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Enter Symbol
or Name
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CA



Strongco Corp
Symbol SQP
Shares Issued 13,221,719
Close 2014-07-30 C$ 3.67
Market Cap C$ 48,523,709
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Strongco earns $1.7-million in Q2

2014-07-30 19:04 ET - News Release

Mr. David Wood reports

STRONGCO ANNOUNCES SECOND QUARTER RESULTS

Strongco Corp. has released its financial results for the three months ended June 30, 2014.

Summary (comparisons are between the second quarter of 2014 and the second quarter of 2013):

  • Strongco had revenue of $135.9-million, down from $140.2-million.
  • Product support revenue was up 5 per cent to $36.7-million.
  • Gross margin was $24.1-million, a slight decrease from the same period in 2013.
  • Operating income was $5.3-million, compared with $6.2-million.
  • EBITDA (earnings before interest, taxes, depreciation and amortization) was $11.4-million, compared with $13.7-million.
  • Net income totalled $1.7-million, compared with net income of $2.9-million.
  • Strongco had earnings per share of 13 cents, compared with 22 cents per share.

"The challenging weather conditions that extended well into May curtailed construction activity across the country and limited oil field access, delaying purchasing decisions by customers," said Bob Dryburgh, president and chief executive officer of Strongco. "The difficult winter exacerbated the already weakened market situation in Eastern Canada, causing a further market decline, and affecting sales of construction equipment and cranes. Crane sales were also down in Alberta, compared to a much stronger market in 2013. However, sales of other heavy equipment in Western Canada and the eastern United States largely offset these short-term pauses in the market."

                    FINANCIAL HIGHLIGHTS
     (in millions of dollars, except per-share amounts)

                                          Three months ended
                                                    June 30,
                                               2014     2013 

Revenues                                    $ 135.9  $ 140.2
Operating income                                5.3      6.2  
EBITDA                                         11.4     13.7 
Income before income taxes                      2.3      4.0  
Net income                                  $   1.7  $   2.9  
Basic and diluted net earnings per share    $  0.13  $  0.22 
Equipment inventory (as at June 30)           276.9    261.4
Equipment notes payable (as at June 30)     $ 229.2  $ 233.1

Note: EBITDA stands for earnings before interest, taxes, 
      depreciation and amortization.

Second quarter of 2014 review

Total revenues in the three months ended June 30, 2014, were $135.9-million, down 3 per cent from the second quarter of 2013. Equipment sales were $93.5-million, down 4 per cent from $97.5-million last year, rental revenues were $5.7-million, down 25 per cent from 2013, and product support revenues totalled $36.7-million, up 5 per cent from $35.1-million from the same period in the prior year.

Gross margin was $24.1-million, or 17.7 per cent of revenue, during the second quarter of 2014, compared with $24.4-million, or 17.4 per cent of revenue, in the same period in 2013. Gross margins for the first half of 2014 were negatively impacted by additional reserves in the first quarter of approximately $1.3-million for losses on inventory sold at auction in the second quarter. Excluding these abnormal losses, year-to-date total gross margins would have been $44.2-million or 18.4 per cent of sales.

Administrative, distribution and selling expenses during the second quarter totalled $19-million, compared with $18.5-million in 2013. Most of the expense increase relates to the investments made in 2013 in new branches in Fort McMurray, Alta., and Saint-Augustin-de-Desmaures, Que., along with additional people to support growth and better service the company's customers.

EBITDA for the second quarter decreased to $11.4-million from $13.7-million in the second quarter of 2013.

Strongco's net income in the second quarter of 2014 was $1.7-million (13 cents per share), compared with net income of $2.9-million (22 cents per share) in the second quarter of 2013.

Outlook

"The onset of warmer and dryer temperatures in June has resulted in improved quoting activity, and order backlogs remain at robust levels, creating a more optimistic outlook for the balance of the construction season," added Mr. Dryburgh. "Management anticipates that heavy-equipment markets across the country will generally follow construction activity, with the possibility of some catch-up in the second half in some regions."

