Wajax Corporation

Mark Foote - President & CEO John Hamilton - SVP, Finance & CFO Darren Yaworsky - CFO

Michael Doumet - Scotia Bank Sara O'Brien - RBC Capital Markets Michael Tupholme - TD Securities

Thank you, operator. I'll make some introductory calls before I turn the call over to John to discuss the details of the fourth quarter.

Despite continuing challenging market conditions Wajax delivered improved results in the fourth quarter on an adjusted net earnings basis and excluding the impact of insurance recoveries and environmental provision. Fourth quarter results increased over the previous years as higher gross margins and lower selling and administrative costs were more than made up for the reduction of revenue.

We are pleased with the improved performance in our power systems business where our cost reduction and margin proven initiatives significantly benefit our fourth quarter results. The reorganization that we announced in March of 2016 is now complete and we will begin exporting externally under our new functional structure for 2017.

Through much hard work by the entire team our reorganization efforts are expected to improve the execution of our strategy and additionally we have realized approximately $8.6 million in savings in 2016 and expect to realize approximately $17 million of full annualized savings in 2017. Our quarterly earnings combine with $14.2 million of cash generated from reduced operating working capital resulted in a $21.9 million reduction in funding net debt in the quarter.

As a result our year-end leverage ratio was 2.1 times just slightly above our target range of 1.5 to 2 times. Looking forward to 2017 although there has been some announced increases in planned investments by Canadian Oil and Gas companies, we expect most major resource market will remain under continuing spending and result in competitive pressure and our focus in 2017 will be to generate revenue sufficient to offset the four large mining shell deliveries made in 2016 which are not expected to be repeated effectively manage our margins and ensure we deliver the full operational improvements and annualized savings expected from our reorganization.

Assuming the achievement of these objectives we anticipate net earnings in 2017 will increase compared to 2016 adjusted net earnings. John?

Thanks Mark. Looking at the numbers and consolidated revenue for the quarter of $313.7 million was down 3% from last year.

Equipment's segment revenue decline 5% on lower western Canada construction material handling and foresee volumes. The power system and industrial components segment, each recorded 2% revenue declines on lower power generation and mining sector volumes respectively.

Consolidated earnings for the fourth quarter were $8.9 million or $0.45 per share compared to an adjusted net earnings of $4 million or $0.20 a share in 2015. Adjusted net earnings for the fourth quarter 2015 include a $37.3 million after tax asset impairment charge.

It should be noted that fourth quarter 2016 net earnings include approximately $2.6 million or $0.10 a share of net proceeds to be received from the settlement to be received from the Fort McMurray fire insurance claim. It also included an environmental remediation expense of a $1 million or roughly $0.04 a share.

Consolidated backlog of $116.7 million decreased $25.4 million compared to September mainly as a result of delivery of large mining shovel in the equipment segment and lower power generation orders in power systems. Turning to the individual segments and starting with the equipment, total revenue of $152.3 million in the quarter was down 5% compared to last year.

Equipment sales decreased $7.2 million, declines in construction, forestry and material handling sales were somewhat offset by increases in mining, craning and utility equipment sales. The mining equipment increase included the delivery of large mining shovel into the oil sands.

Partner service, volumes were down slightly to $58.8 million and quarterly segment earnings of $11.7 million were $2.3 million ahead of last year as a result of higher equipment margins, lower selling administrative costs of $1.3 million and a $1 million of insurance recoveries. Turning to power systems, revenue decreased 2% to $69.6 million.

The Equipment revenue decreased $1.8 million on highway and power generation sales and parts and service sales decreased $3 million on lower power generation sales in all regions. Segment earnings before impairment before goodwill and intangible assets increase $6.4 million to $6.5 million.

The earnings effect of lower revenue was more than offset by higher gross profit margins $1.3 million of lower selling and administrative costs and $1.1 million of insurance recoveries. And lastly turning to Industrial Components, revenue of $92.8 million was down 2% compared to $94.3 million last year.

Bearings and power transmission parts revenue increased $800,000 compared to last year, and fluid power and process equipment sales decreased $2.3 million due to reduced mining and oil sands sector sales. Segment earnings before impairment, goodwill and intangible assets decreased $600,000 to $1.3 million in 2016.

Lower volume, $500,000 higher inventory obsolescence charge and $1 million of environmental provisions were partially offset by $500,000 insurance recoveries and other expense reductions. We finished the quarter with funded net debt of $126 million that was down $29 million compared to September.

And today, the corporation declared $0.25 per share dividend in the first quarter of 2017, payable on April 4, 2017. So, Kelly, I'll now open up the call to questions.

Hi, good morning guys. First off, good quarter, my first question is on power systems.

