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 key themes of companies discussing how inflation and high interest rates affects consumer discretionary spending, a common expectation among industrials executives for a steady return of business volumes till the end of this year, as well as executives’ view on cost optimization for each industry amid inflationary pressures

Macro

High interest rates make it more expensive for companies to refinance

“In December 2023, our senior unsecured debentures with a face value of $200 million will mature. We expect to refinance these debentures with new senior unsecured debentures or other unsecured or secured debt subject to market conditions. To derisk this maturity, we arranged a $200 million delayed draw credit facility with a syndicate of Canadian financial institutions. This credit facility is available any time prior to December 11, 2023, and, if drawn, will have May 29, 2025 maturity date and will be subject to substantially the same covenants and pricing as our existing unsecured credit facility. I'll now turn it back to Vlad to wrap up.” – Chartwell Retirement Residences (CSU.UN) CFO, Jonathan Boulakia

Inflation-related costs were offset by operational efficiency and price increases

“In terms of overall highlights, we reported revenue of $81 million and EBITDA of $14.5 million for the quarter. Our strong second quarter results with significant growth in EBITDA and margins were in line with our expectations. The improvement in margins reflects our disciplined approach to managing operations combined with price increases that we have secured to offset inflation-related costs. We continue to expect a return to pre-pandemic margins in the second half of the year, consistent with historical seasonal trends.” – K-Bro Linen Inc. (KBL) CEO, Linda McCurdy

US listing increases liquidity and flexibility for Canadian companies

“Good morning, ladies and gentlemen, and thank you for joining us. This has been an exciting and transformational few months for ATS, during which we successfully completed our U.S. IPO and New York Stock Exchange listing. This represents an important milestone and supports our strategic growth objectives while providing increased liquidity in our shares and additional flexibility for M&A” – ATS Corporation (ATS) CEO, Andrew Hider

Inflationary pressures continue to have an effect on consumer discretionary spending

“However, inflationary pressures continue to have an effect on discretionary spending in the personal care markets, which may impact timing of some customer investments. On digital, to create real value out of production, digitization, our customers are looking for a partner who is strong in both automation integration and domain knowledge. Our teams are helping customers understand how to capture data, and more importantly, how to extract value from that data to drive impact.For example, a major global customer utilizing our IoT platform for plant performance management recently awarded us with a global management services contract for digital services. Another life sciences customer recently launched a pilot with us for a global IoT platform for performance management. On after-sales services, we are actively engaged with customers as we leverage both technology and services to provide a better customer experience and outcome.” – ATS Corporation (ATS) CEO, Andrew Hider

Retailers brought inventory in earlier than normal to avoid anticipated supply chain disruptions

“As a reminder, in May, we discussed how the toy industry in the first half of '23, felt the impact of retailer clearance activity after ending '22 with significant inventory carryover comparisons from the first half of '23 to the first half of '22 look especially unfavorable since we had unusually high sales in Q2 last year as retailers brought inventory in much earlier than normal to avoid anticipated supply chain disruptions.” – Spin Master Corp (TOY) CEO, Mark Segal

Global oil demand continues to exceed pre-pandemic levels but drilling activity remains below pre-COVID

“Ultimately, the economic forces of supply and demand established the prevailing direction of industry activity. Global oil demand continues to exceed pre-pandemic levels while all sources of supply, including storage, production, the inventory of drilled but uncompleted wells and drilling activity, remain below pre-pandemic levels. Any efforts to increase supply will require additional drilling activity, and as such, our outlook for continued growth in land drilling remains positive.” – Pason Systems Inc. (PSI) CEO, Jon Faber

Industry

Senior residences were able to raise prices while the occupancy rate also improved

“Our same property retirement portfolio occupancy was 80.4% in July. We forecast it to grow another 130 basis points to 81.7% in September. We continue to see positive trends in our personalized tours, closing ratios and lease signings, which sets us up well for our usually strong fall leasing season. We're also achieving our expected rate increases and expect to continue reducing our staffing agency spend throughout the remainder of the year.” – Chartwell Retirement Residences (CSU.UN) CFO, Jonathan Boulakia

Leisure travel-related services enjoyed near term tailwind as travel volumes returned

“As with our first quarter results, we saw continued growth in health care revenue and significant growth in hospitality revenue as business and leisure travel volumes have returned. Overall, consolidated revenue increased 13.9% compared to Q2 2022, with health care revenue having increased by 4.4% and hospitality revenue by 29%.” – K-Bro Linen Inc. (KBL) CEO, Linda McCurdy

Strong organic growth supported by a healthy backlog for consulting services

“Thanks, Alex. For the first quarter, revenues and net revenues reached $3.6 billion and $2.7 billion, up 31% and 30%, respectively, compared to the second quarter of 2022. We delivered net revenue organic growth of 9.3% in the quarter attributable to all reportable segments with growth seen mostly in the U.S.A., Australia, the U.K. and New Zealand. Our backlog as of July 1, 2023, remained robust and stood at $14.3 billion, representing 12 months of revenue with a 3.9% organic growth compared to December 2022.” – WSP Global Inc. (WSP) CFO, Alain Michaud

COVID factor continues to benefit mobile gaming…

“Q2 revenue in Digital Games was slightly higher at $40.5 million compared to last year. This was a strong result for digital games as mobile gaming in Q1 and Q2 '22, continue to benefit from COVID factors. Toca Life World was particularly strong in Q2 this year. Digital Games adjusted operating margin in Q2 was 31.6% up from 24.8% because of lower marketing spending.” – Spin Master Corp (TOY) CEO, Mark Segal

