Wajax Corporation

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00:48 Thank you, operator. And good afternoon and thanks for participating in our third quarter call today.

This afternoon, we'll be following a webcast which includes a summary of presentation of our third quarter twenty twenty one financial results. Presentation could be found on our website under Investor Relations events and presentations.

01:07 I'll provide you with a general update and then we'll turn the call over to Stuart for comments on backlog inventory cash and the balance sheet. Iggy, who will be succeeding this Wajax’s President and Chief Executive Officer effective January first is also with us today, and he will close our call.

Well Stuart and I will handle the questions on the current business. You're welcome to ask any, Iggy any general questions that you might have today.

01:33 To begin, I'd like to draw your attention to our cautionary statement regarding forward looking information on slides two three and four. And additionally, Non-GAAP and additional GAAP measures are summarized on slides twenty one through twenty three for your reference.

If you turn to slide five, please. 01:51 While pandemic conditions continue to improve in some areas of the country, Wajax is continuing to adhere to four important objectives.

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 finally, and consistent with our strategy, grow our company as conditions continue to improve.

Our decisions in the third quarter and going forward will be made according to these objectives. 02:22 If you turn to slide six.

Revenue of four one million dollars was up sixty one million dollars or approximately eighteen percent in the quarter. The increase in revenue resulted from increases in industrial parts and year sales in all regions, including the contribution from Tundra.

Product support sales also increased and benefited from higher sales in Western Canada. Excluding Tundra, total sales increased approximately six and one point five percent.

EBIT of twenty four point seven million dollars was up ten point four million dollars or approximately seventy two percent in the quarter. There is no benefit in third quarter this year from the Canadian emergency wage subsidy, which last year had a positive effect on EBIT five point four million dollars.

3:06 Excluding the effect of the wage subsidy in the pretax restructuring charge of seven point seven million dollars taken in third quarter last year. EBIT increased eight point one million dollars or approximately forty nine percent.

The improved EBIT resulted from higher sales and margins, offset by increased costs to the addition of Tundra, higher personnel costs due to volume and the effect of the wage subsidy. The gross profit rate of twenty one point two percent was strong in the third quarter and was driven primarily by increased margins and product support and industrial parts and a shift in sales mix away from equipment.

03:43 Adjusted net earnings of zero point seven two dollars was up zero point two two dollars or approximately forty four percent in the quarter, noting the adjustments recorded on this chart. And at the end of the third quarter, the year-to-date TRIF rate of one point three four declined thirty five percent as business volumes increased and we experienced an increase in injuries primarily in the second quarter of this year.

We thank everyone on our team further ongoing dedication workplace safety. And for excellent, recent performance resulting on a third quarter TRIF rate of zero point six four percent which has begun to improve our safety trend back to its normally strong level.

If you turn to slide seven. 04:24 As previously stated, the company did not recognize any reimbursement compensation expenses from the CEWS program for this quarter.

We've included a description of last year's wage subsidy and the of the amounts here for your convenience. 04:39 On slide seven, as previously – I'm sorry, on slide eight.

The revenue increase of eighteen point – eighteen percent in the third quarter resulted from growth in Eastern and Western Canada. Central Canada sales of seventy four million dollars increased approximately one percent in the quarter.

Sales increases in product support, industrial parts and ERS offset reductions in equipment sales. Eastern Canada sales of one hundred and fifty million dollars increased nine percent in the quarter due to strength in equipment sales product support and industrial parts.

05:13 And Western Canada sales of one hundred and seventy seven million dollars increased thirty seven percent in the quarter due to volume from Tundra assisted by growth in product support and industrial parts. Excluding Tundra, growth in Western Canada was approximately seven percent.

05:28 we turn to slide nine. An update on equipment and product support sales and year-over-year variances are shown on this page.

Equipment sales of one hundred and five million dollars decreased one percent compared to last year. Equipment sales in the majority of categories were comparable to the prior year.

OEM supply chain challenges have primarily affected equipment supply and construction forestry, material handling and power systems and those challenges are expected to continue in the fourth quarter and to negatively affect equipment and related revenue. 06:03 Product support sales of one hundred and fourteen million dollars increased thirteen million dollars or approximately thirteen percent due to strength in all regions.

Western Canada increased eighteen percent, Eastern Canada increased ten percent and central Canada increased five percent. 06:20 please turn to slide ten.

An update on industrial parts in ERS sales with year-over-year variances are shown on this page. Industrial parts sales are approximately one hundred and eleven million dollars increased twenty seven million dollars or thirty three percent excluding Tundra, organic growth in industrial parts was twelve percent in the quarter.

