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 companies normalizing their businesses from the pandemic and inflationary pressure and how consumer spending is negatively affected in the economic downturn, as well as executives’ view on operational efficiency as a tool to mitigate challenging macro environment.
Macro
Despite a challenging headwind that the US economy experienced including a tough rate environment and housing supply constraints…
“As we noted during our last quarterly earnings call, the U.S. mortgage market seems to be bottom bouncing below 30-year lows. 10-year treasury yields inched higher during the third quarter and spreads remained wide relative to historical averages, which pushed 30-year mortgage rates closer to 7% for a good portion of the quarter.” – Real Matters Inc. (REAL) CEO, Brian Lang
…US home price growth stabilizes
“Even with the backdrop of a challenging rate environment and continued housing supply constraints, most U.S. metros saw home price growth stabilize, which helped drive seasonal demand for housing and a corresponding increase in purchase origination volumes. According to the National Association of Realtors, existing home sales increased 7% year-to-date through May.” – Real Matters Inc. (REAL) CEO, Brian Lang
The refinancing market remains historically low due to high interest rates
“I think it's safe to say that the mix of volume we're seeing between purchase and refinance is unlike any market we've seen over the last 30 years. Purchase transactions today make up close to 80% of the volume on a market size that is extremely low by historical standards. The silver lining for our U.S.” – Real Matters Inc. (REAL) CEO, Brian Lang
Significant currency fluctuation affects the company’s financial results
For the second quarter of 2023, sales increased 1.8% with 1% acquisition-related growth, 5.3% positive impact from foreign currency translation, partially offset by a 4.5% organic decline, resulting in sales of $1.64 billion compared to $1.62 billion in the second quarter of 2022. Operating income was $242 million for the 2023 second quarter compared to $247.8 million for the second quarter of 2022. An 8% decrease, excluding the impact of foreign currency translation. Geoff will expand on the segmented operating results for our CCL, Avery, Checkpoint and Innovia segments momentarily.” – CCL Industries Inc. (CCL.B) CFO, Sean Washchuk
Consumer spending was under pressure due to inflation
“These results offset softer performance in our international operations. particularly in general merchandise sales were inflationary pressures and lower government income support continued to result in a shift in customer spending towards Essentials. More importantly, on top of sales growth, we're starting to see more torque in gross profit dollars as a result of 128 basis increase in our gross profit rate compared to last year. The increase in gross profit rate was due to changes in sales blend and a higher pass-through of cost inflation and retail prices compared to last year. As I have commented in the past, we continue to monitor and adjust our retail prices using a balanced approach that is always with our customers' reality and wallet in mind while striving to maintain as low as possible negative impacts to margin and volumes.” – The North West Company Inc. (NWC) CEO, Daniel McConnell
There is still uncertainty related to the broad economy and the impact of inflation
“That said, there is uncertainty related to the economy and the impact of inflation, which mean negatively impact sales plan and gross profit rates. In our international operations, we're up against the impact of a higher permanent fund dividend in Alaska last year and the ongoing shift in consumer spending from discretionary items towards food. In our Canadian operations, we are closely monitoring the impact of wildfires, which have resulted in the evacuation of some communities and supply chain disruption in other communities. On the upside, our strong in-stock position will help us meet the expected increase in our customer -- consumer demand resulting from the [indiscernible] anticipated and issued, again, I said later in '24 -- sorry, later this year or early 2024.” – The North West Company Inc. (NWC) CEO, Daniel McConnell
Industry
The truckload industry last year experienced short-term tailwinds from inflation and a COVID-related boost…
“Well, we generated solid results in our second quarter this year, though, not as strong as our record quarterly results of Q2 a year ago, and we benefited from superior U.S. truckload rate premiums, higher revenue related to COVID-19 vaccines, ancillary products, and an unusually high airfreight forwarding volumes. Our Q2 this year also reflects much lower fuel surcharges than Q2 last year in line with a similar reduction in expenses. Despite the lack of these operating tailwinds in Q2 this year, our consolidated revenue for the first half of this year is higher than the same period a year ago and our EBITDA margins for the quarter and year-to-date remain within our historical range of 24% to 26%.” – Andlauer Healthcare Group Inc. (AND) CEO, Michael Andlauer
…However, the operation has largely normalized in recent quarters for the industry in general
“As expected, our revenue related to COVID vaccines and ancillary products comprised of less than 1% of our revenue in Q2 this year compared to 2.6% of higher revenue in Q2 a year ago. Our margins and net earnings for the quarter also reflect a year-over-year decline in contribution from our U.S. truckload operations, as the rate premiums we were able to capture in fiscal 2022 related to equipment and driver shortages have now diminished. Our U.S.-based ground transportation revenue and related margins have returned to pre-pandemic levels, and we do not foresee a return to the premiums we achieved in fiscal 2022. These margins are attractive and in line with our initial projections at the time of our acquisitions of Boyle and Skelton USA, and we look forward to driving growth in our U.S.” – Andlauer Healthcare Group Inc. (AND) CEO, Michael Andlauer
Achieve market share gain during the industry downturn
“Appraisal, we recorded net market share gains year-over-year and we launched 1 new channel with an existing client. In U.S. Title, we onboarded the additional market share we won with our Tier 1 lender and we launched 1 new channel with an existing client. In Canada, we launched 5 new clients and increased market share in the third quarter. In U.S.” – Real Matters Inc. (REAL) CEO, Brian Lang
