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Executives

Mark Foote – President and CEO

John Hamilton – SVP-Finance and CFO

Richard Plain – SVP, Wajax Power Systems

Brian Dyck – SVP, Richard Plain – SVP, Wajax Equipment

Analysts

Sara O’Brien – RBC Capital Markets

Michael Tupholme – TD Securities

Ben Cherniavsky – Raymond James

Bert Powell – BMO Capital Markets

Sara Hughes – Cormark Securities

Wajax Corporation (OTC:WJXFF) Q2 2013 Earnings Call August 9, 2013 2:00 PM ET

Operator

Welcome and thank you for attending Wajax Corporation’s 2013 Second Quarter Results Conference Call. On today’s call will be Wajax’s President and Chief Executive, Mr. Mark Foote as well as Mr. John Hamilton, Senior Vice President of Finance and Chief Financial Officer; Mr. Brian Dyck, Senior Vice President, Wajax Equipment; Mr. Richard Plain, Senior Vice President, Wajax Power Systems; and Mr. Adrian Trotman, Senior Vice President, Wajax Industrial Components.

Please be advised that this call is being recorded. Please note that this conference call contains forward-looking statements. Actual achieved results may differ from expected results.

I will now turn the call over to Mr. Mark Foote. Please go ahead sir.

Mark Foote

Thank you. Good afternoon and thanks for joining us. I’ll make a few opening comments and then I’ll turn the call over to John for some detailed results for the second quarter.

Our second quarter earnings were somewhat higher than we had expected. However they were lower than last year due to continued weakness in the oil and gas and the mining markets. The $6.1 million year-over-year decrease in earnings before finance costs and income taxes was more than accounted for by an approximately $7.6 million reduction related to the oil and gas and mining markets. Approximately 2.9 million of this was attributable to the loss of the LeTourneau product line.

Mining related declines including the loss for LeTourneau were partially mitigated by other mining associated aftermarket improvements particularly related to our rotating products growth initiatives. As stated last quarter we expect the weakness in the oil and gas market that began in the third quarter of 2012 to continue through the balance of this year with demand for new equipment and aftermarket services for drilling and well stimulation continuing to be soft.

In mining our quoting activity rains at a reasonable level for the equipment segment as well as power systems electronic, electrical power generation business. However lower commodity prices have resulted in mining customers reducing our capital and development spending limiting their ability to commit to new equipment orders. We have also experienced some softening in market demand for construction equipment in Western Canada and in Quebec.

In spite of this we secured two very important customer orders related to mining trucks and power generation equipment leading to an 11% increase in consolidated backlog and we are particularly pleased with the relationship we have developed with Shell Canada Energy where we have an agreement for the commercial trial of four Hitachi mining trucks.

Notwithstanding our improved backlog position we are maintaining a cautious outlook regarding our end markets for the rest of 2013 and we continue to expect that full year 2013 earnings will be less than 2012. We remain very confident in our opportunities for growth and are well positioned in the mining and oil and gas sectors as our conditions improve. We continue to invest in our strategic initiatives while at the same time taking prudent actions with respect to cost and working capital in managing our businesses in 2013.

I’ll turn the call over to John.

John Hamilton

Thanks, Mark. Second quarter 2013 consolidated revenue was 362.1 million. That was down 6% from last year on revenue declines in equipment and power systems. Consolidated net earnings of $13.5 million or $0.81 a share were down from $18.5 million or $1.11 per share last year on reduced segment earnings in all three businesses. Consolidated backlog of 199.9 million at the end of June was up 11% from March with increases in all three segments.

So turning to the individual segments and against starting with equipment. Equipment’s overall revenue decreased 6% to 198.6 million for the quarter. Equipment sales decreased 19 million on reduced mining sales and to a lesser extent reduced construction equipment sales. Gains were realized in forestry and material handling.

Parts and service revenues were up 8% to 73.2 million. This was in-spite of the discontinuance of the LeTourneau mining line late last year. Excluding LeTourneau from last year’s numbers parts and service revenue increased 18%. This was largely attributable to gains in the mining sector on growth in rotating products in the installed base of Hitachi equipment.

Quarterly segment earnings decreased 1.8 million to 13.9 million. Factors influencing this were lower volume and gross profit margins mainly as a result of the discontinued LeTourneau line and slightly higher selling and administrative costs.

Turning to power systems, revenue decreased 15% to 69.5 million. The main reason for the decline was due to income reduced activity in Western Canada oil and gas sector which negatively affected both equipment and parts and service volumes. Segment earnings of 3.3 million decreased 3.1 million. That was attributable to revenue issues just mentioned and reduced gross margins on parts and service in Western Canada.

Finally in industrial components, overall revenue of 95 million was up slightly compared to 94 million posted last year. However if we back out the two acquisitions made late last year revenue would have been down 5%.

