Stephenson's Rental Services Income Fund
TSX : RNT.UN

Stephenson's Rental Services Income Fund

March 29, 2007 09:35 ET

Stephenson's Rental Services Income Fund Announces Positive Fourth Quarter And Full Year 2006 Results

MISSISSAUGA, ONTARIO--(CCNMatthews - March 29, 2007) - Stephenson's Rental Services Income Fund (TSX:RNT.UN) announced today results for the three months and year ended December 31, 2006. As the Fund commenced operations with the completion of its initial public offering ("IPO") on July 28, 2005, comparative information includes selected unaudited figures of the Fund's predecessor companies for the period January 1, 2005 to July 27, 2005.



Fourth Quarter Highlights: Year Ended December 31, 2006 Highlights:
- Revenue rose 26% - Revenue rose 26%
- EBITDA up 58% - EBITDA up 36%
- Payout ratio of 72.5% - Payout ratio 98.5%


"Our positive operating results for the fourth quarter and the full year and the successful integration of our acquisition of A-1 Equipment Rental Ltd. demonstrates the Fund's continued ability to grow cash flows and complete accretive acquisitions" commented William Swisher, President & Chief Executive Officer. Continuing, he said, "despite the warmest fourth quarter in recent history, that negatively affected our Heating Division, our payout ratio improved by 23% from the prior year to 72.5%".

"On our first full reporting year as an income trust, we are pleased with the Fund's financial performance and our payout ratio of 98.5%, despite the warm winter weather both in the fourth quarter and first quarter of the year. Although the Fund's financial statements for the year ended December 31, 2006 contain a "liquidity" reference pertaining to the maturity of our loan due in May 2007 and a goodwill impairment charge of $18.0 million relating to our annual goodwill impairment test, neither of these issues detract from our strong operating results for the year. This is demonstrated by our revenue and EBITDA growth of, 26% and 36% respectively, while only having the benefits of the A-1 acquisition for seven months of the year".

As previously announced on January 5, 2007, due to the Canadian Federal Government's announcement to tax income trusts and the resulting challenges facing the income trust sector as a result of this proposal, the Board of Trustees has engaged Scotia Capital Inc. to identify and evaluate strategic alternatives available to maximize unitholder value.

The Board of Trustees and Scotia are presently evaluating non-binding expressions of interest received from interested parties who have submitted proposals to acquire the units of the Fund or the Fund's business assets. The process is on-going, however there can be no assurance that the evaluation process will result in any transaction.

Included in the Fund's credit facilities is a bridge loan for $28.8 million due in May 2007. The Fund is currently evaluating alternatives to refinance this loan, however, the outcome of this refinancing is not determinable at this time.

Fourth Quarter Operating Results

Revenue for the three months ended December 31, 2006 increased 25.8% to $16.3 million compared to the fourth quarter of 2005, primarily due to the contribution from the acquisition of A-1 Equipment Rental Ltd. ("A-1") which was acquired on May 24, 2006. Equipment rental revenue represented approximately 81.0% of revenue for the quarter ended December 31, 2006, compared to 78% in 2005. Revenue from consumables and new equipment was $2.3 million, consistent with the same period in 2005. Revenue from the sale of used equipment, typically a more discretionary revenue stream, increased to 5.1% of revenue in the fourth quarter of 2006 compared to 3.9% for the same period in 2005.

Earnings before interest, taxes, depreciation and amortization ("EBITDA", see Non-GAAP measures) for the three months ended December 31, 2006 increased 57.8% to $5.1 million from $3.2 million in the same quarter of 2005 due primarily to the higher revenue in the current year and resulting improved gross profit margins. Selling, general and administrative expenses increased in 2006 compared to the prior year primarily due to higher payroll costs and incremental costs relating to the acquisition of A-1.

Under Canadian generally accepted accounting principles ("GAAP"), $2.0 million of interest/distributions on the Fund's Class A units in the quarter are recorded as an expense. As a result, under GAAP the Fund incurred a loss after amortization, goodwill impairment, income taxes and non-controlling interest of $15.8 million for the quarter ended December 31, 2006. Included in the loss is a goodwill impairment charge of $18.0 million recorded in the quarter.

