Wajax Corporation

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

Bert Powell - BMO Capital Markets Sara O'Brien - RBC Dominion Securities Michael Tupholme - TD Securities

Thank you very much and thanks for joining us today on our results call. I'll make a few openings remarks and then I'll turn the call over to John to talk about the detailed results of the fourth quarter.

My comments will address three things; fourth quarter results and the business conditions that we see heading into 2015; our renewed growth strategy that's detailed in our M&A; and our change in the dividend policy and the amount. As far as questions on today's call are concerned, we would ask that the focus be on our fourth quarter and year-end results, our outlook for 2015 and our dividend decision.

While we'll speak briefly to the renewed growth strategy that's included in the disclosures that went out today, we are holding a webcast, specific to this strategy on March 5th at 11:00 in the morning Eastern, and we would be very pleased if you would join that call and we will deal with more detailed questions on the strategy at that time. On the fourth quarter, our earnings were marginally below our expectations.

Equipment and Industrial Components performed at were better than our forecasts; however, Power Systems did fall short of our expectations, where weak gross margins and higher costs resulted in the shortfall in expected earnings. While we're focused on the long-term, we're planning to manage carefully through what we expect will be a challenging 2015; ongoing weakness in oil and other commodity prices is expected to have a negative effect on our customers in the mining, oil and gas and oil sands markets, which represented 28% of our revenue in 2014.

As a result, we expect that the 52% of revenue derived from Western Canada will come under pressure in 2015. In addition, the lower Canadian dollar will have a short-term negative effect on earnings before selling prices were readjusted.

In an effort to minimize the impact on the profitability in leverage in the short-term, all divisions are prudently reducing costs in affected areas and closely managing working capital as custom demand patterns become more firmly established. We'll take this opportunity to expand upon how each of our businesses is dealing with the reduction in oil and other commodity prices and the resulting slowdown in Western Canada economy.

In Equipment, the Management Group has been proactive in managing our cost base down gradually, beginning mid last year, when we temporarily closed one mining branch and permanently closed another when certain mining customers curtailed production. They've also been quick to react to the changing conditions in other areas such as the oil sands, balancing staffing levels to the changing conditions as we head into 2015.

In Power Systems, upon Michael's arrival at Wajax in the first week of January, the Power Systems team has been reviewing the organization with the goal of finding meaningful efficiencies in how we operate. They have also been adjusting headcount to the changing conditions in Western Canada.

In Industrial Components, we completed a restructuring of the organization last year. In the fourth quarter, we began to see the benefits of those changes, which we expect will be approximately $5 million annually pretax.

And Steve and his team are also continuing to adjust staffing levels where that's warranted. Let me turn briefly to the strategy.

The renewed strategy that we announced today follows an extensive review of the Corporation's competitive position and shareholder value creation. Simply stated, our goal is to be Canada's leading industrial products and services provider, distinguished through three things; the excellence of our sales force, the breadth and efficiency of our repair and maintenance operations, and our ability to work closely with existing and new vendor partners to constantly expand our offering to our customers.

As one of Canada's most diversified industrial distributors, the renewed strategy builds upon our dedicated team, national branch network, diverse end-market expertise, world class vendor base and strong customer relationships. These existing strengths will be leveraged through the following four points of growth; development of our core capabilities, clear organic growth priorities, building the Corporation's capacity to complete and integrate engineered repair services acquisitions, and investment in systems that will improve operational efficiencies and customer service.

We have established financial targets for the five year timeframe from 2015 to 2019; goals over that period are to grow net earnings at a minimum compounded annual growth rate of 7.5% and to target a leverage ratio range of 1.5 times to 2 times. We are very confident in the direction we're taking and I hope you'll be able to join us on March the 5th at 11:00 Eastern to discuss the strategy further.

