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 supply chain improvement, potential peak inflation as short-term tailwinds for operational environements, and executives’ views on how they position their balance sheets and come out stronger on the other side of the recovery.
Macro
Near-term macro headwinds are expected to persist until mid 2023
“Supply chain constraints and general macroeconomic factors such as inflation, high interest rates and lingering pandemic concerns have challenged the business in 2022 as well as disrupted historical trends and seasonality patterns and are expected to continue to do so for the near to midterm as we progress into 2023” – Toromont Industries Ltd. (TIH) CEO, Scott Medhurst
The economic situation remains uncertain due to the tight labor market and the move in interest rates
“In conclusion, I would like to say again that I'm very pleased with the performance above the business unit. We are operating in an environment with many challenges and a good deal of uncertainty. But it's related to incredibly tight labor markets, the unprecedented reimaging of office environment and our historic move in interest rates caused economic uncertainty.” – GDI Integrated Facility Services Inc. (GDI) CEO, Claude Bigras
The supply chain improvement is a near-term tailwind for most businesses
“The supply chain issue that impacted their ability to close our jobs earlier in the year have subside and the business is now firing on all cylinders. Ainsworth continues to benefit from a record backlog as they are booking new business as fast as they are billing.” – GDI Integrated Facility Services Inc. (GDI) CEO, Claude Bigras
Although inflation appears to have peaked in most countries…
“The global macro environment in the past year was characterized by several key dynamics driving market uncertainty and volatility, namely elevated levels of inflation and corresponding interest rate increases. Although inflation appears to have peaked in most countries.” – Brookfield Asset Management Ltd. (BAM) CEO, Bruce Flatt
…trends such as deglobalization and skilled labour shortage are still concerning
“It is possible that certain structural dynamics prove harder to abate such as the effects of deglobalization, energy security and a tight supply of skilled labor. This may result in continued near-term volatility and downward pressure on corporate earnings, which have cyclical exposure.” – Brookfield Asset Management Ltd. (BAM) CEO, Bruce Flatt
Geopolitical uncertainties are creating significant cost pressures
“We also started 2022 expecting net input cost inflation of about $275 million year-over-year. The conflict in the Ukraine created additional input cost pressure, particularly in energy, and China's zero COVID policy resulted in lockdowns and further supply chain pressures. These factors drove an additional $290 million of net cost headwinds, primarily energy-related. Despite significant cost volatility through 2022, we were able to slightly improve from our revised $565 million in net input cost from our April Q1 call. We ended at $530 million for the year.” – Magna International Inc. (MG) CEO, Seetarama Kotagiri
Industry
Industrial companies attempt to measure Return on Equity across business cycles
“Overall, our balance sheet remains well positioned to support operational needs and we are prepared to manage challenges related to the economic variables we are all experiencing. We continue to exercise the operational and financial discipline 1 would expect as we evaluate investment opportunities that may develop within this dynamic environment. Toromont targets a return on equity of 18% over our business cycle. Return on equity improved to 23.5% compared to 19.6% for 2021 and exceeds our 5-year average of 19.8%. Return on capital employed was 32.3%, up from 26.6% last year. ” – Toromont Industries Ltd. (TIH) CFO, Michael Stanley McMillan
Higher interest rates create headwinds for mortgage demand…
“We reported consolidated revenues of $38.2 million, net revenue of $9.8 million and an adjusted EBITDA loss of $2.9 million in the first quarter, reflecting ongoing mortgage market headwinds driven by a significantly higher interest rate environment. ” – Real Matters Inc. (REAL) CEO, Brian Lang
…leading to a multi-year low in mortgage applications
“We also ended the first quarter with a cash and cash equivalents balance of $45.1 million. While 30-year mortgage rates declined in the quarter, they were still up over 330 basis points from the first quarter 2022. And weekly mortgage applications as measured by the Mortgage Bankers Association were at a 26-year low at quarter's end.” – Real Matters Inc. (REAL) CEO, Brian Lang
Margin compression exists due to inflationary cost pressures
“Moving on the margins. Excluding accrued insurance recoveries of $26 million recognized in the fourth quarter, adjusted gross margin came in at 29.1%, down a 150 basis points compared to 30.6% last year. The decline was primarily due to higher raw material and manufacturing costs, which more than offset higher net selling prices and favorable product mix.” – Gildan Activewear Inc. (GIL) CFO, Rhodri Harries
Alternative investments are becoming more attractive against the public market’s volatility
“This uncertainty also resulted in volatility within the public markets, which, in many ways, underscore the value of a highly diversified portfolio with exposure to alternative investments. Our business proved its resiliency over the past year. Connor Teskey will speak more about what our strategies are focused on today. But at a high level, we've aligned our business around the dominant global secular trends of digitization, deglobalization, and decarbonization that we believe will require trillions of dollars of investment over the next decade. ” – Brookfield Asset Management Ltd. (BAM) CEO, Bruce Flatt