Industries that are negatively affected by supply chain issues and inflationary pressures start to recover
“And we're very confident about improving our results as we go forward and addressing the very bright future that the company has. Our focus has really been twofold as we indicated at the last time we spoke with you, first and foremost, we've been focused on returning our business to its normal profitability. And largely, all our issues were supply chain focused. We've discovered -- we've discussed with you at great length the challenges we've had with freight surcharges emerge, exorbitant increases in our glass and packaging costs so that our ambition was to improve our earnings by $20 million over the next 2 years. And we're making great progress against these goals as costs are coming down to their normal levels now at different rates in different places.” – Andrew Peller Limited (ADW.A) CEO, John Peller
Tough macro environment slows down order growth…
“Our core CCL business units faced slower volumes, still with many consumer packaged goods customers. We did see some pickup in orders in July. So in Q2, we saw some softening of orders sort of progressively through the quarter, and that did sort of reverse a bit in July, not everywhere, but in a number of places, but still results of many of our customers in that space are reporting low to mid-single unit volume declines. And once we see that, obviously, at some point, translates back to us.” – CCL Industries Inc. (CCL.B) CEO, Geoffrey Martin
…But demand picture is showing improvement in recent months
“The CCL Design, we do expect to see some modest improvement by Q4 as comps ease and computer industry demand certainly recovers, and we have some new business wins to kick in. So we -- again in CCL Design, we saw in the electronics space, our first improvement in order intake in July versus the prior year. So that's quite encouraging. CCL Secure demand picture remains unchanged for the second half. Again, we have seen some pickup in orders in the month of July.” – CCL Industries Inc. (CCL.B) CEO, Geoffrey Martin
Corporate
Strategic acquisitions are complimentary to strengthen the core business which enhance organic growth
“Looking ahead, we will continue to remain focused on opportunities to strengthen our clients' connection to our platform by broadening our service offerings, increasing our capacity to attract both new clients and new business and pursuing strategic acquisitions to further strengthen our platform in both Canada and in the United States. We have an attractive pipeline and potential acquisition targets and we're well positioned financially to pursue value-enhancing growth opportunities.” – Andlauer Healthcare Group Inc. (AND) CEO, Michael Andlauer
Most companies that benefited from the pandemic tailwind saw their business normalizes…
“In the second quarter, we achieved good results and ended the period with a strong position, building on our major strengths, namely our multi-access value-added service concept and our ongoing acquisition strategy. The comparison with the second quarter of 2022 shows a decrease in sales and earnings, but it should be remembered that the first half of 2022 was particularly favored by exceptional increases in a market context resulting from the pandemic. To put things in perspective, if we compare second quarter of 2023 to the same quarter in 2019, sales increased by 68% and EPS by 67%.” – Richelieu Hardward Ltd. (RCH) CEO, Richard Lord
…leading to margin compression
“Second quarter EBITDA reached $61.5 million, down $16.3 million or 21% over last year, resulting from lower sales and to overall operating expenses returning closer to pre-pandemic level as well as additional external storage expenses due to temporary increased level of inventories. Gross margin remained stable, and the EBITDA margin stood at 13% compared to 16% last year. First half EBITDA reached $110.6 million, down 16%. As for the EBITDA margin, it stood at 12.6% compared to 15.1% last year.” – Richelieu Hardward Ltd. (RCH) CFO, Antoine Auclair
Amid the economic downturn, companies manage working capital efficiently and invest for the long term
“In this transition year, we are actively working in reducing our inventory levels. Therefore, reducing additional external warehousing space that is impacting our performance. In addition, 2023 is a year of significant investment in our network, and these investments will start to bear fruits in 2024. We will remain focused on market penetration, synergies with our recent acquisition and our innovation, value-added service and acquisition strategies to deliver good results in the coming quarters.” – Richelieu Hardward Ltd. (RCH) CEO, Richard Lord
Acquisitions contribute meaningfully to sales amid weak organic growth
“Net earnings for the 2023 second quarter was $155.9 million compared to $163.4 million for the 2022 second quarter. For the 6-month period, sales increased 5%, operating income increased 5% and net earnings increased 3% compared to the 6-month period in 2022. 2023 included the results from 6 acquisitions completed since January 1, 2022, delivering acquisition-related sales growth for the period of 1.9%. Foreign currency translation was a tailwind of 4.9% to sales, partially offset by a 1.7% organic sales decline. Moving to Slide 4.” – CCL Industries Inc. (CCL.B) CFO, Sean Washchuk
Companies cut headcount to maintain a lean cost structure
“In addition to that, being our principal focus, we negotiated -- renegotiated our bank agreement so that we get both more favorable lending terms and recognition for the value of the assets that we hold in our company. We're also reducing our CapEx to low levels to maintenance levels until we're sure that we're out of the storm if you will. We've reduced our SG&A savings significantly. We've restructured our headcount at all levels of the company significantly so that you'll see a focus in maintaining of lower cost. And then we're doing all of that while still painting strong market performance and revenue growth and we're up 2.8% in this first quarter.” – Andrew Peller Limited (ADW.A) CEO, John Peller
Companies mentioned:
Q2 Revenue Growth: -3.3% | Q2 EPS Growth: -33.7%
Andlauer Healthcare Group Inc. (AND)
Q2 Revenue Growth: -7.1% | Q2 EPS Growth: -24.5%
Q3 Revenue Growth: -41.6% | Q3 EPS Growth: N/A
Q2 Revenue Growth: 1.8% | Q2 EPS Growth: -3.7%
Q1 Revenue Growth: 2.9% | Q1 EPS Growth: N/A
The North West Company Inc. (NWC)
Q2 Revenue Growth: 6.8% | Q1 EPS Growth: 18.8%
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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