Thank you for attending Wajax Corporation's 2022 Q3 Results Webcast. On today's webcast will be Mr. Iggy Domagalski, President and Chief Executive Officer, and Mr. Stuart Auld, Chief Financial Officer. Please be advised that this webcast is being recorded. Please note that this webcast contains forward-looking statements. Actual future results may differ from expected results. I'll now turn the call over to Iggy Domagalski. Please go ahead.
Good afternoon, and thank you for participating in our Q3 call. This afternoon, we will be following a webcast which includes a summary presentation of Wajax's Q3 2022 financial results. The presentation can be found on our website under Investor Relations, Events and Presentations. I will provide you with a general update and will then turn it over to Stuart Auld for comments on backlog, inventory, cash, and the balance sheet. To begin, I would like to draw your attention to the cautionary statement regarding forward-looking information on slides two, three, and four. Additionally, non-GAAP and additional GAAP measures are summarized on slides 19 and 20 for your reference. Turning to slide five. In the Q3, Wajax saw improvement in key financial metrics and TRIF.
Revenue of CAD 470.8 million was up CAD 69.5 million or approximately 17% in the quarter. The increase in revenue resulted from higher construction and forestry equipment sales in Western and Eastern Canada, higher mining sales in Western Canada, and higher industrial parts and ERS sales in all regions. EBIT of CAD 26.7 million was up CAD 2 million, or approximately 8% in the quarter. The improved EBIT resulted from higher sales volumes, offset partially by higher selling and administrative expenses. Gross profit margin of 20.3% decreased 90 basis points compared to Q3 2021 due to a less favorable sales mix and lower product support and ERS margins. Gross profit margin of 20.6% year to date compared to 2021 of 20.0% excluding CEWS is in line with expectations.
Selling and administrative expenses as a percentage of revenue decreased to 14.7% in the Q3 of 2022 from 15.1% in the Q3 of 2021. Selling and administrative expenses in the Q3 of 2022 increased CAD 8.7 million compared to the Q3 of 2021, due mainly to higher personnel costs as the volume of business increased over the prior year. Management remains committed to ongoing cost productivity. Adjusted net earnings of CAD 0.78 per share was up CAD 0.06 or approximately 7% in the quarter, noting the adjustments recorded on this chart. At the end of Q3, the year-to-date TRIF rate was 0.93, which decreased 32%. Safety continues to be Wajax's number one priority and management is committed to continuously improving our safety programs to improve on this result.
We thank everyone on our team for their ongoing dedication to workplace safety. Turning to slide 6, the revenue increase of 17% in the Q3 resulted from growth in Western and Eastern Canada. Central Canada sales of CAD 71 million decreased 4% in the quarter, mainly due to lower material handling and power systems equipment sales and lower mining and power systems product support revenue, offset partially by strength in industrial parts sales. Eastern Canada sales of CAD 176 million increased 17% in the quarter, due primarily to higher bearing sales, driving higher industrial parts revenue, higher construction and forestry equipment revenue, and higher product support revenue in the mining category. Western Canada sales of CAD 224 million increased 26% in the quarter due to robust construction and forestry and mining equipment sales and strength in the ERS and industrial parts categories.
Please turn to slide 7. An update on equipment and product support sales and year-over-year variances are shown on this page. Equipment sales of CAD 137 million increased CAD 32 million or 31% compared to last year, due mainly to strong construction and forestry revenue in Western Canada and higher mining sales in Western Canada due to the delivery of a large mining shovel in the Q3. Product support sales of CAD 119 million increased 4%, due primarily to higher construction revenue in Western Canada and higher material handling revenue in all regions, offset partially by lower engine and transmission revenue in Western and Central Canada. Please turn to slide 8. An update on industrial parts and ERS sales and year-over-year variances are shown on this page.
Industrial parts sales of approximately CAD 135 million increased CAD 24 million or 21% due mainly to organic strength in bearing sales in all regions, but particularly in Eastern Canada. ERS sales of CAD 70 million increased CAD 8 million or 13% due to strength in Western Canada. The higher ERS revenue in Western Canada was driven by organic growth in ERS and industrial parts. Turning to slide 9. The slide summarizes sales at a category level for the quarter and year to date for our company's overall groupings of heavy equipment and industrial parts and services.
In the Q3, the heavy equipment grouping increased CAD 38 million or 17%, driven by higher sales in construction and forestry and mining, offset partially by lower sales in power systems. Total growth in industrial parts and services categories of approximately CAD 32 million or 18% was driven by increases in both industrial parts and ERS. I will now turn the call over to Stu.
