Coast Wholesale Appliances Income Fund
TSX : CWA.UN

Coast Wholesale Appliances Income Fund

November 03, 2008 16:15 ET

Coast Wholesale Appliances Income Fund Reports 2008 Third Quarter Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Nov. 3, 2008) - Coast Wholesale Appliances Income Fund (TSX:CWA.UN) will host a conference call and webcast to discuss its third quarter and nine month financial results on Tuesday, November 4, 2008 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern). The call can be accessed by dialing: 1-800-731-5774 or 416-644-3418.

A replay will be available through November 18, 2008 at: 1-877-289-8525 or 416-640-1917, Passcode: 21287114 followed by the pound sign.

The live and archived webcast can be accessed at http://www.investorcalendar.com/IC/CEPage.asp?ID=136456 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, 2008. The three-month period represents the third 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
Q3 Q3 Q3 YTD YTD YTD
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Sales 38,547 37,759 34,674 110,673 105,729 93,193
Gross margin 9,686 9,496 8,717 27,566 26,455 23,086
As a percentage
of sales 25.1% 25.1% 25.1% 24.9% 25.0% 24.8%

Net income before
non-controlling
interest 2,352 3,376 3,379 7,034 8,600 7,539
Basic and diluted
net income per unit 0.234 0.337 0.337 0.701 0.857 0.752

EBITDA (before 2008
accounts receivable
write-off) 4,112 4,208 4,342 10,503 10,884 10,339
EBITDA margin
(before 2008
accounts receivable
write-off) 10.7% 11.1% 12.5% 9.5% 10.3% 11.1%

EBITDA 2,955 4,208 4,342 9,346 10,884 10,339
EBITDA margin 7.7% 11.1% 12.5% 8.4% 10.3% 11.1%

Maintenance capital
expenditures 175 76 141 741 185 383
Adjusted
distributable cash 2,534 3,895 3,987 7,855 9,993 9,259
Adjusted
distributable cash
per unit 0.25 0.39 0.40 0.78 1.00 0.92
Distribution per unit 0.31 0.30 0.30 0.92 0.90 0.90
Adjusted
distribution ratio 121.8% 77.3% 75.5% 117.9% 90.4% 97.5%
------------------------------------------------------------------------
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Third Quarter Operating Results

Coast's revenues for the three months ended September 30, 2008 were $38.5 million, up by $0.7 million, or 2.1%, from the $37.8 million reported in the same period of 2007. Coast continued to see strong contract sales completions with developers, designers and builders during the quarter. As in the first half, the business mix was skewed slightly in favour of contract sales, with retail sales down somewhat year-over-year due to more cautious consumer spending.

Third quarter cost of sales was $28.9 million, or 74.9% of sales. This resulted in a gross margin of $9.7 million, or 25.1% of sales. By comparison, in the third quarter of 2007, cost of sales was $28.3 million, also equal to 74.9% of sales, resulting in a gross margin of $9.5 million, again 25.1% of sales. Although Coast achieved a modest year-over-year improvement in its gross margin percentage on product sales, the gain was offset by a slight decrease in its extended warranty margin and the impact of higher fuel prices on its freight costs.

During the third quarter, as announced in a news release dated October 22, 2008, the Fund concluded a rigorous internal investigation of a series of financial improprieties committed by a former employee at one of its stores and, as a result, recorded a write-off of approximately $1.2 million of accounts receivable. The financial improprieties were detected in a corporate review of internal financial controls and were restricted to the one store and the one employee. New organization-wide internal controls and protocols for financial monitoring and reporting have been implemented, and the matter has now been turned over to local police authorities for their investigation. The Fund is pursuing all possible civil remedies but it is uncertain whether any material amount of the loss will be recovered.

Due mainly to the impact of the accounts receivable write-off on Coast's net income before non-controlling interest, its third quarter EBITDA declined to $3.0 million from $4.2 million in 2007, while its EBITDA margin declined to 7.7% from 11.1%. Excluding the accounts receivable write-off, EBITDA would have been $4.1 million and EBITDA margin would have been 10.7%. The balance of the year-over-year difference in EBIDTA was due to generally increased expenses with the growth of Coast's business. Third quarter net income before non-controlling interest of $2.4 million, or 6.1% of sales, was down from $3.4 million, or 8.9% of sales, in the third quarter of 2007 for the same reasons.

Nine-Month Operating Results

Revenues for the nine months ended September 30, 2008 were $110.7 million, up by $5.0 million, or 4.7%, from $105.7 million in the first three-quarters of 2007. At comparable stores, locations open for more than one year, sales grew by $3.8 million, or 3.6%, year-over-year.

Cost of sales was $83.1 million, or 75.1% of sales. This resulted in a gross margin of $27.6 million, or 24.9% of sales. For the first nine months of 2007, cost of sales was $79.3 million, or 75.0% of sales, providing a gross margin of $26.5 million, or 25.0% of sales. The slight erosion in the nine-month gross margin was due largely to higher freight costs in the first six months of the year.

