Wajax Corporation

Mark Foote - President and Chief Executive Officer John Hamilton - Senior Vice President and Chief Financial Officer Brian Dyck - Senior Vice President, Equipment

Sara O’Brien - RBC Capital Markets Charles Perron-Piché - Desjardins Capital Markets Michael Tupholme - TD Securities Bert Powell - BMO Capital Markets Ben Cherniavsky - Raymond James

Thanks very much for joining us today. I’ll make a few comments and then turn the call over to John.

As expected weakness in the oil and other commodity prices had a negative effect on our customers in the mining, oil and gas, and oil sands markets in Western Canada, resulting in lower first-quarter revenue and earnings. The impact was most significant in our equipment group which the experienced the 17% reduction in parts and service revenues as oil sands operators and miners idled portions of their equipment fleets.

Conversely, operating results in Central Canada improved. This was particularly evident for the equipment and industrial components groups, where sales in those regions increased 40% and 12% respectively.

Our focus in 2015 is centered on three objectives: cost management; managing our asset base and debt level; and finally executing a prudent investment plan to support our 4 Points of Growth strategy. With respect to costs, reductions in consolidated selling and administrative costs of $3.8 million partially mitigated the earnings impact of lower first-quarter volumes.

We are very pleased with the progress made in Industrial Components where our restructuring efforts from last year have resulted in a significant improvement in earnings based on both cost-reduction and improved selling effectiveness. We plan to communicate and begin implementation of restructuring activities in our Power Systems group in the second quarter with severance costs expected to approximate $1.8 million.

This restructuring combined with Power Systems segment cost reductions realized to-date are anticipated to result in annualized savings of approximately $5 million. The increase in our March 31, 2015 debt levels from December was attributable to the combination of a drop in customer demand in Western Canada and seasonal factors.

And we expect to reverse this debt level trend by the end of the year. We continue to execute our 4 Points of Growth strategy in the first quarter.

As previously stated, we’re moving forward in all components of our strategy, including activities related to our core capabilities, organic growth initiatives, ERS acquisitions and systems implementation. While we will control the pace of execution given current market conditions, we will continue to make progress on these programs that are vitally important to our future earnings.

With commodity markets in the Western Canada economy anticipated to be soft for the remainder of the year, we continue to expect that 2015 will be a challenging year. Consequently, we expect the full year earnings to be less than last year.

However we’re very confident that our growth strategy and responsiveness to market conditions will result in an improving business in the medium-term and a strong growth company for the future. John?

Thanks, Mark. So, first quarter consolidated revenue was $317.2 million that was down from last year.

Revenue declined in both the Equipment and the Power Systems segments. However, we recorded a modest increase in Industrial Components revenue.

All three divisions were adversely affected by reduced activity in the oil and gas, and oil sand sectors. Consolidated net earnings of $5.7 million or $0.34 a share, were down from the $6.7 million or $0.40 a share recorded last year.

Segment earnings declines in Equipment and Power Systems were only partially offset by an increase in segment earnings in Industrial Components. Consolidated backlog of $173.3 million at the end of March, decreased 2% compared to December 31, but it increased 10% compared to March 31, 2014.

So turning to the individual segments and starting with Equipment, total revenue of 145.6 million in the quarter was down 9% compared to last year. Equipment sales decreased $3.5 million, mainly as a result of the reduced mining and construction equipment sales in Western Canada.

Increases were recorded in the material handling and forestry equipment. Parts and service volumes were down $11.4 million to $57 million compared to last year on lower mining sector volumes.

Quarterly segment earnings was $6.8 million, declined $3.9 million compared to last year. The negative effect of lower volumes and reduced gross margins were partially offset by $1.4 million of reduced selling and administrative costs, as cost-reduction initiatives begin to kick in.

Turning to Power Systems, revenue increased 3% to $74.6 million, equipment revenue decreased $3.4 million on lower power generation sales and lower off-highway sales to oil and gas customers. Parts and service sales increased 2%, primarily on higher sales to customers in Central and Eastern Canada.

