Strongco Announces Fourth Quarter and Full Year 2014 Results

- Continued Growth in Revenue and Market Share Despite Challenging Markets -

TSX Symbol: SQP

MISSISSAUGA, ON, March 26, 2015 /CNW/ - Strongco Corporation (TSX: SQP) today reported financial results for the fourth quarter and year ended December 31, 2014.

2014 Financial Highlights*

  • Revenues increased by 3% to $498.3 million 
  • Gross margin of $86.3 million, down from $88.9 million in 2013
  • Gain on sale and leaseback of branches of $8.7 million, compared to $3.0 million in 2013
  • Operating income of $13.0 million, compared to $14.5 million in 2013
  • EBITDA of $43.0 million, compared to $45.0 million in 2013
  • Impairment of intangible asset for $1.8 million
  • Net income totalled $0.9 million, compared to $3.0 million in 2013
  • Earnings per share of $0.07, compared to $0.23 per share in 2013
  • Bank debt and notes payable reduced by $22.9 million

* Comparisons are between full year 2014 and full year 2013.

"Last year's harsh winter led to a very late spring in key markets, initially causing our customers to postpone, and ultimately cancel orders as their ability to get on site was delayed further into the year. These slower market conditions intensified the already weakened situation in Eastern Canada," said Robert Dryburgh, President and Chief Executive Officer of Strongco. "In this difficult environment, Strongco completed a number of strategic initiatives including the launch of new branches in Alberta and Quebec, the addition of four new complementary brands, a branch-by-branch focus on operational effectiveness that is yielding sustainable cost reductions, improvements to sales execution and inventory and debt management, as well as extensive work on Strongco's SAP dealer management system, which is poised to go live this May.  Collectively, these investments and enhancements in key markets, technology, our people and our financial stability will fuel continued growth and improve profitability."

Financial Highlights
($ millions except per share amounts)

Period ended December 31

3 months

12 months


2014

2013

2014

2013

Revenues

$128.8

$116.4

$498.3

$485.7

Gross margin

$21.5

$21.6

$86.3

$88.9

Operating income

$0.6

$2.7

$13.0

$14.5

EBITDA*

$8.9

$11.0

$43.0

$45.0

Net income (loss)

($3.3)

$0.3

$0.9

$3.0

Basic and diluted earnings (loss) per share

($0.25)

$0.02

$0.07

$0.23

*"EBITDA" refers to earnings before interest, income taxes, impairment of intangible asset, 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.

Fourth Quarter 2014 Review

Total revenues in the three months ended December 31, 2014 were $128.8 million, an increase of 11% compared to the fourth quarter of 2013. Equipment sales were up $9 million year over year to $84.6 million; product support revenues totalled $35.5 million, compared to $32.0 million from the same period in the prior year; and equipment rentals were rentals $8.7 million, consistent with the prior year.

Gross margin decreased by $0.1 million to $21.5 million during the fourth quarter of 2014. As a percentage of revenue, the overall gross margin was 16.7%, down from 18.6% in 2013, due mainly to lower margins on equipment sales. 

Administrative, distribution and selling expenses in the fourth quarter totalled $20.9 million compared to $20.5 million in 2013. Expenses were higher in the quarter primarily as a result of the higher rents following the sale and leaseback of the Company's branches in Fort McMurray, Saint-Augustin-de-Desmaures, Mississauga and Moncton. Excluding the new rents, operating expenses in the quarter were down $0.5 million from the prior year.

Other income in the fourth quarter of 2014 was $0.1 million, compared to $1.7 million in the fourth quarter of 2013. Other income for the fourth quarter 2014 includes a gain of $0.5 million on the sale and leaseback of the Company's branch in Moncton, New Brunswick, offset by a foreign exchange loss of $0.4 million resulting from the translation of U.S.$ denominated liabilities.  The majority of the other income in the fourth quarter of 2013 related to the $1.5 million gain on the sale of the Ste-Foy, Quebec branch, which was replaced by the new branch in Saint-Augustin-de-Desmaures, Quebec.

As a consequence of the announcement by Volvo Construction Equipment to discontinue production of motor graders, during the quarter, the Company recorded an impairment charge of $1.8 million against the intangible asset related to the distribution rights associated with the Champion Road Machinery business acquired from Volvo in 2008.

EBITDA in the fourth quarter of 2014 was $8.9 million (6.9% of revenues), compared to $11.0 million (9.5% of revenue) in 2013.

Net loss in the fourth quarter of 2014 was $3.3 million (loss of $0.25 per share), compared to net income of $0.3 million ($0.02 per share) in the same quarter of the prior year.

Fiscal 2014 Financial Review

Revenues for 2014 totalled $498.3 million, including $71.0 million from Chadwick-BaRoss in the U.S. This compared to $485.7 million in total revenue for Strongco in 2013. Strongco's equipment sales increased by 2% in 2014 to $326.5 million. Rental revenue in 2014 was $30.4 million, down 3% from 2013. Product support revenues totalled $141.4 million, compared to $133.2 million in 2013. Product support revenues were higher in 2014 across all regions of Canada and in the Northeastern U.S., with the exception of Quebec.

