Wajax Corporation

Thank you, and good afternoon. Thank you for participating on our fourth quarter call.

This afternoon, we'll be following a webcast which includes a summary presentation of our fourth quarter financial results. Presentation can be found on our website under Investor Relations, Events & Presentations.

I'll provide you with a general update and then turn it over to Stu for comments on backlog inventory cash and the balance sheet. And to begin with, I'd like to draw your attention to the cautionary statement regarding forward-looking information on Slides 2 and 3.

And additionally non-GAAP and additional GAAP measures are summarized on Slides 21 through 23 for your reference. If you turn to Slide 4, please.

Wajax has consistently adhered to four objectives in response to the pandemic: protecting the health and safety of our employees, providing strong service to our customers, protecting the financial health of the company, and finally, positioning ourselves to refocus on growing the company as conditions improve. Our decisions in the fourth quarter and going forward will be made according to these objectives and a summary of our actions is included in the MD&A and news release that we issued last night.

On behalf of the Management team and the Board of Directors, I'd like to thank our employees for their dedication, commitment and flexibility during this difficult period. The entire team continues to do an excellent job in the fourth quarter, including adhering to enhanced safety protocols and demonstrating their commitment to serving our customers every day.

Turning to Slide 5. Revenue of $381 million was down 6% in the quarter.

The decline in revenue was due primarily to lower sales in eastern and western Canada. EBIT of $18.8 million was down $2.6 million or 12% in the quarter.

The decrease in EBIT was primarily attributable to $1 million in transaction costs related to Tundra. A $1 million in lower gains on property sales and revenue offset partially by improved sales and margins in ERES.

Adjusted net earnings of $0.48 was down $0.03 or 5% in the quarter, noting the adjustments that are included on the chart. And the full year TRIF rate of 1.08 was 22% better year-over-year.

We're very proud of the team that has continued to improve workplace safety despite the obvious challenges of 2020. If you turn to Slide 6.

The company qualified for $5.7 million in wage subsidies in the quarter and allocated those amounts of $4.4 million and $1.3 million to cost of sales in SG&A respectively. It is important to note that the net positive effect of the subsidies in the fourth quarter was approximately $1.7 million due to the redirection of $4 million to temporary supplemental compensation programs directed primarily at the company's frontline employees, who continue to provide excellent and essential support to our customers across Canada.

If we turn to Slide 7. The revenue decline of 5.7% for the fourth quarter and 8.4% for the full-year was driven primarily by western and eastern Canada.

Central Canada sales declined 1% in the fourth quarter and 3% for the year. In the fourth quarter, stronger ERS in crane utility sales largely offset weakness and forestry and power generation.

Construction and material handling sales were comparable on a year-over-year basis. Eastern Canada sales declined 6% in the fourth quarter and 8% for the full-year.

In the fourth quarter, the sales decline was primarily related to material handling and power generation, partially offset by strong construction sales. While ERS sales were comparable year-over-year, operational restrictions due to required safety protocols in the shops have constrained growth, which we fully expect to increase as COVID conditions improve.

In western Canada, sales declined 8% in the fourth quarter and 12% for the year. In the fourth quarter, sales were generally weak across most categories including mining and material handling, the effects of which were partially offset by strong forestry sales and secondarily by improved results in construction.

If you turn to Slide 8. An update on equipment and product support sales in year-over-year variances are shown on this page.

Equipment sales of approximately $145 million declined 7.3% due primarily to lower equipment sales and material handling and power generation. In material handling, the decline was driven by lower intermodal [ph] sales due to a major order last year, which did not repeat.

Power generation equipment sales continued to be under pressure due to lower project volume. These declines were partially offset by strong construction equipment sales.

Product support sales of approximately $102 million declined 7.5% due primarily to weakness in western Canada and in particular lower parts and service volumes in the oil sands. While the company has yet to see a specific improvement of product support sales in this key market, customer activity does indicate a more positive trend in 2021.

