Rocky Mountain Dealerships Inc. Reports 2017 Second Quarter Results

Sales Growth, a Streamlined Cost Structure and Lower Finance Costs Drive a 47% Increase in Earnings Per Share

Category:

Wednesday, August 9, 2017 11:16 am MDT

Dateline:

CALGARY
"All the while, our disciplined approach to sales and inventory management continues to improve our inventory turns and strengthen our balance sheet."

Rocky Mountain Dealerships Inc. ("Rocky" or the "Corporation") (TSX:RME), Canada's largest agriculture equipment dealer, today reported its financial results for the quarter ended June 30, 2017. All financial figures are expressed in Canadian dollars.

"Modest sales growth, improved margins, a streamlined cost structure and lower finance costs due to our reduced debt levels allowed us to deliver a 47% increase in second quarter earnings per share. That said, our annualized profit margin is expected to be more reflective of the profit margin for the six months ended June 30, 2017," said Garrett Ganden, President & Chief Executive Officer. "All the while, our disciplined approach to sales and inventory management continues to improve our inventory turns and strengthen our balance sheet."

Selected Quarterly Financial Information

         
  Three months ended June 30,   Six months ended June 30,
$ thousands   2017   2016   Change   % Change   2017   2016   Change   % Change
             
Sales 237,156 232,575 4,581 2.0 447,082 422,039 25,043 5.9
Cost of sales   201,545   198,428   3,117   1.6   384,698   359,609   25,089   7.0
Gross profit 35,611 34,147 1,464 4.3 62,384 62,430 (46) (0.1)
Gross profit as a % of sales 15.0% 14.7% 0.3% 14.0% 14.8% (0.8%)
 
Selling, general and administrative 24,743 24,693 50 0.2 47,937 48,910 (973) (2.0)
Loss (gain) on derivative financial instruments 282 (1,469) 1,751 (119.2) (139) (1,217) 1,078 (88.6)
Loss on sale of vacant land 641 - 641 100.0 641 - 641 100.0
Restructuring charges   -   2,231   (2,231)   (100.0)   -   2,231   (2,231)   (100.0)
Earnings before finance costs and income taxes 9,945 8,692 1,253 14.4 13,945 12,506 1,439 11.5
Finance costs   3,026   3,751   (725)   (19.3)   6,017   7,297   (1,280)   (17.5)
Earnings before income taxes 6,919 4,941 1,978 40.0 7,928 5,209 2,719 52.2
Income taxes   2,069   1,575   494   31.4   2,267   1,579   688   43.6
Net earnings   4,850   3,366   1,484   44.1   5,661   3,630   2,031   56.0
Net earnings as a % of sales 2.0% 1.4% 0.6% 1.3% 0.9% 0.4%
 
Earnings per share
  Basic 0.25 0.17 0.08 47.1 0.29 0.19 0.10 52.6
Diluted 0.25 0.17 0.08 47.1 0.29 0.19 0.10 52.6
Dividends per share 0.115 0.115 - - 0.23 0.23 - -
Book value / diluted share – June 30 9.26 8.68 0.58 6.7
 
Adjusted Diluted Earnings per Share(1) 0.29 0.21 0.08 38.1 0.33 0.23 0.10 43.5
Adjusted EBITDA(1) 10,034 8,494 1,540 18.1 13,287 11,237 2,050 18.2
Operating SG&A(1) 22,999 22,356 643 2.9 44,023 44,803 (780) (1.7)
Operating SG&A (1) as a % of sales 9.7% 9.6% 0.1% 9.8% 10.6% (0.8%)
Operating Cash Flow before Changes in Floor Plan(1) 33,800 15,915 17,885 112.4 9,476 10,800 (1,324) (12.3)

(1) – See further discussion in "Non-IFRS Measures" and "Reconciliation of Non-IFRS Measures to IFRS"

Summary of the Quarter Ended June 30, 2017

Sales and Margins

  • Total sales increased $4.6 million or 2.0% to $237.2 million compared with the same period in 2016 due to a $4.5 million increase in equipment sales.
  • Gross profit for the three months ended June 30, 2017 increased by $1.5 million or 4.3% to $35.6 million compared with the same period in 2016. As a percentage of sales, gross margin for the quarter experienced a modest year-over-year increase of 0.3% to 15.0% as a result of strong product support margins. On a year-to-date basis, and consistent with our comments from the first quarter, we have recognized a $0.7 million decrease in manufacturer incentives which is reflective of a change in the incentive programs from our manufacturer and is expected to increase our reported cost of sales during 2017 as compared to last year.
  • On an annualized basis, gross margin is expected to be more reflective of the margin for the six months ended June 30, 2017.

