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Edited Transcript of WJX.TO earnings conference call or presentation 22-Mar-19 1:00pm GMT

Q4 2018 Wajax Corp Earnings Call

MISSISSAUGA Mar 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Wajax Corp earnings conference call or presentation Friday, March 22, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* A. Mark Foote

Wajax Corporation - President, CEO & Director

* Darren Julian Yaworsky

Wajax Corporation - Senior VP of Finance & CFO

* Trevor Carson

Wajax Corporation - VP of Financial Planning & Risk Management & Treasurer

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Conference Call Participants

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* Derek Spronck

RBC Capital Markets, LLC, Research Division - Analyst

* Michael Doumet

Scotiabank Global Banking and Markets, Research Division - Analyst

* Michael Tupholme

TD Securities Equity Research - Research Analyst

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Presentation

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Operator [1]

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Thank you for attending Wajax Corporation's 2018 Fourth Quarter and Year-End Financial Results Webcast. On today's webcast will be Mark Foote, Wajax's President and Chief Executive Officer; Mr. Darren Yaworsky, Senior Vice President, Finance and Chief Financial Officer; and Mr. Trevor Carson, VP, Financial Planning and Risk Management. 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 Trevor Carson.

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Trevor Carson, Wajax Corporation - VP of Financial Planning & Risk Management & Treasurer [2]

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Thank you. Good morning, everyone, and thank you for participating in our fourth quarter results call. This morning, we will be following a webcast, which includes a summary presentation of Wajax's Q4 2018 financial results. The presentation can be found on our website under Investor Relations, Events & Presentations.

To begin, I would 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 20 for your reference.

At this point, I'll ask you to turn to Slide 3, and I'll turn the call over to Mark Foote.

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A. Mark Foote, Wajax Corporation - President, CEO & Director [3]

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Thank you, Trevor, and good morning, everyone. I'm going to look at the fourth quarter highlights. And we changed the format of this page to combine the fourth quarter and year-to-date, just to give you a sense of reference as we finish the year and how that kind of translates to the full year's performance.

On the fourth quarter from a revenue standpoint, the quarter turned out a bit better than we had expected in our revenue forecast, and I'll explain a bit about that regionally in just a moment. On the EBIT basis, though, it was a more disappointing quarter than we had anticipated, primarily because of the gross margins, we'll chat about that in just a second. Some of that is noise from some of the accounting adjustments that we booked in the fourth quarter and some of that is -- but some of that is operating performance, and we'll talk about what contributed to that and how we think about the margin going forward. That said, that disappointment on the margin side translated to lower-than-expected EPS for the quarter itself. And we -- for the Wajax people on the phone because we know there's a number of you, we experienced a pretty good improvement in the safety program in the fourth quarter. And obviously, we'll talk about how that looked for the full year.

On a full year basis, going across to the right-hand side of the page, we had a record revenue year at $1.48 billion, so that was up about 12%. The comparison on revenue would be to 2012, that was our last peak revenue. We'll talk about categories in just a moment. Had just under $59 million in EBIT, which was up about 10%, and that includes some restructuring costs that were in there. So I think if you ex those out it was up a bit better than that. And our earnings per share number for the full year did turn out consistent with our original budget. But as I said, we were disappointed in the performance for the fourth quarter and have taken some actions to improve performance, particularly in the marginal and as we go forward into 2019.

What we're really proud of, and want to thank everybody from Wajax that's listening is that is, really solid performance from a safety standpoint. Our goal has always been to get down to about 1.0 TRIF rate, as a company, and we're very pleased to report that, that, in fact, happened in 2018. We're looking forward to further improvements as we go forward.

Turning to the next page, the revenue on a regional basis. I'm only going to speak to the fourth quarter because I think that for some of the color is maybe helpful.

So if you look at the year-over-year performance by region for 2018 for the fourth quarter, specifically, we were down about 1% in Western Canada. It was actually a bit better than the forecast we had internally. And there were 2 businesses, in particular, that hurt the Western Canada trend, and I would not say that you should interpret market conditions in Western Canada as the driver for that sales result because some of this is a year-over-year difference in what was selling and some of this was inventory arrival timing.

So couple of businesses in Western Canada that did not perform in the fourth quarter: one was forestry, and part of that is simply the arrival time on some inventory, which did hurt sales in that business; and the second was the engines and transmissions business, which is pretty tightly correlated to the oil and gas business in Western Canada. Having said that, the really solid performance we had in that business in the prior year had to do with us building some oil and gas packages that were sent into the U.S., which was not going to be repeated this year. So the performance in the West, while down modestly, was a bit better than our expectations internally for a couple of reasons I mentioned. Central Canada was bang on our expectations. That was a decent improvement over prior year, and we had a number of categories that performed reasonably well up at the top. And the Eastern Canada number, pretty much bang on our expectations also. So a bit better than we had originally expected. And again, I would be cautious in interpreting Western Canada's modest decline as a function of market conditions because there's a bit more to that than that.