Semiconductors supply was still in a shortage in 2022
“2022 was another difficult year for the automotive industry and for Magna. The year started with continued supply chain disruptions, most notably the lack of semiconductor chips, which was expected to improve considerably during '22, but instead remain an issue throughout the year.” – Magna International Inc. (MG) CEO, Seetarama Kotagiri
Corporate
Rental equipment bookings from the construction sector were down, which was partially offset by a healthy backlog in other sectors
“Construction bookings were down 60% in the quarter reflecting a strong prior year comparable that included several large orders. However, systems bookings were also down 25%. Higher orders were received in mining up 45%, agriculture up 17% and material handling up 6%. Backlog of $1.1 billion was 4% lower than last year reflecting improved equipment delivery for manufacturers in the latter part of the year. Approximately 90% of the backlog is expected to be delivered in 2023, but of course is subject to timing differences depending on vendor supply, customer activity and delivery schedules.” – Toromont Industries Ltd. (TIH) CFO, Michael Stanley McMillan
Cost control and conserving cash are critical to getting through downturns
“Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $45.1 million at December 31, 2022. As we noted during our fourth quarter and year-end conference call in November, we have paused activity on our NCIB in favor of conserving cash in this market environment. ” – Real Matters Inc. (REAL) CFO, Bill Herman
Active capital returns while maintaining strong balance sheets create long-term shareholders’ value
“Further, we repurchased approximately 1.2 million common shares in the fourth quarter for approximately $37 million, bringing our share repurchases for the full year under 2 buyback programs to 13.1 million shares or 7% of our float at an overall costs of $444 million. We did this while maintaining a strong balance sheet with our net debt on January 1, totaling $874 million and our net debt to adjusted EBITDA leverage ratio at 1.1x at the lower end of our target range of 1x to 2x. This brings me to our update on our GSG strategy and our outlook for the year ahead.” – Gildan Activewear Inc. (GIL) CFO, Rhodri Harries
Stable and growing free cash flow generation, high-margin and inflation-protected assets are key to outperformance throughout cycles
“These trends will be extremely beneficial for our market-leading infrastructure, renewables and transition strategies. As a reminder, we own 1 of the largest portfolios of inflation protected assets in the world. Our underlying businesses are essential in nature and therefore, continue to generate stable and growing cash flows throughout cycles. These assets are highly cash generative with high margins and are largely inflation protected, hence, are very attractive to investors through market cycles. These factors, combined with our focus on investing in high-quality assets and proactive asset management have continued to strong performance in our underlying businesses despite broader market uncertainty.” – Brookfield Asset Management Ltd. (BAM) CEO, Bruce Flatt
Dry powder allows investors to achieve attractive risk-adjusted returns amid market dislocation
“Thank you, Bruce, and good morning, everyone. As Bruce noted, the broader markets remain more volatile. However, dislocation in financial markets has historically created some of the most attractive risk-adjusted investment opportunities for those investors who have dry powder to put to work. With approximately $90 billion of undrawn capital across our funds, it is shaping up to be a very interesting and active year from an investment perspective across the business. On today's call, we want to focus on some of the themes we are seeing within both the renewables and transition platform and also the private credit sector.” – Brookfield Asset Management Ltd. (BAM) President, Connor Teskey
Demand cyclicality combined with growth capital investment requirements hamper short-term free cash flow
We are entering a period of somewhat cyclical capital investment to support growth, similar to what we experienced in 2016 to 2018. We expect capital spending to be approximately $2.4 billion for 2023 and to modestly decline from these levels out to 2025. Compared to our 2022 level, about $1 billion of our incremental capital spending in the '23 to '25 period relates to our upcoming sales growth in megatrend areas during and beyond our outlook period. This includes almost $500 million in capital in 2023 alone. Based on our current plans, CapEx to sales will reach a peak this year before beginning to decline again. The global and industry challenges have hampered our free cash flow over the past few years. And based on our increased capital spending in the near-term, will impact free cash flow. However, based on our current plans, we expect significantly improving free cash flow throughout our outlook period.
Companies mentioned:
Toromont Industries Ltd. (TIH)
Q4 Revenue Growth: 20.3% | Q4 EPS Growth: 52.0%
Q1 Revenue Growth: -64.6% | Q1 EPS Growth: -310.8%
GDI Integrated Facility Services Inc. (GDI)
Q3 Revenue Growth: 38.0% | Q3 EPS Growth: 12.6%
Q4 Revenue Growth: -8.2% | Q4 EPS Growth: -48.4%
Brookfield Asset Management Ltd. (BAM)
Q4 Revenue Growth: N/A | Q4 EPS Growth: N/A
Q4 Revenue Growth: 5.0% | Q4 EPS Growth: -78.9%
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,
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