Wajax Corporation's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 5.13 | About: Wajax Corp. (WJXFF)

Wajax Corporation (OTC:WJXFF) Q3 2013 Earnings Conference Call November 5, 2013 2:00 PM ET

Executives

Mark Foote - President and CEO

John Hamilton - SVP, Finance and CFO

Brian Dyck - SVP, Equipment

Adrian Trotman - SVP, Industrial Components

Analysts

Sara O'Brien - RBC Capital Markets

Benoit Poirier - Desjardins Capital Markets

Bert Powell - BMO Capital Markets

Michael Tupholme - TD Securities

Operator

Welcome and thank you for attending Wajax Corporation’s 2013 Third 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, 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 contains forward-looking statements. Actual future results may differ materially from expected results.

I will now turn the call over to Mr. Mark Foote.

Mark Foote

Thanks operator. And we apologize for that slight delay. I will make a few opening comments and then I will turn the call over to John for some detailed financial results for the third quarter. Our revenue in the third quarter and our earnings were largely as we had expected. When compared to last year revenue was negatively affected by continued weakness in the oil and gas and mining markets, mining related revenue declines including loss of the return on product line were partially mitigated by increases in mining associated after market sales driven by improvements in both product support and continuing gains from our rotating products initiatives. Growth in mining related after market services those few things I just mentioned largely offset the negative earnings effects of the lower mining equipment sales in the third quarter.

Increased SG&A cost were a factor in our third quarter results but they were considered in our internal forecasts. The reasons to these increases want some comments. SG&A costs were up $3.4 million on a year-over-year basis, the largest single variance related to the cost base associated with the two Industrial Components acquisitions that were completed in the fourth quarter of 2012. The remaining increases relate mainly to investments in strategic initiatives including our rotating products initiative and year-over-year variances in provisions and cost allocations. We have not taken steps to significantly reduce our cost base as the current softness is primarily related to two end markets and we expect those markets will recover overtime. What will happen, we will continue to take steps to reduce where it will not be detrimental for the long term growth of the company while at same time continuing to invest in our strategic initiatives.

We continue to expect the weakness in the oil and gas market to remain for the balance of 2013 with demand for new equipments and after market services for drilling and well stimulation continuing to be soft. In mining, coding activity remains at a reasonable level for Equipment and for Power Systems, electrical power generation businesses. However lower commodity prices continue to result in mining customers reducing their capital and development spending, limiting their ability to commit to new equipment orders. In spite of this we were able to increase our consolidated backlog on increases in non-mining related orders and EPG and Equipment and Power Systems businesses respectively. As well as our commercial trail of the four Hitachi EH5000 320 ton mining trucks begin in the oil sands in the fourth quarter. And we remain confident that the trail and our other mining related activities will position us to expand in this important market.

Consistent with our expectation discussed at the end of the second quarter. We are maintaining a cautious outlook regarding our end markets for the balance of 2013 and continuing to expect the full year earnings for this year would be less than 2012, John.

John Hamilton

Thanks, Mark. So third quarter 2013 consolidated revenue is $338.5 million that was down 5% from last year on revenue declines in Equipment and Power Systems. Consolidated net earnings of $11.5 million or $0.69 per share were down from $16.2 million or $0.97 per share last year on reduced segment earnings in all three businesses. Consolidated backlog of $204.8 million at the end of September was up 2% from June with increases in Equipment and Power Systems.

And now turning to the individual segments and starting up with the Equipment segment, the overall revenue decreased 8% to $179.5 million for the quarter. The Equipment sales decreased $26.4 million on reduced mining sales of $32.1 million. Gains are realized in construction forestry and material handling however. Parts and service revenues were up 19% to $73.4 million. 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 $1.5 million to $11.8 million, to lower volumes and higher SG&A costs were partially offset by higher part and services and sales mix. Increased SG&A costs were attributable to increased expenses in Western Canada including costs related to strategic initiatives and the impact of prior year accrual in cost allocation adjustments.

In Power Systems revenue decreased 8% to $69.2 million. The main reason for the decline was due to the reduced activity in Western Canada oil and gas sector which negatively affected both equipment and parts and service volumes. Segment earnings of $3.7 million decreased $2.3 million attributable to the revenue issues just mentioned and higher SG&A costs which are principally due to the 2012 incentive provision reversal and higher occupancy cost this year.

Industrial Components, the overall revenue of $91.1 million was up 4% compared to $87.5 million posted last year. If we back out the two acquisitions made late last year revenue would have been down 2%. Bearings and power transmission part sales were up $2.4 million as most of the acquisition volume is attributable to this category. Fluid, power and process equipment sales increased $1.2 million or 3% on increases in transportation and construction sector sales.