Okay. I'm going to turn to the revenue analysis on the next page. You can see, and, again, I'm just going to focus on the fourth quarter. You can see on the equipment line, we saw a decrease in total equipment sales, that is a function of crane and utility businesses, which have continued to be an issue for us as a lot of our utility customers have changed their capital spending plans, so that's been a -- that was a drain on us in the fourth quarter, which is typically the largest quarter for that business, particularly in Central Canada. And I mentioned the engine and transmission sales issue that was a year-over-year noncomp sale from last year.

Industrial parts had a very solid quarter, again. It continues to be a real solid performer for us and very, very durable sales. You'll see, though, that part of the contribution to a bit of a margin decline in the fourth quarter was the mix in industrial components, where we had some very high bearings sales, and bearings typically trade out at a lower selling gross than some of the other businesses in industrial. So that was one of the contributors on the operating side to a lower gross margin.

And in product support, pretty solid quarter, up 5%, which is reasonably consistent with how we trended through the year. We did have some parts margin declines that we'll speak about how to think about that going forward. But we did have a solid revenue line in the fourth quarter, some very, very solid mining activity. Did see some weakness in On-Highway and engines and transmissions, part of which was for the reasons I mentioned earlier. But reasonably pleased with the performance of product support.

Turning to the revenue by category, I'm going to focus on this one just on full year performance because hopefully, I've given you some color on the fourth quarter. We continue to break these businesses down on the basis of the classifications we have in our strategic plan, and we're quite pleased with the performance of our targeted growth categories, those being the 3 at the top of the page: Construction, Material Handling and Engineered Repair Services. And you can see that in all regions and in all categories, those businesses were up for the full year. We continue to track back to our Construction kind of sales record, which was a number of years ago. So we've got -- we still got a lot of room for improvement in the Construction business. But the market share gains we had in Construction in 2018 were really solid. The only region in the country where we didn't see market share gains was Atlantic Canada. But in our typical strongholds in Western Canada, we saw some very respectable margin gains, particularly in the Prairie Provinces, and we saw some margin gains in Central and Eastern Canada, which really did impress us with the teams in those markets. So Construction, we're pleased with, but we've still got a lot of work to do to get to back to where we have been historically, but also to get to some of the numbers that we baked into our own strategic plan.

Material Handling was a really solid year, that is a record year for Material Handling in Wajax. Market share was reasonably flat. Remember, the market share in that business, in a lot of cases, is driven by high unit volumes and pretty low gross categories with -- low gross products within Material Handling, but the $143 million in sales was an absolute stellar performance on the part of that team. And the Engineered Repair Services business had a pretty good year and the fourth quarter performance was, obviously, benefited from the acquisition of Delom in October, and that business is something that we are really excited about for the future. The annualized volume of that business is roughly $140 million when you consider the base business that we have, pre-Delom was $70 million plus the $70 million that comes in from Delom on their trailing 12-month basis. So the combination of those 2 businesses, we think, is this growth platform that we're very excited about.

As you scan down the page, so in aggregate, Construction, Material Handling and ERS were up 22% on a year-over-year basis. Our core strength categories, which are in the center of the page with Industrial, Forestry, On-Highway and Power & Marine, they were up 5% on a year-over-year basis. And some -- as I said, some solid performance in Industrial, which is the biggest single category that we have and some excellent performance in Power & Marine, which was -- really got that business back to pretty close to peak levels for us. And we got a wee bit of work to do in Forestry, which has a bit more to do with some market conditions, but just some closer planning between ourselves and some of manufacturers and there you go. So 5% up in the core strength categories. And in the cyclical categories, we enjoyed a pretty good year in mining, and on a full year basis, in the Engines & Transmissions. But -- I'm sorry not -- they were down a little bit there. And as I said, we continue to have some challenges in the Crane & Utility business, which, in our estimations, are not expected to recover to prior levels, but will continue to be competitive in that business, but we got to respect the capital spending plans of some of our customers. So 22% up year-over-year in targeted growth, 5% up in core strength and up 17% in total in the cyclical categories.

We'll come back and talk about the outlook in just a second, and I think I'll turn it to Darren for some financial commentary.