As a result of lower equipment margins in 2014, gross margins in the year decreased to $86.3 million from $88.9 million in 2013. As a percentage of revenues, total gross margin in 2014 was 17.3%, compared to 18.3% in 2013. The sale of several pieces of aged and used equipment inventory at auction in the second quarter resulted in a gross margin loss of approximately $1.7 million which negatively impacted equipment margins and the overall gross margins for the year. Excluding these unusual losses, year to date total gross margins would have been $88.0 million or 17.7% of sales. 

Administrative, distribution and selling expenses in 2014 were $81.3 million which compared to $77.7 million in 2013. As a percentage of revenue, administrative, distribution and selling expenses were 16.3% in 2014, up from 16.0% in 2013. Expenses increased in 2014, primarily as a result of investments made to drive future growth in the business and additional unusual allowances for doubtful accounts receivable from certain financially strained or bankrupt customers primarily in Quebec.

Other income in 2014 amounted to $8.0 million compared to $3.4 million in 2013.  Other income was higher in 2014 primarily due to gains from the sale and leaseback of four properties – Fort McMurray, Alberta; Saint-Augustin-de-Desmaures, Quebec; Mississauga, Ontario and Moncton, New Brunswick. Net proceeds on the sales were $44.3 million which were used to repay the outstanding bank term loans on the facilities and other bank debt. The sales resulted in a total net gain of $8.7 million which was included in other income.  The gain on the sale of these branches was partially offset by foreign exchange losses which arose on the translation and settlement of the Company's US dollar liabilities as a result of a decline in the value of the Canadian dollar.  During 2013 the Company sold two facilities for proceeds of $13.8 million resulting in a total gain of $3.0 million which was included in other income. 

EBITDA in 2014 was $43.0 million (8.6% of revenue), compared to $45.0 million (9.3% of revenue) in 2013.

Strongco's net income in 2014 was $0.9 million ($0.07 per share), down from $3.0 million ($0.23 per share) in 2013.

Outlook

"We expect 2015 to be another challenging year in some key regions of Canada, based on the current low price of oil and devaluation of the Canadian dollar, as well as the continued weakness in Quebec," added Dryburgh. "Throughout 2014, certain cost reduction initiatives were undertaken, particularly in Quebec, the benefits of which are now being realized. Further reductions have been made early in 2015 with the elimination of 21 salaried positions and cancellation of an additional 11 planned new hires.  With the transformational initiatives of the past three years largely behind us, the focus now is to deliver better results than last year and to realize a return on the investments we have made as a company, even as challenges persist in key markets."

Over the last two years Strongco has substantially upgraded its branch network and improved its sales organization.  These actions were taken to improve Strongco's market presence and management believes that the results of these actions will be positive going forward. However, in light of the current low price of oil and devaluation of the Canadian dollar and the ongoing weakness in Quebec, management anticipates 2015 will be a challenging year in heavy equipment markets in certain regions of Canada.

For 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 any recovery in construction activity in and around Montreal. Commodity prices remain at low levels and mining activity in the northern regions of the province is expected to remain low. Overall, demand for heavy equipment in Quebec is expected to remain soft in 2015.  For the longer term, while there has been little infrastructure spending in the province over the last several years, recent approval of funding for certain large bridge reconstruction and highway projects was a positive indicator. In addition, while mining activity in northern Quebec remains slow, there are some early indications of recovery in that sector.  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 in the province, was a positive sign for the future. 

In Ontario, while construction activity remains somewhat buoyant, 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 Ontario's manufacturing sector which could lead to improved confidence and new investment and increased demand for heavy equipment.

In Alberta, the decline in oil prices has cast a shadow of uncertainty over the entire province.  Development in the oil sands region of northern Alberta has been severely curtailed which has led to significant cutbacks and layoffs by the oil companies.  The low oil prices have had a negative impact on the entire Alberta economy which has stifled government spending plans and created significant uncertainty across the whole construction sector.  As a consequence, demand for heavy equipment is expected to be lower in 2015.

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 will be difficult for dealers to pass on these higher costs which may result in margin compression.

With this economic backdrop, the 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.  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 improved market share performance in 2015 and beyond. 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 to reduce balance sheet leverage and lower interest costs.  In addition, management will continue its focus on operational improvement and cost reductions that have begun to be realized in the latter part of 2014.

Conference Call Details

Strongco will hold a conference call on Friday, March 27, 2015 at 10:00am ET to discuss fourth quarter and year-end 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 April 27, 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: Information Contact: J. David Wood, Vice-President and Chief Financial Officer, 905.565.3808, jdwood@strongco.com, strongco.com

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http://www.strongco.com

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