06:40 In ERS sales of sixty seven million dollars increased twenty three million dollars forty nine percent due primarily to the inclusion of Tundra and excluding Tundra organic sales in ERS was up four percent in the quarter. 06:52 Turn to slide eleven.

The slide summarizes the sales at a category level for the quarter and year-to-date for our company's overall group and heavy equipment and industrial parts and services. In the third quarter, total growth and heavy equipment categories of thirteen million dollars or six percent was driven by growth in power systems, mining and material handling that offset lower sales in construction in Forestry.

07:20 In total growth in industrial parts and services categories of approximately forty eight million dollars or thirty eight percent was driven by the inclusion of Tundra and by organic increases in both industrial parts in ERS. Excluding Tundra, Industrial parts and services in total organic growth was approximately seven percent up seven percent in the quarter.

07:42 If you turn to slide twelve, we'd like to provide an update on our upcoming transition that expands our direct distribution relationship with Hitachi. Change was announcing in the news release dated August nineteenth twenty twenty one, which is available on our website, and we encourage you to review that release for more information.

08:03 After two months of transition planning with our partners at Hitachi, we continue to be very confident that this change will provide Wajax was significant long-term benefits from enhanced access to product development, increased market responsiveness and improved reliability of equipment supply. It is also to expect, it is also expected to increase Wajax and Hitachi market share, providing – by providing our customers with better access to products which lead the market in terms of value performance and reliability.

Wajax and Hitachi will continue to work closely on transition planning, leading up to our transition date of March one twenty twenty two. 08:43 I'll now turn the call over, Stuart.

08:46 Thanks, Mark. Please turn to slide thirteen for my comments on backlog.

Our Q3 backlog increased fifty four point seven million dollars or seventeen percent sequentially from the previous quarter and increased one hundred and sixty six point four million dollars or eighty one percent on a year-over-year basis. The sequential increase was driven primarily by higher orders in most categories, offset partially by lower ERS orders.

09:14 The year-over-year increase relates to higher orders in the construction and forestry, material handling and Power systems categories and higher orders in the industrial parts and ERS categories with the addition of Tundra’s backlog. These increases were offset partially by lower mining orders.

Overall, backlog reflects continued momentum in heavy equipment and industrial parts and services backlog, including Tundra. 09:39 Please turn to slide fourteen for an update on our current inventory levels.

Inventory, including that consignment increased two point four million dollars compared to Q2 twenty twenty one. Net of consignment balance sheet inventory decreased by five point one million dollars while that consignment inventory increased by seven point five million dollars.

Inventory, including that consignment decreased sixty five million dollars compared to Q3 twenty twenty due primarily to lower equipment inventory in most categories partially offset by higher mining equipment inventory and the higher parts and work in process inventory. Net consignment inventory decreased forty six point three million dollars compared to Q3 twenty twenty.

10:20 We continue to work with major suppliers with the focus on construction, forestry, material handling and Power systems equipment, to attempt to secure additional inventory to meet our customer demand in the fourth quarter of twenty twenty one. 10:31 Please turn to slide fifteen where I will provide an update on cash flow and leverage.

Cash flow from operating activities in the quarter of forty point two million dollars increased three point six million dollars from Q2 twenty twenty one due primarily to an increase in cash generated from changes in non-cash operating working capital. Our leverage ratio decreased compared to Q2 from one point seven three times to one point three nine times due primarily to lower debt level in the current period.

Cash flow results in the current quarter were positive, which contributed to a material reduction in debt, and resulted in total leverage below the target range of one point two one point five to two times at the end of Q3. Are available credit capacity at the end of Q3 was three hundred and twenty two point six million, which is sufficient to meet short term normal course working capital and maintenance capital requirements and certain strategic investment.

11:31 Please turn to slide sixteen where I'll provide an update on financial position. We continue to focus on working capital efficiency, which is a key component managing our overall leverage targets.

The improvement in inventory turns from Q2 twenty twenty one is due to higher trailing twelve month average sales and lower average levels. As previously disclosed, we continue to evaluate ways to unlock cash from the business and as such have completed a market value of assessment of our own real estate holdings.

12:01 In the third quarter, we entered into sale and leaseback transactions for two of our own properties in [Indiscernible] and Fort St. John for proceeds net of transaction costs of two point one million dollars and three point two million dollars, respectively.

Further opportunities to sell redundant real estate as well as selling leaseback opportunities have been identified and are being pursued in twenty twenty one and twenty twenty two. 12:28 Proceeds from any real estate sales will be used primarily for debt repayment.