Cost Structure and Earnings

Operating SG&A(1) held relatively stable compared with the same period last year and continued to be in line with our target of less than 10% of sales as the result of our long-term cost containment initiatives and the structural changes made to our fixed cost structure. In addition, the $0.7 million or 19.3% year-over-year decrease in finance costs this quarter (explained below) contributed to:

  • Adjusted EBITDA(1) that increased by $1.5 million or 18.1% to $10.0 million; and
  • Adjusted Diluted Earnings per Share(1) that increased by $0.08 to $0.29.

(1) – See further discussion in "Non-IFRS Measures" and "Reconciliation of Non-IFRS Measures to IFRS"

Balance Sheet and Inventory

During the quarter, Rocky:

  • Sold inventory down by $19.9 million, or 4.3%,
  • Reduced floor plan payable by $33.8 million or 10.7% to $282.4 or 71.4% of equipment inventory (a low not reported since 2011), and
  • Disposed of vacant land, and applied $4.0 million of proceeds against our Term Facility.

The continued focus on paying down interest bearing debt with operational cash flow resulted in a $0.7 million or 19.3% year-over-year decrease in finance costs this quarter.

As at June 30, 2017, our equipment inventory declined by $7.5 million or 1.9% and $54.5 million or 12.1% compared with December 31, 2016 and June 30, 2016, respectively.

Rocky's overall investment in inventory has been realigned to current market demand, and we continue to optimize our inventory mix. Through targeted sales efforts, we aim to continue our recent trend of improving inventory turns.

Market Fundamentals and Outlook

The area seeded to field crops in Canada is expected to increase by 2.4% over last year. Notwithstanding an estimated 3.2% decline over last year, early field crop production estimates from Agriculture and Agri-Food Canada suggest another strong year for Canadian Farmers.

Precipitation levels across the Canadian Prairies have generally trailed behind historical averages and many regions have also experienced unseasonably warm temperatures. While rainfall would be welcomed, at present, groundwater levels generally appear adequate to support a healthy crop.

Commodity prices for key Western Canadian crops combined with the relative weakness in the Canadian dollar, also continue to support strong farm balance sheets.

Financial Statements and Management's Discussion and Analysis ("MD&A")

The MD&A as well as the unaudited financial statements and notes to the financial statements for the three months ended June 30, 2017, are available online at www.rockymtn.com and www.sedar.com.

Quarterly Cash Dividend

On August 8, 2017, Rocky's Board of Directors declared a quarterly dividend of $0.115 per common share on Rocky's outstanding common shares. The common share dividend is payable on September 29, 2017, to shareholders of record at the close of business on August 31, 2017.

This dividend is designated by Rocky to be an "eligible dividend" for the purposes of the Income Tax Act (Canada) and any similar provincial or territorial legislation. An enhanced dividend tax credit applies to "eligible dividends" paid to Canadian residents. Please consult with your own tax advisor for advice with respect to the income tax consequences to you from Rocky designating its dividends as "eligible dividends."

Conference Call

Rocky will host a conference call and webcast today at 9:00 a.m. MT (11:00 a.m. ET) to discuss its second quarter 2017 results.

Those interested in participating in the conference call may do so by calling 1-888-231-8191 (toll free) or 1-647-427-7450.

A live webcast of the conference call will also be accessible through the link below:

http://event.on24.com/r.htm?e=1461784&s=1&k=61A7249BAD36149572090FCA7196D765

An archived recording of the conference call will be available until August 23, 2017 by dialing 1-855-859-2056 (toll free) or 1-416-849-0833, passcode: 50704283. This archived recording will also be available via Rocky's website.

