Coast Wholesale Appliances Income Fund

Coast Wholesale Appliances Income Fund

March 23, 2009 16:05 ET

Coast Wholesale Appliances Income Fund Reports 2008 Q4 And Year-End Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - March 23, 2009) - Coast Wholesale Appliances Income Fund (TSX: CWA.UN) will host a conference call and webcast to discuss its fourth quarter and year-end financial results on Tuesday, March 24, 2009 at 8:00 am Pacific Time (11:00 am Eastern). The call can be accessed by dialing: 1-800-732-9307 or 416-644-3415.

A replay will be available through April 7, 2009 at: 1-877-289-8525 or 416-640-1917, Passcode: 21298633, followed by the pound sign.

The live and archived webcast, as well as an mp3 download, can be accessed at or on the Fund's website at

Coast Wholesale Appliances Income Fund (the Fund) today reported financial results for the three and 12 months ended December 31, 2008. The three-month period represents the fourth quarter of the Fund's 2008 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 is held by the former owner of the business, CWAL Investments Ltd. (CWAL).

Performance Highlights
(in thousands of
dollars except
percentages and
per-unit amounts) 2008 2007 2006

Fiscal Fiscal Fiscal
Q4 Year Q4 Year Q4 Year
Sales 36,077 146,750 37,306 143,035 32,762 125,955
Gross margin 9,200 36,766 9,317 35,772 8,570 31,656
As a percentage of
sales 25.5% 25.1% 25.0% 25.0% 26.2% 25.1%
Income before
interest 1,959 8,993 2,227 10,827 2,836 10,375
Basic and diluted
net income per unit 0.195 0.896 0.222 1.079 0.282 1.034

EBITDA before 2008
accounts receivable
write-off 3,356 13,859 3,175 14,059 3,832 14,170
EBITDA margin before
2008 accounts
receivable write-off 9.3% 9.4% 8.5% 9.8% 11.7% 11.3%
EBITDA 3,356 12,702 3,175 14,059 3,832 14,170
EBITDA margin 9.3% 8.7% 8.5% 9.8% 11.7% 11.3%
EBITDA per unit 0.33 1.27 0.32 1.40 0.38 1.41

Maintenance capital
expenditures 171 912 495 679 36 419
distributable cash 2,876 10,731 2,434 12,428 3,512 12,771
distributable cash
per unit 0.29 1.07 0.24 1.24 0.35 1.27
Distribution per
unit 0.25 1.17 0.31 1.21 0.30 1.20
Adjusted distribution
ratio 87.2% 109.6% 126.8% 97.5% 85.7% 94.3%


Fourth Quarter Operating Results

Revenues of $36.1 million for the three months ended December 31, 2008 were down by $1.2 million, or 3.3%, from the $37.3 million reported in the fourth quarter of 2007. Coast's contract business with developers, designers and builders remained relatively strong through the quarter, although deliveries for some projects were delayed to the first half of 2009. Unlike some of its competitors, Coast did not experience major project cancellations. However, due to much more cautious consumer spending, retail sales declined in the final months of the year. As a result, Coast's sales blend continued to shift in favour of contract sales.

Fourth quarter cost of sales was $26.9 million, or 74.5% of sales. This resulted in a gross margin of $9.2 million, or 25.5% of sales. By comparison, in the fourth quarter of 2007, cost of sales was $28.0 million, equal to 75% of sales, resulting in a gross margin of $9.3 million, or 25.0% of sales. The modest improvement in gross margin was due to opportunistic purchases of specially-priced products. These purchases enabled Coast to pre-empt supplier price increases and capitalize on volume rebates.

Coast's fourth quarter EBITDA increased to $3.4 million from $3.2 million in 2007, driving its EBITDA margin up to 9.3% from 8.5%. The year-over-year improvement resulted from tighter control of expenses and improved gross margins. Fourth quarter net income before non-controlling interest decreased to $2.0 million, or 5.4% of sales, from $2.2 million, or 6.0% of sales, in the same period of 2007.

Twelve-Month Operating Results

Record revenues of $146.8 million for the year ended December 31, 2008 were up by $3.8 million, or 2.6%, from $143.0 million in 2007. Cost of sales was $110.0 million, or 74.9% of sales, resulting in a full-year gross margin of $36.8 million, or 25.1% of sales. This was up slightly from 2007, when cost of sales of $107.3 million equalled 75.0% of sales, providing a gross margin of $35.8 million, or 25.0% of sales.

EBITDA for 2008 was negatively impacted by the $1.2 million write-off of accounts receivable that was recorded in the third quarter of the year. This write-off was a result of financial improprieties committed by a former employee at one of Coast's stores. The matter remains under police investigation and the Fund is pursuing all avenues of potential recovery. As previously reported, Coast has since implemented new, improved organization-wide internal controls and protocols for financial monitoring and reporting.

