Strongco Announces Second Quarter Results
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.
- 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 $0.22 per share
* Comparisons are between second quarter 2014 and second quarter 2013.
"The challenging weather conditions that extended well into May curtailed construction activity across the country and limited oil field access delaying purchasing decisions by customers," said Bob Dryburgh, President and Chief Executive Officer of Strongco. "The difficult winter exacerbated the already weakened market situation in eastern Canada causing a further market decline and affecting sales of construction equipment and cranes. Crane sales were also down in Alberta, compared to a much stronger market in 2013. However, sales of other heavy equipment in western Canada and the eastern United States largely offset these short-term pauses in the market."
Three-Month Periods Ended June 30 (Unless Otherwise Noted)
|$ millions except per share amounts||2014||2013|
|Income Before Income Taxes||2.3||4.0|
|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.
"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.
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.
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