Wajax Corporation

Mark Foote - President and CEO John Hamilton - SVP and CFO Brian Dyck - SVP, Equipment Richard Plain - SVP, Power Systems Steve Deck - SVP, Industrial Components

Ben Cherniavsky - Raymond James Bert Powell - BMO Capital Markets Sara O'Brien - RBC Capital Markets Benoit Poirier - Desjardins Capital Markets Michael Tupholme - TD Securities

Thank you and welcome to the call. Now I'm going to make some opening remarks before turning the call over to John for some details on the third quarter.

We're very pleased with the team's performance in the most recent quarter. Revenue and adjusted net earnings were higher than the previous year on strength in all three of our businesses.

In spite a lower mining, parts and service volumes equipment recorded increased earnings on higher equipment sales and improved margins. Power Systems benefited from improved activity in the oil and gas sector and on-highway trucking.

And the Industrial Components business gained momentum as the group began to benefit from its restructuring activities while at the same time increasing revenue and backlog. Planned Restructuring and Industrial Components was completed in the third quarter and we continue to expect annual pre-tax savings to exceed $5 million as a result of these changes.

We've adopted a more cautious outlook for the rest of 2014, given recent and continuing weakness in commodity markets. Our expectation regarding key market demand in Canada for the remainder of this year is mixed.

Capital of goods purchases and certain aspects to maintenance spending by mining and oil sands customers may be constrained, adversely impacting the equipment segment and to a lesser degree Power Systems. Our Power Systems continues to expect some improvement in the conventional oil and gas sector relative to last year.

Industrial Components continues to build backlog in a number of market sectors and coupled with the lower cost phase, the group is expected to outperform the results that were posted in the fourth quarter of last year. Our expectation for full year net earnings continues to support our current dividend of $0.20 a share, which we have confirmed for November and December of 2014 and January and February for next year.

We'd also like to welcome Stuart Auld our new Senior Vice President of Information Systems to our leadership team. Stu has an extensive background in IT operations and finance from a large multi-divisional and multi-branch organizations and Stu’s role would be instrumental in the further development of our IT resources and infrastructure.

John?

Thanks Mark. Just talk about third quarter results now.

Third quarter 2014 consolidated revenue was 359.5 million that was up 6% from last year. Consolidated net earnings of 11.1 million or $0.66 per share were down from the 11.5 million or $0.69 per share recorded last year.

However, 2014 net earnings included a $3.1 million provision for restructuring cost in the Industrial Components segment, excluding these cost adjusted net earnings of 13.3 million or $0.79 per share were recorded. Consolidated backlog of $208 million at the end of September decreased 16.5 million compared to June 30th on declines in the equipment segment partially offset by increases in Power Systems and Industrial Components.

And turning to the individual segments and starting off with Equipment, total revenue of 139.3 million in the quarter was up 4% compared to last year. Equipment sales increased 16 million the biggest gains were in mining and forestry which were up 10.6 million and 9.3 million respectively.

Parts and service volumes were down 8.3 million to 58.5 million and lower mining sector volumes mainly related to fewer component rebuilds compared to last year. Quarterly segment earnings increased 8% to 12.2 million on higher volumes and margins.

Turning to Power System, revenue increased 13% to 78.2 million, equipment revenue increased 5.2 million on higher power generation and off-highway oil and gas sector related sales. Parts and service sales increased 3.8 million primarily on higher sales to customers in the on-highway and oil and gas sectors.

Segment earnings of 5.4 million increased 1.7 million or 44% that was attributable to the increased sales. Turning to Industrial Components, revenue of 103.2 million was up 4% compared to 98.9 million posted last year.

Bearings and power transmission part sales were up 12%, fluid power and process equipment sales including rotating products group decreased 4%. Earnings before restructuring cost increased 1.8 million or 38% as a result of higher volumes and margin and lower selling and administrative cost, including the 3.1 million of restructuring cost segment earnings were up 3.6 million.

We finished the quarter with funded net debt of 224.7 million that was up 6.5 million compared to the previous quarter but an increase of non-cash working capital in the quarter. Corporation also declared dividends of $0.20 per share for November and December 2014 and January and February 2015.