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Darren Julian Yaworsky, Wajax Corporation - Senior VP of Finance & CFO [4]

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Great. Thanks, Mark. Please turn to Slide 7. In the fourth quarter of 2018, adjusted basic EPS declined to $0.40 (sic) [$0.42] from $0.47 for the same period the year before, representing a 10% decline. The earnings decrease relates primarily to lower gross profit margins and higher selling and administration expenses, partially offset by lower finance costs. Overall, SG&A as a percentage of revenue decreased 80 basis points to 14.1% from 13.3% in the prior year, which remains below our targeted range of 14.5% to 15.5%. One caveat to that is that our equity -- our noncash equity compensation hedging mark-to-market loss of roughly $1.5 million after taxes included the SG&A costs. Once you remove that cost, the SG&A percentage of revenue for the fourth quarter was below 14%.

On a year-to-date basis, adjusted basic EPS improved to $2.02 from $1.54 for the same period in the prior year, representing a 31% increase. The earnings improvement relates primarily to higher revenue, improved SG&A productivity and lower finance costs. SG&A as a percentage of revenue declined 80 basis points to 14.1%. Same caveat to that point, if we remove out the MTM on our equity hedging program we were set 14%, and that's from the 14.9% in the prior period.

During 2016, as a part of our transition to the One Wajax operating model, the corporation consolidated 3 former operating divisions: Wajax Equipment, Wajax Power Systems and Wajax Industrial Components into 1 business. And as a result, in 2017, the corporation began to report on its operations as 1 operating segment versus the previous -- or the prior 3 operating segments.

In 2018, the corporation communicated plans to redesign its finance function with the following objectives: To better align the operation -- finance group with the operations of the business; to standardize financial policies, procedures and controls of the 3 former operating divisions and apply the standard financial policies, procedures and controls across the organization to support the implementation of the Corporation's new ERP system, which is expected to begin in 2019. The finance function redesign is being completed in support -- with the support of external advisers to ensure adherence to industry best practices. Management has applied the now standard financial policies, procedures and controls to the 3 former operating divisions and noted noncash accounting errors in the current and prior periods, relating primarily to accounts payable. Although not material than any one year, management has corrected the errors in the financial statements for the current period ending December 31, 2018, and adjusted prior period comparative information. The after-tax error for fiscal 2018 and '17 totals $1.8 million and $3.1 million, respectively. And the cumulative after-tax error for fiscal 2016 and prior totals $7.6 million. As at December 31, 2018, the corporation believes that the deficiencies have been rectified and the control environment has been strengthened.

To assist in the run rate determination, management has applied the error correction to the quarterly performance for 2018 and 2017, and this information could be found on Page 11 under the Selected Quarterly Information section of the MD&A.

Please turn to Slide 8. Our Q4 2018 backlog increased $28 million or 16% on a year-over-year basis and decreased $33.3 million or 14% from Q3 2018. The year-over-year increase relates primarily to higher mining, power generation and forestry orders. The quarter-over-quarter decrease relates primarily to the fulfillment of forestry, mining and material handling orders. And we expect backlog to continue to grow throughout the year.

Please turn to Slide 9. Inventory, including consignments, increased $28.9 million compared to Q3 2018, and it is higher across our targeted growth and core strength categories that Mark mentioned earlier. Consignment inventory increased $32.7 million from Q3 and consists primarily of construction excavator orders to meet our 2019 market share objectives.

Net of consignment and additions from Delom, inventory decreased by $10.6 million and includes $47.3 million, which is out on the field under the terms of our rental purchase program, of each we expect a high percentage to convert into sales this year. We're comfortable with our inventory levels, which align with our gross objective -- growth objectives for this year. However, we do expect the inventory levels will decrease over the second half of the year, which we anticipate will have a positive impact on working capital and cash flow and leverage.

Please turn to Slide 10. Our Q4 leverage ratio increased compared to Q3 from 2.29x to 2.48x, primarily related to the higher debt levels associated with acquisition of Groupe Delom on October 15 for the aggregate purchase price of $52.1 million.

In conjunction with the acquisition, we also announced amendments to our senior credit facilities. The aggregate commitments of lenders had been increased from $300 million to $400 million and the maturity date has been extended from 2021 to 2023, representing a 5-year commitment, providing greater financial flexibility and stability over the long term.

We are continuing to focus on working capital efficiency, which is a key component in managing our overall leverage targets. Our inventory turns have remained stable over the past 12 months and continue to be an area of focus for 2019.

Our inventory investment has increased our working capital to sales ratio on a trailing 12-month basis. But as I mentioned earlier, we expect this ratio to decline in concert with an anticipated decline in inventory levels in the second half of the year.

As our financial performance continues to improve, we're seeing our return on net assets increase on a trailing 12-month basis. Our long-term strategic plan calls for investments above historical levels and higher net assets. However, we are committed to increasing loan on both the short and long term as we continue to focus on enhancing EBIT margins.

