Wajax Corporation (OTCPK:WJXFF) Q2 2022 Earnings Conference Call August 5, 2022 2:00 PM ET
Company Participants
Iggy Domagalski – President & Chief Executive Officer
Stuart Auld – Chief Financial Officer
Conference Call Participants
Michael Doumet – Scotiabank
Michael Tupholme – TD Securities
Devin Dodge – BMO Capital Markets
Operator
Thank you for attending Wajax Corporation’s 2022 Second Quarter Results Webcast. On today’s webcast will be Mr. Iggy Domagalski, President and Chief Executive Officer; and Mr. Stuart Auld, Chief Financial Officer.
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 Iggy Domagalski. Please go ahead.
Iggy Domagalski
Thank you operator. Good afternoon and thank you for participating in our second quarter call. This afternoon we will be following a webcast, which includes a summary presentation of Wajax’s Q2 2022 financial results. The presentation can be found on our website under Investor Relations and Events & Presentations. I will provide you with a general update and we’ll then turn it over to Stu for comments on backlog, inventory, cash, and the balance sheet.
To begin, I would like to draw your attention to our cautionary statement regarding forward-looking information on slides two, three and four. Additionally non-GAAP and additional GAAP measures are summarized on slides 18 and 19 for your reference.
Please turn to slide five, revenue of $511.2 million was up $65.1 million or approximately 15% in the quarter. The increase in revenue resulted from higher construction and forestry sales in Western and Eastern Canada, higher industrial parts and ERS sales in all regions, and higher product support revenue across most categories.
EBIT of $34.1 million was up $4 million or approximately 13% in the quarter. There was no benefit in the second quarter this year from the Canadian emergency wage subsidy which last year had a positive effect on EBIT of $2.1 million.
Excluding the effect of the wage subsidy in the second quarter last year, EBIT increased $6.1 million or approximately 22%. The improved EBIT resulted from higher volumes and higher equipment and product support margins.
These increases were partially offset by higher selling and administrative expenses and a prior year recovery of personnel expenses from the CEWS program without a similar recovery in the current period.
Selling and administrative expenses as a percent of revenue decreased to 13.4% in the second quarter of 2022 from 13.5% in the second quarter of 2021 when excluding the CEWS recoveries of $1.2 million.
Selling and administrative expenses in the second quarter of 2022 increased $9.8 million compared to the second quarter of 2021, due mainly to the prior year $1.2 million recovery of personnel expenses from the CEWS program without a similar recovery in the current year and also higher personnel costs as the volume of business increased over the prior year. Management remains committed to ongoing cost productivity.
Adjusted net earnings of $0.92 per share was up $0.15 or approximately 19% in the quarter, noting the adjustments recorded on this chart. At the end of Q2, the year-to-date TRIF rates of 1.03 decreased 38%.
Safety continues to be Wajax’s number one priority and management is committed to continuously improving our safety programs to improve on this result. We thank everyone on our team for their ongoing dedication to workplace safety.
As previously stated, the company did not recognize any reimbursement of compensation expense for the CEWS program in the quarter. We have included a description of last year’s wage subsidy and the application of the amounts at the bottom of the slide for your convenience.
Turning to slide six please. The revenue increase of 15% in the first quarter resulted from growth in all regions. Central Canada sales of $84 million increased 4% in the quarter mainly due to higher industrial parts sales, offset partially by slightly lower equipment revenue in most categories.
Eastern Canada sales of $202 million increased 18% in the quarter, due primarily to higher equipment revenue in the construction and forestry and power systems categories as well as higher bearing sales driving higher industrial parts revenue.
Western Canada sales of $226 million increased 16% in the quarter due to robust construction and forestry equipment sales and strength in ERS and industrial parts categories attributable to strong sales from Tundra and higher organic bearing sales. Higher product support revenue across most categories also contributed. These increases were partially offset by lower mining equipment revenue.
Please turn to slide seven, an update on equipment and product support sales and year-over-year variances are shown on this page. Equipment sales of $172 million increased 22% compared to last year, due mainly to strong construction and forestry revenue in Western and Eastern Canada and higher Power Systems revenue, primarily in Eastern Canada, offset partially by lower mining sales in Western Canada.
