Wajax Corporation

Thank you very much. Good afternoon and thanks for participating in our fourth quarter call.

This afternoon, we'll be following a webcast which includes a summary presentation of Wajax's Q4 2021 financial results. The presentation could be found on our website under Investor Relations and events and presentations.

I'll provide you with a general update and we'll then turn the call over to Stu for comments on backlog, inventory, cash and the balance sheet. To begin, I'd like to draw your attention to our cautionary statement regarding forward looking information on slides two, three and four.

Additionally, non-GAAP and additional GAAP measures are summarized on slides 18 and 19 for your reference. Turning to slide five, please.

Revenue of $403 million was up $22 million or approximately 6% in the quarter. The increase in revenue resulted from increases in industrial parts and ERS sales in Western and Eastern Canada, including the contribution from Tundra.

These increases were partially offset by lower equipment revenue due to lower mining revenue in Western Canada and lower construction and forestry revenue in Central and Eastern Canada. Excluding Tundra, total sales decreased approximately 3%.

EBIT of $15.3 million was down $3.5 million or approximately 19% in the quarter. There is no benefit in the fourth quarter this year from the Canadian emergency wage subsidy, which last year had a positive effect on EBIT of $5.7 million.

Excluding the effect of the wage subsidy in the fourth quarter last year, EBIT increased $2.2 million or approximately 17%. The improved EBIT result from higher sales and margins and higher proportion of industrial parts and ERS sales compared to equipment sales.

Selling and administrative expenses as a percentage of revenue increased from 13.5% in the fourth quarter last year to 16.5% in the fourth quarter of 2021. This increase was due mainly to additional expenses related to Tundra, higher incentive compensation, a prior year recovery of personnel expense from the CEWS program without a similar recovery in the current year and professional fees related to environmental remediation.

Some of these costs are not expected to reoccur and management remains committed to ongoing cost productivity. Adjusted net earnings of $0.33 per share was down $0.15 or approximately 32% in the quarter, noting the adjustments recorded on this chart.

At the end of Q4, the year-to-date TRIF rate of 1.02 declined 6%. We thank everyone on our team for their ongoing dedication to workplace safety and for excellent recent performance resulting in the fourth quarter TRIF rate of 0.13, which has continued to improve our safety trend back to its normally strong level.

As previously stated, the company did not recognize any reimbursement of compensation expense for the CEWS program in the quarter. We have included a description of last year's wage subsidy and the application of the amounts at the bottom of this slide for your convenience.

Turning to slide. The revenue increase of 6% in the fourth quarter resulted from growth in Eastern and Western Canada.

Central Canada sales of $76 million decreased 7% in the quarter, mainly due to lower construction and forestry equipment revenue, Eastern Canada sales of $157 million increased 6% -- or sorry, increased 6% in the quarter due to moderately higher revenue in most categories, offset partially by lower construction and forestry equipment revenue. Western Canada sales of $170 million increased 12% in the quarter due primarily to ERS and industrial parts strength related to the acquisition of Tundra earlier in the year, offset partially by lower mining equipment sales.

Excluding Tundra, sales in Western Canada declined approximately 9%. Please turn to slide seven.

An update on equipment and product support sales and year-over-year variances are shown on this page. Equipment sales $120 million decreased 18% compared to last year due primarily to lower mining sales in Western Canada and lower construction and forestry sales in all regions.

These decreases were offset partially by higher power system sales in Eastern Canada. OEM supply chain challenges have primarily affected equipment supply and construction, forestry, material handling and power systems, and those challenges are expected to continue into 2022.

Product support sales of $103 million increased 1% due to strength in construction sales and all regions. Please turn to slide eight.

An update on industrial parts and ERS sales and year-over-year variances are shown on this page. Industrial parts sales of approximately $109 million, increased $23 million or 27%.

Excluding Tundra, organic growth in industrial parts was 10% in the quarter. ERS sales of $62 million increased $21 million or 53% due primarily to the inclusion of Tundra.

Excluding Tundra, organic growth in ERS was 15% in the quarter. Turning to slide nine.

The slide summarizes sales at a category level for the quarter and year-to-date for our company's overall groupings of heavy equipment and industrial parts and services. In the fourth quarter, the heavy equipment grouping declined $23 million or 9%, driven by lower sales in mining, construction and forestry that were partially offset by higher sales in power systems.