Despite the slow start to the year, most economists are continuing to forecast modest growth for Canada overall in 2014 with construction markets, by and large, expected to remain active. Growth is expected to be strongest in Alberta, led by robust activity in the oil sector, and weakest in Quebec where activity continues to be stifled by the continuing investigation of corruption in the construction industry by the Charbonneau commission. As well, the recently elected provincial government is yet to commit substantial funds to rectify the infrastructure deficit in the province.

The northeastern United States was also plagued by difficult winter weather conditions. Despite a slow start to the year, heavy equipment markets in New England began to show improvement in the second quarter and are expected to experience continued growth in the latter part of the year as a result of a gradual recovery in the housing market. In conjunction with the strengthening housing sector, demand for mill yard machines and forestry equipment is increasing. Also, greater demand in southern New England for scrap handling machinery in the first and second quarters is expected to continue throughout the balance of the year.

Over the past two years, Strongco has made significant investments in new branches to expand and improve the company's presence in key markets. In 2012, new branches were opened in Acheson, Alta., on the outskirts of Edmonton, in Baie Comeau, Que., to replace the old branch and in Orillia, Ont., to further penetrate the aggregates market in the area. In 2013, new branches were built in Saint-Augustin-de-Desmaures, Que., to replace the old branch just outside Quebec City, and in Fort McMurray, Alta., to better service customers in this key Northern Alberta market. The new branch in Saint Augustin opened in December, 2013, and construction of the new Fort McMurray branch was completed in March, 2014. Over the same time frame as investments were being made in new branches, Strongco was also building and improving its sales organization with additional territory managers, customer service representatives, product support specialists and an enhanced sales management structure, and has increased the number of skilled service technicians across all business units and regions to better service and meet customer demand. With the increase in construction activity associated with more favourable weather conditions, the benefits of these investments are now beginning to be realized. Although the new facilities and additional people have added to the company's cost structure, management anticipates to further reap the benefits of these investments with continued revenue growth and improved market share performance in 2014.

While there was the normal seasonal buildup of equipment inventories in the first half of the year, equipment debt levels were slightly reduced from a year ago, but with a substantial reduction in the interest-bearing portion of equipment debt. Improved inventory management and debt reduction continue to be the company's focus in 2014, with the goal to reduce balance sheet leverage and lower interest costs. In addition, and with the recent infrastructure improvements now in place, emphasis is being placed on further improving operating efficiency.

Consistent with the company's strategy of focusing capital on its core business, Strongco entered into agreements or received letters of intent to sell and lease back its five remaining branch facilities in Canada. The sale and leaseback of the company's newly constructed facility in Fort McMurray, Alta., was completed at the end of the second quarter. The net proceeds of $3.1-million from this sale, after repayment of construction financing and a small vendor take-back loan, was used to reduce operating debt. The sale and leaseback of the company's new Saint Augustin, Que., branch, as well as other owned facilities in Mississauga, Ont., Val d'Or, Que., and Moncton, N.B., are anticipated to close in the third quarter of 2014. Combined, these five sale and leaseback transactions are expected to generate total proceeds of $47-million and net cash, after repayment of mortgage debt, of $19-million, which will be used to support the company's core business operations, to reduce operating debt and to improve balance sheet leverage.

Conference call details

Strongco will hold a conference call on Thursday, July 31, 2014, at 10 a.m. (ET) to discuss second quarter results. Analysts and investors can participate by dialling 1-800-319-4610 or 1-604-638-5340 outside of Canada and the U.S. Following management's introductory remarks, a question-and-answer session will take place for analysts and institutional investors.

An archived recording will be available to listeners following the call until midnight on Aug. 21, 2014. To access it, dial 1-800-319-6413 or 1-604-638-9010 outside of Canada and the U.S., and enter passcode 4689 followed by the number sign.

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