Operator, we’ll now open up the call to questions.

So I have to ask about the elephant in the room with the dividend that you increased your debt levels effectively to fund it looks like in the quarter and you scaled backed your outlook, but at the same time you committed to sustaining this dividend for at least the next four months, this is as you know something that a lot of people have their eye on, is there no change to the strategy here in terms of your capital structure?

So I have to ask about the elephant in the room with the dividend that you increased your debt levels effectively to fund it looks like in the quarter and you scaled backed your outlook, but at the same time you committed to sustaining this dividend for at least the next four months, this is as you know something that a lot of people have their eye on, is there no change to the strategy here in terms of your capital structure?

It’s Mark speaking Ben, no there is no change and we continue to stick with the policy we’ve had for some time now both minimum 75% of expected net earnings so the extent to which we confirm the dividend that means that we’re confident we’re within that policy although driving our business to a capital structure that’s unacceptable to us, so we’re at this point in time and as we review it every quarter with the Board we’re sticking to the policy that we’ve got.

I guess it says something about your outlook for next year as well that you’re comfortable you can fund it even if oil prices are $75 or something like that, is that fair to say?

I guess it says something about your outlook for next year as well that you’re comfortable you can fund it even if oil prices are $75 or something like that, is that fair to say?

What I’d do Ben is as I look at the number of months we confirmed at this point in time here we extended one extra month because of just the reporting calendar that we’ve got, so as you know we considered every quarter with the Board in extent to which we see some trajectory in the business that’s different and we adjust accordingly but at this point in time we’re comfortable with it for the next four months.

And in terms of a growth strategy for the Company a one that might need some capital to fund, is there, is it still sort of a grinding it out locking and tackling approach to the market as far as your opportunity to increase the penetration and grow the business?

And in terms of a growth strategy for the Company a one that might need some capital to fund, is there, is it still sort of a grinding it out locking and tackling approach to the market as far as your opportunity to increase the penetration and grow the business?

Yes in a large way I think we feel pretty comfortable with the organic growth opportunities that we’ve got. We don’t think that the decisions we’re making on the dividend policy are taking away any spending opportunities in the business I mean our outlook is a bit more cautious compared to where it would have been at the end of the second quarter, but we don’t feel we’re walking past any opportunities because of the capital structure or the dividend.

And on a separate matter, the parts and service business was down although actually if I read this right, on the equipment side the machine deliveries were up which seems a bit counterintuitive that parts and service business is supposed to be the one that is steadier and more resilient, can you maybe just shed a little more light on that?

And on a separate matter, the parts and service business was down although actually if I read this right, on the equipment side the machine deliveries were up which seems a bit counterintuitive that parts and service business is supposed to be the one that is steadier and more resilient, can you maybe just shed a little more light on that?

Hi Ben, it’s Brian. I think if you look at our business in the parts and aftermarket construction material handling, cranes and even the forestry business to some extent would be the base of our business.

And then unfortunately the mining business can be a bit lumpy at times and if you look at our even some of our comparables from last year we had a large undercarriage order and just some timing of some rebuilds and again Q3 can be a bit difficult for us on some of that stuff at times, so it’s the mining up and down that’s driving that number to look up or down at different times in the cycle.

And just on the conventional oil and gas as it sounded like it was a little more resilient and that was the way it was looking at the end of the last quarter, do you still see the business that way for 2015 like the oil prices where they are at and I recognize there is some other dynamics going on there, but maybe you can just talk a little more about what you’re seeing in the conventional particularly over the last six weeks?

And just on the conventional oil and gas as it sounded like it was a little more resilient and that was the way it was looking at the end of the last quarter, do you still see the business that way for 2015 like the oil prices where they are at and I recognize there is some other dynamics going on there, but maybe you can just talk a little more about what you’re seeing in the conventional particularly over the last six weeks?

Ben it’s Richard Plain here. At this point obviously we’re watching oil price very closely but feedback we’re getting customers at least in terms of the conventional side is that they’re continuing with their capital programs but I guess it’s going to be continued upon how far the oil price goes.