Finally, the board has approved our first quarter dividend of $0.25 per share payable on April 2. We remain confident in the stability of our dividend at this level across the business cycle.

With that, if you can turn to page 11, and I'll turn it back over to Mark.

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A. Mark Foote, Wajax Corporation - President, CEO & Director [5]

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Thanks, Darren. We have 2 outlook pages that we wanted to go through with you. The first is an updated 3-year outlook based on some adjusted assumptions that relate to both revenue and some of the EBITDA margin calculations. So without reading all the points at the top of the page, if you look at the lower right-hand side of that page at the 2021 outlook, we've rolled forward our 2020 outlook to 2021 and included some alternative assumptions there. So the 2018 column there, those are the actual results for 2018. And if you look over to the 2021 outlook ranges that are shown there, you can see that there are really 2 differences that are included: one is, we've moderated the revenue CAGR numbers. And you can see in comparison to current performance, they would look fairly conservative. So we're comfortable with those revenue CAGR performances that are there. We have -- obviously, that's extrapolated into the revenue range. The EBITDA margin on a like-for-like basis should be considered essentially the same as the current outlook. So it -- the effect on the EBITDA margin is really the IFRS 16 adjustment, which we anticipate could add up to about a full basis point -- a full point in EBITDA to the outlook. So we're not -- that's not a real operating performance improvement so much as an accounting adjustment. And underneath that, we kept the EBITDA margins the same as the outlook that we had previously.

We remain very confident in our ability to hit those EBITDA margins. We improved to 6.2% in EBITDA -- in adjusted EBITDA in 2018. Our peak EBITDA historically was 7.6%, and we don't really have too much trouble expecting that we will return to those kinds of EBITDA margins at least. And so we've -- we kept the range net of the IFRS 16 adjustment at 7% to 9%, and we feel reasonably comfortable with that range as it was previously explained, and that translates into the implied EBITDA numbers that you see at the bottom. So we've rolled -- as I said, we rolled the outlook forward, we moderated the sales. We feel reasonably comfortable with our ability to do that. We've got some great programs in our targeted growth categories and some -- got some core strength categories that really have performed quite well for us. We see some additional opportunity in some of the cyclical categories, particularly mining, that may, in fact, improve upon that. But to be conservative, respecting the current market dynamics and a wee bit of noise in Western Canada, we've moderated the revenue expectations a bit, and -- but held the like-for-like EBITDA assumptions constant, all right?

As far as 2019 is concerned, our outlook was explained in the MD&A and the press release and it's repeated on Page 12. I won't -- I'm not going to read all those words for you, but I did want to add some color to a couple of areas. We do see more of a second half weighted year. And we've got a lot of activity in the company in the first 6 months of the year that relates to some infrastructure investments that we have communicated for some time, or are going to start in the first half of this year, and that's related to our ERP and our customer support centers. Those are important long-term investments for our company, and we're pushing forward with them according to the timing that we had previously communicated. So we do see more of a second half weighted year primarily because of the SG&A load we're coming into this year with, that is higher than what we came into 2018 with.

On the issue of the margin, we have planned our gross margins within the business at slightly higher than the full year margins at the gross margin level for 2018. So we think it would be an error to take the Q4 gross margins and extrapolate them through 2019 because there's some accounting noise in there from the adjustments that we made. And there are some operating issues in there with respect to some of the pricing decisions that we made, which, while we remain pretty dedicated to driving the volume that is in accordance with our share expectations, there have been some adjustments to pricing strategy early in 2019, which will assist in improving the gross margins themselves. We stay very, very focused on the productivity in the business. We're expecting the fact that we are going to make some investments in the first half of that this year, which do have an SG&A impact to them. But we're reasonably comfortable saying that 2019, we should expect adjusted net earnings to increase, noting that it is more a back half loaded year from an earnings standpoint than it is a consistent experience quarter-to-quarter through 2019.

I'd also say that our confidence in our business with the strategy that we have, the investments we're making, the performance we've seen in revenue and market share growth, the operational execution of the business has been really solid. We respect the fact that we had to make some accounting adjustments that were unfortunate, but we're pleased to have that behind us. And we're very confident in where the business position and looking forward to executing in 2018 -- in '19.

And with that, I think I'll stop and open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Michael Doumet from Scotiabank.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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So the first question on gross margin, that fell off quite a bit from maybe what we saw in the previous quarters and, Mark, you elaborated on that. Just wondering if you could discuss a little bit further what you highlighted as a more aggressive pricing strategy in the quarter? My understanding is that that pricing strategy has been applied throughout '18 to some extent. Was there a particular dynamic in Q4 that you can elaborate on?