Due mainly to the impact of the accounts receivable write-off, EBITDA declined to $12.7 million from $14.1 million in 2007, while EBITDA margin was 8.7%, compared to 9.8% in 2007. Excluding this one-time write-off, EBITDA would have been $13.9 million and EBITDA margin would have been 9.4%. The balance of the year-over-year difference in EBITDA was due to generally increased expenses resulting from the growth of Coast's business. The new stores it opened in Alberta in early 2007 have contributed positively to Coast's total EBITDA, but had a small negative impact on its EBITDA margin. Net income before non-controlling interest of $9.0 million, or 6.1% of sales, was down from $10.8 million or 7.6% of sales, in 2007, due mainly to the accounts receivable write-off.

"We faced numerous challenges in 2008, particularly as a result of highly volatile currency exchange rates, fluctuating energy prices and global recessionary pressures. Coast's business was also impacted by the continued slowing of single-family housing starts through the year, and a slowdown in the multi-family residential market beginning in the second half. Under these circumstances, we are very encouraged that we were able to keep our gross margin in line with historical levels," said Blain Lawson, President and CEO of Coast. "The stability of our business in an increasingly unsettled economic environment is due in large part to both the essential nature of the products we sell and our balanced business model, which draws revenues from all three of the new home, home renovation and appliance replacement markets."

Strategic Achievements

As part of its strategy to drive up comparable store sales, Coast relocated its Abbotsford, British Columbia and Regina, Saskatchewan stores to new facilities in higher-traffic areas, in February and September of 2008, respectively. Plans were finalized during the year for a similar relocation of Coast's existing Edmonton North store in late 2009. With this Edmonton relocation, all of Coast's original stores will have been renovated or relocated since the Fund's inception in 2005. To support its growth in the Edmonton market, Coast also completed preparations to add a small warehouse close to the planned new Edmonton store. The new warehouse opened in early February 2009.

To further enhance profitability, and facilitate the future growth and expansion of its business, Coast has continued to streamline its non-selling functions. These efforts have included major upgrades of its computer hardware and inventory management systems. These upgrades were completed in the first and third quarters of 2008, respectively. In the final three months of the year, inventory levels were higher than normal due to opportunistic purchases that allowed Coast to pre-empt supplier price increases announced for 2009 and capitalize on volume rebates from selected suppliers.

Coast also continued to refine and expand its product offerings during the year. A highlight was the successful negotiation of a new agency agreement for Miele appliances, beginning in 2009. "We expect that the addition of this high-quality European line of major home appliances to Coast's already extensive product offering will create considerable additional sales opportunities, particularly in our contract business with developers and builders," said Lawson. "The Miele products will be sold on a consignment basis, so there is no cost involved in adding the new line to our inventories."

Finally, in keeping with one of the Fund's key strategic objectives, Coast expanded its business into Ontario. In the fourth quarter, as previously reported, Coast entered into an agreement to purchase all of the assets and business of Morley's Appliance Centre, a leading independent appliance dealer in the Greater Toronto Area. The transaction was completed successfully on January 2, 2009. In addition to providing Coast with a well-established bridgehead from which to expand into Canada's most populous region, the acquisition of Morley's will allow it to generate incremental sales growth while capitalizing on Coast's buying power and the strong operating synergies between the two businesses. The purchase was financed by Coast's existing acquisition term facility.

Cash Distributions

In each of the first nine months of 2008, the Fund declared and paid distributions in the amount of $0.1025 per unit, representing an annualized distribution rate of $1.23 per unit. Effective with the October 2008 distribution, the Trustees reduced the per-unit monthly amount to $0.0833, or $1.00 per annum, in order to match the Fund's distribution level with its forecast distributable cash flow, thereby maintaining balance sheet strength and financial flexibility. Subsequent to year-end, the Fund declared a distribution in this amount for the month of January. In February, due to the continuing worldwide economic uncertainty and the significant deterioration of the Canadian economy, the Trustees determined that it was prudent to further reduce monthly distributions to $0.0416 per unit, or $0.50 per annum. Since its inception, the Fund has paid a total of 44 consecutive monthly cash distributions to its public unitholders, and equivalent total cash distributions to the non-controlling interest held by CWAL.

For the full 2008 fiscal year, the Fund's adjusted distributable cash (before non-controlling interest) totaled $10.7 million, or $1.07 per unit. This compares to $12.4 million, or $1.24 per unit, in 2007. Excluding the accounts receivable write-off, the Fund would have earned $11.9 million, or $1.18 per unit, in adjusted distributable cash. As a result of the October 2008 distribution decrease, the amount distributed and accrued for payment to unitholders and the non-controlling interest decreased slightly to $11.8 million, or $1.17 per unit, in 2008 from $12.1 million, or $1.21 per unit, in 2007.

