Rocky Mountain Dealerships Inc. Reports Second Quarter 2018 Results and Continued Strong New Equipment Sales

Subsequent to the Quarter RME Continued to Expand its CNH Distribution Footprint and Territory with its Agreement to Acquire the New Holland Dealership in Olds, Alberta

Category:

Wednesday, August 8, 2018 5:00 am MDT

Dateline:

CALGARY, Alberta

Public Company Information:

TSX:
RME

$RME.CA Reports Record Q2 New Equipment Sales and Agreement to Acquire Olds, Alberta New Holland Dealership

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 and six months ended June 30, 2018. RME also announced its definitive agreement to acquire the New Holland dealership in Olds, Alberta. All financial figures are expressed in Canadian dollars.

"We set a new record for second quarter new equipment sales and achieved year-over-year sales growth across all of our categories. Our used equipment sales also outpaced trade-ins, which reduced our used equipment inventory on a sequential basis," said Garrett Ganden, President & Chief Executive Officer. "We continued to see margin pressure, which we explore more thoroughly below. That said, we have made good early progress on our growth plan by achieving $76 million in organic revenue growth since the beginning of 2018. Subsequent to the quarter, we also closed our acquisition of John Bob Farm Equipment, a Saskatchewan-based dealer of New Holland agriculture equipment with locations in Outlook and Tisdale, and agreed to acquire the business assets of the New Holland dealer based in Olds, Alberta.

“As we look towards the second half of 2018, we are beginning to see the impacts of tariffs and a weaker Canadian dollar being reflected in new equipment pricing. While likely to moderate new equipment sales growth to an extent, increased pricing may encourage our customers to consider used equipment as a more cost-effective alternative. With a diverse and current profile of used equipment inventory, we are confident in our ability to capitalize on this opportunity should it materialize.”

SELECTED FINANCIAL INFORMATION

                   
      Three months ended June 30,         Six months ended June 30,
$ thousands       2018       2017       Change       % Change         2018       2017       Change       % Change
Sales 302,639       236,890       65,749       27.8         522,293       446,830       75,463       16.9
Cost of sales       264,539       201,372       63,167       31.4         457,230       384,534       72,696       18.9
Gross profit 38,100 35,518 2,582 7.3 65,063 62,296 2,767 4.4
Gross profit as a % of sales 12.6% 15.0% (2.4%) 12.5% 13.9% (1.4%)
Selling, general and administrative 25,631 24,566 1,065 4.3 49,100 47,669 1,431 3.0
Loss (gain) on derivative financial instruments 829 282 547 194.0 2,255 (139) 2,394 (1,722.3)
Impairment loss on vacant land       -       641       (641)       (100.0)         -       641       (641)       (100.0)
Earnings before finance costs and income taxes 11,640 10,029 1,611 16.1 13,708 14,125 (417) (3.0)
Finance costs       3,133       3,026       107       3.5         5,875       6,017       (142)       (2.4)
Earnings before income taxes 8,507 7,003 1,504 21.5 7,833 8,108 (275) (3.4)
Income taxes       2,385       2,092       293       14.0         2,131       2,316       (185)       (8.0)
Net earnings       6,122       4,911       1,211       24.7         5,702       5,792       (90)       (1.6)
Net earnings as a % of sales 2.0% 2.1% (0.1%) 1.1% 1.3% (0.2%)
Earnings per share
Basic 0.31 0.25 0.06 24.0 0.29 0.30 (0.01) (3.3)
Diluted 0.31 0.25 0.06 24.0 0.29 0.30 (0.01) (3.3)
Dividends per share 0.115 0.115 - - 0.23 0.23 - -
Book value / diluted share – June 30 10.14 9.25 0.89 9.6
Adjusted Diluted Earnings per Share(1) 0.32 0.29 0.03 10.3 0.33 0.33 - -
Adjusted EBITDA(1) 11,006 10,118 888 8.8 13,337 13,467 (130) (1.0)
Operating SG&A(1) 24,348 22,822 1,526 6.7 46,656 43,755 2,901 6.6
Operating SG&A (1) as a % of sales 8.0% 9.6% (1.6%) 8.9% 9.8% (0.9%)
Operating Cash Flow before Changes in Floor Plan(1) (13,260) 33,800 (47,060) (139.2) (62,116) 9,476 (71,592) (755.5)
 

(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:

  • $200 million in organic growth through RME’s present geographic foot print;
  • $200 million in acquired top-line revenue in Canada and/or the United States; and
  • $100 million in revenue synergies on assets that are acquired through this plan.

As part of this plan, during fiscal 2023 RME is targeting Adjusted Earnings1 of $33.8 million, an increase of $11.3 million relative to 2017. In addition, RME is also targeting Adjusted EBITDA of $60.0 million for 2023, a $19.8 million increase relative to 2017.

