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

August 8, 2018

CALGARY, Alberta--(BUSINESS WIRE)--Aug 8, 2018--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

(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 Earnings 1 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.

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; andimpairment 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 levels 2.

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.

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