Wajax Corporation

So good afternoon, everyone. Thanks for participating in the first quarter results call.

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

I'll provide you with a general update and turn it over to Stu for comments on backlog, inventory, cash and the balance sheet. And to begin, 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 20 through 22 for your reference. If you turn to Slide 4, please.

Wajax introduced our first sustainability report as an inclusion in our recently released 2020 Annual Report. The sustainability report covers key components of our ESG program, a summary of which appears on this chart.

We encourage investors to visit wajax.com to more fully review the details. Our ESG program builds on our longstanding strength and employee health, safety and well-being; with additional programs in diversity and equal opportunity, sustainable products and services, environmental responsibility and community service.

Our customers, our investors, and most importantly, our employees, consider these programs as important attributes of our performance as a company, and we look forward to reporting on our progress as we go forward. If you turn to Slide 5.

Wajax has consistently adhered to four objectives in response to the pandemic; first, to protect the health, safety and well-being of our team. Second, to continue to provide strong service to our customers.

Third, to protect the financial health of our company. And fourth, positioning ourselves to focus on growing the business as conditions improve.

Our decisions in the first quarter and going forward will be made according to these objectives. A summary of our actions is included in MD&A and news release that was issued May 3.

And on behalf of the management team and the Board of Directors, I again want to thank our employees for their dedication, commitment and flexibility during this very difficult period. The entire team continues to do an excellent job in the first quarter, including adhering to enhanced safety protocols and demonstrating their commitment to serving our customers every day.

Turning to Slide 6. Revenue of $387 million was up $43 million or approximately 13% in the quarter, the increase in revenue was due primarily to higher equipment sales and benefited from the inclusion of Tundra which contributed $18 million based on partial quarter -- a partial quarter of operations.

EBIT of $22.2 million was up $10.8 million or approximately 95% in the quarter. And adjusted net earnings of $0.59 was up $0.30 in the quarter, noting the adjustments recorded on this chart.

Excluding the net effect of the wage subsidies, adjusted net earnings were $0.47. The first quarter TRIF rate was 1.16, which is 26% better year-over-year.

We are very proud that the team has continued to improve workplace safety despite the obvious challenges of 2021. If you turn to Slide 7.

The company qualified for $6.3 million in wage subsidies in the quarter, and allocated the gross amounts of $2.8 million and $3.5 million to cost of sales in SG&A respectively. It's important to note that the net positive effect of the subsidies in the first quarter was approximately $3.8 million due to the redirection of $2.5 million to temporary supplemental compensation programs directed at Wajax's frontline employees, who continue to provide excellent and essential support to our customers across Canada.

We turn to Slide 8. The revenue increase of 13% in the first quarter resulted from growth in all regions.

Central Canada sales of $81 million increased 11% in the quarter. Due primarily to strength in construction and forestry and assisted by increases in ERS.

Eastern Canada sales of $150 million increased 12% in the quarter, due primarily to strength in construction and forestry, assisted by increases in material handling, power systems and industrial parts. While the ERS market continues to be strong, sales declined in the East due to operational restrictions related to safety protocols.

In the shops which have constrained production, we fully expect sales to catch up to demand as COVID-19 conditions improve. In Western Canada, sales of $156 million increased 14% in the quarter due primarily to construction and forestry and the inclusion of Tundra which positively affected both, industrial parts and ERS.

Excluding Tundra, sales in Western Canada were flat in the quarter, as construction and forestry offset weakness in parts and services, associated with the oil sands that negatively affected both, mining and power system sales. Parts and service demand in the oil sands appears to be improving and fleet utilization is now greater than 90%.

If you turn to Slide 9. An update on equipment and product support sales in year-over-year variances are shown on this page.

Equipment sales of approximately $119 million increased $35 million or 42% due to higher construction and forestry equipment sales in all regions. And product support sales of approximately $107 million declined $10.7 million or 9%, due primarily to weakness in Western Canada and lower parts and service demand from oil sands customers.

As previously stated, demand from oil sands customers appears to be improving, product support volumes in Central and Eastern Canada were strong, increasing 8% and 18% respectively in the quarter. If you turn to Slide 10, an update on industrial parts and ERS sales in year-over-year variances are shown on this page.

Industrial parts sales were approximately $104 million increased $12.4 million or 13%, due primarily to the inclusion of Tundra. Excluding Tundra, organic growth in industrial parts was 3% in the quarter.

ERS sales of approximately $49 million increased $7 million or 16% due primarily to the inclusion of Tundra. Excluding Tundra, ERS sales declined slightly due to lower volumes in Eastern Canada related to COVID-19 restrictions.

