Strongco Announces Second Quarter 2016 Results

Progress in inventory management and cost controls,
but not enough to offset cash flow pressures from depressed markets

TSX Symbol: SQP

MISSISSAUGA, ON, Aug. 4, 2016 /CNW/ - Strongco Corporation (TSX: SQP) today reported financial results for the second quarter ended June 30, 2016.

Financial Summary*

• Revenues essentially flat for the quarter and year-to-date of $126.6 million, and $236.3 million, respectively.
• Gross profit of $17.0 million (13.4% of revenues) for the quarter, compared to $22.3 million (17.8% of revenues). Gross profit of $38.1 million (16.1% of revenues) year-to-date, compared to $43.5 million (18.3% of revenues).
• Operating loss, before restructuring costs, of $3.5 million for the quarter, compared to income of $3.1 million. Operating loss, before restructuring costs, of $0.9 million year-to-date, down from income of $5.2 million.
• Interest expense for the quarter of $1.8 million, down from $2.0 million. Interest expense of $3.6 million year-to-date, down from $5.1 million.
• Net loss of $4.8 million (loss of $0.37 per share) in the quarter, compared to net income of $0.9 million ($0.06 per share). Net loss of $5.5 million (loss of $0.42 per share) year-to-date, compared to a net income of $0.1 million ($0.00 per share).
• Equipment inventory of $171.6 million, down from $199.0 million at December 31, 2015 and $217.8 million at June 30, 2015.
• Lower profits and weaker equipment margins in the first half of 2016 have significantly curtailed free cash flow, placing increased pressure on Strongco's already strained financial resources. Upon careful consideration, the independent directors of the Board have approved the decision to pursue the sale of Strongco's U.S. subsidiary, Chadwick BaRoss, Inc., to the Company's largest shareholder for cash proceeds of approximately US$12.75 million.

* Comparisons are between second quarter 2016 and second quarter 2015.

"Over the past several years, Strongco has made significant investments in the business, with the anticipation of higher growth; however, due to the ongoing challenging economic conditions in many of the regions in which we operate, this growth has not been realized," said Robert Beutel, Executive Chairman of Strongco. "While we continue to see positive reductions in expenses, equipment inventories and the associated financing costs, we are taking actions to improve cash flow in the near term and reduce net debt over the long term, focusing on our most competitive assets to deliver sustainable value, restore stability, and return Strongco to profitability. By taking such actions, we believe our core Canadian business will be significantly strengthened – more efficient and streamlined."

Financial Highlights Table
($ millions except percentages and per share amounts)

Period Ended June 30	Three Months		Six Months
	2016	2015	2016	2015
Revenues	126.6	125.0	236.3	237.7
Gross Profit	17.0	22.3	38.1	43.5
Gross Margin (%)	13.4%	17.8%	16.1%	18.3%
Operating Income (Loss) Before Restructuring Costs	(3.5)	3.1	(0.9)	5.2
EBITDA^*	-	8.4	6.6	16.7
Pretax Income (Loss)	(6.5)	1.1	(7.4)	0.1
Net Income (Loss)	(4.8)	0.9	(5.5)	0.1
Basic And Diluted Earnings (Loss) Per Share	(0.37)	0.06	(0.42)	0.00
Equipment Inventory			171.6	217.8
Equipment Notes Payable			158.1	190.4

* "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 2016 Review

Revenues for the quarter were $126.6 million, up slightly from $125.0 million from the second quarter of 2015, due entirely to higher equipment sales, primarily the result of strong crane sales in Quebec. Depressed market conditions in Alberta, due to the low price of oil, continue to be the biggest challenge for Strongco. In addition, the wild fires around Fort McMurray during the quarter further exacerbated the already weakened activity and demand for heavy construction equipment in the region.

The higher proportion of equipment sales, combined with lower margins on equipment sales and product support, resulted in lower gross profit in the second quarter.  In addition, during the quarter, the Company recorded an additional reserve for anticipated losses on attachment inventory of $2.5 million which resulted in gross profit of only $17.0 million, or 13.4% of revenues, down from $22.3 million, or 17.8%, in the second quarter of 2015.

During the second quarter, Strongco recorded an additional restructuring provision of $1.2 million for severance and other termination costs of certain employees, terminated in response to ongoing weak economic conditions, particularly in Alberta. This was in addition to the $1.7 million restructuring provision recorded in the first quarter. Strongco's headcount has been reduced by 65 employees in 2016 with an expected annualized savings of $6.9 million.

Operating expenses were $19.9 million, compared to $19.2 million in the second quarter of 2015. The increase related primarily to depreciation and ongoing support of the new SAP computer system which went live in the second half of 2015 and the impact of the weaker Canadian dollar on translation of the expenses of Strongco's U.S. operations.

After a slight strengthening in the first three months of the year, the Canadian dollar weakened further in the second quarter, resulting in a foreign exchange loss on US Dollar liabilities of approximately $0.5 million in the quarter.

The lower gross profit, higher expenses and foreign exchange loss contributed to an operating loss of $4.7 million in the second quarter, compared to a profit of $3.1 million in the same period of 2015.

