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 home some companies thrive amid a challenging macro environment due its the resiliency and secular tailwind of the business models, as well as executives’ view on how to position their companies from the expected economic recovery next year.

Macro

Capital light businesses are displaying resilience to economic pressures that are negatively impacting other industries

“We're extremely passionate about supporting our providers. And every day, we focus on supporting them better. This attitude and focus is what has allowed the company to continue to witness healthy growth across all its business segments, including both online and in-person care channels with minimal impacts due to recession, inflation, supply chain, or other macroeconomic effects.” - WELL Health Technologies Corp. (WELL) CEO, Hamed Shahbazi

Businesses are starting to hoard cash with fears of a recession on the horizon

“And as I said earlier, because the customers that they're serving, the customers they're aspiring to serve are unfortunately taking a lot longer to get around to making the decision to move forward with the transformation initiative that they've been discussing with WillowTree for quite some time now because so many businesses out there, their budgets are being constrained or they're being invited to take a bit of a wait and see approach as everybody seems to conserve cash and wait to see what's going to happen in terms of the macroeconomic and geopolitical landscape.” - TELUS International Inc. (TIXT) CEO, Jeffrey Puritt

Increased cost of living through higher interest rates and inflation is causing average monthly rents to increase

“As you can see, a track record of growing average monthly rent continuing its positive momentum during the quarter. For our total portfolio, AMR increased by 7.8% year-over-year and 7.3% on the same-property basis. This robust AMR growth was underpinned by strong increases consistently observed across all markets. While we did experience a marginal dip in occupancy by 40 basis points compared to the previous year for both total and same property portfolios.” - InterRent Real Estate Investment Trust (IIP.UN) CEO, Bradley Cutsey

As a result of macroeconomic pressures, the commercial real estate market has been hit hard

“This provides us with a stable revenue base, even in this current macroeconomic environment. As you're aware, many of our solutions are considered mission-critical with relatively high switching costs. With the year-to-date commercial real estate transactions down 55% versus 2022, we are pleased with the resiliency of our recurring revenue model.” – Altus Group Limited (AIF) CFO, Pawan Chhabra

Despite a tight labour market, contractor labour availability increased in Q3 and is expected to remain high in the near term

“Though labor markets remain tight, as I noted, we continued to experience increased contractor availability during the third quarter. Some challenges remain, and management will continue to focus on further increasing our harvesting capacity through the remainder of the year and into 2024. In the short to medium term, inflation is expected to continue to impact our financial results through elevated contractor rates and fuel surcharges.” - Acadian Timber Corp. (ADN) CEO, Adam Sheparski

Some companies believe inflation appears to be settled and having higher pricing power creates significant leverage against these pressures

“So, we don't currently see the need for accelerated pricing based on where inflation appears to be settling in. But we've always reserved the right if that number moves, and we'll get ahead of it. And then we certainly watch fuel pricing on a daily basis. And if that ticks the other way, we'll take an action. And I think the last 2.5 years or so would indicate that the customer base is stable. We're able to drive the pricing through. It does offset inflation, and we've been able to add to our margins as a result of those actions over the course of, I don't know, 15 a dozen quarters, right, that we've been doing.” - Primo Water Corporation (PRMW) CEO, Thomas Harrington

Industry

Demand for the telehealth services appears to be strong amongst patients and providers

“During Q3 2023, WELL delivered over 1 million patient visits in the quarter through our physical and virtual clinics and over 1.58 million technology and care interactions. WELL now services more than 33,000 healthcare providers with our SaaS and technology services in Canada, which is equal to approximately 1 out of every 3 healthcare providers in the country. We're extremely passionate about supporting our providers. And every day, we focus on supporting them better.” - WELL Health Technologies Corp. (WELL) CEO, Hamed Shahbazi

Generative AI is revolutionizing the CX center industry as customers are beginning to prefer AI offerings over traditional

“Let me now turn our attention to a topic that's top of mind across our industry. The opportunities and impacts of generative AI on our business, on our operations and team and our clients is a key strategic focus of our executive leadership team. At a broader economic and multi-industry level, we believe that the disruptive impact of generative AI will affect most business functions…. Specifically, when it comes to CX center operations, according to Deloitte, nearly 2/3 of contact centers are delivering disjointed customer experiences across communication channels, and 34% of customers, according to the Call Center Management Association, are most frustrated when passed to another representative during a contact or call.To address these issues, we believe that the time is now with GenAI to help transform the CX journey, offering meaningful value creation for customers, as well as the businesses that serve them.” TELUS International Inc. (TIXT) CEO, Jeffrey Puritt

Residential REITs will be an active contributor to solving Canada’s housing shortage

“Our development pipeline is important to us, and we remain committed to contribute to the solution for Canada's housing shortage by introducing much needed housing suites to the market. Nevertheless, we are truly aware of the persistent challenges we face, including rising hard and soft costs, along with constraints in financing. We are proactively examining a range of financing alternatives, including MLI Select and RCFI. We will continue to exercise prudence in our development opportunities RMM with their broader capital allocation strategy.” - InterRent Real Estate Investment Trust (IIP.UN) CEO, Bradley Cutsey

Data analytics is a growing aspect to the commercial real estate industry which is displaying growth even amid low transaction levels

“Our consolidated revenue experienced a modest increase over last year. Analytics continues to exhibit steady growth even as we proceed through one of the slowest commercial real estate transaction levels in over a decade.” – Altus Group Limited (AIF) CFO, Pawan Chhabra

Performance in the forestry products industry will be closely tied to the housing market and should benefit from increased housing starts and repair/remodel activity

