Rocky Mountain Dealerships Inc. Reports First Quarter 2019 Results

Product Support and Gross Margin Improvements Highlight Results for Period

Wednesday, May 1, 2019 4:00 am MDT

Dateline:

CALGARY, Alberta

Public Company Information:

TSX:
RME
"While we experienced challenges in some areas, our sales and operations teams delivered solid revenue growth in both parts and service this quarter, contributing to a favorable sales mix and stronger gross margins."

CALGARY, Alberta--(BUSINESS WIRE)--Rocky Mountain Dealerships Inc. (TSX:RME, and hereinafter "RME"), Canada's largest agriculture equipment dealer, today reported its financial results for the three months ended March 31, 2019. Unless otherwise stated, all amounts are expressed in thousands of Canadian dollars.

Commenting on the quarter, Garrett Ganden, President and Chief Executive Officer, stated, “While we experienced challenges in some areas, our sales and operations teams delivered solid revenue growth in both parts and service this quarter, contributing to a favorable sales mix and stronger gross margins.

“Our equipment sales for the period receded from the record levels reported during the first quarter of last year, a trend consistent with the decline in delivery of new agriculture units in the Canadian marketplace year-over-year. In response to these market pressures we have moderated our presale activity, restocked certain key equipment categories and are focusing our efforts on reducing existing inventory. RME stands ready to support our customers’ needs as Canadian farmers enter the 2019 growing season.”

SUMMARY OF THE QUARTER ENDED MARCH 31, 2019

  • Gross profit as a percentage of sales improved to 14.4% compared to 12.3% for the same period in 2018;
  • Product support revenues increased 9.9% or $2,164 on a same store basis year-over-year;
  • RME repurchased an additional 231,000 shares bringing the total shares repurchased to 631,000 representing approximately 40% of the total amount authorized for repurchase under the NCIB and approximately 3.3% of total shares outstanding as at April 30, 2019;
  • Sales decreased 19.1% or $41,973 to $177,681 compared with $219,654 for the same period in 2018 due primarily to a $46,575 decline in same store new equipment sales for the quarter as we limit presale activity and focus on distributing existing inventory;
  • Maintained a solid balance sheet position – with net debt1 of $55,714 and net debt to Adjusted EBITDA ratio of 1.39x.

SELECTED FINANCIAL INFORMATION

      Three Months Ended March 31,    
$ thousands       2019       2018       Change       %
Sales 177,681       219,654       (41,973)       (19.1)
Cost of sales       152,124       192,691       (40,567)       (21.1)
Gross profit 25,557 26,963 (1,406) (5.2)
Gross profit as a % of sales 14.4 12.3 2.1
Selling, general and administrative 24,522 23,337 1,185 5.1
Loss on derivative financial instruments 4 1,426 (1,422) (99.7)
Loss on revaluation of disposal group       1,061             1,061      
Earnings before finance costs and income taxes (30) 2,200 (2,230) (101.4)
Finance costs       4,213       2,964       1,249       42.1
Loss before income taxes (4,243) (764) (3,479) 455.4
Income taxes       (1,199)       (278)       (921)       331.3
Net loss       (3,044)       (486)       (2,558)       526.3
Net loss as a % of sales (1.7) (0.2) (1.5)
Loss per share
Basic (0.16) (0.02) (0.14) 700.0
Diluted (0.16) (0.02) (0.14) 700.0
Dividends per share 0.1225 0.1150 0.0075 6.5
Book value / share – March 31 10.05 9.87 0.18 1.8
Non-IFRS Measures (1)
Adjusted Diluted (Loss) Earnings per Share (0.11) 0.01 (0.12) (1,200.0)
Adjusted EBITDA 1,334 4,261 (2,927) (68.7)
Operating SG&A 20,690 20,378 312 1.5
Operating SG&A as a % of sales 11.6 9.3 2.3
Operating Cash Flow before Changes in Floor Plan       (34,792)       (47,009)       12,217       (26.0)

(1) See further discussion in “Non-IFRS Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections below.

GROWTH PLAN UPDATE

On May 30, 2018, RME launched its growth plan that aims to grow revenues to at least $1.5 billion in 2023. RME intends to do this through a combination of revenue sources including:

Category Revenue Objective ($ millions)       Progress-To-Date ($ millions)
Organic Growth $200       $12
Acquisitions $200 $38
Synergies $100       -
Total $500       $50

As part of this growth plan, during fiscal 2023 RME is targeting Adjusted Earnings of $33.8 million.

The adoption of IFRS 16, 'Leases' has increased Adjusted EBITDA. As a result, RME has recalibrated its initial Adjusted EBITDA target of $60.0 million to $69.0 million to reflect the impact of this accounting change.

Competitive market pressures have weighed on margins during the TTM ended March 31, 2019. Meanwhile, costs associated with acquired locations as well as investment in our sales force have contributed to increased operating costs and resulted in reductions in both Adjusted Earnings and Adjusted EBITDA relative to their respective 2017 benchmark values. Refer to the "Results of Operations" section below for additional discussion regarding these results.

