Wajax Corporation

Thank you, operator. Good afternoon, and thank you for participating in our second quarter call.

This afternoon, we will be following a webcast, which includes a summary presentation of Wajax' Q2 2023 financial results. The presentation can be found on our website under Investor Relations, Events and Presentations.

I'll provide you with a general update and will then turn it over to Stu for comments on backlog, inventory, cash and the balance sheet. To begin, I would like to draw your attention to our cautionary statement regarding forward-looking information on Slide 2 and the non-GAAP and other financial measures on Slide 3.

Turning to Slide 4. This slide provides an overview of Wajax.

The corporation has 165 years of Canadian operating history operates across 121 branches with a team of over 3,000 employees, including more than 1,100 skilled technicians. During the quarter, our heavy equipment categories and revenue sources made up approximately 58% of our total revenue, while Industrial Products and ERS generated approximately 42%.

Turning to Slide 5. In the second quarter, Wajax saw a strong performance across key financial metrics.

Revenue of $586.2 million was up $75 million or approximately 15% in the quarter. The increase in revenue resulted from increased industrial parts, product support and ERS sales in all regions and higher equipment sales in Western and Central Canada.

EBIT of $45.3 million was up $11.2 million or approximately 33% in the quarter, the improved EBIT resulted from higher sales volumes, offset partially by lower product support margins and higher selling and administrative expenses. Gross profit margin of 19.9% decreased 20 basis points compared to the same period of 2022 due to lower product support and industrial parts margins, offset partially by higher equipment and ERS margins and a higher proportion of ERS sales.

Selling and administrative expenses as a percent of revenue decreased to 12.2% in the second quarter of 2023 from 13.4% in the second quarter of 2022. Selling and administrative expenses in the second quarter of 2023 increased $2.9 million or 4.2% compared to the second quarter of 2022 due primarily to higher personnel costs as the volume of business increased over the prior year.

Adjusted net earnings of $1.26 per share were up approximately 37% or $0.34 in the quarter, noting the adjustments recorded on this chart. At the end of Q2, TRIF rate was 1.12, an increase of 7% from the second quarter of 2022.

The second quarter TRIF was down 4% from the first quarter of 2023. Safety continues to be Wajax' number one priority, and management is committed to continuously improving our safety programs to improve on this result.

We thank everyone on our team for their ongoing dedication to workplace safety. Turning to Slide 6.

Revenue increase of 15% in the second quarter resulted from growth in all regions. Western Canada sales of $269 million increased 19% in the quarter mainly due to strong mining equipment sales, including the delivery of a large mining shovel, higher ERS and industrial parts sales and higher product support revenue in all categories.

Central Canada sales of $123 million, increased 23% in the quarter due primarily to higher equipment sales in the material handling and construction and forestry categories as well as strength in the industrial parts and ERS category. Eastern Canada sales of $214 million, increased 6% in the quarter due primarily to strength in the industrial parts and ERS categories, offset partially by lower equipment sales in the Power Systems category.

Please turn to Slide 7. An update on equipment and product support sales and year-over-year variances are shown on this page.

Equipment sales of $190 million, increased $18 million or 11% compared to last year due primarily to strong mining sales in Western Canada, including the delivery of a large mining shovel and higher material handling and construction and forestry revenue in Central Canada, offset partially by lower power system sales in Eastern Canada. Product support sales of $141 million, increased $18 million or 15% due primarily to higher mining and construction and forestry revenue in Western Canada and higher Power Systems revenue in all regions.

Please turn to Slide 8. An update on industrial parts and ERS sales and year-over-year variances are shown in this page.

Industrial parts sales of approximately $155 million, increased $21 million or 16% due to higher sales in all regions, particularly in Eastern Canada. ERS sales of $89 million, increased $16 million or 22% due to higher sales in all regions, particularly in Western Canada.

Turning to Slide 9. The slide summarizes sales at a category level for our company's overall groupings of heavy equipment, industrial parts and services.

In the second quarter, Heavy Equipment Group increased $38 million or 13%, driven by higher sales in all categories except Power Systems. The increase in the mining category included the delivery of a large mining shovel.

Total growth in Industrial Parts and Services categories of approximately $37 million or 18% was driven by increases in both Industrial Parts and ERS. We continue to see growth in these less cyclical categories, and they remain a core element of our broader growth strategy.

I will now turn the call over to Stu.

Thanks, Iggy. Please turn to Slide 10, for my comments on backlog and inventory backlog.