Please turn to Slide 9. An update on industrial parks and ERS sales in year-over-year variances are shown on this page.

Industrial parts sales were approximately $86 million, declined 3.4% due primarily to western Canada. Sales in central and eastern Canada were comparable year-over-year and ERS sales of approximately $43 million increased 3.3% due primarily to the additional volume from the acquisition of NorthPoint.

If you turn to Slide 10. The slide summarizes our sales at a category level for the quarter and year-to-date.

specific to the fourth quarter and noting that market conditions due to COVID-19 continued to broadly affect our business, aggregate year-over-year sales in our targeted growth categories in the quarter was roughly flat compared to last year. Aggregate year-over-year sales in our core strength categories of industrial parts forestry on highway and power marine declined approximately 7%.

An aggregate year-over-year sales and our cyclical and major project categories of mining engines and transmissions in crane utility declined approximately 11%. Let me turn the call over to Stu.

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

Our Q4 backlog decreased $23.4 million or 11% sequentially from the previous quarter and decreased $62.1 million or 26% on a year-over-year basis. It should be noted that our backlog as at December 31, 2020 now includes our ERS business, including Delom and NorthPoint and therefore for compatibility purposes, backlog includes the Delom and NorthPoint for the September 30, 2020 backlog and includes Delom for the December 31, 2019 backlog.

The sequential decrease was driven primarily by lower mining, forestry, power generation and construction orders, partially offset by higher material handling and industrial parts orders. The year-over-year decrease relates to lower orders in the mining and power generation categories, partially offset by the addition of NorthPoint's ERS backlog.

Please turn to Slide 12 for an update on our current inventory levels. Inventory including consignment decreased $51.2 million compared to Q3 2020 as a result of lower equipment, parts and work in process inventory in most categories, partially offset by higher mining equipment inventory.

Consignment inventory decreased $18.7 million from the previous quarter. Inventory including consignment decreased $130.9 million compared to Q4 2019 as a result of lower equipment, parts and work in process inventory in most categories, partially offset by higher mining equipment inventory.

Consignment inventory decreased $73.4 million compared to Q4 2019. We continue to work closely with suppliers and to review inventory levels in accordance with expected market conditions.

Please turn to Slide 13 where I'll provide an update on cash flow and leverage. Cash flow from operating activities in the current quarter have increased $13.3 million from Q3 2020, due primarily to an increase in cash generated from changes in non-cash operating working capital and higher net earnings.

Our Q4 leverage ratio decreased compared to Q3 from 2.59x to 2.28x as the lower debt level was partially offset by lowered trailing 12-month pro forma adjusted EBITDA. Our available credit capacity at the end of Q4 was $259.3 million, of which $50 million relates to a non-revolving acquisition term facility that was used to finance the acquisition of Tundra in the first quarter of 2021.

The remaining credit capacity of approximately $209 million 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. The decline in inventory turns from Q4 2019 is due to lower trailing 12-month average sales offset partially by lower average inventory levels.

As previous previously disclosed, we continue to evaluate ways to unlock cash from the business and as such completed a market value of assessment of our own real estate holdings. In the fourth quarter, we entered into a sale and leaseback transaction for one of our own properties for proceeds net of transaction costs of $1.2 million.

In the fourth quarter, we also sold one property for $1.6 million with a gain of $1.2 million. Further opportunities to sell redundant real estate as well as leaseback opportunities have been identified and are being pursued in 2021.

Proceeds from any real estate sales will be used primarily to 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 first quarter dividend of $0.25 per share payable on April 6 2021 to shareholders of record on March 15 21. Please turn to Slide 15.

At this point, I'll hand the call back to Mark to provide an update on Tundra and a brief update on our 2021 financial outlook and concluding remarks.

Thanks, Stu. We announced the acquisition of Tundra on December 30 of last year and subsequently closed the transaction on January 22, 2021.