With respect to the dividends, in order to increase the funds available to invest in our strategy, provide additional liquidity in this time of economic uncertainty and bring more stability to dividend payments over the business cycle; the Board of Directors has approved the change to the Corporation's dividend policy and a reduction in the dividend amount. The previous policy of paying a monthly dividend, based on a minimum 75% of expected net earnings, has been changed to implement a quarterly dividend with an initial target amount of $0.25 per share.

Respecting the current conditions, we plant to push forward with a prudent investment plan to support our strategy, balancing the current economic conditions with the long-term benefit that these strategic programs are expected to deliver. Let me turn the call over to John.

Thanks Mark. To go to the fourth quarter results now, the fourth quarter 2014 consolidated revenue was $386.1 million that was down 1% from last year.

Consolidated net earnings of $11.2 million, or $0.67 a share, were down from the $12.2 million, or $0.73 per share, recorded last year. Segment earnings declined, and the Equipment and Power Systems were only partially offset by an increase in segment earnings in Industrial Components.

Consolidated backlog of $177.7 million at the end of December, decreased $30.3 million, compared to September 30th on declines in all three segments. Turning to the individual segments, and again starting with Equipment.

Total revenue of $191.8 million in the quarter was down 8% compared to last year. Equipment sales decreased $17.2 million; we had an $18 million decline in mining equipment sales.

That was only partially offset by the $6.7 million increase in material handling equipment sale. You may remember last year, was the quarter we had the sale of four trucks up in Portland, Murray was primarily the difference in the mining equipment.

Parts and service volumes were down $4.5 million to $55 million on lower mining sector volumes compared to last year. Quarterly segment earnings of $12.4 million declined $1.2 million compared to last year, the decline in volumes.

Turning to Power Systems, revenue increased 3% to $88.3 million. Equipment revenue decreased $2.6 million on lower power generation sales.

Parts and service sales increased $5.5 million, primarily on higher sales to customers on highway sector. Segment earnings of $3.5 million decreased $2.5 million as the higher revenue was more than offset by lower gross margins and higher selling and administrative cost.

And then Industrial Components, revenue of $107.5 million was up 10% compare to $98.1 million posted last year. We had a 17% increase in bearing and power transmission part sales and that was a primary reason for the revenue increase.

Strength was seen in metal processing for stream mining industrial in the oil and gas sectors. Earnings increased $4.2 million as a result of the higher volumes and margins and lower -- as a result of the higher volumes and higher margin, as well as lower selling and administrative cost.

Turning to the balance sheet. We finished the quarter with funded debt of $201 million that was down $23.7 million compared to the previous quarter, on a decline in non-cash working capital.

And the Corporation also declared dividends first one for the month of March of $0.0833 and $0.25 per share for the second quarter of 2015 as we transition to quarterly dividend payments. Steve I'll now open up the call to questions.

Hi good afternoon gentleman. This is Charles sitting up for Benoit.

My first question is regarding the parts and services, in your fourth quarter, they were down 7% during the quarter. Did you see any pressure, maybe in terms of pricing from customer, or just maybe customers delaying their services requirement during the quarter?

It’s Brian Dyck. That’s sort of two questions, I think, the first question on the reduction is, it was driven a lot by pressures in the oil sands for the producers to reduce cost, and a shutdown of a couple of coal mines in Western Canada.

So, that’s going have some challenges for our parts and service revenues going forward. We've had a lot of pressure from our clients to help them reduce cost.

And there is more than one way to do that, not just reducing margins we worked with them on some efficiencies in our service operations on their side of the business and on our side of the business to help the managed their cost. There is also some benefits that we can pass on to our clients when we look at long lead time items, or how they purchase our items, where we can pass on some reductions to them without hurting our margins.

And then, I think, that’s the big issues that we've had in the areas is that we've helped our clients.

And then for 2015, is it fair also to expect this process to continue? Or as you said, you’re probably going to maybe see more better margins on that side in the future or is it fair to expect all those sources and pressure again in 2015?

I think the pressure is just going to come from the volumes.

Okay and regarding your outlook for the construction business. Can you provide me the breakdown our region in Canada?

