Coast Wholesale Appliances Income Fund
TSX : CWA.UN

Coast Wholesale Appliances Income Fund

August 01, 2007 16:15 ET

Coast Wholesale Appliances Income Fund Reports 2007 Second Quarter Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Aug. 1, 2007) -

Coast Wholesale Appliances Income Fund (TSX: CWA.UN) will host a conference call and webcast to discuss its second quarter financial results on Thursday, August 2, 2007 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern). The call can be accessed by dialing: 1-800-590-1817 or 416-644-3422.

A replay will be available through August 16, 2007 at: 1-877-289-8525 or 416-640-1917 Passcode: 21240452 followed by the number sign.

The live and archived webcast can be accessed at http://www.vcall.com/IC/CEPage.asp?ID=118692 or on the Fund's website at www.coastincomefund.com.

Coast Wholesale Appliances Income Fund (the Fund) today reported financial results for the three and six months ended June 30, 2007. The three-month period represents the second quarter of its 2007 fiscal year.

The Fund holds a 65% indirect interest in Coast Wholesale Appliances LP (Coast), a leading independent supplier of major household appliances, and its results are entirely dependent upon Coast's operating results. The remaining 35% interest has been retained by the previous ownership. Distributions to the retained interest are currently subordinated to those of public unitholders, subject to the Fund meeting certain EBITDA and cash distribution targets, as set out in its June 15, 2005 prospectus. The subordination is expected to be removed following the Fund's next full financial audit, anticipated to be conducted subsequent to its 2007 year-end.

Second quarter operating results

In the three months ended June 30, 2007, Coast generated sales revenues of $36.8 million, up by $6.0 million, or 19.5%, from the $30.8 million recorded in the second quarter of 2006. Sales at comparable stores - locations open for more than one year - increased by $4.0 million, or 13.1%, quarter-over-quarter, growing equally across the four western provinces. New store sales growth came from the Calgary store Coast opened in August 2006, its second in the city, and two other new Alberta locations added in the first quarter of 2007. The company opened its second Edmonton store in mid-February and its first Red Deer location at the end of March, bringing its total store count to 15.

As in the first quarter of this year, Coast saw a slight shift in its business mix in favour of retail sales. The company expects that its retail sales will continue to grow at a faster rate than its contract sales to developers and builders as its newly opened stores become more established. In Coast's contract business, as anticipated, the sales lag that the company experienced in British Columbia during the second half of 2006 continued to show signs of catching up as delayed construction projects proceeded to completion. Coast expects to realize the remainder of the deferred contract sales in the third quarter.

Cost of sales for the second quarter was $27.6 million, or 74.9% of sales, which resulted in a gross profit of $9.2 million, or 25.1% of sales. By comparison, in the second quarter of 2006, cost of sales was $23.1 million, or 75.0% of sales, providing a gross profit of $7.7 million, or 25.0% of sales. The year-over-year gross margin improvement was partially due to the shift in Coast's business mix toward retail sales, which generate a higher margin than its contract business. The company also continued to benefit from the new, higher-margin product lines it added to its core offerings in early 2006 to increase sales to the higher end of the multi-family sector.

Second quarter EBITDA was $3.9 million, compared to $3.2 million in 2006. Coast's EBITDA margin of 10.6% for the 2007 period was up slightly from 10.5% in the second quarter of 2006. Removing the full impact of the new stores, the 2007 second quarter EBITDA margin would have been 11.0%.

Net income before non-controlling interest was $3.2 million, or 8.7% of sales, compared to $2.3 million, or 7.5% of sales, in the second quarter of 2006. Removing the full impact of the new stores, the 2007 net income before non-controlling interest would have been 9.1% of sales.

Six-month operating results

Sales for the six months ended June 30, 2007 were $68.0 million, up by $9.5 million, or 16.2%, from $58.5 million in the first half of 2006. Comparable store sales for the six months increased by $6.6 million, or 11.2%, year-over-year.

Cost of sales for the first six months of 2007 was $51.0 million, or 75.0% of sales, resulting in a gross profit of $17.0 million, or 25.0% of sales. This compares to cost of sales of $44.1 million, or 75.4% of sales, and a gross profit of $14.4 million, or 24.6% of sales, in the first half of 2006.

Coast's EBITDA for the six months increased to $6.7 million from $6.0 million in 2006, while its EBITDA margin decreased to 9.8% from 10.2% in 2006. Removing the full impact of the new stores, the 2007 six-month EBITDA margin would have been 10.5%.