Product support sales of $122 million increased 8%, due primarily to higher mining, construction and forestry, and Power Systems revenue in Western Canada.
Please turn to slide eight. An update on industrial parts and ERS sales and year-over-year variances are shown on this page. Industrial parts sales of approximately $134, million increased $20 million or 17% due mainly to organic strength in bearing sales in all regions. ERS sales of $73 million, increased $5 million or 7% due to strength in all regions.
Turning to slide nine. The slide summarizes sales at a category level for the quarter and year-to-date for our company’s overall groupings of heavy equipment and industrial parts and services.
In the second quarter, the heavy equipment grouping increased $41 million or 16%, driven by higher sales in construction and forestry, material handling, and power systems, offset partially by lower sales in mining and total growth in industrial parts and services categories of approximately $24 million or 13% was driven by increases in both Industrial Parts and ERS.
I will now turn the call over to Stu.
Stuart Auld
Thanks, Iggy. Please turn to Slide 10, for my comments on backlog. Our Q2 backlog remained strong at $534.8 million, compared to the record backlog of $540.1 million in the previous quarter and increased $218 million or 69% on a year-over-year basis. The year-over-year increase was due to higher orders in most categories, most notably construction and forestry. Overall, backlog reflects continued momentum in heavy equipment and industrial parts and the services business.
Please turn to Slide 11, for an update on our current inventory levels. Inventory increased roughly $5 million compared to Q1 2022, due primarily to higher industrial parts and ERS inventory offset partially by lower construction and forestry inventory. Inventory increased $37.6 million compared to Q2 2021, due primarily to higher parts inventory driven by increased sales volumes, offset partially by lower equipment inventory. We continue to work with our major suppliers, with a focus on construction, forestry, material handling and power systems equipment to secure inventory to meet customer demand.
Please turn to Slide 12, where I will provide an update on cash flow and leverage. Cash flow from operating activities in the current quarter of $34 million, increased $14.6 million from Q1 2022, mainly due to higher earnings and increase in cash generated from changes in non-cash operating working, capital lower income taxes paid and lower rental equipment additions.
Our Q2 leverage ratio decreased compared to Q1 from 1.24 times to 1.10 times due to the lower debt level in the current period and higher trailing 12 months pro forma adjusted EBITDA. The corporation’s leverage ratio is currently below the target range of 1.2 to 2 times at the end of Q2, due to the strength in the trailing 12-month pro forma adjusted EBITDA, combined with a reduction in debt levels on account of significant cash generated from operating activities.
In June 2022, the corporation fully repaid its $50 million, non-revolving acquisition term credit facility via a drawdown from its revolving term facility. With the repayment, Wajax’s bank credit facility now has a $400 million credit limit as at June 30, 2022 composed of a $50 million non-revolving term facility and $350 million revolving term facility. The bank credit facility matures October 1, 2026. Our available credit capacity at the end of Q2 was $313.2 million, which is sufficient to meet short-term normal course, working capital and maintenance capital requirements and certain strategic investments.
Please turn to Slide 13, where I will provide an update on financial position. We continue to focus on working capital efficiency, which is a key component in managing our overall leverage targets. The working capital sales ratio has been consistently improving, over the trailing five quarters as a result of lower four-quarter average working capital and the higher trailing 12-month sales.
Further opportunities to sell redundant real estate. as well as the sale and leaseback opportunities have been identified and are being pursued in 2022. Proceeds from any real estate sales will be used primarily for debt repayment. The earnings impact from any sale and leaseback transactions is not expected to be material. as any gains are expected to be approximately offset by the incremental lease costs over the release. Finally. the Board has approved our third quarter 2022 dividend of $0.25 per share, payable on October 4, 2022 to shareholders of record on September 15, 2022.
Please turn to Slide 14. And at this point, I will now turn the call back to Iggy.
