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 foreign currency headwinds, layoffs and companies' hedges against inflation and supply chain disruption and how those affect company financials, and executives’ views on the pricing power and nature of their businesses in tough times.

Macro

Macro challenges such as inflation and supply chain constraints have moderated

“We're very pleased to report very good results for the quarter and year-to-date in an environment where the challenges of inflation, supply chain issues and labor shortages have been moderated. This was very evident in our monthly sequential results with September coming in well ahead of schedule. Our CFO, Will Kalutycz, will provide you with some color on our results later on in the presentation. Normality for Premium Brands and its ecosystem, both great food companies means a return to the relentless pursuit of product and process innovation, capacity expansions to satisfy increase in demand and, of course, strategic and opportunistic acquisitions that complement our portfolio for the exceptional businesses. Clearwater Seafoods had a very good quarter and continues to perform well ahead of plan. ” – Premium Brands Holdings Corporation (PBH) CEO, George Paleologou

Due to inflation and supply chain disruption hedges, companies’ inventories are at record levels

“Our inventory levels continue to be at record highs. They've been driven by hedging strategies by our different businesses in this incredibly inflationary environment as well as some hedging against supply chain disruptions. So our inventory at the end of the quarter was $821 million. This was down from the second quarter of $836 million, which was about a $15 million increase.” – Premium Brands Holdings Corporation (PBH) CFO, Will Kalutycz

A strong US dollar is an operational headwind for international companies

“Starting with our fourth quarter results. Consolidated revenue increased 3% to $533 million compared to $518 million. Excluding the impact of foreign exchange, normalized revenue increased 14% for the quarter. As Tom mentioned earlier, normalized revenue excludes the revenue of the exited North America single-use bottled water retail business and the exit of our business in Russia. Reported revenue for the year 2021 includes $142.1 million of revenue associated with our single-use business and $13.6 million of revenue associated with our Russia business.” – Primo Water Corporation (PRMW) CFO, David Hass

Disciplined expansion and an appropriate recruitment pace help companies avoid layoffs  

“According to layoffs.fyi, a website created in 2020 to track tech layoffs globally, both to 160,000 workers from 1,040 companies lost their jobs in 2022, with more than half of them incurring in November and December and nearly 98,000 individuals have been laid off to date in 2023. Although many external factors, including a rapid series of interest rate hikes by central banks have contributed to these job losses, TI's thoughtful and agile approach to recruitment, intentionally adjusting the pace of our new hires in line with our cost optimization efforts and near-term demand dynamics has helped us avoid over hiring and minimize these difficult situations. Our intentional and sustained investment in upskilling and cross-training our team members has also helped in this regard. In 2022 alone, our team members completed or enrolled in nearly 16,000 courses on Udemy, an online learning platform featuring a curated collection of business and technical courses.” – TELUS International Inc. (TIXT) CEO, Jeffrey Puritt

High interest rates to tamper inflation drives down housing starts down meaningfully…

“Turning to our outlook for 2023. We are all well-aware of the interest rate hikes in both the U.S. and Canada during 2022 to try and curb inflation, which has slowed housing sales and price growth. Our forecast in the U.S. housing starts have been lowered to approximately 1.24 million starts in 2023 as compared to 1.55 million in 2022.” – Acadian Timber Corp. (ADN) CEO, Adam Sheparski

…long-term housing demand still remains intact

“These estimates are still consistent with pre-pandemic historical levels. Accordingly, we remain confident that the stability of the Northeast forestry sector, combined with the long-term demand for new homes and repair and remodel activity will support the demand for and pricing of our products.” – Acadian Timber Corp. (ADN) CEO, Adam Sheparski

Industry

Software offering through the cloud is still the future of growth

“And we also were successful in converting some of our large on-premise customers to our private cloud and multi-tenant cloud products, thereby mitigating churn and improving recurring revenue. Offering choice this quarter and managing this complexity did translate positively to our revenue results in the quarter. The second important aspect of our strategy is around our go-to-market focus on what we call micro vertical business segments.” – Enghouse Systems Limited (ENGH) Global President, Vince Mifsud