Strongco continued to make progress in reducing equipment inventories and the associated equipment finance debt. At June 30, equipment inventory was $171.6 million, down $46.2 million from the same time last year and equipment notes payable were $158.1 million, down $32.3 million from a year ago.

As a result, interest expense in the quarter was down $0.2 million from a year ago to $1.8 million. This resulted in a loss before tax of $6.5 million, which compared to a pre-tax profit of $1.1 million in the second quarter of 2015.

After tax there was a net loss of $4.8 million, compared to net income of $0.9 million in the second quarter of 2015. EBITDA for the quarter was $nil, down from $8.4 million in the second quarter of 2015.

While interest expense declined over the last several quarters, lower revenues and reduced margins in the first half of 2016 led to a significant reduction in EBITDA, resulting in a decline in the ratio of EBITDA to interest expense. Interest coverage for the four quarters ended June 30, 2016 was 1.96x, below the minimum 2.5x required under the financial covenants contained in the Strongco's lending agreements with its bank and certain other equipment lenders. This resulted in the Company being in violation of its interest coverage covenant. Subsequent to June 30, the default was waived by the bank and other lenders, and the financial covenant was amended. Additionally, the Company covenanted with its bank to complete the sale of the Company's U.S. subsidiary, Chadwick BaRoss Inc.

Lower revenues and weaker equipment margins in the first half of 2016 also led to reduced cash flow from operations of negative $9.0 million in the second quarter and slightly above a breakeven at $0.5 million for the six months to June 30, 2016.

To provide additional cash to partially alleviate the situation, during the quarter Strongco sold certain pieces of equipment to Oakwest Corporation Limited, a large shareholder and related party of Strongco, for proceeds of $2.8 million. While the proceeds from this sale provided some relief, the Company continued to draw on its bank lines to meet supplier obligations and fund operations. As a result, bank indebtedness has increased to $39.8 million from $33.2 million at December 31, 2015 and $32.5 million a year ago, and there is minimal additional availability on the Company's bank lines.

While the actions taken to reduce expenses and interest, and improve operational effectiveness, are beginning to impact on cash flow in a positive way, given the Company's current financial position, management and the Board have determined that an injection of additional new cash is a foremost priority. After careful consideration, the Board has approved the decision to pursue the sale of Strongco's U.S. subsidiary, Chadwick BaRoss Inc., to the Company's largest shareholder for cash proceeds of approximately US$12.75 million.  The independent directors of the Board have determined the sale of Chadwick BaRoss Inc. is potentially the best means to provide additional financial resources in the shorter term until market conditions improve.

Outlook

Towards the end of the second quarter, with the advent of warm, dryer weather, construction activity and demand for equipment and parts and service increased. While management anticipates further improvement as the season progresses, challenging market conditions are expected to persist for the balance of 2016 in Canada, particularly in Alberta and Quebec. In New England, ongoing recovery in traditional markets for residential construction should continue to benefit heavy equipment markets.

In Alberta, with no recovery in the price of oil anticipated in the near term, economic activity across the entire province is expected to remain depressed. As a consequence, demand for heavy equipment and cranes is expected to remain weak throughout 2016. In response to the current market conditions and weak outlook, management has made adjustments to the cost structure with layoffs and other cost reductions and is focusing on continuously improving operating efficiency and our level of sales execution. The wild fires in and around Fort McMurray exacerbated the already weak market conditions in the region, and while some reconstruction is expected, the extent and timing of any rebuilding is uncertain.

In Quebec, demand for heavy equipment and cranes is expected to remain soft in the near term. While the Charbonneau Report on the investigation into corruption in the construction industry was issued late in 2015, there has been little improvement in activity in the province and no significant new government infrastructure spending planned beyond the reconstruction of the Turcot Interchange in Montreal and the new Champlain Bridge.

In Ontario, while construction activity remains somewhat buoyant, most activity is of a smaller scale and there remains 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 province's manufacturing sector which could lead to new investment and increased demand for heavy equipment; however, no significant government infrastructure spending has been announced, and few large projects are underway or planned for the near term. As a result, larger scale construction activity is expected to remain low and demand for heavy equipment, especially GPE, is not expected to increase significantly in 2016.

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 the current weak construction markets, it has become more difficult for dealers to pass on these higher costs, which has resulted in lower sales and margins. The Canadian dollar is expected to remain weak in the near term in response to low oil prices, and continues to impact sales and margins.

Heavy equipment markets in New England are expected to show further modest improvement in 2016 as the U.S. economy continues to grow. The traditional markets for residential construction and forestry, which experienced an uptick in 2015, are expected to remain active in 2016, which will result in continued demand for heavy equipment.

Conference Call Details

Strongco will hold a conference call on Friday, August 5, 2016 at 10:00am ET to discuss second quarter results. Analysts and investors can participate by dialing
1-800-319-4610 or [phone] 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 September 5, 2016. To access it, dial 1-855-669-9658 or [phone] outside of Canada and USA and enter passcode 00630#.

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 700 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 2016. 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 www.sedar.com.

SOURCE Strongco Corporation

J. David Wood, Vice-President and Chief Financial Officer, 905.670.5100, [email protected], strongco.com