speaker Change: Turning to slide 11.

Speaker Change: The slide summarizes sales at the category level for our company's overall groupings of heavy equipment and industrial parts and services in the fourth quarter heavy equipment categories increased $50 million or 17% driven primarily by higher mining sales in western Canada, including the delivery of the two large mining shovels in the fourth quarter with no such deliveries in the fourth quarter of the prior year as well as higher material handling sales in all regions.

Iggy Domogolsky: In the fourth quarter, heavy equipment categories increased 50 million, or 17%, driven primarily by higher mining sales in western Canada, including the delivery of the two large mining shovels in the fourth quarter, with no such deliveries in the fourth quarter of the prior year, as well as higher material handling sales in all regions. These increases were offset partially by lower construction and forestry sales in all regions.

Speaker Change: These increases were offset partially by lower construction and forestry sales in all regions industrial.

Iggy Domogolsky: Industrial parts and service category decreased $27 million, or 11%, driven by lower ERS sales in all regions, particularly in western Canada, and lower industrial parts sales due to weaker As previously announced, on November 4, 2024, Tonya Casadino has been appointed Chief Financial Officer effective today, following the planned retirement of Stuart Ault from the CFO role.

Speaker Change: The industrial parts and service category decreased $27 million or 11% driven by lower <unk> sales in all regions, particularly in Western Canada, and lower industrial part sales due to due to weaker market conditions.

Speaker Change: As previously announced on November four 2024, tiny Cassady, you know hasnt been appointed Chief Financial Officer effective today. Following the planned retirement of Stewart all from the CFO role do has agreed to remain with wage acts in the near term to support a series of operational efficiency initiatives on behalf of the board and management I would like to thank Stuart for his many contributions to <unk> over the last 10 years.

Iggy Domogolsky: She was agreed to remain with Wajax in the near term to support a series of operational efficiencies. On behalf of the board and management, I would like to thank Stuart for his many contributions to Wajax over the last 10 years. His extensive operational knowledge positions him to remain a core contributor, and we appreciate the continued benefit of his expertise.

Speaker Change: His extensive operational knowledge positions him to remain a core contributor and we appreciate the continued benefit of his expertise and leadership I'd also like to congratulate Tony on her appointment to the role of CFO. We look forward to further leveraging her expertise and disciplined approach to financial risk management I will now turn the call over to Stuart and Tania for commentary on backlog inventory.

Iggy Domogolsky: I'd also like to congratulate Tanya on her appointment to the role of CFO. We look forward to further leveraging her expertise and disciplined approach to financial risk.

Iggy Domogolsky: I will now turn the call over to Stuart and Tanya for commentary on backlog, inventory, and a balance sheet. Thanks, Iggy. Please turn to slide 12 for my comments on backlog and inventory.

Speaker Change: <unk> and the balance sheet.

Thanks, Hey, Keith Please turn to slide 12 for my comments on backlog and inventory.

Stuart Auld: Our Q4 backlog of $564.4 million decreased $23.7 million, or 4%, compared to backlog of $588.1 million at Q3, and increased $10.5 million, or 1.9%, on a year-over-year basis. The sequential decrease was due primarily to lower material handling and mining orders, and backlog at December 31, 2024 included seven large mining shovels. The year-over-year increase was due primarily to higher construction and forestry orders and higher mining orders, including seven large mining shovels offset partially by lower material handling, ERS, and industrial parts orders.

Speaker Change: Our Q4 backlog of $564 $4 million decreased $23 7 million or 4% compared to backlog of $588 1 million at Q3, and increased $10 5 million or one 9% on a year over year basis.

Speaker Change: Sequential decrease was due primarily to lower material handling and mining orders and backlog at December.

Speaker Change: 31, 2024 and included several large mining shovels the year over year increase was due primarily to higher construction and forestry orders and higher mining orders, including several large mining shovels offset partially by lower material handling Crs and the industrial parts orders.

Stuart Auld: Inventory decreased $48.4 million compared to Q3 2024 due primarily from lower equipment inventory in the mining category driven by the delivery of two large mining shovels in the quarter and lower equipment inventory in the power systems category. Management continues to focus on reducing and managing the corporation's inventory levels and ongoing inventory reduction initiatives have decreased inventory by $76.3 million from peak levels at March 31, 2024. Inventory increased $38 million compared to Q4 2023 due primarily from higher equipment inventory in the construction and forestry, mining and material handling categories. These increases were partially offset by lower equipment inventory in the power systems category and lower industrial parts inventory.

Speaker Change: Inventory decreased 48 point.

