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 expand their presence in the international markets, the consumer health across geographies and executives’ view on how businesses are optimizing their cost stucture amid demand uncertainty.

Macro

Global expansion is critical for long-term growth, especially in emerging markets.

“A few highlights about where we're putting some of that money and I thought it would be interesting this quarter to highlight we're still investing in emerging markets. So in 2023, we acquired land to build a large new campus for Checkpoint and CCL label outside of Istanbul. We'll be doing the planning for that in 2024, most of the CapEx will occur in 2025. In Vietnam, we're completing construction of a new Checkpoint ALS plant in Vietnam, including RFID, encoding and insertion, and we should complete that factory this year in 2024. In Singapore, a few maybe 18 months or so ago, we acquired the label business in Singapore.” – CCL Industries Inc. (CCL.B) CEO, Geoffrey Martin

Increasing regulatory complexity and generative AI are long-term tailwinds for legal-related businesses

“The first is the rising complexity of regulatory compliance, and the second is generative AI. We believe our portfolio is uniquely positioned for these tailwinds, and we continue to invest heavily in innovation and our product road map as we seek to play a larger role in the success of our customers. These efforts are contributing to the growing product momentum we see from many areas in our business. Our capital capacity and liquidity remain a key asset that we are focused on deploying to create shareholder value, and we have made good progress on this during the first quarter.” – Thomson Reuters Corporation (TRI) CEO, Stephen Hasker

The high interest rates environment continues to be a tailwind for financial companies with investment income

“Across the group, net investment income grew 66% as a result of a larger portfolio and higher yields. We have experienced striking changes in the contribution to earnings from our investment portfolio and maintain a more defensive and higher-quality portfolio than almost any time in our history. Our growth and profitability has been significant in the context of a higher rate environment, meaning we benefit from a larger portfolio invested at higher rates working now to secure those rates for years to come. We are excited to have closed our U.S. treasury-listed surety acquisition in the quarter. This acquisition further confirms Treasurer's commitment to the U.S. surety market and is an important step in achieving our long-term growth plans of becoming a significant participant in the North American surety space.” – Trisura Group Ltd. (TSU) CEO, David Clare

Due to uncertain macro, consumers continue to look for compelling value in the low-end segment

“Looking ahead, the path of the Canadian economy and future consumer behavior remains hard to predict, but one thing that is clear is the strength of our value proposition. As Canadian consumers seek out convenience and compelling value for their hard-earned money, we will remain laser-focused executing on our value and convenience promise. We will do so across all product categories, including consumable products, general merchandise and seasonal items. Turning to Dollarcity. This morning we announced the expansion of our partnership in Latin America as well as an increased equity stake.” – Dollarama Inc. (DOL) CEO, Neil Rossy

Electrification is critical in the automobile industry over the long term

“Electrification remains an important industry trend although the take rates are uncertain in the short and midterm. Our EV strategy with respect to customers, programs and regions in which we want to participate is both targeted and deliberate. And as you've heard us say for many years, we are quoting business based on our volume assumptions, not our customers. With all this in mind, we continue to win business and advance our position in electrification. We have been awarded specialized eDrive business to support one of our customers' high-end vehicle platform. This primary rear drive system delivers over 700 kilowatts of power and exceptional performance, reflecting our expertise in electric powertrain system engineering and integration.” – Magna International Inc. (MG) CEO, Seetarama Kotagiri

Strategic investments are levers for companies to gain exposure to emerging markets

“First, we have acquired an additional 10% interest in the business for a total implied value of USD 554 million satisfied in Dollarama common shares. This brings our ownership in the Dollarcity business to 60%. Second, we negotiated a call option to purchase an additional 10% interest by no later than December 31, 2027. Third, we confirm that Mexico will be Dollarcity's next country of entry, planned for 2026. Dollarama will own an 80% equity interest in Mexico, which represents a new country of operation under our partnership.” – Dollarama Inc. (DOL) CEO, Neil Rossy

Industry

Consumer product volumes are showing signs of recovery…

“We had strong results in Home & Personal Care and Food & Beverages. Consumer products industry continues to make progress towards retrieving volume growth, modestly down in Health care & Specialty and slower CCL Secure.”– CCL Industries Inc. (CCL.B) CFO, Sean Washchuk

…but the pace of recovery varies across geographies

“The CCL for the quarter, organic growth return continues to make progress, high single digit in Asia Pacific, a lot about the recovery in CCL Design, mid-single digits in Latin America, low single digit in North America and pretty much flat in Europe.” – CCL Industries Inc. (CCL.B) CFO, Sean Washchuk

Conservative reserving is vital to long-term success in the insurance industry

“We remain committed to specialized underwriting as well as conservative reserving. It is our hope that volatility will continue to provide opportunities to win business and strengthen our reputation. We are planning for growth, and with a strong capital base and greater scale, we feel optimistic for the years ahead.” – Trisura Group Ltd. (TSU) CEO, David Clare

High-quality oil assets help companies lower drilling costs and improve capital efficiencies

