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Thank you for attending Wajax' 2020 First Quarter Financial Results Webcast. On today's webcast will be Mark Foote, Wajax's President and Chief Executive Officer; and Mr. Stuart Auld, 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 Mr. Mark Foote.
Thank you very much, and good afternoon, everyone, and thank you for participating in our first quarter results call. This afternoon, we'll be following a webcast, which includes a summary presentation of Wajax' first quarter 2020 financial results. The presentation can be found on our website under Investor Relations, Events and Presentations. To begin, I'd like to draw your attention to our cautionary statement regarding forward-looking information on Slide 2. Additionally, non-GAAP and additional GAAP measures are summarized on Slides 14 through 21 for your reference. Our first quarter results were negatively affected by an unsettled business environment due to COVID-19 that primarily affected March and were further aggravated by low oil prices in Western Canada. Given the conditions are expected to continue over the medium term, we'll move fairly quickly through our first quarter material in order to provide information on our actions to protect employees, continue to serve our customers, protect the financial health of the company and to remain well positioned to execute our growth strategies as conditions improve. If you please turn to Slide 3. Revenue of $344.1 million decreased 8% in the first quarter, consolidated revenue in the first 2 months of the quarter were comparable to last year, but declined in March. We'll give you further breakdowns by region, sales type and category in just a moment. EBIT declined 26% to $11.4 million in the first quarter due primarily to the revenue decline. The gross profit rate of 20% was up 50 basis points to last year on improved equipment and product support margins and due to a higher mix of parts and service. While year-over-year absolute dollar costs were roughly flat for the quarter, including those related to the acquisition of NorthPoint, the SG&A rate to sales degraded by 140 basis points to 16.6%. Actions to reduce costs were significant in late March and April, but lagged the sales decline and therefore, did not offset the volume loss in the first quarter. Adjusted basic EPS of $0.29 in the first quarter was down 33% to last year, and we'll have further comments on EPS in a moment. And the bright spot in the quarter continued to be safety performance, which effective 2020 now includes the safety performance of our ERS acquisitions of Delom and NorthPoint. And in the first quarter, Wajax experienced a 21% decline in recordable injuries and a TRIF rate of 1.57 was an improvement of 17%. If you turn to Slide 4. Central Canada sales of $73 million declined 2% in the first quarter. Industrial parts and product support sales declined in the first quarter, but were partially offset by higher ERS volumes and equipment sales in Ontario increased slightly. Eastern Canada sales of $134 million declined 5% in the first quarter. Eastern Canada continued to be a very strong region, excluding reduced new equipment volume, primarily in March, which was partially offset by strong performance in industrial parts and ERS and stable volume and product support. In 2020, one large mining shovel is scheduled for delivery in Eastern Canada, which is expected to continue on schedule for the second half of the year. Western Canada sales of $138 million declined 14% in the quarter. Volume declines occurred in most categories, but mining remained a bright spot and ERS volumes also increased. In 2020, 2 large mining shovels are scheduled for delivery in Western Canada. The first begins set up shortly for delivery in the second half and timing on the second unit is currently being discussed with the customer. Turning to Slide 5. Summarizing this chart, equipment sales were the primary driver of volume decline. Lower volumes in product support and industrial parts were offset by volume in ERS due to the acquisition of NorthPoint. ERS volumes of $45 million are not shown on this page. And given the increasing importance of that business to our company, our presentational format will be changed to share those volumes effective the second quarter. Turning to Slide 6. This chart shows regional and category level performance based on growth classifications in our strategic plan. Our targeted growth categories of construction, material handling and ERS declined 6% due primarily to lower new construction equipment sales and using construction class excavator as a proxy for new equipment demand, the construction market -- the construction equipment market contracted by 9% nationally in the first quarter. Our core strength categories of industrial parts, forestry, On-Highway and Power & Marine declined 11% on a consolidated basis. Weakness in forestry and Power & Marine was due entirely to low equipment volumes. And finally, our cyclical and major project categories of mining, Engines & Transmissions and Crane & Utility declined 4% on a consolidated basis. As stated earlier, mining had a reasonably strong first quarter. I'll turn the call over to Stu.
