Wajax Corporation

Thank you, and good afternoon, everyone, and thanks for joining us on our third quarter call today. This afternoon we'll be following a webcast including a summary presentation which can be found on our website under Investor Relations events and presentations.

I'll provide you with a general update and then I'll turn it over to Stuart for some additional comments. And our cautionary statement regarding forward looking information is on Slide 2 and additional non-GAAP -- I am sorry, additionally non-GAAP and additional GAAP measures summarized on Slide 3, and additional the information you can find in the appendix at the end of the presentation.

So, if you turn to Slide 4. Wajax has continued to consistently adhere to four objectives in response to current conditions; first, to protect the health and safety of our employees; second, to continue to provide strong service for our customers; third, to protect the financial health of the Company; and fourth, positioning ourselves to refocus on growing the Company as conditions improve.

Our decisions in the third quarter and going forward [indiscernible] will continue to be made according to these objectives, and a summary of our actions is included in the MD&A and the news released that was issued last night. On behalf of the management team in the board of directors, I want to thank our employees for their dedication, commitment and flexibility during this difficult period.

In the quarter, the team's efforts resulted in consistently strong customer service scores, excellent workplace safety results, and their efforts contributed to year-over-year improvements in cash flow from operations due to ongoing efforts to reduce inventory and to manage costs. If you turn to Slide 5, revenue of 340.6 million was down 7% in the quarter, revenue in July was weak on a year-over-year basis, while still down improved a bit in August, and was higher on year-over-year basis in September.

We'll have further revenue commentary in just a moment. EBITDA 14.3 million was down 8% in the quarter.

The revenue decline and the effect of restructuring costs, was partially offset by lower SG&A and other factors. We will address the restructuring and the application of the Canadian Emergency Wage Subsidy just shortly.

Adjusted net earnings of $0.50 was down 4% of the quarter, adjusted earnings reflect the exclusion of the after tax cost of 5.6 million in restructuring, a $1.2 million gain on property sale, and a 1 million non-cash gain or mark-to-market of derivative instruments. Year-to-date TRIF rate of 0.99 is 32% better than last year.

We're very proud that the team has continued to reduce the number of injuries and has implemented a wide range of enhanced safety protocols in order to improve safety during a pandemic, which has benefited our employees, our customers, and our business partners. If you turn to Slide 6, the slide shows an adjusted earnings bridge which provides us an opportunity just to discuss the restructuring that was completed in the quarter.

The corporation made the difficult decision to reduce the size of the workforce by approximately 8% or 243 employees. The Associated annual compensation costs of the employees released is 19.3 million and a major portion of which will not be incurred in 2020 due to the majority of these employees -- excuse me, being on temporary layoff in the second and third quarters.

While the immediate primary driver of the workforce reduction is volume related, the corporation believes that a material portion of the savings will be structurally maintained as volumes improve. Reducing the workforce is a regrettable action, and the Company has endeavourerd to balance customer service, anticipated volumes and costs, in order to minimize the effect to the extent possible on our employees.

Recognizing that, the Company has pleased at approximately 300 employees or 34% of the staff that was originally placed on reduced hours or temporary layoff in the second quarter, have now returned to full time hours. If you turn to Slide 7, the slide provides information on the application of the Canadian Emergency Wage Subsidy in the quarter.

Wajax received 5.4 million on a pretax wages, which was allocated to cost of sales and SG&A in proportion to the related personnel costs associated with those areas. Excluding the effect of the wage subsidy gross profit margin of 18%, decline 1% year-over-year and approved sequentially 3.1% when compared to the second quarter.

As expected, margin pressure related to aged inventory disposal was not as significant a factor in the third quarter. Excluding the effect of the wage subsidy, the SG&A rate of sales of 13.1% decline 40 basis points year-over-year, and excluding the effect of the subsidy in the gain on sale, SG&A reduced by 3.4 million or 7% versus last year in line with the change in revenue.

