Coast Wholesale Appliances Income Fund
TSX : CWA.UN

Coast Wholesale Appliances Income Fund

August 11, 2008 16:15 ET

Coast Wholesale Appliances Income Fund Reports 2008 Second Quarter Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Dec. 18, 2008) - Coast Wholesale Appliances Income Fund (the Fund) (TSX:CWA.UN) -

Coast Wholesale Appliances Income Fund (TSX: CWA.UN) will host a conference call and webcast to discuss its second quarter and first half financial results on Tuesday, August 12, 2008 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern). The call can be accessed by dialing: 1-800-591-7539 or 416-644-3424.

A replay will be available through August 27, 2008 at: 1-877-289-8525 or 416-640-1917, Passcode: 21277694 followed by the pound sign.

The live and archived webcast can be accessed at http://www.investorcalendar.com/IC/CEPage.asp?ID=132314 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, 2008. The three-month period represents the second quarter of its 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, CWAL Investments Ltd. (CWAL).

Performance highlights



(in thousands of dollars except percentages
and per-unit amounts)
2008 2007 2006 2008 2007 2006
Q2 Q2 Q2 YTD YTD YTD
------------------------------------------------------------------------
Sales 38,250 36,809 30,802 72,126 67,970 58,519
Gross margin 9,414 9,228 7,710 17,880 16,960 14,370
As a percentage of sales 24.6% 25.1% 25.0% 24.8% 25.0% 24.6%

Net income before
non-controlling interest 1,783 3,208 2,317 4,682 5,224 4,160
Basic and diluted net
income per unit 0.273 0.320 0.231 0.47 0.52 0.42

EBITDA 3,542 3,883 3,249 6,391 6,676 5,996
EBITDA margin 9.3% 10.6% 10.5% 8.9% 9.8% 10.2%

Maintenance capital
expenditures 385 104 192 566 109 242
Adjusted distributable
cash 2,906 3,543 2,822 5,321 6,098 5,272
Adjusted distributable
cash per unit 0.29 0.35 0.28 0.53 0.61 0.52
Distribution per unit 0.31 0.30 0.30 0.62 0.60 0.60
Adjusted distribution
ratio 106.2% 85.0% 106.7% 116.0% 98.7% 114.2%
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Second Quarter Operating Results

Coast's revenues for the three months ended June 30, 2008 were $38.3 million, up by $1.5 million, or 3.9%, from the record $36.8 million reported in the second quarter of 2007. The company continued to see robust growth in its contract business with developers and builders, most notably in Alberta, where Coast again experienced strong contract sales completions. As in the first quarter, the company's business mix was skewed slightly in favour of contract sales. Due to more cautious consumer spending, retail sales were down somewhat from the particularly high levels experienced in the second quarter of 2007.

Second quarter cost of sales was $28.8 million, or 75.4% of sales. This resulted in a gross margin of $9.4 million, or 24.6% of sales. By comparison, in the second quarter of 2007, cost of sales was $27.6 million, or 74.9% of sales, resulting in a gross margin of $9.2 million, or 25.1% of sales. Although Coast achieved a modest year-over-year improvement in its gross margin percentage on product sales, the gain was more than offset by the impact of rapidly increasing fuel prices on its inbound and outbound freight costs. These increased costs eroded second quarter gross margin by 0.5%.

Coast's second quarter EBITDA of $3.5 million was down from $3.9 million in 2007, while its EBITDA margin of 9.3% was down from 10.5% in the prior year. The reduction in EBITDA was due to the small reduction in Coast's gross margin percentage and generally higher expenses year-over-year. Net income before non-controlling interest was $2.7 million, or 7.2% of sales, down from $3.2 million, or 8.7% of sales, in the second quarter of 2007. The net income decrease was due to Coast's higher expenses and lower gross margin in 2008.

First-Half Operating Results

Revenues for the six months ended June 30, 2008 were $72.1 million, up by $4.1 million, or 6.1%, from $68.0 million in the first half of 2007. At comparable stores - locations open for more than a year - sales grew by $3.0 million, or 4.4%, over the first half of 2007.

Cost of sales for the first half of 2008 was $54.2 million, or 75.2% of sales. This resulted in a gross margin of $17.9 million, or 24.8% of sales. For the first half of 2007, cost of sales was $51.0 million, or 75.0% of sales, providing a gross margin of $17.0 million, or 25.0% of sales. As with the quarterly result, the slight erosion in six-month gross margin of 0.3% was mainly due to the higher freight costs.