Now I have my head wrapped around the lower SG&A and the insurance recoveries but there is still pretty significant improvement in division's gross margins. I guess I think he was sort of a low single digit EBIT business, exo-recovery so does this quarter change or does this change your thinking?

Hi Michael, it's Mark. I think if you net the kind of unusual in the fourth quarter, the power systems EBIT percentages would have been closer to 8%, 7.8% or so.

That would probably be high to put into your models for next year. There are a couple of pretty positive circumstances, mostly on parts margin in the fourth quarter.

We made some excellent improvement in the service margins which we would fully expect to continue but the parts margin going forward might not be quite strong as they were in fourth quarter. So the 7.8% from a looking forward standpoint would probably be a bit high.

It's probably more appropriate to think in the 6% to 7% range.

Okay. Well that's pretty good nonetheless so well done there.

Maybe just turning over to the industrial components, maybe two part question, could you comment on the SG&A increase in the quarter and second can you comment on the inventory obsolescence cost and what exactly is driving the increased cost there?

I guess first of all in terms of the SG&A there, the big driver would be the provision we took on environmental, we took a $1 million provision. That was in SG&A in industrial components.

With regards to obsolescence we took some additional obsolescence on certain pieces of equipment that was in our industrial component business and so the variance versus last year was about half a million dollars so that was a charge that was in March in the fourth quarter.

And going forward, is that into 2017 or is there a potential of the obsolescence cost?

No we wouldn't expect the obsolescence on a year-over-year variance to show that kind of negative variance.

Okay perfect, I guess that's my due and just John it's been shorter from even others but absolutely pleasure working with you so enjoy well-earned retirement.

Thanks very much Michael

Hi, can you comment on the industrial components business, even if we axe out some of those unusual, the margin is pretty low. Just what opportunities there are to improve going forward and what the competitive landscape looks like right now?

Sara its Mark. There's probably two things to think about from a margin standpoint.

The extent to which the Western Canada starts to see more activity is typically accretive to the margin there simply because of the product mix that goes into the oil and gas segment and I think the other thing is the potentially positive in the future force there is a service business grows organically or ERS business. One of the challenges in that business today is obviously there's a number of supply contracts, a number of major customers in particular in their bearing and power transmission side which you have to be awfully sharp to keep in their business so that will be kind of negative to the margin but I would suspect that, I mean the margin was down a little bit on a year-over-year basis on a gross margin level.

Expect we can do a bit better than that. But it's a very competitive business and as I said there's a couple of things that could draw it up but that's kind of a day to day battle in the gross margin side industrial components.

So on the gross margin I get it like the margin pressure is there but what about on the volume side? Shouldn't there be some operating leverages, you know drilling gets back into more activity this year?

Yes, I mean they sent to which the revenue goes up, that changes the story completely but if you just looking at the gross margins, those are some of the factors but we would be hopeful that if things pick up in Western Canada, business has done real well in the East and it's doing better in Ontario but it is small market for us really. The recovery in the West is a pretty big factor in that business right now.

Are you seeing signs of improved volume?

Yes, I think it's probably safe to say there is a bit of activity there. I wouldn't say there is something that the fundamental change in trend, certainly small signs in improvement that have shown up in the first couple of months in this year.

Okay and wondered if you could comment just on the new reporting structure. What should we expect in terms of divisional disclosure and how shall we prepare for that?

Is it effective Q1?

Yes we haven't really completed the thinking there. I can tell you what you won't see.

You won't see us report on the segment basis anymore because reading that more to finish off the year that we don't run the business anymore and we don't allocate costs that way anymore so we are still working our way through. Probably the simplest thing to do would be to think about the business on a total basis and realize you probably have to use your existing models and understanding the segments to try and come up with the right forecasts for yourselves but you really shouldn't, we will have to start thinking about the businesses in total as we get into Q1 because we won't be reporting the same segments anymore.

Okay. And then maybe lastly, just on the shovels, can you remind us what the magnitude of the sales dollars was in 2016 for the four shovel deliver?

And maybe which quarters they feel into?

It was $69 million and I think it was spread one per quarter. We'll check on that but I'm pretty sure, it was one in the first, one in the second, perhaps it was [indiscernible].

Can we get back to you on that? I'm pretty sure it was one of the third one.

Okay. And John, happy retirement.

Hi, I just wanted to ask about forestry component and I note that you said that the tiger cap line was doing better in Central Canada. Can you speak to that like what's going on there and if that market share improvement?

We don't specifically release market share on a regional basis. Tiger cap is a superb product line and I think our guys are really -- they really got fun time selling time so that really is a market leading product but we don't really comment on individual regional shares.

Okay, fair enough. That's it for me.

Thank you. Good afternoon.

