Wajax Corporation (WJX) Earnings Call Transcript

Thank you for attending Wajax Corporation's 2026 Third Quarter Financial Results Webcast. On today's webcast will be Mr. George McClean, President and Chief Executive Officer; Ms. Tania Casadinho, 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 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's Q3 2026 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 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 George.

Thank you, Tania. Thank you, everyone, for joining us today. Before we get into the quarter, I want to spend a moment on where we are as a company and where we're headed. Wajax is building from existing strengths and targeting investment where it will accelerate growth. We have a continued focus on operational excellence with a strong balance sheet and prudent capital allocation. We are proud of our long-standing customer relationships built over the decades, our established partnerships with leading equipment and product suppliers and our technical service capability and skilled technician base. Our areas of targeted investment include technician recruitment and development, leadership training, sales capabilities, digital and e-commerce tools, selected supply chain and facilities investments. These targeted investment priorities are expected to support profitable growth going forward. This slide provides an overview of Wajax. The corporation has more than 167 years of Canadian operating history and operates across 104 branches with a team of about 3,000 employees. During the quarter, our heavy equipment categories and revenue sources made up approximately 56% of our total revenue, while Industrial Products and ERS generated approximately 44%. Turning to Slide 5, 2027 strategy road map. This slide provides an overview of our 2027 strategy road map, which is new, and it was announced on October 8, 2026. Wajax's long-term vision is, by 2031, Wajax will be Canada's fastest-growing provider of industrial products, equipment and services. We are seeking to advance this vision through our 2027 strategy road map and are winning with Wajax better, smarter, faster approach, and that defines how we bring our values to life and execute our strategy. Our ambition is to make Wajax a great place to work, develop strong leaders and teams, help our customers and supplier partners succeed, contribute meaningfully to the communities in which we operate and support the continued growth and development of Canada while delivering sustainable, profitable growth and long-term shareholder value. As we enter into 2027, our strategy road map is organized around the four interconnected priorities that you see on the slide, building the best team, customer and supplier partner focus, supporting our communities and delivering on our commitments. Together, these priorities are intended to strengthen the capabilities and relationships required to support profitable growth and enhance Wajax's competitive position. The road map will guide our priorities, investments and organizational initiatives as we focus on our people and leadership, customer and supplier partnerships, communities, operational excellence and disciplined capital allocation. Turning to Slide 6, Winning with Wajax. This slide provides an overview of our winning ways and how we work. To summarize, Winning with Wajax connects what we believe with how we work. Safety and well-being come first, alongside developing our people and delivering an exceptional customer experience. We expect people to act with integrity and sound judgment, doing the right thing consistently, builds the trust that supports lasting relationships. We need to understand what our customers need, work together to solve their problems and follow through on our commitments. Customers should experience that commitment in every interaction. Further, moving quickly means setting clear priorities, making decisions and adapting with purpose. Continuous improvement requires us to challenge existing practices and learn from our mistakes. Our strength comes from sharing knowledge across teams, building trusted partnerships and recognizing results. This is how we build on a legacy that began in 1858. Turning to Slide 7, highlights third quarter. In the third quarter of 2026, Wajax continued to operate against a mixed economic backdrop with demand conditions varying by region and end market. Revenue of $477.8 million decreased $5.3 million or 1.1% in the quarter. The decrease was driven by the delivery of one large mining shovel primarily in the third quarter of 2025 compared with no such delivery in the current quarter. Additionally, a year-over-year decrease in Industrial Products volume was more than offset by an improvement in product support and ERS revenues. Gross profit margin of 20.1% decreased 70 basis points compared to the same period of 2025. This decrease in margin was primarily due to lower margins realized on product support, Industrial Products and ERS revenue, partially offset by higher margins on equipment sales. Selling and administrative expenses as a percentage of revenue increased to 15% in the third quarter of 2026 from 14.7% in the same period of 2025, driven by the year-over-year decline in revenue. Excluding the adjustments noted on the slide, adjusted selling and administrative expenses increased $2.3 million in the third quarter of 2026 compared with the same period in the prior year due primarily to higher personnel, travel and entertainment and supplies and marketing costs. Management remains focused on gross profit discipline, effectively managing costs and improving operating leverage while continuing to invest selectively in capabilities that support the long-term growth and competitiveness of the business. Adjusted EBITDA margin of 8.1% in the third quarter of 2026 decreased from 9.3% compared to the same period of 2025 and decreased from 8.9% in the second quarter of 2026. Adjusted EBITDA of $38.9 million decreased $5.9 million or 13.2% from the third quarter of 2025, noting the adjustments recorded on this chart. The decrease reflects lower sales volume, lower gross profit margins and $4.1 million in restructuring and other related costs in the third quarter of 2026. Adjusted net earnings of $0.60 per share decreased 19% or $0.15 per share from the third quarter of 2025, noting the adjustments recorded on this chart. Backlog reached a near record level of $598.6 million, up 18.2% year-over-year and 9.5% from Q2, just below the record set in 2023. Sequential growth across construction and forestry, industrial products and ERS provides a solid foundation for future revenue. Safety continues to be Wajax's #1 priority, and management is committed to continuously improving our safety programs to improve on this result. We thank everyone on the team for their ongoing dedication to workplace safety. Turning to Slide 8, revenue by region. The revenue decrease of 1.1% in the third quarter resulted from lower revenue in Western and Central Canada. Western Canada sales of $206 million decreased 2.1% in the quarter due primarily to lower mining equipment sales, including the delivery of a large mining shovel in the third quarter of the prior year with no comparable delivery in the third quarter of the current year. This decrease was partially offset by higher product support sales in the mining category and higher construction and forestry equipment sales. Central Canada sales of $80 million decreased 12% in the quarter due to lower sales in all categories, but most notably in material handling, industrial products and ERS. Eastern Canada sales of $191 million increased 5.5% in the quarter primarily to higher equipment sales in the Construction & Forestry and Power Systems categories. Please turn to Slide 9, equipment and product support revenue. An update on equipment and product support sales and year-over-year variances are shown on this page. Equipment sales of $126 million decreased $5.2 million or 4% compared to last year due primarily to lower mining equipment sales in Western Canada, including the delivery of a large mining shovel in the third quarter of the prior year with no comparable delivery in the third quarter of the current year. This increase was partially offset by higher Construction & Forestry equipment sales in Western and Eastern Canada. Product support sales of $131 million increased $7.7 million or 6.3% compared to last year due primarily to strong mining revenue in Western Canada. Please turn to Slide 10, industrial products and ERS revenue. An update on Industrial Products and ERS sales and year-over-year variances are shown on this page. Industrial Products sales of approximately $127 million decreased $9.1 million or 6.7% compared to last year, with lower sales in all regions driven by competitive and uncertain market conditions as customers continued to be impacted by tariffs and macroeconomic uncertainty. ERS sales of approximately $85 million increased $4.3 million or 5.3% compared to the prior year due primarily to higher sales in Western and Eastern Canada, driven largely by the timing of large projects. Turning to Slide 11, revenue by category. The slide summarizes sales at category level for our company's overall groupings of heavy equipment and industrial products at ERS. In the third quarter, the heavy equipment categories decreased $0.6 million or 0.2%. Industrial Products and ERS categories decreased $4.8 million or 2.2% due to lower industrial product sales in all regions, offset partially by higher ERS sales in Western and Eastern Canada. I will now turn the call back over to Tania for commentary on backlog, inventory and the balance sheet.

