Mr. Robert Dryburgh reports

STRONGCO ANNOUNCES SECOND QUARTER 2015 RESULTS

Strongco Corp. has released its financial results for the second quarter ended June 30, 2015.

Financial summary

• Revenues of $125-million, down 8 per cent from the same quarter in 2014, due mainly to lower revenues in Alberta. For the six months, revenues of $237.7-million, compared with $240.3-million in the prior year;
• Gross profit of $22.3-million (17.8 per cent of sales), compared with $24.1-million (17.7 per cent of sales) in the second quarter of 2014. For the six months, gross profit of $43.5-million (18.3 per cent of sales), up from $42.9-million (17.9 per cent of sales) in the prior year;
• Operating income of $3.1-million, compared with $5.3-million in 2014. For the six months, operating income of $5.2-million, up from $4.2-million in the prior year;
• Interest expense for the quarter of $2-million, down from $3-million in the second quarter of 2014. For the six months, interest expense of $5.1-million, down from $5.9-million in the prior year;
• Net income of $900,000 (six cents per share), compared with net income of $1.7-million (13 cents per share) in the second quarter of 2014. For the six months, net income of $100,000 (nil per share), compared with a net loss of $1.3-million (10 cents per share) in the prior year;
• Equipment inventory of $217.8-million, down from $276.9-million at June 30, 2014, and $226.3-million at Dec. 31, 2014;
• Total debt of $244.5-million, down from $288.3-million at June 30, 2014, and up slightly from $241.5-million at Dec. 31, 2014;
• Canadian bank credit facility renegotiated and renewed in the quarter to provide a three-year committed facility with an increased borrowing limit and improved terms and financial covenants.

"As anticipated, the impact of low oil prices on the Alberta market and the Canadian economy has significantly reduced the demand for heavy equipment in the province and affected buying decisions across the country. In the first six months of 2015, our Alberta market was down close to 40 per cent from a year ago, with the GPE [general-purpose equipment] market off by more than 50 per cent year over year. The Canadian markets we serve were down 10 per cent over all, 19 per cent on GPE, with weakness in the Canadian dollar further influencing customer buying decisions," said Robert Dryburgh, president and chief executive officer of Strongco. "Given these significant headwinds, we were pleased with the results of our market performance and cost management, and are encouraged by the continued progress in inventory management and debt reduction."

Mr. Dryburgh added: "During the second quarter, we successfully launched our new dealer management system across our Canadian operations, replacing a 30-year-old system with SAP. We believe this is a strategic building block for our future customer service capability and growth. There is still work to do, but the risks inherent in making the change are behind us."

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

                                                         Three months               Six months
                                                        ended June 30,           ended June 30,
                                                     2015        2014        2015         2014

Revenues                                         $  125.0    $  135.9    $  237.7     $  240.3
Operating income                                      3.1         5.3         5.2          4.2
EBITDA(1)                                             8.4        11.4        16.7         17.1
Pretax earnings (loss)                                1.1         2.3         0.1        (1.7)
Net income (loss)                                     0.9         1.7         0.1        (1.3)
Basic and diluted earnings (loss) per share          0.06        0.13        0.00       (0.10)
Equipment inventory                                                         217.8        276.9
Equipment notes payable                                                     190.4        229.2

1. EBITDA refers to earnings before interest, income taxes, amortization of capital assets, 
   amortization of equipment inventory on rent and amortization of rental fleet. EBITDA is 
   presented as a measure used by many investors to compare issuers on the basis of ability to 
   generate cash flow from operations. EBITDA is not a measure of financial performance or 
   earnings recognized under international financial reporting standards (IFRS) and therefore 
   has no standardized meaning prescribed by IFRS and may not be comparable with similar terms 
   and measures presented by other similar issuers. The company's management believes that 
   EBITDA is an important supplemental measure in evaluating the company's performance and in 
   determining whether to invest in shares. Readers of this information are cautioned that 
   EBITDA should not be construed as an alternative to net income or loss determined in 
   accordance with IFRS as an indicator of the company's performance or to cash flows from 
   operating, investing and financing activities as a measure of the company's liquidity and 
   cash flows.

