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 applying Artificial Intelligence to be more efficient, as well as executives’ view on how interest rates affect their capital market activities and the demand for their product/ services in the near term.

Macro

The strong capital market leads to a solid merger and acquisition pipeline for acquisitive companies

“In respect to M&A, our expectation is to be very robust on that in the next little while. Our pipeline is really strong. We have a lot of activity going on in the M&A perspective with some of that being on the high end of the ARR side. So we're excited about that. We're excited about getting to the next phase of growth with M&A when positioning our organization to be able to absorb some of these larger acquisitions. So we are starting to make investments into our -- more into our corporate infrastructures, our integration methodology, so that we're ready for these in a concrete fashion.” – Vitalhub Corp. (VHI) CFO, Brian Goffenberg

An increase in unemployment levels forces consumers to cut back on discretionary spending

“ Meanwhile, in Canada, while strong, there are some differences in the broad economy compared to the U.S. While still low from a historical perspective, Canada's unemployment levels increased in March to over 6%, the highest level in more than 2 years. Furthermore, we have observed that consumers are cutting back on spending as demonstrated by the 0 growth in retail sales in the first quarter. Notwithstanding the macroeconomic backdrop, Fora continues to experience improving credit performance as a result of the ongoing refinement of our AI underwriting models.” – Propel Holdings Inc. (PRL) CEO, Clive Kinross

Sales across the restaurant industry have been slowing for a few quarters due to weak consumer spending…

“Before I shift to our segment results, I'd like to address the consumer environment. As we've all seen, sales across the restaurant industry have been slowing for a few quarters. In our own data, we've seen consumers become a bit more sensitive to price, resulting in moderating check growth. This is why driving traffic is so important, and why I'm so pleased to see our brands deliver better traffic than most of the industry this past quarter.” – Restaurant Brands International Inc. (QSR) CFO, Joshua Kobza

…and a deceleration in pricing in Western markets

“For the first quarter, International comparable sales were 4.2% and net restaurant growth was 8.4%, driving system-wide sales growth of 11.6%. Positive results in markets such as France, Brazil, Mexico, Australia and Japan were partially offset by the softer consumer backdrop in China, deceleration in pricing in many Western -- markets in Western Europe and the conflict in the Middle East.” – Restaurant Brands International Inc. (QSR) CFO, Joshua Kobza 

Although executives believe the tightening phase of the rate cycle is complete, the number of rate cuts is still quite uncertain

“Turning to the credit environment. The impact of higher rates is increasingly weighing on consumers and to a lesser extent, our commercial and small business clients. Although we believe the monetary tightening phase of the rate cycle in Canada is now complete, our prior expectation for multiple rate cuts in the back half of the calendar year feels less certain. The reality of a higher for longer rate scenario will naturally result in a continuation of elevated credit provision in our retail portfolios, keeping us at the higher end of our 2024 PCL outlook of 55 basis points.” – The Bank of Nova Scotia (BNS) CEO, Scott Thomson

Cost discipline is driving positive operating leverage for businesses amid a tough macro environment

“Well-managed expenses and productivity gains are driving positive year-to-date operating leverage. And finally, a strong balance sheet, which will allow us to support clients through the cycle while maintaining optionality to invest in our businesses as evidenced by strong liquidity and our 13.2% CET1 capital ratio. In terms of results, the bank reported adjusted earnings of $2.1 billion or $1.58 per share in the quarter. We saw solid revenue growth from both net interest income and fee income, coupled with disciplined expense management. The benefits of our productivity initiatives were particularly notable in our Canadian and International Banking segments, where productivity ratios improved 100 basis points and well over 200 basis points, respectively, over last year. Higher credit provisions reflecting the uncertain macroeconomic environment and the impact of sustained higher interest rates on certain client segments impacted profitability.” – The Bank of Nova Scotia (BNS) CEO, Scott Thomson

Industry

Annual recurring revenue and gross margin are key metrics to evaluate software businesses