Total growth in industrial parts and service categories of approximately $45 million or 35%, was driven by the inclusion of Tundra and by organic increases in both industrial parts and ERS. Excluding Tundra, industrial parts and services organic growth was 12% in the quarter.

I will now turn the call over to Stu.

Thanks Iggy. Please turn to slide 10 for my comments on backlog.

Our Q4 backlog increased $47.5 million or 13% sequentially from the previous quarter and increased $237.4 million or 131% on a year-over-year basis. The sequential increase was driven primarily by a higher construction and forestry orders and higher industrial parts orders.

The year-over-year increase relates to higher orders in all categories, including higher industrial parts and ERS orders, with addition of Tundra’s backlog. Overall, backlog reflects continued momentum in heavy equipment and industrial parts and services backlog including Tundra.

Please turn to slide 11 for an update on our current inventory levels. Inventory increased $17.4 million compared to Q3 2021 due largely to the corporations' previously announced acquisition of all construction-class excavator consignment inventory on hand.

Inventory increased $31.3 million compared to Q4 2020 due primarily to the addition of Tundra’s inventory and higher work-in-process and parts inventory driven by increased sales volumes offset partially by lower equipment inventory. We continue to work with major suppliers with a focus on construction, forestry, material handling, and power systems equipment to attempt to secure additional inventory to meet our customer demand during 2022.

Please turn to slide 12 where I'll provide an update on cash flow and leverage. Cash flow from operations, operating activities in the current quarter of $36 million decreased $4.2 million from Q3 2021 due primarily to lower earnings.

Our leverage ratio decreased compared to Q3 from 1.39 times to 1.29 times due to the lower debt level in the current period offset partially by a lower trailing 12-month pro forma adjusted EBITDA. Cash flow results in the quarter were positive, which contributed to a material reduction in debt.

And our leverage remains below the target range of 1.4 to two times at the end of Q4. Our available credit capacity at the end of Q4 was $342.7 million, which is sufficient to meet short-term normal course working capital and maintenance capital requirements and certain strategic investments.

Please turn to slide 13 where I'll provide an update on financial position. We continue to focus on working capital efficiency, which is a key component of managing our overall leverage targets.

The improvement in inventory turns from Q4 2020 is higher trailing 12-month average sales and 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.

In the fourth quarter, we entered into a sales transaction for one of our own properties in Quebec City for proceeds net of transaction costs of $2 million. Further opportunities to sell redundant real estate as well as sale and lease back opportunities have been identified and are being pursued in 2022.

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

Finally, the Board is approved are first quarter 2022 dividend of $0.25 per share payable on April 5th, 2022 to shareholders of record on March 15th, 2022. Please turn the slide 14.

And at this point I will now turn the call back to Iggy.

Thanks very much. Stu.

Our 2022 outlook appears on slide 14, and rather than reading the outlook verbatim, I will highlight a few important points. First market conditions have continued to be more positive than we originally expected, and those conditions generally continued into the fourth quarter and these favorable market conditions are expected to continue in the first quarter of 2022.

The OEM supply chain issues experienced in 2021 are expected to continue into 2022, which may negatively affect revenue and customer service levels. We continue to work very closely with our suppliers to minimize to the extent possible the effect of these issues.

And as stated, supply issues are most pronounced in equipment and related sales and construction, forestry, material handling and power systems, specifically large engine systems. Lastly, coming off, the record revenue and strong earnings of 2021 and record start of year backlog, our focus is to maintain this momentum and increase shareholder value in 2022.

To do so, we plan to continue focusing on our priorities, which include organically growing our business, building out our acquisition pipeline, supporting our closer relationship with Hitachi and continuing to prudently manage our balance sheets. That concludes the prepared comments.

I'd like to turn it back to the operator for any questions.

Hi. Good morning guys.

Before jumping into the result, Iggy, I wanted to start with a high level question for you. You've been CEO for a couple months now.

You came from Tundra and that was a high growth business. I wanted to get your take on what you thought the opportunities are at Wajax this year in the next several years.

Maybe how should think about a story going forward?

That's a great question. Thanks, Michael.

The strategy that Wajax had before I got here was to really continue investing heavily in the industrial parts and engineered repair service businesses, which are the businesses that I came from for the past 15 years. And I'm really excited to grow those businesses, both organically and through acquisition.