Earnings of $4.3 million were down $1.2 million year-over-year. The decline was a result of lower gross margins mainly as a result of product mix and competitive pressures in Western Canada and a $7,00,000 increase in SG&A costs. The increase costs were attributable to cost taken out as part of the two acquisitions and a higher bad debt provisions offset by lower annual incentive costs and other cost reductions.

We finished the quarter with funded debt of $225.3 million a small increase of $4.1 million in the quarter. At October 23rd, the Corporation issued the $125 million of seven year senior unsecured notes with the coupon of 6.125%. This introduces a layer of longer-term fixed rate debt into our capital structure in an historically favorable interest rate environment.

Simultaneous to the close of the notes the Corporation’s commitment to underwrite bank credit facility was reduced from $300 million to $250 million. And the Corporation also declared dividends of $0.20 per share for November and December of 2013 and $0.20 for January and February each of 2014.

I will now open up the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Sara O'Brien with RBC Capital Markets. Your line is open.

Sara O'Brien - RBC Capital Markets

Hi, good afternoon.

Mark Foote

Hi Sara.

Sara O'Brien - RBC Capital Markets

Equipment group, can you talk about the higher SG&A? You talked about strategic initiatives including rotating products; how much can you grow that segment since it seems to be good high margin and a good growth prospects for you guys?

Mark Foote

The business Sara is on track to double for us this year. There is a lot opportunity in it and we know that’s one of our initiatives in for the growth.

Sara O'Brien - RBC Capital Markets

Okay. And when you talk about like SG&A costs associated, what would that be related to, is that kind of getting new product lines or what exactly?

Mark Foote

When you are growing a business you have to put some infrastructure around it, so its management, its supervisors, it’s service support, mostly in the support of the business relative to the size of its grown for us.

It’s certainly better, it’s a smart speaking part of fairly good piece for the rotating revenues labor related, so there is personnel cost associated with providing that labor to the customers.

Sara O'Brien - RBC Capital Markets

Okay. And then just maybe on the backlog since it was up on the quarter, just wondered what’s the prospects going into like F14 deliveries, are these mostly for current year deliveries or do you see some good pipeline going into next year?

Mark Foote

The growth in our backlog was mostly forestry equipment in the quarter. So that’s just demand has gone up in that business and just the availability to source the equipment. The one tricky thing with our backlog going forward will be any larger, lot a large mining deals or mining deals that we get will maybe not make it into backlog, because we have some inventories, so they just go right to revenues. So backlog is going to be a bit maybe not quite the indicator that it was in the past.

Sara O'Brien - RBC Capital Markets

Okay. Maybe just following on that how do you feel about inventory? I noticed consolidated they were up in the quarter, what's driving that and what's your expectation going to year end?

Mark Foote

The bulk of the inventory in terms of, I guess would more, call it, excess would be in the area of mining inventory, and to smaller degree, much smaller degree some engines in the Power Systems business. And I guess, we've got some opportunity to at least the mining side to make some headway there, but nothing absolutely confirmed at this point.

Sara O'Brien - RBC Capital Markets

Okay. And then maybe just on the balance sheet John, leverage 2.4 times EBITDA, your goal is of kind of 1.5 to 2 times, how long do you see yourselves in that 2 plus range? And what’s the expectation in terms of use of free cash flow going forward?

John Hamilton

I guess the big issue we have in the short run would be our equipment inventory particularly mining equipment and again to a lesser standpoint as I mentioned in the, some engine to the power systems business. So it’s really going to dependent on how successful we are in selling off the mining equipment say we’ve got some good prospects, but just difficult to make any predictions in terms of quarter-by-quarter how that may or may not go.

Sara O'Brien - RBC Capital Markets

Okay. And just your comfort level on the leverage of being at 2.4 times EBITDA?

John Hamilton

Yeah. We had indicated that there will be times that we would be willing to be over or sort of higher end of the range. We are at 2.4 times it’s certainly something that we are focused on and actively managing.

Sara O'Brien - RBC Capital Markets

Okay, thanks. I will turn it over.

Operator

(Operator Instructions) Your next question comes from the line Benoit Poirier with Desjardins Capital Markets. Your line is open.

Benoit Poirier - Desjardins Capital Markets

Thank you very much. Good afternoon John and Mark. If we look at 2014 I understand you won’t provide the guidance, but what should be the key elements we should consider for next year in 2014 for each business segment?

Mark Foote

Well, I’ll do my best Benoit. I think the question for us is pretty simple it’s how significant the recovery that we see in the two markets that are hurting our earnings today. So I think if you look at those, the quoting activity in mining is indicative of still some opportunities that are there, so we’re optimistic for 2014. We have some opportunity for us from a mining equipment standpoint. I think on the mining aftermarket side, we expect rotating to continue to drive some pretty decent increases and that’s accretive to margins.