“Annual recurring revenue, or ARR, of which we formally refer to as annual contract value reached $47.8 million as of March 31, 2024, up from $44.6 million at the end of December 2023, marking a sequential increase of 7.2%. A substantial portion of this growth, $1.5 million or approximately 3.4% of the total ARR and translating to an annualized growth rate of 13.6% was organic, underscoring our commitment to sustained growth through enhancements in our core service offerings. Gross margin on total revenue for Q1 2024 was 81% compared to 80% in the same period last year. This improvement is primarily attributable to an increase in high-margin maintenance and support revenues, which represents a larger share of our overall revenue mix. Recurring revenue constituted 82% of total revenue this quarter, maintaining a consistent level with Q1 2023, highlighting our strong focus on sustained revenue streams.” – Vitalhub Corp. (VHI) CFO, Brian Goffenberg

Artificial Intelligence continues to demonstrate broad applications across industries

 “The year-over-year decrease is a result of, firstly, the ongoing strong credit performance driven by the effectiveness of our proprietary AI-driven underwriting and our ability to continue moving up the credit spectrum. Secondly, a relatively more normalized U.S. tax season and thirdly, continued consumer resiliency in addition to wage growth, keeping up with inflation. I would further highlight that the provision for loan losses and other liabilities as a percentage of revenue in Q1 was the lowest since Q2 of 2021, a period impacted by government support payments issued to individuals related to COVID-19. We are very proud of our credit performance.” – Propel Holdings Inc. (PRL) CFO, Sheldon Saidakovsky

Driving traffic growth is critical in the restaurant industry

“We're proud of the hard work our teams and franchisees are doing to deliver outstanding product quality and service to guests every day at a great value. That's what brings guests back and will be the driver of sales and traffic growth today and into the future. We're also making progress towards improving convenience.” – Restaurant Brands International Inc. (QSR) CFO, Joshua Kobza

Conservative banks are expensing higher credit provisions due to the impact of sustained high interest rates

“In terms of results, the bank reported adjusted earnings of $2.1 billion or $1.58 per share in the quarter. We saw solid revenue growth from both net interest income and fee income, coupled with disciplined expense management. The benefits of our productivity initiatives were particularly notable in our Canadian and International Banking segments, where productivity ratios improved 100 basis points and well over 200 basis points, respectively, over last year. Higher credit provisions reflecting the uncertain macroeconomic environment and the impact of sustained higher interest rates on certain client segments impacted profitability.” – The Bank of Nova Scotia (BNS) CEO, Scott Thomson

A weak freight environment leads to softer volumes across the industry…

 “Well, thank you, operator, and welcome, everyone, to today's call. Our results released yesterday after the close showed continued performance to start the new year in the context of the particularly weak freight environment. Our self-help opportunities, along with the continued hard work of our many talented team members have again helped TFI International deliver solid performance. Especially during weaker freight cycles, we sharpen our focus on the long-held operating principle that we -- that have helped TFI expand rapidly over the years through organic growth and very strategic M&A while always maintaining a strong financial foundation through our emphasis on profitability and cash flow. We then use our excess cash to intelligently invest and return excess capital to shareholders when possible.” – TFI International Inc. (TFII) CEO, Alain Bedard

…, which puts tremendous pressure on the industry’s profitability

“There remains much work to do on cost, all while being only in the early innings of our service-driven sustainable top line improvement program. With that overview, let's take a closer look at each of our four business segments, P&C now represents 6% of our segment revenue before fuel surcharge. As you know, this market is experiencing softer volume across the industry and our revenue before fuel surcharge was down 8% driven primarily by our lower weight per shipment and slightly fewer shipments.” – TFI International Inc. (TFII) CEO, Alain Bedard

Corporate

Streamline operations and realizing cost synergies are essential levers for acquisitive businesses

“This improvement was largely driven by an increase in recurring revenues, which rose to $12.5 million in Q1 '24 from $10 million in Q1 '23. This revenue growth combined with our persistent efforts to streamline operations and realize cost synergies has significantly bolstered our adjusted EBITDA margins. Cash flow from operations before changes in working capital for Q1 '24 was $2.9 million compared to $1.5 million for the same period last year, representing an improvement of approximately 98%. This significant increase highlights in our advanced operational efficiency and robust revenue performance. Cash on hand at March 31, '24 was $33.3 million compared to $33.5 million at the end of '23.” – Vitalhub Corp. (VHI) CFO, Brian Goffenberg

Niche consumer lenders continue to grow loan volumes with prudent underwriting standards