Year Ended December 31, 2006 (Comparatives are for the full year ended December 31, 2005, including for predecessor companies for the period January 1 to July 27, 2005)

Revenue for the year ended December 31, 2006 increased 25.7% to $55.3 million from 2005. The increase was primarily due to the increase in rental revenue generated by the A-1 acquisition, a larger rental fleet, and price increases implemented in 2006. Equipment rental revenue represented approximately 81.0% of revenue for the year ended December 31, 2006, compared to 80.2% in 2005. Sales of consumables and new and used equipment also increased during 2006 compared to the prior year.

EBITDA for the year ended December 31, 2006 increased 36.0% to $14.4 million compared to 2005 as the higher revenue more than absorbed the increased operating costs resulting from the acquisition of A-1 and an increase in selling, general and administrative expenses primarily due to being a publicly traded entity for the full year.

After recognizing approximately $7.8 million in distributions/interest on Class A units as an expense, the Fund incurred a loss after amortization, goodwill impairment, income taxes and non-controlling interest of $20.2 million in the year ended December 31, 2006.

Distributable Cash (See Non-GAAP Measures)

As Stephenson's customers are primarily construction companies and contractors operating in Toronto and surrounding areas, the Fund's operating and financial results are significantly impacted by the seasonal affects of weather in the first quarter and to a lesser extent, the second quarter of each year. Accordingly, results for the third and fourth quarters of the year are traditionally stronger than the first two quarters of the year.

With the seasonal strong performance in the fourth quarter, the Fund achieved a payout ratio of 72.5%, substantially below the payout ratios in the first and second quarters of 2006 and lower than the 93.6% payout ratio generated during the quarter ended December 31, 2005.

Distributable cash for the quarter ended December 31, 2006 was $3.6 million. The Fund declared distributions on its Class A and Class B units totalling $2.1 million and retained $0.5 million in respect of the Series 1 and Series 2 Exchangeable Shares.

Distributable cash for the year ended December 31, 2006 was $10.5 million. The Fund declared distributions on its Class A and Class B units totalling $8.4 million and retained $2.0 million in respect to the Series 1 and Series 2 Exchangeable Shares.

Stephenson's has a $10.0 million revolving credit facility, under which approximately $0.1 million was drawn as at December 31, 2006.

Acquisition of A-1 Equipment Rental Ltd.

As a significant step in Stephenson's growth strategy, on May 24, 2006 the Fund, through its operating subsidiary, completed the acquisition of 100% of the capital stock of A-1 Equipment Rental Ltd., the second largest independent equipment rental company in the Greater Toronto Area. A-1's revenue for the year ended December 31, 2005 was approximately $17.0 million generating adjusted EBITDA of approximately $7.5 million. Management is pleased with the performance of the A-1 acquisition to date.



Financial Highlights
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(in $,000 except per
Unit amounts) Three months ended Year ended 157-day
(unaudited) December 31, December 31, period ended
December 31,
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2006 2005 2006 2005(2) 2005

Revenue:
Equipment Rental $ 13,161 $ 10,141 $ 44,855 $ 35,294 $ 15,881
Sales of Consumables &
New Equipment 2,280 2,290 7,915 7,510 3,291
Sales of Used Equipment 828 499 2,578 1,227 662
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16,269 12,930 55,348 44,031 21,084

Gross profit $ 5,378 $ 3,723 $ 16,070 $ 12,078 $ 6,520
Gross profit % 33.1% 28.8% 29.0% 27.4% 27.3%
Selling, general &
administrative expenses 2,267 1,800 8,287 6,591 3,006

EBITDA $ 5,066 $ 3,211 $ 14,404 $ 10,589 $ 5,750
EBITDA margin 31.1% 24.8% 26.0% 24.0% 27.3%

Interest on Long-Term
Debt (net) 1,456 225 4,263 374
Distributions/Interest
on Class A Units 1,964 1,946 7,843 3,326
Amortization 1,976 1,350 7,092 2,250
Goodwill Impairment 18,000 - 18,000 -
Write-off of IPO expenses - - - 8,362
Income Tax Recovery (716) (84) (4,439) (3,435)
Non-Controlling Interest (3,787) (311) (4,804) (1,340)

Loss (15,782) (1,203) (20,172) (6,023)
Loss per Class B Unit(1) $(30.68) $ (2.34) $ (39.21) $ (11.71)

Distributable Cash $ 3,617 $ 2,717 $ 10,517 $ 4,896
Distributions/Amount
Retained $ 2,622 2,544 $ 10,364 $ 4,340
Distributable Cash per
Unit/Share $0.3795 $0.2939 $ 1.1166 $ 0.5307
Distributions/Amount
Retained per Unit/Share $0.2751 $0.2751 $ 1.1004 $ 0.4703
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(1) As the Fund's Class A units are recorded as a liability under GAAP, the related distributions are reported as interest expense and the Class B Units are considered equity and are used in calculating the income (loss) per unit.