If you turn to Slide 11. The slide summarizes our sales at a category level for the quarter.

This chart has been simplified for previous quarterly calls to focus attention on overall groupings of heavy equipment categories and industrial parts and services. In the first quarter, total growth in heavy equipment categories of approximately $24 million or 11% was driven by total sales and construction and forestry that offset weaknesses, primarily in mining and power systems related to Western Canada.

Total growth in Industrial Parts and Services categories of approximately $19 million or 14% was driven primarily by the inclusion of Tundra. Excluding Tundra, total sales in industrial parts and services were roughly flat year-over-year in the quarter.

And let me now turn the call over to Stu.

Thanks, Mark. Please turn to Slide 12 for my comments on backlog.

Our Q1 backlog increased [Technical Difficulty] or 52% sequentially from the previous quarter and increased $9.8 million or 4% on a year-over-year basis. Sequential increase was driven primarily by higher orders in most categories, most notably, the construction and forestry category and the ERS and industrial parts categories with the addition of Tundra's backlog.

The year-over-year increase relates to higher orders in the construction and forestry category, and with the addition of Tundra's backlog higher orders in the industrial parts and ERS categories. These increases were partially offset by lower mining orders.

Overall, backlog reflects improving momentum and increasing mix to higher relative margins in backlog due to increasing mix of Industrial Parts and Services backlog including Tundra. Please turn to Slide 13 for an update on our current inventory levels.

Inventory including net consignment decreased $2.9 million compared to Q4 2020 as a result of lower equipment inventory in the construction and forestry categories, and a decrease in the net consignment inventory of $24.1 million. These decreases were partially offset by higher balance sheet inventory which increased $21.2 million due primarily to the acquisition of Tundra and higher mining equipment inventory.

Inventory including net consignment decreased $145 million compared to Q1 2020 as a result of lower equipment and parts inventory in most categories. Net consignment inventory decreased $80.9 million compared to Q1 2020.

Overall, we are managing inventory with suppliers to manage supply chain risk due to demand and to secure appropriate levels of inventory to support our customers. Please turn to Slide 14, where I will provide an update on cash flow and leverage.

Cash flow and operating activities; cash flow from operating activities in the current quarter have increased $29.1 million from Q4 2020 due primarily to an increase in cash generated from changes in non-cash operating working capital and higher net earnings. Leverage ratio; our Q1 leverage ratio decreased compared to Q4 from 2.28 times to 2.04 times due to the higher trailing 12-month pro forma adjusted EBITDA.

Cash flow results in the current quarter were positive and allowed a material reduction in debt when considering the $73.4 million in cash used to acquire Tundra in January 2021, and has allowed total leverage to be close to the target range of 1.5 times to 2 times at the end of Q1. Our available credit capacity at the end of Q1 was $195.4 million which is sufficient to meet short-term normal course working capital and maintenance capital requirements and certain strategic investments.

Please turn to Slide 15, 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 improvement in inventory turns from Q1 2020 is due to lower 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, further opportunities to sell redundant real estate, as well as sale and leaseback opportunities have been identified and are being pursued in 2021.

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 second quarter dividend of $0.25 per share payable on July 6, 2021 to shareholders of record on June 15, 2021.

Please turn to Slide 16, and at this point, I'll hand the call back to Mark to provide a brief update on our 2021 financial outlook and concluding remarks.

Thanks, Stu. Recognizing that the challenges Wajax faced in 2020 have persisted into 2021, Corporation nonetheless 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 it in 2020, namely protecting the health and safety and well-being of our team, providing excellent customer service, protecting the Corporation's financial health and driving it's long-term growth strategy. Company expects revenue associated with the acquisition of Tundra to be a significant contributor to total revenue growth in 2021.

In the first quarter general market conditions affecting organic growth were better than the corporations expectations. Wajax will continue to work with our supplier partners to manage 2021 supply chain service levels, inventory and working capital investments will be managed accordingly, pending a clear indication of a sustained recovery.

In the Corporation's heavy equipment categories, Wajax will continue to focus on success in construction and forestry, mining, material handling and power systems, including improvements in product support volumes. Wajax has excellent growth opportunities in these categories and will continue to work closely with our supplier partners to prudently grow market share and capture aftermarket sales.

Industrial parts in the ERS, Wajax expects strong growth, including the 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 the branch network consolidation and technology. And following the COVID-19 related delay in 2020, the phased implementation of the Corporations new ERP system has begun in the second quarter of 2021, and will continue over an approximately 24 month timeframe to -- in order to reduce the associated implementation risks.

Operator, we'll turn the call open for questions now.

Hey, good afternoon guys.