So at this point we’re not raising any arms.

Mark, if I could just go back to the first question as a follow-up point, I just need to understand this a little more clearly I mean do you guys understand and accept that your multiple on your stock is going to be at a discount from the other peers for as long as your payout ratio and the dividend risk is as high as it is and is that something you’re willing to accept at this point?

Mark, if I could just go back to the first question as a follow-up point, I just need to understand this a little more clearly I mean do you guys understand and accept that your multiple on your stock is going to be at a discount from the other peers for as long as your payout ratio and the dividend risk is as high as it is and is that something you’re willing to accept at this point?

I’m not sure we accept that there is a multiple disadvantage I think that’s subject to a lot of influence that don’t have anything to do with the dividend, but I think our return to shareholders is supported somewhat by the dividend policy that we’ve got and we’re comfortable with where we’re at right now.

But you are alienating a large segment of the market who doesn’t want own you stock as they see too much dividend risk.

But you are alienating a large segment of the market who doesn’t want own you stock as they see too much dividend risk.

I can’t comment on what an investor’s strategy is with respect to where they want to put their money, I know that in our case and our understanding of our investor base we’re pretty comfortable with where we are at.

I can’t comment on what an investor’s strategy is with respect to where they want to put their money, I know that in our case and our understanding of our investor base we’re pretty comfortable with where we are at.

I won’t ask any questions about the dividend. The Hitachi order that you’ve booked last quarter, how much of that was delivered this quarter Brian?

I won’t ask any questions about the dividend. The Hitachi order that you’ve booked last quarter, how much of that was delivered this quarter Brian?

We delivered two shovels out of that I think in the realm of about 15 million.

And so that would be, that’s for this year for that order right the next bunch comes in ’16?

And so that would be, that’s for this year for that order right the next bunch comes in ’16?

That’s correct, yes.

Okay. And then…

Okay. And then…

Let me back that up sorry, we have one more to go this year I am sorry.

So, 15 million this quarter, and one more to go next quarter?

So, 15 million this quarter, and one more to go next quarter?

Yes.

And that would be in the order about $7 million of shovel?

And that would be in the order about $7 million of shovel?

A little less than that.

And then Brian just back to the part side of things, the parts and service, this I hear on the seasonality side of it or just kind of it can be a little bit episodic at point, is there anything that you’re seeing today where you’re seeing your customers starting to curtail your maintenance activity is there something that you’re seeing in terms of the marketed customer behavior side of things?

And then Brian just back to the part side of things, the parts and service, this I hear on the seasonality side of it or just kind of it can be a little bit episodic at point, is there anything that you’re seeing today where you’re seeing your customers starting to curtail your maintenance activity is there something that you’re seeing in terms of the marketed customer behavior side of things?

Bert I think the only part we’re seeing in customers obviously is in the mining business, you understand that Walter Energy closed their coal mine in Tumbler Ridge they were a fairly large customer of ours so that had an effect on us. But I think in the oil sands we’ve seen a curtailment of spending or belt tightening over the last 12 months.

So I guess we’re getting used to it and again it truly is the timing of some of the rebuild, the equipment is operating for the most parting there has been idling but for the most part the equipment operates you can defer but there is that installed base that’s going to generate revenue for you.

And so there is nothing you’re seeing let’s say, a change in inflection point in customer’s behavior at this point in time?

And so there is nothing you’re seeing let’s say, a change in inflection point in customer’s behavior at this point in time?

Not yet, I would say it’s been that way for the last 12 months and obviously there has been some mine closures and some equipment idling but that’s -- we’ve been over that…

And then just John on the industrial components in the quarter, what did you realized this quarter in that business from your, of the annual, the greater than 5 million annual savings?

And then just John on the industrial components in the quarter, what did you realized this quarter in that business from your, of the annual, the greater than 5 million annual savings?

It would have been a little better than about 600,000 in the quarter.

Brian I wonder if you can comment on the pricing environment in the oil sand you said that your customers have been tightening their belt for the better part of the year already, so where are you seeing that, is it just on deferral or are you seeing pricing pressure on parts and service component?

