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 week's Earnings Pulse, we note underlying themes of strength in the labour market, rising natural gas prices impacting financial results, uncertainty in the real estate market, and continued pressure from high inflation.
Macro
There is strength in the labour market
"WSP added 2,200 employees to its headcount since the beginning of the year including 1,700 in the second quarter alone. This speaks to the formidable strength of the WSP brand" - WSP Global (WSP) CEO, Alexandre L'Heureux
… and the tightness in the labour market and supply chain constraints are not negatively impacting all companies
"These actions have resulted in performance that we're quite pleased with, given the tight labor markets and supply chain disruptions. We're very pleased to say that these challenges have not resulted in any disruption to our customers." - K-Bro Linen (KBL) CEO, Linda McCurdy
A rebound in hospitality in both Canada and the U.K. can be seen
"Going forward, we expect to continue to benefit from the strong recovery in hospitality volumes in both Canada and the U.K." - K-Bro Linen (KBL) CEO, Linda McCurdy
"... consolidated hospitality revenues significantly increased by roughly 175%, as the result of a pickup in tourism and business travel. Hospitality revenues were at 94% of pre-pandemic levels on a consolidated basis. " - K-Bro Linen (KBL) CEO, Linda McCurdy
Airlines are continuing to extend pilot training contracts for labor shortage and to meet travel demand
“Notable training contracts for the quarter involved several exclusive training agreements in the Americas, which adds to the long list of exclusive training agreements that Civil has signed in the last 1.5 years, with the vast majority of major airlines in the region. This quarter, they include a 3-year extension to a long-term exclusive training agreement with Mesa Airlines, a 5-year exclusive training with United Airlines, a 5-year exclusive training agreement with JetBlue and a 10-year exclusive training agreement with another major North American airline.” - CAE Inc (CAE) CEO, Marc Parent
Entertainment trends are seeing a sticky shift
“Kids have evolved to digital playgrounds as a key form of engagement with their friends. This trend was further compounded by the pandemic where kids were largely out of school, restricted to their own homes and forced to engage with friends online. The industry is now seeing a shift in the macroeconomic environment with kids spending more time in school and extracurricular activities unencumbered by pandemic restrictions.” Spin Master (TOY) CEO, Max Rangel
The rapid rise in natural gas prices is having a negative impact on certain companies
“From an input cost perspective, we continue to face natural gas cost structure, particularly in the U.K.” - K-Bro Linen (KBL) CEO, Linda McCurdy
… but is one that can also be mitigated through hedging
"We have a new natural gas hedge put in place in April of this year through the end of 2024, which will also help going forward." - K-Bro Linen (KBL) CEO, Linda McCurdy
Industry
Real estate transactions are down significantly
“Real estate volumes were down significantly on a year-over-year basis in fiscal in Q3 of this year. But we've managed to migrate this by establishing a new pricing model that reflects the value of our platform delivers to customers in terms of efficiency and productivity.” - Dye & Durham (DND) CEO, Matthew Proud
Despite strong summer months in real estate, uncertainty remains due to macro factors
“I mean the reality is we are seeing real estate market volumes drop in April, but then they have picked up significantly in May. Historically, May and June are very strong months. So we still remain confident that these 2 months will deliver strong performance. But again, there's macro factors that we don't control, and we continue to monitor the market.” - Dye & Durham (DND) CFO, Avjit Kamboj
M&A activity is still underway
"I'm extremely pleased to share with you that we have reached an agreement to acquire all of the outstanding shares of RPS Group plc, a U.K.-based firm listed on the London Stock Exchange" - WSP Global (WSP) CEO, Alexandre L'Heureux
“This was an increase of more than 75,000 customers compared to the same quarter last year through a combination of organic customer additions, customer base acquisitions to our tuck-in strategy and an adjusted customer retention rate of just over 86% on a trailing 12-month basis.” - Primo Water Corporation (PRMW) CEO, Thomas Harrington
A global transition to green energy remains an underlying theme
"WSP aims to build a leading global ESG consulting firm that will contribute towards the transition to a greener and low-carbon world." - WSP Global (WSP) CEO, Alexandre L'Heureux
Companies are looking to better manage their inventory levels
"... demand for our products is elevated as customers attempt to replenish inventories, and we are actively working with our contractors to increase deliveries for the remainder of the year." - Acadian Timber (ADN), CEO, Adam Sheparski
"We've heard reports of high inventory levels at retail due to delays in shipping from the tail end of '21, combined with slowing spending. We have learned many lessons from the operational challenges we experienced in late 2019 and have embedded proactive, rigorous planning practices to ensure we manage inventory levels very tightly.” Spin Master (TOY) CEO, Max Rangel