Speaker Change: $4 million compared to Q3, 2024% due primarily from lower equipment inventory in the mining category driven by the delivery of two large mining shovels in the quarter and lower equipment inventory in the power systems category management continues to focus on reducing and managing the corporation's inventory levels and ongoing inventory reduction.

Speaker Change: Initiatives have decreased inventory by $76 3 million from peak levels at March 31, 2024 inventory increased $38 million compared to Q4 2023, due primarily from higher equipment inventory in the construction and forestry mining and material handling categories. These increases were partially offset by.

Speaker Change: Lower equipment inventory in the power systems category and lower industrial parts inventory I will turn over the call to tenure for comments on cash flow leverage and working capital.

Tanya Casadino: I will turn over the call to Tanya for comments on cash flow, leverage and working capital. Thanks, Stuart. Please turn to slide 13. Cash flows generated from operating activities in the current quarter of $75.9 million compared with cash flows generated from operating activities of $48.5 million in the same quarter of the prior year. The increase in cash generated of $27.4 million was mainly attributable to a decrease in inventory and an increase in accounts payable and accrued liabilities, offset partially by an increase in accounts receivable and a decrease in net earnings, excluding items not affecting cash Our Q4 leverage ratio decreased to 2.61 times from 2.78 times at Q3 due to lower debt levels driven largely by cash generated from operating activities during the quarter.

Thanks, Stuart Please turn to slide 13 cash.

Speaker Change: Cash flows generated from operating activities in the current quarter at $75 9 million compared with cash flows generated from operating activities of $48 5 million in the same quarter of the prior year the.

Speaker Change: The increase in cash generated of $27 4 million was mainly attributable to a decrease in inventory and an increase in accounts payable and accrued liabilities.

Speaker Change: Partially by an increase in accounts receivable and a decrease in net earnings excluding items not affecting cash flow.

Speaker Change: Our Q4 leverage ratio decreased to $2 six one times from 278 times at Q3 due to lower debt levels, driven largely by cash generated from operating activities during the quarter.

Tanya Casadino: The corporation's leverage ratio is currently outside the target range of 1.5 to 2 times at the end of Q4, primarily due to higher debt from investment in working capital and acquisitions completed in 2023 and lower trailing 12-month pro forma adjusted EBITDA driven by weaker market conditions. Our available credit capacity at the end of Q4 was $212.6 million, which is sufficient to meet short-term, normal-course working capital and maintenance requirements and fund our planned strategic initiatives. We continue to focus on working capital efficiency, which is a key component in managing our overall leverage targets. The key for working capital efficiency was 26 percent, a decrease of 60 basis points from September 30th, 2024, due to lower trailing for quarter average working capital and higher trailing 12 month revenue.

Speaker Change: Corporations leverage ratio is currently outside of the target range of one five to two times at the end of Q4, primarily due to higher debt from investment in working capital and acquisitions completed in 2023, and lower trailing 12 months pro forma adjusted EBITDA driven by weaker market conditions.

Speaker Change: Our available credit capacity at the end of Q4 was $212 6 million, which is sufficient to meet short term normal course, working capital and maintenance requirements.

Speaker Change: And fund our planned strategic initiatives.

Speaker Change: We continue to focus on working capital efficiency, which is a key component in managing our overall leverage targets. The Q4 working capital efficiency was 26% a decrease of 60 basis points from September 32024, due to lower trailing four quarter average working capital and higher trailing 12 month revenue.

Tanya Casadino: Excluding the debentures which are classified within current liabilities, working capital efficiency was 28.7 as at both December 31st, 2024 and September 30th, 2024.

Speaker Change: Excluding the debentures, which are classified within current liabilities working capital efficiency was $28 seven as at both December 31, 2024 at September 30 of 2024 subsequent.

Tanya Casadino: Subsequent to year-end, on January 15, 2025, Wajax announced the repayment in full of the $57 million in principal amount owed under its 6% senior unsecured debentures due January 15, 2025, along with accrued interest up to but excluding the maturity date.

Speaker Change: Subsequent to year end on January 15th 2025, Wade Jaques announced the repayment in full of the $57 million and principal amount owed under its 6% senior unsecured debentures. Due January 15th 2025, along with accrued interest up to but excluding the maturity date.

Tanya Casadino: The corporation's existing bank credit facility was used to complete the repayment Finally, the board has approved our first quarter 2025 dividend of 35 cents per share payable on April 2nd, 2025 to shareholders of record on March 14th, 2025.

Speaker Change: <unk> existing bank credit facility was used to complete the repayment.