Thank you, George. Please turn to Slide 12 for my comments on backlog and inventory. Our Q3 backlog of $598.6 million increased $52 million compared to backlog of $546.6 million at Q2 and increased $92.1 million on a year-over-year basis. The sequential increase was due primarily to higher construction and forestry backlog and higher industrial products and ERS backlog. The year-over-year increase was due primarily to an increase in Power Systems backlog driven by the River Class destroy or subcontract entered into its Irving Shipbuilding, Inc. during the fourth quarter of 2025 and higher construction and forestry and ERS backlog. These increases were partially offset by lower mining backlog driven largely by the delivery of three large mining shovels since September 30, 2025. Backlog at September 30, 2026, included two large mining shovels scheduled for delivery in the fourth quarter of 2026. Inventory increased $18.4 million compared to Q2 2026, while inventory increased $3 million compared to Q3 of 2025. The sequential increase was due primarily to higher mining equipment inventory in the quarter. Inventory was down $143.1 million from its peak level in March 2024, and management believes that inventory levels are within normal operating range. Please turn to Slide 13, where I will provide an update on cash flow, leverage and working capital. Cash flows used in operating activities in the current quarter of $23.1 million compared with cash generated from operating activities of $18.5 million in the same quarter of the prior year. The decrease in cash generated of $41.6 million was mainly attributable to an increase in inventory of $18.4 million during the quarter compared to an increase of $3 million in the same quarter of the prior year, an increase in trade and other receivables of $19.9 million during the quarter compared to an increase of $7.5 million in the same period of the prior year. And a decrease in accounts payable and accrued liabilities of $12.9 million compared to a decrease of $1.9 million in the same period of the prior year. Our Q3 leverage ratio increased to 1.82x from 1.38x in Q2 due to higher debt levels from working capital timing and lower trailing 12-month pro forma adjusted EBITDA. Our available credit capacity at the end of Q3 was $276.4 million, which is sufficient to meet short-term normal course working capital and maintenance capital requirements and fund our planned strategic initiatives. Finally, on October 22, 2026, the corporation extended the maturity of its $500 million bank credit facility from October 24, 2029, to October 22, 2031. This extension enhances financial flexibility in support of Wajax's strategic priorities. We continue to focus on working capital efficiency, which is a key component in managing our overall leverage target. The Q3 working capital efficiency was 24.1%, an improvement in efficiency of 20 basis points from 24.3% at June 30, 2026, due to lower trailing 4-quarter average working capital. Inventory turns of 2.4x have remained stable from Q2 of 2026 and improved marginally from 2.3x in Q3 of 2025 due primarily to lower average inventory levels offset by lower sales. The optimization of inventory, improvement in working capital efficiency and meaningful reduction in leverage reflects management's disciplined execution. Finally, the Board has approved our fourth quarter 2026 dividend of $0.35 per share, payable on January 5, 2027, to shareholders of record on December 15, 2026. Please turn to Slide 14. And at this point, I will now turn the call back to George.

