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 key themes of companies discussing how inflation positively or negatively affects their businesses, a common theme of shortage of specialized technicians, as well as executives’ view on high interest rates and its effect on their respective industry.
Macro
Sales growth at companies with pricing power benefits from inflation
“Sales also increased based on higher repair costs due to increasing vehicle complexity, increased scanning and calibration services as well as general market inflation. Gross margin was 45.5% in the second quarter compared to 45.3% achieved in the same period of 2022. Gross margin benefited from improved glass margins, higher part margins and increased scanning and calibration” – Boyd Group Services Inc. (BYD) CEO, Timothy O’Day
Companies focus on controlling costs to mitigate the impact of inflation
“Earlier this year, we estimated about $100 million of incremental input costs net of recoveries over 2022. Based on our initiatives together with improvements in market prices for energy and certain commodities, we now expect to mitigate about half of the incremental net input costs. We also continue to take proactive measures in various other areas. We have executed all initiated consolidation, restructuring and cost containment activities at different levels across the company. We are engaged in ongoing commercial negotiations with our customers to recover costs, transitioning to various index programs and address pricing on challenging programs.” – Magna International Ltd. (MG) CEO, Swamy Kotagiri
Higher financing costs make companies reduce floating rate exposure
“Second, we remain focused on process improvement and cost containment and successfully reduced our cost to maintain by 5% year-over-year. Third, we continue to grow responsibly, exceeding our target of acquiring 805 homes during the quarter at a high 5% to 6% cap rate.We also successfully closed the securitization transaction in July at a weighted average yield of 5.86%. This represents a relatively attractive cost of financing that is in line with our acquisition cap rate for SFR homes in the current market environment. The transaction also helped to reduce our floating rate exposure and term out our debt maturity profile.” – Tricon Residential Inc. (TCN) CEO, Gary Berman
Most major banks tighten their credit lending standard
“Furthermore, the majority of prime lenders, specifically major banks tighten their credit when they are concerned about macro conditions. As a result, we are continuing to experience high-quality borrowers using our products. Secondly, the business initiatives we have executed over the last few years continue to perform well. During the quarter, we added nearly 1,000 new merchants within our point-of-sale financing division, including a recently announced partnership with 123Dentist, a national network of supported dental practices that provide a wide range of dental care to more than 800,000 patients and over 2.5 million patients in the annual.We also added over 200 more automotive dealerships to our auto network, leading to a record automotive financing volume in the quarter.” – goeasy Ltd. (GSY) CEO, Jason Mullins
Higher financing costs make companies reduce floating rate exposure
“Second, we remain focused on process improvement and cost containment and successfully reduced our cost to maintain by 5% year-over-year. Third, we continue to grow responsibly, exceeding our target of acquiring 805 homes during the quarter at a high 5% to 6% cap rate.We also successfully closed the securitization transaction in July at a weighted average yield of 5.86%. This represents a relatively attractive cost of financing that is in line with our acquisition cap rate for SFR homes in the current market environment. The transaction also helped to reduce our floating rate exposure and term out our debt maturity profile.” – Tricon Residential Inc. (TCN) CEO, Gary Berman
Supply chain constraints, capital expenditures inflation and high interest rates are headwinds for the utility industry.
“Several large offshore wind projects globally that entered into revenue contracts prior to the impact of the supply chain constraints, CapEx inflation and higher interest rates, are reassessing their viability. You've seen all the headlines in the last few months. The renewable sector has been impacted by high interest rates and inflation, and our share price has certainly been impacted because of materiality of our two large offshore wind projects. I'm pleased, however, that we've been able to, with our partners, secure amendments in the indexation and denomination of the 1.1 gigawatt Baltic Power Projects revenue contract, as previously disclosed. This restores our project economics generally to what they were when we decided to enter the project in the first place despite the inflation and high interest rates that have been experienced since.” – Northland Power Inc. (NPI) CEO, Mike Crawley
Industry
The business environment for industrial is expected to gradually improve going forward…
“We expect the business environment to gradually improve. However, a number of factors are in play, some of which include the evolving dynamics of the global supply chain and improving availability, inflation, inflationary and macroeconomic trends and managing customer credit risk along with growth opportunities, all of which can overshadow normal seasonality and customer buying patterns. We continue to proactively monitor developments and are taking actions we believe to be appropriate.” – Toromont Industries Ltd. (TIH) CFO, Michael Stanley McMillan
…driven by strong growth in bookings, indicating healthy demand
“Bookings for the second quarter increased 69% compared to last year and increased 10% on a year-to-date basis. The Equipment Group and CIMCO reported increased bookings and good demand for our products. However, certain markets remain cautious given the current economic climate.” – Toromont Industries Ltd. (TIH) CEO, Scott Medhurst
The combination of moderated home prices and higher rents led to the expansion of cap rates for real estate properties
“Within our target market, prices of homes that meet our buy box have declined by roughly 4% year-over-year while rents have increased by about 1%. Taken together, the combination of moderated home prices and slightly higher rents has led to an expansion of cap rates by about 25 basis points compared to last year. At the same time, MLS listings volume in our markets has declined by about 30% compared to last year, given homeowners reluctance to sell and forgo their attractively priced in-place mortgages. As a result, the buying opportunity is smaller than it was a year ago, but it's improving seasonally as we get into the summer months.” – Tricon Residential Inc. (TCN) CEO, Gary Berman
Better demand outlook for auto components leads to strong organic sales growth…