Please note that the adoption of IFRS 16, ‘Leases’ on January 1, 2019 is expected to impact Adjusted EBITDA. RME will recalibrate its Adjusted EBITDA target to reflect the new accounting standards once adopted and preserve the targeted $19.8 million improvement in this metric.

Our progress to-date with respect to the revenue growth initiative is summarized in the table below. While encouraging, our growth in revenues has yet to translate into progress against our Adjusted Earnings and Adjusted EBITDA targets.

           
Category       Revenue Objective ($ millions)       Progress-To-Date ($ millions)
Organic Growth $200 $76
Acquisitions $200 -
Synergies       $100       -
Total       $500       $76
 

Acquisitions Subsequent to the Quarter

On August 7, 2018, RME entered into a definitive agreement to acquire the business assets of the New Holland dealer based in Olds, Alberta, which reported $14.4 million (unaudited) in revenue for its most recent fiscal year. The acquisition, which is expected to close on or about August 17, 2018, is subject to a number of conditions to closing, including approval by New Holland. As part of the transaction, RME will assume certain inventory, related debt, and the lease associated with the existing facility in Olds.

On July 3, 2018, RME announced the acquisition of John Bob Farm Equipment (“JBFE”), a Saskatchewan-based dealer of New Holland agriculture equipment (a brand of CNH Industrial) with locations in Outlook and Tisdale. For the most recent fiscal year ending November 30, 2017, JBFE’s consolidated top-line revenue was approximately $38 million (unaudited).

SUMMARY OF THE QUARTER ENDED JUNE 30, 2018

The second quarter saw continued strong demand for new and used equipment, with new equipment sales supported by pre-sale efforts throughout the winter months. Parts and service activity and revenues also increased year-over-year, with a significant portion of activity allocated to readying trade-ins for sale as part of Case-IH’s certified pre-owned program. The reconditioning of trade-ins is a necessary precursor to used sales activity and we made some meaningful headway on this front during the quarter. Used equipment sales levels outpaced trade-ins, allowing RME to draw down used equipment inventory on a sequential basis despite the trade-in volume associated with record second quarter new equipment sales. Gross profit benefited from the strong sales activity, however, margins deteriorated for the reasons outlined below.

Sales and Margins

  • Total sales increased 27.8% or $65.7 million to $302.6 million compared with $236.9 million for the same period in 2017 due to record second quarter new equipment sales, which increased 46.1% year-over-year. Used equipment and parts contributed increases of 18.1% and 4.4%, respectively.
  • Gross profit increased by 7.3% or $2.6 million to $38.1 million compared with $35.5 million for the same period in 2017. This was the result of increased sales and OEM incentives offset by sales mix, pricing pressure and valuation adjustments. As a percentage of sales, gross margin amounted to 12.6%, down from 15.0% during the same period last year. Several factors contributed to this decline including:
    • new and used equipment sales growth, which further concentrated our overall sales mix within these comparatively lower-margin categories;
    • increased representation of high-value, core-products within our new equipment sales profile, which tend to generate below-average margins in percentage terms;
    • stronger price competition within certain key equipment categories; and
    • impairment charges associated with, among other products, aged seeding units and our phasing-down of an equipment category to limit our exposure to declining customer demand in this area.

Cost Structure and Earnings

As a percentage of sales, Operating SG&A(1) for the second quarter of 2018 decreased by 1.6% to 8.0% compared with 9.6% for the same period in 2017 due to an increase in sales, offset by a $1.5 million year-over-year increase in Operating SG&A.

Finance costs for the quarter ended June 30, 2018 increased 3.5% or $0.1 million to $3.1 million compared with the same period in 2017, due to an increase in the average level of interest-bearing debt.

  • Adjusted EBITDA(1) increased by 8.8% or $0.9 million to $11.0 million for the second quarter of 2018 compared with $10.1 million for the same period in 2017; and
  • Adjusted Diluted Earnings per Share(1) increased by 10.3% or $0.03 to $0.32 for the second quarter of 2018, compared with $0.29 for the same period of 2017.

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

Balance Sheet and Inventory

For the trailing twelve months ended June 30, 2018, inventory turns were 1.85 times, up from 1.81 times for fiscal 2017, and from 1.77 times for the same period a year ago.

Despite the trade-ins associated with new equipment sales in the quarter, our targeted sales, disciplined procurement and pre-sale orders allowed us to increase turns and reduce used equipment inventory on a sequential basis.

  • Used equipment inventory was $348.3 million, representing increases of 22.8% or $64.6 million compared with the same period in 2017, and 10.6% or $33.3 million since the fourth quarter of 2017; and
  • New equipment inventory was $125.9 million, representing increases of 12.6% or $14.1 million compared with the same period in 2017, and 8.6% or $9.9 million since the fourth quarter of 2017.

Since the end of 2017, equipment inventory levels increased $43.2 million, with the majority of this increase concentrated in the used category. The increase in inventory during the first half of 2018 was fully funded by draws on our various floor plan facilities. Much of the equipment taken on trade during the quarter was eligible for interest-free terms.

