Rocky Mountain Dealerships Inc. Reports Year-End 2017 Results and Another Strong Quarter

Strong Margins and Lower Costs Drive Continued Trend of Strong Year-Over-Year Earnings Growth in the Fourth Quarter with Adjusted Diluted Earnings per Share (1) Increasing 70% to $0.39 per Share

Wednesday, March 14, 2018 5:00 am MDT

Dateline:

CALGARY

Public Company Information:

TSX:
RME
"Strong margins and lower costs allowed us to deliver another strong quarter to close out 2017, despite a year-over-year decrease in used equipment sales"

CALGARY--(BUSINESS WIRE)--Rocky Mountain Dealerships Inc. (TSX:RME, and hereinafter "RME"), Canada's largest agriculture equipment dealer, today reported its financial results for the quarter and year ended December 31, 2017. All financial figures are expressed in Canadian dollars.

“Strong margins and lower costs allowed us to deliver another strong quarter to close out 2017, despite a year-over-year decrease in used equipment sales,” said Garrett Ganden, President & Chief Executive Officer. “As expected, our inventory levels went through their seasonal expansion in the fourth quarter and we remain satisfied with the composition and size of our inventory profile. Our confidence in the Canadian agriculture equipment market continues to grow and we remain focused on customer service and financial performance in our market.”

 

Selected Quarterly Financial Information

      For the quarter ended December 31,     For the year ended December 31,
$ thousands       2017     2016     Change     % Change     2017     2016     Change     % Change
                           
Sales 273,389 285,749 (12,360) (4.3%) 959,355 930,435 28,920 3.1%
Cost of sales       235,176     251,633     (16,457)     (6.5%)     819,926     797,028     22,898     2.9%
Gross profit 38,213 34,116 4,097 12.0% 139,429 133,407 6,022 4.5%
Gross profit as a % of sales 14.0% 11.9% 2.1% 14.5% 14.3% 0.2%
Selling, general and administrative 27,275 25,205 2,070 8.2% 99,772 97,970 1,802 1.8%
(Gain) loss on derivative financial instruments (3,131) (605) (2,526) 417.5% (4,578) (4,751) 173 (3.6%)
Loss on vacant land - - - - 641 1,360 (719) (52.9%)
Restructuring charges       -     -     -     -     -     3,564     (3,564)     (100.0%)
Earnings before finance costs and income taxes 14,069 9,516 4,553 47.8% 43,594 35,264 8,330 23.6%
Finance costs       2,799     3,346     (547)     (16.3%)     11,921     14,343     (2,422)     (16.9%)
Earnings before income taxes 11,270 6,170 5,100 82.7% 31,673 20,921 10,752 51.4%
Income taxes       3,099     1,466     1,633     111.4%     8,774     5,955     2,819     47.3%
Net earnings       8,171     4,704     3,467     73.7%     22,899     14,966     7,933     53.0%
Net earnings as a % of sales 3.0% 1.6% 1.4% 2.4% 1.6% 0.8%
Earnings per share
Basic 0.42 0.24 0.18 75.0% 1.18 0.77 0.41 53.2%
Diluted 0.42 0.24 0.18 75.0% 1.18 0.77 0.41 53.2%
Dividends per share 0.115 0.115 - - 0.46 0.46 - -
Book value / diluted share – December 31 10.07 9.14 0.93 10.2%
Adjusted Diluted Earnings per Share(1) 0.39 0.23 0.16 69.6% 1.16 0.83 0.33 39.8%
Adjusted EBITDA(1) 12,754 8,176 4,578 56.0% 40,163 31,621 8,542 27.0%
Operating SG&A(1) 23,066 23,044 22 0.1% 89,115 89,238 (123) (0.1%)
Operating SG&A (1) as a % of sales 8.4% 8.1% 0.3% 9.3% 9.6% (0.3%)
Operating Cash Flow before Changes in Floor Plan(1) (36,367) 14,542 (50,909) (350.1%) (720) 87,626 (88,346) (100.8%)

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

 

