This week, we continue to summarize the broader pulse of public Canadian companies by looking into another set of quarterly earnings (previous post).  

Below, we highlight the Macro, Industry and Corporate trends that we have observed along with quotations from 5i coverage company executives. In this weeks Earnings Pulse, we note underlying themes of some companies that are trying to manage their balance sheet and capital investments amid economic slowdown and executives’ view on how businesses with secular tailwind and strong free cash flow are able to invest with a long term view in their busiess

Macro

Ample liquidity and a well-capitalized balance sheet are crucial to manage economic uncertainties

“We ended the first quarter with ample liquidity, including cash of $983 million and an additional $461 million available to us on our existing credit facilities. Our net debt to total capitalization ratio was negative 14%. Overall, our balance sheet remains well positioned to support operating needs, and we are prepared to manage challenges related to the economic variables and business conditions.” – Toromont Industries Ltd. (TIH) CEO, Michael Stanley McMillan

Large capital projects are delayed by customers due to macroeconomic uncertainty

“The Manufacturing segment companies experienced reduced sales primarily driven by customers delaying large capital projects due to macroeconomic uncertainty. Additionally, the relative adjusted EBITDA decline was expected as DryAir experienced significant seasonality as they contribute virtually all of their adjusted EBITDA in the third and fourth quarter and have negative adjusted EBITDA in the first quarter and part way into the second quarter based on historical norms.Adjusted EBITDA margins were higher in the Aerospace and Aviation segment due to 3 factors. First, leasing revenue in Regional One continues its trajectory towards 2019 levels and leasing revenue generates very high adjusted EBITDA margin. Second, Aerospace contributed additional adjusted EBITDA from its own ISR assets, including in the U.K., and this revenue stream also generates higher adjusted EBITDA margin. Finally, our essential air services experienced higher average load factors improving margins over the prior period.” – Exchange Income Corporation (EIF) CFO, Richard Wowryk

Monetary uncertainty drives significant volatility in the capital market

“The decrease included a 9% lower revenue from MX, due to an unfavorable product mix and a 3% decrease in overall volumes traded. Lower revenue from derivatives trading was partially offset by a 9% increase in revenue from CDCC due to the positive impact of the pricing changes, which came into effect in January 2024 and higher repo volumes. And while sustained volatility across fixed income markets and monetary policy uncertainty continue to drive strong volume activity and liquidity in many of our key products, volumes traded in equity options were down 11% when compared to the first quarter of last year, which was a period of pronounced growth. And we're encouraged though by the continued upward momentum in other areas. Some of the key MX Q1 highlights included 11% higher volumes in shared futures, 6% higher volumes in interest rate products, including continued strength in our bond futures products.” – TMX Group Limited (X) CEO, John McKenzie

A higher capital gains tax inclusion rate disincentives investing activities in Canada

“This increase will add another disincentive to investing in Canada, at a time where we need to be focused on attracting talent, capital and competing for global investment flows. We need to collectively find new ways to incent risk-taking, measures which could include an expansion of the provenly effective mechanism flow through share program as we have suggested, rather than imposing stricter limits on rewards. So our ask is simple for governments to take a pause, to engage directly with representatives from the industry most effective, most affected and to gain a better understanding of the impact of what is essentially a 33% tax increase on investing activity. And then work with us all, towards viable alternatives and mitigants. Now in closing today, I want to reemphasize TMX's pledge, to serve stakeholders across our marketplace around the world, with excellence and integrity.” – TMX Group Limited (X) CEO, John McKenzie

Workforce restructuring is one of the main ways for businesses to cut cost

“Thank you, Mirko, and good morning, everyone. I'll begin on Slide 7 with BCE's consolidated financial results. Adjusted EBITDA was up 1.1%, which drove an 80-point [indiscernible] 2% reduction in operating costs. Total revenue was down 0.7%, if you adjust for the one-time retro benefit of Bell Media last year and the loss of revenue from source this year, revenue was flat. We've actioned a number of cost and efficiency initiatives, including a sizable workforce restructuring that remains on track to generate in-year savings of $150 million to $200 million.” – BCE Inc. (BCE) CFO, Curtis Millen

A well-regulated capital market enhances a country’s innovation and entrepreneurship

