Rocky Mountain Dealerships Inc. Reports Second Quarter 2019 Results

Macro conditions weigh on Q2 results

Wednesday, July 31, 2019 4:00 am MDT

Dateline:

CALGARY, Alberta

Public Company Information:

TSX:
RME

Rocky Mountain Dealerships Inc. Reports Second Quarter 2019 Results

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 June 30, 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, “The second quarter of 2019 was difficult, and from a business perspective reminiscent of the spring of 2015, but for very different reasons. Many of the fundamentals that drive our industry are moving in the right direction. Rain across much of the prairies has provided good moisture, and forecasts indicate that crop production and yields are going to be better year over year.

"While some industry fundamentals remain solid, unfortunately, political and macroeconomic issues continue to create significant uncertainty for Canadian farmers and our business. The inability of the Canadian Government to make meaningful progress toward improving international trade relations with several key partners only exacerbates this uncertainty.”

Diplomatic tensions with key trade partners currently impacting the Canadian Agricultural industry include:

  • China - in the spring of 2019 announced they would no longer purchase Canadian canola and later added pork;
  • India - Canadian Government’s failure to negotiate the Canada-India Economic Partnership Agreement (CEPA), a trade deal which has been cited as a potential reason for the increase in tariffs on Canadian lentil imports;
  • Saudi Arabia - decision last August to stop buying Canadian wheat and barley amid diplomatic tensions.

“This political and macroeconomic uncertainty in turn has weighed on industry sales, which is validated by reports1 that deliveries of new agriculture units in the Canadian marketplace continued to decline in the second quarter indicating persistent, weak demand. We will continue to fight for and support our customers and manage those elements of our business that are within our control to deliver long-term value to our shareholders.”

SUMMARY OF THE QUARTER ENDED JUNE 30, 2019

  • Gross profit as a percentage of sales improved to 15.3% compared to 12.6% for the same period in 2018;
  • Operating SG&A decreased 11.6% or $2,589 to $19,814 compared with $22,403 for the same period in 2018;
  • Sales decreased 35.7% or $108,065 to $194,574 compared with $302,639 for the same period in 2018 due primarily to declines in new and used same store equipment sales of $70,385 and $49,418 respectively, reflecting weaker 2019 demand and an unusually high level of out-of-season equipment deliveries realized during the second quarter of 2018;
  • Maintained a solid balance sheet position – with net debt of $61,010 and net debt to Adjusted EBITDA ratio of 1.84x.

     

SELECTED FINANCIAL INFORMATION

 

Three Months Ended June 30,

$ thousands

2019

2018

Change

%

Sales

194,574

302,639

(108,065)

(35.7)

Cost of sales

164,756

264,539

(99,783)

(37.7)

Gross profit

29,818

38,100

(8,282)

(21.7)

Gross profit as a % of sales

15.3

12.6

2.7

 

 

 

 

 

 

Selling, general and administrative

23,497

25,484

(1,987)

(7.8)

Loss on derivative financial instruments

808

829

(21)

(2.5)

Recovery on sale of disposal group

(272)

(272)

Earnings before finance costs and income taxes

5,785

11,787

(6,002)

(50.9)

Finance costs

4,679

3,364

1,315

39.1

Earnings before income taxes

1,106

8,423

(7,317)

(86.9)

Income taxes

356

2,362

(2,006)

(84.9)

Net earnings

750

6,061

(5,311)

(87.6)

Net earnings as a % of sales

0.4

2.0

(1.6)

 

 

 

 

 

 

Earnings per share

 

 

 

 

Basic

0.04

0.30

(0.26)

(86.7)

Diluted

0.04

0.30

(0.26)

(86.7)

Dividends per share

0.1225

0.1150

0.0075

6.5

Book value / share – June 30

9.92

10.07

(0.15)

(1.5)

 

 

 

 

 

Non-IFRS Measures(1)

 

 

 

 

Adjusted Diluted Earnings per Share

0.06

0.32

(0.26)

(81.3)

Adjusted EBITDA

5,994

12,951

(6,957)

(53.7)

Operating SG&A

19,814

22,403

(2,589)

(11.6)

Operating SG&A as a % of sales

10.2

7.4

2.8

 

Operating Cash Flow before Changes in Floor Plan

(3,894)

(11,423)

7,529

(65.9)

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

GROWTH PLAN

On May 30, 2018, RME established certain aspirational targets within its growth plan (the “Plan”) to increase revenues to at least $1.5 billion in 2023 as well as grow Adjusted Earnings and Adjusted EBITDA to $33.8 million and $69.0 million, respectively, over the same timeframe.

Current circumstances beyond the direct control of RME have contributed to RME’s decision to withdraw the Plan.