I think in industrial components, their Adrian’s business is still subject to the issues of mining and oil and gas. And I think we’ve seen a little bit of reason for optimism there. We don’t see recovery, but it’s certainly, there is a couple of green sheets I think in those businesses as it relates to Adrian. And at the [Richard’s] business it really it’s the household as the equipment market in oil and gas going to be. So we are staying very focused on our expense structure, we are very [singularly] focused on our efficiencies and I think it really is a function of how aggressively those end markets recover and help us with some of the inventory that we’ve got and the sales trends in each of our three businesses.

Benoit Poirier - Desjardins Capital Markets

Okay, very good color. And could you maybe talk a little bit about your new mining trucks, what are the prospects and what’s in the backlog right now and what are the opportunities to sell those new trucks?

Mark Foote

We have four trucks in the backlog right now. They are going in or they are in a trial today as John had mentioned they’ve been working for probably a couple of weeks. Obviously if we have a successful trial in Fort McMurray we are hoping that that would open the door for more opportunities in that market for us. They are bit smaller truck than the traditional ore truck out there. So there is some definite opportunities for us in Fort McMurray.

We’ve also got some 240 ton trucks in stock that we have some active quotes [sold] on. And have a lot of support from our manufacturer on those to get into a similar trial like we were doing in Fort McMurray today. So we have some real opportunities in those.

Benoit Poirier - Desjardins Capital Markets

Okay. Very good. And is there any commitment for those truck for next year in the sense, have you committed any specific order to Hitachi to receive more trucks, should we expect that inventory still to go up next year or you will wait and see a little bit before committing to some numbers?

Mark Foote

Not for trucks.

Benoit Poirier - Desjardins Capital Markets

Okay, perfect. Very good. And maybe last question if I may. Any comments about the market share trends on the equipment side this quarter? Was there any big changes or any comments?

Mark Foote

Our market share in most products was actually up except in large excavators and that was mostly in Eastern Canada.

Benoit Poirier - Desjardins Capital Markets

Okay, perfect. Okay. Thank you very much for the color. Have a good day.

John Hamilton

Thanks, Benoit.

Operator

Your next question comes from the line of Bert Powell with BMO Capital Markets. Your line is open.

Bert Powell - BMO Capital Markets

Thanks. Just wanted to get a point of clarification on the trucks. Do a set of trucks that went in for trial last quarter that were kind of didn't run through backlog and you had trucks in backlog. This 240 that you're referencing, Brian are potentially up for trials, those are the ones you had committed to for backlog either earlier this year or last year, if I got that right?

Brian Dyck

No, the trucks going into the trial, the four trucks they were in backlog at the end of the third quarter. So they would be delivered in the fourth quarter. So those are the four. The other six trucks are still on inventory.

Bert Powell - BMO Capital Markets

Other six, okay. So you got four going in the fourth quarter?

Brian Dyck

Right, Bert.

Bert Powell - BMO Capital Markets

Got it. Okay. And then Mark I just want to get back to your comments to make sure I heard you properly just in terms of you said you’re not taking steps to reduce the cost base that you sort of are looking through the valley here with respect to oil and gas and mining. So in order for you to make that statement you have to have some line of site or some level of confidence that is in fact the case. So I am just wondering in particular what you’re seeing that would cause you to say we're going to stand here through the second half or at the end of 2013 and 2014 to look better?

Mark Foote

Okay. So I guess as it relates to mining the quoting activity remains as we said pretty strong so we're confident we’ll come to that. We're also seeing some positive effect of rotating on the overall mining business, so not to say that we're not concerned about mining, but we definitely think that we can continue to weather the storm and seasonal opportunities in 2013. I think as it relates to oil and gas it’s a bit of different story. The issue for us right now is we are seeing some positive trends in discussing things with customer in quoting activities, some sales results et cetera. I think we're reasonably confident though that in addition to the normal products and services that we offer there are some diversification opportunities that would help us grow in the oil and gas business and replace some of the volume we might have otherwise lost.

So I’d say that we've got a great big increase to backlog or something like that that would be misleading, but we've got enough positive signs that we're not feeling compel to do anything structural for the business right now because we do think it is going to recover in the foreseeable future.

Bert Powell - BMO Capital Markets

How much was the issues in Quebec a drag for you this quarter?

Mark Foote

You mean in construction equipment?

Bert Powell - BMO Capital Markets

Yeah. Well, I imagine some level of affect, it would affect all of it, all elements of your business, but just curious if that was a no worthy impact?

Mark Foote

Maybe Brian can comment on construction and Adrian could comment on the industrial market.