Consumers' strength continues to be high, especially in consumer staples
“Importantly, as it relates to price elasticity, customer pushback related to the higher pricing has been minimum. We monitor this closely through a combination of metrics, including customer growth, call center activity and customer retention, all of which remain healthy…
…With the macroeconomic uncertainty, we want to highlight the recession resilience of the bottled water industry and our business.” Primo Water Corporation (PRMW) CEO, Thomas Harrington
Defense contracts might be showing some slowdown
“... taking all these factors into consideration, we're lowering our expectations for Defense for the current fiscal year to account for the 2 U.S. program charges that we just incurred and to reflect the more acute sector-wide headwinds that we're now experiencing, namely supply chain pressures, labor shortages and a slower Defense contracting environment.” - CAE Inc (CAE) CEO, Marc Parent
Canadian Apartment occupancy is showing strength
“The REIT's occupancy in Canada finished the second quarter of 2022 at 95.2% compared to 91.8% at June 30, 2021. Overall, occupancy has increased across the portfolio and it's anticipated it will continue to improve to the end of the year. Leasing activity significantly increased as COVID restrictions were lifted, economic conditions improved and as people returned to their normal routine.” - Morguard North American Residential REIT (MRG.un) CEO, Christopher Newman
Corporate
Tax changes in the US have increased companies’ tax expenses
"Also, income taxes paid in '22 were higher than in 2021, mainly due to lower tax installment and changes in tax regulation in the U.S." - WSP Global (WSP) CFO, Alain Michaud
Rising interest rates are not negatively impacting all companies’ debt balances
"As a final note and as a reminder, in the current rising interest rate environment, Acadian's debt has fixed rate terms expiring in 2025 through 2030." - Acadian Timber (ADN) CFO, Susan Wood
Inflationary pressures are impacting some companies’ financial results
"Inflationary pressures are weighing on our financial results. We have seen modest increases in our contractor rate and in the fuel surcharge, we pay our contractors, as prices continue to be at historic levels" - Acadian Timber (ADN), CEO, Adam Sheparski
"... we are certainly feeling the impact of inflation in our operating expense, as you can see by the year-to-date figure, our top line growth expectations should continue its positive NOI growth climb in 2022." - InterRent Real Estate (IIP.UN) CEO, Bradley Cutsey
However, many companies are handling inflation quite well
“Adjusted EBITDA in the second quarter increased 9% to $108 million, supported by higher volume, increased pricing and effective expense management that helped offset the impact of inflation.” - Primo Water Corporation (PRMW) CEO, Thomas Harrington
And doing so through pricing initiatives
“To address the higher cost starting in the quarter, our commercial teams implemented pricing actions in North America in addition to the 2 price increases taken in the first quarter. Given what we are seeing today, we believe that these pricing actions are sufficient to cover the higher operating costs and incremental investments in the customer experience. In addition, we have recently implemented price increases in our European operations.” - Primo Water Corporation (PRMW) CEO, Thomas Harrington
However, it may take time to see the benefits
“The benefit of these actions will be realized later in our third quarter, and the full benefit will be realized in our fourth quarter.” - Primo Water Corporation (PRMW) CEO, Thomas Harrington
FX headwinds continue to be pronounced for companies with operations in Europe in particular
“Some of these challenges include the translational effect of a significant devaluation of the euro and the unprecedented inflationary environment. We remain focused on what we can control as we continue to build on our core competencies to achieve our multiyear objectives.” - Primo Water Corporation (PRMW) CEO, Thomas Harrington
Fair value increases on apartment REIT's income-producing properties
“The value increase is a result of cap rate compression realized on most of our U.S. portfolio during the first quarter as well as an increase in underwritten NOI in both the U.S. and Canadian properties.” - Morguard North American Residential REIT (MRG.un) CEO, Christopher Newman
Companies mentioned:
Q2 Revenue Growth: 5.0% | Q2 EPS Growth: -26.5%
Q2 Revenue Growth: 34.6% | Q2 EPS Growth: -52.8%
Q2 Revenue Growth: -15.0% | Q2 EPS Growth: -24.6%
InterRent Real Estate Investment Trust (IIP.UN)
Q2 Revenue Growth: 17.5% | Q2 EPS Growth: 25.4%
Q3 Revenue Growth: 78.3% | Q3 EPS Growth: 176.3%
Primo Water Corporation (PRMW)
Q2 Revenue Growth: 8.6% | Q2 EPS Growth: 172.5%
Q2 Revenue Growth: 29.6% | Q2 EPS Growth: 159.4%
Q1 Revenue Growth: 24.0% | Q1 EPS Growth: -96.6%
Morguard North American Residential Real Estate Investment Trust (MRG.UN)
Q2 Revenue Growth: 17.2% | Q2 EPS Growth: 765.5%
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,
Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in the securities mentioned.
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