 “While we and our bank partners are continuing to maintain a prudent underwriting posture, we will also continue to originate record loan volumes with a higher proportion of new customers relative to last year, particularly from the higher-yielding segments of the portfolio. There is still a large runway in front of our existing brands in the U.S., and they continue to account for the majority of our overall origination volume. Time and again, we hear from our U.S. customers that we and our bank partners offer some of the most competitive products in the market. In fact, our Net Promoter Score, which is a score that measures how likely a customer is to recommend our products, have seen record highs this past year across many of our products.” – Propel Holdings Inc. (PRL) CEO, Clive Kinross

Cost discipline is driving positive operating leverage for businesses amid a tough macro environment

“Well-managed expenses and productivity gains are driving positive year-to-date operating leverage. And finally, a strong balance sheet, which will allow us to support clients through the cycle while maintaining optionality to invest in our businesses as evidenced by strong liquidity and our 13.2% CET1 capital ratio. In terms of results, the bank reported adjusted earnings of $2.1 billion or $1.58 per share in the quarter. We saw solid revenue growth from both net interest income and fee income, coupled with disciplined expense management. The benefits of our productivity initiatives were particularly notable in our Canadian and International Banking segments, where productivity ratios improved 100 basis points and well over 200 basis points, respectively, over last year. Higher credit provisions reflecting the uncertain macroeconomic environment and the impact of sustained higher interest rates on certain client segments impacted profitability.” – The Bank of Nova Scotia (BNS) CEO, Scott Thomson

A strong balance sheet and healthy liquidity are highly important for a cyclical industry

“Moving right along, I'll provide an update on our balance sheet and liquidity. For starters, we generated free cash flow of $137 million during the first quarter. Adding to our liquidity near the end of March, we closed a $500 million term loan at an attractive rate with tranches due March 25 to March 27. We ended the quarter with a funded debt-to-EBITDA ratio of 1.6. This very solid financial foundation is a core part of our strategy along for smart investment cycle in and cycle out.” – TFI International Inc. (TFII) CEO, Alain Bedard

Favourable commodity prices lead to an acceleration in revenue growth and margin expansion…
“We are off to a very good start with revenues of $107.4 million, which is $27.1 million or 34% more than the first quarter ended a year ago. Gross margin as a percentage of revenues at 29.2% is up from the 16.8% margin for the quarter ended April 30, 2023, while adjusted EBITDA at $23.1 million was $13.1 million or 130% higher than the first quarter ended last year.” – ADF Group Inc. (DRX) CFO, Jean-François Boursier

…and healthy backlog in the near term

“As I just mentioned, liquidities are, as of today, back to our January 31 level and even exceeding these levels. As such, the corporation believes that the available cash exceeds the amount required to support the growth and execution of our order backlog on end as at April 2024 and to meet our financial covenants plan for fiscal 2025.” – ADF Group Inc. (DRX) CFO, Jean-François Boursier

Companies with disciplined capital allocation tend to outperform over time

“Given ADF's favorable financial position, the size of our order backlog and our cash flow generation profile, the Board of Directors evaluated the options available to the corporation with respect to the use of excess cash to create value for our shareholders, including dividends and share repurchases and opportunities to finance certain projects that could provide additional long-term competitive advantages and allow the corporation to benefit from strong payment discounts negotiated with its suppliers. With this in mind, the corporation intends to enter into private agreements within 30 days from tomorrow with Jean, Pierre and Marise Paschini, members of the Board of Directors and corporation management team, through their respective holding companies to purchase port insulation up to a maximum of 3 million shares of the corporation had a price to be agreed upon the parties the minimum discount of 3% on the price of the last independent transaction immediately before the proposed repurchase.” – ADF Group Inc. (DRX) CFO, Jean-François Boursier

Companies mentioned:

Vitalhub Corp. (VHI)

Q1 Revenue Growth: 21.1% |  Q3 EPS Growth: 707%

Propel Holdings Inc. (PRL)

Q1 Revenue Growth: 47.1%  |  Q4 EPS Growth: 75.0%

Restaurant Brands International Inc. (QSR)

Q1 Revenue Growth: 9.4%  |  Q2 EPS Growth: 19.3%

The Bank of Nova Scotia (BNS)

Q2 Revenue Growth: 1.9%  |  Q1 EPS Growth: -6.3%

TFI International Inc. (TFII)

Q1 Revenue Growth: 1.1%  |  Q4 EPS Growth: -14.2%

ADF Group Inc. (DRX)

Q1 Revenue Growth: 33.8%  |  Q4 EPS Growth: 184.2%

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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