Brian I wonder if you can comment on the pricing environment in the oil sand you said that your customers have been tightening their belt for the better part of the year already, so where are you seeing that, is it just on deferral or are you seeing pricing pressure on parts and service component?

There has been some deferral and there is some pricing pressure, but there is some efficiency that we have been able to drive out of our business and I think that’s what you’ll see and why our EBIT margin is improved somewhat, so I think that whole culture in Fort McMurray needed to have some change to it we’ve driven some efficiency out of them, out of our people and out of our operations and we’ve been able to react to the pricing pressure and still maintain our margins.

And then maybe just John on the working capital looking at the availability, the flexibility you have with your current covenant just wondering, with the mining slowdown and potentially further slowdown in the equipment group if that’s going to come, how comfortable are you with your current working capital position and can you bring it down by year-end or into F ’15 to give you more flexibility on the balance sheet?

And then maybe just John on the working capital looking at the availability, the flexibility you have with your current covenant just wondering, with the mining slowdown and potentially further slowdown in the equipment group if that’s going to come, how comfortable are you with your current working capital position and can you bring it down by year-end or into F ’15 to give you more flexibility on the balance sheet?

I guess first of all with regard to where we’re in our leverage ratios I think we’re quite comfortable with where we are. In terms of do we have the capability to bring down our working capital certainly we do I think we gave no bones about that over the course of the last couple of quarters particularly in the mining sector.

But again we recognize that that’s going to take some time. I am not going to speculate on what may or may not happen next year I know certainly there is more uncertainty now and that’s why we’ve taken a more cautious view but right now it’s just speculation.

And then maybe in your Industrial Components what’s going on with the slurry pumps work there have you seen any difference in activity levels since the crew has come off?

And then maybe in your Industrial Components what’s going on with the slurry pumps work there have you seen any difference in activity levels since the crew has come off?

No certainty that the activity level up here in the Fort McMurray slurry pump businesses I would say stable and consistent with what it has been, it’s not growing or greatly bounced but it’s not diminishing either.

And just going back to the working capital John, just on, so I understand the working capital can fluctuate but how confident are you that the free cash flow ability will be there going into 2015 whether it’s a pay down debt or existing with the current dividend?

And just going back to the working capital John, just on, so I understand the working capital can fluctuate but how confident are you that the free cash flow ability will be there going into 2015 whether it’s a pay down debt or existing with the current dividend?

Again, we felt comfortable going out for the next four months in terms of the dividend with our debt position. I guess it’s sort of two questions there when you say pay down debt if we’re depending on how we make out with mining equipment we’ll determine largely how we make out with regard of being able to pay down debt.

Is there any, I mean I know the bidding activity was quite active on the mining side I mean has there been any, I guess what’s the probably that you can actually unload some of the mining equipment from our inventory before you end at this point?

Is there any, I mean I know the bidding activity was quite active on the mining side I mean has there been any, I guess what’s the probably that you can actually unload some of the mining equipment from our inventory before you end at this point?

I was able to move a shovel in the quarter to another dealer, we’ve a lot of quotes out there is still some opportunities so as a probability we think there is still some room to move some equipment this year.

It should also Sara that our projections and what not in terms of being able to maintain the position around this is not predicated on moving mining equipment by the end of the year. So we run various models we’re comfortable with where we are from a debt standpoint in terms of our capacity to do what we need to do.

Just a question on the outlook, it seems that now you’re a bit more cautious despite the fact that the third quarter was still a very decent quarter given the current market environment so I’m just wondering how you would qualify the upcoming fourth quarter or maybe qualify how strong was the Q4 last year in 2013 so I was just wondering if you’re being facing an easy compare, a tough compare or anymore color?

Just a question on the outlook, it seems that now you’re a bit more cautious despite the fact that the third quarter was still a very decent quarter given the current market environment so I’m just wondering how you would qualify the upcoming fourth quarter or maybe qualify how strong was the Q4 last year in 2013 so I was just wondering if you’re being facing an easy compare, a tough compare or anymore color?

