Wajax Corporation

Thank you for attending WageX Corporation's 2024 Fourth Quarter and Year-End Financial Results Webcast. On today's webcast will be Mr. Iggy Domogalski, President and Chief Executive Officer, Mr. Stuart Auld, Outgoing Chief Financial Officer, and Ms. Tanya Casadino, Incoming Chief Financial Officer. Please be advised that this webcast is being recorded. Please note that this webcast contains forward-looking statements. Actual future results may differ from expected results. I will now turn the call over to Tanya Casadino.

Thank you, operator, and good afternoon. Thank you for participating in our fourth quarter results call. This afternoon, we will be following a webcast, which includes a summary presentation of Wage Access Q4 2024 financial results. The presentation can be found on our website under Investor Relations, Events, and Presentations. To begin, I would like to draw your attention to our cautionary statement regarding forward-looking information on slide two. and the non-GAAP and other financial measures on slide three. Please turn to slide four, and at this point, I'll turn it over to Iggy.

Thank you, Tanya. To start, I will provide highlights on our fourth quarter before turning it over to Stuart and Tanya for commentary on backlog, inventory, and the balance sheet. This slide provides an overview of WageX. The corporation has 167 years of Canadian operating history and operates across 114 branches with a team of more than 3,000 employees. During the quarter, our heavy equipment categories and revenue sources made up approximately 62% of our total revenue, while industrial products and ERS generated approximately 38%. Turning to slide five. This 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 a 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 six, this slide provides an overview of our strategic priorities, which have been refined for 2025. 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 seven. In the fourth quarter, Wajak saw higher revenues and lower selling and administrative expenses, which were offset by lower gross profit margins and restructuring and other related costs. Revenue of $565.9 million increased $23.3 million in the quarter. The increase resulted primarily from higher mining equipment sales in Western Canada from the delivery of two large mining shovels in the fourth quarter of 2024, with no such deliveries in the fourth quarter of the prior year. These increases were offset partially by lower ERS sales in Western and Central Canada. First profit margin of 17.1% decreased 420 basis points compared to the same period of 2023, driven primarily by lower margins realized on equipment, ERS, and rental revenue due to increased market pressures, as well as a lower proportion of ERS product support and industrial parts sales relative to equipment sales. Selling at administrative expenses as a percentage of revenue decreased to 14.1% in the fourth quarter of 2024 from 16.1% in the fourth quarter of 2023. Selling and administrative expenses in the fourth quarter of 2024 decreased $7.4 million, or 8.5%, compared to the fourth quarter of 2023, due primarily to lower spending in multiple areas, including personnel, bonuses, travel and entertainment, and supplies and marketing, driven largely by cost savings initiatives. In the fourth quarter of 2024, the corporation implemented workforce reductions in response to market conditions. A restructuring cost of $5.8 million was recognized in the fourth quarter, relating primarily to severance costs. Adjusted EBITDA of $35.1 million decreased 12.1 million or 25.6% from the fourth quarter of 2023, noting the adjustments recorded on this chart. The decrease resulted primarily from lower gross profit margins offset partially by reduced selling and administrative expenses. Adjusted net earnings of $0.35 per share decreased 58.2% or $0.48 