“TMX is a vocal and engaged advocate at all levels of government in this country for measures to unlock the flow of capital and create the environment that investors look for, regulatory certainty and clear globally competitive incentives for entrepreneurs, workers and investors to share in the success of Canadian companies. And while we have seen some signs of progress and evidence that our voice is being heard, we have a good deal of work ahead of us, specifically to help policymakers better understand the scope of the impact of their decisions have -- which have on crucial components of our ecosystem. In the recent federal budget announcement, the government indicated that they would explore the expansion of Canada's signature R&D support program to include public companies. This is a welcome and encouraging development on a key recommendation we are pursuing for a number of years and it is an important step forward. However, at the same time, we share the concerns of many across Canada's business and investment community about the unintended consequences from the announced increase in the capital gains tax inclusion rate.” – TMX Group Limited (X) CEO, John McKenzie

Industry

Despite macro uncertainty, the backlog for industrial activities remains strong

“Historically, this period reflects seasonality in areas of our business, including construction. The Equipment Group delivered lower results in the first quarter of 2024 versus the similar period of last year, which was a strong comparator, given specific customer deliveries and market dynamics in play at that time. Prime product delivery was lower, impacted by delays in customer deliveries, while rental was also lower, mainly due to market and abnormal weather conditions. Product support reported good market activity, and we continue to increase technician headcount. Improving equipment availability, solid bookings in the quarter and a healthy opening order backlog remained supportive for the future.CIMCO had a solid start to the year, driven by good execution in both Canada and the U.S., coupled with healthy activity levels. Product support activity continued to demonstrate growth, supported by larger technician workforce.” – Toromont Industries Ltd. (TIH) CEO, Michael Stanley McMillan

The growth runway for the aerospace players in the international market remains attractive

Our proposed services would be for the operation of up to 6 Medevac aircraft in the province. We believe we are 1 of 2 proponents to bid on the contract and hope to hear the result of our bid during this second quarter.Lastly, we are seeing significant interest around the world for our aerospace services. We see large opportunities in Australia, Europe and expanded opportunities in Canada. We are very bullish about future opportunities, and these contracts are right in line with our EIC core capabilities and business model as they generate consistent cash flows throughout the term of the agreement. We brought our analysts to visit our aerospace operations in Newfoundland in April.” – Exchange Income Corporation (EIF) CEO, Michael Pyle

Favourable industry tailwind provides assurance for companies to invest in the long term

But in the long term, we are still very confident in our ability to grow the business to $1 billion by 2025 with the aging population. A unique value proposition for the one-stop shop and a wide range of product that we have with the expansion in R&D, with new products, and bringing some new existing products in Europe. I think we have the tools in our hand to succeed.” – Savaria Corporation (SIS) CEO, Sébastien Bourassa

Operational efficiency is highly important in a commodity industry

“As a result, we are targeting to finish the year with strong exit rates as a conventional more shorter cycle growth activity ramps up in the second half of the year. We continue to find ways to be more effective and efficient, including optimizing our turnaround schedule. For example, we are well prepared for the upcoming turnaround at Horizon, where we will be tying in the final components of the reliability enhancement project, which sets us up for strong utilization and production in the second half of the year and add 28,000 barrels a day in 2025 when we skip a turnaround.” – Canadian Natural Resources Limited (CNQ) President, Scott Stauth

Businesses that involve a high leveraged level should optimize for the cost of capital

“We updated our internal target leverage policy to 3x adjusted EBITDA. We believe this new target objective is reflective of our operational size and strength and optimize cost of capital and is aligned with the expectations were stable. While currently in excess of this level, it is consistent with a strong balance sheet, ample financial flexibility and investment-grade credit ratings. ” – BCE Inc. (BCE) CFO, Curtis Millen

Declining capital expenditure will improve free cash flow in the near term

“In line with our plan to reduce capital investments by $500 million in 2024, CapEx was down $84 million this quarter. The year-over-year quarterly step-down in spending will be more pronounced for the rest of the year as we advance spending in Q1 given favorable construction conditions this winter. Our Q1 free cash flow was flat compared to last year reflecting higher EBITDA, lower CapEx and a related positive change in working capital attributable due to lower supplier payments. These factors were offset by the timing of cash tax installments and severance paid to employees who departed the company in Q1.” – BCE Inc. (BCE) CFO, Curtis Millen