Mark, you increased the annualized level of savings you expect to realize from $15 million to $17 million; I realize it's not a huge increase but that -- the additional $2 million that you expect to realize, what trigger that or what caused that? And is it in any particular -- one particular area?

I don't know the exact breakdown of the $2 million by business because I think by the time we saved, the business does really exist in the same state anymore but if you're thinking about how to forecast, they are probably spreading it, 50% in power systems and 25% in the other two businesses and probably a decent walking around number. The result have gone from '15 to '17 really was -- there is two more people like the organization and is originally planned, so that's what the savings number would work upon [ph].

Okay. And then as we think about your -- so your longer term growth strategy; I noticed you're still talking about acquisitions as being a part of that, you did Wilson Machine acquisition last year; can you talk a little bit about whether you'd expect it to be more active in terms of acquisitions in the upcoming year or how we should think about that as a potential source of growth?

The easiest way to think about it would be that it's a very important source of growth for our company. We're committed to the ERS strategy, that's the kind of the tuck under approach, we've talked about previously.

And as you'll see from some new investor presentation that will come out, we've spend a considerable amount of time in 2016 -- and really looking carefully at the industrial services market in Canada and what are the types of businesses we would like to be part of. So surprising to say that acquisitions are very important part of our company's growth; we plan to continue with the tuck under strategy that we have and there is some possibility we'll think a little bit differently and incrementally from that; but not too much to say about that right now but we're deeply, if not more committed the strategy, it's probably best to think about the fact that in 2016 there were so many things happening in our business that we choose to really focus on integrating Wilson and not taking on some additional work while we focused on the reorganization.

And were you able to in terms of sort of forming the pipeline of opportunities that you might consider from an acquisition perspective in terms of the tuck under, were you able to make any progress on that front or can you may be at least comment on what the landscape of potential opportunities looks like today?

The pipeline remains very strong Michael, so it's really no different than it was when we originally started. But we've got -- I'd say there is -- at any one time at Wajax there is going to be between five and eight target companies that we would be in contact with and discussions with.

And that's really no different today. We just choose not to pull the trigger on anything significant while we were doing some of the things we had to get done in last year.

Okay, makes sense. And then can you also just talk about whether or not you're looking at any new products to expand the company's offering?

Yes, there are a few additional -- some mainline construction stuff that we'll be announcing shortly we hope. And there are number of other -- I would say important of the future types of product lines but they will be relatively small shares in today's world.

Most obvious example of that would be -- we're a diesel engine and natural gas engine business but a lot of the vehicles and applications that we participate in today whether our customers are starting to switch to different kinds of power technologies, be it electric or hydrogen. So we're pretty intent on making sure that we've got a good angle on where the future of that engine business is going to go.

But as far as kind of mainline businesses that represent some significant opportunities over the short-term that really is focused on one particular construction line that we hope to make sure [ph].

Okay. And then lastly, would you expect -- is there a possibility of any additional insurance recoveries or is -- have you recovered everything you would expect to at this point?

That's the extent of it in terms of what we've had in the fourth quarter.

Okay, well, that's great, thank you. And John, congratulations and all the best for your retirement.

Thanks very much Mike.

Just before there is another question, if Sara is still listening, there were two shovels in Q2, one in Q3 and one in Q4.

Okay. Well, we're going to give Darren a chance to say hello in just a second but I wanted to just pass on behalf of our entire team, I think we calculated, this was your 72nd earnings release call.

So John's real tired you guys, so I guess he is going to leave now. But the whole management team will obviously get a chance to spend a bit more time with John than the folks on the phone would, but on behalf of the board, the management team and everyone in our company, we really wish John a very healthy and happy retirement.

He has earned it more than -- certainly more than most and we're going to ask him to close the call. But before I do that -- Darren, if you want to just say hello and --

I, unlike John, have a lot more energy for you guys so I look forward to working for you in the months and years to come. Thank you.

Okay. I do have energy for you guys, so don't believe what Mark is saying.

I guess just in closing, I just wanted to say a couple of things. One, it's really been an honor for me to be CFO of this company for 18 years.

I've enjoyed all of it and particularly the last five years with Mark, it's been great and I really think that the company has got nothing but upside given the management team that we've got in place with Darren coming onboard. I really look forward to seeing how the future unfolds and I'm really excited about it.

Lastly, I just want to say thank you to the analyst community. I've dealt with you folks over the last 18 years.

Some of you guys and gals have been more recent addition to the overall group but you've been the real strong supporter of Wajax and you dealt with me in a very professional and courteous manner and I really appreciate it and I will miss you guys. So I've enjoyed my relationship with you.

So -- anyway thanks for those good wishes and I'm done.