This week, we continue to summarize the broader pulse of public Canadian companies by looking into another set of quarterly earnings (previous post).
We saw mixed quarterly reports from Canadian banks this week. Royal Bank of Canada and Bank of Nova Scotia started off the week reporting lower-than-expected earnings driven by international segments, leading to price target cuts by analysts and lower share prices. Toronto-Dominion and Canadian Imperial Bank of Canada, on the other hand, posted market-beating results driven by strong domestic retail business. Across the board, we saw higher provisions for credit losses driven by a dimmer macroeconomic outlook. Several players in the industrials sector (WSP, TFII, and ACQ) made M&A or divestiture announcements in efforts to streamline or strengthen revenues and/or pay down debt focusing on core strengths. A general theme of share buybacks popped up across earnings calls as a way to improve shareholder return.
Macro
Asian markets are still impacted by recent pandemic restrictions…
“Second quarter results were impacted by lower sales in Hong Kong, driven by pandemic-related restrictions and lower equity market-related fee income.” Sunlife (SLF) CFO, Manjit Singh
…Especially in Hong Kong
“The rest of Asia is actually opening up really nicely, whereas Hong Kong is still facing some of the restrictive measures as it started with zero-COVID policy.” Sunlife (SLF) CFO, Manjit Singh
…But a silent recovery continues in the rest of the global economy from pandemic restriction
“Outside of Hong Kong and International, insurance sales grew double digits in the rest of our markets as they emerge from pandemic restrictions. Asia wealth sales were lower than the prior year, reflecting declines in global equity markets.” Sunlife (SLF) CFO, Manjit Singh
Inflation May Last Longer than Hoped
"Unless there's deflation which I don't think is in the horizon our costs are going to be" - Andlauer (AND) CEO, Michael Andlauer
Banks are boosting provisions for credit losses due to a dimmer macroeconomic outlook
“The increase in our PCL (Provisions for Credit Losses) ratio this quarter is primarily driven by expectations of longer-lasting inflationary pressure and more central bank rate increases. Our ACL (Allowances for Credit Losses) coverage reflects this outlook.” - Bank of Nova Scotia (BNS) CRO (Cheif Risk Officer), Phil Thomas
“Last quarter, we increased both the severity and likelihood of the downside scenarios used to determine our provisions. This quarter, the increase in reserves primarily reflects a weaker base case credit outlook and macroeconomic forecast. For example, we now assume the Canadian and U.S. economies will face a moderate recession in 2023, and Canadian house prices will, on average, decline over 12% from their peak. Additionally, business growth, particularly in our cards and commercial portfolios, as well as a shift in our portfolio composition contributed in part to the increased allowances this quarter.” - Royal Bank of Canada (RY) CRO, Graeme Hepworth
High net worth investors have been looking to put cash to use
“This is mostly offset by higher new business gains in our international high net worth business and while international sales were lower than the prior year, profitability of sales is up as we focus on selective origination in the high net worth market.” Sunlife (SLF) CFO, Manjit Singh
Retail investors have been selling and going to cash while institutional investors have been buying
“Net outflows in the quarter were driven by U.S. retail, reflecting significant industry-wide retail redemptions. In fact, Q2 reflected the highest level of U.S. retail industry redemptions in over 30 years. That said, MFS saw lower relative retail redemptions as a proportion of AUM compared to the industry. Institutional inflows were USD 1.5 billion in the quarter.” - Sunlife (SLF) CFO, Manjit Singh
"Volumes in this channel are exceptionally high based on customer preferences for GICs, also corresponding to the selloff in equity markets" - EQB Inc. (EQB) CFO, Chadwick Westlake
Certain Companies are Benefiting from Pandemic-Related Supply Chain Issues
"This outsized growth is probably largely due to the result of pandemic-related supply chain issues" - Andlauer (AND) CEO, Michael Andlauer