“However, inflationary pressures have begun to show signs of easing, and the consensus forecast for U.S. housing starts has risen to approximately 1.42 million starts in 2023. We remain confident that the stability of the Northeastern forestry sector combined with the long-term demand for new homes and repair and remodel activity will continue to support the demand for our products.” - Acadian Timber Corp. (ADN) CEO, Adam Sheparski

The water solutions industry has a competitive advantage to capitalize on long-term trends of health & wellness, and sustainability

“Our long-term growth targets are driven by the connectivity of water dispensers to our water solutions as well as consumer tailwinds, such as the focus on health and wellness and concerns about the aging water infrastructure. We have a healthy balance sheet, a compelling long-term growth outlook and an attractive margin profile.” - Primo Water Corporation (PRMW) CEO, Thomas Harrington

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Corporate

 Reinvesting cash flows is typically a positive development for small/mid cap companies looking to create sustained growth

“Our revenue growth continues to outpace our EBITDA growth due to the following 2 reasons: One, we continue to reinvest any excess cash flow back into the business for growth. This is most demonstrated in the case of our U.S. digital healthcare businesses, Circle and WISP, who have had strong top line growth but who have both gone through a period of heavy reinvestment over the past few quarters.” - WELL Health Technologies Corp. (WELL) CEO, Hamed Shahbazi

Companies with longer sales conversion cycles need to be proactive to expand relationships with existing customers

“And while sales cycles remain elongated, our global sales team continues to acquire new logos. For example, during the third quarter, we won new business with the largest food ordering and delivery company in the U.S., a luxury fashion retailer and a well-known property and casualty insurance company in the U.S. Within our existing client base, we expanded engagements with a leading Canadian bank, the world's largest technology company by revenue, a leading ride sharing and food delivery provider, and the world's leading short-form video platform. We also continue to successfully expand volumes with now our second largest client, Google.” - TELUS International Inc. (TIXT) CEO, Jeffrey Puritt

Despite challenging economic times, businesses are continuing to give back to communities and displaying commitment to ESG initiatives

“We are excited to highlight some remarkable sustainability milestones from the quarter. In September, our annual Mike McCann Charity Golf Tournament took place, bringing together hundreds of support of partners from various organizations. This event successfully raised an incredible $1.67 million, bringing our cumulative total to $8.2 million since the inception of the tournament… All proceeds from this event will be directed to support various charities within our communities, including the Boys & Girls Club, Habitat for Humanity and Shepherd's of Good Hope, just to name a few. For all of those who joined us at the event, we once again extend our heartfelt gratitude for your support and generosity.” - InterRent Real Estate Investment Trust (IIP.UN) CFO, Curt Millar

Companies continue to shift to cloud focussed technology offerings which benefit both the users and firms

“Our ongoing transition to ARGUS Cloud is tracking to plan. We ended the quarter with 72% of our ARGUS Enterprise users contracted on the cloud, a steady improvement from 55% a year ago. The adoption percentage will move in step functions as several major clients convert to cloud in line with the termination date of their existing contracts. The cloud conversion should be substantially complete near the end of fiscal 2024. Turning to new bookings. This metric captures incremental new business growth.” – Altus Group Limited (AIF) CEO, Jim Hannon

Companies are seeking opportunities to monetize their carbon credits despite the market for carbon credit sales slowing down

“A few comments on our carbon credit project. As we noted last quarter, the first 770,000 carbon credits associated with the project were registered in the American Carbon Registry on June 8, under the name, Anew - Katahdin Forestry. The team is currently working on the second reporting period, which is expected to produce approximately 215,000 credits, with the third reporting period credits expected to be developed later in fiscal 2024, resulting in approximately 215,000 additional credits. We are in regular contact with our third-party developer and understand that volumes of carbon credit sales have slowed somewhat over the last couple of quarters as a result of a number of factors. However, pricing for voluntary improved forest management credits appears to be stable, which we expect to bode well for a project like Acadian's. And as buyers gravitate toward quality, we remain optimistic with regards to the monetization of the first 770,000 credits.” - Acadian Timber Corp. (ADN) CEO, Adam Sheparski

Divestitures can be an effective way for companies to improve fundamentally and drive shareholder returns

“The transaction was a result of a proactive board-led process that resulted in an agreement that offers an attractive premium valuation for the businesses sold. It enables us to focus on the North American market where we have leadership, scale and a significant addressable customer opportunity. The proceeds will be used to drive organic growth, reduce leverage, accelerate Water Direct tuck-ins, pursue opportunities in water adjacencies and return capital to shareowners via share repurchases. Highlights of the transaction include up to $575 million all-cash purchase price for a significant portion of our international businesses, unlocking substantial shareowner value. An attractive premium valuation multiple of approximately 11x trailing 12 months Q2 adjusted EBITDA. Upon closing the transaction, we intend to repay the outstanding balance of our cash flow revolver with a long-term goal of sustaining net leverage under 2.5x adjusted EBITDA. In addition, upon closing, the Board plans to authorize an incremental $25 million share repurchase program.” - Primo Water Corporation (PRMW) CEO, Thomas Harrington

Companies mentioned:

WELL Health Technologies Corp. (WELL)

Q3 Revenue Growth: 40.2% |  Q3 EPS Growth: N/A

TELUS International Inc. (TIXT)

Q3 Revenue Growth: 7.8%  |  Q3 EPS Growth: -86.4%

InterRent Real Estate Investment Trust (IIP.UN)

Q3 Revenue Growth: 8.8%  |  Q3 EPS Growth: N/A

Altus Group Limited (AIF)

Q3 Revenue Growth: 4.2%  |  Q3 EPS Growth: -86.7%

Acadian Timber Corp. (ADN) 

Q3 Revenue Growth: 12.7%  |  Q3 EPS Growth: 30.4%

Primo Water Corporation (PRMW)

Q3 Revenue Growth: 6.4%  |  Q3 EPS Growth: 2497%

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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