Wajax Corporation

Good afternoon, everyone and thank you for participating in our fourth quarter results call. This afternoon we will be following a webcast includes a summary presentation of Wajax's Q4 2019 financial results.

The presentation can be found on our Web site under Investor Relations, Events & Presentations. To begin, I would like to draw your attention to our cautionary statement regarding forward-looking information on slide two.

Additionally, non-GAAP and additional GAAP measures are summarized on slides 14 through 21 for your reference. Please turn to slide three, and at this point I'll turn the call over to Mark.

Thanks, Trevor. And thanks for joining us today.

I'll provide details on the fourth quarter before turning the call over to Steve for commentary on backlog, inventory in the balance sheet. So looking at the slide, revenue of $403.9 million increased 4% in the fourth quarter Trend in the fourth quarter was consistent with prior periods in 2019 when improved volumes in Eastern Canada more than offset weaker results in the West and Central.

Provide additional comments on regional performance in just a moment. EBIT improve $9.8 million in the fourth quarter of $21.4 million.

Excluding the effect of restructuring and other related costs the 4% revenue increase and a 40 basis point improvement in gross profit rate contributed $4.1 million of EBITDA gain with a balance resulting from $5.2 million in SG&A reduction which included property gain on sale of $2.3 million. Adjusted basic EPS of $0.51 in the fourth quarter was up 21% to last year.

We'll have further comments on EPS in just a second. And finally, safety performance continues to be very strong in the fourth quarter based on a full year reduction of 8% and injuries and TRIF rate of 0.93.

2019 was Wajax's safest year on record and improvement over the excellent performance of last year. For our team members listening on the call, we want to thank you again for your daily dedication to workplace safety and working hard to ensure that everyone goes home safe at the end of every shift.

Turning to Slide 4, Central Canada sales of $82 million declined 6% in the fourth quarter and full year sales of $311 million declined 4%. The sales pressure on the Ontario market continued to be in the construction category, excluding the loss of a road building line that was previously disclosed.

Sales on a full year basis we're approximately 2% in Ontario. The market remains a significant focus for Wajax and we continue to focus our efforts on growing the business to volumes more comparable to our Eastern and Western Canada regions.

Eastern Canada sales of $157 million increase 16% in the fourth quarter and full year sales of $618 million increase 23%. Sales momentum remains strong in many categories in the fourth quarter helping us deliver growth despite bumping over the acquisition of Delom in the fourth quarter of last year.

The full year increase of $114 million in Eastern Canada revenue was comprised of approximately 50% from increased direct sales and 50% from very strong performance in categories such as material handling, power generation, forestry, industrial parts and construction. On a two year basis, Eastern Canada revenue has now grown by approximately 40%.

Western Canada sales of $164 million declined 1% in the fourth quarter, and full year sales of $624 million decline 5%. Fourth quarter sales in the West were assisted by a large shovel sale, material handling and ERS activity.

But the gains were offset by weaknesses in other categories. On a full year basis increases in product support any ERS were more than offset by week equipment markets and industrial activity.

As an indicator of market conditions, the construction class excavator market decline 23% for the full year and 15% in the fourth quarter in the West. While we recognize the conditions in the West may remain challenging.

We're pleased with the increasing install base of mining shovels including two additional shovels which are scheduled for delivery in the second half of 2020. Turning to Slide 5.

Equipment sales of $156.5 million we're up 12.5% in the fourth quarter driven primarily by increased material handling, mining and forestry sales, offset by weaker construction sale. Lower equipment sales of $523.9 million we're down 3.5% due primarily to construction and secondarily to mining, partially offsetting these areas Wajax delivered a very strong year in material handling and forestry equipment sales.

Industrial parts sales of $88.5 million were down 2.2% in the fourth quarter, and in the quarter and on a full year basis improvements in Eastern Canada served offset weak results in the west. Full year industrial parts sales of $366.6 million we're up 1.4%.

Product support sales of $110.2 million we're down 3.5% in the fourth quarter due to weak activity in Western Canada. That was not fully offset by stronger results in the east.

The trend in Western Canada product support volumes had improved a priority levels by the end of the quarter. Full year product support sales a $476.1 million increase 4.1% compared to prior year based on increases in Western and Eastern Canada.

Turning to Slide 6. We have a few brief comments on overall category level performance based on the growth classifications we've used in our strategic plan, which describe the majority of our growth coming from our targeted growth categories.

So our targeted growth categories those of construction material handling and ERS grew 9% on a consolidated basis for the full year inconsistent with our plan delivered most of our growth in 2019 despite weaknesses in construction. We expect positive results in 2020 in both material handling and ERS were the recent acquisition and NorthPoint will add to our scale.