Is it fair to expect the ripple effect in Western Canada from the lower oil and gas? And also maybe, you see the east picking up with lower Canadian dollar.

What do you say on that front?

I think you're right on markets across we’re up. But I'm going say that all the increase was driven mostly by Ontario.

Mark, I'm not sure if this is a question that is to march this question or not. But in your press release, you talked about investing in the sale and CRM and training, and what not.

And I'm just wondering, those will be ongoing expenses for the business as you do that and I was wondering if you can help us think about how that impacts profitability as you make those investments, and I assume those are through '15 and are done for '16? Or just help us think about the impact on the profitability of the organization from these initiatives?

We can expand on it, I guess, on Thursday. But I guess the shorter answer is we would consider the trading investment in those core capabilities to be an ongoing number for the Company.

It's not like it will end after a year or something. It's modest in 2015, given the current circumstances.

But you can probably think about our trading investment of probably between $1 million and $2 million a year, between what we'll do with the sales force and what we'll do with labor proficiency, respecting that it's expected to get off to a bit of slower start just given some of the cost pressure we may face in the short-term.

And Brain just wants to go back to your business. The dollar slide has been quite dramatic.

And now you got customers who are dealing with, increased prices here in Canadian dollar and [Audio Gap] if you could talk to us a little bit about how that’s impacting the competitive dynamic with used new your competition? And then just your major vendor reports in yen, does that give you end does that give you any flexibility in terms of your pricing or margin in this market?

I think there’s still a slowdown, there's still a bit of inventory that's in the business, that we bought 90 days ago, even that's actually created some margin opportunity for us in the short-run. But I think it's fair to say that on some new equipment that we'd have to factory order, there's some sticker shock right now.

And you blend that with the equipment that you have in inventory, and I think it generally takes three months to six months to get that through all of our businesses.

So is the expectation, even though you have the margins in parts and service up in the fourth quarter that will continue to see margin erosion in new equipments through 2015?

Margin erosion in 2015?

Yes.

From new -- I'm not sure that we're saying there's going to be margin erosion in 2015, Bert.

No I know -- I'm just asking you if that's what you -- you haven’t said anything about it. I'm just asking if that -- is that a possibility?

I think there's in the short run, there's some margin opportunity. And then I think as you move forward, and everybody's inventory gets to the exchange rates that we're dealing with, the margins equalize.

So, I don’t see a big swing one way or the other.

And just last question Steve in your business. Given the savings that were put in the $5 million of your savings and given sales that were not that than were to Q3, kind of what are the thoughts that the operating profit would have been higher than $5.9 million in the quarter?

Is that mix that impacted the business? Or it was Q3 adjusted for the costs higher than you would have thought?

In Q4, we had some warranty and obsolescence issues, and we also had a little bit of higher incentive. Those were the main drivers.

So what would have been if you kind of thought about it on a normalized basis, Steve?

I'm not sure -- we're talking about several hundred thousand dollars Bert. But we're not going to start giving out specific numbers on those things.

No, I was just trying to make sure it's not like $600,000 or $700,000. Okay, thanks.

John, can you provide a little bit more color around the F15 guidance? Just in terms of, Brian was talking about some volume pressure.

Is that expected across all divisions? And where would you expect to see margin pressure from volumes spend at most?

I guess, we would be expecting pressure, as we mentioned in the press release across all three lines of business, because all three lines of business have particular activities in Western Canada and all three of them are somewhat tied to oil and gas. So, we would expect it to be kind of across all three of the businesses.

I'm going to hesitate to give you any more specific guidance, because things do change -- or have been changing fairly rapidly. But at this point in time, it seems to be isolated to Western Canada.

And I guess I'm not sure, Mark, if you want to say anything else about it. But I think that's what all we can say at this point in time.

And just, Brian, I didn’t understand, I just want a bit more clarity on the kinds of solutions you're finding with clients, that does not put pressure on the product support side, if you could just repeat some of those initiatives and how those are playing right now?

