Wajax Corporation

Mark Foote - President, CEO John Hamilton - SVP, CFO Michael Gross - SVP, Power Systems

Benoit Poirier - Desjardins Michael Tupholme - TD Securities Bert Powell - BMO Capital Markets Ben Cherniavsky - Raymond James

Thank you. And thanks for joining us this afternoon.

Just a note Brian Dyck, Senior Vice President of Equipment business was unable to join us today. But, we will handle questions for him in his absence.

I will make some opening remarks before turning the call over to John to talk about the detailed results of the second quarter. As expected weakness in the Western Canada economy resulted in lower second quarter revenue and earnings.

While all three segments were impacted by the Western Canada slowdown. The effect was more significant in the Equipment and Power Systems businesses.

Despite the headwinds in Western Canada, the Industrial Components segment reported an increase in segment earnings as a result of the cost reductions implemented last year and improved bearing and power transmission part sales. In addition, revenue in Central and Eastern Canada improved in all three businesses.

As stated last quarter, our focus in 2015 continues to be centered on three objectives, cost management, managing our asset base and debt level, and finally, executing a prudent investment plan to support our four points of growth strategy. With respect to cost management, reductions in consolidated SG&A of $2.9 million in the quarter and volume related service personnel staffing adjustments partially mitigated the earnings impact at lower second quarter volumes.

Our 2014 restructuring efforts in Industrial Components continue to result in a significant improvement in earnings based on both cost reductions and improved selling effectiveness. In the Equipment segment, we have reduced our Western Canada workforce by more than 10% in response to soft market conditions and while similar reductions have been implemented in Power Systems in the second quarter we reported a $2.1 million restructuring provision based on plans to further reduce the cost in this business.

The restructuring combined with the segments volume related cost reductions are anticipated to result in annualized savings of approximately $7.4 million. Our debt was reduced by $84.7 million in the quarter, $71.4 million of this was attributable to the application of the cash proceeds from the common share offering we completed in June providing us with additional financial flexibility to execute our strategy.

The remainder was attributable to cash generated from operating activities including a reduction in working capital as we begin to reduce assets employed in the business in response to market conditions in Western Canada. In addition, subsequent to the second quarter, we monetized the mining trucks we had in inventory which is expected to result in a further reduction in working capital in the third quarter.

We continue to execute our four points of growth strategy with controlled pace in the second quarter. We are continuing to move forward in all components of our strategy including activities related to our core capabilities, organic growth initiatives, our ERS acquisitions and systems implementation.

With commodity markets in the Western Canada economy anticipated to be soft before the foreseeable future, we continue to expect that 2015 will be a challenging year for us. Consequently, we continue to expect that full year earnings will be less than the previous year.

We are pleased with the performance of our team and remain very confident that our 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. Second quarter 2015 consolidated revenue was $340.7 million that was down 9% from last year.

And revenue declined in all three segments and it was adversely affected by reduced activity in the mining and oil and gas and oil sand sectors. Consolidated net earnings of $9 million or $0.52 per share, were down from the $12.3 million or $0.73 per share recorded last year.

Segment earnings included a $2.1 million restructuring charge in the Power Systems segment. As well as the June 12, equity offering resulted in a $0.02 per share earnings dilution compared to last year.

Consolidated backlog of $171.2 million at the end of June, decreased slightly compared to March. And turning to the individual segments and starting with Equipment, total revenue of $166.9 million in the quarter was down 11% compared to last year.

Equipment sales decreased $12.1 million, mainly as a result of reduced construction equipment sales in Western Canada partially offset by an increase in forestry equipment volumes. Parts and service volumes were down $9.2 million to $60.7 million compared to last year on lower Western Canada mining and construction sector volumes.

Quarterly segment earnings of $11.7 million, declined $1.9 million compared to last year. The negative effect of lower volumes were partially offset by higher gross margins and $1 million reduction in selling and administrative costs.

Turning to Power Systems, revenue decreased 10% to $73.9 million, equipment revenue decreased $334 million on lower off-highway sales to oil and gas customers. Parts and service sales decreased $4.8 million attributable to lower sales to customers in Western Canada.

Segment earnings decreased $3.1 million compared to the previous year. $2.1 million of this decrease relates to the restructuring charge taken into the quarter with the rest mainly attributable to lower volumes.

And in Industrial Components, the revenue of $100.8 million was down 4% compared to $105.2 million posted last year. A 2% increase in bearing and power transmission parts revenue was offset by a 12% decline in fluid power and process equipment sales.