Hi, Michael.

Nice quarter. The first question; just on the outlook, you commented that you saw better than expected organic growth in the quarter, and that you were managing inventories pending a clear indication of a sustained recovery.

I mean, for clarity, are you suggesting that there should have been particular strength in Q1 that maybe is less repeatable in subsequent quarters?

I think right now to be perfectly honest with you, Michael, the growth we think to some extent is a bit of a pull forward on demand. I don't think that the growth we saw in the market would necessarily continue at the same rates for the balance of the year.

So, while the market conditions are -- as we said, generally more positive than we expected to start the year, and we've gone into the second quarter with similar conditions, at least in the early portions of the quarter. We suspect that those types of conditions won't really be the case for the entire year.

Got you. Okay.

And how do you feel about the current inventory levels and thus the ability to secure additional inventories to meet demand at this point? I mean any comments on lead times or anything like that would be helpful.

Yes, there is a variety of issues I think that we're managing upstream with supplier partners right now. On the industrial parts, and -- what you might call the mobile equipment parts side of the world, there -- the lead times and service levels are fine, there is a couple of pockets of issues but nothing significant.

On the heavy equipment side of things, construction activators, the lead time has stretched out a bit, we're still running with inventory on the ground; so we've got a wee bit of cushion there. But construction activator lead times of stretched out and forestry lead times are stretched out which shouldn't be too surprising just because of the volume of business that occurred in the first quarter.

So, there is some degree of engine lead time issues. I think that you would have read about all sorts of things affecting engine deliveries and things like that but I think the bigger issue for us right now is trying to manage the inbound flow of construction and forestry equipment to try and take advantage of the market conditions while they exist.

Got you. And I guess the other side of that question is on the working capital improvement; that's been quite significant in the last four quarters.

What should we expect further for the balance of the year?

We'll continue to see positive improvement albeit not at the rate that we saw in the first quarter.

Got you. All right, great quarter, guys.

Thanks for answering the questions.

Thanks, Michael.

Thanks so much. Mark, just on the comment that general market conditions affecting organic growth were better than expected to start the year, and I appreciate that you think that maybe some pull forward.

But I'm wondering if you can comment on what areas that would be a product categories end-markets or regions, did you see that additional strength?

It's most pronounced, Michael, and I wouldn't say it's regionally specific because it was -- we saw growth in all regions in construction and forestry; I think it's most pronounced in construction and forestry. Typically, the second quarter is the biggest quarter; I think as you know, in -- particularly, the construction business.

And we saw a unit count in the first quarter which was higher than we've seen in quite a while. So that being the case, we're up against some soft comparables from last year; so that's noted.

But I suspect that the maintenance -- I'm sorry, the sustainability of market conditions and construction and forestry is probably where we think the market got off to a very hot-start and probably won't stay that way for the entire year. The general market conditions affecting other businesses are probably a bit more balanced, the industrial parts market has been continuing to gather some momentum, we do that -- we think that is sustainable.

The ERS market is excellent right now, we think that's sustainable. There has been some additions in mining quoting activity; so that market appears to be improving more so than we might have expected as we closed last year.

And as we mentioned, our oil sands product support business, we expect to that to improve also. So the comment on the sustainability of market conditions is more specific to construction and forestry, the other markets a bit more balanced, and there is more likelihood that those levels of more positive conditions can be sustained.

Okay, that's very helpful. And maybe just -- this next question kind of ties into what everything you just sort of spoke about.

But if we go back to your Q4 results release, you noted in your outlook at that time that organic revenue growth in 2021 was expected to be modest and you didn't expect heavy equipment markets to fully recover to 2019 levels this year. I'm just wondering, if you can talk about how your views on that thinking may have evolved given the better start to the year?

I think it is more likely than we would have originally expected that the recovery in heavy equipment markets to 2019 levels can be achieved in 2021. Obviously, that's an estimate on our part but the heavy equipment markets have started the year considerably stronger than we would have expected and it's possible that we -- that the two-year cycle we were originally expecting maybe shorter than we originally estimated.

Okay, that's helpful. Just in terms of the -- in terms of procurement of inventory and supply chain, some of the areas where you've seen lead times become a little more extended; is there anything you're doing, any particular strategies are employing to sort of mitigate that or to position yourselves where you do see strength in the market you want to have -- you want to get more product?

Other than saying we work day to day with supplier partners, Michael, I'm not sure we have a different strategy than that. I think we're in daily contact with major suppliers and the extent to which we can get our hands on additional inventory, we definitely action that.

It's a day to day issue, I'm not sure we have any particular strategy other than continue to work really closely with them on where we see the market going, what their lead times are, and how quickly we can secure inventory.

