Coast Wholesale Appliances Income Fund
TSX : CWA.UN

Coast Wholesale Appliances Income Fund

August 10, 2009 16:05 ET

Coast Wholesale Appliances Income Fund Reports Second Quarter 2009 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Aug. 10, 2009) - Coast Wholesale Appliances Income Fund (TSX:CWA.UN) will host a conference call and webcast to discuss its second quarter financial results on Tuesday, August 11, 2009 at 8:00 am Pacific Time (11:00 am Eastern). The call can be accessed by dialing: 1-800-731-5319 or 416-644-3418 (GTA).

A replay will be available through August 25, 2009 at: 1-877-289-8525 or 416-640-1917. Passcode: 21311454, followed by the pound sign.

The live and archived webcast, as well as an mp3 download, can be accessed at http://www.investorcalendar.com/IC/CEPage.asp?ID=147600 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, 2009. The three-month period represents the second quarter of the Fund's 2009 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)
------------------------------------------------------------------------
2009 2008 2007 2009 2008 2007
Q2 Q2 Q2 YTD YTD YTD
------------------------------------------------------------------------
Sales 37,913 38,250 36,809 71,092 72,126 67,970
Gross margin 8,828 9,414 9,228 16,551 17,880 16,960
As a percentage of sales 23.3% 24.6% 25.1% 23.3% 24.8% 25.0%
Income before
non-controlling interest 2,001 2,741 3,208 3,051 4,682 5,224
Basic and diluted net
income per unit 0.199 0.273 0.320 0.304 0.467 0.521

EBITDA 2,780 3,542 3,883 4,769 6,391 6,676
EBITDA margin 7.3% 9.3% 10.5% 6.7% 8.9% 9.8%

Maintenance capital
expenditures 100 385 104 143 566 109
Adjusted distributable
cash 2,347 2,906 3,543 3,961 5,321 6,098
Adjusted distributable
cash per unit 0.234 0.290 0.353 0.395 0.530 0.608
Distribution per unit 0.125 0.308 0.300 0.291 0.615 0.600
Adjusted distribution
ratio 53.3% 106.2% 85.0% 73.8% 116.0% 98.7%
------------------------------------------------------------------------


Second Quarter Operating Results

Despite continued economic uncertainty in its key markets, Coast recorded second quarter revenues of $37.9 million, just $0.4 million, or 0.9%, lower than the $38.3 million reported in 2008. Contract business with developers, designers and builders continued to benefit from strong project completions. Retail sales, while stronger than in the first quarter of 2009, remained below the 2008 second quarter level, due to much more cautious consumer spending. As a result, Coast's sales blend continued to favour contract sales.

In BC, the softening of Coast's retail business was again offset by the strength of its contract sales. Business in Alberta remained generally down, particularly in the contract segment. Second quarter sales in Saskatchewan increased year-over-year, and revenues in Manitoba were in line with the 2008 level. Finally, Coast's new store in the Greater Toronto Area (GTA) continued to perform below expectations due to the exceptionally challenging economic conditions in southern Ontario.

Second quarter cost of sales was $29.1 million, or 76.7% of sales. This resulted in a gross margin of $8.8 million, or 23.3% of sales. By comparison, in the second quarter of 2008, cost of sales was $28.8 million, equal to 75.4% of sales, resulting in a gross margin of $9.4 million, or 24.6% of sales. The reduction in gross margin was mainly due to the year-over-year decrease in retail sales, which generate a higher margin than contract sales.

EBITDA for the second quarter was $2.8 million, down by $0.7 million from $3.5 million in 2008, driving Coast's EBITDA margin down to 7.3% from 9.3%. The decrease in EBITDA was mainly due to the slight revenue reduction and lower gross margin in 2009. Net income before non-controlling interest decreased to $2.0 million, or 5.3% of sales, from $2.7 million, or 7.2% of sales, in the same period of 2008.

"Our performance remains in line with our expectations, given the continuing economic recession in Canada and globally, and the corresponding slowdown in housing starts across the country," said Blain Lawson, President and CEO of Coast. "In light of the challenging business environment, we are continuing to focus on streamlining our non-selling functions and business processes in order to increase operating efficiency as we work to enhance profitability by increasing sales from our existing stores."

Lawson added that the reduction in monthly distributions to unitholders introduced in February 2009, together with the relative stability of Coast's revenues, have enabled the Fund to strengthen its balance sheet. "At quarter-end, we had significantly improved our cash position from the 2008 year-end and paid down our operating line. Subsequent to the end of the quarter, we further reduced our debt by applying $1.0 million to our acquisition term loan," he stated.