per share from the fourth quarter of 2023, noting the adjustments recorded on this chart. At the end of Q4, the TRIF rate was 0.94, a decrease of 7% from the fourth quarter of 2023. The fourth quarter TRIF rate was up 3% from the third quarter of 2024. Safety continues to be Wage Act's 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 workforce safety. Turning to slide eight. Revenue increase of 4.3% in the fourth quarter resulted from higher revenue in Western Canada offset partially by lower revenues in Central Asia. Western Canada sales of $275 million increased 16.7% in the quarter, due primarily to higher industrial part sales and higher mining equipment sales, including the delivery of two large mining shovels in the fourth quarter of 2024, with no such deliveries in the fourth quarter of the prior year. These increases were offset partially by lower ERS sales. Central Canada sales of $100 million decreased 5.4% in the quarter due primarily to lower equipment sales in the construction and forestry category as well as lower ERS sales. The decrease was offset partially by higher equipment sales in the material handling category. Eastern Canada sales of $191 million decreased 5.1% in the quarter due primarily to lower equipment sales in the construction and forestry category as well as lower industrial parts sales. The decrease was partially offset by higher equipment sales in the material handling 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 $208 million increased $50 million, or 32% compared to last year, due primarily to higher mining sales in Western Canada, including the delivery of two large mining shovels in the fourth quarter of 2024, with no such deliveries in the fourth quarter of the prior year, as well as higher material handling sales in all regions. These increases were offset partially by lower construction and forestry sales in all regions. Product support sales of $133 million were essentially flat compared to last year. 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 $134 million decreased $2 million or 2%. ERS sales of approximately $79 million decreased $25 million or 24% due to lower sales in all regions, particularly in Western Canada. Turning to slide 11. The slide summarizes sales at the category level for our company's overall groupings of heavy equipment and industrial parts and services. In the fourth quarter, the heavy equipment categories increased 50 million, or 17%, driven primarily by higher mining sales in Western Canada, including the delivery of two large mining shovels in the fourth quarter, with no such deliveries in the fourth quarter of the prior year, as well as higher material handling sales in all regions. These increases were offset partially by lower construction and forestry sales in all regions. The industrial parts and service category decreased 27 million, or 11%, driven by lower ERS sales in all regions, particularly in Western Canada, and lower industrial parts sales due to weaker market conditions. As previously announced, on November 4, 2024, Tanya Cassadino has been appointed Chief Financial Officer effective today, following the planned retirement of Stuart Auld from the CFO role. She has agreed to remain with Wajax in the near term to support a series of operational efficiency initiatives. On behalf of the board and management, I would like to thank Stuart for his many contributions to WageX over the last 10 years. His extensive operational knowledge positions him to remain a core contributor, and we appreciate the continued benefit of his expertise and leadership. I'd also like to congratulate Tanya on her appointment to the role of CFO. We look forward to further leveraging her expertise and disciplined approach to financial risk management. I will now turn the call over to Stuart and Tanya for commentary on backlog, inventory, and a balance sheet.