Thanks, Mark. Please turn to Slide 7. Adjusted net earnings of $5.8 million or $0.29 per share decreased 33% in the first quarter. In addition to the impact of lower revenues, EPS was negatively impacted by higher finance costs, which increased $1.3 million year-over-year due to higher working capital related primarily to inventory and the effect of the acquisition of NorthPoint. Please turn to Slide 8 for my comments on backlog. Our Q1 backlog increased $13.7 million or 6% sequentially from the previous quarter and decreased $23.5 million or 9% on a year-over-year basis. The sequential increase relates to higher construction orders. The year-over-year decrease relates to lower material handling and power generation orders offset primarily by higher mining orders. Please turn to Slide 9 for an update on our inventory levels. Inventory, including consignment, increased $12.5 million compared to Q4 2019 due to higher equipment inventory in the forestry, Construction and Mining categories, including the receipt of a large mining shovel at the end of the quarter. Consignment inventory decreased $15.4 million from the previous quarter. Inventory, including consignment, increased $2.7 million compared to Q1 2019 as a result of higher equipment inventory in the Construction and Mining categories, including the receipt of a large mining shovel at the end of the quarter. Consignment inventory decreased $47.8 million compared to Q1 2019 and consists primarily of construction excavators. As stated previously, our incoming new equipment inventory orders began to be adjusted down significantly in the second half of last year. We are focused on reducing new equipment levels, including working very closely with manufacturers on various incentive programs directed at improving value for our customers. The inventory quality of new equipment remains high. Please turn to Slide 10, where I will provide an update on our financial position. Our Q1 leverage ratio increased compared to Q4 from 2.6x to 3.04x as a function of both higher debt levels and lower trailing 12-month pro forma adjusted EBITDA, while our senior secured leverage ratio, which excludes the debentures, increased to 2.53x from 2.1x in Q4. Our available credit capacity at the end of Q1 was $137.4 million, which is sufficient to meet short-term normal course working capital requirements. We continue to focus on working capital efficiency, which is a key component in managing our overall leverage targets. Finally, the Board has approved our second quarter dividend of $0.25 per share payable on July 3, 2020, to shareholders of record on June 15, 2020. Please turn to Slide 11, and I'll hand the call back to Mark.
Thanks, Stu. Before proceeding to the outlook comments, Slide 11 shows a summary of Wajax' priorities and related actions in response to COVID-19, which I will summarize. First -- our first objective is obviously to protect the health and safety and well-being of our employees; second, to provide strong support to our customers, third, to protect the financial health of the corporation; and fourth, to continue to be well positioned to execute our growth strategy as conditions improve. This chart contains a summary table showing the actions taken as at the release of our first quarter results and focusing on the actions taken to protect the financial health of the company, significant steps have been taken to lower costs. Personnel costs are our largest expense and have been the focus of ongoing planning. As at April 27, approximately 34% or almost 1,000 employees were affected by virtue of inclusion and layoffs, 97% of which are expected to be temporary. Reduced workweeks, work share programs and salary reductions, which includes management and the Board of Directors. Our entire team has performed in an exemplary fashion. Nonpersonnel costs have also been significantly reduced. These temporary cost reductions mitigate a portion of the revenue decline that is expected in the second quarter and can at least partially extend in the third quarter if required. On the issue of liquidity and working capital, Stu provided you with our availability of approximately $137 million at the end of the first quarter. And a number of additional cash actions have been taken including, depending on terms, certain pockets of used equipment inventory may be disposed of in the second quarter on an accelerated fashion. And capital investments have been reduced to a minimum, including deferring our investment in rental fleet assets and a temporary delay in our infrastructure investments, including the implementation of our ERP, which was originally scheduled to begin in the second quarter. Turning to Slide 12. With respect to our outlook, this chart is based on our first quarter press release and MD&A and summarizes the points made during this call. The last paragraph makes the key points on our company's posture in managing for the next few months or quarters. We've modeled a number of scenarios for the balance of 2020 that have informed our decisions on operations, costs and our decision to maintain our quarterly dividend. Management and the Board of Directors will continue to adjust our decisions based on our objectives to protect our employees, serve our customers, to protect the financial health of the company and be positioned to execute our growth strategy as these conditions improve in accordance with jurisdictional changes, market conditions and volumes. Operator, we'll now turn the call open for questions.
[Operator Instructions] Your first question comes from Michael Doumet from Scotiabank.
So based on the month-to-month revenue trends, so if January and February are, in fact, flat, I would think March sales were down, plus or minus, call it, 25%. Any way you can give us a sense for how April is trending so far?
March wasn't down quite as much as what you just said, but you're not too far off. And April is trending down to a higher degree than that would be, but pretty consistent with our expectations as we kind of sat here at the beginning of May.
Okay. And then just turning to inventory, and we've talked about this in the past, and I guess what you've considered to be access inventory. You've also discussed the sale of some used equipment on an accelerated basis. I just want to know if you have targets in terms of inventory reduction through the year, obviously, as that's a big driver of the free cash flow this year?
Yes. I'd like to say we have -- I mean we obviously have targets in our original budget for inventory reduction, but given it's hard to call the market right now, I'm not sure those targets are going to be that relevant to us. I think we do expect new equipment inventory to be lower at the end of the second quarter than it was at the end of the first. And probably a good walking around number for used equipment disposal is somewhere between $4 million and $8 million. But we haven't really worked our way through the terms of where that's going to go right now. We do believe we'll generate some cash through the disposal of used equipment. Most of that's coming out of our used equipment on the balance sheet. Some of it's coming out of the rental fleet. And the guys are doing, I think, pretty good work in the new equipment side of things, particularly on -- in the consignment area, we're focusing on the oldest units first to kind of get the deposits down also. So we're cautiously optimistic that new equipment inventory will be lower at the end of the second quarter than it is right now. That said, it's really a function of what's happening with customers, so we're continuing to work pretty hard on that.