We’ve worked with our major customers obviously they're all looking to reduce cost. But one of our major suppliers had some programs in place where we do some planning on our rebuilds our long lead time purchasing.

There’s some relatively significant discounts that we can pass-through to the client, which is not -- doesn’t have a margin effect on our margins, but also produces savings for them. There is also, when we talk about work efficiencies, there's things that we've done with being more efficient on the customer side and then working with the customer to remove any obstacles that have hurt us in our efficiencies, even hours of work processes, things like that.

We've done a lot of work with that, even staffing levels, to some extent on the support side that we provide to some of our clients. And then obviously this one's probably not going to have as big an effect this year with our clients.

But we also have some volume discounts in place that you get the growth parts of sales with us there's some incentives for that. But this is going to be a tough year to achieve those.

At this point, is anyone trying to tie-in commodity price, or would you try tie-in commodity price to pricing levels of service?

No, I don’t think so, because most of the time our clients don’t like to share the upside either, so we're going to -- we haven’t done any of that.

And then just switching back, John, just wondered on the free cash flow basis that with some of these strategic plan initiatives. Would you expect any major difference to free cash flow in 2015, relative to '14?

Well, I guess one of the big things is and I guess it depends what you mean by free cash flow, if you're assuming, its cash generated from operating activities less capitals of dividends. Obviously, the dividend would be less than what it would have been previously.

Yes, the pre-dividends.

So, that would be the big item from a capital standpoint. Depending on how we find ourselves in the economic circumstances, there may be some additional capital.

But we're taking a wait-and-see approach at this point in time.

And just in terms of the CapEx, on the IT systems, is that sort of fluid through -- and I’m just wondering if we should expect any major change to the way you're investing in?

Again, we're taking a wait-and-see approach at this point in time, until we have a better handle on where 2015 is.

Just wanted to ask a question about the target earnings, minimum target rings CAGR, 7.5% and I realized we may get more on Thursday. But, just wanted to clarify, as we think about the base off of which you’re planning to grow that, I assume it's off of 2014.

But should we assuming the base, the 41.2 million of reported, or do you have some kind of an adjusted number in mind, given some of the restructuring charges you have in the year.

I think you can safely take it off the reported number. And I am not sure that the restructuring charge over a five term is going to make that much difference.

And then secondly, within the Power Systems segment, the operating margin of 3.9%, quite low in the quarter. And, I know you attributed that in-part to higher personnel costs.

Wondering as we move forward, are there any beneficial offset to that or is that kind of level we’re kind of running here for a little while?

There is potentially some beneficial offsets. We've indicated we’re in the process of looking at the cost base of Power Systems to try to take some additional costs out, so hopefully there will be some benefits there.

That being said, obviously, the oil and gas business is pretty significant to the Power Systems business. So, that is something that will impact that business in 2015 as well in down side.

And I guess to clarify, given that you're taking some costs out of that segment, presumably on the personnel side. The fact that you have had in fact higher personnel cost.

I am not quite sure I really understand that.

The costs we’re taking out, we're starting that initiative in Q1. So, -- and are you talking about the Q4 number, we would have had higher cost, is that what you're referring to.

Year-over-year, you're talking about, I guess?

Right, so in Q4 we had higher costs and SG&A year-over-year in Q4. The costs we’re taking out, we're starting that initiative started at very beginning of this year.

And this is, I suppose, somewhat related to couple of large questions around free cash flow. But can you talk about your expectations for working capital reversals in 2015 and where you'd expect to end the year from a leverage standpoint?

Again, there is a lot of moving parts on both of those items. I think we've been clear.

We do have a certain amount of inventory. As you know, we still have trucks in inventory, and some other mining equipment.

So depending on how successful we are in selling that -- some of that equipment is really going to impact where we're going be in terms of our leverage and obviously our earnings and where 2015 actually shakes out, is going the impact. And so, I'm just not going put myself in a position to sort of speculate on where that might be.

