Strongco Announces First Quarter 2015 Results

Revenues up; expenses down; market share improved; debt reduced.

TSX Symbol: SQP

MISSISSAUGA, ON, April 29, 2015 /CNW/ - Strongco Corporation (TSX: SQP) today reported financial results for the first quarter ended March 31, 2015, which included pre-tax profits slightly ahead of breakeven (before unusual non-cash charges) compared to a loss of $3.6 million (before non-cash charges) in 2014.

Financial Highlights*

  • Revenues increased by 8% to $112.6 million
  • Gross margin increased by 12% to $21.2 million
  • Operating expenses were down 4%
  • Operating income was $2.1 million, compared to a loss of $1.1 million
  • EBITDA was up 45% to $8.3 million compared to $5.7 million
  • Pre-tax profits, before non-cash charges, were marginally ahead of breakeven compared to a loss of $3.6 million
  • Net loss totalled $0.8 million compared to a net loss of $3.0 million
  • Loss per share was $0.06 compared to a loss of $0.23 per share
  • Equipment inventory was $207.5 million, down from $245.5 million at March 31, 2014 and $226.3 million at December 31, 2014
  • Total debt was $233.9 million, down from $287.4 million at March 31, 2014 and $241.4 million at December 31, 2014

* Comparisons are between first quarter 2015 and first quarter 2014.

"We are pleased to report sales improvements in both equipment and product support, with market share growth in Canada and the United States despite new challenges relating to declines in the price of oil and the Canadian dollar as well as the familiar headwinds in Eastern Canada, and that we were able to continue positive trends in inventory management and debt reduction," said Robert Dryburgh, President and Chief Executive Officer of Strongco. "With the exception of two non-cash charges, namely foreign exchange losses due to a rapid decline in the Canadian dollar and a mark-to-market loss on interest rate swap agreements, we achieved positive earnings for the quarter, which we attribute to expense reductions and effective cost controls,  the culmination of a three-year transformation of Strongco with numerous customer-centric initiatives – from sales re-organization to new branches to enhanced product support – coming together and beginning to reach full potential."

Financial Highlights Table
($ millions except per share amounts)

Three-Month Periods Ended March 31 (Unless Otherwise Noted)

$ millions except per share amounts

2015

2014

Revenues

112.6

104.4

Operating Income (Loss)

2.1

(1.1)

EBITDA

8.3

5.7

Pretax earnings (loss) before non-cash losses † 

0.1

(3.6)

Net Loss

(0.8)

(3.0)

Basic and Diluted Loss Per Share

(0.06)

(0.23)

Equipment Inventory

207.5

245.5

Equipment Notes Payable

183.2

212.0

 "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.

"Pretax earnings (loss) before non-cash losses" refers to earnings before income taxes, excluding foreign exchange losses and interest rate swap agreement mark-to-market losses. Pretax earnings (loss) before non-cash losses is presented as a measure used by many investors to compare issuers on the basis of operating performance. Pretax earnings (loss) before non-cash losses 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 pretax earnings (loss) before non-cash losses 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 pretax earnings (loss) before non-cash losses 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.

First Quarter 2015 Review

Strongco increased revenues by 8% year over year to $112.6 million in the first quarter of 2015, despite weaker market conditions in Alberta, as a result of the sharp decline in oil prices, and in Quebec, as a result of the ongoing effects of the Charbonneau Commission and the downturn in mining. Equipment sales and product support revenues were higher in Canada and the U.S. with market share gains realized across all regions of Canada, except Ontario and the Northeastern United States. Equipment rentals were $6.3 million, consistent with the prior year.

With the higher revenues, gross margins increased by $2.3 million, or 12%, to $21.2 million and as a percent of revenue improved to 18.8% from 18.1% due to improved equipment sales margins. 

While revenues and gross margins were higher, operating expenses were 4% lower than the prior year, due to actions to reduce expenses combined with improved cost recoveries and operating efficiencies. The net result was operating earnings of $2.1 million, a significant improvement from an operating loss of $1.1 million in the first quarter of 2014. 

Foreign exchange losses of $0.6 million caused by a decline in the value of the Canadian dollar during the quarter and a non-cash mark-to-market adjustment of $0.6 million on interest rate swap agreements, brought earnings before taxes to a loss of $1.0 million. Before these non-cash charges, pretax earnings were at slightly more than breakeven, a substantial improvement from a pretax loss of $3.6 million, before non-cash charges, in the first quarter of 2014. After taxes, the net result was a loss of $0.8 million, improved from a net loss of $3.0 million a year ago.

