Wajax Corporation (WJX) Earnings Call Transcript & Summary

Thank you for attending Wajax Corporation's 2024 First Quarter Financial Results Webcast. On today's webcast will be Mr. Iggy Domagalski, President and Chief Executive Officer; Mr. Stuart Auld, Chief Financial Officer; and Miss Tania Casadinho, 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 conference over to Tania Casadinho.

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 Wajax's Q1 2024 financial results. The presentation can be found on our website under Investor Relations, Events and Presentations. To begin, I would like to draw your attention to our cautionary statement regarding forward-looking information on Slide 2 and non-GAAP and other financial measures on Slide 3. Please turn to Slide 4. And at this point, I'll turn the call over to Iggy.

Thank you, Tania. I will provide highlights on our first quarter before turning it over to Stu for commentary on backlog, inventory and the balance sheet. This slide provides an overview of Wajax. The corporation has 166 years of Canadian operating history, and operates across 119 branches with a team of more than 3,250 employees. During the quarter, our heavy equipment categories and revenue sources made up approximately 50% of our total revenue, while industrial parts and ERS generated approximately 50%. Turning to Slide 5. This slide provides an overview of our purpose and values. Wajax's purpose statement is empowering people to build a better tomorrow, which we strive to achieve by living our values and delivering an exceptional experience to our people, customers, suppliers and the communities we serve. By living our purpose and values, we will continue to build the 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. Turning to Slide 6. This slide provides an overview of our strategic priorities, which were refreshed and enhanced in 2023. Management is completely focused on executing against these priorities. Between our purpose and values in these 6 priorities, we have the foundation to continue growing our company for many years to come. Turning to Slide 7. In the first quarter, Wajax 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 in Construction and Forestry in Western and Eastern Canada and lower material handling sales in Eastern Canada. These decreases were offset partially by higher industrial parts sales in Western Canada and higher ERS sales in Central Canada. In the current high interest rate environment, some customers are electing to rent prior to purchasing, although historically, these types of arrangements have a very high conversion rate to sales. Gross profit margin of 22% increased 150 basis points compared to the same period of 2023, driven primarily by a higher proportion of and higher margins on product support, industrial parts and ERS sales. Selling and administrative expenses as a percentage of revenue increased to 16.4% in the 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 4.3% compared to the first quarter of 2023 due primarily to higher personnel costs. Adjusted EBITDA of $40.7 million decreased $2.3 million or 5.3% 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 an improved gross profit margin. Adjusted net earnings of $0.59 per share decreased 28.5% or $0.24 per share from the first quarter of 2023, noting the adjustments recorded on this chart. At the end of Q1, the TRIF rate was 0.54, a decrease of 54% from the first quarter of 2023. The first quarter TRIF rate was down 47% from the fourth quarter of 2023. Safety continues to be Wajax's #1 priority, and management is committed to continuously improving our safety programs to improve on this result. We thank everyone on our team for their ongoing dedication to workplace safety. Turning to Slide 8. Revenue decrease of 6.5% in the first quarter resulted in lower revenue in the Western and Eastern regions. Western Canada sales of $220 million decreased 7.7% in the quarter, mainly due to lower equipment sales in Construction and Forestry. These decreases were offset partially by higher industrial parts sales. Central Canada sales of $90 million increased 3.7% in the quarter due primarily to higher ERS sales. Central Canada has experienced 6 consecutive quarters of year-over-year growth. Eastern Canada sales of $172 million decreased 9.8% in the quarter due primarily to lower equipment sales in construction and forestry and lower material handling sales. Please turn to Slide 9. An update on equipment and product support sales and year-over-year variances are shown on this page. Equipment sales of $98 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 turn to Slide 10. An update on industrial parts and ERS sales and year-over-year variances are shown on this page. Industrial parts sales of approximately $155 million increased $2 million or 1%, while ERS sales of $84 million decreased $1 million or 0.9%. Turning to Slide 11. 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 parts sales in Western Canada were partially offset by lower ERS sales in Western Canada. These less cyclical categories remain a core element of our broader growth strategy. I will now turn the call over to Stu.

Thanks, Iggy. 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 increased $56.4 million or 10.6% on a year-over-year basis. The sequential increase was due primarily to higher construction and forestry orders. The year-over-year increase was due to higher mining and material handling orders, offset partially by lower construction and forestry and industrial parts orders. Overall, our strong backlog reflects continued momentum in our heavy equipment, industrial parts and ERS categories. Inventory. Inventory increased $116.4 million compared to Q4 2024 due primarily from higher equipment inventory in the construction, forestry, mining and material handling categories, and lower sales activity in the quarter. A significant contributor to the increase in inventory was the early delivery of selected heavy equipment in exchange for more favorable payment terms. Given the increased backlog of the new Hitachi Construction Machinery Americas financing program, inventory is expected to decline over the next 2 quarters. Please turn to Slide 13, where I'll provide an update on cash flow, leverage and working capital. Cash flows used in operating activities in the current quarter of $7.3 million compared with cash flows used in operating activities of $69.6 million in the same quarter of the prior year. The increase in cash generated of $62.2 million was mainly attributed both to the decrease in cash used in noncash operating working capital and lower income taxes paid. Leverage ratio. Our leverage ratio increased to 2.2x from 1.8x in Q4 due to the higher debt level in the current period, driven largely by the corporations and investment in inventory and lower trailing 12-month pro forma adjusted EBITDA. The corporation's leverage ratio is currently outside our target range of 1.5 to 2x at the end of Q1 due to the investment in inventory during the year. Our available credit capacity at the end of Q1 was $197.5 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. 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 4-quarter average working capital and the lower trailing 12-month revenue. Finally, the Board has approved our second quarter 2024 dividend of $0.35 per share payable on July 3, 2024, to shareholders of record on June 14, 2024. Please turn to Slide 14. And at this point, I will now turn it back to Iggy.