Segment earnings of $3.4 million were essentially flat with the previous year. Lower sales were offset by higher gross profit margins.

And turning to Industrial Components, the revenue of $97.9 million was up 2% compared to $96 million posted last year. A 10% increase in bearing and power transmission part revenue was offset by an 8% decline in fluid power and process equipment sales.

Strength was seen in forestry and mining excluding Western Canada. Earnings increased $2.2 million to $3.4 million as a result of lower selling and administrative costs.

Industrial Components also absorbed a $1.3 million of additional bad debt expense this quarter. We finished the quarter with funded debt at $252 million that was up $51 million compared to the year-end 2014.

Non-cash working capital increased $43.9 million compared - primarily due to the slowing economy in Western Canada, seasonal factors and higher inventory values at the U.S. source inventory.

I just want to make a couple of comments on the increase in the working capital. We had expected our working capital to go up in Q1 fairly significantly.

The actual increase was somewhat higher than what we had expected and the reason for the higher amount was because of the slowing economy in Western Canada, as well as the decrease in the Canadian/U.S. dollar exchange rate.

And lastly on March 3, 2015 the corporation declared $0.25 per share dividend for the second quarter of 2015 and that’s payable on July 1. So operator, we’ll open the call up for questions now.

Hi, good afternoon. Can you comment on the liquidity position of the company?

With the leverage ratio at 2.7 times, about $50 million in available capacity here, how comfortable are you with your current facilities and would you look at perhaps other sources of financing just for flexibility?

I think right now we’re certainly obviously not as comfortable as we were last quarter. But we knew our leverage was going to go up.

So we still have room in terms of our leverage ratio. That being said, we’ll look at any kind of prudent options that are in front of us to try to help deal with that to bring us down in back into the desired range.

And in that respect though, I mean, is it more working capital management or increasing accessibility to - or access to liquidity?

I think it’s kind of all the above that we’re not - or we’re going to look at all sort of prudent activities to try to help to bring that down. Obviously, the biggest thing that we can do and the thing that we’re mostly focused on is working capital side of it.

Okay. And in Mark’s comments, it sounded like the trend will reverse by year-end.

Does that mean as of Q2 you expect that free cash flow will turn positive and help that out or is this more later in the year kind of event?

Again, it’s pretty difficult to go quarter-by-quarter to know exactly when things are going to turn. Some of this is depending on how soon we can liquidate some of the inventory into successful sales.

But I would - I guess, I wouldn’t expect that all to come in at the end of the year. It would be coming throughout the next nine months but I’ll stop at making some predictions as to exactly where it’s going to be next quarter.

Okay. And just your last comment, liquidate inventory into sales, do you expect or have to take a discount on inventory to move it and generate some cash?

Yes, I didn’t mean it that way in terms of liquidate it in terms of like it’s not going to auction or anything like that. It’s just more of turning it into sales that we would normally sell.

Okay. Then a question for Brian, in mobile equipment, just wondering if you can comment on the product support decline, it seems like the fall off is greater than even in the last recession.

What are you seeing that’s different in the oil sands now versus 2008, 2009 and how are you preparing for the remainder of the year in terms of how you think product support will play out?

Well, our parts and service volumes were down about 17% and that was all basically related to oil sands and even to other mining activities like coal mining. I would say that, the majority of that was all just equipment being part.

Honestly, I don’t see it getting any worse for the rest of the year, I’d probably say it at all - it will be flatter maybe up a little bit, but I think that’s what you are going to see.

Okay. Like flatter up versus Q1?

That’s right.

Okay. And in terms of the margin, I mean, it was off 200 basis points in the mobile equipment group.

Is that something - were there any one-off costs for severance or anything that or - FX impact in Q1 on parts that might have worsened that relative to your expectation for the rest of the year?

Not really. Sometimes it’s a mix of the parts we sell.

