Rock to Road

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Strongco adjusts to tough market conditions


October 30, 2015
By Andrew Macklin

October 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.

“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 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.

“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.

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Outlook

“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,” said Dryburgh.

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 U.S. 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.”