Of course, strength categories of industrial parts forestry on highway and power and marine grew 4% on a consolidated basis and contributed meaningfully to our results and including a very strong year in forestry. And finally are cyclical and major project categories mining engines and transmissions and crane utility grew 1% on a consolidated basis.

We expect improve results in mining equipment sales in 2020, with three large shovel delivers scheduled in the second half of the year, that being two that I mentioned previously in the West, and one large shovel going to Eastern Canada. Turn to Slide 7, adjusted net earnings of $10.1 million or $0.51 a share increased 21% in the fourth quarter, and we're $2.10 up 4% for the full year.

Note that the adjusted full year EPS result includes the overall negative effect of IFRS 16, which would be worth approximately $0.07 share. EPS growth was negatively impacted by higher finance costs which excluding the effect of IFRS 16 increased approximately $5.9 million on a pretax basis due to higher debt levels which resulted primarily from increased work and capital due to high levels of construction inventory, and due to the acquisition of Delom late in 2018.

Let [ph] further comments on the balance sheet as we progress through the call. And if you'll turn to Slide 8, I'll turn the call over to Stu.

Thanks, Mark. I'm on Slide 8.

Our Q4 backlog decreased $69.9 million or 24% sequentially from the previous quarter and increased $11.2 million or 5% on a year over year basis. The sequential decrease relates to lower mining, forestry, power generation and material handling orders.

The year over year increase relates to higher mining orders offset partially by lower power generation material handling and construction orders. The sequential drop in backlog was impacted by seasonality and further reduced by the removal of a large mining shovel that was delivered at the end of the fourth quarter.

Please turn to Slide 9 for an update on our current inventory levels. Inventory including consignment decrease $37.2 million compared to Q3 2019.

Due to lower equipment, and parts inventory and most categories, partially offset by higher mining equipment and parts inventory. Consignment inventory decreased $17 million from the previous quarter.

Inventory including consignment increased $43.2 million compared to Q4 2018 as a result of higher construction equipment and mining equipment and parts inventory. Consignment inventory decreased $5.7 million compared to Q4 2018.

As stated previously, we're adjusting our incoming inventory orders based on market conditions and are focused on reducing equipment levels. We continue to expect that as inventory levels decrease during 2020 as anticipated, there will be a positive net impact on working capital cash flow and leverage.

Please turn to Slide 10, where I will provide an update on financial position. Our Q4 leverage ratio decreased compared to Q3 from 2.81 times to 2.6 times as a function of both lower debt levels and higher trailing 12 month pro forma adjusted EBITDA.

We continue to focus on working capital efficiency, which is a key component in managing our overall average targets. And we expect the ratio to improve in 2020.

All actions into lowering working capital are expected to increase run up over time, which will have the additional benefit of lowering our working capital to sales ratio and increasing inventory turns. As previously disclosed we continue to evaluate ways to unlock cash from the business and as such have completed a market value assessment of our own real estate holdings.

In the fourth quarter we entered into two sale and leaseback transactions for two of our wholly owned properties for proceeds net of transaction costs of $9.4 million. Further opportunities to sell redundant real estate as well as sale and leaseback opportunities have been identified.

Proceeds from any real estate sales will be used primarily for debt repayment. The earnings impact from any sale and leaseback transactions is not expected to be material, as any gains are expected to be approximately offset by the incremental lease costs over the term of the lease.

Finally, the board has approved our fourth quarter dividend of $0.25 per share payable on April 2 2020 for the shareholders of record on March 16 2020. We remain confident in the sustainability of our dividend at least this level across the business cycle.

Please turn to Slide 11. And at this point, I'll hand the call back to Mark to provide a brief update on our 2020 financial outlook and concluding remarks.

Thanks, Stuart. Before preceding the outlook comments, we've revised the description of our leverage language.

Our target range for leverage and a summary of which is shown on Slide 11. And I'll just go through the basic points for you.

Our normal course target range for total average remains 1.5 to 2 times. Consistent with a prior description we may operate outside of that range during changes in economic cycles, such as what we are currently experiencing primarily in Western Canada.

And the revised description clarifies that we may also operate outside of that range due to the effect of acquisitions, which has explained or an important aspect of our strategy, particularly an engineered repair services. Very important that despite the changes in the language, that the corporate overall risk tolerance is unchanged.

We expect to operate the base business within the target range considering the effect of where we are in cycle and for acquisitions we will assess the effect on total average considering the targets fit to our strategy and it's expected future cash flows. Turning to the next page for the outlook.