Bearings and power transmission part sales were up 4.6 million as most of the acquisition volume is attributable to this category. Fluid, power and process equipment sales decreased 3.6 million or 8% on softness in the oil and gas sector. Earnings of 4.8 million were down $1.4 million year-over-year. The decline was a result of lower gross margins mainly in Western Canada as a result of competitive pressures and an unfavorable sales mix.

We finished the quarter with funded net debt of 21.2 million, a slight increase of 2.2 million in the quarter. As well the corporation declared dividends of $0.20 per share for August, September and October. So Matthew we’ll open up the call for questions now.

Question-and-Answer Session

Operator

Certainly. [Operator Instructions]. Your first question comes from the line of Sara O’Brien with Royal Bank of Canada. Your line is open.

Sara O’Brien – RBC Capital Markets

Hi guys. In the power systems, just wondered if this is uniquely a volume issue or are those kinds of problem contracts that are flowing through backlog here?

Richard Plain

Sara, it’s Richard here. It really it’s volume. There is no one particular issues at this time.

Sara O’Brien – RBC Capital Markets

Okay, so I mean given that there is no expected lift in the back half of the year you expect your run rate of this kind of margin for the rest of the year?

Richard Plain

We are starting to see some marginal quotation improvements and we are seeing some activity in our power gen business, which would give us some hope that things will improve for the balance of the year.

Sara O’Brien – RBC Capital Markets

Okay. And then just may be Brian in the equipment group a bounce back in margin looked good. Just wondering now with the construction coming under pressure, are you seeing pricing pressure that’s picking up and I just note that on the conference call yesterday you talked about going after the excavator market for greater market share. Wondered if that’s been a more competitive arena or so do you expect to going forward?

Brian Dyck

I think it’s been competitive for probably the first half of this year. So and you know our margins improved a bit in the second quarter and there is some lumpy things in our margins may tend to bounce around a little bit. But know I don’t know how much more competitive the equipment game can get.

Sara O’Brien – RBC Capital Markets

Okay.

Richard Plain

And when Brian when you talk about margin you talk about EBIT margins?

Brian Dyck

EBIT margins yeah.

Sara O’Brien – RBC Capital Markets

Yeah, okay and just on the Hitachi Truck deal, congratulations. Just wondered if that are those trucks in backlog now or are these like a special agreement they are purchasing or is this commercial trial only?

Brian Dyck

The trucks are in backlog.

Sara O’Brien – RBC Capital Markets

Okay for Shell or for other customers as well?

Brian Dyck

No, the Shell deal’s in backlog because we will be selling the trucks to a third party.

Sara O’Brien – RBC Capital Markets

Okay, sorry. Can you repeat there you said it’s in backlog because it’s going to Shell?

Brian Dyck

We are selling the trucks to a third party that was in turn going to have been in the Shell mine as part of the trial.

Sara O’Brien – RBC Capital Markets

Oh, I see okay. Got it okay, thanks, I’ll turn it over.

Operator

Your next question comes from the line of Michael Tupholme with TD Securities. Your line is open.

Michael Tupholme – TD Securities

Thanks and good afternoon. Mark you mentioned that the Q2 earnings were higher than expected. I am just wondering if you can talk about the source of your performance versus your expectations.

Mark Foote

We did a bit better in equipment then we had anticipated and there is a couple of reasons for that. I think so that the performance of Brian’s group was a bit better than we had expected. Probably important to note that despite the fact that it was a bit better than we expected in the second quarter, really hasn’t changed our outlook for the balance of the year. The fundamentals in mining and oil & gas continue to be pretty tough for us.

So we’ll take that win in the second quarter but it hasn’t really adjusted how we feel about second half.

Michael Tupholme – TD Securities

So the nature of that’s just some orders that came through they weren’t expecting or…?

Mark Foote

General performance in aftermarket, rotating and et cetera. So is a number of different things that I think contributed to it.

Michael Tupholme – TD Securities

And then as far as parts and service within equipment the volumes if you strip out they turned up 18% so another quarter of strong improvement. How much of that would have been due to the rotating products growth?

Mark Foote

It would be the majority of it.

Michael Tupholme – TD Securities

Okay. And I was wondering if you could just expand a little bit on the weaker construction. That has been an area that hit been pretty good through Q1. And I think you had a bit of a tough comps because I think if I recall Q2 of last year was pretty good for construction. But it sounds like you are talking about the market as weakened. Can you may be just of expand on that and then may be comment on the outlook for the balance of the year as you see it from now?

Mark Foote

Sure the market in Western Canada that we participate in construction was down about 5% in the quarter. And it was a fairly decent comp because we had some good ramp up last year. But the bigger decline is in the Quebec market which was down 25% in the quarter. So that would probably have more effect and that’s what I was discussing in the MD&A, was just the market that has declined that way. I think you are going to see I think the market is declined to a point in Quebec and even in Western Canada with what you see is what you are going to get I think it will be pretty straight line for the rest of the year.