Speaker Change: Finally, the board has approved our first quarter 2025 dividend of 35 per share payable on April 2nd 2025 to shareholders of record on March 14th 2025. Please.

Tanya Casadino: please turn to slide 14, and at this point I'll turn the call back to...

Speaker Change: Please turn to slide 14, and at this point I will turn the call back to <unk>.

Iggy Domogolsky: Thanks, Tanya. Our outlook is summarized on slide 14. During the fourth quarter of 2024, Wajax delivered revenue of $565.9 million, up $23.3 million, or 4.3% from the fourth quarter of 2023. The year-over-year increase in revenue is primarily due to higher mining equipment sales in Western Canada from the delivery of two large mining shovels in the fourth quarter of 2024, with no such deliveries in the fourth quarter of the prior year. Gross profit margin decreased to 17.1% in the fourth quarter of 2024 versus 21.2% in the fourth quarter of 2023, driven by lower margins realized on equipment, ERS, and rental revenue due to increased market pressures, as well as a lower proportion of ERS, product support, and industrial parts sales relative Looking ahead to the first half of 2025, we continue to see strong customer demand in the mining and energy sectors, with the former supported by strong backlog.

Speaker Change: Thanks, Tanya our outlook are summarized on slide 14 during the fourth quarter of 2024, we delivered revenue of $565 9 million up $23 3 million or four 3% from the fourth quarter of 2023, the year over year increase in revenue was primarily due to higher mining equipment sales in western Canada from the delivery of two large mining.

Speaker Change: Levels in the fourth quarter of 2024 with no such deliveries in the fourth quarter of the prior year.

Speaker Change: Gross profit margin decreased to 17, 1% in the fourth quarter of 2024 versus 21, 2% in the fourth quarter of 2023, driven by lower margins realized on equipment rental revenue due to increased market pressures as well as a lower proportion of IRS product support and industrial parts sales relative to equipment sales looking ahead to the first half of 2025, we continue to see strong.

Speaker Change: Customer demand in the mining and energy sectors with the former supported by strong backlog headwinds are expected with broader market conditions remaining soft and uncertainties surrounding potential tariffs and counterterrorism, Canada U S trade and additional headwinds are expected as such tariffs materialize.

Iggy Domogolsky: Headwinds are expected, with broader market conditions remaining soft and uncertainty surrounding potential terrorists and counter-terrorists on Canada-U.S. trade, and additional headwinds are expected as such tariffs.

Iggy Domogolsky: Despite this backdrop, management remains committed to executing the corporation's six strategic priorities, which are set out on slide six, which will continue to support and position the business for future success, and which have been refined for 2020. As additional focus areas, management will execute initiatives to reduce inventory, improve margins and lower costs.

Speaker Change: And this backdrop management remains committed to executing the corporation six strategic priorities, which are set out on slide six which will continue to support and position the business for future success, and which have been refined for 2025 as additional focus areas management will execute initiatives to reduce inventory and improve margins and lower costs I'll now turn it back to the operator and open the line for <unk>.

Operator: I'll now turn it back to the operator and open the line.

Speaker Change: Questions.

Speaker Change: Okay.

Operator: Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please lift your handset before pressing any keys.

Speaker Change: Ladies and gentlemen, we will now begin the question and answer session.

Speaker Change: So do you have a question. Please press star followed by the number one on your Touchtone phone, you'll hear a prompt that your hand is being raised.

Speaker Change: Should you wish to decline from the polling process. Please press star followed by the number too.

Speaker Change: If you are using a speaker phone please lift your handset before pressing any keys.

Jonathan Goldman: Your first question comes from the line of Jonathan Goldman from Scotiabank. Please go ahead. Hi, good afternoon, and thanks for taking my questions.

Speaker Change: Your first question comes from the line of Jonathan Goldman from Scotiabank. Please go ahead.

Speaker Change: Hi, good afternoon, and thanks for taking my questions a question Hey.

Iggy Domogolsky: Hey Jonathan. Iggy, the gross margin pressure in the quarter, are you able to delineate how much of that was due to mixed versus lower product line margins? Yeah, so there was a, the mixed impact was material. I mean, we, the mix in Q4 was totally different than any of our previous three quarters. So a bunch of them, a bunch of the impact was definitely due to mix. And then we are seeing some pressures in the market. I wouldn't say that we're losing any market share, but customers are certainly sharpening their pencils, which is making us sharpen our pencils.

Speaker Change: Jonathan.

Speaker Change: The gross margin pressure in the quarter are you able to delineate how much of that was due to mix versus lower product line margins pipeline.