The reduced sales were mainly attributable to lower customer volumes in the oil and gas and oil sands markets in Western Canada. However, earnings increased 17% to $5.4 million.

Lower sales were more than offset by $1.7 million decrease in selling and administrative costs. We finished the quarter with funded net debt of $167.3 million that was down $84.7 million compared to March 31 as Mark had mentioned.

The decrease was attributable to the net cash proceeds from the equity offering at $71.4 million and $15.5 million generated from operating activities less dividend at $1.4 million. Today, the Corporation declared a $0.25 per share dividends for the third quarter of 2015 payable on October 2, 2015.

So operator, I will now open the call to questions.

Hi, good afternoon gentlemen. Just to come back on the mobile equipment margins, obviously a very strong performance on a sequential basis, was there anything none sustainable in that quarter and should we expect kind of the similar levels in the second half?

There wasn't anything of a kind of an unusual nature with the volumes. That said Benoit we had a pretty good or a better mix between parts and service in our equipment volume as well some of our activities to try to reduce costs and improve our service efficiency were paying off.

As we look forward to the rest of the year, we would expect the EBIT margin in Q3 to be quite good because we will be having the gain on the monetization of the trucks. That being said, we are kind of not really in a position to give specific guidance on where we think the EBIT margin will be for the second half of the year.

Yes. Okay.

Got it. And just with respect to the monetization of the trucks what will be the impact on the inventory in Q3 John?

The monetization of the trucks would generate in excess of $20 million as a reduction of working capital.

Okay. Specifically for Q3 and what is the overall magnitude we should expect in terms of inventory reduction for the balance of 2015?

It really depends how we – the only inventory position that we remain, I will say concerned about, but I don't necessarily mean concerned which would be in excess of what we would normally have would be in the area of mining equipment and some engines that for the oil field in our Power Systems business. So any additional reductions would depend on how we make out selling those products into the market which is as we admit is relatively soft.

So it's kind of long answer to say it's difficult for me to tell.

Okay. And Power Systems the 4.3% margins you also announced restructuring, what type of margins would you like to sustain with once you include the restructuring for Power Systems?

Sorry. Can you repeat that, Benoit?

With respect to the recent restructuring you have announced in Power Systems, I understand it will provide a boost. But, what type of margins should we try to build on once you include the restructuring?

Well, again, the restructuring charge that we take – we have indicated that the total savings would be over $7 million in total. But, a lot of that is going to be in relationship to some of the reductions that we have taken as a result of the reduced volume and a lot of that will be in the cost of goods line, in the service operations.

So some of it is, is just bringing that business back in line of which we had a portion of that – small portion of that we would have enjoyed in Q2. The remainder of it or smaller portion of it rather would be in the SG&A line which you should see kind of fall into the bottom line.

So again, a long story to say that. We have taken cost out of the business but the actually EBIT margin is certainly going to depend on what we can do in the top line and a lot of that has to do with how successful we are going to be in the EPG business.

So we are – over time obviously, we are looking to improve the margins, but I'm not going to – here to be predicting that we are going to be seeing improvements in margins. It really depends on how we make out the stuff in markets.

Okay. And lastly, with respect to the investor presentation you made on in March with 4 points of growth, have you started to see the benefits yet in terms of the new plan you put our?

It's Mark speaking, Benoit. I don't – we have just gotten started.

So I think that there is a fair amount of organizational energy around some of the improvements particularly as it relates to the sales force. I think a lot of the programs you had in our repair and maintenance operations have served to help us preserve some profitability particularly in equipment under some tough market conditions and we are active with respect to the ERS acquisition building a pipeline and looking at potential targets.

But, I would say that as far as defining it back to the financial results it would be a bit early for that right now.

Okay. So are you looking at south of the border in terms of acquisition, Mark?

No.

No. Okay.

Okay. Perfect.

Sorry. Okay.

Thanks for the time.

Thanks. In terms of the cost savings within the Power Systems segment the $4.2 million you expect to get this year, did I understand correctly John, some of that actually came in the second quarter?

That's correct.

And you maybe try to break it down a little bit for me just in terms of understanding what would have -- exact numbers – that what would have fall in Q2 and then, is Q3 and Q4, the impact fairly even or does it ramp more as you go into the latter part of the year.

You could use roughly $1 million for Q2 and we would expect to see a ramping up as the quarters go on.

Okay. Great.

Thank you. And then not split as you mention some of that's in cost of goods sold and some of that's in SG&A?

Correct.

Okay. Great.

Are you expecting any additional restructuring charges in any segments in Q3?

No.