Thanks, Iggy. Please turn to slide 10 for my comments on backlog. Our Q3 backlog reached a record CAD 558.8 million, an increase CAD 23.9 million or 4.5% compared to backlog of CAD 534.8 million at Q2, and compared to the previous record backlog of CAD 540.1 million in Q1.
Increased to CAD 187.2 million or 50.4% on a year-over-year basis. The sequential increase was due to higher mining, material handling and ERS orders. The year-over-year increase was due to the increased volume of orders in most categories, most notably construction and forestry, industrial parts and ERS. Overall backlog reflects continued momentum in heavy equipment, industrial parts and services business. Please turn to slide 11 for an update on our current inventory levels. Inventory increased CAD 32.7 million compared to Q2 2022, due primarily from the receipt of a large mining shovel in the quarter and increased overall parts purchasing due to strong sales, increased order activity and investment in certain key parts stock levels as part of the corporation's strategic initiatives.
Inventory increased CAD 75.4 million compared to Q3 2021 due to primarily higher parts, industrial parts, ERS and equipment inventory driven by increased sales volume and the desire to increase fill rates and product support sales. We continue to work with major suppliers with a focus on construction, forestry, material handling and power systems equipment to secure inventory to meet customer demand. Please turn to slide 12, where I will provide an update on cash flow and leverage. Cash used in operating activities in the current quarter of CAD 3.4 million decreased CAD 37.4 million from cash generated from operating activities of CAD 34.0 million in Q2 2022, mainly due to lower earnings, a decrease in cash generated from changes in non-cash operating working capital and higher income taxes paid.
The decrease in cash generated from changes in non-cash operating working capital was driven primarily by the increases in inventory mentioned on the previous slide. Leverage ratio. Our Q3 leverage ratio increased compared to Q2 from 1.1x to 1.28x, due primarily to the higher debt level in the current period. Corporation's leverage ratio is currently well below the target range of 1.5x-2x at the end of Q3, due primarily to strength in the trailing twelve-month pro forma adjusted EBITDA. Our overall credit capacity at the end of Q3 was approximately CAD 300 million, which is sufficient to meet short term normal course working capital and maintenance capital requirements, our acquisition program and strategic initiatives. Please turn to slide 13. We'll provide an update on our financial position.
We continue to focus on working capital efficiency, which is a key component in managing our overall leverage targets. The working capital to sales ratio has been consistently improving over the trailing five quarters as a result of the lower four-quarter average working capital and the higher trailing 12-month sales. Finally, the board has approved our Q4 2022 dividend of CAD 0.25 per share, payable on January 4, 2023 to shareholders of record on December 15, 2022. Please turn to slide 14, and at this point, I will now turn it back to Iggy.
Thank you, Stu. Our 2022 outlook appears on slides 14 and 15. Rather than reading the outlook verbatim, I will highlight a few important points. As we move into the last quarter of 2022, we continue to see sound fundamentals in many of our key markets, bolstered by elevated commodity prices and capital spending. Positive view of the market remains counterbalanced primarily by rising interest rates, inflation, labor availability and ongoing supply chain issues. We continue to manage these challenges through frequent dialogue with key suppliers and customers. Overall, we are pleased with our Q3 performance and are happy with our product mix of 56% heavy equipment and 44% IP and ERS. The IP-ERS component of our business increased as a percentage of total sales compared to last quarter due to success in both our industrial parts and ERS businesses across Canada.
Our robust balance sheet and record quarter-end backlog of CAD 559 million, approximately two-thirds of which is expected to be converted in 2022, continues to show momentum in the business. To maintain this momentum and increase shareholder value, we plan to continue our focus on the following priorities, investing in our people and their safety, delivering exceptional customer experiences, organically growing our business, building our acquisition pipeline, supporting our enhanced relationship with Hitachi, prudently managing the balance sheet, deploying our ERP and remote diagnostic systems, and building sustainability into the business. Thank you. I'll turn it back over to the operator for questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touchtone phone. If you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Michael Doumet at Scotiabank. Please go ahead.
Hey, good afternoon, Iggy and Stu.
Hey, Michael.
Hi. The first question, you know, it seems like the backlog conversion implies significant sales growth in Q4. Can you break that down just in terms of how to think about the growth and how it skews into, you know, versus, like, equipment versus industrial parts and ERS? Also curious to hear how you think that momentum, you know, could continue into 2023.
Thanks for the question, Michael. When we look at the backlog, important to remember that part of our product support revenues are in backlog. There's a decent component of parts that appears in there. So that's important just to think about that. Our current estimate is that two-thirds of it will be shipped, but it is subject also to labor availability, especially on the equipment side. We need the technicians to be able to PDI the equipment and get it out the door. Labor supply continues to be a challenge for us and a lot of companies out there, and also just the equipment arriving on time from our suppliers.
