Strongco Announces Third Quarter Results

TSX Symbol:  SQP 

Equipment and Product Support Sales Growth in Alberta and the U.S. Offset Challenging Conditions in Crane Markets and the Quebec Downturn

MISSISSAUGA, ON, Oct. 29, 2014 /CNW/ - Strongco Corporation (TSX: SQP) today reported financial results for the three months ended September 30, 2014.

Summary

Total revenues in the quarter were essentially unchanged from the prior year.  Higher equipment sales in Alberta and the northeastern United States largely offset the impact of continued weak construction markets in Quebec and lower demand for cranes across the country. In addition, revenue from rentals and product support activities remained strong and were up year over year. During the quarter, the Company completed the sale and leaseback of two of branch facilities, resulting in a gain on sale of $8.2 million, which is included in operating income, and generated $24.3 million of net cash proceeds used to reduce debt and de-lever the balance sheet.

• Revenue of $129.2 million, down slightly from $131.7 million in 2013
• Gross margin of $21.9 million compared to $24.2 million in 2013
• Gain on sale and leaseback of two branches of $8.2 million included in operating income
• Operating income of $8.2 million, up from $5.7 million in 2013
• Net income totalled $5.5 million, up from net income of $2.0 million in 2013
• Earnings per share of $0.42 compared to $0.15 per share
• EBITDA of $17.0 million, up from $13.8 million in 2013
• Proceeds from sale and leaseback transactions used to reduce bank debt to $25.3 million from $46.3 million at the end of June
• Equipment inventory reduced in the quarter by $18.3 million to $258.6 million
• Interest bearing equipment notes reduced to $149.7 million from $171.2 million at September 2013

"In the third quarter, we improved on four fronts: the sale of two branches enabled us to reduce debt and de-lever the balance sheet, interest bearing equipment notes declined significantly from the prior year, we showed the progress we have been looking for from our improved market presence through new branches and enhanced sales organization, and operating costs are beginning to reflect our focus on improved efficiencies and cost recoveries," said Bob Dryburgh, President and Chief Executive Officer of Strongco. "Alberta and the northeastern U.S., in particular, have produced significant growth in equipment sales, offsetting continued weak markets in Quebec and lower demand for cranes across the country.  We are also very pleased to see growth in product support revenues, validation from our customers that our significant investment in facilities, technicians and after-sale service is working."

Financial Highlights

Three-Month Periods Ended September 30 (Unless Otherwise Noted)

$ millions except per share amounts	2014	2013
Revenues	129.2	131.7
Operating Income	8.2	5.7
EBITDA^†	17.0	13.8
Income Before Income Taxes	5.6	2.9
Net Income	5.5	2.0
Basic and Diluted Net Earnings Per Share	0.42	0.15
Equipment Inventory (As at September 30)	258.6	253.6
Interest bearing equipment Notes Payable (As at September 30)	149.7	171.2

 

^† "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.

Third Quarter 2014 Review

Total revenues in the three months ended September 30, 2014 were $129.2 million, down 2% from the third quarter of 2013. Equipment sales were $83.7 million, down 5% from $87.8 million last year; rental revenues were $9.0 million, up 6% from 2013; and product support revenues totalled $36.5 million, up 3% from $35.4 million from the same period in the prior year.

Gross margin was $21.9 million or 17.0% of revenue during the third quarter of 2014, compared to $24.2 million or 18.3% of revenue in the same period in 2013. Gross margins for the nine months ended September 30, 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 unusual losses, year-to-date total gross margins would have been $66.1 million or 17.9% of sales.

Administrative, distribution and selling expenses during the third quarter totalled $21.5 million, compared to $19.8 million in 2013. Additional provisions for doubtful accounts of $1.1 million were recorded in the third quarter primarily related to amounts owing from certain customers in Quebec that have become bankrupt or financially strained, as well as two steel mills in Ontario that announced restructuring proposals.  Expenses were also up due to the impact of the weakening Canadian dollar on Chadwick-BaRoss expenses. Excluding these additional costs, year-over-year expenses were relatively flat despite the additional expense increases related to investments made in new branches in Fort McMurray, Alberta and Saint-Augustin-de-Desmaures, Quebec, and additional people to support growth and better service our customers.