We included this chart as a point of reference on Tundra and emphasize that we're very excited about our ability to expand Tundra's business within its current western Canada market and over time in Wajax at central and eastern Canada markets through our customer relationships and sales and operational footprint. If you turn to Slide 16; this puts Tundra into context with our broader ERS strategy, with the markets and services that make up what we estimate to be a $5 billion market annually in Canada and noting that our existing large customers are typically major consumers of ERS services, Tundra has helped us close an important gap in our offering to our customers and specifically process in instrumentation systems.

Combined with our acquisitions of Delom and NorthPoint, Wajax is building our position as a Canadian leader in ERS services. Our 2021 outlook appears on Slide 17.

Recognizing that the challenges Wajax faced in 2020 have persisted into 2021, the company nevertheless enters 2021 with confidence expecting that it's positioned to succeed over the longer term. In 2021, Wajax remains focused on the same priorities that guided us in 2020, specifically protecting the health and safety of our employees, providing excellent customer service, protecting the company's financial health and driving our long-term growth strategy.

Corporation expects revenue associated with the acquisition of Tundra to be the significant contributor of total revenue growth in 2021. Organic revenue growth is expected to be modest, due primarily to heavy equipment markets that are not expected to fully recover to 2019 levels in 2021.

Wajax's inventory and working capital investments will remain conservative, pending a clear indication of a sustained recovery. Considering the acquisition debt related to Tundra to be incurred in the first quarter, leverage is expected to decline by year-end due to positive cash flow from operations, real estate monetization and other cash management initiatives.

In the corporation's heavy equipment categories representing pro forma sales of 58%, Wajax will continue to focus on success and construction, material handling, and forestry and mining, including improvements in product support volumes. While equipment markets are not expected to fully recover in 2021, Wajax has excellent opportunities in these categories and will continue to work closely with its supplier partners to prudently grow market share and capture aftermarket sales.

In the industrial parts in ERS, representing pro forma sales of 42%, Wajax expects higher organic growth and a strong contribution from Tundra. ERS continues to be one of the corporation's most significant opportunities capable of growth at each point in the economic cycle.

Corporation's infrastructure programs are expected to continue in 2021, including investments in branch network consolidation and technology. Following the COVID-19 related delay in 2020, a phased implementation of the corporation's new ERP system is expected to begin in the second quarter of 2021 and continue over an approximate of a 24-month time frame in order to reduce the associated implementation risks.

And with that, Operator, we'll open it up for questions.

Hey, good afternoon, guys. So starting on the revenue expectations for 2021 versus 2019, Mark, you called out higher organic recovery in industrial parts and ERS versus heavy equipment.

I was wondering if you could just maybe start us off by providing a little bit more color in there. And then as it relates to heavy equipment, what do you think about product support in 2021, how that could approach 2019 levels?

I guess in heavy equipment in the specifically the equipment side of it, Michael, our conversations with our manufacturing partners, suggests that the recovery in the equipment markets will be gradual over the course of the next couple of years. So, our budgets and expectations are built, respecting that expectation.

If recoveries are stronger than that, then obviously we'll do our absolute best to capture those opportunities. But we have most of our expectations built on a gradual recovery that don't see full equipment recovery of the 2019 levels until 2022.

Okay, now, there's a bunch of different opinions about that, but that's the way we built our current expectations. In product support, I think we're reasonably pleased with product support outside of western Canada and the product support volumes in the west, the weakness that we saw in 2020 -- so call it just over 80% of the product support declines in 2024 Wajax were related to the oil sands and the extent to which activity in the oil sands improves, we anticipate obviously that that trend would improve also.

As I said in the commentary, we haven't seen a specific indication of that from a sales standpoint just yet, but activities with the customers have markedly increased and we're cautiously optimistic that that trend will be a bit better for us in 2021 than it was in 2020.

And then just lastly on the bullishness around industrial parts, ERS, the major drivers are there, Mark?