The earnings impact from any cell 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 zero point two five dollars per share payable on January twenty twenty two to shareholders record on December fifteenth twenty twenty one.

12:56 Please turn to slide seventeen and at this point, I'll turn it back to Mark.

13:01 Thanks Stuart. We'd encourage you to read the outlook completely I think for today's call rather than reading the outlook for verbatim, I'm going to point out three changes from our report at the end of the second quarter.

First, I'm going to start with the market conditions have continued to be more positive than we originally expected those conditions generally continued into the third quarter. 13:27 The second important point is OEM supply chain issues have been a factor throughout twenty twenty-one, but became more pronounced in the third quarter and those issues are expected to continue in the fourth quarter, which may negatively affect revenue and customer service levels.

We are working very closely with each of our major suppliers to minimize to the extent possible, the effect of these issues. As stated, supply chain issues are most pronounced in equipment and related sales in construction forestry material handling and power systems specifically large engine systems.

14:03 Third, we're pleased to report that we continued to expand the implementation of our new ERP system in the third quarter and have now successfully converted the majority of heavy equipment branches in Alberta, Saskatchewan and Manitoba, now totalling thirteen locations, including a number of high volume sites. While we will continue to take a cautious approach to the implementation over the next eighteen months, we are very encouraged by the progress made to date.

14:31 Finally, this is my last quarterly call as Wajax CEO, leading to my retirement on December thirty one and I wanted to express my sincere thanks that those listening greatly enjoyed my ten years as a member of the team and to reporting the progress of our business to our investors. And as many if not, all of you would be aware Iggy Domagalski will replace me effective January first and we've asked Iggy to close our formal remarks today.

15:01 Thank you very much, Mark. You are certainly leaving some very big shoes to fill.

It is an honour to be chosen to lead this proud Canadian company. I am excited to continue the great work that Mark, Stuart in the Wajax leadership team have executed over the past decade, and I'm a firm believer in the current strategy for growing the business.

15:22 Between now and the end of the year, I will continue to learn about this great company by visiting as many of our one hundred and fourteen branches across the country as I can. And as of January first, it be my turn to be a member of this team, and I look forward to reporting the progress of our growing business to our investors and to everyone in this call.

Thank you for your time, and I look forward to working with you. And with that, I will ask the operator to open the line for questions.

16:24 Hey, good afternoon. Nice to see the strong performance in gross margins.

I presume there are several subscribers including the relationship between higher gross profit margins and lower inventories. How do you guys see that relationship overall all for the company and I guess the industry over the next couple of quarters?

16:52 Michael, it's Mark. Our general premises that the margins at a category level are generally sustainable.

A couple of things to think about that the particularly in the third quarter, the mix away from equipment was a bit more dramatic than it was in the first half of the year. So, that was accretive to margin, but the extent to which equipment sales improve in twenty twenty two beyond some of the supply chain issues that we face that would obviously affect the margin negatively, but I think at the category level, our margins and industrial parts are quite strong.

Our margins in product support both labor and parts are pretty strong and just given certain supply issues, our margins and equipment, are stronger than they typically would be. I think that's an area where we would probably give a little bit back when in total gross margin that wouldn't be – that wouldn’tss have too much of an effect.

So, I think the only thing that is not necessarily sustainable from what we see in the third quarter is likely to be a mix. 17:58 And because the inventories are running very tight, margins are obviously quite healthy.

But that's also a function of the fact that the extent to which we take hits on disposing of excess inventories is obviously, that has really going down over the course of the last twelve months or so.

18:18 Got it. Thanks, Mark.

You commented on the sourcing of equipment that being a little bit more challenging Q4, giving the visibility on when that improves, you have a kind of of better capability of needing demand.

18:34 We are not expecting it to improve in the fourth quarter, Michael, to be perfectly honest with you. It's a vendor by vendor, category by category discussion.

I think we're expecting construction in forestry to continue to be an issue for us for a while. That's a function of tight supply, that's a function of transition to Hitachi.

It's a function of labor disruption and one of our primary manufacturers over the last month or so. So those are all negative issues and we're expecting those issues to take a while to work their way through the system.

19:06 We've got some real types of supply on the forestry equipment side, which we’re managing. So, we think that'll be with us for a little while.

And our partners in material handling supply in large engine and systems, I think they've got some challenges ahead and the two. I think where we feel quite a bit better is post, the transition to Hitachi, we think the access to equipment supply will be considerably more dependable and our partners there have worked very closely with us in planning for our twenty twenty two budget.