Speaker Change: Yeah.

Speaker Change: Yes, so there was a.

Speaker Change: The mix impact was material I mean, we.

Speaker Change: The mix in Q4 was totally different than any of our previous three quarters. So.

Speaker Change: A bunch of them a bunch of the impact was definitely due to mix and then we are seeing some pressures in the market I wouldn't say that we're losing any market share, but customers are certainly sharpening their pencils, which is making us sharpen our pencils as theres more.

Iggy Domogolsky: There's more three bids in a buy as opposed to just getting sole sourced on certain things. So, so there is some pressure there.

Speaker Change: Three bids antibody as opposed to just getting sole sourced on certain things.

Speaker Change: So there is some pressure there.

Iggy Domogolsky: As we, as we look forward, I would say that, you know, Q4 was a, you know, seems like it was definitely a low point in our margins. We do see a definite and meaningful improvement over Q4 in the, in the short term. But we don't expect to be getting back to the levels of say the first half of 2024 in the near term.

Speaker Change: As we as we look forward I would say that.

Speaker Change: Q4 was a you know it seems like it was definitely a low point in our margins we.

Speaker Change: We do see a definite and meaningful improvement over Q4.

Speaker Change: In the in the short term.

Speaker Change: But we don't expect to be getting back to the levels of say the first half of 2024.

Speaker Change: In the near term.

Iggy Domogolsky: And can you discuss how the competitive environment is trended so far in Q1 relative to Q4? Yeah, good question. I think the competitive environment hasn't changed too much between Q1 and Q4. Competition remains strong as it always has and we haven't seen too many different tactics. I just think the customer sentiment continues to be a challenge with what's going on in the U.S. and recent announcements even yesterday and today. I think, you know, some of our customers are just a bit hesitant and uncertain on what's going to happen here in the coming months.

Speaker Change: So that makes sense and can you discuss how the competitive environment has trended so far in Q1 relative to Q4 Q4.

Speaker Change: Yeah. Good question I think the competitive environment hasn't changed too much between Q1 and Q4.

Speaker Change: Competition remains strong as it as it always has and we haven't seen too many different tactics I just think the customer sentiment continues to be a challenge with what's going on in the U S. In recent announcements, even even yesterday and today I think you know some of our customers are just start a bit hesitant on.

Speaker Change: And uncertain on what's going to happen here in the coming months.

Jonathan Goldman: Okay, maybe if I can squeeze in one more, I'm just trying to reconcile the comments and the outlook. On the one hand, you're talking about strong customer demand in mining and energy, but then you're also talking about broader market conditions being soft and headwinds, and it does seem also customers are exercising capital discipline. I'm just trying to reconcile on the one hand some sort of positive commentary and then also the caution.

Speaker Change: Okay, and maybe if I can squeeze in one more I'm just trying to reconcile the comments on the outlook on the one hand, you're talking about strong customer demand in mining and energy.

Speaker Change: But then you're also talking about broader market conditions being soft.

Speaker Change: It does seem also customers are exercising capital discipline I'm just trying to reconcile.

Speaker Change: Some sort of positive commentary and then also the caution.

Speaker Change: Yes.

Iggy Domogolsky: Yeah, I think in the near term, a lot of these customers are under long-term contracts, and I'm talking specifically about customers who sell to the U.S. They're under long-term contracts, and so we think a lot of those contracts are good and they'll continue to deliver those products that are needed by the U.S. But we also have a lot of mining customers and energy customers who don't sell a lot of their products to the U.S. And those customers are seeing consistent strong demand, and we continue to see strong demand from them.

Speaker Change: Yes, I think in the in the near term.

Speaker Change: Lot of these customers are under long term contract and I'm talking specifically about customers.

Speaker Change: Who sell to the U S.

Speaker Change: They're under long term contracts and so we think a lot of those contracts are good and they will continue to to deliver those products that are needed by the U S.

Speaker Change: But we also have a.

Speaker Change: A lot of mining customers in energy customers, who are who who don't sell a lot of their products to the U S. And we see consistent are those customers are staying consistent strong demand and we continue to see strong demand from them.

Jonathan Goldman: Okay, thanks for taking my questions. I'll get back in queue.

Speaker Change: Okay. Thanks for taking my questions I guess.

Speaker Change: Thanks, Jonathan.