Iggy Domagalski
Thanks very much, Stu. Our 2022 outlook appears on Slide 14. And rather than reading the outlook verbatim, I’ll highlight a few important points. As we move into the second half of 2022, we continue to see sound fundamentals in many of our key markets, bolstered by strong commodity prices and capital spending. This positive view of the market is counterbalanced primarily by rising interest rates and supply chain issues, which we expect will be a factor throughout the year ahead particularly in our heavy equipment business.
We continue to manage these challenges through frequent dialogue with key suppliers and customers, preordering new equipment and utilizing repairs and rebuilds to extend the service life of equipment. Labor issues also continue to be a factor, and we manage those on a daily basis.
Overall, we are very pleased with our Q2 performance and are happy with our product mix of 60% heavy equipment, and 40% IP and ERS. The heavy equipment component of our business increased as a percent of total, compared to the last quarter largely due to success in our construction business, which has experienced success as a result of our new direct relationship with Hitachi.
Our improved balance sheet and strong quarter end backlog of $534.8 million, continues to show great momentum in the business and to maintain this momentum and increase shareholder value we plan to continue our focus on the following priorities investing in our people and their safety, delivering exceptional customer experiences, organically growing our business, building our acquisition pipeline, supporting our close relationship with Hitachi, prudently managing our balance sheet, deploying our ERP and remote diagnostic systems and building sustainability into the business.
At this point, I will turn it back to the operator, and open the line for questions. Thank you.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, we will now being the question-and-answer session. [Operator Instructions] First question comes from Michael Doumet at Scotiabank. Please go ahead.
Michael Doumet
Hey, good afternoon guys.
Iggy Domagalski
Hi Michael.
Michael Doumet
Hey. It’ll start with the backlog. Quarter-over-quarter, it looks like the equipment and industrial parts backlog moved in different directions. Any color in terms of the purchasing patterns as Q2 progressed? And are you seeing any moderation in terms of orders on the construction side, or any other pieces of the equipment segments?
Iggy Domagalski
Yeah. Thanks for the question Michael. We’re not seeing anything really changing. In our industrial products business, we just — we continue to see a lot of strength and things are going well in that business. And in our equipment business, a lot of — some of the decrease in that backlog was simply due to us just delivering a lot of Hitachi product in the second quarter. There was a lot of preorders that our customers made and we got a lot of units out the door.
Michael Doumet
Okay. Nicely done there. And I guess on the industrial parts business, if I remember correctly, Tundra I think was generating pre-pandemic sales of about $190 million, in the first 12 months post acquisition sales were trending, I think about 20% below that. So seeing 17% organic growth there makes sense. I’m just wondering, if that’s something we should see as a sustainable number for the next couple of quarters. We’re in that range approximately.
Iggy Domagalski
Yeah. Thanks for the question Michael. We haven’t been disclosing Tundra’s revenue separately. But I can tell you that Tundra is doing well and they’re hitting all their planned targets.
Michael Doumet
Can I just sneak in a third one? Can you provide us with maybe an update on the ERP implementation just in terms of what’s later timing and maybe some of the benefits?
Stuart Auld
Yeah. So we have two major systems that one that runs our equipment power systems, the other one runs our — and I’ll forget the acquisitions for now Michael. The other system runs the industrial parts and ERS business. So by the — and let’s just call them 50 branches each. So we’re currently roughly 80% done on the equipment side and we’ll finish that up at October 1st. So the equipment power business will be completely off the old ERP. And then next year, we hope to complete the rollout of the industrial branches.
So hopefully by the end of next year we’ll have industrial done, equipment well done. And then we’re in the process of tackling Tundra and our other acquisition NTS, which we hope to do next year also.
Systems has been up and running obviously since 2019. We did a slowdown because of COVID, but we’ve ramped it back up and all the training is virtual. But really we just went live in Ontario. They just finished their first month end with no issues.
We think — I think the long-term benefits are consistency in our business, visibility to customers, vendors, inventory, all in one place easier to train your staff because you have one system and then all sorts of other benefits like being able to have mobile field service, which is really the digitalization of all the paper that we do and a bunch of other things. And, obviously, we have people that might be in the same facility now operating on two systems they’d operate on one system.
Michael Doumet
That’s great color guys. Thanks very much guys.
