Canadian Quarterly Earnings Pulse - Q1 2023

Michael Huynh Jun 01, 2023
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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 companies utilizing their balance sheet to maintain growth and shareholder returns and how management teams use multiple levers to drive growth and profitability, as well as how executives in different industries handle their businesses during a challenging macro environment.


Stable, recurring cash flow protects companies’ balance sheet from a rising interest rate environment…

“Our earnings are protected with 98% of the cash flows being generated from either cost of service or contracted throughput. 95% of our customer base is investment grade, and 80% of our EBITDA comes from assets with built-in inflation protection against rising costs. As discussed earlier, our balance sheet is in great shape, and all of the agencies have reaffirmed our BBB high credit ratings. We actively manage our interest rate exposure and less than 5% of our debt portfolio is exposed to floating rates.” – Enbridge Inc. (EBN) CEO, Greg Ebel


A strong US dollar and modest inflationary pressure provide a short-term tailwind for Canadian companies’ operating results

“We're expecting continued strong operating performance across all of our businesses and the stronger U.S. dollar provides a slight tailwind for our results. However, warmer weather, rising interest rates, modest inflationary pressure on operating costs, and commodity price backwardation in our Energy Services business unit, our hurdles were looking to offset. – Enbridge Inc. (EBN) CFO, Vern Yu


Limited exposure to commercial real estate protects banks’ loan book

“Specific to our commercial real estate exposure, we provided additional disclosures related to the composition of the portfolio. Our exposure and recent growth are heavily weighted to the Residential and Industrial segments, which together comprise 75% of the portfolio. The Office segment represents less than 10% of our overall commercial real estate exposure with U.S. exposure at only $300 million.” – The Bank of Nova Scotia (BNS) CEO, Scott Thomson


Solid capital base helps companies navigate a challenging macroeconomic environment…

“Our common equity Tier 1 capital ratio strengthened in the quarter to 12.3%. The capital build this quarter brings us above our 12% target sooner than expected, and we will aim to remain at 12% or above until we have more conviction on the macroeconomic outlook and regulatory expectations.” – The Bank of Nova Scotia (BNS) CEO, Scott Thomson


…On the other hand, higher interest rates are short-term tailwinds for financial companies with better interest income

Net interest income increased 9% year-over-year as loans grew 6%, while deposits grew a strong 11%, supporting year-over-year margin expansion of 8 basis points. Loan margin expansion resulted in the margin expanding by 4 basis points quarter-over-quarter. Loan growth was 6% year-over-year as mortgages grew a modest 3%. Business loans grew 18%; automotive, 8%; credit card, 16%; and personal, loans 6%, all higher-yielding portfolios. Quarter-over-quarter, average loans were in line with Q1 as the decline in mortgage balances offset growth in other higher-yielding loan categories.” – The Bank of Nova Scotia (BNS) CFO, Raj Viswanathan


A challenging macro environment leads to a dire capital market condition

“Now turning to capital formation. It is no surprise that global macroeconomic factors, including sustained high-interest rates, concern over inflation, and increased volatility, weakened the capital-raising environment in the first quarter of the year. Revenue from capital formation in Q1 2023 was $63.5 million, a 1% decrease from last year, reflecting lower revenue from additional listing fees due to a lower number of financing transactions on Toronto Stock Exchange and a decrease in dollars raised on both TSX and the TSX Venture exchange.” – TMX Group Limited (X) CEO, John Mckenzie


Management’s priority is to maintain a healthy and growing dividend payout

“Let's move on to that now. Our capital allocation priorities are unchanged. Our #1 priority is maintaining a strong, flexible balance sheet. Q1 debt-to-EBITDA was 4.6x, leaving us plenty of room to execute our secured capital program. We'll continue to return capital to shareholders through a sustainable and growing dividend, while maintaining the dividend within our 60% to 70% payout range. ” – Enbridge Inc. (EBN) CFO, Vern Yu


Strong organic growth from office cleaning services despite the work-from-home trend…

“I will begin the call with an overview of GDI's financial results for the first quarter of '23, and we will then in like Claude to provide his comments on the business. In the first quarter, GDI recorded revenue of $591 million, an increase of $96 million or 19% over Q1 of last year, made up mainly of organic growth of 14% and growth from acquisitions of 2%. We recorded an adjusted EBITDA of $33 million in the quarter, a decrease of $3 million or 8% over Q1 of last year. ” – GDI Integrated Facility Services Inc. (GDI) CFO, Stephane Lavigne


Despite the tough comparison, North American apparel distributors showed notable, sequential improvement

“In activewear, as previously communicated, we faced a strong comparative period as we cycled post-pandemic inventory replenishment at U.S. distributors. Overall, although year-over-year POS trends at North American distributors remain down, they showed notable, sequential, quarterly improvement. Further, while international sales in the quarter were down 17%, continuing to maintain a positive outlook regarding recovery in international markets for the full year, encouraged by positive POS in the first quarter.” – Gildan Activewear Inc. (GIL) CFO, Rhod Harries


Although retail customers remain cautious about inventory levels, the demand environment has shown improvements recently

“while our retail customers remain cautious on replenishment across all product categories, we were encouraged by improving inventory levels in the first quarter reflecting what we believe is an improving demand environment for our products.” – Gildan Activewear Inc. (GIL) CFO, Rhod Harries


Prudent lending and risk management to be successful in banking

“Turning to business banking. The underlying portfolio continues to perform well. Our direct exposure to U.S. regional banks is immaterial. And our well-diversified business lines, customer segments and geographies, give us confidence in our balance sheet and liquidity positions.