Caution regarding forward-looking statements

Certain information set forth in this news release, including, without limitation, statements that imply any future earnings, profitability, economic benefit or other financial results; statements regarding the seasonal nature of Rocky's core; statements discussing or implying any economic or financial results for 2017, including statements that Rocky expects its annualized profit margin to be more reflective of the profit margin for the six months ended June 30, 2017; statements that Rocky will continue to improve inventory turns and strengthen its balance sheet; statements regarding the anticipated crop yields for 2017; statements about groundwater levels and the health of Canadian crops; and statements regarding our scheduled quarterly conference call, are forward-looking information within the meaning of applicable Canadian securities laws. By its nature, forward-looking information is subject to numerous risks and uncertainties, some of which are beyond Rocky's control. While this forward-looking information is based on information and assumptions that Rocky's management believes to be reasonable, there is significant risk that the forward-looking statements will prove not to be accurate. Readers are cautioned not to place undue reliance on forward-looking statements as a number of factors could cause actual future performance and events to differ materially from that expressed in the forward-looking statements. Accordingly, this news release is subject to the disclaimer and qualified by risks and other factors discussed by Rocky in its management's discussion and analysis ("MD&A") for the quarter ended June 30, 2017, and as discussed in Rocky's Annual Information Form dated March 14, 2017 under the heading "Risk Factors." Except as required by law, Rocky disclaims any intention or obligation to update or revise forward-looking statements, and further reserves the right to change, at any time, at its sole discretion, its current practice of updating its guidance and outlooks.

About Rocky

Rocky is Canada's largest agriculture equipment dealer with branches located throughout Alberta, Saskatchewan, and Manitoba. Through its network of Rocky Mountain Equipment locations, Rocky sells, rents, and leases new and used agriculture equipment and offers product support and finance to its customers.

Additional information on Rocky is available at www.rockymtn.com and on SEDAR at www.sedar.com.

NON-IFRS MEASURES

We use terms which do not have standardized meanings under IFRS. As these non-IFRS financial measures do not have standardized meanings prescribed by IFRS, they are unlikely to be comparable to similar measures presented by other issuers. Our definition for each term is as follows:

  • "Adjusted Diluted Earnings per Share" is calculated by eliminating from net earnings, the after-tax impact of the losses (gains) arising from the Company's derivative financial instruments and DSUs, as well as the expense (recovery) associated with its SARs. These items arise primarily from changes in the Company's share price as well as fluctuations in interest rates and are not reflective of the Company's core operations.

The Company also adjusts for any non-recurring charges (recoveries) recognized in net earnings. Management deems non-recurring charges (recoveries) to be unusual or infrequent items that the Company incurs outside of its common day-to-day operations. Adjusting for these items allows management to isolate and analyze diluted earnings per share from core business operations. For the periods presented, restructuring costs associated with amalgamating the industrial operations and losses recognized on the impairment and subsequent disposition of vacant land have been classified as non-recurring charges. The losses on the sale of vacant land are not expected to give rise to a reduction in our tax provision.

  • "EBITDA" is a commonly used metric in the dealership industry. EBITDA is calculated by adding finance costs associated with long-term debt, income taxes and depreciation and amortization to net earnings. Adding back non-operating expenses allows management to consistently compare periods by removing changes in tax rates, long-term assets and financing costs related to the Company's capital structure.
  • "Adjusted EBITDA" is calculated by eliminating from EBITDA, the impact of the losses (gains) arising from the Company's derivative financial instruments and DSUs, as well as the expense (recovery) associated with its SARs. These items arise primarily from changes in the Company's share price as well as fluctuations in interest rates and are not reflective of the Company's core operations.

The Company also adjusts for any non-recurring charges (recoveries) recognized in EBITDA. Management deems non-recurring charges (recoveries) to be unusual or infrequent items that the Company incurs outside of its common day-to-day operations. Adjusting for these items allows management to isolate and analyze EBITDA from core business operations. For the periods presented, restructuring costs associated with amalgamating the industrial operations and losses recognized on the impairment and subsequent disposition of vacant land have been classified as non-recurring charges.

  • "Operating SG&A" is calculated by eliminating from SG&A, depreciation and amortization expense as well as the impact of the losses (gains) arising from the Company's DSUs and the expense (recovery) associated with its SARs. These items arise primarily from changes in the Company's share price and are not reflective of the Company's core operations.