Crop Outlook

Despite a late start to seeding, favourable conditions throughout the spring and early summer have thus far supported crop development. While still early, customer sentiment across our trade area remains optimistic for the 2018 growing season.

Agriculture and Agri-Food Canada’s (“AAFC”) most recent forecast estimates total production of principal field crops in the upcoming 2018-2019 crop year to approximate last year’s robust levels2.

The combination of solid production and healthy commodity prices for key Western Canadian crops continues to reinforce the already strong balance sheets of our customer base.

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

The unaudited condensed consolidated interim financial statements and MD&A three and six month periods ended June 30, 2018 and 2017, are available online at www.rockymtn.com and www.sedar.com.

2018 Dividend Declaration Schedule

Commencing this quarter, dividend and earnings announcements will be done as separate, stand-alone press releases. To align RME with best practices, future dividend announcements will occur at the beginning of the month in which the dividend is to be paid. The record date will be scheduled for the middle of the month, and the payment date will be scheduled for the end of the month in accordance with RME's established payment schedule.

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, expenses pertaining to the acquisition and integration of JBFE and losses recognized on the disposition of vacant land have been identified as non-recurring.

  • “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, expenses pertaining to the acquisition and integration of JBFE and losses recognized on the disposition of vacant land have been identified as non-recurring.

  • “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, expenses pertaining to the acquisition and integration of JBFE have been identified as non-recurring. 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       2018     2017       2018     2017
             
Earnings used in the calculation of diluted earnings per share 6,122 4,911 5,702 5,792
Loss (gain) on derivative financial instruments 829 282 2,255 (139)
(Gain) loss on DSUs (76) 8 (166) 34
SAR (recovery) expense (729) (156) (1,259) 121
Acquisition and integration costs 299 - 299 -
Non-deductible loss on sale of vacant land - 641 - 641
Tax effect of adjustments (27%)       (87)     (36)       (305)     (4)
Earnings used in the calculation of Adjusted Diluted Earnings per Share 6,358 5,650 6,526 6,445
Weighted average diluted shares used in the calculation of diluted earnings per share (in thousands)       19,882     19,384       19,890     19,384
Adjusted Diluted Earnings per Share       0.32     0.29       0.33     0.33
 

Adjusted EBITDA

                 
     

Three months ended
June 30,

     

Six months ended
June 30,

$ thousands       2018     2017       2018     2017
             
Net earnings 6,122 4,911 5,702 5,792
Finance costs associated with long-term debt 387 448 805 943
Depreciation and amortization expense 1,789 1,892 3,570 3,759
Income taxes       2,385     2,092       2,131     2,316
EBITDA 10,683 9,343 12,208 12,810
Loss (gain) on derivative financial instruments 829 282 2,255 (139)
(Gain) loss on DSUs (76) 8 (166) 34
SAR (recovery) expense (729) (156) (1,259) 121
Acquisition and integration costs 299 - 299 -
Loss on sale of vacant land       -     641       -     641
Adjusted EBITDA       11,006     10,118       13,337     13,467
 

Operating SG&A

                 
     

Three months ended
June 30,

     

Six months ended
June 30,

$ thousands       2018     2017       2018     2017
             
SG&A 25,631 24,566 49,100 47,669
Depreciation and amortization expense (1,789) (1,892) (3,570) (3,759)
Gain (loss) on DSUs 76 (8) 166 (34)
SAR recovery (expense) 729 156 1,259 (121)
Acquisition and integration costs       (299)     -       (299)     -
Operating SG&A       24,348     22,822       46,656     43,755
Operating SG&A as a % of sales       8.0%     9.6%       8.9%     9.8%
 

Operating Cash Flow before Changes in Floor Plan

                 
     

Three months ended
June 30,

     

Six months ended
June 30,

$ thousands       2018     2017       2018     2017
             
Cash flow from operating activities (5,060) (35) (633) (5,744)
Net (increase) decrease in floor plan payable(1) (8,200) 33,835 (61,483) 15,220
Floor plan assumed pursuant to business combinations       -     -       -     -
Operating Cash Flow before Changes in Floor Plan       (13,260)     33,800       (62,116)     9,476
 

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=1200633&tp_key=995cecffeb

Within 24 hours of the event, the webcast will be available for replay at the link above until August 7, 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 22, 2018 by dialing 1-800-585-8367 (toll free) or 1-416-621-4642, Conference ID: 8592878. This archived recording will also be available at www.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 2018; 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 2018 as the annual agriculture cycle plays out; 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 June 30, 2018, 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.

1 Represented by the line item “Earnings used in the calculation of Adjusted Diluted Earnings per Share” within the calculation of Adjusted Diluted Earnings per Share, a Non-IFRS measure.
2 Canada: Outlook for Principal Field Crops – July 19, 2018

Contact:

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

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