Patrick Sullivan: Your next question is from the line of Patrick Sullivan from TD Cowen, please go ahead. Good afternoon. Thanks for taking my question. Just to get back onto the margin topic, I sort of inferred that part of the impact was from right-sizing inventory. And it sounds like management is prepared to do more inventory right-sizing as well. So, is that accurate? And then is there any sort of amount or number you could put on that? Yeah, there was, during Q4, there was continued inventory reduction. We did sell some inventory at meaningfully lower margins. So that had a small impact on the gross profit percentage in the quarter.

Speaker Change: Your next question is from the line of Patrick Sullivan from TD Cowen. Please go ahead.

Patrick Sullivan: Hi, good afternoon, Thanks for taking my question.

Speaker Change: Yes.

Speaker Change: To get back onto the margin topic.

Speaker Change: Sort of inferred that part of the impact was from right sizing inventory.

Speaker Change: And it sounds like management is prepared to do more inventory right sizing as well. So is that accurate and then is there any sort of amount or a number you could put on that.

Speaker Change: Yes, there was.

Speaker Change: During Q4, there was continued inventory reduction.

Speaker Change: We did sell some inventory at meaningfully lower margins. So that had a that had a small impact on the gross profit.

Speaker Change: Percentage in the quarter.

Iggy Domogolsky: As we look forward, we do plan to continue to reduce inventory. So if you look back to the end of Q1 of 2024, our inventory peaked at just around $750 million, and we brought that down to about $675 million by the end of the year. That's about $25 million a quarter. It's not perfectly $25 million a quarter, but we see that as a good rate of inventory reduction.

Speaker Change: As we look forward, we do plan to continue to reduce inventory.

Speaker Change: You look back to the end of Q1 of 2024, our inventory peak to just around $750 million and we brought that down to about 675 by the end of the year.

Speaker Change: So that's about $25 million a quarter, it's not perfectly $25 million a quarter, but we see that as a as a good rate of inventory reduction.

Iggy Domogolsky: Okay, excellent. Thank you.

Speaker Change: Okay excellent. Thank you and then I guess he RFS revenue is down quite a bit I mean can you elaborate on that is that work more break in nature and was it a slow period with any of that deferred or delayed because of the backlog in the IP address was relatively stable quarter over quarter.

Iggy Domogolsky: And then, I guess, ERS revenue is down quite a bit.

Iggy Domogolsky: I mean, can you elaborate on that? Is that work more break-into-nature? Was it a slow period? Was any of that deferred or delayed? Because the backlog in the IP ERS was relatively stable quarter-over-quarter. Yes, so the backlog is relatively stable. What we're finding with our customers is there is still a mixed component in our backlog and in our business, even within IP and ERS. And some of the business, most of the business within IP and ERS is that MRO, the maintenance repair operation type business, where that spending needs to happen almost no matter what's going on.

Speaker Change: Yes, so the backlog is relatively stable.

Speaker Change: What were finding with our customers is there there is still a mix component in our in our backlog and in our business, even within IP and IRS.

Speaker Change: And.

Speaker Change: Some of the business most of the business within <unk> is that MRO, the maintenance repair operation type business, where.

Speaker Change: That spending needs to happen almost no matter, what's going on but there is a portion of our IP and our <unk> business that is related to capital projects and those are new facilities that are being built are significant upgrades brownfield type projects.

Iggy Domogolsky: But there is a portion of our IP and ERS business that is related to capital projects. And those are new facilities that are being built or significant upgrades, brownfield type projects. And there has been a slowdown in those, a material slowdown. So the MRO business remains strong. The capital portion of IP and ERS has definitely been slower with customer uncertainty.

Speaker Change: And there has been a slowdown in those.

Speaker Change: Cereal slowdown so the MRO business remained strong the capital portion of IP and the IRS has definitely been slower with customer uncertainty.

Iggy Domogolsky: Okay, great. Thank you.

Speaker Change: Okay, great. Thank you.

Speaker Change: Thanks, Patrick.

Devin Dodge: Your next question is from the line of Devin Dodge from BMO Capital Markets, please go ahead. Yeah, thanks. Good afternoon. I wanted to start with the supplier finance programs. You continue to see that increase in Q4. I think it now covers about. 45% or so of your equipment inventory.

Speaker Change: Your next.

Speaker Change: One is from the line of Devin Dodge from BMO capital markets. Please go ahead.

Devin Dodge: Yeah. Thanks, good afternoon.

Speaker Change: I wanted to start with the supplier financing programs.

Speaker Change: You continue to see that increase in Q4 I think it now covers about.

Speaker Change: 45% or so of your equipment inventory.