Benoit its mark, I think we tried to describe in the outlook specifically kind of the ups and downs per business. I think just given the fluctuations at the commodity markets we think it’s prudent to express some caution about the momentum in the business right now, so I think if you check our outlook that attempts to kind of get at the various dimensions that could affect each of our businesses.

And just for the equipment margin obviously a little bit 6.8 versus 6.6 for the last year and where the product support has been down and new equipment has been up so seems pretty good performance, just wondering where you would attribute that kind of a good performance, is it better profitability from forestry or it is actually mining products or any reason why you’ve been able to increase specifically the margin despite the fact that product support has been down?

And just for the equipment margin obviously a little bit 6.8 versus 6.6 for the last year and where the product support has been down and new equipment has been up so seems pretty good performance, just wondering where you would attribute that kind of a good performance, is it better profitability from forestry or it is actually mining products or any reason why you’ve been able to increase specifically the margin despite the fact that product support has been down?

There is three real reasons Benoit the first one is we had a real increase in our forestry business, we sell Tigercat forestry equipment they are market leader and also we buy it in Canadian dollars so I think that’s helped us a bit considering where the dollar has gone. We had a good quarter in the Crane and Utility business, there is a fair amount of value added in that business so that helps our margins instead of just selling a commodity and we also had improvements in our service efficiencies which drove our EBIT margins and our service departments in the month those are probably that you heard in the quarter so those are probably the three biggest reasons.

And maybe what’s your outlook in terms of the forestry going to the next 12 months should we expect the forestry market still to contribute positively Mark?

And maybe what’s your outlook in terms of the forestry going to the next 12 months should we expect the forestry market still to contribute positively Mark?

I can answer that Benoit, it’s Brian. In 2013 and ’14 we saw some significant increases in customer fleet additions and replacement that really came after several years that there wasn’t any growth.

Again we’ve also increased our market share in Tigercat in Canada. I think all the reports are that lumber prices are forecasted to remain relatively stable in 2015 so we would anticipate that market to remain stable but I don’t think we’ll see the growth on the numbers that we saw in this year considering the amount of replacements and additions that went on, the other big opportunity for us in that business will be the aftermarket, that equipment runs has an atrocious environment and it has a lot utilization so we’ll concentrate on that going forward.

And if you strip out the forestry product I mean most of your products are typically priced in U.S. dollar just wondering if you could elaborate a little bit how easy is it to pass through the U.S.

dollar right now increased to customers?

And if you strip out the forestry product I mean most of your products are typically priced in U.S. dollar just wondering if you could elaborate a little bit how easy is it to pass through the U.S.

dollar right now increased to customers?

When the dollar fluctuates a lot it gets a little tricky depending on how much aged inventory or competitors or even ourselves have in play, because it does produces a spread in the equipment that you can sell into the marketplace. So generally you can move it forward depending on where your competitors are, or even where you sit with aged inventory that would be obviously priced better at a different exchange rate and then as the dollar stabilizes it doesn’t get quite as sloppy and price is stabilized and you can push that additional cost through easier.

And power system good contribution on the margin standpoint went up sequentially, is there anything particular to highlight in the quarter for power system.

And power system good contribution on the margin standpoint went up sequentially, is there anything particular to highlight in the quarter for power system.

Benoit, Richard here. Just in general it had a better performance in our equipments on a quarter-to-quarter, year-over-year basis so that was a big contributor but we’re also up in our parts and service, or the number of parts and service initiatives as well as positive oil and gas businesses helped our parts and service business which of course helps to boost our profitability.

And last question just for industrial components, so the goal is to achieve 5 million a year so is it fair to assume that you were able to achieve half of what you expect to realize in the quarter so typically 600,000 this is what you’ve realized in terms of cost saving while you should be closer to 1.2 let’s say per quarter roughly 1.25.

And last question just for industrial components, so the goal is to achieve 5 million a year so is it fair to assume that you were able to achieve half of what you expect to realize in the quarter so typically 600,000 this is what you’ve realized in terms of cost saving while you should be closer to 1.2 let’s say per quarter roughly 1.25.

That’s correct.