We feel good about our backlog, and we feel pretty good about the year going forward. We do see sound fundamentals with our customers, and generally, we see good fundamentals in some of the commodity markets. Oil and gas seems to continue to be reasonable, as does mining, and those are two spaces that affect us quite a bit.
That's perfect and helpful. Maybe moving to product support. You know, with price likely a double-digit tailwind there for parts and mining activity doing well, where was the softness that tempered some of that product support growth that maybe some of us would have expected?
Sorry, Michael, could you just clarify that a little bit, please?
Yeah, no problem. I guess the read from, you know, some of the peers is that price increases for parts are running at double digits, mining activity pretty strong. With, you know, product support running at 4%, I'm just wondering where maybe some of the softness could have come from, that potentially offsets in that number.
Yeah, Michael. I think it really comes from two of our main challenges that we mentioned in our outlook. Supply chain is still an issue, so getting the parts in the door is a challenge. Just the delivery of our service with our technicians. It's a challenging market for both recruiting and retention out there. That's why we had a bit of softness.
Perfect. That makes sense. Thanks, guys.
Thanks, Michael.
Thank you. Next question comes from Devin Dodge at BMO Capital Markets. Please go ahead.
Yes, thanks. Good afternoon. Maybe start with Central Canada. Looked a bit soft in Q3, and looks like really soft, I guess, year to date across all the heavy equipment categories. I believe you made some leadership changes there, but can you talk about the market conditions that you're seeing? I'm just trying to understand if the numbers we're seeing in your results, is that a reflection of the overall market or something more Wajax specific?
Hey, Devin. Thanks for the question. You know, in the region, as I mentioned, we have had some leadership changes. We have a lot of confidence in the team that's in place right now, and they're still coming up to speed. We're very optimistic on the market. We think Ontario is just one of our best growth opportunities, but we haven't seen, you know, our efforts and changes turn into bottom line results just yet.
Okay. Just a quick follow. What do you feel is a reasonable expectations for when you could see a turn in that Ontario business?
We're pretty confident that we'll start to see some good results in 2023.
Okay. Second question. Hitachi recently put out an updated corporate vision, I think they're calling it, and a medium-term management plan. It looks like it's, you know, focused on strengthening its value proposition beyond new equipment sales. Can you help us understand how to think about Wajax's role to support that plan?
Yeah. Thanks for the question, Devin. Wajax and Hitachi have a you know a wonderful partnership. As of this year, it's really been transformed and we're really excited about the future. Hitachi's got big growth plans, and Wajax is a part of those growth plans. The specifics of that we're working on in the background. Wajax is one of Hitachi's largest customers in the world. We're just particularly excited about the future, but the details on those plans are TBD for the public markets.
Okay. Got it. I'll turn it over. Thank you.
Thanks, Devin.
Thank you. Next question comes from Bryan Fast at Raymond James. Please go ahead.
Yeah. Good afternoon, guys. Once again, we saw material gains from industrial parts. Could you just talk about some of the drivers there and maybe just the sustainability of that growth rate?
Thanks for the question, Bryan. We really like the industrial parts business for its resiliency. You know, it has the opportunity to grow in all cycles, and just personally, that's the business that I've grown up in for the last 15 years. We have made some investments in our parts inventory as part of our corporate initiatives. Just really having a conscious effort to make sure that we're meeting our customers' expectation for fill rates. We feel that that's had at least a part of the impact in the increase in sales in our industrial parts business.
Thanks. I know you touched on it before, but just on labor or technician availability, are there areas within your regions that appear more tight than others? Are you seeing higher levels of attrition than you normally do?
When we think about the whole country, Quebec has and continues to be one of our most challenged markets for finding technicians. It's, I would say it's equally tough across the country, but just a little tougher in Quebec.
Are you seeing higher levels of attrition than you normally would on the technician headcount?
Yeah, we're starting to see some increases in technician attrition.
Okay, thanks. That's it for me.
Thank you. Next question comes from Michael Tupholme at TD Securities. Please go ahead.
Thanks. Maybe just going back to one of the sort of ideas that was brought up earlier, just on the idea of pricing versus volume. I know that was asked specifically in the context of product support, but I guess across the entire company and the revenues you generated, can you provide any sense for how much of that was price-driven versus volume-driven?
Yeah, I'm not sure we can break that down for you the way that you're looking for Michael. Sorry.
What about just in terms of any kind of rough split? Like, not looking for exact numbers, but any context at all or not possible?