Nine-month EBITDA was $9.3 million, down from $10.9 million in 2007. EBITDA margin for the nine months was 8.4%, down from 10.3% in 2007. Excluding the third-quarter accounts receivable write-off, Coast would have generated an EBITDA margin of 9.5% on EBITDA of $10.5 million. The balance of the difference for the year-to-date was due to Coast's increased expenses and the modest decrease in gross margin. The new stores Coast opened in Alberta during 2007 have contributed positively to its 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 $7.0 million, or 6.4% of sales, down from $8.6 million or 8.1% of sales, in the first nine months of 2007.

"We are pleased with our continued sales growth," said Blain Lawson, President and CEO of Coast. "In the current uncertain economic environment, we are continuing to benefit from a balanced business model that allows us to draw revenues from all three of the new home, renovation and replacement markets, as well as from the essential nature of the major home appliances we sell."

Lawson said that Coast remains focussed on enhancing profitability by streamlining its non-selling functions and working to increase sales from existing stores. As part of its strategy to drive up comparable store sales, Coast relocated its Regina, Saskatchewan store to a new facility in a higher-traffic area in September 2008. The new location will mark its official grand opening in the fourth quarter. In addition, Coast has now completed the roll-out of its new inventory management system. The upgraded system is designed to support the future growth of its business. Coast will also be relocating its Edmonton north store to a new facility in a higher traffic location during the third quarter of next year.

Cash Distributions

Distributions in the amount of $0.1025 per unit were paid for each of July, August and September 2008, representing an annualized distribution rate of $1.23 per unit. From its inception until the end of the third quarter, the Fund had paid a total of 39 consecutive monthly cash distributions to its public unitholders, as well as 11 consecutive quarterly cash distributions and six 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 third quarter, the Fund earned $2.5 million, or $0.25 per unit, in adjusted distributable cash (before the non-controlling interest). This was down from $3.9 million, or $0.39 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 during the third quarter of 2008 to $3.1 million, or $0.31 per unit, from $3.0 million, or $0.30 per unit, in 2007.

For the first nine months of this year, adjusted distributable cash (before the non-controlling interest) was $7.9 million, or $0.78 per unit, down from $10.0 million, or $1.00 per unit, in 2007. The amount distributed and accrued for payment to unitholders and the non-controlling interest increased to $9.3 million, or $0.92 per unit, from $9.0 million, or $0.90 per unit, in 2007.

The Fund's adjusted payout ratio for the third quarter was 121.8%, up from 77.3% in 2007. On a 12-month trailing basis to September 30, 2008, its adjusted payout ratio increased to 120.0% from 89.2% a year ago and 94.9% two years ago. The higher payout ratios in 2008 were due to reduced cash flow from operations before changes in non-cash working capital (which included the $1.2 million accounts receivable write-off), increased maintenance capital expenditures and the higher monthly distribution amount. Capital expenditures during the first nine months were primarily for the Abbotsford, BC 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, its adjusted payout ratio is 98.4%.

As previously announced, effective with the October 2008 distribution, the monthly distribution amount has been reduced by 18.7% to $0.0833 per unit, equating to an annualized distribution rate of $1.00 per unit. Lawson said that the new distribution level should enable Coast to maintain the balance sheet strength it needs to pursue growth opportunities while keeping its payout ratio in an appropriate range. Coast believes that this level of distributions will be sustainable going forward.

Subsequent Event

As announced October 31, 2008, the Fund has reached a tentative agreement to purchase all of the assets and business of independent Ontario appliance dealer Morley's Appliance Centre. This transaction is in keeping with the Fund's strategic objective of expanding the business of Coast into Eastern Canada. It will provide Coast with a well-established foothold in the Greater Toronto Area while allowing it to generate incremental sales revenue growth by capitalizing on Coast's buying power and operating synergies between the two businesses. Subject to due diligence and other customary conditions, Coast expects to complete the transaction by year-end. The purchase will be financed by its existing term acquisition facility and is expected to be immediately accretive to the Fund's EBITDA and distributable cash.

Outlook

Single-family housing starts and permits in Western Canada are continuing to slow and multi-family starts have now begun to slow down as well. This is expected to have a negative impact on Coast's contract sales. Given the present global economic climate, turmoil in credit markets, fluctuating currency and energy prices, and the resulting impact on consumer discretionary spending, the outlook for Coast's business going into the fourth quarter is cautious.

The Fund is continuing to review opportunities to further expand Coast's market coverage. It is also continuing to evaluate the most advantageous course of action for the Fund and its unitholders 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.

A more detailed discussion of the Fund's financial results can be found in its third 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 November 3, 2008.

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 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 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 third quarter 2008 Management's Discussion and Analysis posted on the Fund's website and SEDAR.

Contact Information