In the third quarter of 2024, Wajax Corporation (TSE: WJX), a leading Canadian industrial products distributor, reported a decline in revenue and gross profit margin compared to the same period last year, as detailed in their latest earnings call. The company's revenues decreased by 5.6% to $481 million, primarily due to lower sales in mining equipment and product support. Despite the revenue dip, Wajax achieved a higher backlog and announced a fourth-quarter dividend, signaling resilience amid market challenges.
Key Takeaways
- Wajax's Q3 2024 revenue fell to $481 million, a 5.6% decrease from Q3 2023.
- Gross profit margin dropped to 19.2%, a decline of 300 basis points year-over-year.
- Backlog increased by 7.9% from Q2 2024, reaching $588.1 million.
- Cash flows from operating activities improved; leverage ratio exceeded the target at 2.78.
- A fourth-quarter dividend of $0.35 per share will be payable on January 7, 2025.
- CFO Stuart Auld to retire on March 4, 2025, with Tania Casadinho appointed as his successor.
Company Outlook
- Management focuses on strategic priorities and cost reduction to navigate softer market conditions.
- Anticipates a gradual market recovery post-U.S. elections with potential improved conditions in 2025.
- Plans to reduce inventory levels further in Q4.
Bearish Highlights
- Declines in gross profit margin and revenue due to lower mining equipment sales and reduced product support revenue.
- Market pressures and competitive challenges in product support and industrial parts segments.
Bullish Highlights
- Increased backlog suggests higher orders in construction and forestry.
- Cost-saving initiatives leading to a decrease in selling and administrative expenses to 14.7% of revenue.
- Leadership transition with the appointment of Tania Casadinho as the new CFO, indicating a smooth succession plan.
Misses
- Despite strong demand in mining and energy sectors, revenue from product support and industrial parts segments fell short of expectations.
Q&A Highlights
- No further questions were asked during the call, indicating that the management's presentation covered the essential aspects of Wajax's performance and strategy.
Wajax Corporation's leadership, including President Iggy Domagalski and the soon-to-retire CFO Stuart Auld, remain dedicated to steering the company through the current economic headwinds. With a focus on strategic priorities, including cost reduction and operational efficiency, Wajax is positioning itself for a potential market rebound in the coming year. The company's proactive approach to managing expenses and the strategic succession planning for the CFO role demonstrate a commitment to long-term stability and shareholder value.
Full transcript - None (WJXFF) Q3 2024:
Operator: Thank you for attending Wajax Corporation's 2024 Third Quarter Financial Results Webcast. On today's webcast will be Mr. Iggy Domagalski, President and Chief Executive Officer; Mr. Stuart Auld, Chief Financial Officer; and Ms. Tania Casadinho, VP Corporate Controller. Please be advised that this webcast is being recorded. Please note that this webcast contains forward-looking statements. Actual results may differ from expected results. I will now turn the call over to Tania Casadinho.
Tania Casadinho: Thank you, operator. Good afternoon and thank you for participating in our third quarter results call. This afternoon we will be following a webcast which includes a summary presentation of Wajax' Q3 2024 financial results. The presentation can be found on our website under Investor Relations Events & Presentations. 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. Please turn to Slide 4. And at this point, I'll turn the call over to Iggy.