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A. Mark Foote, Wajax Corporation - President, CEO & Director [3]

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Yes. It didn't specifically happen only in Q4, it kind of started midway through the third quarter. We adjusted our pricing on parts, and you would know that parts is a pretty profitable part of the business. And we adjusted our margin on parts because we -- our pricing on parts because we weren't satisfied with the volume gains we were getting, particularly in our targeted growth categories. So we were gaining market share and selling a lot of gear, but we were not necessarily keeping up with the parts volumes that we would have anticipated would have been the case. And I think we felt that our pricing in -- was part of the reason for that, and we pulled the lever in a reasonably aggressive way. That was in retrospect probably too aggressive, and some of that's been pulled back a little bit. So a bit of that margin decline in the fourth quarter was self-inflicted, and some of those pricing strategy has been adjusted that. We did not see any significant unanticipated hit in the whole good side of the business, so those margins performed pretty much bang on expectations. And the only other operating performance issue, which -- I'm sorry, it's not really an operating performance issue, such as a sales -- such -- as opposed to a sales mix issue, is that in the industrial parts business, we -- our volumes grew pretty significantly in the lowest growth side of the business, which on a gross margin dollar basis, it was fine, but the rate took a bit of a hit for that. So the area that's different, Michael, I think, is we were pretty aggressive in pricing on parts and some hard goods categories, and we have pulled that back a wee bit because we were probably too aggressive in retrospect.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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Okay. And maybe just -- I know you revised the pricing strategy on the parts there, but maybe if you can discuss the response on the volume side from the pricing strategy, and you said I'm assuming it wasn't enough, but just to get a sense for the response, if any?

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A. Mark Foote, Wajax Corporation - President, CEO & Director [5]

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The response from customers or from competitors?

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [6]

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No, from customers.

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A. Mark Foote, Wajax Corporation - President, CEO & Director [7]

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We saw the response in some areas of the business and certainly not in others. And learning from that, we've -- that's why we've adjusted some of the pricing -- reset some of the pricing.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [8]

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Okay. Fair enough. And maybe just flipping to your comments on '19. You're calling for earnings growth based on revenue improvements and the contribution from Delom. So just trying to breakdown that a little bit further, should we expect earnings growth improvement in 2019 on a purely organic basis? And then second, you don't discuss your earnings growth from, call it, operational leverage in the outlook, which is considered to be a big driver for the 2020 and 2021 outlook, just if you could elaborate on 2019, and how we should think about reconciling that to your long-term expectations.

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A. Mark Foote, Wajax Corporation - President, CEO & Director [9]

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Yes. I mean, we're, obviously, expecting earnings growth out of the base business, if you ex out Delom, and that is a function of an expectation of improved revenue, slightly improved gross margin and a continued focus on cost productivity. I'll be honest with you, though, it is going to be a bit of a lumpy year simply because of where the costs will fall, the productivity leverage is more in the second half of the year than the front just because of the infrastructure investments that we're making. So we do expect the base business increase in that earnings. We expect it because of -- when you close the year out, at the end of the year, we expect it because of productivity and modest gross margin improvements and some revenue improvement. Delom is an addition to that.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [10]

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Okay. And maybe just one more, I know there's quite a few people on the queue, but just if you can speak about the cadence of the SG&A and the CapEx throughout the year as you implement some of those infrastructure projects.

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A. Mark Foote, Wajax Corporation - President, CEO & Director [11]

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I don't think you'll see a material difference in the CapEx, maybe a wee bit we're into rental fleet landing in the front half of this year than it was last year, but that's a good thing for us. And on the SG&A side, as I said, we are entering 2019 with a higher expense base than we did last year. So without necessarily giving you the exact numbers, I think, you should expect the productivity to not look as positive in the first half of this year and look more positive in the second.

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Operator [12]

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Your next question comes from the line of Derek Spronck with RBC Capital Markets.

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Derek Spronck, RBC Capital Markets, LLC, Research Division - Analyst [13]

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Just to start off, market share gains. Are you seeing any differences regionally in terms of market share gains? And should we -- how should we think about the market share gains trends in 2019?