"we do have pricing power. The in-store, we did push price that would be consistent with, I would say, the average inflation" - Parkland Corporation (PKI) CEO, Robert Espey
"Actually, I think we're seeing an increase in the pipeline as a result of the macroeconomic conditions and inflation, supply disruption, the war, transportation lane challenges, lack of cargo containers" - Kinaxis (KXS) CEO, John Sicard
… and many companies are investing in improving post-pandemic shift towards working from home
“We also witnessed the increase in the number of attacks and successful breaches, elevating the threat risk within our customers' environments. We knew these pressures would accelerate the need to modernize network architectures to ensure employees and devices remain connected and secured even when outside of the secure office setting…. For fiscal '23, we expect adjusted revenue to be in the range of $241.5 million to $246.5 million, representing revenue growth of 14.8% to 17.1% year-on-year.” - Absolute Software Corp (ABST) CEO, Christy Wyatt,
Industry
Investors are beginning to turn to secured debt, which could mean some stability in bond and equity markets
“We're seeing good traction across all asset classes offered through our diverse alternative investment platform, including BGO, where investors are pivoting to debt secured by real estate to provide protection against current economic conditions.” -Sunlife (SLF) CEO, Kevin Strain
Further Rate Hikes to Hinder Near-Term Housing Market Activity, but long-term prospects look bright
"But the case can certainly made strong employment opportunities for Gen Y and Z cohorts, rising immigration and shortage of housing stock in our region's focus will provide the support the market needs to be healthy in future years" - EQB Inc. (EQB) CEO, Andrew Moor
Renewable energy and carbon capture markets are beginning to recover
“And we see renewables, RNG, hydrogen and carbon capture, picking up steam and bolstering growth…
…I think there's a very visible runway here, obviously, with, let's call them, the conventional projects that we've been used to, but you're going to see the ramp-up in lower carbon probably a little bit further down the road, and then it will start ramping up significantly. That's how we see it in carbon capture, whether it's hydrogen opportunities, of course, the renewables business itself has some good legs, but that will ramp up” - Enbridge (ENB) CEO, Al Monaco
"Our growth in our co-processing would take our total capacity to 12,000 barrels a day and make us the largest manufacturer of renewables in the province of BC" - Parkland Corporation (PKI) CEO, Robert Espey
North American natural gas companies can help with European shortages
“If you look at the fundamentals around how gas is going to have to be diversified in terms of the sources of supply for Europe, it's an opportunity for us. It always comes down, of course, to whether we can get the right risk/reward profile, just like any other project. The good news is that with the renewables business that we've established there.” - Enbridge (ENB) CEO, Al Monaco
Energy pipeline companies are hyper focused on getting supply to meet demand
“It's pretty clear we're in a global energy crisis, and that we'll need all sources of supply to meet demand with affordable, sustainable and secure energy. And as we've said before, North America is extremely well positioned with a globally competitive, reliable and sustainable supply.” - Enbridge (ENB) CEO, Al Monaco
Investments in liquid natural gas (LNG) continue strong - optimism in long-term prices
“Let's shift now to our LNG strategy, starting with the fundamentals and how we're positioned. And right off the bat, it's clear that natural gas is an increasingly exciting story and will be a growth driver for us in the long term. First, North American LNG exports are expected to increase to 30 Bcf per day, and everyone knows the reasons behind that.” - Enbridge (ENB) CEO, Al Monaco
In-person shopping and dining has been strong
“Overall revenue grew 50% and GTV grew by 36%. Revenues were strong this quarter as the return to in-person shopping and dining drove demand for omni-channel solutions.” Lightspeed (LSPD) CEO, Jean-Paul Chauvet
Travel and hospitality are also picking up
“And thanks to our strong travel market, our European region, which is heavily slanted towards hospitality, also had a strong quarter.” - Lightspeed (LSPD) CEO, Jean-Paul Chauvet