This is our first discussion with you for this year. So we'll spend just a minute on clarify just making sure that we've properly described our outlook for 2020.

So we expect that the more challenging market conditions that are emerged in 2019 will continue in 2020, resulting in pressure on capital equipment demand, company utilization rates, however, are expected to be generally stable on a full year basis, which will support parts and service volumes. And based on manufacturer discussions and industry information, we do expect market conditions to improve later in 2020.

Our objective for the year is to manage our business and capital conservatively until trends in the market improve. Market oriented pressure on revenue is expected to be at least partially offset by higher volumes and engineered repair services and industrial parts and expected mining deliveries in the second half of 2020.

Wajax has also identified opportunities to improve gross margin, drive additional cost, productivity, and lower finance costs based on reductions in inventory. We welcome our new friends from NorthPoint, whose approximately $50 million in annual revenue is expected to add to our scale and engineer repair services in 2020.

We plan to move forward with the implementation of our new ERP system beginning in the second quarter of 2020. Implementation is expected to occur over an 18 to 24 month timeframe.

In order to minimize the risks associated with the change. Our branch network optimization program will also continue including the previously disclosed the efforts to monetize selected real estate assets through their sale and leaseback or site closure due to the co-location of branches.

Proceeds as Stu mentioned from the real estate programs are expected to be applied against our credit facility. And Wajax will continue to strive for an appropriate balance between pace of change and market conditions while continuing to track toward our strategic plan goals and targets.

The strength of our strategy continues to be demonstrating the ability to consistently improve our performance and both high and low points in the business. Before turning over to questions.

I want to welcome Steve to our quarterly calls; Steve joined Wajax in 2014 as our President of what were then industrial components and has been a very important contributor to our strategy and management team from day one. When we eliminated the previous segments and reorganize the company 2016 Steve became our Senior Vice President of Business Development.

Managing overall sales, teams, marketing, our industrial and ERS teams, and effective the fourth quarter of last year Steve became our Chief Operating Officer which added product support and branch operations to his responsibilities. So Steve will see will be available today and in future calls to help you with any questions you have.

I'll turn it back to the operator.

Hey, good afternoon guys. So maybe I'll start with a quick question on gross margins.

That was up modestly but a relatively easy comp last year. So just on a sequential basis, maybe we should get into the decline there.

I mean was that largely mix or did you see pressure in certain categories?

And Michael, it's Steve Deck here. We did pretty well in our margins both quarters over quarter and over the year.

We saw the improvement mostly in our equipments or service in our parts area. We had a little bit of softness in our margins in our industrial business both quarter over quarter and over the year.

We also had a little bit of softness, because as you just said in the mix, we had greater equipment sales than we thought we were to depart sales.

Okay, thanks. And then maybe just flipping to inventories and the expected decline there throughout the year, I think last call; you talked about having excess inventories in the range of $20 million to $40 million.

Is that the range that we should expect in terms of decline for 2020? Or have you identified additional opportunities given maybe the soft macro?

Yes, that's probably a good walking around range, Michael, its Mark speaking. I think we're, obviously our plan is based on the reductions in inventory.

And particularly in construction, that's really the only area of the business where we're carrying excess beyond our historical amount. So really, the focus is on driving down construction inventory, so that included halting a lot of the inbound and focusing on sales of the equipment that we have in the yards right now.

So where that actually goes and how quickly it goes, it's just going to be a function of the market and working pretty hard to see those numbers decline, although just given noise in the market right now. It's a bit difficult to tell you exactly when that's going to happen.

But our budgets are definitely based on it coming down materially before the end of this year.

Okay. Thanks, Mark.

And maybe I just want to carry that comment into your outlook for 2020. I think you talked about gross margin opportunities.

So I guess first, can you elaborate on that a little bit. And second, as you manage your inventory down in construction, again, given the current macro condition did you expect potentially softening equipment margins as an offset into next year?

It's certainly possible. We've managed to drive some share increase in 2019.

Our equipment margins are pretty healthy. So we may choose to accelerate the disposition of some used equipment which may be negative to margin, but that's within kind of how we built our budget.

So at this point in time, we continue to think that a good gross profit rate assumption people can make what the company's about '19. As far as the improvements of gross profit are concerned, there's a number of blocking and tackling things which will, the team did a pretty good job in 2019, we can do a bit better and that has to do with basic things.

It's like freight recoveries and warranty costs and things like that. So we've got a contingency just in some of the action plans we have to try and maintain the margin even if we do see a bit of pressure on the capital equipment sales.