Turning to Slide 8, dealing specifically with regional sales in the quarter and keeping comments at a pretty high level. Central Canada sales of 74 million increased 3%.

We continue to be confident in an improved long-term position in the Ontario market and saw evidence of that in the third quarter. September sales were particularly strong.

Eastern Canada sales of 137 million declined 10%, lower equipment sales and shortfalls in ERS and industrial parts contributed to the decline. Similar to Ontario, Eastern Canada sales strengthened in September.

Western Canada sales of 130 million declined 9%. Revenue pressure in the mining and engines and transmissions categories continued in the West due in part lower oil sands volumes.

And while the trend in September did improve slightly, total volumes in the West were not as positive as again seen in Central and Eastern Canada. Indicators on oil sands activity are more positive looking forward recognizing those effects are yet to be seen in our results.

If you turn to Slide 9, sales by type of transaction is shown on this page and in addition to what's listed here, two additional points to consider. First, in product support, approximately 81% of the decline in sales released to Western Canada, the majority of which is due to lower oil sands activity affecting the mining and engines and transmissions, products and service sales.

And in ERS sales increases relate to the acquisition of NorthPoint in January 2020. The Company remains very pleased with the performance of the recent acquisitions of both Groupe Delom and NorthPoint and continues to review additional ERS acquisition opportunities for execution on the market and balance sheet conditions are appropriate.

If you turn to Slide 10, this slide summarizes our sales at a category level for the quarter and year-to-date. Noting that market conditions are broadly affecting our business, sales contribution from our target to growth categories in the quarter increase 7.5% based on flat sales and construction and gains in material handling and engineered repair services.

We'll turn the call over Stuart.

Thanks Mark. Please turn to Slide 11 for my comments on backlog.

Our Q3 backlog decreased 18.5 million or 10% sequentially from the previous quarter, and decreased 115.7 million or 40% on a year-over-year basis. The sequential decrease was driven primarily by lower orders in most categories, but most notably in the construction, material handling and ERS categories.

The year-over-year decrease relates to lower orders in all categories except construction, but most notably lower orders and mining, power generation and material handling categories. Please turn to Slide 12 for an update on our current inventory levels.

Inventory including consignment decreased 39.2 million compared to Q2 2020 as a result of lower equipment inventory in the construction, power generation and mining categories. Consignment inventory decreased 15.5 million from the previous quarter.

Inventory including consignment decreased 116 million compared to Q3 2019 as a result of lower equipment inventory in the construction, forestry, power generation and material handling categories, and lower parts inventory in the industrial parts and ERS categories offset personally by higher mining equipment inventory. As previously stated, we are adjusting our incoming inventory orders based on market conditions and are focused on reducing equipment levels.

Please turn to Slide 13, where I will provide an update on cash flow and leverage. Cash flow from operating activities in the current quarter have decreased 8.5 million from Q2 2020 due primarily to lower net earnings and higher finance costs, paid on the depth and rental equipment additions.

Our Q3 leverage ratio decreased compared to Q2 from 2.82 times to 2.59 times as the lower debt level was partially offset by lower trailing 12-month performance adjusted EBITDA. On our available credit capacity at the end of Q3 was 181.8 million, which is sufficient to meet short-term normal course, working capital and maintenance capital requirements and certain strategic investments.

Please turn to Slide 14 where I'll provide an update on financial position. We continue to focus on working capital efficiency, which is a key component in managing our overall leverage targets.

All actions aimed at lowering working capital expected to increase RONA overtime, which will have the additional benefit of lower and our working capital sales ratio and increasing inventory terms. The decline in inventory turns from Q3 2019 is due to lower trailing 12-month average sales and higher average inventory levels.

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 third quarter, we entered into a sale and leaseback transaction for one of our own properties for proceeds net transaction costs of 5.2 million.

Further opportunities to sprawl 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 transaction 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 January 5, 2021 to shareholders of record on December 15, 2020.