Achieving the Plan targets was predicated on several assumptions including:

  • The availability of accretive acquisition targets and RME's ability to unlock synergistic value therefrom, and
  • A favourable North American agriculture business climate.

Accretive acquisition targets have not yet been identified, and escalating trade disputes between North America and many of its key agriculture commodity trading partners are weighing on commodity prices. The resulting current uncertainty has significantly tempered farmer sentiment and demand for RME's products and services, creating an unfavourable agriculture business climate.

Notwithstanding current macroeconomic headwinds, RME believes the long-term fundamentals underlying the Western Canadian agriculture market remain strong, and the Company remains committed to achieving multi-faceted revenue growth and improved earnings.

SUMMARY OF RESULTS FOR THE QUARTER ENDED JUNE 30, 2019

Momentum in our parts and service business in the first quarter of 2019 continued to positively contribute to revenues early in the second quarter. However, once seeding was completed in the late April, early May timeframe, market sentiment turned sharply negative as a result of broad macro-economic and political uncertainty coupled with significantly reduced sales across all departments. The arrival of spring rains in late June improved sentiment, but these macro uncertainties persisted and continued to weigh on farmer sentiment.

SALES AND MARGINS

  • Sales decreased 35.7% or $108,065 to $194,574 compared with $302,639 for the same period in 2018 due primarily to declines in new and used same store equipment sales of $70,385 and $49,418 respectively, reflecting weaker 2019 demand and an unusually high level of out-of-season equipment deliveries realized during the second quarter of 2018.
  • Gross margin as a percent of sales increased by 2.7% to 15.3% from 12.6% in the same period in 2018 as mix shifted toward higher-margin parts and service sales.
  • Gross profit decreased by 21.7% or $8,282 to $29,818 from $38,100 for the same period in 2018.

COST STRUCTURE

  • Operating SG&A decreased 11.6% or $2,589 to $19,814 compared with $22,403 for the same period in 2018.
  • As a percentage of sales, Operating SG&A for the second quarter of 2019 increased by 2.8% to 10.2% compared with 7.4% for the same period in 2018, as the decline in sales outpaced the reduction in Operating SG&A.
  • Finance costs for the quarter ended June 30, 2019 increased 39.1% or $1,315 to $4,679 compared with $3,364 during the same period in 2018 due to an increase in the average level of interest-bearing floor plan payable.

EARNINGS

  • Adjusted EBITDA for the quarter ended June 30, 2019 decreased by 53.7% or $6,957 to $5,994 compared with $12,951 for the same period in 2018.
  • Adjusted Diluted Earnings per Share decreased by $0.26 to $0.06 for the second quarter of 2019, compared with $0.32 for the same period of 2018.

BALANCE SHEET AND INVENTORY

  • Inventory turns over the trailing twelve-months ended June 30, 2019 were 1.34 times, down from 1.73 times for fiscal 2018, reflecting the aforementioned decline in sales activity in combination with an increase in the average level of inventory on hand.

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.

TRADE DISPUTES

Trade barriers between Canada and several of its agriculture commodity trading partners continue to impede farmers' ability to deliver their crops to key end markets. China, with its recent ban on Canadian canola, joins India, Saudi Arabia and others in implementing trade barriers affecting Canadian agriculture products including canola, wheat and lentils. In a June 17, 2019 letter to Canada's Minister of Agriculture and Agri-Food Canada, the Western Canadian Wheat Growers estimated market losses since inception of these trade barriers (beginning to 2017) to exceed $3.7 billion.

The severity of these disputes continues to weigh on agriculture commodity prices and overall farmer sentiment which, in turn, tempers demand for RME's product and service offerings. In its June 2019 Ag Tractor and Combine Report for Canada, the Association of Equipment Manufacturers reported year-to-date sales declines in major product categories including 4WD tractors (down 34.8%) and self-propelled combines (down 18.7%), a manifestation of this downturn in sentiment.

CROP OUTLOOK

Precipitation throughout late June and early July helped to ease concerns over a lack of spring moisture. While some areas would benefit from additional rainfall, Western Canadian crops are generally maturing well with overall production and yield expected to surpass last year's levels.

In its Outlook for Principal Field Crops dated July 19, 2019, Agriculture and Agri-Food Canada estimates seeded area to be relatively comparable to last year with higher expected yields boosting overall forecast production of principal field crops in 2019 over 2018 levels.