Thanks, Ziggy. Please turn to slide 12 for my comments on backlog and inventory. Our Q4 backlog of $564.4 million decreased $23.7 million, or 4%, compared to backlog of $588.1 million at Q3, and increased $10.5 million, or 1.9%, on a year-over-year basis. The sequential decrease was due primarily to lower material handling and mining orders, and backlog at December 20, 31, 2024, included seven large mining shovels. The year-over-year increase was due primarily to higher construction and forestry orders and higher mining orders, including seven large mining shovels offset partially by lower material handling, ERS, and industrial parts orders. Inventory decreased $48.4 million compared to Q3, 2024, due primarily from lower equipment inventory in the mining category driven by the delivery of two large mining shovels in the quarter and lower equipment inventory in the power systems category. Management continues to focus on reducing and managing the corporation's inventory levels, and ongoing inventory reduction initiatives have decreased inventory by 76.3 million from peak levels at March 31, 2024. Inventory increased 38 million compared to Q4 2023 due primarily to from higher equipment inventory in the construction and forestry, mining, and material handling categories. These increases were partially offset by lower equipment inventory in the power systems category and lower industrial parts inventory. I will turn over the call to Tanya for comments on cash flow, leverage, and working capital.

Thanks, Stuart. Please turn to slide 13. Cash flows generated from operating activities in the current quarter of $75.9 million compared with cash flows generated from operating activities of $48.5 million in the same quarter of the prior year. The increase in cash generated of $27.4 million was mainly attributable to a decrease in inventory and an increase in accounts payable and accrued liabilities, offset partially by an increase in accounts receivable and a decrease in net earnings excluding items not affecting cash flow. Our Q4 leverage ratio decreased to 2.61 times from 2.78 times at Q3 due to lower debt levels driven largely by cash generated from operating activities during the quarter. The corporation's leverage ratio is currently outside the target range of 1.5 to 2 times at the end of Q4, primarily due to higher debt from investment in working capital and acquisitions completed in 2023 and lower trailing 12-month pro forma adjusted EBITDA driven by weaker market conditions. Our available credit capacity at the end of Q4 was $212.6 million, which is sufficient to meet short-term, normal-course working capital and maintenance requirements and fund our planned strategic initiatives. We continue to focus on working capital efficiency, which is a key component in managing our overall leverage targets. The Q4 working capital efficiency was 26%, a decrease of 60 basis points from September 30, 2024, due to lower trailing four-quarter average working capital and higher trailing 12-month revenue. Excluding the debentures, which are classified within current liabilities, working capital efficiency was 28.7, as at both December 31, 2024, and September 30, 2024. Subsequent to year-end, on January 15, 2025, Wajax announced the repayment in full of the $57 million in principal amount owed under its 6% senior unsecured debentures due January 15, 2025, along with accrued interest up to but excluding the maturity date. The corporation's existing bank credit facility was used to complete the repayment. Finally, the Board has approved our first quarter 2025 dividend of $0.35 per share, payable on April 2, 2025, to shareholders of record on March 14, 2025. Please turn to slide 14, and at this point I'll turn the call back to Iggy.

Thanks, Tonya. Our outlook is summarized on slide 14. During the fourth quarter of 2024, Wage Act delivered revenue of $565.9 million, up $23.3 million, or 4.3% from the fourth quarter of 2023. The year-over-year increase in revenue is primarily due to higher mining equipment sales in Western Canada from the delivery of two large mining shovels in the fourth quarter of 2024, with no such deliveries in the fourth quarter of the prior year. Gross profit margin decreased to 17.1% in the fourth quarter of 2024 versus 21.2% in the fourth quarter of 2023, driven by lower margins realized on equipment, ERS, and rental revenue due to increased market pressures, as well as a lower proportion of ERS product support and industrial parts sales relative to equipment sales. Looking ahead to the first half of 2025, we continue to see strong customer demand in the mining and energy sectors with the former support of a strong backlog. Headwinds are expected, with broader market conditions remaining soft and uncertainty surrounding potential tariffs and counter-tariffs on Canada-U.S. trade, and additional headwinds are expected as such tariffs materialize. Management remains committed to executing the corporation's six strategic priorities, which are set out on slide six, which will continue to support and position the business for future success, and which have been refined for 2025. As additional focus areas, management will execute initiatives to reduce inventory, improve margins, and lower costs. I'll now turn it back to the operator and open the line for questions.

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. you will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please lift your handset before pressing any keys. Your first question comes from the line of Jonathan Goldman from Scotiabank. Please go ahead.

Hi, good afternoon, and thanks for taking my question. Hey, Jonathan. Iggy, the gross margin pressure in the quarter, are you able to eliminate how much of that was due to mix versus lower product line margins?

Yeah, so there was a – the mix impact was material. I mean, we – the mix in Q4 was totally different than any of our previous three quarters, so a bunch of the impact was definitely due to mix. And then we are seeing some pressures in the markets. I wouldn't say that we're losing any market share, but customers are certainly sharpening their pencils, which is making us sharpen our pencils. There's more three bids and a buy as opposed to just getting sole sourced on certain things. So there is some pressure there. As we look forward, I would say that Q4 seems like it was definitely a low point in our margins. We do see... definite and meaningful improvement over Q4 in the short term. But we don't expect to be getting back to the levels of, say, the first half of 2024 in the near term.

That makes sense. And can you discuss how the competitive environment has trended so far in Q1 relative to Q4?

Yeah, good question. I think the competitive environment hasn't changed too much between Q1 and Q4. Competition remains strong, as it always has, and we haven't seen too many different tactics. I just think the customer sentiment continues to be a challenge with what's going on in the U.S. and recent announcements even yesterday and today. I think some of our customers are just – a bit hesitant and uncertain on what's going to happen here in the coming months.

Okay, and maybe if I can squeeze in one more. I'm just trying to reconcile the comments and the outlook. On the one hand, you're talking about strong customer demand in mining and energy, but then you're also talking about broader market conditions being soft in the headwinds, and it does seem also customers are exercising capital discipline. I'm just trying to reconcile it on the one hand. some sort of positive commentary and then also the caution.