Actually, most of my question is about the quarter, have been asked do you want to do the head horse with any of them, are we not allowed to ask any questions about your growth strategy at this point?

Sure, go ahead Ben.

I'm just wondering if -- may be I don’t want to show you a thunder from the Thursday. But can you tell us little bit now, just because we're putting together notes and opinions on direction you guys are going.

Like, can you elaborate a little bit more on what's you’re thinking about for the growth, or where the opportunities are in what markets, and what, in terms of acquisitions conceptually, what you'll be looking for?

Yes I think we tried to do a proper job of giving you a brief introduction to it in the MD&A. And there is a few pages in the MD&A that talk about kinds of the things at a high level.

It lists the programs, the specific areas, the type of investment we're planning to make, the range of investment, et cetera. So, short of -- just asking it, did you have a chance to look at the MD&A?

I'm not sure if there is a specific area that you might want to.

No, actually travelling so I haven’t had that.

So, if you -- the press release has a few words in it, the MD&A has a couple of pages on it. And I think if you do have a chance to join us on Thursday, Thursday really is a about unpacking the points that are highlighted in the MD&A, which, I think, which do a decent job of giving you a summary of the key programs and investments.

What about the impetus behind this, if you guys -- could you disclose any of that in the MD&A, or could you care to comment on it at a high level here?

Can you just clarify what you mean by impetus?

Well, I mean, frankly for years, the plan was we generate more cash than we know what to do with. Our maintenance CapEx is an adequate amount of investment to keep the business competitive.

And we're an income orientated company. And this is a fairly dramatic change that -- I mean, I'm not saying it's bad one, it's just fairly dramatic revision, pretty much for the last 15 years, or way back to history.

So what -- I assume, you didn’t wake up one night and have this idea. But what was the -- is this been something you've been working on since you became CEO Mark, like three years ago now I think?

No I wouldn’t say no, it's something the team started doing together with the Board. It stage around, in significant terms, in the second quarter of 2014.

And it really was an assessment of how well we've done from a shareholder value creation standpoint, what our competitive position was, and what are the options in accelerating the growth of the Company. And that basic question led to what I think is turned out to some really solid direction for the Company.

And there were a number of factors that went into how to fund this strategy like that. But certainly wanting to divert more of the internally generated funds towards growth of the Company was one of the factors that we ended up concluding was the right thing to do.

So I think, Wajax has been a very effectively run company for a very long period of time. And I think when we took a step back from what was going to drive growth for us, over the next stage of our outlook period that being for five years in front of us, we thought there were some changes that were positive for us and for our ability to increase the value we're creating for shareholders.

And that's what this plan is about.

This is Charles again. Just a follow up, given your comment that revenue from Western Canada will be under pressure in 2015, is it fair to assume that the overall consolidated revenue growth should be negative this year, or your expectation for Eastern Canada should compensate this revenue decline?

We don’t really have a specific prediction on revenue right now. I think it's important for us to let the market shakeout a little bit from the effect on our customers.

We've got some -- we got, definitely got some pressures in Western Canada, we also have some good things that are happening in Western Canada. And we definitely feel that we can grow our business in the east, just given the market conditions that would get better.

But we haven’t really forecasted revenue at this point in time from the perspective of something we're prepared to disclose.

And in terms of competitive landscape in Western Canada, can you tell us how your competitors are reacting in term, some of you pricing and the services, or in the new equipment sales? And how do you adapt to their reaction of your competitor?

Whenever there is a slowdown in the market, there is obviously some margin pressure. And you either take the margin pressure, or your share reduces.

And I think there is good deals and bad deals and we look at them and decide where we're going to go without just drawing our price point in the marketplace and our market share position. So, when times are difficult, there is some pressure there's.

That's how it is.

Okay, well thanks very much for joining us today. And again, we would appreciate your time on Thursday, if you have it, at 11 O'clock.

We're looking forward to talking a bit more about the strategy and dealing with some good questions then. So thank you very much for your attention today and hopefully we'll speak to you again on Thursday.