Summary of the Quarter Ended December 31, 2017

Sales and Margins

  • Total sales decreased 4.3% or $12.4 million to $273.4 million compared with $285.7 million for the same period in 2016 due to an $18.5 million decrease in used equipment sales year-over-year offset by an increase in new equipment, parts, and service revenues. Used equipment sales in the fourth quarter of 2016 were higher than usual as a result of lingering harvest activity and our concerted effort to downsize our used equipment inventory levels.
  • Fourth quarter gross profit increased by 12.0% or $4.1 million to $38.2 million compared with $34.1 million for the same period in 2016, due to increased profit margins as explained below.
  • Gross profit as a percent of sales increased to 14.0% for the fourth quarter of 2017 compared with 11.9% during the same period of 2016 due to higher transactional margins on equipment sales.

Cost Structure and Earnings

Operating SG&A(1) for the fourth quarter of 2017 was flat compared with the same period of last year, but increased as a percentage of sales to 8.4% from 8.1%, as a result of decreased sales activity during the quarter.

Finance costs for the quarter ended December 31, 2017 decreased 16.3% or $0.5 million to $2.8 million compared with $3.3 million for the same period in 2016, due to reduced financial leverage. This reduction, combined with stronger margins translated into year-over-year improvements in both:

  • Adjusted EBITDA(1) for the fourth quarter of 2017, which increased by 56.0% or $4.6 million to $12.8 million compared with $8.2 million for the same period in 2016; and
  • Adjusted Diluted Earnings per Share(1) for the fourth quarter of 2017, which increased by 69.6% or $0.16 to $0.39 compared with $0.23 in the same period of 2016.

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

Balance Sheet and Inventory

We continue to focus our attention on maximizing the return on assets deployed, namely inventory. Through targeted sales efforts as well as disciplined procurement, including factory-direct orders, we strive to maintain an inventory balance and profile which is conducive to continued improvement in inventory turns. As anticipated, RME’s inventory increased during the fourth quarter of 2017, due to a combination of trades taken on fourth quarter new equipment deliveries and restocking in preparation for the coming sales season.

Since the third quarter of 2017:

  • Used equipment inventory increased $54.5 million, due in part to late model trade-ins (1-2 years old) associated with recent new equipment sales. Trade value is typically correlated to age, with later-model equipment incorporating newer technology, having fewer hours and a higher market price relative to the profile of units sold out of inventory during the period. Used equipment inventory growth was distributed across equipment categories and is in line with our overall inventory plan; and
  • New equipment inventory increased $9.5 million in preparation for future sales.

Inventory turned 1.80 times during 2017, up from 1.64 times last year, a 9.8% improvement year-over-year.

Market Fundamentals and Outlook

Supply

In recent years, the number of new agriculture units delivered to Canadian farmers trailed historical levels as the market digested an elevated equipment population as well as price increases associated with new technology and a depreciating Canadian dollar.

In response, agriculture equipment manufacturers curtailed production and focused on moving existing inventory levels through the supply chain by providing price relief to farmers. After having absorbed this supply, demand for new equipment remained relatively satiated for a period of time where new unit deliveries declined.

In recent quarters, we have begun to see signs that Western Canada’s agriculture equipment profile is reverting to a more typical composition, with customer demand for new equipment beginning to pick up. With supply and demand now largely realigned, we have also begun to see manufacturer delivery lead-times grow on certain products during peak demand times.

Crop Outlook

Unlike a year ago, when late-fall precipitation deferred harvest in some northern regions until the spring, the 2017 harvest has left very little crop in the field. Although delayed, due in part to the harvesting of these overwintered crops, the Canadian Prairies were seeded corner-to-corner in 2017. Statistics Canada estimates the total area seeded to principal field crops to have increased by 0.4% over 2016. Yield estimates have, however, receded as compared to last year. While still robust, overall crop production levels, are expected to decline 1.2% year-over-year1. The combination of solid production and healthy commodity prices for key Western Canadian crops serves to reinforce the already strong balance sheets of our customer base.

1 Canada: Outlook for Principal Field Crops – February 16, 2018

Financial Statements and Management’s Discussion and Analysis (“MD&A”)

The MD&A as well as the audited financial statements and notes to the financial statements for the twelve month periods ended December 31, 2017 and 2016, are available online at www.rockymtn.com and www.sedar.com.