Thanks, Tania. Our outlook is summarized on Slide 14. Our third quarter results reflected mixed market conditions and variability in customer demand and project timing. While revenue and margins were below the prior year, backlog increased 18% year-over-year, product support and ERS revenue continued to grow, and we generated $59.9 million of cash from operating activities during the first 9 months of 2026. Our balance sheet remains strong with leverage of 1.82x within our target range and the extension of our $500 million credit facility to 2031, further enhancing the financial flexibility available to support our operating and strategic priorities. As we prepare to enter 2027, our priorities are clear and our focus is on executing our strategy road map and implementing our announced organizational changes. This includes discipline on margin performance, cost and working capital and increasing operating leverage. At the same time, we will make targeted investments in our people and the commercial, digital and operational capabilities required to grow. Together with greater accountability and a stronger focus on our customers and supplier partners, we believe these actions will strengthen Wajax's competitive position and support sustainable profitable growth over the long term. Looking ahead, market conditions are expected to remain mixed across certain end markets and regions with continued variability in customer demand and project timing. Broader macroeconomic uncertainty is likely to continue to weigh on customer confidence and investment decisions. The corporation's diversified exposure across equipment, product support, industrial products and engineered repair services, together with its national footprint and supplier relationships, provides a broad platform from which to navigate these conditions and pursue opportunities for growth. On October 8, 2026, Wajax announced the strategy road map, organized around the four priorities covered earlier. Wajax also announced planned organizational changes, including the planned appointment of a President of equipment parts and service, our President of Industrial Products and Engineered Repair Services and the Chief Value Officer. All of these are intended to provide greater role clarity and accountability in several areas such as sales, sales force effectiveness and supply chain. The intention is to strengthen our focus on profitable sales growth, efficient distribution and customer and supplier partner relationships. Management believes the disciplined execution of the strategy road map and the planned organizational changes will strengthen Wajax's competitiveness, support profitable growth and create sustainable long-term value for shareholders. Thank you very much for your interest and your continued interest in Wajax, and would now ask Joanna, please to open the line for questions.

[Operator Instructions] First question from Devin Dodge with BMO Capital Markets.

You look in Q3 and dropped some language related to more specific sector commentary. Just wondering if you can provide the various -- can you talk about the various end markets and if there are any changes versus earlier this year.

Yes. I think the drop language is more of a formatting issue and not an intentional move. But certainly, in terms of end market, it remains mixed, but we have strength in mining, utilities and energy and infrastructure. And certainly, customers are continuing to approach capital spending selectively and equipment utilization, maintenance requirements, asset life extension, supports parts and service demand. Quotation activity is actually really encouraging in several markets. The timing, obviously, is unknown but we certainly feel confident in that. Mining is strong. Forestry is selling through and solid. And certainly, government utilities and power is solid as well. So that's our overall outlook on the market. Our main goal at this stage is to make sure Wajax is well placed in terms of strength in good times and tough times, and that's why we're launching the road map. We're launching our organizational design changes effective January 1, but in play now to get great leaders into the right roles and take full advantage of all the positive macro trends in Canada today with build Canada and infrastructure design. So pretty confident about the changes we're making to take advantage of those macro trends.