SUMMARY OF RESULTS FOR THE QUARTER ENDED MARCH 31, 2019

Solid contributions from our parts and service business were a good news story in first quarter, wherein many of the regions within our sales territory experienced unseasonably cold winter conditions. As winter gives way to spring and seeding activity commences, Canadian farmers are ready to sow yet another strong crop and RME stands ready to support their equipment and product support needs.

SALES AND MARGINS

  • Sales decreased 19.1% or $41,973 to $177,681 compared with $219,654 for the same period in 2018 due primarily to a $46,575 decline in same store new equipment sales for the quarter as we limit presale activity and focus on distributing existing inventory.
  • Gross profit decreased by 5.2% or $1,406 to $25,557 from $26,963 for the same period in 2018.

COST STRUCTURE

  • As a percentage of sales, Operating SG&A for the first quarter of 2019 increased by 2.3% to 11.6% compared with 9.3% for the same period in 2018, as a result of reduced sales.
  • Finance costs for the quarter ended March 31, 2019 increased 42.1% or $1,249 to $4,213 compared with $2,964 during the same period in 2018 due to an increase in the average level of interest-bearing floor plan.

EARNINGS

  • Adjusted EBITDA for the quarter ended March 31, 2019 decreased by 68.7% or $2,927 to $1,334 compared with $4,261 for the same period in 2018.
  • Adjusted Diluted (Loss) Earnings per Share decreased by $0.12 to a loss of $0.11 for the first quarter of 2018, compared with earnings of $0.01 for the same period of 2018.

NORMAL COURSE ISSUER BID ("NCIB")

  • During the first quarter of 2019, RME repurchased 231,000 of its outstanding common shares pursuant to an NCIB.

MARKET FUNDAMENTALS AND OUTLOOK

RME is primarily engaged in the business of selling agriculture equipment to grain, oilseed and pulse crop farmers in Alberta, Saskatchewan and Manitoba.

In addition to equipment price, demand for agriculture equipment is supported by farming incomes which, in turn, are a function of commodity prices, quantity and quality of the crop, as well as input costs. Many of these factors are influenced by weather conditions on both a local and, to an extent, global basis. Changes in these demand drivers can cause our customers’ buying patterns to shift. The agriculture sector exhibits cyclical surges in demand and profitability driven by these macroeconomic factors, as well as other factors that can impact our industry.

Equipment utilization rates, by contrast, are less volatile as agricultural equipment tends to incur hours in the field regardless of weather or economic conditions. The business of farming requires producers to work their fields each year. Circumstances may exist, however, that cause farmers to opt for used equipment in lieu of new equipment, or they may elect to maintain rather than replace their fleets. Our broad range of product and service offerings enables us to respond to these shifts in buying patterns and provides a measure of stability within our financial results.

CROP OUTLOOK

Agriculture and Agri-Foods Canada is forecasting yet another strong year for Canadian agriculture. Increased seeded area and improved yields are expected to boost overall production of principal field crops in 20192. Recent disruptions in Chinese imports of Canadian canola, however, introduce a measure of short-term uncertainty heading into the growing season, with elevated levels of carry-in stocks weighing on canola prices. While seeding decisions for 2019 had largely been made prior to the disruption, such shifts in the supply and demand equation can be resolved over time as farmers adjust shift their production into other crops.

U.S. MARKET

During Q1 2019, RME's location in Tonganoxie, Kansas commenced operations. With its close proximity to the vibrant agriculture markets of Kansas, Iowa, Nebraska, Missouri and Oklahoma, this location provides an additional distribution channel for late-model, used agriculture equipment while also helping to establish RME within the U.S. dealership landscape.

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 quarters ended March 31, 2019 and 2018, are available online at www.rockymtn.com and 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 (Loss) Earnings per Share” is calculated by eliminating from net (loss) earnings, the after-tax impact of the losses (gains) arising from RME’s derivative financial instruments and DSUs, as well as the expense (recovery) associated with its SARs. These items arise primarily from changes in RME’s share price as well as fluctuations in interest rates and are not reflective of RME’s core operations.

RME 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 RME 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, the loss on the revaluation of the geomatics disposal group and costs associated with the acquisition and integration of complimentary businesses have been classified as non-recurring charges.

  • “Adjusted EBITDA” is derived by eliminating the following items from net (loss) earnings: finance costs associated with long-term debt; income taxes; depreciation and amortization; the impact of the losses (gains) arising from derivative financial instruments and DSUs; and the expense (recovery) associated with SARs. Adjusting net earnings for these items allows management to consistently compare periods by removing the impact of fluctuations in tax rates, long- term assets, financing costs related to RME’s capital structure and RME’s share price.

