Strongco sees modest decline in 2015
By Andrew Macklin
March 31, 2016 – Strongco Corporation recorded a modest decrease in revenue in 2015, down five per cent to $474.3 million. The decline was announced as part of the company’s announcement of its year-end financials for 2015.
“Over the past several years, Strongco has invested heavily in new branches, technology, and product lines; however, difficult market conditions, particularly in resources and energy, along with a weak Canadian dollar, led to disappointing results for the year,” said Robert Beutel, executive chairman of Strongco. “We believe however, that with focus on our talents and streamlining our operations, we can return to levels of stability and financial strength in the near and long term.”
Fiscal 2015 Financial Review
Overall revenues for 2015 totaled $474.3 million, down $24 million or five per cent from 2014, with most of the decline occurring in Alberta, due to the weak economic conditions in the province. Overall revenues in Canada were down $42.3 million, or 10 per cent, primarily due to the drop in Alberta. This was partially offset by strong growth in Strongco’s U.S. operations.
Gross profit was $82.7 million, or 17.4 per cent of revenues for 2015, compared to $86.3 million or 17.3 per cent of revenues in 2014. While lower revenues impacted margins, the decline in gross profit resulted mainly from the additional $4.5 million reserve for aged equipment inventory recorded in the fourth quarter. Before this large reserve, gross profit was $87.2 million, or 18.4 per cent of revenues, compared to $86.3 million, or 17.3 per cent of revenues, in 2014.
Management anticipates a continuation of challenging market conditions in Canada in 2016, particularly in Alberta and Quebec, while, in New England, ongoing recovery in traditional markets for residential construction and forestry should continue to benefit heavy equipment markets.
In Alberta, with no recovery in the price of oil anticipated in the near term, economic activity across the entire province is expected to remain depressed. New development in the oil sands region of northern Alberta has been severely curtailed, and low oil prices have had a negative impact on the entire Alberta economy, creating significant uncertainty across the whole construction sector in the province. As a consequence, demand for heavy equipment and cranes is expected to remain weak throughout 2016. In response to the current market conditions and weak outlook, management has made adjustments to the cost structure with layoffs and other cost reductions, and is focusing on continuously improving operating efficiency and our level of sales execution.
In Quebec, overall, demand for heavy equipment and cranes is expected to remain soft in the near term. While the report on the investigation into corruption in the construction industry by the Charbonneau Commission was issued late in 2015, there has been little improvement in construction activity in the province and with no plans for significant new government infrastructure spending, construction activity in Quebec is expected to remain weak in the near term. There have been positive signs with increased activity on the reconstruction of the Turcot Interchange in Montreal, and construction of a new Champlain Bridge both of which began late in 2015, but beyond these two large projects, activity is expected to remain slow.
In Ontario, while construction activity remains somewhat buoyant, most activity is of a smaller scale and 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. However, no significant government infrastructure spending has been announced and few large projects are underway or planned for the near term. As a result, larger scale construction activity is expected to remain low and demand for heavy equipment, especially general purpose equipment, is not expected to increase significantly in 2016.
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 the current weak construction markets, it has become more difficult for dealers to pass on these higher costs, which has resulted in lower sales and margins. The Canadian dollar is expected to remain weak in the near term in response to continuing low oil prices, which will continue to impact sales and margins.
With this economic backdrop, the overall markets for heavy equipment across Canada are expected to be flat to down while competition is expected to remain strong. In response to the weak market conditions in Canada during 2015, particularly in Alberta, actions were taken to contain and reduce costs. Layoffs in 2015 resulted in a reduction in headcount of 45, or seven per cent, of the company’s workforce in Canada. Management has taken additional measures early in 2016 to further reduce costs without impacting the company`s ability to service its customers. In addition, with the expectation of continuing weak markets, management is taking further aggressive action to reduce aged equipment inventory and the associated financing to lessen balance sheet leverage and free up cash.
Heavy equipment markets in New England are expected to show further modest improvement in 2016 as the U.S. economy continues to grow. The traditional markets for residential construction and forestry, which experienced an uptick in 2015, are expected to remain active in 2016, which will result in continued demand for heavy equipment.