Okay. Good color. And just a bit of a follow-up. I think just kind of -- you touched on this in your answer there, but -- are you seeing improving demand signals in construction in forestry? I think when we look at your commentary, I think equipment sales in these end markets were higher year-over-year. Backlog increases attributed to Construction & Forestry. Just wondering what you're seeing there and are we off the bottom now.

Yes. Thanks, Devin. So certainly, construction is mixed, and we're encouraged by the additional lineup improvements from Attachie that are coming next year. So that will be helpful as well in terms of a compact track loader, and the articulated dump truck, that's good news as well. We're looking forward to determining when and how we can introduce those in Canada, very confident about that. The forestry sector definitely has some green shoots, and there's obviously been a lot of change in the market and the cross-border activity there, but we feel good about forestry as well. And what we're doing going forward is having this new organizational design, which has a President of Equipment and Product Support and then a Vice President responsible for sales in each of these segments. So we'll have front-to-back responsibility and clarity around sales, and then we'll also have service operations under that President as well. So we'll show up much more as a stronger pure-play competitor in that space, and be much more competitive given that front-to-back sales responsibility versus the intertangled nature historically of sales and operations and various segments through a regional approach. So very excited about that order design, which will give us better line of sight to construction in forestry, for example, and also a much more focused, clear approach to growing those specific segments across the board.

Okay. Good color. Last one for me. Margins on product support Industrial Products and ERS, I think were lower year-over-year. Just trying to get a sense of this was due to increased competitive activity, inflationary pressures that couldn't be passed through or mix of work or something else? What should we attribute that softness too?

Thanks for the question, Devin. Yes. So gross margin on a year-over-year basis declined 70 basis points. It's important to note that within the types of revenue, there is a product mix impact as well. So when you're -- when we're comparing quarter-over-quarter, if that mix shifts in any way, shape or form, then that becomes a bit of a harder comparison. The way we're looking at margins is -- if we look at the full year, our margins are up on a year-over-year basis or year-to-date, we're at 20.5 versus versus last year, which is a 90 basis point improvement. So I can't say necessarily that it's anything specifically driving that would -- is concerning to us. But on a year-over-year basis, we are still seeing some of our margin initiatives and improvements flow through. And on a 9-month period being at 20.5, does show an improvement to earlier 2025 and where we're at at the end of 2024.

Next question from Pat Sullivan with TD Cowen.

I guess the first one is, obviously, there's a bit of movement around the performance of the three key regions you outlined, but it does seem like Central Canada is a bit of a notable lagger. What end markets, I guess, are contributing to that weakness? Is there any kind of line of sight to green shoots or potential inflection there?

Yes. Thanks for the question. So in terms of the regions we have, historically, over the last number of months, had some gaps in leadership in Ontario, in particular. And we've had some people covering on an interim basis. But with our new org design and as we fill the president role as the Chief Value Officer roles and then the various Vice Presidents in segments, we will cover those gaps very quickly. But I think -- we know that, that's part of the challenge for us has been gaps and changes in leadership through some normal attrition and departures, but we're filling those gaps quickly, and we'll have a full complement of sales and operations leaders in both of those key areas of the business, equipment and product support and IP and ERS.

Okay. That's great. I guess the other thing I was wondering about is, industrial parts does seem to have kind of shown some -- or been an area of underperformance for several quarters now. And I guess just what are you seeing as the main challenges in that area? And I guess, is there anything in the 2027 strategy that sort of aims to address that?

On Industrial Products, it's obviously an important segment in our business, and it actually provides a nice complementary approach to the market we have in equipment and product support. So a really nice rounded portfolio. We believe that we can take full advantage of it -- take full advantage of. We have a really good set of suppliers, and we have great relationships there, and we have a good customer set as well. As we improve the org design and get a President named for Industrial Products and ERS that will provide us with much better focus, we've got good people on that team today, but they're in various category groups, sales groups, specialist groups, and we need to get that organized and moving forward. So there's nothing fundamentally challenged here other than the org design and getting fully aligned to get sales, operations, category management, supplier relationships, all lined up in industrial products, but we've got a really good basis for that. In addition, we have distribution centers across the country and branches that house industrial products, but we're not as efficient as we can be. We've named a few new roles in the company, as you know, in terms of sales force effectiveness. Our VP sales enablement and marketing has joined the company with a lot of experience. And then more recently, we have a Vice President of Supply Chain and inventory management. And already speaking with her, we know there's opportunities in supply chain and our ability to utilize those distribution centers fully for industrial products and the branch footprint in deciding how we can deliver same day, next day to our customers in the most effective way. So there's a number of areas there. We know we can improve in industrial products, nothing fundamentally in terms of any major change over the last few months, but we just need to make sure that we're investing and focused because we think there's a lot of potential there in terms of the suppliers we have, the segments we support and the history we have with customers.