If it’s in more of a commodity like under care [ph], sometimes that affects the margins, but there was nothing one-off there, just subject to the volume basically.

Okay. I’ll leave it there.

Sara, I don’t mean to contradict Brian, but there was a bit of FX in the margins in equipment.

And that you would expect to fully pass through to the customer as of Q2.

Yes, well, yes, it would be an inventory now, but anyway there was a little bit there, not a substantial amount, but there was some there.

Okay. Thanks.

Hi, good afternoon, gentlemen. This is Charles Perron-Piché filling in for Benoit.

Thank you very much for taking my question. Just the first question, you highlighted higher equipment sales in Central Canada during the quarter.

I was curious to know, what you see so far during the second quarter in terms of market activity in Central Canada, if you expect this pick-up to last for the balance of 2015.

Within speak to the equipment division and maybe just specifically to excavators, so I can give you some numbers, and then maybe comment on what we see there. But overall in Canada the market for construction excavators was down about 10%, but when you look at the swings from East to West - the Western Canada was down about 25%, but Ontario was up 40%.

So we’re seeing a lot of positive things going on in Ontario, certainly not contravening what happens in the West, but we thing that will continue for the rest of the year.

Okay. Very good color.

Another question, you expect to record a $1.8 million severance cost charge in the second quarter. I was wondering if you could provide maybe an update on your current headcount situation.

And if you see maybe other opportunities to right-size the operation beyond what was announced today if market conditions stays the same in the future?

The end of the first quarter, the total headcount for the company was down about 4%. And that was mostly a function of what happened in Western Canada, where the headcount was down 7%.

I think the equipment business headcount was down about 9%. The balance of the year headcount reductions are primarily related to what’s happening with respect to further actions in Power Systems.

I think the extent to which things unfold more negatively than we’re expecting and we would be prepared more aggressively than that. But right now we’re planning to contain further headcount reductions to primarily what’s going to happen in the Power Systems group.

Okay, okay. And you mentioned in D&A that your debt level increased primarily due to lower accounts payable in the quarter.

I was wondering if you have some kind of bargaining power over some of your suppliers to maybe renegotiate your term more favorably in the future.

The answer to that would be no. Most of the payables would be to our major suppliers whether there are defined terms that you have to stick to.

So most of it is as a result - there is not a lot of movement there for us in those kinds of payables.

Okay, okay, thanks. And maybe last one for me.

Would it be fair to say, that your net debt to EBITDA ratio could meet your target of 1.5 to 2 times ratio by the end of the year?

Not about to make those predictions.

Okay, perfect. Thanks for the time guys.

Thanks. Good afternoon.

Hi, Mike.

Just wanted to circle back on the equipment segment. So if I’m hearing, Mark, correctly, it sounds like other than power systems, you’re satisfied with the cost structure changes you’ve made across the company.

So if I look at the equipment segment with the margins being down the way they were, it sounds like maybe FX sort of having work through FX and price adjustments you get a little bit of a benefit there. But is this sort of a level we should be thinking about for the next sort of while until volumes pick up, or is there anything else they can help margins?

I don’t think we’re banking on anything significant and in equipment to help margins. The FX issue while it wasn’t overly significant in the first quarter, they will continually be on FX side and that will flow through the way we - the way we handle some of our hedging programs, we don’t get hedge accounting on everything that we do.

So depending on where the kind of the U.S. dollar goes, there will be some positive or negative effect - FX going through for each quarter.

So I guess long story short, there’s nothing that we could point to and say well, this and itself is going to drive margins higher.

Other than demand picking up and more favorable mix, I guess. Okay.

Secondly, just wanted to - similar sort of question I guess is on industrial components. Same thing, it sounds like the restructuring is done there, and I realized there were some incremental bad debt expense year-over-year, but if I adjust for that, look like margins were still sub- 5%, which I think the - would be the lowest have been in three or four quarters now.