Iggy Domogolsky: Just wondering if there's a way to frame how much time on at least on average that Wajax has until this becomes interest bearing and what do you view as a targeted level for this equipment financing for your business? Uh, Devin, I would... I mean, we have floor plans from a number of our manufacturers and we feel pretty comfortable with where we're at right now. Where we're really focusing our efforts is just moving out older inventory. Over the last year, the inventory that is now interest-bearing has gotten a little bit higher and that's really the focus of our inventory dispersal program and we've developed some new reporting and new programs to help our sales teams really focus on those and get those out the door so that we're just not paying interest on the inventory that's on the ground.

Speaker Change: Wondering if there's a way to frame how much time.

Speaker Change: At least on average than what you guys had until this becomes interest bearing and what do you view as a targeted level for this financing for your business.

Devin Dodge: Devin I would.

Speaker Change: Let's see.

Speaker Change: We of floor plans from a number of our of our manufacturers and we feel pretty comfortable with where we're at right now where we're really focusing our efforts is just moving out older inventory.

Speaker Change: Over the last year the inventory that is now interest bearing it has gotten a little bit higher and and that's I think.

Speaker Change: Really the focus of our of our inventory just personal program and we've developed some new reporting and new programs to help our sales teams really focus on those and get those out the door. So that we're just we're just not paying on that.

Speaker Change: Interest on the inventory that's on the ground.

Iggy Domogolsky: Okay, fair enough.

Speaker Change: Okay fair enough okay.

Devin Dodge: Okay, in the six priorities listed in the outlook, there's a small change that we noted. It was on the focus on parts service and margin improvement. I think we saw the comment on expanding product support was stripped out, and investment in tools, training and support was added.

Speaker Change: And our six priorities listed in the outlook.

Speaker Change: A small change that we've noted.

Speaker Change: It was on the focus on parts service and margin improvement I think we saw the comment on expanding product support restrict out.

Speaker Change: And investment in tools training and support was added so I was wondering if you're probably a bit more color on this and any shifts in focus or priorities from say six to 12 months ago.

Iggy Domogolsky: So just trying to provide a bit more color on this and any shifts in focus or priorities from say, six to 12 months ago. No, Devon, I wouldn't say there's a... We just refined our strategic priorities and tweaked the wording, but generally the focus on product support is still there and there hasn't been a meaningful change in direction.

Speaker Change: I don't know Devin I wouldn't say there's a.

Speaker Change: We just refined our strategic priorities and just and tweak the wording but.

Speaker Change: Generally the focus on product support is still there and there hasn't been a meaningful change in direction.

Iggy Domogolsky: OK, and then the last one for me. You've made a lot of progress on streamlining costs. in late 2024. The outlook suggests, you know, more focus on lowering the cost structure in 2025. Just wondering if you could provide some thoughts on what areas of the business you see the most opportunity for cost improvement as we think about 2025. When you look at our P&L, the biggest cost that we have is people, and the second biggest cost that we have is facilities. And so those are two areas that we continue to look at. As you noted, we had a restructuring charge in Q4 of 2024, and we're continuing down the path of reducing our costs and just making sure that we're right-sized and that we're just defensive.

Speaker Change: Okay.

Speaker Change: And then maybe last one for me.

Speaker Change: <unk>.

Speaker Change: You've made a lot of progress on streamlining costs.

In late 2024, and the outlook suggests.

Speaker Change: More focus on.

Lowering the cost structure in 2025 I'm just wondering if you could provide some thoughts on what areas of the business you see the most opportunity for cost improvement as we think about 2025.

Speaker Change: When you look at our P&L.

Speaker Change: The biggest cost that we have is people and the second biggest cost that we have as facilities and so those are two areas that we continue to look at.

Speaker Change: As you noted we had a we had a restructuring charge in Q4 of 2024, and we're continuing down the path of reducing our costs.

Speaker Change: And just making sure that we're that we're right sized and that were just defensive.

Iggy Domogolsky: What is going to be happening here in the coming months and years with our economy and our biggest trading partner to the south still remains a bit of a question mark, so we're playing it safe.

Speaker Change: What is going to be happening here in the coming months and years with our economy and our biggest trading partner to the south still remains a bit of a question Mark So where we're playing it safe.

Iggy Domogolsky: Okay, thanks for that.

Devin Dodge: I'll turn it over.

Speaker Change: Okay. Thanks for that I'll turn it over.