Okay. Awesome. I did have one more. So you alluded to this before, but I did see in Hitachi's earnings released last week that they highlighted some new truck offerings for North America coming in 2027.I guess can you just tell us a little bit more of that. Is this like a larger class offering that's going to be available to you in 2027? And then I guess do you think there's good appetite for customer appetite in Canada for that?

Yes. So there's two types of trucks that Hitachi offers. The first is built in Golf Canada, Golf Ontario and Canada today, which is a great offer from a heavy haul mining perspective. And we are actively quoting on that truck today to a number of customers and looking forward to converting those to sales in a decent way. On the other side of it, you mentioned Bell trucks, which is an articulated dump truck, which actually articulates at the center of the vehicle and is used for different environments where articulation and agility is critically important. And we actually sell today and have the distribution network for Bell trucks in Canada. So as that partnership is announced and rolled out, we feel we're in a good position to provide continued support to that truck and something we've done for many, many years. So it's a nice addition under the Hitachi brand and provides clarity there for the customer around the increasing portfolio offered by Hitachi and Wajax in Canada.

Next question from Maxim Sytchev with National Bank Capital Markets.

I just wanted to circle back to your road map ambitions of accelerating growth. And obviously, we're seeing revenue declines from the time being. So when we think on a prospective basis, could you maybe talk about how much of that improvement has to come from macro getting better versus some of the variables that you can control internally? Maybe you can talk about 3 or 4 factors that you're going to be spending most of your time on again, to show that accelerating growth across the platform on a prospective basis.

Max, thanks for the question. So in terms of accelerating growth, certainly, we're looking forward to the macro trends, and we're following them carefully, whether it's the current build Canada work or elections in British Columbia and the announcements that have been made there. So I think those are all helpful for us, and we're watching those carefully. In terms of internal variables, certainly, there's a lot we can cover. And a lot of that's in the strategy road map and also behind the scenes in terms of the project plan we're working on right now for 2027. So a few things come to mind. Certainly, sales force effectiveness. So we have a team of salespeople inside, outside and support across the country that do a good job, but we could increase our productivity there in terms of pipeline management, our use of our CRM salesforce.com and actually setting standards for call volumes and activity within the marketplace. And obviously, in the sales world, the more activity, the more calls as those filter down on a percentage basis, it results in more sales. So there's lots we can do there. We need to get our arms better around national accounts and government accounts. We've got some work underway now where we're gathering all the major projects, companies and government divisions that are investing in Canada today. And so we'll get our arms around that and then assign that to the sales teams as we go forward. And that's a really sort of open opportunity for us at Wajax, which is something I've certainly done before at Grainger and in other organizations and can result in a lot more earlier and more focused approaches on those projects and companies again, with the portfolio we have from excavators to loaders to crane utility, material handling, power on-road and off-road, our ERS services, et cetera, we have a lot to offer to those existing and new customers. So that's on the SFE side and the supply chain side -- sorry, and the national accounts side, the third would be supply chain. So today, we have 104 locations, 3 distribution centers and there's an opportunity to optimize that. So today, the branches are often filled with service base and great activity from technicians there, but we also have industrial products going out the back door of branches in some situations. In some cases, that makes sense. And in other cases, we need to rely more heavily on our central distribution center network across the country and optimize that with warehouse management system with automation and with probably introducing a hub-and-spoke model and perhaps doing more same-day next day from those distribution centers instead of from branches where it's less efficient and we're less efficient on an inventory basis as well. So we do, as I said, have a VP of supply chain and inventory management. She's new has decades of experience in large organizations, and we're already seeing good benefits there. And then the final area that's important for sales is actually technician experience and making sure that -- we attract and retain the best technicians. It is a battleground in Canada today for labor and talented labor. And we have an effort, as you know, in that segment to make sure we appoint a leader of technician experience, understand all the attributes and elements that attract and retain the best technicians from compensation to tools and equipment and training and make sure we're great there. That not only sells our service -- of service, but it actually creates better conditions for selling new equipment as we build solid relationships with customers. So those are the internal variables are the main ones. We're focused on all lined up within the strategy road map and all rolling out into and through 2027.