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

Stephenson's Rental Services Income Fund

November 10, 2006 09:22 ET

Stephenson's Rental Services Income Fund Announces Strong Growth in Third Quarter 2006

MISSISSAUGA, ONTARIO--(CCNMatthews - Nov. 10, 2006) - Stephenson's Rental Services Income Fund (TSX:RNT.UN) announced today results for the three months ended September 30, 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.

THIRD QUARTER HIGHLIGHTS:

- Revenue up 41% compared to 2005 due to contribution from acquisition and organic growth of 6%

- EBITDA rises 49% compared to 2005

- Payout ratio of 67% during the quarter

"We continue to be pleased with our strong operating performance in 2006. As expected, the contribution from our recent acquisition of A1 Equipment Rental Ltd. ("A1"), combined with solid organic growth, has resulted in a considerable increase in both revenues and cash flow in the quarter," commented William D. Swisher, President and Chief Executive Officer. "Most importantly, we capitalized on the seasonal nature of our business to significantly reduce our third quarter payout ratio to 67%. Looking ahead, we anticipate a strong finish to the year with an annual payout ratio below 100%. The Department of Finance announcement on October 31, 2006 relating to the future taxation of income trusts has created some uncertainty for trusts, but as we evaluate the impact of this announcement on the Fund, we remain confident in the fundamental strength of our business."

Third Quarter Operating Results

Revenue for the three months ended September 30, 2006 increased 40.8% to $16.5 million compared to the third quarter of 2005, primarily due to the contribution from A1 acquired on May 24, 2006. Equipment rental revenue represented approximately 86% of revenue for the quarter ended September 30, 2006, consistent with 2005. Revenue from consumables and new equipment was $1.8 million, an increase of 28.7% compared to the same period in 2005. Revenue from the sale of used equipment, typically a more discretionary revenue stream, also increased in the third quarter of 2006 compared to the same period in 2005.

Earnings before interest, taxes, depreciation and amortization ("EBITDA", see Non-GAAP measures) for the three months ended September 30, 2006 increased 48.5% to $5.5 million from $3.7 million in the same quarter of 2005 due primarily to the higher revenue in the current year and resulting improved gross margins. Selling, general and administrative expenses have increased in 2006 compared to the prior year primarily due to higher payroll costs, expenses related to becoming a publicly traded entity, and incremental costs relating to the acquisition of A1.

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, the Fund under GAAP incurred a net loss after income taxes and non-controlling interest of $1.2 million for the quarter ended September 30, 2006 compared to a loss of $4.8 million in 2005. The loss in the third quarter of 2005 included a write-off of IPO expenses of $8.4 million prior to income tax recovery.

Nine Months Ended September 30, 2006

Revenue for the nine months ended September 30, 2006 increased 25.6% to $39.1 million from the same period in 2005. The increase was primarily due to the increase in rental revenue generated by the A1 acquisition, the larger rental fleet, and price increases implemented in late 2005 and through 2006. Equipment rental revenue represented approximately 81.1% of revenue for the nine months ended September 30, 2006, consistent with 2005. Sales of consumables and new and used equipment also increased in the first nine months of 2006 compared to the prior year period.

EBITDA for the nine months ended September 30, 2006 increased 26.6% to $9.3 million compared to the same period in 2005 as the higher revenue more than absorbed the increased operating costs resulting from the acquisition of A1 and the increase in selling, general and administrative expenses due to the higher employee costs and public company related expenses incurred in 2006 compared to 2005.

After recognizing approximately $5.9 million in distributions/interest on Class A units as expense, the Fund incurred a net loss after income taxes and non-controlling interest of $4.4 million in the nine months ended September 30, 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.

To eliminate this seasonal impact on unit holders the Fund has equalized monthly cash distributions through the year and anticipates its annualized distributions will be sustainable at the present level of $1.10 per unit, consistent with the distributions outlined at the time of the Fund's IPO.

With the seasonally strong performance in the third quarter, the Fund's payout ratio improved significantly in the third quarter to 67.0%, substantially below the payout ratios in the first and second quarters of 2006 and lower than the 82.4% payout ratio generated during the 65-day period ended September 30, 2005.

Distributable cash for the three months ended September 30, 2006 was $3.9 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 nine months ended September 30, 2006 was $6.9 million. The Fund declared distributions on its Class A and Class B units totalling $6.3 million and retained $1.4 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 $1.0 million was drawn as at September 30, 2006.

Acquisition of A1 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 A1 Equipment Rental Ltd., the second largest independent equipment rental company in the Greater Toronto Area. A1's revenue for the year ended December 31, 2005 was approximately $17.0 million generating adjusted EBITDA of approximately $7.5 million.

The acquisition continues to bring a number of benefits to Stephenson's unitholders:

- A1's rental fleet original cost of $26 million has historically generated annual dollar utilization (ROI) of approximately 50%, as compared to Stephenson's 61% on similar rental fleet product categories. Stephenson's "hub and spoke" branch operating model will provide the opportunity to improve A1's dollar utilization.

- Stephenson's consolidation of its largest independent competitor has resulted in a market share increase approaching 30% of markets served.

- During the third quarter two of the A1 branches were consolidated with existing Stephenson's locations, and a Stephenson's branch was consolidated with the remaining A1 operation. The rationalization of the combined network should result in further improvement in profitability going forward.



Financial Highlights

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(in $,000 except per Unit Three months ended Nine months ended
amounts) September 30, September 30,
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2006 2005(2) 2006 2005(2)

Revenue:
Equipment Rental $ 14,235 $10,121 $ 31,694 $ 25,153
Sales of Consumables & New
Equipment 1,829 1,421 5,635 5,219
Sales of Used Equipment 475 206 1,749 729
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16,539 11,748 39,078 31,101
Gross profit $ 5,926 $ 4,032 $ 10,692 $ 8,355
Gross profit % 35.8% 34.3% 27.4% 26.9%
Selling, general &
administrative expenses 2,446 1,656 6,020 4,791

EBITDA $ 5,486 $ 3,694 $ 9,338 $ 7,377
EBITDA margin 33.2% 31.4% 23.9% 23.7%

Interest on Long-Term Debt (net) 1,738 2,807
Distributions/Interest on
Class A Units 1,963 5,879
Amortization 1,906 5,116
Income Tax Expense (Recovery) (588) (3,723)
Non-Controlling Interest (306) (1,016)

Income (Loss) (1,233) (4,391)
Income (Loss) per Class B
Unit(1) $ (2.39) $ (8.53)

Distributable Cash $ 3,878 $ 6,901
Distributions/Amount
Retained $ 2,599 $ 7,741
Distributable Cash per
Unit/Share $ 0.4105 $ 0.7356
Distributions/Amount
Retained per Unit/Share $ 0.2751 $ 0.8253
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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 September 30, 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, Monday, November 13, 2006 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 219364. 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 19 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, 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 30, 2006 and Management Discussion and Analysis dated November 10, 2006. 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 Services Income Fund
    William D. Swisher
    Chief Executive Officer
    (905) 507-3650
    Website: www.stephensons.ca