Competitors with aggressive growth strategies experienced business restructuring and large layoffs

“Although the CX market is growing, we are coming up against some of our SaaS vendors becoming more aggressive in terms of product and service pricing, which makes it more difficult for us at times to retain customers or sign new projects, new customers at our target gross profit margins. During Q4, a number of our competitors in the CX market announced the discontinuation of their on-premise products, large personnel layoffs, changes in leadership and other restructuring measures.” – Enghouse Systems Limited (ENGH) Global President, Vince Mifsud

Macroeconomic uncertainty has minimal impact on healthcare demand

“The company continues to witness healthy growth in our smallest business segments, including both on and off-line care channels with minimal impact due to recession, inflation, supply chain or other macroeconomics effects currently felt by companies and other industries and around the globe. Q3 2022 was a tremendous quarter for the company. And before I even get further into the details of the quarter results, I'll provide some background on the company for the benefit of new investors and listeners on this call. WELL provides care and support for the care providers themselves that serve patients. Our business model is very simple. ” – Well Health Technologies Corp. (WELL) CEO, Hamed Shahbazi

Great businesses raise prices without losing volumes

“Regarding price elasticity, customer trends remain consistent with prior quarters. Customer feedback related to the higher pricing has been minimal as we track this through a combination of metrics, including call center activity, customer retention and customer growth. From a digital perspective, we continue to see positive responses from the update of our mobile app, MyWater+ and its ease of use for our customers. Our digital focus in 2023 is centered on new water customer acquisitions through costcowater.com as one example, water dispenser sales and connectivity to our water solutions. We continue to invest in best-in-class digital solutions for our customers.” – Primo Water Corporation (PRMW) CEO, Tom Harrington

The water providing industry is highly recurring, predictable, and resilient against a tough macro environment

“Thanks, David. We are pleased with last year's results and are excited about our future. We are one of the only pure-play water platforms that benefit from a predictable and resilient revenue base, well balanced with the residential and B2B customer base. Our high single-digit long-term growth targets are driven by the connectivity of water dispensers to our water solutions with supporting consumer tailwinds to include focus on health and wellness and concerns with aging global water infrastructure. We have a healthy balance sheet, a compelling long-term growth outlook and an attractive margin profile that has risen to more than 20% in the last 2 quarters.” – Primo Water Corporation (PRMW) CEO, Tom Harrington

Research and development investments (R&D) are crucial to drive efficiency

“Through our TELUS International iLabs, our R&D initiative launched in 2020 to design and build disruptive solutions for customer interactions. We have long been developing in-house chatbot solutions, leveraging natural language processing, speech recognition and semantic understanding among other tools. The possibilities presented by ChatGPT and similar alternatives are seemingly endless in how we can leverage generative AI to design and build better bots that are more conversational, can better answer follow-up questions and admit mistakes and even reject inappropriate requests.” – TELUS International Inc. (TIXT) CEO, Jeffrey Puritt

Despite the volatile lumber market, demand for softwood products continued to strengthen due to regional demand

“As a reminder, demand for our softwood sawlogs is driven primarily by regional dynamics. And although softwood lumber pricing decreased from recent highs to more normalized levels, demand for softwood sawlogs remained stable and pricing increased in the regions in which Acadian operates. Demand for softwood pulpwood continued to strengthen and both volumes and pricing increased over the prior year. Similar to what we experienced with softwood sawlogs, and despite volatile hardwood lumber markets in the second half of the year, demand and pricing for Acadian hardwood sawlogs also continued to increase.” – Acadian Timber Corp. (ADN) CEO, Adam Sheparski

Corporate

Software is a highly recurring, predictable business that could generate positive cash flows even during tough economic conditions