Six-month net income before non-controlling interest was $5.2 million, or 7.7% of sales, up from $4.2 million, or 7.1% of sales, in the first half of 2006. Removing the full impact of the new stores, the 2007 six-month net income before non-controlling interest would have been 8.2% of sales.

"We are pleased with our strong operating performance in the first half of 2007," said Blain Lawson, President and CEO of Coast. "Our sales growth is right on target, thanks largely to the sustained robust economy in Western Canada, where all 15 of our stores are located."

Cash distributions

The Fund declared monthly cash distributions of $0.10 per unit for each of April, May and June 2007. By the end of the quarter, the Fund had paid a total of 24 consecutive monthly cash distributions to its public unitholders, as well as eight consecutive quarterly cash distributions to the subordinated non-controlling interest held by the previous owners of the business. As previously announced, a subsequent monthly distribution of $0.10 per unit to public unitholders has been declared for the month of July 2007.

In the second quarter of 2007, the Fund earned $3.6 million in adjusted distributable cash before the non-controlling interest, or $0.36 per unit. This compares to $2.9 million, or $0.29 per unit, in the same period of 2006. In both quarters, the Fund distributed and accrued for payment $3.0 million, or $0.30 per unit, to unitholders and the non-controlling interest.

Adjusted distributable cash before non-controlling interest in the first six months of the year totaled $6.2 million, or $0.62 per unit, up from $5.4 million, or $0.54 per unit in 2006. In both years, the Fund distributed and accrued for payment $6.0 million, or $0.60 per unit, to unitholders and the non-controlling interest.

The Fund's adjusted distributable cash payout ratio varies throughout the year according to the seasonality of Coast's business. While the Fund has levelled distributions to provide a regular stream of income to unitholders, Coast expects that the less profitable first half of the year will be offset by historically higher earnings in the second half.

In the second quarter of 2007, Coast's adjusted payout ratio improved to 83.8% from 103.1% in the same period of 2006. For the six months, its adjusted payout ratio improved to 97.3% from 111.0% in 2006. Removing the full impact of the new stores, the six-month adjusted payout ratio would have been 95.0%. On a 12-month trailing basis, the Fund succeeded in reducing its adjusted payout ratio to 87.4% from 97.3% at June 30, 2006.

Outlook

For the balance of 2007, Coast expects continued, steady sales growth from its existing stores, as well as incremental sales gains from its ongoing expansion in Alberta. The company is actively seeking additional locations in both BC and Alberta, as well as acquisition targets in Eastern Canada. To support its growth, Coast amended its credit facilities during the second quarter to extend the maturity of its term debt from June 23, 2008 to July 31, 2010 and added a new $13.5 million acquisition facility.

Coast is also proceeding with a number of initiatives to increase sales from existing stores and enhance profitability. "As planned, we are set to relocate our Calgary warehouse to a newer, larger facility in the third quarter," said Lawson. "We also now have agreements in place to relocate our Regina and Abbotsford stores to new, larger premises in higher-traffic areas in the first half of 2008."

Lawson said that Coast is optimistic about the outlook for its business for the second half of 2007, and added that the Fund will continue to evaluate the potential impact of the new tax on income trusts announced by the federal government on October 31, 2006 and enacted into legislation on June 12, 2007. The changes result in taxation of distributions at the trust level starting in 2011. "We will determine the most appropriate course of action for our Fund as more information becomes available," he stated.

A more detailed discussion of the Fund's financial results can be found in its second quarter 2007 Management's Discussion and Analysis, which will be posted with financial statements at the Fund's website (www.coastincomefund.com) and at SEDAR (www.sedar.com) on or before August 2, 2007.

Company profile

Coast Wholesale Appliances is a leading independent supplier of major household appliances to developers and builders of multi-family and single-family housing and to retail customers in Western Canada. Founded in 1978, Coast currently operates 15 locations and four warehouse distribution centres across the four western provinces.

Forward-looking statements

This news release may contain forward-looking statements relating to expected future events and financial and operating results of Coast that involve risks and uncertainties. The actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons. These include market and general economic conditions, and the risks and uncertainties detailed from time to time in Coast's continuous disclosure materials filed with Canadian securities regulatory authorities, including the second quarter 2007 and year-end Management's Discussion and Analyses filed at SEDAR (www.sedar.com). These forward-looking statements are based on assumptions that management considered reasonable at the time they were prepared. Due to the potential impact of these factors, Coast disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law.

Non-GAAP Financial Measures

EBITDA, EBITDA margin, and adjusted distributable cash are non-GAAP financial measures that are defined in the second quarter 2007 Management's Discussion and Analysis posted on the Fund's website and SEDAR.

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