Improved Operating Profit on Lower Sales in Tough Market Conditions

TSX Symbol: SQP

MISSISSAUGA, ON, Oct. 29, 2015 /CNW/ - Strongco Corporation (TSX: SQP) today reported financial results for the third quarter ended September 30, 2015.

In a quarter with two major markets at depressed levels, the Alberta market shrunk by 60% and Quebec continued at levels 40% below two years ago, Strongco has reduced costs, decreased inventories and lowered debt to produce an improved operating profit on lower sales.

Financial Summary

• Revenues of $108.4 million, down 16% from the same quarter in 2014, due mainly to lower revenues in Alberta. For the nine months, revenues of $346.1 million, compared to $369.5 million in the prior year.
• Gross profit of $21.3 million (19.6% of sales), compared to $21.9 million (16.9% of sales) in the third quarter of 2014. For the nine months, gross profit of $64.8 million (18.7% of sales), versus $64.8 million (17.5% of sales) in the prior year.
• Operating profit of $1.2 million before foreign exchange losses, up from $0.3 million in the third quarter of 2014, excluding gains on the sale of real estate. For the nine months, operating income of $6.9 million, up from $4.7 million before foreign exchange losses and real estate gains.
• Interest expense for the quarter of $2.2 million, down from $2.6 million in the third quarter of 2014. For the nine months, interest expense of $7.3 million, down from $8.5 million in the prior year.
• Net loss of $2.1 million (loss of $0.16 per share), compared to net income of $5.5 million ($0.42 per share) in the third quarter of 2014. For the nine months, net loss of $2.1 million (loss of $0.16 per share), compared to a net income of $4.2 million ($0.32 per share) in the prior year.
• Equipment inventory of $236.3 million, down from $258.6 million at September 30, 2014.
• Total debt of $262.3 million, down from $267.9 million at September 30, 2014.

"Difficult market conditions related to the current low price of oil in Alberta, the impact of a weaker Canadian dollar, which declined by $0.09 in the quarter, and the familiar headwinds we continue to experience in Quebec, have delayed the full realization of Strongco's significant investments over the past three years in the branch network, operations and our people. We are responding to this environment and are pleased to be seeing tangible improvements in cost controls and recoveries, operating efficiencies and sales execution, as well as reduced equipment inventories and related equipment finance debt," said Robert Dryburgh, President and Chief Executive Officer of Strongco. "Despite the lower revenues during the quarter, we achieved improved margins as a percentage of sales, lower operating expenses, and – excluding foreign exchange losses – an increase in operating profit year-over-year."

Financial Highlights Table
($ millions except per share amounts)

* "Profit from Operations before Gains on Sales of Real Estate and Foreign Exchange Losses" refers to operating income before gains on the sale of real estate and foreign exchange losses. This is presented as a measure of profit from operating activities of the Company.  Sales of real estate and foreign exchange losses from movement in currency valuation are considered by management to be outside of the normal operating activities of the Company. Profit from Operations before Gains on Sales of Real Estate and Foreign Exchange 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 Profit from Operations before Gains on Sales of Real Estate and Foreign Exchange Losses is an important supplemental measure in evaluating the Company's performance and comparability between reporting periods. Readers of this information are cautioned that Profit from Operations before Gains on Sales of Real Estate and Foreign Exchange Losses 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.

** "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.

Third Quarter 2015 Overview

Revenues for the quarter were $108.4 million, down $20.8 million, or 16%, from the same period in 2014. The decline was mainly in Alberta where revenues were down $21.6 million, or 52%, due to continuing weak market brought on by the decline in oil prices. Demand for heavy equipment in Alberta is estimated to be down close to 40% year-over-year with general purpose equipment down almost 60% and, with large amounts of equipment sitting idle, demand for parts and service has also been curtailed.

With the lower revenues, gross profit declined by $0.6 million, or 3%, to $21.3 million; however, as a percentage of sales, gross margin was higher at 19.6% compared to 16.9% in the third quarter of 2014, due to a higher proportion of product support sales and a small improvement in the margins on equipment sales.

In addition, actions taken to reduce expenses combined with improved cost recoveries and operating efficiencies resulted in operating expenses 6% lower than a year earlier, despite higher lease costs from the four branches sold and leased back in 2014 and inflated expenses from the translation of the expenses of the Company's U.S. operations, as a result of the weaker Canadian dollar.

The weakening Canadian dollar, which declined by a further $0.09 in the quarter, resulted in foreign exchange losses on US Dollar liabilities of $1.8 million in the quarter, reducing operating income in the quarter to a small loss of $0.6 million compared to breakeven, before the large gains on real estate sales in 2014. Without the non-cash foreign exchange losses, operating profit was $1.2 million, compared to only $0.3 million in the third quarter of 2014 (before gains on the sale of real estate), a substantial improvement in light of the large drop in revenues.

Interest expenses in the quarter were down $0.4 million from last year to $2.2 million, as a direct result of the actions taken to reduce equipment inventory and the associated debt.

The net result was a loss before income taxes of $2.8 million which compared to loss before tax of $2.6 million, before real estate gains, in the third quarter of 2014.

Strongco has achieved a significant reduction in equipment inventories and the associated equipment finance debt despite the fact the weak Canadian dollar has increased the cost of incoming inventory in 2015, as well as the related floor plan debt. At September 30, 2015 equipment inventory was $236.3 million, down $22.3 million from the same time last year, and equipment notes payable were down $29.0 million from a year ago.

Outlook

"While we anticipate that the tough economic conditions in Alberta and Quebec will persist, offset slightly by improving conditions in other markets such as the northeast U.S., our overall strategy for the business remains on course," added Dryburgh. "In response to the current market outlook, we have taken additional actions to contain and reduce costs in ways that are not felt by our customers in order to maintain our strong service reputation and increase market share through this challenging period."

In Alberta, with no changes in the foreseeable future to the current low price of oil, economic activity across the entire province is expected to remain depressed. In addition, the low oil prices have had a negative impact on the entire Alberta economy, creating significant uncertainty across the whole construction sector. As a consequence, demand for heavy equipment and cranes is expected to remain weak throughout the balance of 2015. 

In Quebec, the report on the investigation into corruption in the construction industry by the Charbonneau Commission, is expected to be issued in November 2015. It is expected that construction activity will continue to be constrained for the balance of the year. 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, which began in the summer of 2015, and activity related to the initial preparation for construction of 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 for the balance of 2015. 

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.

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.

During the second quarter, Strongco successfully launched its new Dealer Management System on SAP software in its Canadian operations. While certain remaining software operating matters still need to be resolved, the implementation of this new computer operating system was a success. User operating efficiency is improving and continues to be a focus. With this implementation, Strongco has converted from an almost 30-year-old system, and is now operating on a modern software package that will serve as the foundation for future developments and improvements in how the company services its customers.

"On a final note, I would like to thank Colin Osborne personally, and on behalf of the Board, for his advice and support as a director of Strongco," stated Dryburgh. "Colin has recently taken on a new role, which limits his involvement in external boards and, as a result, effective October 28, 2015, he will no longer be a director of Strongco. We all wish him every success in his new challenge."

Conference Call Details

Strongco will hold a conference call on Friday, October 30, 2015 at 10:00am ET to discuss third quarter results. Analysts and investors can participate by dialing 1-800-319-4610 or +1-604-638-5340 outside of Canada and the United States. 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 26, 2015. To access it, dial 1-855-669-9658 or +1-604-674-8052 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 720 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