Second quarter 2015 overview

Revenues for the quarter were $125-million, down $10.9-million, or 8 per cent, from the same period in 2014. The decline was mainly in Alberta, where revenues were down $12-million, or 31 per cent, due to the weak economic environment brought on by the decline in oil prices. Demand for heavy equipment in Alberta is estimated to be down close to 40 per cent year over year and, with large amounts of equipment sitting idle, demand for parts and service has also been curtailed.

With the lower revenues, gross profit declined by $1.8-million, or 7 per cent, to $22.3-million, and as a percentage of sales improved slightly to 17.8 per cent from 17.7 per cent due to improved product support margins.

Operating expenses were 1 per cent higher than the prior year, primarily due to the negative effect of the weaker Canadian dollar on the translation of the expenses of the company's U.S. operations. Excluding the effect of currency translation, operating expenses were down year over year despite higher lease costs from the four branches sold and leased back in 2014. The net result was operating earnings of $3.1-million, compared with $5.3-million in the second quarter of 2014.

Interest expenses in the quarter were down $1-million from last year due to the significant reduction in equipment inventory and the associated debt. This resulted in pretax earnings of $1.1-million, compared with pretax earnings of $2.3-million in the second quarter of 2014. After taxes, the net result was earnings of $900,000, compared with $1.7-million a year ago.

During the quarter, Strongco achieved a significant reduction in equipment inventories and improved its balance sheet. Although equipment inventories did increase in the quarter, as anticipated, with machines being purchased for the coming season, at June 30, 2015, equipment inventory was down $59.1-million from a year ago. Total equipment notes payable were also lower by $38.8-million compared with a year ago. As a result, the ratio of total liabilities to shareholders equity improved to 4.3 from 5.3 a year earlier.

Outlook

"Given the current economic climate, management continues to anticipate that the balance of 2015 will be a challenging period for the heavy equipment markets in certain regions of Canada, while the northeastern United States is expected to benefit from the ongoing recovery in traditional markets," added Mr. Dryburgh. "In light of the prevailing market conditions, Strongco remains focused on executing the cost-reduction and management initiatives initiated in 2014, while also improving upon our level of sales execution and operational effectiveness."

In Alberta, the decline in oil prices has not only severely curtailed new development in the oil sands region of Northern Alberta, but has depressed activity over the entire province. This has created significant uncertainty across the whole construction sector. As a result, the demand for heavy equipment is expected to be lower in 2015.

In Quebec, due to the lack of government spending on infrastructure and the continuing investigation into corruption in the construction industry by the Charbonneau Commission, construction activity in the province is expected to be constrained for the balance of the year. In northern regions of the province, commodity prices remain at low levels and mining activity is expected to remain low. As a result, over all, demand for heavy equipment in Quebec is expected to remain soft in 2015.

In Ontario, while construction activity remains somewhat buoyant, there is an overall air of caution, which is affecting the purchase decisions for heavy equipment. The current low oil prices and weak Canadian dollar should be of benefit to the manufacturing sector, which could lead to new investment and increased demand for heavy equipment.

As the majority of heavy equipment is priced in U.S. dollars, the weak Canadian dollar has resulted in the cost of new equipment to Canadian dealers rising. In light of the weak construction markets, it may be more difficult for dealers to pass on these higher costs, which may result in margin compression.

Heavy equipment markets in New England are expected to show further modest improvement in 2015 as the U.S. economy continues to grow. The traditional markets for residential construction and forestry are expected to remain active in 2015, which will result in continued demand for heavy equipment.

Improved inventory management and debt reduction will continue to be a focus of the company in 2015, with the goal of reducing balance sheet leverage and lowering interest costs.

Conference call details

Strongco will hold a conference call on Thursday, July 30, 2015, 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 United States. 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. 27, 2015. To access it, dial 1-855-669-9658 or 1-604-674-8052 outside of Canada and the United States and enter passcode 4689 followed by the pound sign.

We seek Safe Harbor.