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A. Mark Foote, Wajax Corporation - President, CEO & Director [14]

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Well, we're -- I guess, in looking at the market share report here and recognizing Derek, that the part of our business where we attract share with some real specifics is construction and material handling, and our market share in material handling was generally flat on a year-over-year basis. That's less of an issue for us because the profitability depending on which class of goods you're trading in, in material handling is very different. So while we like the concept of growing market share, we'll note that 2018 was a record year for sales in material handling because we focused on a lot of higher-margin businesses, big trucks and that type of thing. So market share is important in material handling, but it's not as big an indicator to us at least as the construction share. And in construction, just looking at the regions, we had very solid performance in Ontario. We had excellent performance in Québec on a year-over-year gain basis and some pretty strong performance in the Prairies, a little bit less in BC, but pretty consistent. So our manufacturing partners are typically -- I don't know what the right word would be, but I guess they're aggressive on our ability to gain share, and we hit our manufacturing targets for share gains in 2018. As far as 2019 is concerned, noting the commentary about material handling, we're expecting the construction market to be generally flat from a unit standpoint, perhaps it grows a bit, but we're expecting it to be generally flat. The market did grow at 14% on kind of construction class excavators in 2018, and we gained that plus the market share gains that we had, but it's -- we're expecting to be -- at least be able to hold share in 2019, but we continue to be focused particularly in Ontario and Québec to gain a bit more share than we did, although we're quite pleased with what happened in 2018.

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Derek Spronck, RBC Capital Markets, LLC, Research Division - Analyst [15]

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Okay. No, that's great color. Do you take your foot off the accelerator in terms of price-led market share strategy if the end-market demand softens? Is it almost then inverse relationship, if demand softens, you slow the price-led focus, and if demand strengthens, then you can -- sorry, is that the right way to think about how you're looking at your...

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A. Mark Foote, Wajax Corporation - President, CEO & Director [16]

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I believe it probably turned out a bit differently than we had originally expected. We have gained share and seen some very nice top line improvements on the whole goods side of the categories we've really been focusing without any material decline in gross margin. So while we feel we've been priced competitively -- as the market has grown as much as it has, we have not experienced the share decline, which a number of you had anticipated that if the market is growing you shouldn't have the price to gain -- to necessarily gain share. Gaining share is perhaps more a function of your ability to support the product than necessarily how it's priced. So I think in 2018, there may be -- I'm sorry, 2019, there may be a bit more pressure on whole goods because the market isn't expected to grow as aggressively as it did last year. We're not anticipating our delivered margin on whole goods to be any lower, however, simply because of some of the programs that we're running behind the scenes that are helping to support the margin and working closer with the manufacturers. So the real issue for us is really improving the overall profitability of a couple of categories through better performance of parts and service. We're pretty comfortable with the trajectory we've got on the whole goods. We've got a lot of work to do to be better at capturing the parts and service business after the gear has been sold.

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Derek Spronck, RBC Capital Markets, LLC, Research Division - Analyst [17]

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Okay. Yes, that makes sense. You made a comment and I might have missed the reason, but you indicated that don't necessarily read that there's a weakness in Western Canada based on fourth quarter results. Did I get that correct and maybe you could elaborate a little bit further on that comment?

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A. Mark Foote, Wajax Corporation - President, CEO & Director [18]

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Yes, there's a lot -- there's a bunch of noise in Western Canada, so it really just depends on which market you're talking about. My comment was to say that we have been growing nicely in Western Canada up until the end of the third quarter, and we declined by 1% in the fourth. And part of that, I'm sure -- I mean, if you think about markets like construction, as an example, we had a pretty solid fourth quarter in Western Canada. So -- and that -- arguably, we could have had a better quarter, but one indication in construction was we had a lot of rental purchase activity, which typically in the fourth quarter would convert to a final sale and did not, so customers kept the gear on rental purchase because I think there was just some degree of question on their minds about whether or not they wanted to commit the price of the gear, just given some of the noise in the fourth quarter in the west. So -- but we did have a pretty solid quarter in construction. We had an excellent quarter in mining. We took a hit in a couple of categories, which really had less to do with market conditions, so the level of uncertainty in the west definitely was higher in the fourth quarter, but I don't think that has translated completely into sales, and some of our performance in the west was just for the reasons I mentioned. So I would say, we're probably more bullish on opportunities in Western Canada than the conditions indicated in the fourth quarter, so we're continuing to drive forward. We've got some great oil sands activity right now. We've got a decent pipeline of construction equipment lined up. Those are deals that aren't closed, but we got a lot of activity. And we're -- we've got some changes in a couple other categories that make us feel reasonably good about the west. So even if the west has macro issues, we're not translating that into our sales expectations.

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Derek Spronck, RBC Capital Markets, LLC, Research Division - Analyst [19]

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Okay. That's great. I'll -- maybe just one quickly before I turn it over for Darren. There's going to be 1% margin pick up due to IFRS changes. What's the associated liability increase due to IFRS?

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Darren Julian Yaworsky, Wajax Corporation - Senior VP of Finance & CFO [20]

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We haven't specifically finalized that number, but we're looking somewhere in the neighborhood of $70 million to $80 million.