Okay, that makes sense. In terms of the backlog, the quarter-over-quarter improvement, $94.8 million; I know a portion of that -- meaningful portion was Tundra but are you able to break that down in terms of how much was Tundra versus how much was organic, the quarter-over-quarter backlog improvement?

Yes. On a sequential basis, the quarter-to-quarter backlog increased; if you ex-Tundra out, it was 36%.

So Tundra was $28 million in backlog in the first quarter. We saw generally pretty strong backlog in construction and forestry, some power systems, particularly power generation, and we saw some pretty solid backlog in the ERS.

So, the organic growth in backlog was respectable Tundra was helpful but the growth absent Tundra was still 36%.

That's definitely good growth, ex-Tundra. And then lastly just in terms of the qualifying for sues [ph] in the quarter.

How should we think about that going forward? You're now back in Q1 to a situation where you had positive year-over-year revenue growth, and in fact across all of your regions, now part of that was obviously a function of the acquisition but what does it look like going forward?

And I think it goes into the third quarter from not mistaken the program right now.

Yes, we'd expect something in the second quarter, albeit very modest at this point. Just given the improvement in revenues.

Okay. I will turn it over.

Thank you.

All right, thanks. Maybe just to start with -- for the categories where you saw some demand strength, so I guess the construction and forestry.

Does it seem like inventory levels are lean across the industry? And has it started to translate into better gross margins on those sales?

I don't know if we can really comment on inventory across the industry, it would really than ours -- margins in the equipment categories are generally pretty positive. We did take advantage of some equipment base disposals into the U.S.

market which were dilutive to similar construction margins. With that being the case, if you axe [ph] that out, margins on whole good sales are fairly positive right now.

Okay. Just maybe ties back to one of your earlier answers, Mark, but -- can you talk about what you're seeing with regards to RFPs for new mining shovels?

And can you remind us how many are currently in the backlog in the timing of the deliveries?

There is only one major shovel that's in backlog right now, and that's effectively [ph] delivering in the second quarter. So backlog on mining is, I think at the end of the first quarter really reflects that main shovel and couple of smaller pieces; so it's not significant.

Quoting activity on mining equipment is broadly good, there is activity in the oil sands, there is activity in coal, and there is activity in gold in Ontario. So, I would say that we're cautiously optimistic that the mining business will be -- maybe a bit better this year than we had expected, given that we have some pieces in inventory, but the extent to which customers are looking at the things we don't have an inventory they are unlikely to fall into 2021.

Okay, that's helpful. Maybe just one last one for Stu.

I think your prepared remarks, you talked about the real estate monetization program. Any -- is there anyway for you to kind of size -- potentially size that how meaningful that could be in 2021?

And when you expect those transactions to kind of flow through?

At this point I can't size them.

Okay, I'll leave it there. Thanks, guys.

Thanks. Good afternoon, guys.

Hi, Bryan.

Just in the forestry segment, I know we saw strength in equipment sales in that sector is sought out the lights. Do you sense a different tone from customers in their comfort level regarding the durability of the cycle, just relative to prior peaks that we've seen in that sector?

Can you -- just do that a little slower from me. Sorry, I just want to make sure I completely understand the question.

Could you do that again, please.

Yes. So just in the forestry segment, I know we've seen strength there; do you sense a different tone from customers and their comfort regarding the durability of the cycle relative to prior peaks?

Yes. I guess it depends how far you might consider the cycle to have a duration from a customer's perspective.

But I would say that there is a fair degree of optimism that the current conditions are going to be with us for a while on the part of customers, and that's obviously been a catalyst for their purchase of equipment.

Okay, thanks. And then just regarding ERS, I think you mentioned a decline organically in that segment on the quarter.

As we turn to a more normalized environment, what would be an appropriate organic growth rates for the ERS side of business?

I don't think we've really established an organic growth rate but I think if we achieve less than 5% to 10% organic growth rate in the base ERS business, I think we'd be disappointed. So, we typically plan our ERS organic growth rates higher than the other categories just simply because the amount of work that's out there that we can get at.

Really the issue right now for us has nothing to do with the market and has nothing to do with the company, it has to do with the fact that we got a lot of physical distancing requirements to keep employees safe in a bunch of the shops and that's constraining production. But I would say that if we achieve less than 5% to 10% organic growth rate in the ERS we'd be pretty disappointed on a kind of a post-COVID circumstance.

Thanks. That's helpful.

That's it for me.

All right. I think that's it.

Is that it, operator?

Just saying thank you very much for your time today. We're looking forward to talking to you again in August.

Thanks a lot.