The Company also adjusts for any non-recurring charges (recoveries) recognized in SG&A. Management deems non-recurring charges (recoveries) to be unusual or infrequent items that the Company incurs outside of its common day-to-day operations. For the periods presented, no non-recurring charges (recoveries) have been identified. The assessment of Operating SG&A facilitates the evaluation of discretionary expenses from ongoing operations. We target a sub-10% Operating SG&A as a percentage of total sales on an annual basis.

  • "Operating Cash Flow before Changes in Floor Plan" is calculated by eliminating the impact of the change in floor plan payable (excluding floor plan assumed pursuant to business combinations) from cash flows from operating activities. Adjusting cash flows from operating activities for changes in the balance of floor plan payable allows management to isolate and analyze operating cash flows during a period, prior to any sources or uses of cash associated with equipment financing decisions.

RECONCILIATION OF NON-IFRS MEASURES TO IFRS

Adjusted Diluted Earnings per Share
         
  Three months ended
June 30,
  Six months ended
June 30,
$ thousands   2017   2016   2017   2016
     
Earnings used in the calculation of diluted earnings per share 4,850 3,366 5,661 3,630
Loss (gain) on derivative financial instruments 282 (1,469) (139) (1,217)
Loss on DSUs 8 79 34 70
SAR (recovery) expense (156) 90 121 84
Industrial restructuring charges - 2,231 - 2,231
Non-deductible loss on sale of vacant land 641 - 641 -
Tax effect of adjustments (27%)   (36)   (251)   (4)   (315)
Earnings used in the calculation of Adjusted Diluted Earnings per Share 5,589 4,046 6,314 4,483
Weighted average diluted shares used in the calculation of diluted earnings per share (in thousands)   19,384   19,384   19,384   19,384
Adjusted Diluted Earnings per Share   0.29   0.21   0.33   0.23
 
 
EBITDA and Adjusted EBITDA
         
Three months ended
June 30,
  Six months ended
June 30,
$ thousands   2017   2016   2017   2016
 
Net earnings 4,850 3,366 5,661 3,630
Finance costs associated with long-term debt 448 454 943 907
Depreciation and amortization expense 1,892 2,168 3,759 3,953
Income taxes   2,069   1,575   2,267   1,579
EBITDA 9,259 7,563 12,630 10,069
Loss (gain) on derivative financial instruments 282 (1,469) (139) (1,217)
Loss on DSUs 8 79 34 70
SAR (recovery) expense (156) 90 121 84
Industrial restructuring charges - 2,231 - 2,231
Loss on sale of vacant land   641   -   641   -
Adjusted EBITDA   10,034   8,494   13,287   11,237
 
 
Operating SG&A
         
Three months ended
June 30,
  Six months ended
June 30,
$ thousands   2017   2016   2017   2016
 
SG&A 24,743 24,693 47,937 48,910
Depreciation and amortization expense (1,892) (2,168) (3,759) (3,953)
Loss on DSUs (8) (79) (34) (70)
SAR recovery (expense)   156   (90)   (121)   (84)
Operating SG&A   22,999   22,356   44,023   44,803
Operating SG&A as a % of sales   9.7%   9.6%   9.8%   10.6%
 
 
Operating Cash Flow before Changes in Floor Plan
         
Three months ended
June 30,
  Six months ended
June 30,
$ thousands   2017   2016   2017   2016
 
Cash flow from operating activities (35) (2,801) (5,744) (6,344)
Net decrease in floor plan payable(1) 33,835 18,716 15,220 17,144
Floor plan assumed pursuant to business combinations   -   -   -   -
Operating Cash Flow before Changes in Floor Plan   33,800   15,915   9,476   10,800

(1) – Includes change in floor plan payable classified as liabilities associated with assets held for sale.

Contact:

Rocky Mountain Dealerships Inc.,
Garrett Ganden, President and Chief Executive Officer;
David Ascott, Chief Financial Officer, or
Jim Wood, Chief Sales and Operations Officer, #301, 3345 8th Street S.E., Calgary, Alberta T2G 3A4, Telephone: (403) 265-7364, Fax: (403) 214-5644