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Operator [21]

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(Operator Instructions) Our next question comes from the line of Michael Tupholme with TD Securities.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [22]

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Mark, if I look at the equipment sales line, you had pretty nice performance on a revenue basis, equipment sales for the full year up close to 18%, but obviously, the fourth quarter some weaknesses as you've talked about. How does that look through the first quarter now that we're close to the end of the quarter?

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A. Mark Foote, Wajax Corporation - President, CEO & Director [23]

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We typically don't comment on that, Mike, until the quarter is behind us.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [24]

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No, fair enough. But I guess, what I'm trying to get at is, Mark, the fact that you talked about some unusual situations with respect to forestry and equipment availability and whatnot. So I'm just trying to get a sense if you've seen some improvement in terms of how equipment sales are trending through the first quarter? I mean, you don't have to give us a specific number, but just is it performing more your expectations? Have you seen some improvement? Or is there some continuation of what you saw in the fourth quarter in the first quarter?

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A. Mark Foote, Wajax Corporation - President, CEO & Director [25]

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Yes. To be honest with you, Mike, I'm a bit uncomfortable answering the question. Just bear with us until we put the first quarter out.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [26]

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Okay. Okay, and I think you sort of spoke to this in respect to one of Derek's question, but just looking at the outlook commentary, it sounds like sort of stable performance within Eastern and Central Canada is the expectation, but there seemed to be some more uncertainty in the commentary around Western Canada, but then I think in respect to Derek's question, you sounded a little more optimistic, so I'm a little unsure how to think about your outlook for Western Canada, I guess. So if you can just kind of...

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A. Mark Foote, Wajax Corporation - President, CEO & Director [27]

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Yes, I think when we write the outlook we were a wee bit earlier in the year, so we haven't chosen to adjust it. But I think we would say, we are -- we see some positives and negatives in Western Canada at a category level. We don't know how that's going to shake out in total. So we've called it as an uncertain market condition for us today. Don't really know if I have to much more to say at a category level, but we're going to continue to work hard and we would call attention to the fact that when things really went south in 2015 and '16, we don't think what we're experiencing out there is anywhere close to what happened the last time we might have had an energy price reduction, but recognizing that that was more of a fourth quarter 2018 issue than it necessarily is right now. Heavy oil pricing is fundamentally better than it was a wee bit ago. We see a bunch of activity, not in the conventional oil and gas business, from a repower standpoint that we're pretty excited about. We've got a -- there's some pockets of some excitement in the west that are very business-specific, but the general economic conditions, we're continuing to watch pretty closely because it is not as bullish as it would have been for 2018. And our manufacturers would call demand for equipment and parts and all those kinds of things as less positive in 2019 than it certainly was in 2018. So it's a mixed bag and it's tough to call.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [28]

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Again, how do we think about crane & utility sales going forward? You mentioned that the weakness in the fourth quarter was across all regions. Is that still the case that you're seeing that weakness across all regions, or have things sort of flattened out even if there's no growth there?

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A. Mark Foote, Wajax Corporation - President, CEO & Director [29]

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You know what, I would be surprised if it went any lower than it is. But it's -- and again, not to be a discouraging point, but it's not a big business for us today. It's something that we want to support our utility customers. But I'd say you're probably looking at a trough level for 2018, and even if I'm wrong, the effect on total business is not significant. So I don't expect you should see it to come back up to where it might have been 3 or 4 years ago just simply because if you're Ontario Hydro or Québec Hydro or people like that, who typically were the biggest customers in those businesses, your capital burn is just different now. So if we're wrong that it hasn't troughed, it won't matter too much because it's not the biggest business to us anymore.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [30]

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Okay. And then with respect to some of the initiatives, infrastructure-related initiatives that are going to be going on through the first half of the year, ERP and customer support centers, particularly, it sounds like the benefits of that, you're going -- you're hoping to see in the second half, but again, we're close to the end of the first quarter, can you just comment on how those initiatives are going so far through this year because I imagine they're well underway?