EBITDA for the third quarter increased to $17.0 million, from $13.8 million in the same quarter of 2013.

Strongco's net income in the third quarter of 2014 was $5.5 million ($0.42 per share), compared to net income of $2.0 million ($0.15 per share) in the same quarter of 2013.

Outlook

"Consistent with our strategy to continually strengthen Strongco's balance sheet and deploy capital more efficiently, we have completed the sale and leaseback of three properties resulting in net cash proceeds of $41 million, which was used to reduce bank term loans and operating debt. In addition, lower interest bearing notes and flat operating expenses in the quarter demonstrate our commitment to improving inventory management and operating efficiencies," added Dryburgh. "While the weather and certain economic factors have stifled our profit performance in 2014, we believe the table is set for 2015 to see positive bottom-line results from our improvements to Strongco's product lineup, sales organization, support and customer service, physical presence in key markets, and capital structure."

The start of the construction season in 2014 was delayed as a result of prolonged extreme cold winter weather conditions that extended well into the second quarter.  This curtailed construction activity and delayed customers' buying decisions, partially until weather conditions allowed job site access and also, to some degree, indefinitely.  Weather conditions in Alberta also affected drilling activity and thus slowed crane sales in that province.  The return to more normal weather conditions led to a construction activity pick up in the third quarter and increased demand for heavy equipment. With the slow start to the year and some catch up in heavy equipment markets across Canada in the third quarter, management anticipates that trend will continue in the final quarter of 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.  For the balance of 2014 and looking forward to 2015, the strong growth expectations in Alberta may be moderated by current oil prices if they prevail for an extended time; flat markets are expected in Ontario and ongoing weakness is anticipated in Quebec where activity continues to be stifled by the impact of the Charbonneau Commission.  As well, the new provincial government in Quebec has yet to commit substantial funds to rectify the infrastructure deficit in the province. Mining activity in northern Quebec has not recovered although there are currently indications of some early recovery in that sector. In addition, the new provincial government has recently announced the revival of Plan Nord, a long-term, multi-billion dollar program for economic and social development of the northern territory in the province. In summary, continued growth is expected in Alberta, flat markets in Ontario and ongoing weak demand in Eastern Canada.

The northeastern United States also experienced longer than normal 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 continued strong into the third quarter.  Construction markets are expected to show 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 has increased and is expected to remain strong in the near term.

Over the past two years, Strongco has made significant investments in new branches to expand and improve the Company's presence in key markets.  New branches were opened in 2012 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 December of 2013, a new branch was opened in Saint-Augustin-de-Desmaures, Quebec, to replace the old branch just outside Quebec City, which was followed by a new branch in Fort McMurray, Alberta in the first quarter of 2014, to better service customers in this key northern Alberta market.  Over the same time frame as investments were being made in new branches, the Company 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.  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 2015 and beyond. With these infrastructure improvements now in place, emphasis is being placed on further improving operating efficiency.

After the normal seasonal build-up in the first half of the year, equipment inventories began to decline toward the end of the third quarter and are expected to decline further in the fourth quarter.  Equipment debt levels have also come down and are also expected to decline further by year end.  In addition, with the company's focus on reducing older inventories and improving inventory management there has been a substantial reduction in the interest bearing portion of equipment debt.  Improved inventory management and debt reduction continues to be the Company's focus with the goal to reduce balance sheet leverage and lower interest costs. 

Interest costs were lower in the third quarter primarily as a result of lower interest bearing equipment notes. With the substantial reduction in debt from the proceeds of the three branch sales, interest costs are expected to decline further in the balance of 2014 and beyond.

Conference Call Details

Strongco will hold a conference call on Thursday, October 30, 2014 at 10:00am ET to discuss third 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 November 28, 2014. To access it, dial 1-800-319-6413 or [phone] 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 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 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

J. David Wood, Vice-President and Chief Financial Officer, 905.565.3808, [email protected], www.strongco.com