Corporate

Operational and financial disciplined drive return on equity over time

 “We will continue to exercise the operational and financial discipline one would expect as we evaluate investment opportunities that may develop over time. Toromont targets a return on equity of 18% over a business cycle. Return on equity was 22% compared to 24.9% for Q1 of 2023, and exceeds our 5-year average of 20.8%.” – Toromont Industries Ltd. (TIH) CEO, Michael Stanley McMillan

Disciplined growth through acquisitions drives shareholder value

 “Secondly, we invest in those companies and nurture their growth. And lastly, in doing so, we can provide stable and growing dividends for our shareholders. This strategy has been the blueprint for our success for the past 20 years and is even more relevant today. The secret sauce is the disciplined nature of our acquisitions and investments in growth capital in our businesses and operational execution by our underlying subsidiaries. EIC preserves the cultures in our acquired entities and creates an environment where their management and employees can thrive.With me today is Richard Wowryk, our CFO, who will speak to our financial results; and Carmele Peter, our President, who will expand on our outlook for the second quarter and beyond.” – Exchange Income Corporation (EIF) CEO, Michael Pyle 

Vertical integration helps companies be more efficient and innovative in operation

“Overall, Savaria has remained a very attractive business for dealers with in all different markets, the one-stop-shop, a wide range of products we have, a global footprint and a vertically integrated supply chain. We continue to expand our build-out in Mexico.” – Savaria Corporation (SIS) CEO, Sébastien Bourassa

Price adjustment and cost control improve margins despite a decline in revenue

“Thank you, Sebastien, and good morning to everyone on the call. I'm excited to share some remarks regarding our Q1 2024 results. So starting off some key highlights for the quarter include strong EBITDA margin improvement driven from gross margin improvement. North American Accessibility of revenue growth of 11% and strong cash generation from operations, including from working capital in our seasonally weakest quarter. So over the quarter, we generated revenue of $209.4 million, a decrease of $2.2 million or 1% versus last year.” – Savaria Corporation (SIS) CFO, Stephen Reitknecht

An effective capital allocation strategy…

“Through improved turnaround and commissioning scheduling as well as optimization efforts, we are targeting to recover these daily production volumes in the last 3 quarters of the year. Our operating costs in our Oil Sands Mining and Upgrading assets are top tier, averaging $24.85 a barrel in the first quarter comparable with the first quarter of 2023. Canadian Natural has a proven effective capital allocation strategy. We have a balance of near-, medium- and long-term growth opportunities, as I mentioned at the beginning of my call, not only on our Oil Sands Mining assets but across our entire asset base. And with the strategic weighting of our capital program this year to add growth in the second half of the year and exit 2024 with strong rates, we are targeting strong free cash flow in the last 9 months of this year. Now I will turn it over to Mark for our financial review.” – Canadian Natural Resources Limited (CNQ) President, Scott Stauth

…along with healthy free cash flow generation creates tremendous shareholder value over time

 “As Scott has already laid out, when you combine our strategic plan in 2024, our continuous improvement initiatives and optimized production with strong commodity prices, specifically for WCS and high-value SCO, we are targeting significant free cash flow through the remainder of the year. This resulted increasing shareholder returns through our 100% of free cash flow allocation policy. With that, I'll turn it back to you, Scott, for some final comments.” – Canadian Natural Resources Limited (CNQ) CFO, Mark Stainthorpe

Companies mentioned:

Toromont Industries Ltd. (TIH)

 Q4 Revenue Growth: 23.6% |  Q4 EPS Growth: N/A

Exchange Income Corporation (EIF) 

Q4 Revenue Growth: -7.5%  |  Q4 EPS Growth: N/A 

Savaria Corporation (SIS)

TMX Group Limited (X)

Q4 Revenue Growth: -15.8%  |  Q4 EPS Growth: N/A

Canadian Natural Resources Limited (CNQ) 

Q4 Revenue Growth: 5.8%  |  Q4 EPS Growth: -35.3% 

These are quotes from just some of the more than 60 Canadian companies we cover at 5i Research. To view their recent reports you can search for their tickers in the Reports section. If you are not a member and would like to gain access to these reports as well as the Q&A service where you can ask and search questions on these companies, you can fill in your information below to sign up for a free trial.

Take Care,

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