Our Q2 backlog of $551.2 million, increased $20.5 million or 3.9% compared to backlog of $530.8 million at the end of Q1 and increased $16.4 million or 3.1% on a year-over-year basis. The sequential increase was due to higher material handling and ERS orders, offset partially by lower construction and forestry orders.

The year-over-year increase was due to higher ERS and material handling orders, offset partially by lower construction and forestry and power systems orders. Overall, our strong backlog reflects continued momentum in our heavy equipment, industrial parts and ERS businesses.

Inventory increased $40.7 million compared to Q1 2023 due primarily to higher equipment inventory in the construction and forestry and material handling categories and increased overall parts purchasing due to strong sales activity. Inventory increased $211.1 million compared to Q2 2022 due to increases in most categories as a result of strong sales activity.

The overall increase in inventory was driven by continued investment in parts and equipment to support customer orders and demand. Inventory turns remain at acceptable levels.

Please turn to Slide 11, where I'll provide an update on cash flow, leverage and working capital. Cash used in operating activities in the quarter of $6 million decreased $40 million from cash generated from operating activities and $34 million in Q2 2022, mainly due to the increase in inventory during the quarter mentioned on the previous slide.

Our leverage ratio increased slightly to 1.67x from 1.74x in Q1, due to the higher debt level in the current period, driven largely by the corporation's investment in inventory. Corporation's levered ratio is currently within our target range of 1.2x at the end of Q2.

Our available credit capacity at the end of Q2 was $198.6 million, which is sufficient to meet our short-term normal course working capital and maintenance requirements and fund our acquisition program and plan strategic initiatives. We continue to focus on working capital efficiency, which is a key component in managing our overall leverage target.

The Q2 working capital efficiency was 18.9%, an increase of 140 basis points from March 31, 2023 due to the higher trailing four-quarter average working capital. Finally, the Board has approved our third quarter 2023 dividend of $0.33 per share, payable on October 3, 2023, to shareholders of record on September 15, 2023.

Please turn to Slide 12. And at this point, I'll now turn it back to Iggy.

Thanks, Stu. Our 2023 outlook is summarized on Slide 12.

Wajax delivered strong organic growth with revenue of $586.2 million in the second quarter of 2023, up 14.7% over the prior year with meaningful growth in all regions, led by Central Canada and saw adjusted diluted earnings per share grow 37.1% to $1.22. Management continues to invest in working capital, most notably in inventory to support both incoming customer orders and forecasted demand while delivering improved fill rates and inventory turns remain at acceptable levels.

Subsequent to year-end, on July 4, 2023, the corporation completed the acquisition of Polyphase Engineered Controls, 1977 Limited through its wholly-owned subsidiary Tundra Process Solutions. Flying approximately 44 people of facilities in Calgary and Edmonton, Polyphase specializes in producing custom electrical and instrumentation equipment and this acquisition expands both Tundra's and Wajax' Electrical Solutions portfolio.

Corporation continues to develop a robust pipeline of acquisition targets with a focus on expanding its industrial parts and ERS business across key markets nationwide. After the first half of 2023, we continue to see solid fundamentals in many of the markets we serve, particularly mining, energy and construction, supported by relatively elevated key commodity prices and sustained customer budgeting for capital projects.

We expect growth in our heavy equipment business and anticipate further strong demand in our less cyclical industrial parts and ERS businesses. For the balance of 2023, we continue to expect challenges associated with ongoing supply chain volatility although some improvements are anticipated.

Higher interest rates, wage and price inflation and a tight labor market are also expected to remain challenges. Management continues to monitor market dynamics and customer sentiment for signs of weakness.

Overall, we are very pleased with our Q2 performance as it represents a significant improvement over Q2 last year, including both strong topline organic growth and growth in our less cyclical and high-priority Industrial Parts and Engineered Repair Services Business. Our backlog continues to be robust, ending the quarter at $551.2 million, representing a sequential increase of almost 4% from an already strong backlog of $530.8 million in the first quarter.

The strong backlog continues to underpin our confidence as we advance further into the year. Our core strategic priorities remain unchanged and we are focused on continuing to invest in our people and their overall health and wellbeing, delivering exceptional customer value, organically growing our business, transacting on a robust acquisition pipeline, leveraging our enhanced relationship with Hitachi, prudently managing our balance sheet, deploying our ERP system and entrenching sustainability into the business.

I will now turn it over to the operator for any questions.

Hey, Devin.

Hi, Iggy. Hi, Stu.

Congrats, nice results here. I'm going to start with SG&A expenses.

Look, there was a meaningful spread between the growth in revenues and SG&A costs, which was great to see. Just can you talk about the puts and takes within that SG&A expense in the quarter, and if we should be expecting to have a similar level of operating leverage going forward?