With respect to commercial real estate, our exposure was $67 billion as of Q2. And of this, Office represents approximately 10% and 2/3 of the portfolio is Investment grade. The bank's real estate portfolio is strong with 75% of our exposure being Residential and Industrial. These exposures are primarily with top-tier developers where we have long-standing relationships. We remain comfortable with our business banking portfolio, but remain prudent based on forward-looking macroeconomic indicators.” – The Bank of Nova Scotia (BNS) CRO, Phil Thomas


Being the top exchange platform helps companies remain resilient, indicating a strong competitive position

“Despite the impacts of these worldwide environmental challenges, our public market ecosystem remains resilient, and we are seeing positive signs within the deal-making community that markets are poised for a rebound as conditions normalize. And while the slowdown in financing activity during the first quarter had a negative impact on our results and the number of new listings on TSX and TSXV decreased year-over-year, Canada's markets remain the #1 growth platform in the world for small- to medium-sized enterprises. And it's important to measure our performance versus those global peers. We stack up extremely well. In fact, our exchanges ranked second among global peers by the number of new listings during the first 3 months of the year; and third, by the number of new international listings.” – TMX Group Limited (X) CEO, John Mckenzie


Strong pricing power allows companies to maintain margins

“As expected, we have seen a progressive decrease in per extra services in Canada, and we expect this to continue through the coming few quarters. We continue to expect margins in Canada to remain at a premium to pre-pandemic levels for the foreseeable future. Our business service US segment had a good quarter despite a lower margin in the quarter, which is primarily driven by a reduction of extra services, pass-through expenses and timing in price increases to customers” – GDI Integrated Facility Services Inc. (GDI) CEO, Claude Bigras


Operational performance helps companies deleverage faster than expected

“The 3 acquisitions that we concluded in 2022 has been successfully onboard and are all performing well. Our balance sheet, which has been supporting our strong organic growth has a leverage ratio or less than 3x debt to EBITDA. We are a very strong and well-positioned competitor in the market. Our balance sheet is healthy and capable of supporting our growth objectives and our M&A team is actively working on new opportunities. I am pretty much looking forward to our team to continue adapting in this evolving environment in 2023. ” – GDI Integrated Facility Services Inc. (GDI) CEO, Claude Bigras


Higher input costs and an unfavourable mix compressed short-term gross margins

“Turning to margins. Gross and adjusted gross margin came in at 26.7% and 26.2%, down year-over-year by 430 and 470 basis points, respectively. This is mainly a result of the anticipated flow-through impact on our cost of sales of peak fiber costs and higher manufacturing input costs. Margins were also impacted by unfavorable mix related to fleece sales.” – Gildan Activewear Inc. (GIL) CFO, Rhod Harries


Capital investments for growth are prioritized before returning to shareholders

In fact, construction of the first facility is in its final stages and progressive ramp-up of operations is now underway, which will continue through 2023 into '24. We also bought back 1 million shares in the quarter. reflecting our strong commitment to return capital to shareholders under our capital allocation priorities. The company ended the first quarter of 2023 with net debt of $1.15 billion and a net debt-to-EBITDA leverage ratio of 1.6x, in line with our 1 to 2x leverage framework.” – Gildan Activewear Inc. (GIL) CFO, Rhod Harries


Profitability grew faster than revenue due to operating leverage

“Total revenues for the quarter were up 22% over the prior year with organic revenue growth at 17%. Again, this quarter boosted by particularly strong growth in our Brands division. EBITDA was up 32%, reflecting a margin of 8.1%, a 60-basis point increase over last year's Q1, primarily resulting from operating leverage in brands. Earnings per share were up 16%. The -- we're very pleased with our performance to start the year and confident that it sets us up for a strong 2023.” – FirstService Corporation (FSV) CEO, Scott Patterson


Having multiple levers to drive revenue growth in a tough time are crucial

“We see the previous 10% annual revenue growth target ticking up to the low teens percentage range for 3 reasons: one, strong Q1 performance; 2, restoration backlog conversion driving incremental revenue in Q2 and 3 recent tuck-under acquisition contribution. We are maintaining our view that consolidated margins will be relatively in line or possibly slightly higher versus prior year.” – FirstService Corporation (FSV) CFO, Jeremy Rakusin


Companies mentioned:


Enbridge Inc. (ENB)

Q1 Revenue Growth: -20.0% |  Q1 EPS Growth: -10.5%


GDI Integrated Facility Services Inc. (GDI)

Q1 Revenue Growth: 19.4%  |  Q1 EPS Growth: -50.0%


Gildan Activewear Inc. (GIL)

Q1 Revenue Growth: -9.3%  |  Q1 EPS Growth: -29.9%


The Bank of Nova Scotia (BNS)

Q2 Revenue Growth: -6.5%  |  Q1 EPS Growth: -22.0%


TMX Group Limited (X)

Q1 Revenue Growth: 126.9%  |  Q4 EPS Growth: -66.5%


FirstService Corporation (FSV)

Q1 Revenue Growth: 22.0%  |  Q1 EPS Growth: 12.7%


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,

5i Research Team Signature





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