“We have consistently demonstrated even during adverse economic conditions that we can generate positive operating cash flows and augment our cash reserves to be deployed for acquisitions and further investment in our business. We believe that our financial discipline, product approach and commitment to customers, partners and employees will continue to drive long-term shareholder value” – Enghouse Systems Limited (ENGH) Vice President - Finance, Rob Medved

Inorganic growth through acquisitions is a main contributor to the growth of mature companies

“Some highlights for the quarter include the following: WELL achieved 47% year-over-year revenue growth in the third quarter compared to the third quarter in the prior year; company's growth was driven by acquisitions made over the past year as well as solid year-over-year organic growth of approximately 18%; WELL also achieved record patient engagements in the quarter with over 1.25 million combined omnichannel, diagnostic and asynchronous patient interactions, representing approximately 5 million annual patient interactions. This demonstrates our continued leadership position as the preeminent end-to-end healthcare company in Canada, while our U.S. businesses continue to exhibit industry-leading growth metrics. Our Virtual Services revenues were extremely strong this quarter, increasing 191% overall as compared to the previous year and 75% organically. Virtual Services are now -- as a category, our largest line of business at 36% of total revenue, larger than CRH and also larger than our Canadian Clinics business, both of which are also growing and performing very well. ” – Well Health Technologies Corp. (WELL) CEO, Hamed Shahbazi

Shareholders’ value creation should be measured on a per-share basis

“WELL also has substantially increased its revenue and EBITDA on a per share basis, indicating that the company's capital allocation and organic growth program is delivering real value to shareholders. For instance, WELL's revenue per share went from $0.49 per share in Q3 2021 to $0.64 per share in Q3 2022 on an undiluted basis. Meanwhile, adjusted EBITDA attributable to WELL's shareholders per share increased from $0.08 per share in Q3 2021 to $0.09 per share in Q3 2022, reflecting an 11% increase and these are important metric. Lastly, I will provide an update on our M&A activity during the third quarter. In the first half of the year in 2022, our M&A program slowed down considerably as compared to last year due to the volatility in the capital markets, which caused public and private valuations to drop. ” – Well Health Technologies Corp. (WELL) CFO, Eva Fong

Growth capital expenditures should be deployed based on an internal rate of return

“We differentiate project capital expenditures from maintenance capital expenditures by the fact that these are all projects that are expected to generate a 15% internal rate of return after tax unlevered, maintenance capital expenditures are those that don't meet that test. So during the quarter, we spent $44.1 million on project capital expenditures. And year-to-date in 2022, we spent $125 million. You can see from the chart, virtually all of these are relating to capacity expansions across our many platforms. So lots of growth opportunities ahead, and we continue to invest significantly in the future.” – Premium Brands Holdings Corporation (PBH) CFO, Will Kalutycz

Pulpwood prices increased driven by strong demand although lumber prices went down during that period

“Weighted average selling price, excluding biomass, increased 17% year-over-year, benefiting from strong sawlog prices and improved pulpwood prices driven by strong demand as well as the recovery of elevated fuel costs from our customers. Overall pricing for softwood sawlogs and softwood pulpwood increased 19% and 16%, respectively, compared to the prior year period due to strong demand.” – Acadian Timber Corp. (ADN) CFO, Susan Wood

Companies mentioned:

Enghouse Systems Limited (ENGH)

Q4 Revenue Growth: -4.5% |  Q4 EPS Growth: 24.1%

Well Health Technologies Corp. (WELL)

Q3 Revenue Growth: 46.8%  |  Q3 EPS Growth: -67.2%

Premium Brands Holdings Corporation (PBH)

Q3 Revenue Growth: 21.0%  |  Q3 EPS Growth: -9.4%

Primo Water Corporation (PRMW)

Q4 Revenue Growth: 2.9%  |  Q4 EPS Growth: N/A

TELUS International Inc. (TIXT)

Q4 Revenue Growth: 5.0%  |  Q4 EPS Growth: -2.2%

Acadian Timber Corp. (ADN)

Q4 Revenue Growth: -8.4%  |  Q4 EPS Growth: 233.3%

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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