Alberta, weak dollar hurts Strongco’s bottom line
By Andrew Macklin
July 30, 2015 – Strongco encountered a tough second quarter in 2015, on the heels of a weak market in Alberta and a lower Canadian dollar.
“As anticipated, the impact of low oil prices on the Alberta market and the Canadian economy has significantly reduced the demand for heavy equipment in the province and affected buying decisions across the country. In the first six months of 2015, our Alberta market was down close to 40% from a year ago, with the GPE market off by more than 50% year-over-year. The Canadian markets we serve were down 10% overall, 19% on GPE, with weakness in the Canadian dollar further influencing customer buying decisions,” said Robert Dryburgh, president and chief executive officer of Strongco. “Given these significant headwinds, we were pleased with the results of our market performance and cost management, and are encouraged by the continued progress in inventory management and debt reduction.”
Second Quarter 2015 Overview
Revenues for the quarter were $125.0 million, down $10.9 million, or eight per cent, from the same period in 2014. The decline was mainly in Alberta where revenues were down $12.0 million, or 31 per cent, due to the weak economic environment brought on by the decline in oil prices. Demand for heavy equipment in Alberta is estimated to be down close to 40 per cent year-over-year 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 $1.8 million, or seven per cent, to $22.3 million, and as a percentage of sales, improved slightly to 17.8 per cent from 17.7per cent due to improved product support margins.
Operating expenses were one per cent higher than the prior year, primarily due to the negative impact of the weaker Canadian dollar on the translation of the expenses of the Company’s U.S. operations. Excluding the impact of currency translation, operating expenses were down year-over-year despite higher lease costs from the four branches sold and leased back in 2014. The net result was operating earnings of $3.1 million, compared to $5.3 million in the second quarter of 2014.
Interest expenses in the quarter were down $1.0 million from last year due to the significant reduction in equipment inventory and the associated debt. This resulted in pretax earnings of $1.1 million, compared to pretax earnings of $2.3 million in the second quarter of 2014. After taxes, the net result was earnings of $0.9 million, compared to $1.7 million a year ago.
During the quarter, Strongco achieved a significant reduction in equipment inventories and improved its balance sheet. Although equipment inventories did increase in the quarter, as anticipated, with machines being purchased for the upcoming season, at June 30, 2015 equipment inventory was down $59.1 million from a year ago. Total equipment notes payable were also lower by $38.8 million, compared to a year ago. As a result, the ratio of total liabilities to shareholders equity improved to 4.3 from 5.3 a year earlier.
“Given the current economic climate, management continues to anticipate that the balance of 2015 will be a challenging period for the heavy equipment markets in certain regions of Canada, while, the Northeastern United States is expected to benefit from the ongoing recovery in traditional markets,” added Dryburgh. “In light of the prevailing market conditions, Strongco remains focused on executing the cost-reduction and management initiatives initiated in 2014, while also improving upon our level of sales execution and operational effectiveness.”
In Alberta, the decline in oil prices has not only severely curtailed new development in the oil sands region of northern Alberta, but has depressed activity over the entire province. This has created significant uncertainty across the whole construction sector. As a result, the demand for heavy equipment is expected to be lower in 2015.
In Quebec, due to the lack of government spending on infrastructure and the ongoing investigation into corruption in the construction industry by the Charbonneau Commission, construction activity in the province is expected to be constrained for the balance of the year. In northern regions of the province, commodity prices remain at low levels and mining activity is expected to remain low. As a result, overall, demand for heavy equipment in Quebec is expected to remain soft in 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 the manufacturing sector, which could lead to 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 are expected to remain active in 2015, which will result in continued demand for heavy equipment.
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.