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 some companies that are trying to get fit in term of cost control and executives’ view on how the quality of the businesses matter in tough times, as well as some companies with secular tailwind that continue to do well despite a challenging macro environment.

Macro

Artificial intelligence initiatives help corporations be more efficient over the long term

“In Singapore, we launched a new indexed universal life product, providing high net worth clients a dynamic balance between long-term protection and growth and the flexibility to customize premium payments and investment allocations. This product has been well received by the market. We're doing more to think and act like a digital company, harnessing the power of Generative AI. We're testing and learning with several Gen AI experiments across the organization, balancing innovation while managing risk. This quarter, we launched a new Gen AI-powered tool that helps developers write and test code more efficiently.” – Sun Life Financial Inc. (SLF) CEO, Kevin Strain

Macro environment eases as interest rates are expected to go down

“Today, the macro environment feels better. Short-term interest rates have crested globally and are expected to go down. As capital markets regain strength, we anticipate transaction activity to pick up. As a result, it looks like 2024 and 2025 will be good years for our business.

We recognize that geopolitics can lead to heightened volatility, but this does seem to have become the new normal. The most important thing for shareholders to remember is that owning businesses and assets that form the backbone of the global economy, combined with maintaining access to multiple sources of capital, is always a safe place to be. This has proven over many decades. And in our view, this has not changed.” – Brookfield Corporation (BN) CEO, Bruce Flatt

Challenging supply chain conditions created demands for adjacent solutions

“This added time and cost and reduced available capacity. Shippers scrambled to secure space on ocean vessels for their shipments and readjust their supply chain for delays. Carriers adjusted prices, added surcharges and reallocated to vessels capable of making the Cape journey. This has created demand for many Descartes solutions such as our ocean rate management, booking and tracking solutions, but has also impacted demand for competitive intelligence and compliance screening for new trading relationships. Second, additional sanctioned parties.” – The Descartes Systems Group Inc. (DSG) CEO, Edward Ryan

Geopolitical sanctions present difficulties in compliance for businesses

“This past quarter has once again seen additional international sanctions imposed primarily as a result of the war in Ukraine, activities in Israel and Gaza and on the specific companies using forced labor. Even after our fiscal year ended in February, the U.S. announced 500 additional sanctions against Russia as a consequence of the ongoing war in Ukraine and the death of Alexei Navalny. An expanding world of sanctions presents difficult compliance challenges for our customers, so we've had to be on top of updating lists and able to meet the increased demand for sanctioned parties list.” – The Descartes Systems Group Inc. (DSG) CEO, Edward Ryan

High cost of capital could negatively affect company’s margin in the near term

“Looking ahead, we expect continued profitability for the business. External factors like the continued higher cost of capital and increased supply from the utility pole industry bear undetermined effects, which could impact our EBITDA margin. In light of this, we remain confident in attaining our 16% objective through 2025. We are also optimistic that the proactive planning and execution of our business strategy will enable us to continue returning capital to shareholders, having already returned almost 40% of the minimum $500 million objective outlined in our guidance. We are focused on maintaining our leadership position in North America and that requires us to evolve with the needs of our customers.” – Stella-Jones Inc. (SJ) CEO, Eric Vachon

Commodity-sensitive companies should manage their exposure to price volatility prudent

“As Eric stated at the top of the call, Stella-Jones delivered another year of solid financial performance, marked by increased sales and a record improvement in profitability. Sales for the year were $3.3 billion, up $254 million from last year. This increase was driven by the 13% organic sales growth of our infrastructure products. All of our infrastructure products benefited from favorable pricing dynamics while residential lumber and logs and lumber sales pulled back due to the decrease in the market price of lumber.” – Stella-Jones Inc. (SJ) CFO, Silvana Travaglini

Industry

High return on equity and a strong capital position are crucial for financial companies during the downturn

“Our strong results were broad-based with strength in Canada, U.S. and SLC Management. Underlying ROE of 18.4% this quarter is above our medium-term financial objective of 18% plus, reflecting our strong earnings and disciplined financial management. Further, we maintained a strong capital position with an SLF LICAT ratio of 149%. Our results reflect exceptional individual protection sales and good momentum in our Group Health and Protection businesses in the fourth quarter. Strong Group Health and Protection sales were driven by both our Canadian and U.S. Group businesses. In Canada, sales were up 63% year-over-year, largely due to higher large case sales, and in the U.S., both Dental and Health and Risk Solutions sales were strong. This quarter, DentaQuest was awarded two new Medicaid dental benefits contracts in 2 states and commercial dental sales increased 55% over the prior year.” – Sun Life Financial Inc. (SLF) CEO, Kevin Strain

Deglobalization, decarbonization and digitalization are the three key themes of alternative asset managers

“By building a leading global development platform for data centers, renewable power and combined with our large global real estate business, we are positioned to meet the exponentially growing needs for the largest and fastest-growing companies in the world.

