Strongco Announces Second Quarter 2015 Results

Alberta Impact on Revenues Offset Partly by Strong U.S. Sales;
Profitable Quarter Despite Difficult Market; and Improved YTD Results

TSX Symbol: SQP

MISSISSAUGA, ON, July 29, 2015 /CNW/ - Strongco Corporation (TSX: SQP) today reported financial results for the second quarter ended June 30, 2015.

Financial Summary

• Revenues of $125.0 million, down 8% from the same quarter in 2014, due mainly to lower revenues in Alberta. For the six months, revenues of $237.7 million, compared to $240.3 million in the prior year.
• Gross profit of $22.3 million (17.8% of sales), compared to $24.1 million (17.7% of sales) in the second quarter of 2014. For the six months, gross profit of $43.5 million (18.3% of sales), up from $42.9 million (17.9% of sales) in the prior year.
• Operating income of $3.1 million, compared to $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 $2.0 million, down from $3.0 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 $0.9 million ($0.06 per share), compared to net income of $1.7 million ($0.13 per share) in the second quarter of 2014. For the six months, net income of $0.1 million ($0.00 per share), compared to a net loss of $1.3 million (loss of $0.10 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 December 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 December 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% from a year ago, with the GPE market off by more than 50% year-over-year. The Canadian markets we serve were down 10% overall, 19% 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."

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 Table
($ millions except per share amounts)

* "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 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 $125.0 million, down $10.9 million, or 8%, from the same period in 2014. The decline was mainly in Alberta where revenues were down $12.0 million, or 31%, 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% 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%, to $22.3 million, and as a percentage of sales, improved slightly to 17.8% from 17.7% due to improved product support margins. 

Operating expenses were 1% higher than the prior year, primarily due to the negative impact of the weaker Canadian dollar on the translation of the expenses of the Company's U.S. operations. Excluding the impact 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 to $5.3 million in the second quarter of 2014. 

Interest expenses in the quarter were down $1.0 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 to pretax earnings of $2.3 million in the second quarter of 2014. After taxes, the net result was earnings of $0.9 million, compared to $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 upcoming 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 to 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 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 ongoing 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, overall, 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 US 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 10:00am 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 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 August 27, 2015. To access it, dial 1-855-669-9658 or +1-604-674-8052 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, Sennebogen, Konecranes and SDLG. 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 2015.  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 news release, 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