At this point, I'll hand the call back to mark provide a brief update on our 2020 financial outlook in his concluding remarks.

Thanks Stuart. Current business conditions related primarily to COVID-19 and secondarily to weak resource markets in Western Canada have continued to have a negative effect on the corporation's results during the third quarter of 2020.

Volume trends in comparison to last year as we stated earlier improved as the quarter progressed. While volumes have recently shown an improving trend, Wajax continues to expect revenue to be lower year-over-year in the fourth quarter.

As such, the corporation made the difficult decision in third quarter reduced the workforce by approximately 8% when compared to January 1, 2020. In response to difficult market conditions and consistent with the corporation's plans, owned and consignment inventory continue to decline in the third quarter while margins improved sequentially from the second quarter when accelerated disposal based inventory temporarily reduced margins.

Corporations focuses to manage the business according to its four key objectives, protecting the health and safety of employees, providing strong service to customers, protecting the financial health of the corporation and positioning the Company to execute its growth strategy as conditions improved. The Company expects to partially offset the effects of volume declines with cost reductions while managing customer service levels working capital and capital spending accordingly.

Corporation's current sources of liquidity are expected to be sufficient while preparing to return to growing the business as conditions improve. With that, I think we'll open it up for questions.

Hey. Good afternoon, guys.

I was wondering, if you could provide additional information as it relates to restructuring initiative, where exactly the headcounts reduced in terms of regions or categories? And as a follow-up, Mark, you discussed it in most of the cost reductions were volume related.

So, how should we think about the potential structural improvement in the SG&A going forward?

On the first part of the question, Michael, the only about 70% of the reductions came from non-ERS businesses and about 30% came from ERS businesses. As it relates to kind of the base business reductions, they were spread in pretty much across all regions with the mostly effecting felt in Western Canada, specifically the peers.

And ERS side of things, some volume reductions that have really come from a number of social distancing issues we have to condemn with, and some of the bigger shops that we have at Eastern Canada, gave us a requirement to remove some of the stuff there. I think as it relates to looking forward, I think, it's probably safe to assume that about a third of those annualized costs are structurally maintainable as volumes improve.

It could be a bit higher than that, but that's probably a reasonably conservative estimate.

Thanks for that Mark. And then just turning it to the inventories and the free cash flow generation and obviously lots of progress there, should we expect Q4 cash flow from inventories to be typical of regular seasonality?

And I guess it was probably the first year, at least to me where equipment companies are thinking about managing their inventories down through the downturn and then up for the recovery in the same period. So just, how are you thinking about inventory restocking as the macro recovers from here?

So, at this point, at least, to the end of the year, we're still working with our vendors to manage those inventories slightly down for the balance of the year and not really have to start placing significant orders until early next year. And then, we would expect a positive cash flow in the fourth quarter.

Michael, look I'll just add one thing which Stuart said, which was accurate. The equivalent inventory levels in Wajax really have only been an issue in construction.

Outside of that, the equipment inventory levels been international quite good. So while it's has been an issue for us for this year because of demand, to Stuart's point, the likelihood is we'll be getting to the point where orders are going to have to be placed for probably the second quarter of next year or we're going to even with a lot of sales expectations likely to run short.

So, we're getting into pretty good shape, and a lot of the corrections that have occurred this year have set us up, we think for a pretty positive next year.

Got you. So Mark fair to say that the construction inventory would be at normal levels, some point early next year?

Yes, I mean, I think if you look at the inventory charts that Stuart had in the presentation, the targeted growth categories, which construction is the biggest contributor to are running at inventory levels that pretty consistent with a couple of years ago now. So, we still have some consignment inventory to work through although all the net consignment is come down quite a bit.

So, I'd say that to Stuart's point earlier, likely by the end of this year, we're at -- we're certainly at run rate construction levels. And hopefully, as demand picks up, we'll need increase the orders a bit more than ever.

Got you. Thanks.