As you know, we have a lot of dry powder on our balance sheet. And so, we're actively looking for targets in the IP and ERS space throughout Canada.

We recently brought on a dedicated resource as a Vice President of Corporate Development to focus on that area. He comes with 27 years of experience in the IP and ERS space and has a deep M&A background.

So, we're really excited to focus on that area and grow it. Within the heavy equipment business, which is a little bit new to me, but definitely not to Wajax.

We're excited to continue growing that space as well. And that area more through continued investment in developing our technicians, providing great customer support, and making sure that we have the product support and parts availability that our customers need.

That's great. And I don't know if you can frame the overall organic or many opportunity in terms of industrial parts and ERS.

But anyway, investors can think about it in terms of expectations going forward, that be helpful too.

Michael, our sound system is glitching a little bit. Would you mind repeating the question please?

Yeah. I'm hearing a little bit of an echo here.

Just asking if you can frame the overall opportunity on the organic and M&A side for industrial parts and ERS and board.

Yeah. Great question, Mike.

Thank you. Let's talk about acquisition front, over the last four years, we've deployed a little over $175 million in acquisition capital to acquire a number of companies, including two tuck-ins in the last six months.

And we see that as a very large opportunity in Canada. Management estimates that the IP and ERS market is around $10 billion in the country.

And we see ourselves as a logical consolidator of that business. A lot of it is mom and pop shops, and we're actively looking at those, but there are also some Tundra size and beyond acquisitions out there that we're looking at as well.

So, we're working hard to build that pipeline, but we think that's a really, really strong area for growth. And then, on the organic front, the business that we have there is distribution of industrial parts and services.

And so, we're limited in those areas mostly by availability of technicians. We're seeing a challenging environment for hiring technicians, but we're investing significantly in a number of initiatives around recruiting and retention, that we hope will be able to really drive the organic growth of that business quickly.

That's great. Thanks again.

I'm going to try one more [technical difficulty] the feedback here. But as it relates to the equipment sales, that was down a little bit more than I would've expected in the quarter and understanding it was a tough comp.

And I just wonder how much of that had to do you with tight equipment availability as of this month; you'll be sourcing Hitachi equipment from the Hitachi construction machinery loaders of America. I wonder what you feel about your ability to source sufficient equipment in the near term, and maybe talk about the cadence of deliveries in 2020.

Sure. That's a great question, Michael.

I'll start with Hitachi. I mean, we have been receiving excellent support from Hitachi and are very confident in the transition.

We're just really excited to have a partner that wants us to win and wants us to be successful. And so Hitachi is a wonderful partner.

We expect to receive inventory consistent with our 2022 joint targets, and all of the Deer [ph] consignment inventory that we've acquired, that's all been -- nearly all of that's been sold, and committed. So, we're on track with Hitachi to receive all the equipment that's been promised.

When we look at some of our other vendors in the heavy equipment space, they're having some supply chain challenges. So, we're working with them daily to make sure that we can get as much equipment as possible.

And when we see opportunistic times to purchase inventory, we're definitely taking those. In our industrial parts business, it's less of an issue, where everyone is seeing supply chain challenges, but within industrial parts, we have the ability to switch suppliers and often we're not exclusive.

So, if a customer needs a certain part, we have the ability to go to multiple suppliers to get it and our supply chain teams are doing that. So, we're not seeing very many issues in that space.

Thanks very much, guys. Those are my questions.

Thanks Michael.

Thank you. Just to clarify some comments about Tundra contribution, sounded like it was around $30 million in the quarter.

Is that close to correct? Or is that correct?

That's correct, Michael.

Okay. Perfect.

On the product support side, a little bit surprised to see the revenues essentially flat on a year-over-year basis after some strong growth in the second and third quarters. Are you able to speak to the factors that would've contributed to that slower rate of growth in the fourth quarter?

And I'm not sure if this has any do with the technician issues, just highlighted there Iggy.

That's a good question. Thanks for that, Michael.

There is some seasonality to those numbers and there is the issue of being to able to recruit technicians to meet the demand. So, those are two other reasons why we saw numbers flat from the same quarter last year.

Okay. And then maybe more generally on the fourth quarter revenue performance, was there any issue in the quarter whereby the Omicron surge toward the middle of the fourth quarter.

