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 week Earnings Pulse, we note underlying themes of high energy costs, sticky inflation impacting financial results, executives’ views on their businesses’ challenges, dire capital market conditions, and cost-cutting pressures.

Macro

Inflation is expected to remain high for a while

“Inflation is up and high, and it's going to remain high for a while, we believe. And we've seen the fastest increase in interest rates since the 1970s” – Dye & Durham Limited (DND) CEO, Matthew Proud

Cost-cutting initiatives across industries as the macroeconomic environment deteriorates

“Touching on the [indiscernible] market. I've always been a large believer in running a business with operational and financial discipline. This is more important than ever right now, given the macroeconomic environment remains extremely challenging and continues to deteriorate in many cases. As such, I've decided the company to act more aggressively and decisively to protect its business and financial position. Therefore, we will be implementing cost reduction initiatives to reduce the current operational cost by at least 10% commencing in the second quarter of fiscal '23, i.e., the current quarter.” – Dye & Durham Limited (DND) CEO, Matthew Proud

Price increases across geographic segments

“Highlights of the CCL segment this quarter, 13.2% organic sales growth, only partly price-led, probably the majority of that 13.2 million came from price, but there was some volume increase, too. North America and Asia Pacific, up high single digit, Europe up double-digit and Latin America up more than 40%.” – CCL Industries Inc. (CCL.B) CFO, Sean Washchuk

In the European market, energy cost spikes and freight inflation affect companies’ profit margins

“But by far, the majority of the problem in the quarter was really the unprecedented summer energy cost spike in Europe and freight inflation. So that was really responsible for all the profit decline for the quarter in Europe.” – CCL Industries Inc. (CCL.B) CFO, Sean Washchuk

…while in the American market, higher-cost inventories due to inflation also negatively impacted profitability

“In the Americas, we were affected by the margin squeeze from higher-cost inventories as resin indices declined, reducing our selling prices, the reverse effect of what we experienced in 2021. Outlook for the coming quarter. The core CCL business unit orders picture still remains solid. In the CCL design space, we see improving automotive output that's likely to be offset by slower conditions in the technology space. Comps on CCL Secure were much easier in the second half of the year than they were the second half of last year, but are harder in Q4 than they were in Q3.”

Industry

Logistics companies expect a normalized operating environment outside of inflated fuel costs and COVID vaccine distribution

“These 2 factors forwarding returning to a more expected quarterly level in packaging revenue now exceeding pre-pandemic levels are perhaps a sign of the return to a more normalized operating environment outside of the inflated fuel cost and the ongoing role in supporting COVID vaccine distribution” – Andlauer Healthcare Group Inc. (AND) CEO, Michael Andlauer

Real estate transaction volumes have come under tremendous pressure

“I'm often asked how resilient is the business in the face of deteriorating real estate market. Real estate transaction volumes have come under significant pressure, especially in Canada since December 2021” – Dye & Durham Limited (DND) CEO, Matthew Proud

Nuclear power and hydro are key technologies facilitating the buildout of renewables

“Our investment in Westinghouse is an attractive entry point into nuclear power generation, which we believe along with hydro to be one of the key technologies facilitating the rapid buildout of intermittent renewables. Wind and solar must be complemented by clean, dispatchable baseload power generation.” – Brookfield Renewable Partners L.P. (BEP.UN) CEO, Connor Teskey

Same-store sales growth has steadily recovered due to the easing of restrictions

“Since March 2020, COVID-19, as you know, has adversely impacted A&W restaurant operations across Canada and, in particular, for those restaurants located on urban street fronts as well as in shopping centers. However, since the second quarter of 2020 when COVID-19 impacts at A&W were at their peak, the impact of COVID-19 on royalty pool same-store sales growth has steadily declined. The easing of restrictions has brought many Canadians back to their offices and into shopping centers, which has helped us to grow sales in 2022.”