Yeah, I think in the near term, a lot of these customers are under long-term contracts. And I'm talking specifically about customers who sell to the U.S. You know, they're under long-term contracts. And so we think a lot of those contracts are good and they'll continue to deliver those products that are needed by the U.S. But we also have... a lot of mining customers and energy customers who don't sell a lot of their products to the U.S. And we see consistent, or those customers are seeing consistent strong demand, and we continue to see strong demand from them.

Okay, thanks for taking my questions.

I'll get back to you.

Thanks, Jonathan.

Your next question is from the line of Patrick Sullivan from TD Cowan. Please go ahead.

Good afternoon. Thanks for taking my question. Just to get back onto the margin topic, I sort of inferred that part of the impact was from right-sizing the inventory, and it sounds like management is prepared to do more inventory right-sizing as well. So is that accurate? And then is there any sort of amount or number you could put on that?

Yeah, during Q4, there was continued inventory reduction. we did sell some inventory at meaningfully lower margins. So that had a small impact on the gross profit percentage in the quarter. As we look forward, we do plan to continue to reduce inventory. So if you look back to the end of Q1 of 2024, our inventory peaked at just around $750 million, and we brought that down to about $675 by the end of the year. The So that's about 25 million a quarter. It's not perfectly 25 million a quarter, but we see that as a good rate of inventory reduction.

Okay, excellent. Thank you. And then I guess ERS revenue is down quite a bit. I mean, can you elaborate on that? Is that work more break-in in nature? Was it a slow period? Was any of that deferred or delayed? Because the backlog in the IP ERS was relatively stable quarter-by-quarter.

Yeah, so the backlog is relatively stable. What we're finding with our customers is there is still a mixed component in our backlog and in our business, even within IP and ERS. And some of the business, most of the business within IP and ERS is that MRO, the maintenance repair operation type business, where that spending needs to happen almost no matter what's going on. But there is a portion of our IP and ERS business that is related to capital projects. And those are new facilities that are being built or significant upgrades, ground field type projects. And there has been a slowdown in those, a material slowdown. So the MRO business remains strong. The capital portion of IP and ERS has definitely been slower with customer uncertainty.

Okay, great. Thank you. Thanks, Patrick.

Your next question is from the line of Devin Dodge from BMO Capital Markets. Please go ahead. Yeah, thanks. Good afternoon.

I wanted to start with the supplier finance programs. You continue to see that increase in Q4. I think it now covers about 45% or so of your equipment inventory. Just wondering if there's a way to frame how much time, at least on average, that WCAG has until this becomes interest-bearing and What do you view as a targeted level for this equipment financing for your business?

Devin, I would say we have floor plans from a number of our manufacturers, and we feel pretty comfortable with where we're at right now. Where we're really focusing our efforts is just moving out older inventory. Over the last year, the inventory that is now interest-bearing has gotten a little bit higher, and that's really the focus of our inventory dispersal program, and we've developed some new reporting and new programs to help our sales teams really focus on those and get those out the door so that we're just not paying interest on the inventory that's on the ground.

Okay, fair enough, okay. In the six priorities listed in the outlook, there was a small change that we noted It was on the focus on part-to-service and margin improvement. I think we saw the comment on expanding product support was stripped out, and investment in tools, training, and support was added. So I'm just wondering if you could provide a bit more color on this and any shifts in focus or priorities from, say, six to 12 months ago.

No, Devin, I wouldn't say there's a – we just refined our strategic priorities and tweaked the wording, but – Generally, the focus on product support is still there, and there hasn't been a meaningful change in direction.

Okay. And then the last one for me. You've made a lot of progress on streamlining costs in late 2024. I think the outlook suggests, you know, more focus on lowering the cost structure in 2025. Just wondering if you could provide some thoughts on what areas of the business you see the most opportunity for cost improvement as we think about 2025.

When you look at our P&L, the biggest cost that we have is people, and the second biggest cost that we have is facilities. And so those are two areas that we continue to look at. As you noted, we had a restructuring charge in Q4 of 2024, and we're continuing down the path of reducing our costs and just making sure that we're right-sized and that we're just defensive in what is going to be happening here in the coming months and years with our economy and our biggest trading partner to the south. So it remains a bit of a question mark. So we're playing it safe.