First half EBITDA was $6.4 million, down from $6.7 million in the same period in 2007. EBITDA margin for the six months was 8.9%, down from 9.8% in 2007. The EBITDA margin reduction was mainly due to Coast's increased expenses and decreased gross margin. The new stores Coast opened in Alberta during 2007 have contributed positively to the company's total EBITDA, but have negatively impacted its EBITDA margin. As volume grows in these stores, Coast expects the increase in total gross margin dollars will result in an increase to its EBITDA margin. Net income before non-controlling interest was $4.7 million, or 6.5% of sales, down from $5.2 million or 7.7% of sales, in the first half of 2007.

"We are pleased with our continued sales growth in the first half of the year, particularly given that our second quarter gain was on top of the record 19.5% sales increase we achieved in the second quarter of last year," said Blain Lawson, President and CEO of Coast. "We remain focussed on enhancing profitability by streamlining our non-selling functions and working to increase sales from our existing stores. We have also adjusted our freight rates to reflect higher fuel costs."

As part of its strategy to drive up comparable store sales, Coast relocated its Abbotsford, BC store to a new facility in a higher-traffic area at the end of the first quarter of 2008. The new location marked its official grand opening on April 19, 2008. A similar relocation of Coast's store in Regina, Saskatchewan is scheduled for September 2008, with a grand opening the following month. In addition, Coast has upgraded its inventory management and computer systems to support the future growth of its business. The new inventory management system was rolled-out across Coast's British Columbia stores and distribution network during the second quarter. The new system will be implemented across the balance of Coast's locations over the next few months.

Cash distributions

Distributions in the amount of $0.1025 per unit were paid for each of April, May and June 2008. This represents an annualized distribution rate of $1.23 per unit. From its inception until the end of the second quarter, the Fund had paid a total of 36 consecutive monthly cash distributions to its public unitholders, as well as 11 consecutive quarterly cash distributions and three monthly cash distributions to the non-controlling interest held by CWAL. Effective with the April 2008 distribution, all cash distributions to both public unitholders and the non-controlling interest are now paid monthly.

During the second quarter, the Fund earned $2.9 million, or $0.29 per unit, in adjusted distributable cash (before the non-controlling interest). This was down from $3.5 million, or $0.35 per unit, in the same period of 2007. With the per-unit monthly distribution increase introduced in October 2007, the amount distributed and accrued for payment to unitholders and the non-controlling interest increased in 2008 to $3.1 million, or $0.31 per unit, from $3.0 million, or $0.30 per unit, in 2007.

For the first half, adjusted distributable cash (before the non-controlling interest) was $5.3 million, or $0.53 per unit, down from $6.1 million, or $0.61 per unit, in 2007. The amount distributed and accrued for payment to unitholders and the non-controlling interest increased to $6.2 million, or $0.62 per unit, from $6.0 million, or $0.60 per unit, in 2007.

The Fund's adjusted payout ratio for the second quarter was 106.2%, up from 85% in 2007, but slightly lower than the 106.7% reported in 2006. On a 12-month trailing basis to June 30, 2008, its adjusted payout ratio increased to 105.3% from 88.5% a year ago and 100.1% two years ago. The higher payout ratios in 2008 were due to reduced cash flow from operations before changes in non-cash working capital, increased maintenance capital expenditures and the higher monthly distribution amount. First-half capital expenditures were primarily for the Abbotsford, BC store relocation, 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, its adjusted payout ratio is 96.8%.

Outlook

While remaining optimistic about the outlook for Coast's business, Lawson was somewhat more cautious about the immediate future in light of the impact of rapidly rising fuel and commodity prices on consumer discretionary spending. "Although single-family housing starts have slowed in Western Canada, the multi-family market remains robust and total housing starts in 2008 are still expected to near the record levels of the past two years," he noted.

For the balance of 2008, Coast expects ongoing sales growth from its existing stores. The company is continuing to actively review opportunities for expansion by increasing its coverage of Western Canada and potentially entering the eastern Canadian market.

The Fund also continues to consider the impact of the taxation of distributions at the trust level set to begin in 2011. "We have been reviewing the draft legislation released last month regarding the conversion of trusts to corporations with our legal and tax counsel, and will continue to work with our advisors to determine the most advantageous course of action for the Fund and our unitholders," said Lawson.

A more detailed discussion of the Fund's financial results can be found in its second quarter 2008 Management's Discussion and Analysis, which will be posted with unaudited interim consolidated financial statements at the Fund's website (www.coastincomefund.com) and at SEDAR (www.sedar.com) on or before August 12, 2008.

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

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