So still comfortable with the overall guidance quote that we've given around having our target being 14.5 to 15.5, you'll note that there was one large mining shovel in there that drives the rate down in the quarter. But I'd say, we're pretty comfortable operating not only within that range that we've had, but we've certainly proven that we can continue to operate and perform lower than that.

So I wouldn't say 12.2 to answer your question directly, is going to happen next quarter, but we would hope to perform well below our target that we've given you, and we think we've proven that over the last number of quarters.

Okay. Thanks for that.

Okay. And then I was going to switch over maybe Hitachi.

As I'm sure you're well aware, the ambitions to push harder into that ultra-class mining truck space. I believe Wajax is evaluating if this is a fit.

Just can you speak to how you're thinking about that potential opportunity? And what sort of implications would this have on Wajax if it did?

Or even if it did not elect to sell and support that type of equipment?

Yes. Great question, Devin.

Thanks. Iggy here.

It's certainly an opportunity that's of interest to us. We're in discussions with Hitachi about this, but this is not a 2023 or even a 2024 initiative.

When we do decide to get into that business, you have to place an order, there's long lead times and then getting your first set of trucks is still quite a way though. If we do it, I think it would be a very significant investment.

I think it would be fairly game-changing for our mining business, but there's still quite a bit of time between now and then.

Okay. Makes sense.

And just one last one. Just wondering if I had two-week port strike in BC earlier in July, it had much of an impact on your business from a supply chain perspective?

Yes. That's a good question, Devin.

I think it affected everybody a little bit. We heard some grumblings from inside the business that some pieces of equipment weren't getting shipped, but I certainly would not say that it was material in any way.

Okay. Good to hear.

Okay, I'll turn it over. Thank you.

Thanks, Devin.

Thanks, Devin.

Hey, Michael.

Hey, guys. Nice way to end the week guys.

First question on Central Canada. It looks to me, highest revenue ever in a quarter.

I know there's been a change at the top there. But can you maybe just flush out what's starting to work there?

I believe I heard you say that there was a delivery of a mining shovel in the region, but any other regions or sorry, any other end markets in the province that's picking up? And then maybe just more broadly.

The mining shovel was not in Central Canada. The – I go back to what we said before.

I mean the change in management is started to really kick in and that sort of works its way through the entire organization in Central Canada. So that stability has been really, really helpful.

I would say that one of the biggest drivers has been industrial performance in that region. So we've really benefited from a strong sales team there.

And we still think we have considerable opportunity to grow that side of the business.

Perfect. Okay.

And maybe just a follow-up on that Stu. The outperformance versus Central Canada and Eastern – sorry, versus Eastern and Western, do you think there's still quite a bit of ways to go there?

Sorry, where Michael?

Central versus Eastern and Western, just that outperformed? I know there's – again, you've talked about some of the changes there that are starting to work.

Just going forward, if you think that you can maintain that outperformance?

Yes. So we've had three good quarters of better performance in Ontario, which we're very happy with, and we're working very hard to continue that.

We're still working off of a lower base in Ontario. Our market share in Ontario, generally for all of our categories is lower than other places in the country still.

So we think there's still a lot of upside in Ontario for us.

Perfect. And then just lastly, on the inventories, it was a pretty decent sized investment there in the first half.

It sounds like your peers are managing that amount down as lead times and equipment availability improves. So I wonder if that's the expectation we should have for you guys in the second half?

Or if it's something that's more specific as it relates to Hitachi?

I think a lot of our Hitachi orders were presold, not sold off of the lot, if you will. And as supply chain constraints get loosened a little bit, we're going to need to we have been building that inventory so that our customers have units to buy off of the shelf.

So we're pretty comfortable with where inventory levels are at the moment. And we generally feel pretty good about our equipment levels.

And I think you'll recall, Michael, if it goes back to March of last year, we really had no Deere or Hitachi inventory at all. So Hitachi a start-up.

We're still working through the kinks of what they're getting us. It hasn't hurt us from a sales perspective but it's going to sort us through what the right inventory level is.

Got it. Perfect.

Thank you, guys.

Thanks Michael.

Hey, Mike.

Hey, good afternoon. First question is around revenue growth.

So strong again in the quarter, up 15% year-over-year. Your outlook sounds favorable and you're making investments in inventory, which would again appear to suggest you've got a favorable outlook in terms of further sales growth.

I guess the question is, it does look like you start to face some tougher comps after quite a while of showing some very good growth here, tougher comps in the second half of the year. Just wondering if you can help me understand what the growth potential looks like going forward.