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A. Mark Foote, Wajax Corporation - President, CEO & Director [31]

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Yes. They're going pretty well. There's really two major programs and one is the customer support center. So that will essentially go into a bit of a pilot state next week, and we're real -- real excited with where that takes our business over the course of time because it's both an inbound customer support channel, but it's an outbound sales channel. And our company has not been nearly as aggressive as we needed to be on some of the technology necessary to run those types of centers. And we think we're going to create a very interesting capability that a lot of our manufacturing partners will look at as a huge step forward for the industry. So we're really pleased with where that takes us over the course of time. We've not baked any significant positive factors into that for the second half of the year. It's more a function of the fact that the SG&A normalizes as you kind of close out the first half. On the ERP side, everybody would know that ERPs are always a bit of a journey. I think we've spent -- we delivered the 2018 part of that program for less than the budget and it's running on time. We're looking forward to what that technology is going to do for our company, and we're -- but we're being very conservative with how it's implemented. It's going to be in pilot in the first half of this year. And we're taking a good 12 to 18 months at least to roll it out because we want to avoid any disruption to our customers and to our team. So we feel very confident about those 2 programs. They've been very carefully planned. There's a bunch of investment that's going into them. They are good for the long term part of the business, but we just have to get through the 2019 part of it, which is probably the most complicated aspect of it.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [32]

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Okay. And maybe you just addressed it in the last bit of the comment you made there, but -- and there's always risks with these sorts of implementations. Are you -- it doesn't sound like you're kind of quite through to the point where you can, with a high level of confidence, say you're sort of in the clear. Like there's still things to work through over the course of '19 here in terms of implementation, so no -- nothing to be concerned about at this point by the sounds of it, but there's still work to do.

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A. Mark Foote, Wajax Corporation - President, CEO & Director [33]

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Yes. The CSC is almost a 0 risk issue. It's more an investment we're making. If we do anything wrong with the customer support centers, it's an added value to the business, so we just fix it and move on. So it's not going to disrupt our customers or our business in any way. It's on top of what we already do. The ERP, it's always good to go into those projects with a real dose of reality about what you have to watch for and the potential disruption. But having done this a few times, I would say this one is about as risk-averse as I have ever seen. So we're as comfortable as you ever should be before we start implementing one.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [34]

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Okay. And then just on the 3-year targets that you've rolled forward to 2021, it sounds like you've described really two changes, moderated revenue growth expectations to what you had been assuming previously, and then the impact of IFRS 16. But if we just try to look at the 2020 targets you had previously put out, I mean, I realize you're not -- you haven't sort of reissued those, but would the idea there be if -- that you simply would expect the growth rates that you're looking at in that new 2021 target, if we thought about those for the 2020 targets, is that how -- like, I'm trying to think about the 2020, any updates to that relative to what you had previously communicated, maybe excluding IFRS 16. Is it simply a moderation of revenue growth over the 2020 period?

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A. Mark Foote, Wajax Corporation - President, CEO & Director [35]

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The way we've -- when asked the question, the way we've positioned the expectations for earnings growth through the course of our strategic plan is, we expected to see some solid growth in 2018, and so we delivered -- the expectation we thought we'd do a bit better, but we delivered the expectation. And we had bigger expectations for earnings growth in 2019 and 2020. And we moderated those expectations in 2021 and 2022. We tried to push as much emphasis into showing earnings growth early in the outlook and less in the latter portions of it. What we've done here is we've -- our internal targets have not changed. So if you sat through our board meeting last night, there's nothing about our internal budgets have changed from the outlook we produced in 2020. But I think in the expectations of trying to introduce a wee bit more conservatism into it, we may have flattened out the growth a little bit from an expectation standpoint externally to manage expectations a bit differently. So we continue to have very aggressive budgets ourselves for 2019 and 2020. But in the -- just recognizing and respecting the execution risk in accordance with that, we've moderated our 2021 outlook -- or 2020 outlook a little bit in -- what you see in the right-hand side of that page.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [36]

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Okay. And then just lastly, maybe this is a question for Darren, just on the leverage ratio. How should we think about that through the year? I think last quarter, you had suggested that you expected to be within your target range of 1.5x to 2x by mid-2019. Just wondering sort of what the updated outlook for the leverage ratio is?

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Darren Julian Yaworsky, Wajax Corporation - Senior VP of Finance & CFO [37]

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Yes. We've -- across Q4, we got delivery of inventory late, primarily relating to the forestry space that pushed up our leverage unexpectedly, closing the Delom acquisition and probably need a little bit more water under the bridge to see how that translates into cash generation. So far, it looks -- it's been very, very strong, probably better than our expectations to support the delevering. But we're likely going to see leverage creep up a little bit over the next couple of quarters, and over the back end of the year come back down again. To be able to get back into our target leverage range, we're probably looking more as a 2020 phenomenon than a 2019 phenomenon.

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Operator [38]

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There are no further telephone questions at this time. I turn the call back to our presenters.

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A. Mark Foote, Wajax Corporation - President, CEO & Director [39]

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Okay. Well, just, say, thank you very much for your time this morning. Apologize for the 2-week delay in reporting. We had a couple of things we had to sort out to get to where we are today. But we appreciate your time, as I said. And we're looking forward to speaking to you again in May when we release our first quarter. Thanks a lot.

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Operator [40]

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