I would note the future will be centered around 3 trends: decarbonization, deglobalization and digitalization, as well as tilted towards the still emerging markets, which have voracious capital needs. As we constantly evolve our focus, we believe the backbone and the global economy will continue to be an excellent place to invest for a very long time. It always just looks a little different.” – Brookfield Corporation (BN) CEO, Bruce Flatt

Being able to manage production volume matching with demand is important for consumer discretionary sector.

“While market conditions, have softened in the second half of fiscal '24, we were proactive and quickly adapted to the new reality. As mentioned in November, we have reduced our production volume in order to lower network inventory. And now, in light of our Q4 results, we are adjusting snowmobile production for next year, and taking a more cautious approach for marine. We are known to be agile, and we never hesitate to reprioritize our investment, to find the right balance between the short, mid, and long-term growth perspective. Looking at our EV plan, we have just launched 2 new electric snowmobile model, and we are looking forward to the upcoming launch of the Can-Am Electric Motorcycle at our dealer event in August. We remain committed to electrifying our product lines, but we have decided to delete some of our EV introduction, and will provide an update in due time.In closing, I remain confident in our future.” – BRP Inc. (DOO) CFO, Sebastien Martel

Government’s infrastructure spending helps businesses stabilize demand for industrial businesses

“For utility poles, we have several of our customers shift to long-term sales commitment to secure supply for their ongoing maintenance program and expansion projects. Utilities and governments, both in Canada and the U.S., have also publicly announced broadband expansion and electrical grid hardening projects. The railway tie product category remains underpinned by steady demand driven by railroad maintenance and our railway tie and industrial products are expected to benefit from important government infrastructure investments and mandates. In addition to the strong long-term fundamentals of our infrastructure businesses, the value-driven dynamics of our residential lumber customer base provide a relative steadiness and positive prospects for this business. Our loyal and dedicated customers recognize Stella-Jones' value-added proposition of premium lumber products, accessories and composite products distribution.” – Stella-Jones Inc. (SJ) CEO, Eric Vachon

Acquisition is a key channel to grow for mature industries

“Our dual growth strategy, leveraging strategic acquisitions and organic growth, largely enabled us to overcome uncertain market conditions and inflationary pressure during the past year. MTY generated system sales growth of 33% year-over-year, largely due to the acquisitions of Barbecue Holdings late in our 2022 fiscal year and Wetzel's Pretzels and Sauce Pizza & Wine early during the 2023 fiscal period. Excluding acquisitions and foreign exchange impact, system sales were up 4% with our Canadian divisions accounting for most of the organic growth. In the fourth quarter, system sales improved 11% to $1.3 billion, while same-store sales dropped 0.9% year-over-year as consumers reigned indiscretionary spending, which affected certain segments of our portfolio.” – MTY Food Group Inc. (MTY) CEO, Eric Lefebvre

Predictable industries could support a higher leveraged balance sheet

The 27% increase was the result of our higher EBITDA as well as lower income taxes paid and improvements to our working capital year-over-year. We are especially pleased with our free cash flow growth given the almost doubled interest payments made during the quarter. In the fourth quarter of 2023, we reimbursed $27.6 million of long-term debt, paid $6.1 million in dividends to our shareholders and repurchased 80,800 shares for a total consideration of $4.2 million on top of paying $12.1 million in interest on our bank facilities. At the end of the quarter, MTY had a very healthy cash position of $58.9 million and long-term debt of $767.4 million, mainly in the form of bank facilities and promissory notes on acquisitions. Our revolving credit facility has an authorized amount of $900 million, of which USD 558 million had been drawn. Finally, our net debt to normalized adjusted EBITDA ratio stood at 2.8x at quarter end. And with that, I thank you for your time, and we'll now open the lines for questions.

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Corporate

International expansion in emerging markets has always been both a risk and an opportunity for companies.