Stuart Auld
Okay.
Iggy Domagalski
Thanks Michael.
Operator
Thank you. Next question comes from Michael Tupholme at TD Securities. Please go ahead.
Michael Tupholme
Thank you. Can you provide a little bit more detail on the very strong equipment sales performance in the quarter, revenue up 22% year-over-year against what seems like a fairly tough comp period? I know you talked to some of the factors on slide 7, but wondering if there are any large pieces of equipment in the quarter such as mining shovels or anything else to call out that would have influenced that 22% growth?
Iggy Domagalski
Hey Mike, thanks for the question. In terms of large pieces of equipment there was not anything that shipped in the second quarter. We still have 28,000 [ph] in the backlog that are — that continue to be forecasted to ship in the second half of this year. So that hasn’t changed since our last call. And our relationship with Hitachi really kicked off on March the 1st. So that’s when we started to see units from Hitachi direct landing in our shops. And it takes a little bit of time to get those units ready. Our team has to add on attachments and do the PDI, and get them ready to go out the door. So really those units started to go out the latter half of March, and then all through the second quarter. So it’s just — we’re starting to see the benefits of our Hitachi direct relationship.
Michael Tupholme
Okay. That’s good to hear. Is that sort of a situation where there’s sort of some pent-up deliveries I guess, if you will, or is this sort of — can we look at this as more of a run rate situation the Hitachi equipment coming in and now getting to like to?
Stuart Auld
We really didn’t have much in terms of Deere left. At the end of last year we had some. So there was some gear that went out in the first quarter. But there was a bunch of pent-up demand for Hitachi. As Iggy said, we really didn’t get anything out the door in March. So you had a bunch of that stuff and you had some multiunit deals, which we never could do with the Deere relationships.
So you have pent up demand, sometime delay and then us just really being good at getting the stuff out the door. I think it surprised us how quickly we could do that. Is it an exact run rate? Probably not at this point. But I think Iggy would agree, we’re pretty pleased with the promises that Hitachi had made and they’ve come through just about on everything so far.
Michael Tupholme
Okay. That’s helpful. Thank you. Just looking at the different growth rates that you’ve been seeing across your main geographic regions in the last several quarters, I guess specifically trying to get a better sense for drivers to the differences between the growth you’ve been seeing in Eastern Canada, which has been strong of late and the relatively slower rates of growth you’ve been seeing in Central Canada, I sort of feel like Western Canada maybe the dynamics are a little bit different. But Central and Eastern, I’m not sort of sure I understand why the variance in growth rates is what it is.
Iggy Domagalski
I can provide a few comments there Mike for you here. In Western Canada, there — despite oil and gas companies returning most of their earnings to shareholders, they are starting — they have increased their spending materially. So we’re seeing the benefit of that across most of our categories. And in Eastern Canada, a lot of that is driven by Quebec. We have a very strong business in Quebec and we have really strong leadership out there, also partially driven by mining.
When we look at Central Canada, which is only Ontario and the way that we describe it, that region for us has been challenged. We’ve had leadership challenges in that region. Recently we have put in new stable leadership which we are very happy with. But in order for that really to get some traction it takes a little bit of time. So we haven’t quite seen the benefits of that yet.
Michael Tupholme
Okay. That’s helpful. Thank you. And then, to an extent you were sort of asked about this earlier and you may provide some comments, but I just want to ask about the outlook. I mean the commentary sounds fairly upbeat. But understandably you did highlight risks related to rising interest rates.
So obviously, with concerns around the broader economic outlook having increased of late, can you maybe talk a little bit more about what you’ve been hearing from your clients just in the last sort of one to two months the very recent past? And any commentary on if you’re seeing anything in terms of changes in booking or quoting activity kind of across the business?
Stuart Auld
No. I think in general, we’re feeling actually pretty positive. But I think, as Iggy has commented there is a big macroeconomic cloud out there that we’re operating within and we’re just trying not to get too far ahead of ourselves. But as you can see by the backlog, it’s been positive. It’s been positive on the construction side. It’s been positive on the industrial parts side, quoting is up in a number of our businesses. So there’s a lot of good things. It’s just those other things that you can’t — you have to pay attention to inflation, lack of people, et cetera. I don’t know if you’d add anything to that Iggy.