(2) The 2005 results include selected unaudited figures of the Fund's predecessor companies for the period January 1 to July 27, 2005.

The Fund's financial statements for the period ended December 31, 2006, including its Management's Discussion and Analysis, are available in the investor relations section of the Fund's web site at www.stephensons.ca and at www.sedar.com.

Investor Conference Call:

Stephenson's Rental Services Income Fund will hold a conference call at 11:00 a.m. ET today, Tuesday, April 3, 2007 to discuss these financial results and current industry conditions. Please dial 1-877-407-0778 to access the call. A recording of this call will be available for the following week. To access the recording, please call 1-877-660-6853, Account Number 286, Conference I.D. Number 236961. The recording will also be available at www.stephensons.ca.

About Stephenson's:

Stephenson's is the leading equipment and tool rental company in Toronto and the surrounding areas. Over the last 50 years, the Company has grown from a single location into one of the top ten equipment rental businesses in Canada.

Through its 18 branches, Stephenson's provides rental equipment and sells consumables to a diverse base of over 30,000 customers, divided into three primary categories: (i) residential new construction; (ii) non-residential new construction; and (iii) renovations.

Further information can be found on the Fund's web site at www.stephensons.ca and in the disclosure documents filed with securities regulatory authorities available at www.sedar.com

Non-GAAP Measures:

References to "EBITDA" are to earnings before interest, taxes, depreciation and amortization distributions/interest on Class A units, goodwill impairment, write-off public offering expenses and non-controlling interest. Management believes that in addition to net income or loss, EBITDA is a useful supplemental measure of cash available for distribution prior to debt service, changes in working capital, capital expenditures and taxes. However, EBITDA is not a recognized measure under Canadian GAAP. Investors are cautioned that EBITDA should not be construed as an alternative to net income or loss determined in accordance with GAAP as an indicator of the Fund's performance or as an alternative to cash flows from operating, investing and financing activities as a measure of the Fund's liquidity and cash flows. The Fund's method of calculating EBITDA may differ from the methods used by other issuers and, accordingly, the Fund's EBITDA may not be comparable to similarly titled measures used by other issuers.

The Fund believes that presentation of EBITDA enhances an understanding of financial condition, results of operations and cash flows because EBITDA is used by the Fund to satisfy its debt service obligations, its capital expenditures and other operational needs, as well as to provide funds for customer account growth. In addition, EBITDA is used by lenders and the investment community to determine the current borrowing capacity and to estimate the long-term value of companies with recurring cash flows from operations.

Distributable cash is not a defined term under Canadian GAAP but is determined by the Fund as EBITDA reduced by interest expense, net maintenance capital expenditures funded from operating cash flow and gain on sale of equipment. Management believes that distributable cash is a useful measure of performance as it provides investors with an indication of the cash available for distribution to Unitholders. Investors are cautioned, however, that distributable cash should not be construed as an alternate to using net earnings as a measure of profitability or the statement of cash flows. Furthermore, the Fund's method of calculating distributable cash may not be comparable to other similarly named calculations.

Forward-Looking Statements:

Certain statements in this press release may constitute "forward-looking" statements that involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Fund and its subsidiary entities, or the industry, to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. When used in this press release, such statements use words such as "may", "will", "expect", believe", "plan" and other similar terminology. These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of the press release. These forward-looking statements involve a number of risks and uncertainties, including those set out under the heading "Risk Factors" in the Fund's Annual Information Form dated March 29, 2007 and Management Discussion and Analysis dated March 29, 2007. New risk factors may arise from time to time and is not possible for management of the Fund to predict all of those risk factors or the extent to which any factor or combination of factors may cause actual results, performance or achievements of the Fund to be materially different from those contained in forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Although the forward-looking statements contained in this press release are based upon what management believes to be reasonable assumptions, the Fund cannot assure investors that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of the press release, and the Fund assumes no obligations to update or revise them to reflect new events or circumstances.

Contact Information

  • Stephenson's Rental Service Income Fund
    William D. Swisher
    Chief Executive Officer
    (905) 507-3650