Did that have any impact in terms of weighing on the revenue performance in the quarter?

Generally, Omicron did not have a material impact. We only saw it a little bit in our loan [ph] business, but not material.

Okay. Thanks for that.

And then just on the margin side, if we look at the SG&A expenses as a percentage of revenue in the quarter, a little higher than they've been recently. I know you called out some of the factors.

Can you discuss how we should think about selling an admin expenses going forward in 2022? And what you expect those to look like?

Yeah. That's a great question, Mike.

Thanks. Compared to Q4 last year, we did have that higher compensation expense of about $4 million and $1 million in environmental remediation costs.

And when you take those out, we would've been at around 15.3% SG&A, which is still higher than we'd like to be and what we usually are. So, expense control remains key focus for management.

And at the same time, we're building staffing levels to meet our customer demands, but a general range that we're comfortable with and that we believe we can stay in is 14.5% to 15.5%.

Okay. And within that, just a couple clarifications, I guess.

First off, the professional fees related to the environmental remediation in the quarter, can you elaborate on what that related to? Is that something we should expect to potentially see additional expenses in connection with going forward and just a bit better clarity on what happened there?

No. I can answer that.

It's Stuart. It's a one-time environmental cost, that won't be repeated for one location.

Okay. Thanks Stu.

And then just the last clarification. In terms of expenses going forward that's helped with the range you've provided Iggy.

Can you just talk about what you're seeing with respect to wage inflation and how well your position to pass on any higher costs in terms of higher labor cost inflationary pressures to your customers?

Yeah. I can probably take that, Iggy can fill in.

Clearly, we've seen wage inflation in a number of areas, but you can see that our margin has continued to increase. So, we've been able to take the inflation and pass it on not only through price increases, but also service price increases.

So we've been pretty good at that. We continue to monitor the changes from our vendors and as much as possible try to pass that on through increase store rates and obviously managing wages for our employees.

We're pretty close to that because obviously, we're looking to continue to retain people, but we think we've done a pretty good job and that's reflected in our ability to improve the margins over time.

Okay. Thanks very much.

I will turn it over.

Yeah. Good afternoon.

Just one question for myself here. Previous comments on the competitive labor market, indicated it was most pronounced out East and mostly in Quebec.

Is that still the case? And are you seeing an increase in tightness out West just given the strength in energy markets?

Hi Bryan. Thanks for the question.

Labor markets continue to be a challenge across the country. For us it's most pronounced in Quebec and we are starting to see pockets of it in Western Canadian oil and gas as well.

Okay. Thanks.

That's it for me.

Yeah. Thank you.

Just a couple of other questions. In 2022, are there any large mining shovel orders that are expected to be delivered in the current year and that currently are in backlog?

Yeah. Thanks for the question.

Yes, we have two 8,000s in the backlog and they're both expected to be delivered in Western Canada in the second half.

Okay. And then when we look at the backlog, it's obviously continued to grow, both year-over-year and sequentially.

To what extent is that indicative of a lengthening of the duration of the backlog? You've talked obviously a little bit already about supply chain challenges.

Is this -- just trying to get a sense for how much of this is sort of true volume growth? If there's a pricing component you can comment on how much might that be and then versus just an extension of the duration or lengthening of the duration of the backlog.

That's a great question. Thank you.

A small portion of the backlog has increased due to supply chain issues, but the majority of the sequential increase in our backlog is all order that had original delivery dates in 2022 and it's across all categories. And when we look at the delivery dates for our backlog, nearly all of it is delivering in 2022.

Okay. And then I guess just one last one, and I know you don't provide formal guidance.

But if we look at the backlog growth you had been achieving in the last several quarters, and we look at sort of the revenue performance this quarter up just under 6% year-over-year, the -- there's a bit of a mismatch there. So, as we look to 2022, I'm just trying to get a sense for -- the backlog is up significantly.

But are there any sort of guideposts or any kind of commentary you can provide just around the revenue side of things? It sounds like you expect growth, but just trying to kind of narrow in, on what might be an appropriate way to think about the level of growth you think you could achieve in the current environment.

I appreciate the question. Thank you.

But we can't provide forward looking guidance on revenue.

Okay. Thanks very much.

Thank you very much for joining us. We will see you at the next quarterly call.