I know just maybe one more before I pass it on. I'd like to sort of get your take on Q4 sales trends, I mean, you've indicated on one hand that you were up in September, but you expects sales to be down in the fourth quarter just help us reconcile the two please?

Thanks.

Yes, the sales points on the month basis and in the third quarter, it'd difficult to spot a trends there. Opening volumes in the fourth quarter are not bad.

I think we're trying to be reasonably conservative with how we think about the fourth quarter right now. We've got one large shovel to deliver in December, but that's comp the last year.

So, our biggest issue right now I think is watching what happens particularly in the oil sands in the fourth quarter, but the volume there is pretty important to us. But out of the gate in the fourth quarter, the volumes are not too bad.

Thanks. Just one more color on the margin compression in products and services for the quarter?

Okay, call it 80% of the sales reduction is Western Canada, most of that's in the oil sands. That's our most profitable products of service business.

And really, the primary area of margin compression is product support and a bunch of that as the labor sentiments. Now, the mix is hurting us from overall products of service business because as I said, the oil sand business is the largest contributor to our products of service profitability.

But we saw actually reasonably strong margins and equipment in the quarter, good margins in ERS. We saw a little bit of a decline in industrial parts, but that's primarily because of the shift from in regions and some weakness in the West.

And we did see some compression in parts and labor margins, particularly driven by the West, but the labor margins were probably the bigger issue.

Okay, thanks. And then just looking at the forestry segment, with revenue down 10% year-over-year, we're seeing record profits from lumber companies and forestry companies heading into year end.

I do expect a bit of a lag effect in activity levels and maybe a pickup in 4Q for that sector.

We’re expecting actually reasonably strong year in the forestry business. We have to book some -- we had to finish those sales in the fourth quarter, but we are expecting to have a reasonably good fourth quarter in the forestry business.

Thanks. Good afternoon.

Mark, can you just talk a little bit more about your thoughts on the outlook for product support you've mentioned a couple times that's been one of the hardest hit areas and critically important to your Western Canadian business? How do you see that trending as you move forward here through the fourth quarter and into next year?

I think we're cautiously optimistic that the next year and perhaps towards the end of this year is a bit better than what we experienced so far this year, primarily because we think the equipment activity levels will improve. We got about 30% of the fleet that we serve as part.

And I think these curtailments would be expected come off later this year, and some of our large customers see some production increases and we generally believing that the trends will improve. So, we're optimistic with that trend does not continue into 2021 and we're hopeful that it's a bit better by the end of this year.

That's on the kind of heavy equipment side of things. The engines and transmissions business, that may be a structurally a bit longer to recover, but it's not as big a factor as the hydraulic shovels and some of the heavier products and service stuffs we have with our oil sands mining customers.

Okay, thanks for that. And then just as we think about the fourth quarter, your comment that you do still expect sales to be lower year-over-year.

If we look across the various product categories and you just spoke to product support, but as far as some of the other areas, would you expect sort of a similar distribution in terms of what's contributing to the declines? Or is there anything that you see sort of coming back more quickly, or frankly, or for that matter falling off a little bit in the fourth quarter, as you think about the other categories?

I would say that in kind of a distribution by sales type, I think product support is going to continue to be a bigger issue for us than some of the other ones line. We may see a bit of an improvement in some of our ERS volumes, but I'd say the product support at least for the fourth quarter of this year, we're expecting it to be continued to be a bit of a drag on the results.

Okay. And then, just in terms of the [indiscernible] benefit looking forward.

Is that you again expect to realize some benefit from that program in the fourth quarter? And if so, is there any way to help us think about how to frame that?

If we do, it'll be a lot less than what we saw on either Q2 or Q3. You have to wait until the month happens to do the calculations.

So, we expect there will be some benefits, but it's going to be much lower than either the last quarters.

Okay, well, thanks very much for your time. We appreciate that and look forward to talking to you again in the fourth quarter.

Thank you.