So just wondering is - same kind of thing is that the same situation, where borrowing a pickup in demand were in and around these levels, or is there anything else that you see in industrial components like it help margins?

Industrial components they would have had a bit of an FX issue in Q1. If you recall from prior years when the Canada and U.S.

dollar swing significantly, industrial components is the division that is affected the most in the short run. So they did have to work through some FX issues and some pricing issues, some pretty significant pricing issues from some of our suppliers in Q1, which I guess are our FX related even though with a lot of our suppliers were buying the product in Canadian dollars.

But the price increases that they gave us whereas a result of - a lot of it were a result of the change in the exchange rate. So it took them a while to realize some of the price increases that we would normally get at January 1.

So we would expect some upward movement in margins there.

So - have those now been fully passed through and your way you’d like to be in terms of prices relative to the change in the dollar, or is there more to happen in Q2?

They’ve been fully passed through at this point.

Okay. And then just to clarify the restructuring within Power Systems is the $1.8 million that’s going to be recognized entirely in Q2?

That’s the intention at this point.

Okay. And how do we think about the ramp-up to realizing the $5 million dollars of annual savings, is that - we be fully there in Q3, or is it take longer than that?

I guess, what I am going to say is the vast majority of the $5 million of savings would be completed by the end of the year.

Okay, okay.

So, it does not to say that they’re all going to happen in Q4, but as soon as we finalized our plans, we’ll start executing, but some of the - not everything will happen in kind of day one.

So if we think about, when you will be running at the equivalent of $5 million run rate of annual savings that should happen by Q4?

The vast majority of it would be by the end of Q4.

Right, okay. And then on the bad debt expense up year-over-year, is that something that you’re concerned about in terms of going forward, or how comfortable are you, I guess that, but that doesn’t continue to be a drag on earnings?

Well, I don’t think you can ever be totally comfortable that there aren’t additional bad debts. These were a couple of kind of larger accounts that we would have had.

They’re related to the energy in the mining sector. So we’ve, obviously, our review processes is heightened pretty significantly, but it is the business we’re in, we are in those sectors and from time-to-time we do have those.

But there’s nothing that we see right now that we’re concerned about of any significance at this point?

Great. Thanks very much.

Thanks. In the press release you talk about the segment decrease in earnings for mobile equipment was more than attributable to Western Canada operation.

So what was going on outside of Western Canada? And I think we’ve seen some margin pressure on new equipment sales from some of your peers, I’m just wondering how much of that was at work in terms of impacting the margins beyond just the mix in the parts and service?

I guess, the first part of question is on the margins. And there is some pressure on margins typically as dealers’ yards fill up with equipment and the market flattens, we all get a bit aggressive trying to keep our inventories in line, so we’ve had some pressure there.

Conversely, we’ve had some good programs from our suppliers that are recognizing that there’s some issues in Canada. So we had a bit of a - a bit of margin pressure on equipment, that’s for sure.

As far as the rest of Canada goes, the market in the Atlantic Canada and Québec was down about 10% by market for the equipment. So we felt a bit of pressure there, but nothing like what affected us in Western Canada were.

Okay. So Brian, well, I got the - if you think about the parts and servicing, your parts and service businesses were down equally service and parts.

Can you talk to us a little bit about what your supplier - what your customers are talking you about these days? We’re hearing lots of ask for concessions on parts and on labor, certainly, there’s more bodies around and people can self-serve a little bit on this front.

I’m just wondering how much of that is a factor for you beyond the clients were just simply were not running it, therefore, don’t bother coming?

Yes, if you want to get into our parts and service a little bit better or a little bit deeper, our Construction business and Material Handling business was relatively flat. Our Forestry business was actually up considerably in parts, not considerably, but up in parts and service.

So there are some brighter areas in the business. As we said in our release, most of the decline was in the mining business.

And I guess, maybe somewhere to our benefit isn’t, most of our oilfield clients and our mining clients are on contractual pricing. And a lot of the decline in margin comes where the discounts come in, as when you get to certain volume targets.