Iggy Domagalski: Thank you, Tania. I will provide highlights on our third quarter before turning it over to Stu for commentary on backlog inventory and the balance sheet. Slide provides an overview of Wajax. The corporation of 166 years of Canadian operating history and operates across 116 branches with a team of more than 3,100 employees. During the quarter, our heavy equipment categories and revenue sources made up approximately 55% of our total revenue, while industrial parts and ERS generated approximately 45%. Turning to Slide 5. Slide provides an overview of our purpose and values. Wajax's purpose statement is empowering people to build a better tomorrow, which we strive to achieve by living our values and delivering an exceptional experience for our people, customers, suppliers, and the communities we serve. By living our purpose and values, we'll continue to build the people-first company that is strong resilient and profitable. Our purpose and values guide our decision-making and allow us to execute on our strategic priorities. Turning to Slide 6. Slide provides an overview of our strategic priorities, which were refreshed and enhanced in 2023. Management is completely focused on executing against these priorities between our purpose and values and these six priorities. We have the foundation to continue growing our company for many years to come. Turning to Slide 7. In the third quarter, Wajax saw lower revenues and gross profit margins, which were offset partially by lower selling and administrative expenses. Revenue of $481 million, decreased $28.7 million in the quarter. The decrease resulted primarily from lower mining equipment sales in Western Canada, driven largely by the sale of a large mining shovel in the third quarter of the prior year with no such sale in the current year. Lower product support sales in Western Canada, lower ERS sales in Eastern Canada, and lower industrial parts sales in all regions. These decreases were offset partially by higher equipment sales in Construction & Forestry category in Western and Eastern Canada. Gross profit margin of 19.2% decreased 300 basis points compared to the same period of 2023, driven primarily by a higher proportion of equipment sales relative to product support, industrial parts, and ERS sales. In addition increased market pressures resulted in lower margins realized on product support and industrial parts sales. These decreases were partially offset by higher margins on ERS sales. Selling and administrative expenses, as a percentage of revenue, decreased to 14.7% in the third quarter of 2024 from 14.9% in the third quarter of 2023. Selling and administrative expenses in the third quarter of 2024, decreased $5 million or 6.6% compared to the third quarter of 2023, due primarily to lower personnel costs, driven largely by cost saving initiatives implemented in the quarter. Adjusted EBITDA of $37.4 million decreased $12.6 million or 25.3% from the third quarter of 2023, noting the adjustments recorded on this chart. The decrease resulted primarily from lower sales volumes and lower gross profit margins, offset partially by lower selling and administrative expenses. Adjusted net earnings of $0.44 per share decreased 54.2% or $0.52 per share from the third quarter of 2023, noting the adjustments recorded on this chart. At the end of Q3, the TRIF rate was 0.91, a decrease of 13% from the third quarter of 2023. The third quarter TRIF rate was up 12% from the second quarter of 2024. Safety continues to be Wajax's number one priority and management is committed to continuously improving our safety program to improve on this result. We thank everyone on our team for their ongoing dedication to workplace safety. Turning to Slide 8. Revenue decrease of 5.6% in the third quarter, resulted from lower revenue in all regions. Western Canada sales of $210 million, decreased 10% in the quarter, due primarily to lower mining equipment sales, driven largely by the sale of a large mining shovel in the third quarter of the prior year with no such sales in the current year, lower industrial parts sales, and lower product support sales. These decreases were partially offset by higher equipment sales in the construction and forestry category. Central Canada sales of $88 million decreased 3.9% in the quarter due primarily to lower industrial parts sales. Eastern Canada sales of $183 million decreased 1.1% in the quarter due primarily to lower industrial parts and ERS sales, partially offset by higher equipment sales in the construction and forestry category. Please turn to Slide 9. An update on equipment and product support sales and year-over-year variances are shown on this page. Equipment sales of $132 million increased $6 million or 5% compared to last year due primarily to higher construction and forestry equipment sales in Western and Eastern Canada and higher material handling sales in Central Canada. These increases were partially offset by lower mining sales in Western Canada, driven largely by the sale of a large mining shovel in the third quarter of the prior year, with no such sale on the current year. Product support of $123 million decreased $12 million or 9% compared to last year due to lower sales in most categories and regions. Please turn to Slide 10. An update on industrial parts and ERS sales and year-over-year variances are shown on this page. Industrial parts sales of approximately $136 million decreased $25 million or 15% due to market conditions that were less favorable than expected. Turning to Slide 11. Slide summarizes sales at a category level for our company's overall groupings of heavy equipment and industrial parts and services. In the third quarter, the heavy equipment categories decreased $6 million or 2% driven primarily by lower mining equipment sales in Western Canada driven largely by the sale of a large mining shovel in the third quarter of the prior year, with no such sale in the current year. The decrease was offset partially, by higher construction and forestry equipment sales in Western Canada and Eastern Canada and higher material handling sales in Central Canada. Industrial parts and service categories decreased $23 million or 10%, driven by lower industrial parts sales in all regions due to market conditions that were less favorable than expected. These less cyclical categories remain a core element of our broader growth strategy. I'll now turn the call over to Stu.