“Our Hong Kong sales growth reflected our diversified mix of high-performing, quality-focused distribution channels, including our broadened broker network and new agency teams focused on Mainland Chinese individuals and our bancassurance partnership with Dah Sing Bank. Canadian individual protection sales were up 23% year-over-year, driven by higher third-party sales. Wealth sales and asset management gross flows were up in the quarter, with the Canadian business up 32% due to higher individual wealth and defined benefit sales. SLC demonstrated strong capital raising, closing the year with $177 billion in fee-earning AUM, up 8% over the prior year. SLC also won the 2023 CIO's Industry Innovation Awards for Private Credit.” – Sun Life Financial Inc. (SLF) CEO, Kevin Strain

Disciplined capital allocation creates long-term shareholder value

“Looking back over the last 20 years, the value of our business has grown at a compound annualized return of 23%. To illustrate, a holder of 1 share started with a split-adjusted value of just over $2.50 at that time. And over the 20 years, assuming dividend reinvestment, the total value is today $145 or 57x the return on capital. We think, though, the best is yet to come. The discount of our trading price to our value also presents an excellent opportunity for us to continue to add value to the company through share buybacks. Accordingly, we plan to accelerate our share repurchases this year and buy an additional $1 billion shares in the open market over the next number of months if prices stay reasonable.” – Brookfield Corporation (BN) CEO, Bruce Flatt

Recurring revenue businesses create the consistency for long-term value creation

“To deliver this consistency, we continue to operate from the following principles. Our long-term plan is for our business to grow adjusted EBITDA 10% to 15% per year. We grow through a combination of organic and inorganic or acquisitions. We take a neutral party approach to building and operating solutions on our Global Logistics Network. We don't favor any particular party.

We run our business for all supply chain participants, connecting shippers, carriers, logistics service providers and customs authorities. When we overperform, we try to reinvest that overperformance back into our business. We focus on recurring revenues and establishing relationships with customers for life. And we thrive on operating a predictable business that allows us forward visibility to our revenues and investment paybacks.” – The Descartes Systems Group Inc. (DSG) CEO, Edward Ryan

Managing a proper inventory level is critical in a slow demand environment

“However, we had an excellent performance in Latin America, driven by the Brazilian and Mexican markets. Given these trends, we maintained a cautious approach entering FY '25. Our priority is to tightly manage network inventory, to protect dealer profitability. Now let's turn to Slide 8 for a Year-Round products. Revenue were up 9%, reaching $1.4 billion in Q4, primarily driven by a favorable product mix, and a return to normal shipment pattern for 3-wheel vehicles. At retail, Can-Am side-by-side had its strongest Q4 ever, being up low 20%, primarily driven by solid growth in the utility category.” – BRP Inc. (DOO) CEO, Jose Boisjoli

…which improve cashflow to support shareholder return

“From a cash perspective, based on the above and following a prioritization exercise of our project portfolio, which led to CapEx optimization, we expect to generate in excess of $750 million of free cash flow for next year. As such, we expect to have the financial flexibility, to continue providing strong return of capital to shareholders, notably as we have announced a 17% increase of our dividend for fiscal '25.To conclude, we have provided a summary of the key drivers bridging our fiscal '24 results, to the midpoint of our fiscal '25 guidance.” – BRP Inc. (DOO) CFO, Sebastien Martel

Digital sales increasingly become a larger portion of restaurants’ revenue

“I'm also encouraged by the positive outcome of the company's increased efforts and usage of data, digital marketing, online ordering and websites during the past year. Our digital sales grew 25% year-over-year to $1 billion in fiscal 2023. Excluding acquisitions and foreign exchange impact, digital sales rose 5%. This is -- there's still a lot of work to do to achieve our objectives, but we continue to take steps to make the customer experience as seamless and engaging as possible so that the growth momentum continues in the future.” – MTY Food Group Inc. (MTY) CEO, Eric Lefebvre

Companies mentioned:

Sun Life Financial Inc. (SLF)

Q4 Revenue Growth: 0% |  Q4 EPS Growth: -35.3%

Q4 Revenue Growth: 1.9%%  |  Q4 EPS Growth: N/A

BRP Inc. (DOO)

Q4 Revenue Growth: -12.5%  |  Q4 EPS Growth: -45.7%

Q4 Revenue Growth: 3.5%  |  Q4 EPS Growth: 62.0%

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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