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Solid growth in Alberta helps offset losses for Strongco


August 1, 2014
By Strongco Corporation

July 30, 2014, Mississauga, Ont. – Strongco Corporation has reported
its financial results for the second quarter of 2014, with strong performances
in Alberta and New England mitigating the further Quebec downturn and
weather-related purchasing delays.

July 30, 2014, Mississauga, Ont. – Strongco Corporation has reported
its financial results for the second quarter of 2014, with strong performances
in Alberta and New England mitigating the further Quebec downturn and
weather-related purchasing delays.

 

"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."

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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.

 

Outlook

 

"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.