Thank you very much, Stu. Our 2024 outlook is summarized on Slide 14. In the first quarter of 2024, Wajax delivered revenue of $482.3 million, down 6.5% from the first quarter of 2023. Gross profit margin increased to 22% in the first quarter of 2024 versus 20.4% in the first quarter of 2023, primarily due to a larger proportion of and higher margins on product support, industrial parts and ERS sales. We continue to see solid fundamentals in many of the markets we serve, particularly in mining and energy, supported by relatively elevated commodity prices and sustained customer budgeting for capital projects. Effective March 1, 2024, Hitachi Construction Machinery America introduced a new financing program with competitive rates that will benefit Wajax customers, and is expected to result in stronger equipment sales in the near term. The majority of recent increases in short-term equipment rental arrangements are also expected to convert to equipment sales within 6 to 12 months. Given the corporation's increased backlog and the new HCMA financing program, inventory is expected to decline over the next 2 quarters. Management continues to monitor end markets and customer purchasing patterns while being prudent with costs and continuing to focus on the execution of its 6 strategic priorities, which were set out on Slide 6. We will now turn the line over to the operator and open for questions.

[Operator Instructions] Your first question comes from Devin Dodge from BMO Capital Markets.

I wanted to start with the weakness that you saw 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?

Thanks for the question. We have not seen any meaningful order cancellations. We did see some deferrals from Q1 to Q2 just based on certain projects starting in Q2 instead of Q1. And we're still seeing reasonable demand in the end markets. We just -- we didn't have a financing program, and that was a pretty big deal for us. All of our competitors have 0% and now we do too.

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

Yes. Maybe just to elaborate on what happened, we actually took early delivery of orders that were already placed. So the orders were intended to arrive in Q2, and our manufacturer had their year-end at the end of March and gave us some really favorable terms to take it a bit early, so we were happy to do that. I can't really get into the details, but it was very favorable for us to accept the inventory early.

And then maybe just one last one for Stu. Working capital efficiency, there's lots of moving parts, obviously, with supply chain, parts availability, the change with Hitachi. Just -- is there a targeted level of working capital efficiency that we should be thinking about as these trends kind of normalize?

Devin, not that we would disclose at this point.

Your next question comes from Michael Tupholme from TD Securities.

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. 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?

Thanks for the question. So there's a few factors at play. We've got about $54 million of equipment available on rental purchase orders, on rental purchase options, our RPOs. And all of those are expected to convert within 6 to 12 months, some earlier. As you know, our bookings are up about $33 million in Construction and Forestry. And this Hitachi financing program has really right out of the gate created a lot of excitement for our frontline sales and our customers. And in addition to that, we do have a lot of gear in the [ lots ] at our branches. So we do have a lot of inventory available for selection for our customers, and it's all good, new stuff that's not aged. To answer your specific question, we expect it to be both. We expect positive momentum in Q2 and beyond.

Maybe just to drill into a few of those things a little bit more. The rental purchase options that you discussed, this roughly $54 million, can we put that into context, like how would that compare to where you were 1 year ago and how much converted over the last 6 to 12 months?

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

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

These contracts, the ones that we have, $54 million of today, 1 year ago it would have been about half of that.

And then in the terms of the construction and forestry markets, that was the source of weakness on the equipment sales side in Q1. But it also sounds like that was a driver to the backlog growth you saw sequentially in Q1. So what changed in your mind between -- there was some weakness from a sales perspective in the first quarter, but then you got this demand that drove the backlog. So what sort of flipped there, if you can comment on that?

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

I guess there's a lot of focus, obviously, on the fact that equipment sales were down as much as they are. And I think in the release, you talked about some of the reasons you may be seeing some strength going forward. But if we look at some of the other parts of the business or really all the other parts of the business, industrial parts, CRS, product support, you've been seeing very good growth in those areas for some time now. And if we look this quarter, Q1, year-over-year revenue growth was pretty much flat year-over-year in all those areas. So is this sort of a slowdown that's likely to persist? Or is there something going on that was unique to the quarter? Just trying to get a sense of how we think about those areas going forward because I think you were fairly upbeat about the prospects for those areas in 2024 when we last talked and wasn't necessarily expecting this kind of a slowdown?

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

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

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