Okay, perfect. Thanks guys.

Hey guys, this is Joshua [ph] calling in for Devin. Wanted to check in, Hyster-Yale provided some commentary regarding their market share growth plans through expanding your offerings and improving their dealer capabilities.

Do you guys have any thoughts on how this might benefit Wajax?

Were you asking can we comment on what Hyster-Yale said about their market share growth plans?

Yes and how it could benefit your material handling business?

Well, Hyster is our primary partner in the business. So I'll let Steve add some color, but there are primary partner so anything they do to expand their product offering or improve the price competitiveness of their products going to be accretive to us.

I'm not sure. Steve, do you have any other comments with that or?

So do you have any specific part of what they said that you may want to ask us about or was it more of a general question?

No, it's more of a general question, that's fair.

They're very important partner to us. So we had a very good year in material handling and we're looking forward to how their business improves in the future, because that'll help ours.

Perfect, thank you. And just maybe a second question.

Your receivables they seem to be currently elevated. Do have any concerns around the quality of receivables?

No, we don't.

Perfect. Awesome.

Thanks for taking my question.

Thank you. Good afternoon.

Just looking at your outlook commentary, given the market challenges you talked about sounds like equipment sales, expect to be under some pressure in 2020. But there are some offsets in the form of ERS and you talked about parts and service volumes being supported by utilization rates, just as we try to put all that together on a net basis.

Any further thoughts about how we can think about the overall top line in 2020?

I'm going to stop, sure Michael have given you a number. We've been pretty conservative in our internal revenue planning at least as far as we can tell today, probably one way to think about it would be you got roughly $50 million bucks in mining shovels that deliver in the second half of the year.

And you don't see a lot of risk of them slipping. It's always possible, but we don't see a lot of risk of them slipping right now.

And we've got the additional volume from NorthPoint. So you're talking about $100 million bucks in incremental roughly speaking, I mean, we did have some mining equipment sales this year, but it was generally a weaker year.

So you got the color between $80 million and $100 million bucks in incremental revenues. So we did a $1.55 billion this year.

So right now, I mean, we see the market decline in construction being somewhere between 5% and 10%. That's pretty consistent, we think across the industry.

And we planned our revenue reasonably conservatively because we weren't expecting it to be a big growth year just on a pure organic basis.

Okay, that's helpful. Thanks, Mark and then just in terms of the comment that some of your manufacturers have given you some confidence that there could be a rebound later in the year.

Is that specifically construction or what are the areas that potential rebound could benefit?

We're going off of feedback, really from two types of sources. One is a number of capital equipment manufacturers and secondly is just general industrial activity through industry associations that would help people in the industrial parts and services businesses and most of the forecasts would say that the front half of the year generally speaking is weaker.

And with some expectations are recovering the second half. So obviously, your crystal ball would be just as good as ours, but that's the assumptions we're making in our own budgeting and how we're kind of thinking about allocation of capital, capital investments, activities, generally speaking, but it's not just the construction business.

It's a broader base of markets than that.

Okay, it was awful. And then when we look at the ERS business, I know you just mentioned that NorthPoint should add about $50 million of revenue in the year but when we look at that business, can you just talk about the organic growth trends in ERS?

Either what you have been seeing or if possible, what do you expect to see from that business organically in 2020?

Yes, it's Steve Deck. I'll take that question.

Our organic growth in our legacy ERS business has been has been very good. Delom have delivered, they said they would and we're expecting the same from NorthPoint as well.

And then, just in terms of the additional cost productivity that you see an opportunity to drive some additional cost efficiencies in 2020. Can you elaborate on that?

Where you think those likely come from?

Our business is driven really by primarily by personal cost. So it's better, Michael we continued to.

We try very hard not to starve the front end of our business from a sales and technical standpoint, but we continue to do what's necessary on the backside of our business. We're running with fewer people today than we were as we started last year.

So vast majority of the costs in our business come from personnel, so its personal productivity, we continue to focus on.

Okay, all right. Thank you

Good morning guys. I just wanted to go back to some of the targets that were set a couple of years ago with the one Wajax strategy and in particular, some of the EBITDA metrics that you guys should put forward back then, which were three year targets I guess sort of markings on the market this year.

Just given the change in the accounting with IFRS and the impact that's had on your EBITDA, what's the right way to think about those targets now?

Ben, it's Mark. Last year in March, we recalculated all the targets in considering IFRS 16 and the acquisition of Delom.

Well the targets we put out in March of last year. We haven't chosen to revise them and they relate to 2021.