So, I think some of the issues we faced towards the end of the third quarter will persist through the fourth and likely into the first half of next year.

19:53 Got it. And then turning to mining, you talked about a strong forwarding activity.

Can you disclose maybe what should come into the backlog in the next several quarters, and maybe longer term, but the largest opportunities are for the company, particularly as we think about the end of the HCMJV?

20:15 Yes. The, I mean the mining quarter, it'd be great to be able to tell you how the quotes are going to turn into backlog.

I don't know if we really know how to do that right now. Quoting activity is pretty strong.

I can't tell you that you get into next year, we've already gotten backlog one large shovel incremental to where we were this year, so that's worth about call it twenty million. So, we're expecting the mining equipment business to be better next year than it was this year and that's what booked orders, the extent to which some quoting activity turns into booked orders that'll will obviously get a little bit better than that.

20:50 Got it. Okay.

I'll leave it there, but take or before I pass line Mark, I just want to say about appreciated and enjoy these calls and our conversations over the years. So, you'll be best.

20:59 Thanks, Michael. Appreciate it.

21:08 Hi, thanks. I just wanted to come back to the gross margin just as you transition away from consignment with Hitachi, should we be expecting there to be a bit of an expansion to your gross margin, and if so, can you speak to how meaningful that could be?

21:27 You know it's expected to be a bit more positive in the normal course. And I suspect that you probably won't see the benefit of that in twenty twenty two for a couple of reasons.

We ourselves in our partners at Hitachi really do want to do a proper job of the implementation of that line and managing that change. So, we may trade some of that margin for increased aggressively from a retail pricing standpoint.

I think in the normal course, that will reset itself a little bit, but we'll really want to get off the ground pretty aggressively. So, we wouldn't necessarily expect any material increase in margin at least in twenty twenty two.

22:10 Okay. That's good color.

Thanks for that. The balance sheet look appears to be in pretty shape here.

But I'm wondering if the need to rebuild your inventory position and transition may confirm, we just develop, does that impact the timing for when you consider moving forward on some M&A opportunity?

22:32 The short answer to that one definitely not. I think rebuilding inventory there, I think that the team's done a superb job of spending parts pretty quickly.

We probably need more parts inventory, but I expect that will catch up from a sales standpoint I think the turns and parts are pretty strong and I think they would stay that way. 22:55 I think on the equipment side of things, the extent to which those inventories come up, they'd be zero effect on the ability of the company to finance the acquisition program.

So, I wouldn't worry about that one at all.

23:09 Okay. And then how does that M&A pipeline look now?

23:15 It's, I would say it's a rich pipeline. We don't have anything of scale to report to you at this point in time.

There are couple of small deals in the Ontario market that the team is working on. They would not be consistent with an order of magnitude like [Indiscernible] Tundra, so there smaller deals that we continue to work on.

But I think it's obviously a pretty big focus for the management team. Is to get some of those deals to the front of the queue and use some of that liquidity to invest in that growth strategy.

It's just real important to the future of the company.

23:53 Okay. Look before I turned over, I just wanted to say congrats Mark the upcoming retirement and best wishes for the next steps.

24:00 Appreciate that. Thank you.

24:10 Thank you. You've already talked a lot of bit about supply chain issue.

I'm wondering if you can also the touch on how those issues maybe talking in your industrial parts and business and parts [Indiscernible]?

24:27 It is, there are some emerging issues in industrial parts, Michael. I think the fundamental difference between IP and a lot of the heavy equipment categories, if not all of heavy equipment categories is there's, the strength, there's switching opportunities.

In industrial parts where one if one brands is not available, we can usually successfully convert the customer to another. So, the extent which is substitute ability in the product line that works to our advantage, even though there are supply chain issues.

So, there's some issues there. I don't think we, some that I don't think we don't see those as chronic as some of the heavy equipment supply.

And we reasonably confident that while they will continue through the fourth quarter and into the first half of next year, they're not expected to have a significant impact on the revenue line as the equipment side of things.

25:25 Okay, That's helpful. Thank you.

The comments that you plan to purchase all find in inventory on hand out of October thirty first related to the [Indiscernible] approximately how much capital investment that all recognized?

25:46 I’m looking Stuart to not said, but I believe that in October, roughly about ten million bucks came under of the balance sheet…

25:54 Yes.

25:55 And whatever is received from the current supplier between now and the end of February of next year, we bring that on the balance sheet also. I think which want to watch Michael is that coming on the balance sheet isn't necessarily negative from a cash flow standpoint because we're obviously trying to sell that stuff as soon as it arrives because we're short.