Okay, thanks. I'll turn it over.

Your last question is from the line of Maxim Sycha from National Bank Financial. Please go ahead.

Hi, good afternoon. Hi, Max. I was wondering if it's possible to get a bit of color around the cyclicality of ERS and IP business. Just curious, when we look at obviously 2023, lots of growth. In hindsight, it maybe just feels like a pull-through of COVID. What are your thoughts right now around the quality of these businesses?

You know, Max, in our IP and ERS business, the cyclicality is, it really ranges by customer. And we just have so many different customers in so many different areas that we serve that there is a little bit, it's harder to really pinpoint the cyclicality. We're definitely coming off of two peak years in 2022 and 2023. We grew by almost 20% each year. So it's a It's a little bit softer. But I would say the general comment within the year, Q2 and Q4 seem to be a little bit higher, and Q3 would be a bit of a softer season for us. But there is a lot of individual customer variability in there.

Yeah. And I guess, I mean, there was also the word before tariffs. How do you think that kind of wet blanket is going to play out on this market? on these part of the business?

Next. Yeah, so there's a few ways that we think about tariffs. I mean, one is our direct exports to the U.S., which is very minimal. That would be less than 1% of revenue, so immaterial. Then there is on our customers who export to the U.S. So we're exposed to a lot of them. So thinking of the steel and aluminum producers and others, we expect that they're not shutting down their plants and that they will still continue to need our products and services for the MRO portion of their operation. And during the previous tariff period, we weren't affected too much. History doesn't always repeat itself, so we don't know exactly what this one will be. But there was a minimal impact last time this happened. And then the last one is on reciprocal tariffs coming into Canada. The first round of $30 billion is... negligible impact on us, it's the next round that is a question mark. You know, will individual bearings be tariffed or not? If they are, that could have an impact. Forklifts remain the question mark or other heavy equipment. You know, in some cases it could be negative, but in some cases it could actually be positive. And I think of Hitachi as an example, you know, where the product's made in Japan, so obviously not subject to any kind of tariffs. but much of our competition is made in the U.S., so it immediately gives us an upper hand. So while I think there are some headwinds on the topic of tariffs, I also think there could be select opportunities that we'll definitely jump on should they materialize.

Yeah, well, fair enough. And then I just was wondering also about the dividend payout ratio. I think we're kind of questioning about 50% And as you sort of think about your financial priorities and cost of debt and all these things, do you mind maybe kind of revisiting the priorities and, again, the comfort level around where we are relative to net income for cash flow generation?

As we look forward for the rest of the year, referring to our previous remarks right at the end on the last slide there, we've got some meaningful priorities to reduce inventory, continue to reduce costs, and improve our margins. and when all those things line up, you get reduced leverage, and that is ultimately the priority. We're at 2.6. We're outside of our range of 1.5 to 2, so we definitely want to get our leverage back in the range where we feel comfortable, and then when that happens, we continue to review the dividend on a quarterly basis, but when you're in a better leverage spot, then the dividend becomes a lot more stable.

Yeah, and I guess, I mean, can you provide any color around the working capital sort of free up that we can expect on a prospective basis and how quickly we can get to that maybe two times leverage ratio? Thanks.

Yeah, I mean, we've been reducing inventory by an average of $25 million a quarter since we started at the end of Q1. And so I would say that type of a pace is something reasonable to look at. And then, I mean, the other two big pieces of our working capital are receivables and payables, which we continue to manage the same as always. And so they just fluctuate, and they generally offset each other.

Okay. Okay, that's a great message from me. Thank you very much. Thanks, Max.

There are no further questions at this time. I'd like to turn the call over back to Mr. Igi Domogalski for closing remarks. Sir, please go ahead.

Thank you, operator. Thank you for continued interest in wage acts. We look forward to providing you with further updates at our annual general meeting on May the 6th. Thank you.

This concludes today's conference call. Thank you very much for your participation. You may now disconnect.