Yes, recall then you push them out to 2021. Anyway, so those are the recalculated for IFRS?

Yes, they are.

And you think they're still achievable at this point?

Well, the range is pretty broad. So if you look at the targets that were set up between a revenue and the dollar range, the range was fairly broad.

If you look at where the business ended from an EBITDA standpoint, it's at the end of 2019. It's sneaking into the lower end of the range now.

And the revenue on an adjusted basis for NorthPoint pro forma would be in the bottom end of that range pretty much also. So if the question is do we think we can be inside of that range in 2021?

The answer is yes. Where we sit specifically is going to depend on how the macro turns out this year, because that's obviously going to establish the base for the year after.

But the range is broad; we're almost inside of it already. And it's been recalculated for all the kind of accounting adjustments.

So it's pretty straightforward at this point and we haven't chosen to change it.

Okay, I'll go back. And I do recall you making those changes.

So I'll go back and revisit them. But I guess just on a related follow up, like what's the, how do you think of the tradeoff between achieving those targets, and sort of the risk you assume and doing that in particular the financial risk like that you can get your EBITDA if you're going to be taking on more debt to do acquisitions and things like that.

It's going to take on more inventory to do sales, etcetera which sort of seems to be what's happened on track with those targets, albeit year off and lower end of them, but you know, you're stuck with them. But I think, as you pointed out, the leverage is above your target would be if we think just in terms of EBITDA, then, you know, relatively easy to get there by buying stuff because you're not accounting for the cost of capital or the assets.

So what? How do you guys think about, those targets relative to the financial risk you put into the company and getting there?

Well, I think that's one of the reasons we clarified the leverage language. So the base business leverage, good run between one and a half and two times.

So we're running if you ask so the Delom acquisition from our current leverage, running about 2.3. So our expectation is to be able to run our base business inside the one and a half to two times and obviously, as businesses like Delom, mature, a little bit inside of the business would expect to be able to absorb them inside of that leverage, too.

So absent [ph] the material acquisition, going forward, we would expect operate within that leverage range and the balance between the EBITDA and revenue numbers you see here and the leverage ranges, that's kind of the guardrails we work with. If we have an acquisition opportunities that we feel has good stable cash flow, it's consistent with our strategy.

And you know, it's obviously a purchase price that we consider to be reasonable, and then we would allow the leverage to creep up. But we would also adjust these targets.

So we're quite sensitive to leverage right now. And we feel comfortable these targets, but we do think that the having the leverage inside of that range is also an important part of the contribution.

I should also say that if you look at management compensation in Wajax, it's neither of these numbers, its net earnings. So we're obviously pretty sensitive to finance costs and all the other things that go into the P&L and delivering proper value for shareholders.

Right. I guess I Just I'd be a bit reluctant to sort of start thinking about a different leverage ratio for the base business versus the whole business.

I mean, I think, I recognize that you're adding depth to these acquisitions. But if the acquisitions don't work out, or the market takes a turn for the worse, you still end up wearing them.

You can't sort of just separate the base business from what you've acquired. And the financial risk is what it is.

So do you. I guess my question is, do you at some point, say, we have to take our foot off the M&A strategy and the growth strategy to manage the financial risk that's building up in the business because the markets aren't going our way?

Yes, I think we're always sensitive to financial risk then but if we see acquisitions, which are good for our strategy, and as I said, provide stable cash flow. As such, we believe we can forecast the leverage implications of them and they are available to us at a reasonable price.

We will tolerate leverage above two, simply because it's the right thing to do. You can't I'm not sure how the math would work is if you found an acquisition you get for a reasonable multiple anything material is going to cause that leverage to go up if you're inside of one and a half to two times, at least at least in our sidebar based business today.

So as we said we're not indicating a fundamental change and risk tolerance in the business. But acquisitions are an important part of our strategy.

And we're comfortable with the leverage being above two, if in fact the cash flows from the acquiring business are stable enough where we feel comfortable that that we can predict the outcomes.

Okay, fair enough. Just one last thing on the inventories, would you like to get that down to how much idle inventory for lack of a better word or aged inventory do you think you're sitting on right now?

We're not sitting on a lot of aged inventory at the moment. So the quality inventory is pretty high.

But I think earlier in the call, well 40 is probably a good walking around number for the excess inventory we're carrying and it's essentially all in construct. So that's we're really focused on getting our construction equipment turns back to where we would like to see them within this fiscal year.

Okay, thanks very much.

Okay, well, thank you very much for joining us today. We look forward to talking again in May.