During the second quarter, Coast also expanded its geographic coverage to the Maritime region, entering into a sales agreement with an agent based in Nova Scotia. Leveraging its buying power and well-established ability to serve the needs of developers and builders, the opportunistic arrangement will allow Coast to generate incremental contract sales revenue without adding to its fixed costs. Sales under the agreement, initially expected to be modest, will be administered under existing corporate systems, with deliveries flowing though a local third-party warehouse.

First Half Operating Results

Revenue for the six months ended June 30, 2009 was $71.1 million, down by $1.0 million, or 1.4%, from $72.1 million in 2008. Cost of sales was $54.5 million, or 76.7% of sales, resulting in a gross margin of $16.6 million, or 23.3% of sales. This compares with cost of sales of $54.2 million, or 75.2% of sales, and a gross margin of $17.9 million, or 24.8% of sales, in 2008. As with the quarterly result, the decline in first half gross margin was due to the shift in Coast's business mix in favour of contract sales. First half EBITDA was $4.8 million, down by $1.6 million from $6.4 million in 2008, bringing Coast's EBITDA margin down to 6.7% from 8.9% in 2008. Again, as with the quarterly result, the decrease in EBITDA was due to the lower sales and gross margin in 2009, and the added costs associated with the new GTA store. Net income before non-controlling interest was $3.1 million, or 4.3% of sales, compared to $4.7 million, or 6.5% of sales, in the first half of 2008.

Cash Distributions

For each of the months of April, May and June 2009, the Fund declared and paid distributions in the amount of $0.0416, equating to an annualized distribution of $0.50 per unit. Since its inception, the Fund has paid a total of 48 consecutive monthly cash distributions to its public unitholders, and equivalent cash distributions to the non-controlling interest held by CWAL.

During the second quarter, the Fund generated adjusted distributable cash (before non-controlling interest) of $2.3 million, or $0.23 per unit. This compares to $2.9 million, or $0.29 per unit, in 2008. The amount distributed and accrued for payment to unitholders and the non-controlling interest in the second quarter decreased to $1.3 million, or $0.12 per unit, in 2009 from $3.1 million, or $0.31 per unit, in 2008.

The Fund's adjusted payout ratio for the second quarter of 2009 was 53.3%, down from the 106.2% in 2008. The lower payout ratio in 2009 was due mainly to the February 2009 reduction in the Fund's distribution level. On a cumulative basis, from the Fund's inception, the Fund's adjusted payout ratio is 95.6%.

Outlook

The following discussion is qualified in its entirety by the forward-looking statements report at the end of this news release.

The outlook for Coast's business through the second half of 2009 remains very cautious. In the contract segment, while Coast has benefited from strong project completions over the past 12 months, the ability of its major contract customers to start new projects continues to be restrained by tight credit markets. On the retail side, although sales have improved in certain markets since the beginning of the year, customers remain cautious about major purchases due to their general lack of confidence in the Canadian economy.

"We are continuing to benefit from the cost control initiatives we have successfully implemented since 2008, and we believe the current level of cash distributions will allow us to maintain the balance sheet strength we require to manage through the current market downturn," said Lawson. "Over the longer term, we remain confident of our ability to grow our business when market conditions improve by capitalizing on our balanced business model and our recently established foothold in the Greater Toronto Area."

As part of its on-going strategy to drive up comparable store sales, Coast is proceeding with final preparations for the relocation of its existing Edmonton North store to a smaller facility in a higher-traffic area in the third quarter of 2009. With this store move, all of Coast's original stores will have been renovated or relocated since the Fund's inception in 2005.

The Fund is also 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 by the end of the year.

A more detailed discussion of the Fund's financial results can be found in its 2009 second quarter Management's Discussion and Analysis, which will be posted with the unaudited interim consolidated financial statements at the Fund's website (www.coastincomefund.com) and at SEDAR (www.sedar.com) on or before August 11, 2009.

Coast Profile

Coast 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

This news release includes forward-looking statements. These 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 the Fund's 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: 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 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 (the Fund's current market areas); continuing access to current credit facilities; volatility in exchange rates; low and stable interest rates; difficult credit markets for the Fund'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. These forward-looking statements are made only as of the date of this news release and the Fund assumes no obligation to update or revise them 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 second quarter 2009 Management's Discussion and Analysis posted on the Fund's website and SEDAR.

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