Strong Performances in Alberta and New England Mitigate Further Quebec
Downturn and Weather-Related Purchasing Delays
TSX Symbol: SQP
MISSISSAUGA, ON, July 30, 2014 /CNW/ - Strongco Corporation (TSX: SQP)
today reported financial results for the three months ended June 30,
2014.
Summary*
-
Revenue of $135.9 million, down from $140.2 million
-
Product support revenue was up 5% 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 to $6.2 million
-
EBITDA was $11.4 million, compared to $13.7 million
-
Net income totalled $1.7 million, compared to net income of $2.9 million
-
Earnings per share of $0.13, compared to $0.22 per share
* Comparisons are between second quarter 2014 and second quarter 2013.
"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
Three-Month Periods Ended June 30 (Unless Otherwise Noted)
$ millions except per share amounts | 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
|
†"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 to 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 indicators of the Company's performance or to
cash flows from operating, investing and financing activities as
measures of the Company's liquidity and cash flows.
Second Quarter 2014 Review
Total revenues in the three months ended June 30, 2014 were $135.9
million, down 3% from the second quarter of 2013. Equipment sales were
$93.5 million, down 4% from $97.5 million last year; rental revenues
were $5.7 million, down 25% from 2013; and product support revenues
totalled $36.7 million, up 5% from $35.1 million from the same period
in the prior year.
Gross margin was $24.1 million or 17.7% of revenue during the second
quarter of 2014, compared to $24.4 million or 17.4% 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% of sales.
Administrative, distribution and selling expenses during the second
quarter totalled $19.0 million, compared to $18.5 million in 2013. Most
of the expense increase relates to the investments made in 2013 in new
branches in Fort McMurray, Alberta and Saint-Augustin-de-Desmaures,
Quebec, along with additional people to support growth and better
service our 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
($0.13 per share), compared to net income of $2.9 million ($0.22 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 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 ongoing
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, Alberta, on the
outskirts of Edmonton, in Baie Comeau, Quebec to replace the old branch
and in Orillia, Ontario to further penetrate the aggregates market in
the area. In 2013, new branches were built in
Saint-Augustin-de-Desmaures, Quebec, to replace the old branch just
outside Quebec City and in Fort McMurray, Alberta 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 timeframe 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 build-up 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 continues 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, Alberta 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, Quebec branch as well as other owned
facilities in Mississauga, Ontario, Val D'Or, Quebec and Moncton New
Brunswick 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, reduce operating debt and improve
balance sheet leverage.
Conference Call Details
Strongco will hold a conference call on Thursday, July 31, 2014 at 10:00am ET to discuss second quarter results. Analysts and investors can
participate by dialing 1-800-319-4610 or +1-604-638-5340 outside of Canada and the USA. 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 August 21, 2014. To access it, dial 1-800-319-6413 or
+1-604-638-9010 outside of Canada and USA and enter passcode 4689#.
About Strongco Corporation
Strongco Corporation is a major multiline mobile equipment dealer with
operations across Canada and in the United States, operating through
Chadwick-BaRoss, Inc. Strongco sells, rents and services equipment used
in diverse sectors such as construction, infrastructure, mining, oil
and gas, utilities, municipalities, waste management and forestry. The
Company has approximately 750 employees serving customers from 27
branches in Canada and five in the United States. Strongco represents
leading equipment manufacturers with globally recognized brands,
including Volvo Construction Equipment, Case Construction, Manitowoc
Crane, including National and Grove, Terex Cedarapids, Terex Finlay,
Terex Fuchs, Terex Trucks, Ponsse, Fassi, Allied Construction, Taylor,
ESCO, Dressta, Sennebogen, Jekko, Takeuchi, Link-Belt, Kawasaki and
Konecranes. Strongco is listed on the Toronto Stock Exchange under the
symbol SQP.
Forward-Looking Statements
This news release contains forward-looking statements that involve
assumptions and estimates that may not be realized and other risks and
uncertainties. These statements relate to future events or future
performance and reflect management's current expectations and
assumptions which are based on information currently available to the
Company's management. The forward-looking statements include but are
not limited to: (i) the ability of the Company to meet contractual
obligations through cash flow generated from operations, (ii) the
expectation that customer support revenues will grow following the
warranty period on new machine sales and (iii) the outlook for 2014.
There is significant risk that forward-looking statements will not
prove to be accurate. These statements are based on a number of
assumptions, including, but not limited to, continued demand for
Strongco's products and services. A number of factors could cause
actual events, performance or results to differ materially from the
events, performance and results discussed in the forward looking
statements. The inclusion of this information should not be regarded as
a representation of the Company or any other person that the
anticipated results will be achieved and investors are cautioned not to
place undue reliance on such information. These forward-looking
statements are made as of the date of this MD&A, or as otherwise stated
and the Company does not assume any obligation to update or revise them
to reflect new events or circumstances.
Additional information, including the Company's Annual Information Form,
may be found on SEDAR at sedar.com.
SOURCE Strongco Corporation
<p> J. David Wood<br/> Vice-President and Chief Financial Officer<br/> 905.565.3808<br/> <a href="mailto:jdwood@strongco.com">jdwood@strongco.com</a><br/> <a href="http://www.strongco.com">strongco.com</a> </p>