I mean, when we get inflationary increases from our suppliers, you know, I think we've been pretty successful at passing those along to our customers. In terms of actually splitting it out and giving you any kind of a guidance on how much is volume versus price increases, that's not something we can do today.
Right. Fair enough. Again, just another follow-up on the labor availability. Would you say that situation and the challenges there, has that gotten more pronounced since the last quarterly conference call? Or are you simply highlighting an ongoing area of challenge?
Yeah, we're just highlighting an ongoing area of challenge. I think, technician availability has been a challenge for quite some time.
Got it. Just looking at the regional revenue details you provided, I think I might have asked about this last quarter as well. You know, obviously seeing strong growth in Western Canada and Eastern Canada, and tend to think about Western Canada as you know, obviously you've got the oil and gas piece that you mentioned there, not necessarily the same drivers in the other parts of the country.
Looking at Eastern Canada, again, strong performance in terms of year-over-year revenue growth, but we did see continued sort of softer performance in Central Canada. I think it had been up last quarter, but then we saw it sort of contract a little bit year-over-year in Q3. Wondering if you can kinda compare and contrast Eastern versus Central and talk a little bit about what's holding Central back and how you see that evolving going forward.
Thanks, Mike. Our Eastern Canadian business, which is like Quebec and the East, is run by quite stable leadership that's been there a long time, and there's also a strength in the fundamental markets like mining. In Ontario, we see the market as pretty good. That region is still just getting used to their new leadership, and I think that'll take a bit of time. As mentioned, we think we'll start seeing some positive results in 2023. We think it's one of our biggest opportunities. We just haven't seen that turn into bottom line results just yet.
I just like one clarification. The leadership in the East is now the leadership, the same leadership in the Central, which we think is a really positive change for us. That just sorta came into place early this year. We haven't had really stable leadership in Central for quite some time, whereas the East and the West we have.
Okay. That's helpful. Thanks. Then just on the outlook generally, the outlook commentary continues to sound fairly upbeat. Obviously, the growth you saw in the quarter was continued to be strong. Not surprisingly, you highlighted some of the key macro risks that I think, you know, everybody's aware of and most companies are also contending with. I guess I'm just wondering, in terms of the conversations with your clients and in quoting activity, how do things look now versus a quarter ago? Obviously, the backlog improved sequentially in the Q3.
I mean, I'm just wondering if the cautionary sort of comments that go alongside the fairly upbeat outlook commentary, you know, if you're actually seeing any changes just in terms of customer willingness to you know, to purchase.
That's a good question. When we look at just the high level macro environment, you know, there are those big challenges in inflation and interest rates. When we go and speak with our customers and ask them about those, they say they see them too, but they don't seem to be slowing down their activity. We haven't seen a change over the last couple quarters in our customer sentiment.
Okay, that's helpful. Just two sort of housekeeping items. The effective tax rate in the quarter was lower than it has been and than I was expecting. I guess sort of a two-part question. One, what was the driver there? Secondly, how do we think about that going forward, both in the Q4 and into 2023?
We had a one-time settlement with Canada Revenue Agency in the period related to prior year estimates. That was a one-time item that took place. It won't take place in Q4 and into next year. You'll see the tax rate at a more normal statutory level.
There you go. Thanks, Stu. Just lastly, just in terms of changes in non-cash working capital, there was some additional investment obviously that occurred this quarter. Can you help provide any thoughts or comments around how to think about that going forward, both Q4 and then any thoughts around next year?
I think in general, the comments sort of year to date, Iggy kinda mentioned it a bit, is we made a conscious decision to increase our inventory in a number of places, particularly, parts availability. You know, one example is obviously the industrial parts business that's really been doing well. So we made that conscious decision to have more. Also we've taken some opportunity where we could have some opportunity buys to beef up our inventory just given the supply chain challenges. We don't think—we still think that, you know, inventory around the CAD 425 range is kind of a good number. We don't see that dragging cash flow in the future.
Okay. Thank you.
I think just to add to that, in our inventory at the end of the quarter, we have a bit of mining gear. We've got an EX8000 unit and two of our EX5600 units, and both of those are scheduled to ship in the Q4. Or sorry, all three of those are scheduled to ship in the Q4.
Okay, that's helpful. Thanks, Iggy. That actually just reminded me, was there anything of that nature in the Q3 in terms of that type of equipment?
18,000 in the Q3, and then if you look back at last year, there was 1 in total in the Q4.
Okay. All right. I'll turn it over. Thank you.
Thank you. There are no further questions. You may proceed.
Thank you very much, everyone. Have a wonderful day.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.