RME also adjusts for any non-recurring charges (recoveries) recognized in Adjusted EBITDA. Management deems non- recurring charges (recoveries) to be unusual or infrequent items that RME 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, the loss on the revaluation of the geomatics disposal group and costs associated with the acquisition and integration of complimentary businesses 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 RME’s DSUs and the expense (recovery) associated with its SARs. These items arise primarily from changes in RME’s share price and are not reflective of RME’s core operations.

RME 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 RME incurs outside of its common day-to-day operations. For the periods presented, costs associated with the acquisition and integration of complimentary businesses have been classified as non-recurring charges. The assessment of Operating SG&A facilitates the evaluation of discretionary expenses from ongoing operations.

  • “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 (LOSS) EARNINGS PER SHARE

Three Months Ended March 31
$ thousands 2019       2018
     
Loss used in the calculation of diluted loss per share (3,044) (486)
Loss on derivative financial instruments 4 1,426
Gain on DSUs (3) (90)
SAR recovery (530)
Acquisition and integration costs 48
Loss on revaluation of disposal group 1,061
Tax effect of adjustments (27%) (300)       (218)
(Loss) earnings used in the calculation of Adjusted Diluted (Loss) Earnings per Share (2,234) 102
Weighted average diluted shares used in the calculation of diluted (loss) earnings per share in thousands) 19,483       19,896
Adjusted Diluted (Loss) Earnings per Share (0.11)       0.01

ADJUSTED EBITDA

      Three Months Ended March 31    
$ thousands       2019       2018
     
Net loss (3,044) (486)
Finance costs associated with long-term debt 680 640
Depreciation and amortization expense 3,787 3,579
Income taxes       (1,199)       (278)
EBITDA 224 3,455
Loss on derivative financial instruments 4 1,426
Gain on DSUs (3) (90)
SAR recovery (530)
Acquisition and integration costs 48
Loss on revaluation of disposal group       1,061      
Adjusted EBITDA       1,334       4,261

OPERATING SG&A

      Three Months Ended March 31    
$ thousands       2019       2018
     
SG&A 24,522 23,337
Depreciation and amortization expense (3,787) (3,579)
Gain on DSUs 3 90
SAR recovery 530
Acquisition and integration costs       (48)      
Operating SG&A       20,690       20,378
Operating SG&A as a % of sales       11.6       9.3

OPERATING CASH FLOW BEFORE CHANGES IN FLOOR PLAN

      Three Months Ended March 31    
$ thousands       2019       2018
     
Cash flow from operating activities 9,552 6,274
Net increase in floor plan payable (44,344) (53,283)
Floor plan assumed pursuant to business combinations            
Operating Cash Flow before Changes in Floor Plan       (34,792)       (47,009)

CONFERENCE CALL

RME will host a conference call and webcast to discuss the quarter at 9:00 a.m. MT (11:00 a.m. ET) today. Please note that the format of the webcast incorporates a visual presentation for investors and analysts. To listen to the live webcast and watch the presentation please use the following link:

https://event.webcasts.com/starthere.jsp?ei=1240000&tp_key=b510eaf0a6

Within 24 hours of the event, the webcast will be available for replay at the link above until August 29, 2019.

Those interested in participating in the conference call may do so by calling 1-866-521-4909 (toll free) or (647) 427-2311.

An archived recording of the conference call will be available until May 16, 2019 by dialing:

  • 1-800-585-8367 (toll free) or 1-416-621-4642,
  • Conference ID: 7847378

This archived recording will also be available on the RME investor website at https://investors.rockymtn.com.

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 RME's business; statements discussing or implying any economic or financial results for 2019; statements implying future economic or financial benefits as a result of recent trends in Western Canada's agriculture equipment profile; statements regarding RME's expectation for another strong year in agriculture in 2019; statements discussing or implying future planting or seeding intentions of Canadian farmers; statements discussing or implying any future changes to commodity prices; all statements contained under the heading “Growth Plan Update”; statements discussing or implying any future dividend payments or changes; 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 RME's control. While this forward-looking information is based on information and assumptions that RME'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 RME in its MD&A for the quarter ended March 31, 2019, and as discussed in RME's Annual Information Form dated March 13, 2019 under the heading "Risk Factors." Except as required by law, RME 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 MOUNTAIN DEALERSHIPS INC. (TSX:RME)

RME is Canada's largest agriculture equipment dealer with branches located throughout Alberta, Saskatchewan, and Manitoba. Through its dealer network, RME sells, rents, and leases new and used agriculture equipment and offers product support and financing to its customers.

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

1 Net debt now reflects lease obligations recognized on the balance sheet pursuant to the adoption of IFRS 16 – “Leases”. Please refer to Notes 4 & 19 to the Financial Statements for the period ended March 31, 2019 for further details.

2 Agriculture and Agri-Food Canada: Outlook for Principal Field Crops – April 16, 2019

Contact:

FOR INVESTOR AND MEDIA INQUIRIES, PLEASE CONTACT:
Rocky Mountain Dealerships Inc.
Clayton Paradis, 403-999-7658
cparadis@rockymtn.com