Recovery in automotive production volume

“We had a strong quarter in the Personal Health Care and Food and Beverage businesses. It was pretty good at CCL Secure compared to a slow period in 2021. CCL Design was also up on recovery in automotive production volume, but that was offset by a modest decline in electronics and the slowing computer industry. ” – CCL Industries Inc. (CCL.B) CFO, Sean Washchuk

Higher fuel costs negatively affect the margin of transportation, the logistics industry

“Growth in dedicated in last-mile delivery reflects route expansion and increases in fuel costs passed on to customers. Our cost of transportation services was $81 million or 49.1% of revenue compared with $47.5 million or 45.6% of revenue for Q3 last year” – Andlauer Healthcare Group Inc. (AND) CFO, Peter Bromley

…which were also passed on to customers

“Michael already discussed the impact of higher fuel costs during -- driving year-over-year growth in our airfreight forwarding revenue. Growth in dedicated in last-mile delivery reflects route expansion and increases in fuel costs passed on to customers” ” – Andlauer Healthcare Group Inc. (AND) CFO, Peter Bromley

Corporate

Disciplined capital deployment to achieve attractive risk-adjusted returns

“And lastly, we have a differentiated growth capability, with over 100 dedicated investment professionals around the world looking to deploy capital at attractive risk-adjusted returns, while delivering on our 12% to 15% return target” – Brookfield Renewable Partners L.P. (BEP.UN) CEO, Connor Teskey

Annuity-like cash flow revenue and operating leverage

“The business is dramatically larger today than it was at the time of IPO 2.5 years ago. We're building a global leader in the B2B software and services space that supports legal and business professionals. As you can see, we built a highly resilient business and a highly reliable business that generates digital infrastructure cash flows. The annuity nature of our revenue and the relatively fixed nature of our cost base, we've managed -- means we've managed in an extremely disciplined manner through the recent inflationary period. And this provides for tremendous levels of productivity in our revenue as well as adjusted EBITDA.” – Dye & Durham Limited (DND) CEO, Matthew Proud

…drives margin expansion without additional capital investment

“It also allows us to drive the high EBITDA margins we do because the revenue can scale dramatically without corresponding cost increases.” – Dye & Durham Limited (DND) CEO, Matthew Proud

Contracted long-term and inflation-linked cash flows creates stability and predictability in business performance

“Second, our cash flows are contracted long-term and inflation-linked, meaning, we will remain resilient throughout all economic environments. Third, our robust liquidity, strong balance sheet and access to deep and varied sources of capital provide us the ability to execute on some of the largest and most attractive decarbonization investment opportunities” – Brookfield Renewable Partners L.P. (BEP.UN) CEO, Connor Teskey

Diverse pools of capital become a key advantage to financing growth

“Our balance sheet is in excellent shape, with our credit rating recently affirmed at BBB positive with a stable outlook. We remain resilient to the rising interest rates globally with over 90% of our borrowings being project level, non-recourse debt with an average remaining term of 12 years, no material near-term maturities and only 3% exposure to floating rate debt. In increasingly volatile markets, our access to diverse pools of capital becomes even more differentiated.” – Brookfield Renewable Partners L.P. (BEP.UN) CEO, Connor Teskey

Best businesses earn a perpetually growing stream of cash without additional significant capital expenditure

“The fund is the majority owner of A&W Trade Marks, Inc., which, through its interest in A&W Trade Marks Limited Partnership, owns the A&W trademarks used in Canada. These trademarks include some of the best-known names in the Canadian food service industry, including A&W Root Beer, The Burger Family and Chubby Chicken. The fund earns income through its ownership interest in A&W Trade Marks, which, through the partnership, licenses the A&W Trade Marks to A&W Food Services. In return for the use of the Trade Marks, Food Services pays A&W Trade Marks a royalty equal to 3% of the gross sales reported by A&W restaurants in the royalty pool” – A&W Revenue Royalties Income Fund (AW.UN) CFO, Kelly Blankstein

Companies mentioned:

Dye & Durham Limited (DND)

Q3 Revenue Growth: 6.7% |  Q3 EPS Growth: -221.1%

Brookfield Renewable Partners L.P. (BEP.UN)

Q3 Revenue Growth: 14.4%  |  Q3 EPS Growth: 21.6%

A&W Revenue Royalties Income Fund (AW.UN)

Q3 Revenue Growth: 7.4%  |  Q3 EPS Growth: 3.9%

WSP Global Inc. (WSP)

Q3 Revenue Growth: 9.3%  |  Q3 EPS Growth: -11.0%

CCL Industries Inc. (CCL.B)

Q3 Revenue Growth: 11.4%  |  Q3 EPS Growth: 7.7%

Andlauer Healthcare Group Inc. (AND)

Q3 Revenue Growth: 58.3%  |  Q3 EPS Growth: 41.9%

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,

Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in the securities mentioned.