So, there is some inventory coming on the balance sheet, but the likelihood it's going to stay there isn't very high. Just given the demand and being not sure we are in backlog.

26:28 In backlog, yes, apologize. Backlog and construction is up obviously, so.

26:35 That's clearly my next question which is about the backlog and strong increase in the quarter. That was like you probably gain the most of our product categories, I guess sort of two more questions, number one, the gain, were those driven primarily by some demand or is there any impact to your, just from [Indiscernible] and then secondly wondering if you could kind of run through the gains you saw category or was it concentrated in some areas areas?

27:15 Yeah, I think I guess to the answer the first part of the question, Michael, so I'm going to talk sequentially, okay, as it opposed to year-over-year because there's obviously a pretty big difference year over year. So sequentially it's probably the more relevant piece.

So sequentially, there's about a fifty five million dollars increase in backlog and trying to guide you as much as we can the vast majority of that say something between forty million dollars and forty five million dollars really has nothing to do with supply chain issues. 27:46 It is simply orders that were booked with original delivery dates that were well into next year.

So that's either mining or major power chain projects or aspects of material handling that are kind of larger units and later orders. So, the majority of the sequential increase in backlog has nothing to do with supply chain.

There's undoubtedly, we've been a supply chain effect in there, but at the end of the third quarter, I would say that it certainly wasn't the biggest piece of that sequential increase. 28:19 And I'm sorry, your second part was what are the some of the categories?

28:23 It sounds like you probably about you said in most categories, but I'm just wondering if is more detail there if there were any particular areas that were major to the quarter-over-quarter change?

28:38 Yes. So, quarter to quarter, pretty solid increase in mining, really pretty solid increase in power generation and pretty solid increase in material handling and obviously a nice amount of momentum in industrial parts.

28:56 Perfect. And then I guess just one last one related to that.

It sounded like in quarter ERS quarters were a little lower.

29:06 Yeah.

29:05 Just wondering if you can comment on that? Was there a particular driver?

Is that indicative of sort of what you're seeing in the market more generally or is it specific to some situation and how do we think that going forward?

29:18 No, I wouldn't read too much into that and ERS particularly as it relates to some of the bigger orders that effect alone can be a bit of a lumpy business on a year-over-year basis. So, I think momentum in ERS is actually quite good.

And I think as I said, I think the momentum is actually quite good. So, I wouldn't read too too much into a quarter to quarter reduction in orders.

I think our biggest issue in engineered repair services really labor. And it's just finding enough people enough technicians to fulfil just kind of the day to day demand and some of the larger orders the companies got access to if it can staff them.

29:59 Okay, that's helpful. I will get back in the queue.

Thank you.

30:15 Thanks. Good afternoon you guys.

Just on the rental fleet, looks like rental equipment on the balance sheet, is that multi year lows? What should we expect I guess for rental CapEx next year?

30:31 Brian, it'll be somewhat consistent with each of the past two years. So, we continue to look at the rental fleet and our biggest objective is to maintain the currency and get it anything above five years we don't really want to have on our books we look to sell that and try to keep it current.

So, expect it to be about the same again in twenty twenty two.

30:58 Okay, thanks And then just understanding that it is competitive out there. Can you just comment on what you're seeing on the labor side of things just some comment on technician availability and the competitive environment?

31:14 Well, two things, I guess, first of all, it is very competitive. I think our most pronounced market for labor shortages is Quebec.

It's not Alberta, DC and Ontario would be not too too far behind, but Quebec would definitely be our most competitive labor market. 31:33 We've with respect to wage inflation, I think we like others have adjusted some wages in regions and localities where we needed to in order to either hold on to the staff that we have or attract some additional folks.

But we typically recovered that through the labor margins through to the customer. So, at this point in time, it's really an attempt to make sure we hold on to the really good folks work for the company, fill out the vacancies that we have, the issues are certainly most pronounced with technicians, and that's on the heavy equipment and the ERS side.

I think that makes sense to wish there's wage inflation so far that's been recovered through labor margins.

32:16 Okay, great. Thanks, Mark.

And before I sign off here, just congratulations Mark on the retirement and best of luck.

32:23 Thanks, Bryan. Appreciate it.

32:35 I was looking today because I thought you might close, but I'll probably didn't quarter that very well in advance. So, I just want to say thank you very much for listening to us today.

And I'm sure my colleagues look very much forward to talking to you again in March. And I'll be here to support them for the first few months next year.

But I certainly appreciate your time attention today and for all the other conference calls we've done together, okay. So, thanks very much.

Talk to you again in March.