And am I seeing that right? Like do I have that right that the comps do get a bit tougher and does that result in a slowdown in the rate of revenue growth you've been seeing?

Thanks for the question. I think any time you start having good results, it gets harder to create continued better results next year.

But we're seeing continued strength in our customer markets, as mentioned in the outlook, it's something that we're keeping a close eye on but we're just – we're not seeing weakness in our customer base. Mining activity continues to be strong.

Our whole industrial business is moving along at a great pace. ERS is doing well.

Construction is doing well. So we're still seeing strength in a lot of the markets, and we're feeling pretty good about that.

One note is that we – we did have a monster Q4 last year in terms of mining. And at the moment, we've got two of our two large shovels that are coming up 5,600 on RPO that we expect to convert and then a 5,600 in backlog.

But it certainly – Q4, certainly the mining piece won't repeat the way that it did in 2022.

Okay. That's actually I was going to ask about that.

So one large shovel delivery in the second quarter, was that an EX8000?

Yes.

Okay. And then so yes, in terms of the second half of this year is really – is it just the fourth quarter where there are some larger deliveries and it's 25,600?

Is that what you're suggesting?

15,600 has already gone out the door in Q3 and it will likely convert before the end of Q4 as a sale. It's on rental purchase right now.

And at that time, it will convert. We have another 5,600 that's going to the same customer.

Okay. So two in the fourth quarter is likely to make...

No, one. One that will convert to a sale.

The other one will show up as rental.

Okay. Can you remind what – I know you, I took your point there about last year was very strong in the fourth quarter.

What did you have last year in the second half of the year in terms of large equipment deliveries?

If you have another question that Iggy can answer. I think I can probably take that out.

Okay. Yes.

I'll move on, and we can circle back or take it offline. I guess just one of the other questions I have is, there’s mention in the release, and I'm not sure this is actually new, but in the release, you do talk about given the strength of your balance sheet, it gives you the flexibility to further invest in your expanded relationship with Hitachi.

Two-part question, I guess one is first off, can you just sort of provide a bit of an update on any further progress or developments as it relates to that new relationship? Anything that sort of occurred in the quarter or is underway or in the works right now, if there is anything?

And then the second part is when you talk about further investing in that expanded relationship. Are you really talking about inventory?

Or is there something else you're investing in beyond that at this point?

Yes. I wouldn't say that there has been any dramatic new outcomes over the last quarter.

The financing piece is access finance went in – went in place a few months ago, and that was talked about on our last call, but that's starting to really get traction, which is wonderful now that we have our own in-house financing product to sell these machines through. And if you recall, Hitachi also had a tornado rip through their parts warehouse in Georgia.

That's been a challenge, a big challenge. Parts are pretty important to keeping our customers happy.

And it's been a challenge to get them. They're finally getting access to that place.

They figured alternate ways to get us parts. So that piece of the business is getting much better.

And all the other areas, Hitachi is performing exactly as promised, and we're meeting both of our targets on both sides. In terms of the second part of your question, additional investment.

There's a question about mining trucks that came up earlier, that's something a little bit in the future, but that's something that we're in constant discussions with Hitachi about. And then we're just – we're trying to figure a way that we can do business better.

Is there ways to import parts into the country better and reduce costs out of the system? Is there ways to PDI machines better?

And is there a way to train our technicians better and really just work with the manufacturer a lot more hand in hand than we used to prior to this enhanced relationship.

That's helpful. Thank you.

One more and then I'll turn it over. I guess, just looking at the gross margin, somewhat flattish year-over-year.

So in terms of the EBIT margin improvement you saw that was really driven by the SG&A line, which you talked about earlier. But if I look at the gross margins, I think there's a comment that's been in there for a few quarters in a row now about product support margins being down year-over-year.

I guess, just wondering if you can comment on what's weighing on product support margins? And at what point do you lap the tougher comps and get to a point where that ceases to be kind of a drag on a year-over-year basis?

It's an area that we're constantly working on. There's – I think many companies are having challenges with technician turnover and training new people, and then they're just not as productive.

So it's an area that we're working hard on and that we hope to improve.

Okay. Perfect.

And I don't know if you found that info or not.

Yes, yes, we did. So I'll just walk you through it from 2022 Q3, we delivered an 8000 and then Q4, there was another 8000 and 5600 and another 5600 RPO conversion.

That would have been four shovels in the second half.

Which is roughly $50 million just in the fourth quarter.

Okay. That's great.

Thank you very much for that.

Thank you, everyone, for joining us today, and I wish you a wonderful weekend.