Maxim Sychev: Your last question is from the line of Maxim Sychev from National Bank Financial, please go ahead. Hi, good afternoon. I was wondering if it's possible to get a bit of color around the cyclicality of ERS and IP business. Just curious when we look at obviously 2023 lots of growth, in hindsight, maybe just feels like a pull through of COVID. What are your thoughts right now around the quality of these businesses? Um, you know, Max, in our, in our IP and ERS business, the cyclicality is, it really ranges by customer. And we just have so many different customers in so many different areas that we serve that, um, that there is a little bit, it's harder to really pinpoint the cyclicality.

Speaker Change: Your last question is from the line of Maxim <unk> from National Bank Financial. Please go ahead.

Speaker Change: Hi, good afternoon.

Speaker Change: Hi, Max.

Speaker Change: I was wondering if it's possible to get a bit of color around the cyclicality of Crs in the IP business.

Speaker Change: I'm just curious when we look at 2023 Youll also growth.

Speaker Change: In hindsight, maybe just feels like.

Speaker Change: Rule of Covid, what are your thoughts right now rounds, so the quality of these businesses.

Speaker Change: Max in our in our IP in Erith business. The cyclicality is it really ranges by customer and we just have so many different customers in so many different areas that we serve that.

Speaker Change: There is a little bit it's harder to really pinpoint the cyclicality, we're definitely coming off of two peak years Ah in 2022 and 2023, we grew by <unk>.

Iggy Domogolsky: We're definitely coming off of two peak years. Uh, in 2022 and 2023, we grew by, uh, almost 20% each year. So it's, it's, uh, it's a little bit softer. Um, but it, I would say the general comment within the year Q2 and Q4 seem to be a little bit higher and Q3 would be a bit of a softer season for us, but there is, there is a lot of individual customer variability.

Speaker Change: Almost 20% each year, so it's a it's a little bit softer.

Speaker Change: But I would say as a general comment within the year Q2, and Q4 seemed to be a little bit higher in Q3 would be a bit of a softer season for us but there is there is a lot of individual customer variability in there.

Iggy Domogolsky: Yeah, and I guess, I mean, The results obviously were before tariffs, how do you think that, kind of what blanket is going to play out on this? on these part of the business. Yeah, so there's a there's a few ways that we think about tariffs. I mean, one is our direct exports to the US, which is very minimal. That would be less than 1% of revenue. So immaterial. Then there is on our customers who export to the US. So we're exposed to to a lot of them. So thinking of the steel and aluminum producers and others.

Yes.

Speaker Change: Yes.

Speaker Change: I mean.

Speaker Change: There was also obviously were before.

Speaker Change: For tariffs how do you see.

Speaker Change: That kind of wet blanket is going to play out on on this on.

Speaker Change: At least part of the business.

Speaker Change: Yes, so there's a few ways that we think about tariffs I mean, one is our direct exports to the U S, which is very minimal.

Speaker Change: That would be less than 1% of revenue so immaterial.

Speaker Change: There is on our customers who export to the U S.

Speaker Change: So we're exposed to a lot of them, so thinking of the steel and aluminum producers and others.

Iggy Domogolsky: You know, we we expect that you know they're not shutting down their plants and that they will still continue to need our products and services for the MRO portion of their operation uh... and during the during the previous tariff period we weren't affected too much uh... you know history doesn't always repeat itself so we don't know exactly what this one will be but there was a minimal impact last time this happened and uh... and then the last one is on reciprocal tariffs coming into Canada the first round of thirty billion is negligible impact on us it's the next round that is a question mark uh...

Speaker Change: We expect that they.

Speaker Change: They're not shutting down their plants and they will still continue to need our products and services for the MRO portion of their operation.

Speaker Change: And during the day.

Speaker Change: During the previous tariff period, we werent affected too much.

Speaker Change: History doesn't always repeat itself. So we don't know exactly what this one will be.

Speaker Change: But there was a minimal impact last time this happened.

Speaker Change: And then the last one is on reciprocal tariffs coming into Canada. The first round of 30 billion is negligible impact on us. It's the next round that is a question mark.

Iggy Domogolsky: you know will individual bearings be tariffed or not if they are that could have an impact uh... forklifts remain the question mark uh... or other heavy equipment uh... you know in some cases it could be negative but in some cases it could actually be positive and I think of Hitachi as an example uh... you know we're the products made in Japan so obviously not subject to any kind of tariffs uh... but most of our uh... much of our competition is made in the U.S. so it immediately gives us an upper hand so while there's uh...

Speaker Change: We will individual bearings be tariffs or not if they are that could have an impact.

Speaker Change: Forklifts remains a question Mark.

Speaker Change: Or other heavy equipment.

Speaker Change: In some cases, it can be negative but in some cases, it could actually be positive and I think of Hitachi as an example.