“Our organic sales grew by 17% year-over-year, surpassing weighted production by 5%, excluding Complete Vehicles and 3% including Complete Vehicles. Our second quarter showcased strong Q2 operating performance with high organic sales contributing to robust earnings. These results represent a significant improvement both year-over-year and compared to the first quarter of this year. We have raised our 2023 sales, adjusted EBIT margin and adjusted net income outlook ranges for 2023. This upward revision in our EBIT margin range demonstrates solid operating performance even with the inclusion of Veoneer Active Safety, which is launching significant new business over the next 18 months. We are highly committed to executing our strategy and remain confident in our ability to achieve our long-term growth and margin outlook. And we continue to win business across all product areas which supports our Go Forward Strategy.” – Magna International Ltd. (MG) CEO, Swamy Kotagiri
…driven largely by reduced supply constraints, stable production schedules and resilient auto sales
“It is important to note that the industry has seen some positive developments, including reduced supply constraints, stronger and more stable production schedules and resilient auto sales in a number of markets. However, the global economy continues to face some interlocking challenges, including continuing elevated inflation, higher interest rates, geopolitical risks and slowing economic growth. These challenges are impacting our entire industry. In North America, there are concerns about upcoming OEM labor negotiations when union contracts expire in September which may have short-term impacts on production. Rest assured, efforts to contain costs and improve our margins remains a top priority for us.” – Magna International Ltd. (MG) CEO, Swamy Kotagiri
High mortgage rates increased demand for the rental market
“Demand for housing is outstripping supply. And with skyrocketing 30-year mortgage rates, the case for rental has never been more compelling. In fact, owning a single-family starter home today costs $1,000 more per month than renting the same home, making renting with Tricon an affordable and attractive option for many American families. We serve the need for rental housing by acquiring single-family homes, renovating them to a high standard and providing a hassle-free lifestyle for our residents.” – Tricon Residential Inc. (TCN) CEO, Gary Berman
Corporate
A challenging labor market due to a lack of specialized technicians
“While the ability to service demand continues to be constrained by market conditions, new technician training and other initiatives are providing some improved capacity. However, the path to servicing the level of demand requires continuing increases in technician compensation to attract more labor into the industry and company, and this will require continued price increases from our customers. As we address this issue, we will be able to reduce cycle times and better serve our customers.” – Boyd Group Services Inc. (BYD) CEO, Timothy O’Day
Weak organic sales growth was partially offset by acquisitions
“Thus far in the third quarter, same-store sales increases are approximately half of what we have experienced during the first 6 months of 2023. Boyd is pleased to have opened or acquired 57 collision repair locations thus far in 2023 and the pipeline to add new locations and expand into new markets is robust.” – Boyd Group Services Inc. (BYD) CEO, Timothy O’Day
Execution is critical in a challenging macro environment
“General macroeconomic factors such as inflation, higher interest rates, Canadian dollar movements continue to challenge the business as well as disrupt historical seasonality and are expected to continue to do so for the near term. Looking forward, our teams remain focused on executing customer deliverables, key strategies while adhering to our operational model and disciplined execution.” – Toromont Industries Ltd. (TIH) CEO, Scott Medhurst
Companies with scale are in a position to capture greater market share and take advantage of market disruption
“First, as we have suggested during the last few quarters, a difficult macro environment benefits those with scale as inflation affects operating expenses, range growth affects salaries, higher borrowing costs compresses margins and economic concerns require credit tightening smaller subscale companies struggle. As a result, those with scale are often in a position to capture a greater share of the market and take advantage of that market disruption, goeasy is currently benefiting from these dynamics today. An example, the number of companies bidding directly against us within Google paid search during the quarter was down nearly 40% year-over-year.” – goeasy Ltd. (GSY) CEO, Jason Mullins
…and take advantage of market disruption due to less competitive pressure
“50% of our unsecured loan originations in the quarter were from these cross-selling efforts. The combination of less competition and strong performing strategic business initiatives produced nearly 42,000 new customers, a company record for a single quarter. As a result, it led to the highest proportion of credit advance and new customers in more than five years at 71% of all net lending volumes. Combined, we received a record number of applications for credit at nearly $500,000, up 25% year-over-year. The elevated level of applications led to record originations in the quarter, up $657 million, up 6% over the second quarter of 2022.” – goeasy Ltd. (GSY) CEO, Jason Mullins
The utility industry returns on capital are regulated due to its favourable competitive position…
“While the "band adjustment" revenue is lower in 2023, it is only a matter of timing of revenue recognition under the regulated framework, and therefore, it is not expected to impact the overall return of the Spanish portfolio. We expect to achieve our designated regulatory return of between 7.1% to 7.4% over the remaining regulated asset life of the portfolio” – Northland Power Inc. (NPI) CFO, Pauline Alimchandani
…as a result, limiting its ability to grow free cash flow
“The regulated change impact is expected to reduce adjusted EBITDA in 2023 by approximately CAD 90 million and adjusted free cash flow and free cash flow by CAD 75 million as detailed in our disclosures. ” – Northland Power Inc. (NPI) CFO, Pauline Alimchandani
Companies mentioned:
Boyd Group Services Inc. (BYD)
Q2 Revenue Growth: 22.3% | Q2 EPS Growth: 97.0%
Q2 Revenue Growth: 13.5% | Q2 EPS Growth: 40.5%
Q2 Revenue Growth: 17.3% | Q2 EPS Growth: N/A
Q2 Revenue Growth: 22.5% | Q2 EPS Growth: -80.4%
Q2 Revenue Growth: -15.3% | Q2 EPS Growth: -99.0%
Toromont Industries Ltd. (TIH)
Q2 Revenue Growth: 11.5% | Q1 EPS Growth: 21.1%
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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