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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