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 June 30, 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 Earnings per Share” calculated by eliminating from net earnings, the after-tax impact of the losses (gains) arising from RME’s derivative financial instruments and DSUs, as well as the 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 nonrecurring 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 recovery on the sale of the geomatics disposal group and costs associated with the acquisition and integration of complementary businesses have been classified as non-recurring charges.
  • “Adjusted EBITDA” is derived by eliminating the following items from net 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 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 nonrecurring 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 recovery on the sale of the geomatics disposal group and costs associated with the acquisition and integration of complementary 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 gains arising from RME’s DSUs and the 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 complementary 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. During Q2 2019, RME amended the definition of this measure to also exclude the non-cash impact of changes in floor plan arising from fluctuations in foreign exchange rates on U.S. denominated floor plan facilities. 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

$ thousands

2019

2018

 

 

 

Earnings used in the calculation of diluted earnings per share

750

6,061

Loss on derivative financial instruments

808

829

Gain on DSUs

(60)

(76)

SAR recovery

(729)

Acquisition and integration costs

81

299

(Recovery) loss on sale of disposal group

(272)

Tax effect of adjustments 26.5% (2018 - 27%)

(142)

(87)

Earnings (loss) used in the calculation of Adjusted

Diluted Earnings per Share

1,165

6,297

 

Weighted average diluted shares used in the

calculation of diluted earnings per share (in thousands)

19,257

19,882

Adjusted Diluted Earnings per Share

0.06

0.32

ADJUSTED EBITDA

 

Three Months Ended June 30

$ thousands

2019

2018

 

 

 

Net earnings (loss)

750

6,061

Finance costs associated with long-term debt

669

618

Depreciation and amortization expense

3,662

3,587

Income taxes

356

2,362

EBITDA

5,437

12,628

Loss on derivative financial instruments

808

829

Gain on DSUs

(60)

(76)

SAR recovery

(729)

Acquisition and integration costs

81

299

(Recovery) loss on sale of disposal group

(272)

Adjusted EBITDA

5,994

12,951

OPERATING SG&A

 

Three Months Ended June 30

$ thousands

2019

2018

 

 

 

SG&A

23,497

25,484

Depreciation and amortization expense

(3,662)

(3,587)

Gain on DSUs

60

76

SAR recovery

729

Acquisition and integration costs

(81)

(299)

Operating SG&A

19,814

22,403

Operating SG&A as a % of sales

10.2

7.4

OPERATING CASH FLOW BEFORE CHANGES IN FLOOR PLAN

 

Three Months Ended June 30

$ thousands

2019

2018

 

 

 

Cash flow from operating activities

8,316

(3,223)

Net increase in floor plan payable

(11,977)

(8,200)

Change in floor plan arising from changes in foreign exchange rates

(233)

Floor plan assumed pursuant to business combinations

Operating Cash Flow before Changes in Floor Plan

(3,894)

(11,423)

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=1251418&tp_key=167cf718e5

Within 24 hours of the event, the webcast will be available for replay at the link above until November 28, 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 August 15, 2019 by dialing:

  • 1-800-585-8367 (toll free) or 1-416-621-4642,
  • Conference ID: 7739037

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 implying crop production and yields are going to be better year over year; 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 results caused by recent trends in Western Canada's agriculture equipment profile; statements discussing or implying future planting or seeding intentions of Canadian farmers; statements discussing or implying any future changes to commodity prices; statements contained under the heading “Growth Plan”; statements contained under the heading “Market Fundamentals and Outlook”; 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 June 30, 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.

Certain measures set forth in this news release may be considered to be future-oriented financial information or a financial outlook within the meaning of applicable securities legislation. Financial outlook and future-oriented financial information contained in this news release are based on assumptions about future events based on management's assessment of the relevant information currently available. In particular, this news release contains RME’s projections of revenues, Adjusted Earnings and Adjusted EBITDA , which are based on, among other things: (i) the various assumptions as to RME’s revenue sources; (ii) RME's challenges in finding suitable/accretive acquisition targets; (iii) the products RME sells (and by implication, the products RME's OEMs manufacture) continue to meet the ever-evolving needs of RME's customer base; (iv) that demand drivers including, but not limited to, weather, foreign exchange or government regulation have impacted customer demand and the North American agriculture business climate as a whole; and (v) that farmer cash receipts and balance sheets remain consistent. The future-oriented financial information and financial outlook contained in this news release is included to provide readers with information regarding RME’s current expectations and plans regarding its future operations. Readers are cautioned that any such financial outlook and future-oriented financial information contained herein may not be appropriate for other purposes and therefore should not be used for purposes other than those for which it is disclosed herein.

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 Association of Equipment Manufacturers, June 2019 Ag Tractor and Combine Report for Canada

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Contact:

For Investor and Media Inquiries:
Rocky Mountain Dealerships Inc.
Clayton Paradis, 403-999-7658
cparadis@rockymtn.com