Rock to Road

News
Strongco ends 2014 on solid ground


March 27, 2015
By Rock to Road

March 27, 2015 – Solid sales growth in the fourth quarter of
2014 has led to a three per cent increase in total revenue for Strongco in
2014.

March 27, 2015 – Solid sales growth in the fourth quarter of
2014 has led to a three per cent increase in total revenue for Strongco in
2014.

 

Revenues for 2014 totaled $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 two
per cent in 2014 to $326.5 million, while Rental revenue in 2014 was $30.4
million, down three per cent 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.

Advertisment

 

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.

 

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," said
Robert Dryburgh, President and Chief Executive Officer of Strongco.
"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."

 

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 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 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.

 

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.