Iggy Domagalski
Yes. Yes, Mike, I’d add a couple of things. I mean, I’m — I’ve been in the seat now for a little over seven months and I’m extremely excited about the business and the future. When I think about our biggest opportunities the ones that really jump out, the first is Hitachi. We’re just starting to see the wonderful fruits of that. And we’ve been waiting for this for a very long time. It’s going — it’s already good and it will continue to be very good.
I’m really excited about our industrial parts and ERS business. In the first half, we closed two tuck-in acquisitions. We have a dedicated resource that all he does is look for acquisitions and the pipeline continues to grow and we have a lot of them in flight. So we’re excited about those and just continuing to build that especially that industrial products business, just the earnings profile is a lot smoother and a lot less cyclical. So when I look at those combined with our giant opportunity in Ontario where we have this better leadership now, I’m pretty excited about the future. I think we have some good things going for us that would allow us to outpace the market a little bit.
Stuart Auld
And I think I’d add one thing. And just obviously the balance sheet is in really good shape. So if something is coming we’re well positioned to weather that.
Michael Tupholme
Okay. I appreciate all the color. Thank you.
Operator
Thank you. Next question comes from Devin Dodge of BMO Capital Markets. Please go ahead.
Devin Dodge
All right. Thanks. Good afternoon guys. I wanted to start with the outlook. I think there was a mention in there that you were preordering equipment. How do you guard against preordering too much and makes those decisions? Is it controlled by the at the branch level, or is it more centralized?
Iggy Domagalski
That’s a good question, Devin. Thank you. A lot of the preordering for us is actually based on orders from customers. We just have to order it and the customers have to wait. And these are in businesses where typically the customers would be buying these out of the yard. So that’s part of what we mean by preordering equipment. And then all of our supply chain teams and procurement teams are just working really hard to make sure that we have the right equipment on the shelves. So it’s a combination of those two things. And we don’t really see a lot of risk at this time that we’ve ordered too much. And we haven’t seen very much in the way of any kind of order cancellations for orders that are in backlog.
Stuart Auld
It’s primarily driven by the category managers who are closest because we’ve got 115 branches. So not all of them sell equipment, but you want category managers to have a view with the regional leaders about what we think we need and where we need that. And then obviously, we have to provide orders to our manufacturers well in advance of production to make sure that we’ve got our name in the slot. And we obviously look at how we’re doing at any point in time, as an indicator of what we need to order what we’ve got on order what we expect to sell and what we have in the inventory.
Devin Dodge
Okay. That makes sense. So that’s good color. So second question, I was going to ask about gross margins. Look, they were stronger in the quarter for equipment and product support. This is something that we’ve seen from some of your competitors as well. I’m just wondering are there other parts of your business where it’s a bit more difficult to pass through some of the cost inflation that you’re seeing?
Stuart Auld
No. I mean I think in general, if you look at the industrial parts side, we’re able to pass those. We’re able to pass on whatever comes from our manufacturers. There hasn’t been a lot of pushback at all because they’d be seeing that across the market. We’ve been able to pass on in the ERS business. They obviously use parts, but we’ve been able to pass on labor rate increases. On the equipment side, we — the price of the machine is the price of the machine. And just given the tightness in the markets on getting machines hasn’t forced us at all to discount. So you’ve seen a benefit of being able to quite readily increase prices as we’ve had to. And with some of the stuff, not discount because of the lack of supply.
Devin Dodge
Okay. Okay. And maybe just one last one just a quick one on the backlog. How much of that backlog at Q2, how much do you expect to deliver in the back half of the year?
Iggy Domagalski
Good question. Thanks, Devin. We expect the majority of it to deliver this year.
Devin Dodge
Okay. Okay. Perfect. I’ll turn it over. Thank you.
Iggy Domagalski
Thank you.
Operator
Thank you. There are no further questions you may proceed.
Iggy Domagalski
Thank you everyone for joining our call. We look forward to catching up with you next time.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.
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