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 will now incorporate a visual presentation for investors and analysts. To listen to the live webcast and watch the presentation please use the following link:

http://event.on24.com/wcc/r/1601853-1/26A7DEBE6DF577558A33B567AA4F27B6

Within 24 hours of the event, the webcast will be available for replay at the link above until March 13, 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 March 28, 2018 by dialing 1-800-585-8367 (toll free) or 1-416-621-4642, Conference ID: 1574699. This archived recording will also be available at www.rockymtn.com.

Annual and Special Meeting of Shareholders

RME also announced today that its Annual and Special Meeting of Shareholders ("AGM") will take place at 11:00 a.m. on Wednesday, May 9, 2018, in the showroom of Rocky Mountain Equipment, 260180 Writing Creek Crescent, Rocky View County, Alberta. Material related to the AGM will be sent in due course to shareholders of record as at the close of business on March 27, 2018.

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 regarding RME's Inventory balance and profile; statements implying future economic or financial benefits as a result of recent trends in Western Canada's agriculture equipment profile; statements regarding the anticipated crop yield for 2018; 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 management's discussion and analysis ("MD&A") for the year ended December 31, 2017, and as discussed in RME's Annual Information Form dated March 13, 2018, 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 finance to its customers.

Additional information on RME 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 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, 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.
  • “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 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, 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 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, 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

For the quarter ended

December 31,

    For the year ended

December 31,

$ thousands       2017     2016     2017     2016
       
Earnings used in the calculation of diluted earnings per share 8,171 4,704 22,899 14,966
Gain on derivative financial instruments (3,131) (605) (4,578) (4,751)
Loss on DSUs 162 16 245 220
SAR expense 2,231 230 2,995 757
Non-deductible loss on vacant land - - 641 1,360
Restructuring charges - - - 3,564
Tax effect of adjustments (27%)       199     97     361     57
Earnings used in the calculation of Adjusted Diluted Earnings per Share 7,632 4,442 22,563 16,173
Weighted average diluted shares used in the calculation of diluted earnings per share (in thousands)       19,515     19,384     19,413     19,384
Adjusted Diluted Earnings per Share       0.39     0.23     1.16     0.83
 
         

Adjusted EBITDA

For the quarter ended

December 31,

    For the year ended

December 31,

$ thousands       2017     2016     2017     2016
       
Net earnings 8,171 4,704 22,899 14,966
Finance costs associated with long-term debt 406 450 1,770 1,795
Depreciation and amortization expense 1,816 1,915 7,417 7,755
Income taxes       3,099     1,466     8,774     5,955
EBITDA 13,492 8,535 40,860 30,471
Gain on derivative financial instruments (3,131) (605) (4,578) (4,751)
Loss on DSUs 162 16 245 220
SAR expense 2,231 230 2,995 757
Loss on vacant land - - 641 1,360
Restructuring charges       -     -     -     3,564
Adjusted EBITDA       12,754     8,176     40,163     31,621
 
         

Operating SG&A

For the quarter ended

December 31,

    For the year ended

December 31,

$ thousands       2017     2016     2017     2016
       
SG&A 27,275 25,205 99,772 97,970
Depreciation and amortization expense (1,816) (1,915) (7,417) (7,755)
Loss on DSUs (162) (16) (245) (220)
SAR expense       (2,231)     (230)     (2,995)     (757)
Operating SG&A       23,066     23,044     89,115     89,238
Operating SG&A as a % of sales       8.4%     8.1%     9.3%     9.6%
 
         

Operating Cash Flow before Changes in Floor Plan

For the quarter ended

December 31,

    For the year ended

December 31,

$ thousands       2017     2016     2017     2016
       
Cash flow from operating activities 3,424 12,917 6,955 27,163
Net (increase) decrease in floor plan payable(1) (39,791) 1,625 (7,675) 60,463
Floor plan assumed pursuant to business combinations       -     -     -     -
Operating Cash Flow before Changes in Floor Plan       (36,367)     14,542     (720)     87,626

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

 

Contact:

For investor and media inquiries:
Rocky Mountain Dealerships Inc.
Tom McMillan, 403-466-7220
tmcmillan@rockymtn.com