Speaker Change: The products made in Japan, So obviously not subject to any kind of tariffs.

Speaker Change: But most of our much of our competition has made in the U S. So it immediately it gives us an upper hand, so while there is.

Iggy Domogolsky: you know I think there are some Some headwinds on the topic of tariffs. I also think there could be select opportunities that we'll definitely jump on should they materialize.

Speaker Change: Well I think there are some.

Speaker Change: Some headwinds on our on the topic of tariffs I also think there could be select opportunities that will definitely jump on should they materialize.

Maxim Sychev: Well, fair enough. And then I just was wondering also about the dividend payout ratio. I think we're kind of cresting above 50.

Speaker Change: Yes fair enough and then just was wondering if it also by the dividend payout ratio I think we're kind of a question about 50.

Iggy Domogolsky: And as you sort of think about your financial priorities and cost of debt and all these things, do you mind maybe kind of revisiting the priorities and again the comfort level around where we are relative to net income for cash flow generation? As we look forward for the rest of the year, referring to our previous remarks right at the end on the last slide there, we've got some meaningful priorities to reduce inventory, continue to reduce costs, and improve our margins. And when all those things line up, you get reduced leverage, and that is ultimately the priority.

Speaker Change: And as you sort of think about your financial priorities and cost of debt and all these things.

Speaker Change: Do you mind, maybe kind of revisiting the priorities and again the confidence level around where we are relative to net income and free cash flow generation.

Speaker Change: Okay.

Speaker Change: As we look forward for the rest of the year.

Speaker Change: Referring to our previous remarks right at the end on the last slide there, we've got some meaningful priorities to reduce inventory continuing to reduce costs and improve our margins.

Speaker Change: And when all those things line up you get reduced leverage in that and that is ultimately the priority. We're at two six were outside of our range of one five to two so we definitely want to get our our leverage back in the range, where we feel comfortable.

Iggy Domogolsky: We're at 2.6. We're outside of our range of 1.5 to 2, so we definitely want to get our leverage back in the range where we feel comfortable. And then when that happens, we continue to review the dividend on a quarterly basis, but when you're in a better leverage spot, then... dividend becomes a lot more stable.

Speaker Change: And then and then when that happens.

Speaker Change: We continue to review the dividend on a quarterly basis, but when you're in a in a better.

Speaker Change: A better leverage spot than than the dividend.

Speaker Change: There's a lot more stable.

Iggy Domogolsky: Yeah, and I guess, I mean, can you provide any color around the working capital sort of free up that we can expect on a prospective basis and, you know, how quickly we can get to that maybe two times leverage ratio? We've been reducing inventory by an average of $25 million a quarter since we started at the end of Q1, and I would say that type of a pace is something reasonable to look at. And then the other two big pieces of our working capital are receivables and payables, which we continue to manage the same as always, and so they fluctuate and they generally offset each other.

Speaker Change: Yes, and I guess I mean.

Speaker Change: Can you provide any color around the working capital sort of free up that we can expect on a prospective basis and how quickly we can get to that maybe two times leverage ratio. Thanks.

Speaker Change: Yes, I mean, we've been we've been reducing inventory by an average of $25 million a quarter. Since we since we started at the end of Q1, and so I would say that type of pace is something reasonable to look at and then the other the other two big pieces of our working capital receivables and payables, which we <unk>.

Speaker Change: Continue to manage the same as always.

Speaker Change: So they just they fluctuate, but and they generally offset each other.

Maxim Sychev: Okay. That's great.

Speaker Change: Okay, Okay Thats great Thats. It from me. Thank you very much.

Maxim Sychev: That's it for me. Thank you very much. Thanks, Matt.

Max: Thanks Max.

Operator: There are no further questions at this time.

Speaker Change: There are no further questions at this time I'd like to turn the call over back to Mr. <unk> for closing remarks, Sir. Please go ahead.

Iggy Domogolsky: I'd like to turn the call over back to Mr. Igi Domogalski for closing remarks. Sir, please go ahead. Thank you, Operator. Thank you for your continued interest in Wajax.

Speaker Change: Thank you operator. Thank you for your continued interest in <unk>, we look forward to providing you with further updates at our annual general meeting on May the sixth thank you.

Iggy Domogolsky: We look forward to providing you with further updates at our Annual General Meeting on May the 6th. Thank you.

Operator: This concludes today's conference call. Thank you very much for your participation. You may now disconnect.

Speaker Change: This concludes today's conference call. Thank you very much for your participation you may now disconnect.

Speaker Change: [noise].