We believe our business in central and eastern Canada will continue to enjoy a reasonably positive trend. If you exit the second quarter last year, even with COVID it wasn't a bad year for an industrial park standpoint.

So I think we've got some optimism particularly around Ontario. As it relates to industrial parts from a growth standpoint, we have a great market share in Quebec.

So I think we'd expect to hold on to that. And if we see some increase in the oil sands markets, then that obviously drags industrial parts in the ERS up a wee bit.

So that's where the constructiveness would be there.

Got you. Okay, thanks.

And then maybe just moving down to gross margins. Obviously, a lot of moving parts to consider for next year.

You've talked about a little bit more growth in industrial parts in the ERS products support, make yourselves [ph] contingent on the recovery in the oil sands, but just how should we think about gross profits, maybe first half, second half, and any color around mix as well?

We have generally planned gross profit margins at a higher rate than we experienced in 2020, even if you axe out the impact of SUS [ph]. Some of that is an expectation of mix because of equipment sales continuing to at least not being expected to grow as significantly as if the recovery was faster.

But there's a number of gross margin improvement initiatives underway in the company right now. So we're reasonably bullish on an improvement in margins to take materially higher levels than we experienced in 2020.

Okay, that's the top one. Maybe if I can squeeze one in here, on your expectations as it relates to CapEx and working capital for 2021.

I think you talked about a couple of initiatives; you called out cash management initiatives in the press release. If you can talk about that a little bit more, thank you.

I think as we experienced in 2020, we were really close to how we manage both our inventory levels, our receivables and our payables. And really, it's going to be just a lot more of what we did this year, in terms of staying close to it, managing it, and trying to drive the cash flow to pay off debt.

In addition to that, Michael, if I could add something to what Stuart said, the expectation is we will allocate roughly the same amount of capital to the rental fleet in 2021, as we did in 2020. So you just check the amount of gross investment in rental fleet, it's expected to be reasonably similar, we wouldn't have committed that capital at this point in time in the second half of the year, but, but we have committed it in the front half.

Thanks. Mark, your comments around the year outlook for equipment sales in 2021, I appreciate your comments and your reliance on your suppliers.

Wondering if you can break those comments down a little further, just in terms of some of the various product categories within equipment? In the comments seems a little bit general, just wondering if there are any areas where you are expecting a bit of a pickup, or if you can highlight those areas that you see as more challenged and likely to recover more gradually?

I would say that, if I took apart the major categories at a reasonably high level, we remain reasonably bullish about mining equipment, although we're recognizing that that's a low unit kind of hot dollar issues. So we have seen a bunch of increase in the activity around mining equipment.

So most of that stuff is in inventory right now. So that would be quite positive to move through.

We've only booked into our own expectations to say the committed orders for the most part. So the extent to which mining opportunities that are indicated by current quoting, materialized and that's positive, we've remained pretty conservative on construction and material handling and forestry equipment, albeit for different reasons.

I think in construction, our partnerships with a number of major manufacturers continue to point to modest declines in the market on a percentage basis. And again, if that's not the case, then we should be able to do better than our current expectations.

So we really are looking at the construction equipment market and being, we think, prudent with respect to the size and the momentum of it. We've been on an absolute tear from a forestry standpoint.

And, our market shares in forestry have really gotten some pretty impressive levels. So we're not expecting the forestry market to continue to grow in 2021, to the extent that it did this year.

And in material handling, it's a bit like the construction market, it's a fairly broad-based industrial market, our conversations with suppliers would continue to indicate that it's a slower recovery than I think some people expect. And again, if that's not true, then we should we should be able to do a bit better.

Perfect. And then in your outlook, when you refer to market share growth opportunities, which areas in particular do you see the greatest opportunities in 2021 and beyond?

I would say, probably in the construction of mature Island [ph] businesses. And I would stress that their prudent market share increases, not swinging for the fences on the increases themselves.