“On our South Clearwater assets, we are seeing positive results from the implementation of the fan design. The approach -- this approach to drilling is strategic in this part of the play, given the sands here are thinner and so it enables us to access more reservoir utilizing less capital, wider spacing intervals and access more reservoir. Ultimately, that translates into higher recoveries, improved capital efficiencies, lower costs, which drive higher economic returns. So far, we have brought on 3 wells in 2024 with IP30 rates in the 200 to 245 barrels of oil per day range, with another 3 wells currently in the process of cleaning up for finished drilling.” – Tamarack Valley Energy Ltd. (TVE) CEO, Brian Schmidt

Production cost is highly important in the commodity business…

“Our strong financial performance was driven by our increased oil weighting, we were at 86% in Q1 '24 relative to 82% in Q1 of 2023. Higher realized price margins where we have been able to leverage improved market access and lower wellhead deductions, which contribute directly to the bottom line. We also improved our production costs, which were lower on a per barrel basis by 10% year-over-year, and we expect that to continue to improve as we move through the year.” – Tamarack Valley Energy Ltd. (TVE) CFO, Steve Buytels

…which directly affects capital returns to shareholders

“Looking forward at strip prices, we expect to reach the second tranche of our enhanced return framework in the second half of this year where we would direct 50% of the quarterly access funds flow to enhance returns through buybacks.” – Tamarack Valley Energy Ltd. (TVE) CFO, Steve Buytels

Corporate

Uncertain demand leads to goodwill impairment and additional restructuring costs

“We fully impaired our operating assets and warrants in the first quarter totalling $294 million. We have $195 million in deferred revenue associated with the Fisker contract that could offset the $294 million in asset impairments that cannot be recorded in Q1. This amount will be recognized in income as performance obligations are satisfied or upon termination of the Fisker contract manufacturing agreement. We fully impaired our operating assets and warrants in the first quarter totaling $294 million. We have $195 million in deferred revenue associated with the Fisker contract that could offset the $294 million in asset impairments that cannot be recorded in Q1. This amount will be recognized in income as performance obligations are satisfied or upon termination of the Fisker contract manufacturing agreement.” – Magna International Inc. (MG) CEO, Seetarama Kotagiri

Maintaining a lean cost structure is important amid uncertain outlook demand

“Next, I will cover our updated outlook, which incorporates slightly higher-than-expected vehicle production in China, while our assumptions for production in North America and Europe are unchanged from our previous outlook. We also assume exchange rates in our outlook will approximate recent rates. We now expect a lower euro and Canadian dollar for 2024 and a slightly higher RMB all relative to our previous outlook. And as Swamy mentioned earlier, we are assuming no more production of the Fisker Ocean. We are reducing our expected sales range.

Despite this, we are maintaining our EBIT margin outlook, reflecting our operational excellence efforts to contain cost and obtain commercial recoveries. We have increased our expected tax rate for 2024 from 21% to 22%, largely reflecting a change in the mix of earnings towards higher tax jurisdictions.” – Magna International Inc. (MG) CFO, Patrick McCann

Subscription business has a high degree of visibility into the future cash flow…

“We now see total revenue growth of 6.5% to 7%, up from approximately 6.5%; organic revenue growth of 6% to 6.5%, up from approximately 6%; total Big 3 revenue growth of 8% to 8.5%, up from approximately 8%; and organic Big 3 revenue growth of 7.5% to 8%, up from approximately 7.5%. We are maintaining other 2024 guidance metrics, including adjusted EBITDA margins of approximately 38% and free cash flow of approximately $1.8 billion.” – Thomson Reuters Corporation (TRI) CFO, Michael Eastwood

…and tends to possess a very solid organic growth profile

“Tax & Accounting also had a very strong quarter, growing 14% organically. Recurring and transactional revenue grew 14% and 15%, respectively. Seasonal revenue strength from SurePrep and Confirmation, along with continued robust growth from our Latin America businesses, were key drivers. In addition, we faced an easier comparison, as Q1 of 2023 included a minor revenue reserve that we called out last year. This benefited the segment revenue growth rate by nearly 2% this quarter.” – Thomson Reuters Corporation (TRI) CFO, Michael Eastwood

Operational efficiency directly drives Return on Equity over time

“Our fronting operational ratio has started to move down as operations normalized in U.S. fronting despite continued investments in infrastructure. We reiterate our target of a low 80s to high 70s fronting operational ratio in the medium term. Continued growth and improved loss ratio and an increase in investment income, which grew 53% in the period, contributed to a 30% increase in operating net income and supported a 14% operating ROE.” – Trisura Group Ltd. (TSU) CEO, David Clare

Companies with a track record of capital allocation could be flexible in terms of share issuance

“First on the acquisition of an additional 10% equity interest in the Dollarcity business. The transaction was satisfied by the issuance of approximately 6.1 million common shares of Dollarama for a total implied value of USD 554 million. The shares were issued via private placement and represent approximately 2.1% of our total issued and outstanding shares. The transaction is expected to be neutral to our net earnings per share for fiscal 2025. By satisfying the purchase price through the issuance of common shares, there is no near-term impact on capital allocation strategy, both in terms of investing in organic growth and optimizing shareholder returns through share repurchases and a modest quarterly dividend.” – Dollarama Inc. (DOL) CEO, Patrick Bui

Companies mentioned:

CCL Industries Inc. (CCL.B)

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

Magna International Inc. (MG)

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

Thomson Reuters Corporation (TRI)

Trisura Group Ltd. (TSU)

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

Tamarack Valley Energy Ltd. (TVE)

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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