EBITDA in the first quarter of 2015 was $8.3 million (7.4% of revenues), up from $5.7 million (5.5% of revenue) in the same period in 2014.

Net loss in the first quarter was $0.8 million (loss of $0.06 per share), compared to net loss of $3.0 million ($0.23 per share) in the same quarter of the prior year.

During the quarter, the Company also improved its balance sheet with a reduction in equipment inventory of $38.0 million and reduction in equipment notes payable of $28.8 million from a year ago. Total bank debt and other notes payable at March 31, 2015, were also lower by $24.7 million compared to the same time last year resulting in a year-over-year reduction of total debt by $53.5 million. As a consequence, the ratio of total liabilities to shareholders equity improved to 4.2 from 5.0 a year earlier.

Outlook

"While management anticipates 2015 to be a challenging year in the heavy equipment markets, we continue to benefit from the completion of a number of strategic initiatives including the launch of new facilities in Alberta and Quebec, the addition of four new complementary brands, a heightened focus on operational effectiveness, and improvements to sales execution and inventory and debt management," added Dryburgh. "Economic difficulties in key markets are providing a good test for Strongco and our competitors in terms of balancing cost controls with customer satisfaction. We are pleased to have delivered positive results against this backdrop in the first quarter, and management is confident that we can establish a trend of improved profitability going forward."

Despite an air of caution for the balance of 2015 in certain regions of Canada and in New England, heavy equipment markets are expected to continue to benefit from the ongoing recovery in traditional markets for residential construction and forestry.

In Alberta, the decline in oil prices has cast a shadow of uncertainty over the entire province. New development in the oil sands region of northern Alberta has been severely curtailed, leading to significant cutbacks and layoffs by the oil companies and related service companies. The low oil prices have had a negative impact on the entire Alberta economy, creating significant uncertainty across the whole construction sector. Despite the provincial government's recent commitment to infrastructure spending, the demand for heavy equipment is expected to be lower in 2015.

In Quebec, the ongoing investigation into corruption in the construction industry by the Charbonneau Commission, which was extended by the provincial government to November 2015, is expected to continue to constrain the recovery in construction activity in and around Montreal. However, after many years of little infrastructure spending throughout the province, there are signs of some increased activity with the reconstruction of the Turcot Interchange in Montreal, expected to commence in the summer of 2015, and the recent award of a contract to build a new Champlain Bridge. In northern regions of the province, commodity prices remain at low levels and mining activity is expected to remain low. Overall, demand for heavy equipment in Quebec is expected to remain soft in 2015. 

Quebec's longer term outlook is more optimistic as there are some early indications of recovery in addition to the major construction projects mentioned. The announcement by the new provincial government of its plan to revive Plan Nord, a long-term, multi-billion dollar program for economic and social development of the northern territory of the province, was a positive sign. In addition, the announced plans that the Caisse de Dépôt will become involved in infrastructure projects in Quebec provided increased confidence to the construction sector. 

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 Ontario's manufacturing sector which could lead to improved confidence and 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.

With this economic backdrop, the overall markets for heavy equipment across Canada are expected to be flat to down while competition is expected to intensify.

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, which experienced an uptick in 2014, are expected to remain active in 2015, which will result in continued demand for heavy equipment.

Over the past two years, Strongco has made significant investments in new branches to expand and improve the Company's presence in key markets. Over the same time frame that 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 improved market share. With these infrastructure improvements now in place, emphasis is being placed on further improving operating efficiency.

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. Management will also continue its focus on operational efficiency and improved cost recovery that began to be realized in the latter part of 2014. In addition, and in anticipation of 2015 being a challenging year, management has taken action to reduce overhead costs by eliminating 21 positions and cancelling an additional 11 new hires planned for the year. Throughout 2014, cost reduction initiatives were undertaken to reflect the prevailing market conditions, particularly in Quebec, the benefits of which are now being realized.

Conference Call Details

Strongco will hold a conference call on Thursday, April 30, 2015 at 10:00am ET to discuss first 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 May 30, 2015. 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, 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

For further information: J. David Wood, Vice-President and Chief Financial Officer, 905.670.5100, jdwood@strongco.com, strongco.com

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http://www.strongco.com

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