Michael Tupholme – TD Securities

Okay that’s great thanks.

Operator

Your next question comes from the line of Ben Cherniavsky with Raymond James. Your line is open.

Ben Cherniavsky – Raymond James

Hi guys.

Mark Foote

Hi Ben.

Ben Cherniavsky – Raymond James

And the backlog going up in the context of an outlook that you’ve provided being still pretty tough right now. Is that mostly those trucks going in the backlog?

Mark Foote

So it was two things really, there was some aspects of backlog that actually weakened and then it was off-set by the truck order and by one large EPG order that Richard tiered for mining. So the EPG order doesn’t affect revenue this year and we are thinking that based on the current schedule the trucks will go into operation sometime in the second half of the year.

Ben Cherniavsky – Raymond James

Great well done on that. And then anything you are seeing with opportunities, be they biding at this point or even just longer term opportunities all the talk around L&G in Western Canada. What would your role be there?

Mark Foote

And as it relates L&G I mean we supply natural gas engines and bio-fuel systems. So if it comes to the use of gas in terms of our current portfolio of engine products that’s a plus for us on the L&G since. And off-course any exploration that comes as a result helps to improve our opportunities for drilling as well. So.

Ben Cherniavsky – Raymond James

And some of the equipment that you sell in service with the mobile equipment…

Mark Foote

We are doing some work with the contractor in [inaudible] in BC on some of the L&G expansion. They had some success with our bell trucks in that area so yeah it drives some work for us.

Ben Cherniavsky – Raymond James

Great and then may be one last one if I can flip it in. Just on inventories still at levels not that different from what we’ve seen in the last couple of quarters, which has been consistent with almost all that you guys have reported. And what are you comfortable where they are, do you think they are coming down on the back half, what – to may be comment on that?

Brian Dyck

Yeah we expect over time inventories will come down. And the big issues we have in equipment is the mining inventories that we have. So that will be a slower decline as that market remains soft. But with any luck this year we should see some declines there.

Ben Cherniavsky – Raymond James

Great okay thanks.

Operator

Your next question comes from the line of Burt Powell with Bank of America sorry Bank of Montreal. Your line is open.

Bert Powell – BMO Capital Markets

At least didn’t confuse me with Ben again.

Mark Foote

It’s common problem.

Bert Powell – BMO Capital Markets

It is yeah don’t know for who. The trucks that are third party, is that I am assuming that’s a sale to a contractor right who is on site?

Mark Foote

No, it’s just really is somebody who is going to be financing the deal.

Bert Powell – BMO Capital Markets

Okay so that’s okay so it’s just okay just want to make sure. And just in terms of the parts and service if you’re excluding LeTourneau’s pretty strong growth and its most of that rotating products and that means you are seeing a slowdown in we would think of more conventional truck it shovel type parts. Is that a fact going on or is that is there just some seasonality going on the parts?

Mark Foote

No in Fact, the majority John said the majority of our parts and service growth was in rotating, but included in our gains we had some gains quarter over quarter in our Hitachi shovel business and as far as parts and service goes. And we had some good success in Western Canada over the last three or four years, installing a pretty large base of excavators and we saw some real reasonable growth in the construction parts and service business.

Bert Powell – BMO Capital Markets

Okay so you are not seeing any change in customers’ propensity to take parts and service in response to slowdown or caution on the mining side at all?

Mark Foote

No, what we are seeing as an uptick in that area.

Bert Powell – BMO Capital Markets

Okay that’s interesting. All right thanks very much.

Operator

Your next question comes from the line of Sara Hughes with Cormark Securities your line is open.

Sara Hughes – Cormark Securities

I have a question on parts and services and equipment. We’ve seen it around that 72 million in terms of revenue Mark for the last few quarters, is that a good run rate do you think for you guys going forward?

Mark Foote

I’m not sure we want to get in the specific numbers regarding products and services in terms of where it’s going to be. I think you got to look on a quarter-over-over basis that we had improvements this year for the first two quarters and I think we would still be expecting improvements in the later quarters, but you have to look at it on a quarter-over-quarter basis.

Sara Hughes – Cormark Securities

Okay and then in the quarter in terms of just your gross margins, giving your higher percentage of revenue coming from the product and service I would have thought that they would have come up a bit. Is there something, is it because of LeTourneau coming out, is that what the main thing or…?

John Hamilton

Yeah, that would be the biggest reason.

Sara Hughes – Cormark Securities

Okay. And then on the industrial components, how much EBIT contribution would you have gotten from the acquisitions. Would you able to give us that number, you indicated the revenue I think around 6-7 million?

