Coast Wholesale Appliances Income Fund
TSX : CWA.UN

Coast Wholesale Appliances Income Fund

November 05, 2007 16:15 ET

Coast Wholesale Appliances Income Fund Reports 2007 Third Quarter Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Dec. 18, 2007) -

Coast Wholesale Appliances Income Fund (TSX:CWA.UN) will host a conference call and webcast to discuss its third quarter financial results on Tuesday, November 6, 2007 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern). The call can be accessed by dialing: 1-800-595-8550 or 416-644-3422.

A replay will be available through November 21, 2007 at: 1-877-289-8525 or 416-640-1917, Passcode: 21250883 followed by the number sign.

The live and archived webcast can be accessed at http://www.vcall.com/IC/CEPage.asp?ID=122412 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 nine months ended September 30, 2007. The three-month period represents the third 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.

Performance Highlights



(in thousands of dollars except 2007
percentages and per-unit amounts) Q1 Q2 Q3 YTD
------------------------------------------------------------------------
Sales 31,161 36,809 37,759 105,729
Gross profit 7,732 9,228 9,496 26,456
As a percentage of sales 24.8% 25.1% 25.1% 25.0%

Net income before non-controlling
interest 2,015 3,209 3,376 8,600
Basic and diluted net income
per unit 0.200 0.320 0.337 0.857

EBITDA 2,792 3,884 4,208 10,884
EBITDA margin 9.0% 10.6% 11.1% 10.3%

Adjusted distributable cash 2,555 3,543 3,895 9,993
Adjusted distributable cash
per unit 0.25 0.35 0.39 0.99
Distribution per unit 0.30 0.30 0.30 0.90
Adjusted distribution ratio 117.8% 85.0% 77.3% 90.4%
------------------------------------------------------------------------


(in thousands of dollars except 2006
percentages and per-unit amounts) Q1 Q2 Q3 YTD
------------------------------------------------------------------------
Sales 27,717 30,802 34,674 93,193
Gross profit 6,659 7,710 8,717 23,086
As a percentage of sales 24.0% 25.0% 25.1% 24.8%

Net income before non-controlling
interest 1,843 2,317 3,379 7,539
Basic and diluted net income
per unit 0.184 0.231 0.337 0.752

EBITDA 2,747 3,249 4,343 10,339
EBITDA margin 9.9% 10.5% 12.5% 11.1%

Adjusted distributable cash 2,450 2,822 3,987 9,259
Adjusted distributable cash
per unit 0.24 0.28 0.40 0.92
Distribution per unit 0.30 0.30 0.30 0.90
Adjusted distribution ratio 122.9% 106.7% 75.5% 97.5%
------------------------------------------------------------------------


Third quarter operating results

Coast's revenues for the three months ended September 30, 2007 reached a new quarterly high of $37.8 million. This is an increase of $3.1 million, or 8.9%, from the $36.7 million recorded in the third quarter of 2006. At comparable stores - locations open for more than one year - sales increased by $1.6 million, or 4.7%, quarter-over-quarter. New store sales growth during the quarter came from the two new Alberta locations Coast added in the first quarter of 2007. The company opened a second Edmonton store in mid-February and its first Red Deer location at the end of March, bringing its total store count to 15.

Coast continues to expect that its retail business will grow at a faster rate than its contract sales to developers and builders as the new Alberta stores become more established. Retail sales in the third quarter were slightly lower than in the second quarter, but in line with first quarter levels. The company's new Edmonton store continues to perform particularly well.

In its contract business with developers and builders, as anticipated, Coast realized most of the remaining deferred sales from the lag it experienced in British Columbia during the second half of 2006. The company expects that its contract business will remain strong in the fourth quarter.

Cost of sales for the third quarter was $28.3 million, or 74.9% of sales. This resulted in a gross profit of $9.5 million, or 25.1% of sales. By comparison, in the third quarter of 2006, cost of sales was $26.0 million, also 74.9% of sales, providing a gross profit of $8.7 million, again 25.1% of sales.

Coast's EBITDA for the third quarter was $4.2 million, compared to $4.3 million in 2006, while its EBITDA margin of 11.1% was down from 12.5% last year. Removing the full impact of the new stores, the 2007 third quarter EBITDA margin would have been 11.7%. The remainder of the year-over-year EBITDA margin difference was due to the impact of generally higher expenses with the growth of Coast's business.