Stuart Auld: Thanks, Iggy. Please turn to Slide 12, for my comments on backlog and inventory. Our Q3 backlog of $588.1 million increased $43.3 million or 7.9% compared to backlog of $544 million at Q2 and decreased $11.1 million, on a year-over-year basis. The sequential increase was due primarily to higher construction and forestry and mining orders offset partially by lower material handling and ERS orders. The year-over-year decrease was due to lower construction and forestry material handling, ERS and industrial parts orders offset partially by higher mining orders. Currently, the corporation has seven large mining shovels in backlog to be delivered over the next seven quarters. Inventory. Inventory decreased $0.8 million compared to Q2, 2024 as management continues to focus on reducing and managing the corporation's inventory levels. At the end of the quarter, the corporation had a large mining shovel in inventory that is expected to be delivered in the fourth quarter of 2024. Inventory increased to $65.1 million compared to Q3, 2023 due to increases in most categories, offset partially by lower forestry equipment inventory. Please turn to Slide 13, where I'll provide an update on cash flow leverage and working capital. Cash flows used in operating activities in the quarter of $34.5 million compared with cash flow was used in operating activities of $62 million in the same quarter of the prior year. The increase in cash generated of $27.5 million was mainly attributable to a decrease in cash used in noncash operating working capital, offset partially by lower earnings. Our Q3 leverage ratio increased to 2.78 times from 2.17 times in Q2, due to the higher debt level and lower trailing 12-month pro forma adjusted EBITDA. Corporation's leverage ratio is currently outside our target range of 1.5 to 2 times at the end of Q3, primarily due to the investment in working capital during the year and acquisitions completed in 2022 [ph]. Our available credit capacity at the end of Q3 was $167.1 million, which is sufficient to meet short-term normal course working capital and maintenance capital requirements, and fund our acquisition program and plan strategic initiatives. We continue to focus on working capital efficiency was a key component in managing our overall leverage ratio -- leverage targets. The Q3 working capital efficiency was 26.6%, an increase of 10 basis points from June 30, 2024 due to the lower trailing 12-month revenue. Excluding the debentures, which are classified within current liabilities working capital efficiency was 28.7%, an increase of 80 basis points from June 30, 2024. Finally, the Board has approved our fourth quarter 2024 dividend of $0.35 per share payable on January 7, 2025 to shareholders of record on December 16, 2024. Please turn to Slide 14. At this point, I will turn the call back to Iggy.
Iggy Domagalski: Thanks, Stu. Our outlook is summarized on Slide 14. During the third quarter of 2024, Wajax delivered revenue of $481 million, down $28.7 million or 5.6% from the third quarter of 2023. The year-over-year decrease in revenue was primarily due to the delivery of a large mining shovel in the third quarter of 2023, with no such delivery in 2024 and lower product support and industrial parts revenue, due to softer-than-anticipated market conditions. Gross profit margin decreased to 19.2% in the third quarter of 2024 versus 22.2% in the third quarter of 2023, driven by a higher proportion of equipment sales relative to product support industrial parts and ERS sales. In addition, increased market pressures resulted in lower margins realized in product support and industrial parts sales, partially offset by higher margins on ERS sales. We continue to see strong customer demand in the mining and energy sectors and reduced activity in industrial and forestry. Given softer-than-expected market conditions on year-to-date results, management has implemented a number of cost savings initiatives and is actively pursuing further cost reduction measures. Management is continuing to focus on the execution of our six strategic priorities for 2024, which were set out on Slide 6. Management also continues to evaluate options to repay or refinance the corporation's $57 million and senior unsecured debentures that are maturing on January 15, 2025. On November 4, 2024, Wajax announced the planned retirement of Chief Financial Officer Stuart Auld to be effective March 4, 2025. Tania Casadinho, Vice President and Corporate Controller has been appointed to succeed Mr. Auld, as Chief Financial Officer effective March 5 – March 4, 2025. Stuart will remain as CFO for the next four months. And during that time Stuart, Tania and myself will work closely to ensure a smooth transition. On behalf of the Board and management team, I want to express my appreciation to Stuart for his exceptional contributions over the past decade. Among many things, Stuart played a key leadership role in unifying Wajax's operational structure, significantly growing our business and has most recently led the successful implementation of our new ERP system. He has also provided crucial advice and guidance to me, since I joined Wajax in 2021 for which I'm very grateful. I'll now turn it over to Stu.
Stuart Auld: Thank you, Iggy. And I just want to say thanks to the entire Wajax team but more specifically, my direct reports and my team. It's been a privilege to be part of Wajax for the past 10 years, seeing the company evolve and work alongside such talented people. I'm very proud of what we have accomplished together. I'm also very pleased that Tania will be stepping into the CFO role. I am incredibly confident that she will do an outstanding job and continue supporting the company's success in every way. I'll now turn it over to Tania.