Our market share in forestry is, as I said just a second ago, reasonably high and our market share in hydraulic mining shovels is also historically and currently quite high. So I don't expect that we would see increases in shared forestry or mining, but I do think we could expect to see some degree of modest share improvement in construction and material handle.

Okay, thanks for that, and then just in terms of large mining shovel deliveries in 2021, looks like maybe there's one due to be delivered, if you can just confirm if that's the case if the number is different? And then secondly, remind what occurred in 2020.

Yes, we would have had three large shovels in 2020. And we have one currently booked in 2021, and it's in the second quarter.

Thanks for that. Just with respect to the Tundra acquisition, I know it only closed a little over a month ago.

But wondering if you can just comment on how that's performing so far? And the extent to which you would expect to see Tundra revenues improve in 2021 versus the trailing 12-month revenue level you disclosed when you announced that acquisition?

Yes, our most updated TTM number for Tundra that's in the presentation that would have been just up on the screen there. I think the TTM was about $141 million or so.

We currently would have Tundra planned a bit less than that for two reasons. One, looking at just the conditions in Western Canada, and all the way enormously optimistic about Tundra's medium to longer term growth standpoint or opportunities.

The current conditions of Western Canada continue to be a bit of a pressure for Tundra businesses like ours. So, we're budgeting Tundra less than the TTM number that showed up on the screen for that reason, and also for the fact that we don't actually have them for a full fiscal year, so be it 11 out of 12 months.

I wouldn't say that the differences between the TTM number and the budget are that material, but they're a slight bit less.

Okay. And then just two more for me.

ERP implementation, can you just remind of any additional costs as you begin that implementation that we need to be thinking about?

No, minimal additional costs to start to roll it out.

Okay. And then lastly, presumably this is a bit of a moving target.

But what would be your expectations for any further Sue's [ph] amounts in 2021?

The program continues. We don't really have a large expectation this year, we expect to get some money.

But we really haven't done the calculation at this point, because we haven't finished. We've only finished one month this year.

And Michael, not to suggest we're at all irresponsible with the money, but if you notice what we did in the fourth quarter, we returned a lot of that subsidy to the team.

Yes. And just one last, I think you covered this off, Stuart, a moment ago, but just to be clear.

Expectations for changes in non-cash working capital in in 2021 for the full year, how should we be thinking about that?

Well, it won't be as large as it was this year. We should see an improvement.

But the biggest components were obviously the inventory reductions.

And that's largely done now, right?

Yes. There could be some additional improvement, it won't be to the extent that it was last year, though.

Good afternoon. Thanks for taking my question.

Just digging deeper on the product support question that was asked earlier. I think last quarter, you mentioned that around 30% of the fleet that you service was parked.

Is there an update on those tickers, is it safe to assume that number is lower now?

Yes, it would be lower, Bryan. I think our discussion with the team earlier this week indicated that we had about 10% of the fleet parked now, versus 30% in the last time we talked.

I think that's encouraging. And then, how are you thinking about your physical footprint?

You've taken a number of rationalization measures and executed on sale leaseback transactions, maybe what do you mean [ph] are you in that effort?

Sorry, Bryan, can you just repeat the last part of your question, please?

So maybe what do you mean, are you in that effort, are you still early days or should we expect an end to those transactions in the near future?

We have a number of significant transactions that we're considering for 2021, one is the sale leaseback, so that's a non-operating gain if it occurs. And it's possible that we'll be asseting a large facility and simply closing it, which obviously would be a straight gain and collocating into another facility.

So we have a number of small projects that are underway, which won't move the needle a ton. But there are a couple of more significant ones that are underway right now, it doesn't fundamentally change the total footprint of the company.

We're at 116 locations, including Tundra. So I think we would expect to gradually decline that over time.

We've already got plans for one of the Tundra facilities to close in the second quarter of this year, and move those operations into other Tundra locations and, in fact, into some Wajax's facilities. So there's always a continuous improvement to exercise underway there, all the time.