"Looking to the end of the year, we are optimistic that an earlier-than-usual start of the travel season and our acquisitions will continue to drive growth in our International segment" - Parkland Corporation (PKI) CEO, Robert Espey
Transportation Companies Benefiting From Increased Fuel Costs
"organic growth and higher fuel costs passed on to customers as a component of our pricing." - Andlauer (AND) CFO, Peter Bromley
Supply chain issues still continue to plague some sectors
“While there was some catch-up in merchandise sales in Q2 2022, as previously ordered merchandise made its way to our cemeteries and was delivered and installed, we continue to experience delays in the post-sale supply chain and, in some instances, a further lengthening of lead times. As we continue to grow our company, the impact of any one business will continue to become more muted.” - Park Lawn Corp (PLC) CEO, Brad Green
The market is seeing more divestitures and spinoffs across North America as companies reassess their business segments and seek to improve ROIC
"TFI has decided to focus its US-based operations on less-than-truckload services, asset-light logistics and specialized truckload units. This transaction will reduce our capital intensity, with some of the proceeds used to pay down debt in the near term and over time redeployed with the objective of generating higher returns.” TFI International (TFII) CEO, Alain Bedard
Corporate
Executives expect economic “softness” for the rest of the year
“And while we do expect inflation and continued softness in consumer spend will continue for the rest of the year…” - Lightspeed (LSPD) CFO, Asha Bakshani
But more certainty and confidence on business outlook
“…given our multiple growth levers, the diversity of our customer base and the Payments opportunity ahead of us, we are confident in our ability to meet our previously established revenue outlook. - Lightspeed (LSPD) CFO, Asha Bakshani
"We entered the second half of the year with tailwinds in the form of a full cruise ship season and a positive start to the summer driving season" - Parkland Corporation (PKI) CFO, Marcel Teunissen
Companies getting ahead of potential economic headwinds by focusing on reducing operating costs
“…by focusing In addition, we continue to focus on finding efficiencies across the business through continuous integration of previously acquired businesses, as Brandon mentioned, and we continue to remain disciplined and intentional on operating expenditures, reducing spend in lower priority areas.” - Lightspeed (LSPD) CFO, Asha Bakshani
Companies facing margin pressure and volatility from interest rate hikes
"Our hedging has been effective at reducing interest rate risk and reinvestment risk, but again, can be impacted in a particular quarter when there were very significant shifts in interest rates" - EQB Inc. (EQB) CFO, Chad Westlake
Share buybacks are a higher consideration now for shareholder return
“We still maintain that based on our robust acquisition pipeline as well as the nature and quality of those businesses, our capital is best deployed by continuing to make a steady drumbeat of acquisitions as that is the best way for us to continue executing on our 2026 aspirational goals of EBITDA growth and adjusted earnings per share. However, as Dan also noted, our goal is to drive the best overall returns for our shareholders and if the public markets provide us with that opportunity, we intend on executing through the NCIB.” Park Lawn Corp (CEO), Brad Green
Companies mentioned:
Q2 Revenue Growth: -84.1% | Q2 EPS Growth: -12.6%
Q2 Revenue Growth: 20.7% | Q2 EPS Growth: -68.1%
Q2 Revenue Growth: -39.2% | Q2 EPS Growth: -133.3%
Lightspeed Commerce Inc (LSPD)
Q2 Revenue Growth: 50% | Q2 EPS Growth: 79.5%
Andlauer Healthcare Group Inc (AND)
Q2 Revenue Growth: 58.1% | Q2 EPS Growth: 48.5%
Q2 Revenue Growth: -1.2% | Q2 EPS Growth: -17.3%
Q2 Revenue Growth: 95.3% | Q2 EPS Growth: -222.6%
Q2 Revenue Growth: 34.5% | Q2 EPS Growth: -191%
Q2 Revenue Growth: 0.1% | Q2 EPS Growth: 4.8%
Q2 Revenue Growth: -11.3% | Q2 EPS Growth: -15.5%
Q2 Revenue Growth: 65.3% | Q2 EPS Growth: 56.1%
Q2 Revenue Growth: 31.9% | Q2 EPS Growth: 30.6%
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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