Okay. There was a comment about the parts and service gross margins in the equipment segments being up slightly year-over-year, just wondering if you can help me understand what's driving that that I've would thought perhaps in this more competitive environment in co-market conditions if anything we would have seen maybe some pressure relative to the prior year there?

The majority that would have to do with some of the efficiencies that we are trying to bring out of our particular to our service operation. So specifically in the equipment business in Alberta.

They consolidated some of their service operation given some of the downturn in the market which is gotten us some better efficiency, so even though the business is down the return we are getting on the service business and the equipment business has been better because of the work that they have done.

Okay. Great.

I will get back in the queue. Thank you.

Thanks. So it's been number of quarters now where the parts and the services revenues went down in the mobile equipment business, I think some of that attributable to part equipment that's been in there for some time.

Mark is there anything that's starting to move that is going to take that burst of parts and services to get back up and running or is it still stuff that's sitting idle?

It would be – the assumption we are making right now Bert, we certainly didn't see any improvement in equipment utilization in the second quarter. There are couple of mining jobs at west that helped us in the part side that we are pretty positive.

But as far as the partly portion of what we are dealing with right now, we are assuming not to be the case for the balance of the year, it may not be but our information and talking to our customers is that what's part today is going to stay that way at least for the balance of this year?

Okay. That's helpful.

And just when I think about this year's Q3 compared to last year, I don't if I have this right, so I apologize if I don't. But, as I recall it was fairly significant shovel say last year in Q3 for new equipment sales.

Have I got that right something to the tune of $15 million?

That was this – yes, I think it was. Sorry, Bert, I don't have that answer.

We don't have that in front of us, we will – as we go through the call, we will have a look.

If that answer to that was yes, what was your actual question, Bert, was there something additional to that?

Yes. No, no.

What I was trying to – I just try to get the gauge on that in terms of what – how that's going to impact obviously make this much tougher comp relative to Q3 and then my assumption would be that shovel then would be coming at lower margin which would have impacted Q3 last year, which would make Q3 this year with the mix maybe a better equipment margin excluding the gain you are going to book in the quarter sort of trying to get at that Mark.

We will get back to you on that Bert.

Okay. And then just in terms of what EPG that seem to be at least one bright spot for power in the quarter, can you just give us a bit of sense of what's going on there?

Just hand it to Michael.

You could use it, for us definitely a growth business and it's a good business like all the other businesses currently whatever the competitive pressure in there and it's tough, but that's for us definitely the growth business.

Okay. How much would that have contributed to power capital sales in the quarter?

It's a good portion of the equipment sales would be the EPG but we are not going to give a specific number, but a good portion to the equipment sale would be EPG.

Okay. And then just lastly John, it looks like you changed the segment mix under industrial components the service seems to be now corporately different, what happened?

Yes. We just refined some other reporting with regard to service.

We have now completely – the old service reporting the way industrial components looked at it. There was a portion of parts included in the service because of the way they looked at it.

But, we have had them split that out now. So that's just pure service in there now.

Okay. Great.

Okay. Thank you.

Hi, guys.

Hi, Ben.

I don't know I maybe splitting hairs on nomenclature, but you guys are referring to the mining truck sales as a gain, I mean, wasn't this just an inventory, it's going to flow through revenue cost of goods sold et cetera?

No. It actually won't flow through your sales.

And why is that?

Because it's not a sale and I guess, we are – just not a lot we can -- we are at liberty to talk about with regard to that transaction. But, we have monetized them, it's not going to the sale and we are going to report a gain.

Okay. But, you can't tell us where they are going?

No. But, they won't be in our marketplace.

Sending it back to the manufacturer?

We are not really at liberty to talk anymore detail and we just did them.

It's a pretty material transaction though. Will you elaborate on it in the next quarter after it's completed?

No. It's left our balance sheet.

It's relieved our working capital and we will report a gain as a result of that. But, that's about as much as we are going to say.

All right. Rental, your CapEx is up a little bit, is there any particular reason for that what could we assume for the year in the rental markets unusually strong or you just sort of trying to build a footprint or what would explain an increase in the asset base there at this point?

I don't think I would read anything unusual into that. The rental purchases can be fairly lumpy throughout the year and depending on the needs and particular customer needs, we will go ahead buy some rental fleet.

So there would have been more in the third quarter. Our expectation is that those needs would be less in the second half of the year given the market conditions that we are in now.

Okay. Thanks guys.

Okay. Well, I would like to say thank you very much for your time this afternoon, appreciate that.

And we look forward to talking to you at the end of the third quarter.