Mark Foote

I think we’ll just say the acquisition would be accretive.

Sara Hughes – Cormark Securities

Okay, okay. And then lastly, any – in the guidance you talked about continuing to look for taking prudent actions in terms of cost. Is there any active cost reduction program going on right now? Or you’ve got a number in last few quarters and that will fall through going forward?

John Hamilton

Each of the business is running their cost in accordance with how the P&Ls are looking right now. So I’d say that that’s a kind of a block and tackle issue that will continue through the balance of the year. Like on a SG&A percentage of sales basis we won’t hit the number we had last year, by the time of year closes, but will probably be within about 50 basis points.

Sara Hughes – Cormark Securities

Okay, great. That’s it from me. Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Arianne Pulku with Desjardins Capital. Your line is open.

Unidentified Analyst

Yeah, thanks. Yeah, Arianne Pulku filling in for Benoit Poirier. This is sort of follow-up question to Sara’s question. I was hoping to get more color on the agreement with Shell Albian Sands and how big is their current Hitachi fleet and how big do you think the potential order for the 320 ton truck could be? And I was also wondering if there is an opportunity to sell the 240 ton truck here, thanks?

Mark Foote

Well our relationship with Shell on the truck trial is four units. That’s what the opportunity is today. The largest concentration of large shovels in the world is with Shell. So we have a reasonable relationship with them obviously. And we are hoping, we put together this trial with certain KPIs that we want to meet that would provide a success or win over this trial and then that would hopefully open up the market for us for future opportunities with them.

Unidentified Analyst

Right and do you have any kind of sense as how big their current fleet is right now. I understand it’s for four units right now, but may be this could grow into a larger opportunity.

Mark Foote

It could but I don’t think in fairness to our client that I should comment into the size of their business.

Unidentified Analyst

That’s fine. Thank you.

Mark Foote

Thanks.

Operator

Your next question comes from the line of Michael Tupholme with TD Securities. Your line is open.

Michael Tupholme – TD Securities

Thanks. Just wanted to circle back the question asked earlier about the margins within the equipment segment; sequentially there was a big uptick and I think it was suggested there’s some lumpiness. So should we interpret that to mean there was some unusual things going on this quarter that gave rise to the increase and it’s not expected that that should stay at that level in the back half or can you just may be elaborate on that little big please?

Mark Foote

No I wouldn’t suggest there is anything significantly lumpy there. There is certainly a number of things that went the right way for us, but I don’t think we can point to one thing and say there is overall or anything significant like that, no.

Michael Tupholme – TD Securities

Okay so I mean things, it will stop me from repeating these kind of margins?

Mark Foote

I think the point is that if you look at the EBIT margins of the course of the last three or four quarter, it does jump around a bit. Some of its seasonal but some of it is just based on what is being sold. So I think we’re just trying to stay clear of saying, well if we hit 7% in Q2, 7% is good number going forward or something less or something more than that. It does have the tendency to jump around little bit.

Michael Tupholme – TD Securities

From a mix perspective it looks a less favorable this quarter than Q1, but I guess its operating leverage a factor as well? Just given, I am looking at it sequentially, so given in fact that sales are up sequentially a fair bit, is that part of the…?

Mark Foote

Yes, that would be part of the certainly.

Michael Tupholme – TD Securities

Certainly helps, yeah. Okay, thanks.

Operator

Your next question comes from the line of Ben Cherniavsky with Raymond James. Your line is open.

Ben Cherniavsky – Raymond James

Hi guys. Just to follow-up if I may, those Hitachi trucks, have you find any kind of aftermarket agreement to support the vehicle guaranteed part supply or uptime or anything like that?

John Hamilton

That would be part of the KPIs that we put together Ben that’s as far as I can go still not disclosing our agreement.

Ben Cherniavsky – Raymond James

But are you, other financial implications to those KPIs, in other words if there is downtime on the trucks or parts failure with the dealer beyond the normal OEM manufacturing is extending behind it.

Michael Tupholme – TD Securities

Really there is no, there is not a lot of risk, from that out?

Ben Cherniavsky – Raymond James

Well, okay I mean because there have been other dealers who have, have problems with those kinds of arrangements right as you all know?

Mark Foote

We’re trying to respect the confidentiality required Ben. So we’re not really going to divulge the nature of the deal other than saying that from a Wajax company perspective, there really isn’t a lot of financial risk associated with the trial.

Ben Cherniavsky – Raymond James

Okay, I’ll take it that. Thank you.

Operator

We have no further questions at this time. I’ll turn the call back over to Mr. Mark Foote for any closing remarks.

Mark Foote

Just appreciate your time this afternoon and thank very much for your attendance. We look forward to talk to you again in third quarter call.

Operator

This concludes today’s conference call. You may now disconnect

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