Okay. That's helpful. And maybe just one last question. I want to get your thoughts on capital allocation at this juncture. I mean at a 12% dividend yield, I could argue that the market isn't really paying for the dividend also, at least the full extent of the dividend. Also, the current share price, the market isn't really even paying for the tangible book value of the business. I mean are there considerations for adjusting the capital allocation that you think could help surface value?
I think under normal circumstances, the answer to that is always going to be yes. Under these current circumstances, I think we told shareholders at the beginning of 2015, we felt pretty comfortable about being able to maintain the dividend through a significant down cycle. I don't think we consider these conditions when we said that. But we believe that given our expectations of the business, our management of costs, what we see from an inbound as in highly limited inbound inventory, trimming back on the capital associated with rental fleet. We think the capital allocation of the dividend is appropriate right now. The Board considers those decisions every quarter. And kind of uses the facts in front of them, the management's expectations for what's coming, but we feel comfortable with where it is right now. And as conditions improve, our payout ratio was pretty much 50% last year, which is the lowest it's been for quite some time. So we'd like to continue to maintain the dividend, and we wouldn't risk the financial health of the company over it, but we do consider it important to be able to maintain.
[Operator Instructions] Your next question comes from Michael Tupholme from TD Securities.
Mark, can you talk about how parts and product support have trended through April? And whether or not, I guess, with the very sort of beginning here of certain things starting to open up again, if there's any kind of early indications of any turn in either of those 2 areas?
It's a bit early, Michael. I can tell you that our equipment sales trends, obviously, in April, are orders of magnitude higher and declined than our product support side would be. So product support is down, but not nearly to the extent that the equipment sales are down coming into the second quarter. I'm sorry, your additional question was if there's any kind of green shoots out there right now or...
Yes. I mean correct me if I'm wrong, but I sort of thought that, that might be the first area that you would see things turn, but I mean maybe if that is the case.
I'd say this. Wajax has a fairly diverse mix of parts and service now between industrial, mobile equipment, power systems and ERS. There are some indications of deferred maintenance projects unrelated to mobile equipment that some of the fixed plant customers are choosing to do right now which have been helpful. But in the traditional product support area associated with either mobile, like construction equipment or power systems, et cetera, we wouldn't have seen a material change in trend, effective the beginning of May.
Okay. And on ERS, can you talk about what the revenue performance there on a year-over-year basis looks like if we back off the impact of the acquisitions and then sort of as an extension of that, how that's holding up in April on an organic basis?
Yes. And if you look at the first quarter -- I know your question was the second, but just to give you context, if you look at the first quarter, organic sales in ERS were down probably about $1 million. So they were holding in there reasonably good. I think right now, the challenge in ERS is the field side of the business is okay. The shop side of the business because there's a lot of physical distancing issues that are faced there because when the guys are working on some of the bigger equipment, just figuring out how to run their shifts, et cetera, is a bit more complicated right now. But we remain very bullish on the ERS business. We might have a bit of a hiccup with what's happening right now. But as the bigger fixed plant customers ramp production back up a bit, and that's particularly in the power kind of hydro and mining spaces, I think we're remaining very optimistic about that business.
Okay. There's been a -- there's already some talk on the call about inventories, but I guess looking at working capital on an overall basis, presumably, in this environment, you're going to see receivables come down as well. Is that your expectation that, that would be a source of cash? And if possible, can you maybe just talk about how you see working capital evolving over the next few quarters, more holistically, just -- not just on inventory, but overall?
Yes. I think it just comes down to 2 factors. It's going to be earnings and changes in working capital. I think we're -- we -- there's not a lot of inventory coming in the back door right now. And so the question is how much is going to be going out the front. We haven't seen any fundamental degradation in the quality of receivables. But obviously, as sales go down, receivables are going to go down and payables are going to go. So we're optimistic that we can see some improvements in working capital. That's what we're working towards.
Okay. And then just lastly, in terms of Fort McMurray, there's some flooding in that area. Just wondering if that's had any impact on your business in the quarter at all.
No, it's affected a small number of our employees, but it has not been a major factor in our business.
We have no further questions. I would like to turn the call back over to Mark Foote for closing remarks.
Okay. That's -- sorry, just Richard checking a question here. It seems to have been typed in.
It's from Patrick Murphy. To what extent can Wajax benefit directly or indirectly from any of the applicable government stimulus programs announced?
Okay. I don't know if you did or didn't hear my colleague, Steven, reading that question, but the question was from Patrick Murphy, and where is Patrick from?
It doesn't say.
Okay. We're not sure if Patrick was on the -- Patrick's question was about the application of any government support programs for -- and whether or not they apply to Wajax. We aren't certain what our position on that is going to be right now. Our focus is on whether or not the Canadian Emergency Wage Subsidy program will, in fact, apply to Wajax. We've not determined that at this point in time, and we've made no claim, but we'll determine that sometime in the second quarter. And I think that's the end of the question.
We have no further questions.
So we have no further questions. So we appreciate your time today. Thank you very much, and we look forward to speaking to you again in August.
Ladies and gentlemen, this concludes today's conference call and webcast. You may now disconnect.