I'm not sure that's ever really going to be done. But there are a couple of larger real estate transactions which could occur this year.

But again, I'll just stress, they're non-operating gains, but they could be potentially quite good from a cash inflow standpoint.

Okay, good. And then, it continues on the earlier questions, just looking at the Tundra acquisition.

The slide deck does show pretty significant growth in fiscal 2020. Was there anything in particular that contributed to that, to those figures?

The Tundra guys have demonstrated over the course of time that, through the addition of more product and service lines, they've managed to grow the business at the number that, I think, we've always been very impressed with, in the period. It was a 10-year period of leading up until 2020, that 27% compound annual growth rates are really impressive growth capabilities.

There are always major project opportunities at Tundra, they're infrequent but significant. We typically clean them out of how we think about the TTM number, though.

So we're continuing to be pretty optimistic about tundra from a number of perspectives. One is, the guys have some really impressive and exciting additional lines that they have access to, that operate within the footprint, the AORs they have their business in today.

Wajax's customer list is 32,000. So it's orders of magnitude larger than Tundra's list.

So we can migrate a lot of those products and services into customers that Tundra just simply wouldn't have access to yet. So the thesis on Tundra is excellent.

We're very excited about it and we respect that market conditions right now are not as optimistic, or not as positive as it could be. But I think that's one of the reasons we want to move on this now, because we can show some excellent growth, I think, in the medium to longer term.

Hey, good afternoon. This is Chen Jua [ph] calling in for Devin.

Looking at the SG&A where costs have come in below the target of 14.5% to 15.5% of revenues. Even if the full Sue's [ph] benefit was excluded, should we be recalibrating this to a lower range?

And maybe, how should we be thinking about the puts and takes for the SG&A costs in 2021?

This is Mark speaking. We typically come in below the outlook range we provided a while ago, a 14.5% to 15.5%.

We set the range pretty wide, because it's intended to reflect the cyclicality in the sales line. So I would say that it's more -- it's probably better to think about the SG&A in the 14% to 15% range and even that may be a bit conservative.

Got it. And I also was wondering if you could provide your thoughts on the ERS consolidation opportunity, or after acquiring Delom, NorthPoint and Tundra.

Do you think there is more than one way for Wajax to pursue this strategy?

Yes, the short answer to that is yes. It's a pretty fragmented market.

The scale of Tundra would be a bit unusual in the fact that -- it's worth to recognize that Tundra is not purely an ERS firm, which would be the case with Delom and NorthPoint. Tundra is a hybrid industrial parts and ERS company, so that gives it a bit more scale.

But the short answer is yes, there are significant opportunities in the Canadian market with respect to scale ERS and IP acquisitions, ERS being the bigger focus for Wajax. And Wajax is ideally positioned to be an aggregator of those acquisitions.

So that's a strategy we continue to pursue, we've always got a number of opportunities in front of us that we'll execute when that makes some sense for the company. But it's a strategy that we've demonstrated, I think, that we can execute and that we would continue to pursue.

And how do you feel about your current inventory position, and have you started to make plans to replenish for a potential recovery and demand for the year?

We feel quite good right now about where we stand with inventory. And as Mark said, we're cautiously optimistic that things will start to improve.

But we're going to stick with where we're at now and manage throughout the year and not increase it too much, because we don't think it's really necessary at this point.

I think our focus right now is just making sure returning the inventory effectively, and if the market bounces back more aggressively, than we had built our expectations on, there's obviously going to be some lead time issues and things like that from a supply standpoint. But a backup to what Stuart said, our inventory levels right now we're quite comfortable with.

The extent to which the demand recovers really quickly, we'll obviously be chasing additional inventory from suppliers. But we'll be doing that on the basis of not overshooting demand that we're confident in.

Thank you very much for your attendance today. And we look forward to speaking with you at the end of the first quarter.