Brian Dyck

Across Canada the Eastern Canadian market and specifically Quebec is one market that is down considerably just the market itself, but I guess fortunately for us in Quebec that is in the construction business. We were able to deliver a fairly large order of container handlers in the quarter in Quebec. We had a lot of success in the quarter in the agricultural business in Quebec. So, and then the forestry business has been relatively strong for us. So yes, it hurt, but there is also some great spots there.

Adrian Trotman

And for industrial components where it affects us is in the aggregate segment of the marketplace. And when you look at it versus last year, we’re down double-digit in that segment. So that's how it’s been affecting industrial components business.

Mark Foote

Hey Bert, just as it relates specifically to oil and gas and mining, clearly oil and gas is Western Canada, but the vast majority of Wajax’s current mining business is located in the West, so the expense which we've got, mining and market issues in Eastern Canada that's primarily an issue for industrial components and it would be modest in the grand scheme.

Bert Powell - BMO Capital Markets

Okay. That's great. Thank you.

Operator

We now have a question in queue from the line of Michael Tupholme with TD Securities. Your line is open.

Michael Tupholme - TD Securities

Thanks. Good afternoon. Mark, the diversification opportunities within power systems that you mentioned there in the prior question, can you elaborate a little bit on that?

Mark Foote

Yeah. It’s expansions in aftermarket services as it relates to equipment. Our industrial components and our power systems group have done a fair amount of work together on some everything from subsystems to different types of equipment we wouldn’t historically have provided service for. So we are in a process of looking at just different aftermarket related opportunities for well stimulation equipment, drilling equipment and some support equipment. No firm plans yet, but there is enough evidence to support the fact that we’ve got some additional aftermarket opportunities that has given us some optimism that if the equipment markets don’t fundamentally recover, we’ve got some other opportunities to help us replace the volume.

Michael Tupholme - TD Securities

And then can you talk about your comfort with the dividend, I know you have declared the dividend through the first part of next year. I just want to understand if when we think about the dividend, is this a situation where if conditions in key areas would have to get worse for you to be concerned about the current dividend or is it a situation where if a certain amount of time goes by and you don’t see things get better as I think you hope you become concerned at that point?

Mark Foote

Well, it’s not too much difference than it is every quarter, I mean we revisit the dividend based on the expectations of current year net earnings. So clearly we declared through to the end of this year. So we are within the range that we’ve prescribed as a minimum of 75% of expected current year net earnings.

As far as adjustments to dividends and the future concerned don’t have any current plans to adjust the policy that we have. So I guess you could kind of draw the math that the extent to which earnings go up or down and that would help us [tract] on the dividend. If our business held essentially where it is today than subject to, we have to work through that every quarter with our Board of Directors, but our current policy suggested for dividend, for earnings to where they are today. There is no reason to believe our dividend would be adjusted.

Michael Tupholme - TD Securities

Okay, so it’s not a matter of things getting better to be -- to remain comfortable, it’s just a matter of things not getting any worse and at least holding?

Mark Foote

Yeah, I mean you got to keep in mind Michael that every quarter we revisit this with afford but that is probably good assumption.

Michael Tupholme - TD Securities

Okay, perfect. And just, I mean, I think this has been addressed, but just want to be 100% sure, the four trucks that the trial, the four Hitachi 320 trucks that the trial begin in Q4, so the revenues will actually hit in the fourth quarter, is that (inaudible)?

Mark Foote

Correct.

Michael Tupholme - TD Securities

Perfect, thanks a lot.

Operator

Your next question comes from the line of Benoit Poirier with Desjardins Capital Markets. Your line is open.

Benoit Poirier - Desjardins Capital Markets

Yeah, just a follow-up question on the seasonality, how should we look at seasonality going into Q4? If we look back in the last three years, typically Q4 is the little bit softer in comparison to Q3, so is there anything different that will happen in Q4, how should we look at the quarter from a seasonality standpoint?

John Hamilton

I am not sure I would read too much in from sort of what you would perceive to be past seasonality issues. The big issues that are affecting our quarters as we go on is some of the lumpiness around some of the bigger orders, whether it’d be mining orders or EPG orders. So I am not sure you could say that we would think Q4 would be worse because of seasonality effect.

Benoit Poirier - Desjardins Capital Markets

Okay. And I guess same comment also for Q1?

John Hamilton

Too early at this point in time for us to be talking about Q1.

Benoit Poirier - Desjardins Capital Markets

Okay, perfect. Thanks for the time.

Operator

There are no further questions in queue at this time. I’ll turn the conference back over to our presenter.

Mark Foote

Okay, well, thanks very much, operator. Again, we apologize for the slight delay a little bit earlier and thank you very much for your participation today.

Operator

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

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