Tania Casadinho: Thank you, Stu and thank you, Iggy for the confidence that you and the Board have placed in me. I am both humbled and excited to step into this role and committed to building on the strong financial foundation that Stu has created. I'm also extremely excited to continue to focus on the execution of our long-term strategic priorities and vision for Wajax. I look forward to engaging with the investment community and sharing the Wajax story, as we continue to drive our goals forward. With that, I will turn it back to the operator and open the line for questions. Thank you.
Operator: [Operator Instructions] And your first question will be from Jonathan Goldman at Scotiabank (TSX:BNS). Please go ahead.
Jonathan Goldman: Hi, good afternoon. Stu, I want to congratulate you on your career and your retirement and congratulations on your new appointment. My first question, I wanted to dig into the decline in Product Support and Industrial Products margins. Iggy, I was wondering if you could elaborate on the increased competitive pressures you experienced? How did those evolve in the quarter? And how should we think about the margin trajectory for those two product lines for the balance of 2024 and into 2025?
Iggy Domagalski: Yes. Thanks for the question, Jonathan. I think we've just started to see the economy slow and a lot of the external metrics that we look at have slowed. It's certainly gotten more pronounced, as we've gotten further into the year. And essentially, we're just seeing our customers slow down and defer their spending on CapEx and even on maintenance. So just generally, slower with some of our customers. And as we look to the rest of the year, Q4 looks to be a solid quarter for mining. We've got two 8,000 shovels shipping in the quarter. And -- but generally we're still seeing a little bit of uncertainty as we go into the rest of the year, especially, there's a US election that's happening today. And regardless of the result I think once that is settled and works its way through the system. I think we'll start seeing just a little bit more calmness in the market and a return to customers making buying decisions in the New Year.
Jonathan Goldman: Yes. That makes sense. And I guess relatedly then the product support and the industrial products revenues were softer I think a little softer than you anticipated but the new equipment sales were actually relatively strong, especially, considering you are lapping a tough comp with the mining shovel delivery last year. So how do I square those two trends?
Ignacy Domagalski: Yes. I think our teams have been doing a really great job on the sales front. We've got some great manufacturing partners. Some of our larger ones would be Hitachi (OTC:HTHIY), Hyster Tiger Cat -- all of them have great programs to help us get equipment out to our customers. And the supply chains have also really for the most part gotten back to normal and we have a lot of -- we've got a lot of gear on the shelf right now. Our inventory is still higher than we'd like it to be. And because of that we've got a lot of equipment that's available for sale.
Jonathan Goldman: Its good color. Thanks, again. I will get back in queue.
Ignacy Domagalski: Thank you.
Operator: Thank you. Next (LON:NXT) question will be from Devin Dodge at BMO. Please go ahead.
Devin Dodge: Thanks. Good afternoon. Just before getting the questions I wanted to wish Stu good luck on his pending retirement and congrats to Tania on the new role.
Stuart Auld: Thank you.
Tania Casadinho: Thank you.
Devin Dodge: Maybe just to start with just wondering if you could speak to the increase in competitive market pressures for industrial parts and product support. I'm just trying to get a sense if this was concentrated in certain regions or end markets and if these intensified through the quarter if it was relatively consistent through the summer months?
Ignacy Domagalski: That's a good question. I mean just seeing a bit more competitive pressure in a bunch of places. We have a number of US publicly traded industrial product peers who also operate a very significant business in Canada. They're all calling everything down for both this year and next year and also calling out competitive market pressures. So we're all kind of feeling it and I think just mostly due to customers pulling back on the spending. So I don't think it's -- it's not really allocated to specific markets or specific areas. We do generally still see that energy and mining is pretty strong and the pressures there are not quite as large in other areas. But there's competitive pressure across the board I would say.
Devin Dodge: Okay. And when we look at industrial parts and product support I guess how do those gross margins compare like now versus we'll say pre-pandemic, let's say, in more normal times. I'm just trying to understand this is a return to normal or if this is more a transient kind of compression of that gross margin?
Ignacy Domagalski: I think they're similar to what we saw pre-COVID.
Devin Dodge: Okay. And then let's see, can you help us to better understand the working capital investment in the quarter? It seems like it was almost entirely from accounts payable. Just trying to understand what was driving that and if you expect this to reverse in the coming quarters?