…while global toy point of sale (POS) experienced a decline

“From a Spin Master perspective, our U.S. retail inventory at the end of Q2 was down 17% over last year as of the end of Q2. Last quarter, we spoke about the expected softening of the toy industry in '23, specifically in the U.S., a region that has traditionally held up well during tougher economic periods. Global toy POS in Q2 declined 10%, and we trailed the market with a decline of 17% for Circana. As in Q1, most of our POS decline in Q2 occurred in the U.S.” – Spin Master Corp (TOY) CEO, Mark Segal

North America drilling activity is expected to plateau before beginning to increase steadily through next year

“Our outlook for a return of steady growth in North American industry activity in the second half of 2023 is unchanged. After declining steadily through the first half of the year, we expect North American land rig counts to plateau near current levels before beginning to steadily increase through the end of 2023 and into 2024.” – Pason Systems Inc. (PSI) CEO, Jon Faber

Corporate

Portfolio optimization by divesting underperforming assets is critical to improving operation

“We continue our important portfolio optimization activities, divesting noncore, less-competitive properties where we had to make the difficult decisions to cease operations. Our operations teams with their people first approach successfully transitioned most of the impacted residents to other Chartwell residences.” – Chartwell Retirement Residences (CSU.UN) CEO, Vlad Volodarski

Acquisitions are a key way to fuel growth and create diversification…

“Lastly, on M&A, we deployed nearly $3 billion since January 2022 to complete an integrated -- and integrate 11 strategic acquisition, bolstering our expertise and directly contributing to the quality and the diversification of our platform. As stated before, M&A continues to be our preferred option to deliver shareholder value.Thanks to the dedication and expertise of our people, we continue to build a stronger business, delivering on our ambitions with focus and discipline. Today, I see an even clearer path to reach our vision unveiled in 2022 to double in size and deliver an adjusted EBITDA margin above 20%.” – WSP Global Inc. (WSP) CEO, Alexandre L'Heureux

…as well as recruit talent professionals

“Thank you, Alain. Our increased outlook is a reflection of WSP's unique position in a thriving market and our ability to achieve our financial ambitions. On the M&A front, we have continued to push forward in core sectors and expand a growth area. During the quarter, we announced the acquisition of LGT adding 150 employees to our workforce and further positioning WSP as a key player in the Quebec's building sector. LGT is recognized with its cutting-edge expertise specific to data centers and critical infrastructure, which contributes directly to our global capabilities.In addition, we completed the Calibre transaction and expanded on our Australian workforce by 800 professionals.” – WSP Global Inc. (WSP) CEO, Alexandre L'Heureux

Taking an appropriate leverage profile to do acquisitions creates long-term shareholder value

“On leverage, our net debt to adjusted EBITDA ratio was 2.0:1 as of the end of Q1, down from 2.7:1 at the end of Q4 and in line with our target leverage range of 2 to 3x net debt to adjusted EBITDA.Our lower sequential leverage reflects net proceeds from our recently completed equity offering that we have used to initially pay down amounts outstanding on our revolving senior secured line of credit. We ultimately intend to utilize capital from the offering to pursue strategic opportunities, including acquisitions. As noted previously, we are willing to temporarily increase our leverage beyond our target leverage range to support short-term working capital requirements or for an acquisition that fits within our framework and creates long-term value for our shareholders” – ATS Corporation (ATS) CFO, Ryan McLeod

Efficient cost control is crucial for companies with high fixed cost base

“Our second quarter results continue to highlight our mostly fixed cost base. Of note, our rental services costs, which represent the largest operating cost category within the business and represented in excess of 60% in the second quarter of 2022, have increased by less than 1% since the third quarter of 2022 despite inflationary impacts and a stronger U.S. dollar. In that same time period, revenue per industry day has grown by 4.5%.” – Pason Systems Inc. (PSI) CFO, Celine Boston

Wages as a percentage of revenue decreased due to stabilization of labor in certain markets

“Wages and benefits in the second quarter of 2023 increased by $2.5 million to $31 million compared to $28.5 million in the comparative period of 2022 and as a percentage of revenue, decreased by 1.7 percentage points to 38.4%. The decrease as a percentage of revenue is primarily related to stabilization of labor in certain markets, production efficiencies gained from the AHS transition and price increases secured across various markets.” – K-Bro Linen Inc. (KBL) CEO, Linda McCurdy

Companies mentioned:

Chartwell Retirement Residences (CSH.UN)

Q2 Revenue Growth: 3.2% |  Q2 EPS Growth: N/A

WSP Global Inc. (WSP)

Q2 Revenue Growth: 31.2%  |  Q2 EPS Growth: 61.3%

ATS Corporation (ATS)

Q1 Revenue Growth: 23.4%  |  Q1 EPS Growth: 19.1%

Spin Master Corp (TOY)

Q2 Revenue Growth: 22.5%  |  Q2 EPS Growth: -80.4%

Pason Systems Inc. (PSI)

Q2 Revenue Growth: -16.9%  |  Q2 EPS Growth: -68.7%

K-Bro Linen Inc. (KBL)

Q2 Revenue Growth: 13.9%  |  Q1 EPS Growth: 188.7%

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,

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