The Fund's adjusted payout ratio for 2008 was 109.6%, up from 97.5% in 2007. The higher payout ratio in 2008 was mainly due to reduced cash flow from operations before changes in non-cash working capital. This included the $1.2 million accounts receivable write-off. Increased maintenance capital expenditures, and the higher rate of distribution introduced in October 2007 and paid in the first nine months of 2008 also contributed to the higher payout ratio. Excluding the accounts receivable write-off, the Fund's adjusted payout ratio for 2008 was 99.0%. Capital expenditures during 2008 were primarily for the Abbotsford and Regina store relocations, necessary building improvements and other planned expenditures required for normal operations, as well as to support the future growth of the business. On a cumulative basis, from the Fund's inception, the Fund's adjusted payout ratio is 97.6%.


The following discussion is qualified in its entirety by the forward-looking statements report at this end of this news release. The outlook for Coast's business through 2009 is extremely cautious. Housing starts are declining in most Canadian markets and total starts for the year are expected to fall substantially from 2008 levels. In the higher-margin segment of its business, retail sales, Coast anticipates that it will see a continued shift away from top-end products, with consumers trading down to next-level products. It also expects that more homeowners may seek to repair rather than replace older appliances.

"We anticipate that purchases of new appliances will be concentrated on essential needs, such as refrigeration and laundry, as well as dishwashers, with an emphasis on energy efficiency. These product categories will be our focus for the year to come," said Lawson. "We believe that the Home Renovation Tax Credit introduced in the 2009 Federal Budget will provide spinoff benefits for our renovation business. As in previous recessionary periods, we expect to see a trend toward "cocooning", with a greater focus on home improvement among consumers."

In response to the current economic climate and market conditions, Coast is rigorously controlling expenses. All discretionary spending outside of growth-related expenditures to support its new Toronto area store has been eliminated. Coast has cut back on non-essential capital expenditures and is continuing to work to streamline operations and trim overhead. It will also be reducing marketing expenditures in 2009, in part by making more effective use of co-op advertising dollars available from suppliers.

Lawson said that Coast is focused on ensuring its workforce is as efficient and effective as possible and noted that, to Coast's advantage, its wage model is primarily based on a variable commission structure. "With 30 years of experience, a well-diversified business model, a proven employee group, and attractive growth opportunities, we remain confident of our ability to manage through the current market challenges," he concluded.

The Fund is continuing to evaluate its most advantageous course of action in response to the taxation of distributions at the trust level set to begin in 2011, as well as the timing of any such action. It expects to complete these plans in the coming year.

A more detailed discussion of the Fund's financial results can be found in its 2008 year-end Management's Discussion and Analysis, which will be posted with the consolidated financial statements at the Fund's website ( and at SEDAR ( on or before March 24, 2009.

Coast 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. Founded in 1978, Coast currently operates 15 stores across the four western provinces and one store in the Greater Toronto Area of Ontario, as well as a network of warehouse distribution centres strategically situated to serve these locations.

Forward-looking statements

Forward-looking statements are included in this news release, which involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements are identified by the use of terms and phrases such as "anticipate", "believe", "estimate", "expect", "may", "plan", "will", and similar terms and phrases, including references to assumptions. Such statements may involve, but are not limited to, comments with respect to the sustainability of The Fund's distributions and the level of its payout ratio in the future.

These statements reflect current expectations of management regarding future events and operating performance as of the date of this news release. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the following factors: sensitivity to general economic conditions; maintenance of profitability and management of growth; competition; fluctuations in fuel and commodity pricing, which may impact freight and other costs; usage of extended warranty programs and the costs to deliver these services; changes to planning and supply chain processes; changes in consumer preferences; changes in the mix of product sales; reliance on suppliers; lack of supplier agreements; reliance on key personnel; foreign exchange rates as they relate to imported products; and interest rates.

Although the forward-looking statements contained in this news 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. The forward-looking statements reflect management's current beliefs and are based on information currently available to the Fund. They are made and speak only as of the date of this news release, and reflect current assumptions regarding future events and operating performance. These assumptions include, without limitation: a continuing recession in the Canadian economy, including Western Canada and the Greater Toronto Area (our current market areas); continuing access to current credit facilities; volatility in exchange rates; low and stable interest rates; difficult credit markets for Coast's major builder customers to obtain financing for their current and future building activities; reduced consumer confidence in light of the recessionary environment and its impact on the willingness of consumers to purchase household appliances; and a significant reduction in new building permits compared to the last few years. The Fund assumes no obligation to update or revise the forward-looking statements to reflect new events or circumstances, other than as required by law.

Non-GAAP Financial Measures

EBITDA, EBITDA margin, maintenance capital and adjusted distributable cash are non-GAAP financial measures that are defined in the 2008 year-end Management's Discussion and Analysis posted on the Fund's website and SEDAR.

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