Stuart Auld: Yes. Devon more just timing of AP payments nothing out of the ordinary.
Devin Dodge: Okay. And then just maybe one last one here. Just one of the notes to the financial statements. There was mention of Wajax use of a supplier or a supplier financing programs. I think there was a new one in Q3 as well. It looks like the use of these programs has increased pretty meaningfully this year. Just can you provide some context what's behind that? I'm not sure if this is related to Hitachi or something else?
Stuart Auld: Portion of it is related to Hitachi. We basically have -- the financing now is going through Wajax versus when it was going through Hitachi before. So that's new to us.
Devin Dodge: Okay. Got it. I’ll turn over. Thank you.
Operator: Thank you. [Operator Instructions] Next we will hear from Michael Tupholme at TD Cowen. Please go ahead.
Michael Tupholme: Thank you. I'll just start by echoing the comments from others all the best to you Stu and congratulations Tania. I just wanted to go back to, I guess, the subject that's been focused on so far in terms of industrial parts and product support. You sounded like initially you sort of suggested that once we get through the uncertainty associated with the U.S. election, you could see some improvement in those areas, but it also sounded like afterward you suggested your competitors in those areas are particularly industrial parts are talking about weakness persisting into next year. So do you have a different view of the market than them? Or how do we reconcile those two comments?
Iggy Domagalski: When we look at our U.S. competitors they're calling out there, I mean, they're American so they call it the entire U.S. market, which we're only in Canada. In Canada, we do see 2025 not being a terrible year.
Michael Tupholme: Okay. And so does that -- when you say not a terrible year, does that imply a pickup in terms of the run rate revenues you're doing in industrial parts, do you think there's an improvement in a pickup in 2025. Is that what you mean by not a terrible year?
Iggy Domagalski: I think, it's hard to say at this point. Once we need this American election to work its way through, and I think that will give us a little bit of a better view on what's happening going forward. I think interest rates coming down is positive. Bank of Canada has continued to say that they think that will keep coming down, which I think will allow our customers to keep spending a little bit more. But I think we'll really have a better understanding over the next couple of months.
Michael Tupholme: Okay. Fair enough. Can you talk a little bit about the gross margins 19.2% down 300 basis points. It sounded like you see a lot of that decline as being driven by mix, but then you also did call out the impact of the competitive and market pressures. So I guess I'm just trying to understand to what extent that was mix driven versus the latter if there's a way to sort of break that up help us understand the two components.
Iggy Domagalski: I would say, it's balanced between those areas, where there's an element of mix in there. There is definitely an element of competitive pressure in IP and product support. And we're also working hard to move equipment out of our yards. We've got a decent amount of it. And so we're being a little bit more aggressive on price.
Michael Tupholme: All right. And maybe on that front can you or Stu help us think about the degree or the extent to which we should see inventories come down in the fourth quarter like relative to where you were at the end of the third where you think you'll land at the end of the year?
Iggy Domagalski: I think where we -- our peak inventory was at the end of Q1. So that was approximately $750 million. We brought that down by $28 million over the next quarter and throughout Q3 were flat, but we also got a large shovel in there that's already pre-sold, so it's kind of a timing issue and that one retails for about $20 million. So, I think we've been bringing it down at a reasonable rate. We plan to continue bringing it down. It's a little bit too high. And as we work through some of these sales in the fourth quarter, we think, we'll definitely see it come down.
Michael Tupholme: Okay. And then on the cost savings front some have already been implemented. It sounds like you're working on others. Can you provide a little bit more detail? Is this primarily bringing on personnel costs? And I guess when you've accomplished what you'd like to do on that front, if we look out to next year do you see yourself landing back in your 14.5% to 15.5% SG&A as a percentage of revenue target range?
Iggy Domagalski: Yes. So as mentioned in our commentary, we implemented some meaningful cost savings in the third quarter plan to do a bunch more in the fourth quarter. Our largest cost is people. So that's the biggest chunk of it. And then our next biggest cost is facilities and there's a little bit there too. But yes, when we've done everything we expect to be comfortably within that range again.
Stuart Auld: And arguably there's some savings in terms of bringing your inventory down.
Michael Tupholme: All right. Okay. I'll get back in the queue. Thank you.
Operator: Thank you. And at this time we have no other questions registered. Please proceed.
Iggy Domagalski: Thank you very much for joining our call. Good day.
Operator: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.
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