Net income before non-controlling interest for the three months was $3.4 million, or 8.9% of sales. This matches the $3.4 million Coast recorded in the third quarter of 2006, which equalled 9.7% of sales. Removing the full impact of the new stores, net income before non-controlling interest would equal 9.3% of sales in 2007.

Nine-month operating results

Coast's financial results for the nine months to September 30, 2007 were also strong. Total sales for the first three quarters of the year were $105.7 million, up by $12.5 million, or 13.5%, from $93.2 million in 2006. Comparable store sales for the nine months increased by $8.2 million, or 8.8%, year-over-year.

Year-to-date cost of sales was $79.3 million, or 75.0% of sales, resulting in a gross profit of $26.5 million, or 25.0% of sales. This compares favourably to cost of sales of $70.1 million, or 75.2% of sales, and a gross profit of $23.1 million, or 24.8% of sales, in the first nine months of 2006. The year-to-date improvement in gross margin was due in part 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 in early 2006.

During the first three quarters, Coast's EBITDA increased to $10.9 million from $10.3 million in 2006, while its EBITDA margin decreased to 10.3% from 11.1% in 2006. Removing the full impact of the two new stores, this year's nine-month EBITDA margin would have been 11.7%.

Profitability also improved, with net income before non-controlling interest growing to $8.6 million, or 8.1% of sales, from $7.5 million, also 8.1% of sales, in the first nine months of 2006. Removing the full impact of the new stores, Coast's 2007 nine-month net income before non-controlling interest would have been 8.6% of sales.

"We are very proud of our strong operating performance in the first three quarters of the year, which is reflected in the increase in our monthly cash distributions we announced in mid-October," said Blain Lawson, President and CEO of Coast. "In the coming months, we will continue to work to drive up our distributable cash so we can further reduce the Fund's payout ratio."

Cash distributions

For each of July, August and September 2007, the Fund declared monthly cash distributions of $0.10 per unit. By the end of the quarter, the Fund had paid a total of 27 consecutive monthly cash distributions to its public unitholders, as well as nine consecutive quarterly cash distributions to the subordinated non-controlling interest held by the previous owners of the business. With the October distribution to be paid on November 15, 2007, the Fund's monthly cash distribution amount will increase to $0.1025 per unit. On an annualized basis, this represents a distribution rate of $1.23 per unit.

During the third quarter, the Fund earned $3.9 million in adjusted distributable cash (before the non-controlling interest), or $0.39 per unit. This compared to $4.0 million, or $0.40 per unit, in the same period of 2006. In each of the first three quarters, it distributed and accrued for payment $3.0 million, or $0.30 per unit, to unitholders and the non-controlling interest.

For the first nine months of the year, the Fund's adjusted distributable cash (before non-controlling interest) totaled $10.0 million, or $0.99 per unit, up from $9.3 million, or $0.92 per unit in 2006. In both years, the Fund distributed and accrued for payment $9.0 million, or $0.90 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 leveled 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.

For the nine months, the Fund's adjusted payout ratio improved to 90.4% from 97.5% in the first nine months of 2006. On a 12-month trailing basis, its adjusted payout ratio of 89.2% was down from 94.9% at September 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 opportunities for expansion in Eastern Canada.

"The near-term outlook for our business is very positive," said Lawson. "Although single-family starts in Western Canada have slowed somewhat from the recent record levels, the multi-family market remains robust."

Lawson said the company is continuing to concentrate on increasing sales from its existing stores and enhancing profitability. As planned, Coast relocated its Calgary warehouse to a newer, larger facility in the third quarter, which became fully functional in October.

The company is now moving forward with its plans to relocate its Regina and Abbotsford stores to new, larger premises in higher-traffic areas in the first quarter of 2008.

Coast continues to evaluate the potential impact of the new tax on income trusts proposed by the federal government on October 31, 2007 and enacted as legislation on June 12, 2007. The taxation of distributions at the trust level will begin in 2011. "As more information relating to transition rules becomes available, we will determine the most appropriate course of action for our Fund," said Lawson.

A more detailed discussion of the Fund's financial results can be found in its third 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 November 6, 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 third 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 third quarter 2007 Management's Discussion and Analysis posted on the Fund's website and SEDAR.

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