And today’s utilization you are just not going to get there. So we haven’t felt too much pressure from our margins from that standpoint just mostly that the work isn’t there, the equipment is not running.

But you are saying that if you don’t get involved in volume threshold, you have an ability to charge more?

No, we don’t charge more. There’s less discount.

Less, they were less effectively though.

No, discounting would be a better way to put it.

Okay.

Not all of our accounts, but the major ones that you negotiate that.

Okay. So if I look at the numbers then the margins in the mobile equipment and the parts and service like, I’m just trying to figure out, how much of this is just under absorbing cost, because activity is the lower, you are keeping people around versus how much of this is more systemic pressure on that business from customers coming back at all take the discount - the discounts don’t - aren’t there, which is a mitigating factor.

But outside of that, is there - are there pressures on this business on the labor side?

Well, when you consider the margin that’s driven from parts and service in, especially in the large sector of our business, we’ve taken cost out of the business, but you can’t take that much cost out of the business to offset that decline in your parts and service revenues, because of the margin that it generates.

Yes, no, fair enough. Okay.

And last question, Mark, just in terms of your strategic plan going forward, I think M&A was something you’ve talked about. I’m just wondering if you could tell us how you are thinking about M&A in the context of your balance sheet today?

We’re still pretty active in building a pipeline of ERS acquisitions, because they’re typically, as you know, generally so proprietorships or family-run businesses, so they take a little bit of time to work their way through the negotiation. So I think we’re still, we’re quite bullish on the pipeline that we’re building.

There are some opportunities in front of us prior to the end of this year we hope. And at this point in time, we’re not allowing the leverage of debt situation as slow as down.

So, we’ll make the right decisions at the time, but it hasn’t put the brakes on the program.

Okay. Thanks, Mark.

Hi, guys. Can you hear me?

Yes.

Yes, we can.

Yes. Most of my questions have been answered.

I suppose, maybe you can just speak a little bit more about the general market trends in Western Canada. I think, Brian, you said excavator sales were down 25%, is that - those are industry sales, is that right?

That’s correct.

Would that be roughly the same for most product classes in the region, would you say the market is down about 25%, 30% in the first quarter?

In our Material Handling business, I don’t think it’s about - it’s probably down around 10%. I got the articulated truck market this week, I think it was down in Western Canada 60%.

So it sort of depends where you are and what you’re doing, but there’s not a ton of good news in the markets.

So how does the - so the backlog that you reported held up reasonably well and you noted increases in mining. Can you - how does that washout?

We are able to add a couple of small shovels to our mining backlog in the quarter and our forestry backlog is actually up. There is an industry that’s actually doing quite well in Canada and forestry backlog is up right now.

And that was enough to offset the declines elsewhere?

That’s correct, yes.

And then just finally, this old issue of inventory that has been hanging around for number of years now, I mean, up $30 million, I think from the first quarter of last year and up from the fourth quarter, I mean, you guys have shed a little bit of light on your working capital issues. But how does this happen, like, how do you end up with that much inventory?

Were these orders that were placed by again August, September, before the market really the bottom fell out of the market and you sort of get stuck with this stuff, or with inventory is being an issue for as long as they have. How do you end up with that much extra inventory at the end of the quarter at this stage in the cycle?

I think you’re exactly right on some of the construction equipment inventory, still fairly busy in the United States and some of the inventory that we are receiving now was ordered 6 to 8, 10 months ago, and those orders aren’t cancelable with our supplier. We also had some initiatives in our business, where we’re trying to gain some market share that we invested in - strategically in some inventories to help our business.

So - but combination of market is slowing. The other issue and it’s not really an issue, but in some of our businesses when time slowdown, the rental purchase game starts to become a lot more prevalent and that keeps inventory in our books a bit longer than maybe normally in a more robust cycle.

Okay, great. Thank you.

Okay. Well, thank you very much for joining us today.

We appreciate your time and we’ll speak again at the end of the second quarter.