Just a question on the outlook commentary, Mark I’m just wondering if the cautiousness that you’re expressing if that’s based more on actual slowdown in intangible things like bookings or increased caution you’re hearing from the customers or is it really more just you looking at the commodity prices price of oil and et cetera and making that call?

Just a question on the outlook commentary, Mark I’m just wondering if the cautiousness that you’re expressing if that’s based more on actual slowdown in intangible things like bookings or increased caution you’re hearing from the customers or is it really more just you looking at the commodity prices price of oil and et cetera and making that call?

I don’t know how to portion it exactly but I would that it’s pretty heavily weighted to the latter part of your comment.

And I mean as we’ve gone through the, I guess the last couple of months and seen the decline particularly in the price of oil, what sort of change have you seen with regard to the commentary and discussions you have with your customers?

And I mean as we’ve gone through the, I guess the last couple of months and seen the decline particularly in the price of oil, what sort of change have you seen with regard to the commentary and discussions you have with your customers?

I think as Richard pointed out on the capital goods side from conventional oil and gas customers we haven’t at this point in time seen any significant drop off in demand so we still see some decent activity. I think in Richard and Steve’s businesses because they both participate in some of the aftermarket refurb different types of projects et cetera demand has been reasonable.

I think we’re just cautious that the kinds of drop offs that we’ve seen in those markets at some point does should be expected to have some kind of negative effect on the top-line and while we haven’t seen it yet we do expect that that could happen and that’s why we’ve taken a bit more of a cautious outlook.

And just as a sort of a follow-on that, you reported Q2 your outlook commentary was more upbeat than I guess it had been in Q1 so more bullish at that point and now you’re sort of dialing things back net-net where would you say you are compared to where you would have been at the beginning of the year or Q1 I guess?

And just as a sort of a follow-on that, you reported Q2 your outlook commentary was more upbeat than I guess it had been in Q1 so more bullish at that point and now you’re sort of dialing things back net-net where would you say you are compared to where you would have been at the beginning of the year or Q1 I guess?

That’s great, thank you. Just as I look back at Q4 ’13 in terms of the prior year comp that you have been facing when you report next, looks like you had a very strong revenue performance in terms of equipment volumes both in the equipment segment and the power systems segment.

And I’m just wondering if there is something seasonally going on there that pushed that up in Q4 last year whereby Q4 is stronger than we’d have seen earlier in the year or does last year’s fourth quarter represent a tougher comp at least as it relates to the equipment volumes?

That’s great, thank you. Just as I look back at Q4 ’13 in terms of the prior year comp that you have been facing when you report next, looks like you had a very strong revenue performance in terms of equipment volumes both in the equipment segment and the power systems segment.

And I’m just wondering if there is something seasonally going on there that pushed that up in Q4 last year whereby Q4 is stronger than we’d have seen earlier in the year or does last year’s fourth quarter represent a tougher comp at least as it relates to the equipment volumes?

Yes, there is a tougher comp on the equipment side that would be a correct statement and mainly from the standpoint of the equipment side of things as opposed to the parts and service side of things.

Within both of the equipment segment and a power system segment?

Within both of the equipment segment and a power system segment?

Power systems, there was some on the equipment side again it can be a little bit lumpy because of some of the power gen projects so we had a couple of larger projects going through to the -- may be in the last year but we’re not that concerned about at least on the top-line in terms of the comps in power systems.

And then just last thing may be more of the housekeeping and question within the power systems segment there was, can you just provide a bit of additional detail on this comment about the operating lessons provision and some offsetting positive provision it looks like?

And then just last thing may be more of the housekeeping and question within the power systems segment there was, can you just provide a bit of additional detail on this comment about the operating lessons provision and some offsetting positive provision it looks like?

Yes we took some operating lessons on some engines as we kind of do in the normal course of business, coupled with that there were some provisions that will no longer needed in the balance sheet that we released in the income.

Net-net sort of a neutral impact?

Net-net sort of a neutral impact?

Yes.

Okay, well thanks very much for joining us on the call today and we look forward to sharing the fourth quarter earnings with you at the close of the next quarter. Thanks very much.