Coast Wholesale Appliances Income Fund
TSX : CWA.UN

Coast Wholesale Appliances Income Fund

November 09, 2009 16:05 ET

Coast Wholesale Appliances Income Fund Reports Third Quarter 2009 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Nov. 9, 2009) - Coast Wholesale Appliances Income Fund (the Fund) (TSX:CWA.UN) -

Coast continues to strengthen balance Sheet, reduces debt by $3.3 million

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 10, 2009 at 8:00 am Pacific Time (11:00 am Eastern). The call can be accessed by dialing: 1-800-814-4859 or 416-644-3418 (GTA).

A replay will be available through November 24, 2009 at: 1-877-289-8525 or 416-640-1917. Passcode: 4173716, 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=151404 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, 2009. The three-month period represents the third 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
Q3 Q3 Q3 YTD YTD YTD
------------------------------------------------------------------------
Sales 37,341 38,547 37,759 108,433 110,673 105,729
Gross margin 8,813 9,686 9,495 25,364 27,566 26,455
As a percentage of
sales 23.6% 25.1% 25.1% 23.4% 24.9% 25.0%
Income before
non-controlling
interest 2,241 2,352 3,376 5,292 7,034 8,600
Basic and diluted
net income per unit 0.223 0.234 0.336 0.527 0.701 0.857

EBITDA 3,117 2,955 4,208 7,886 9,346 10,884
EBITDA margin 8.3% 7.7% 11.1% 7.3% 8.4% 10.3%

Maintenance capital
expenditures 459 175 76 600 741 185
Adjusted
distributable cash 2,335 2,534 3,895 6,296 7,855 9,993
Adjusted
distributable cash
per unit 0.233 0.253 0.388 0.627 0.783 0.996
Distribution per
unit 0.125 0.308 0.300 0.416 0.923 0.900
Adjusted distribution
ratio 53.6% 121.8% 77.3% 66.3% 117.9% 90.4%
------------------------------------------------------------------------


Third Quarter Operating Results

During the third quarter, Coast recorded sales revenue of $37.3 million, down by $1.2 million, or 3.1%, from the $38.5 million reported in 2008. For the fifth consecutive quarter, contract business with developers, designers and builders benefited from strong project completions. Retail sales, while up somewhat from the first and second quarters of this year, remained below the Q3 2008 level, due to much more cautious consumer spending. As a result, Coast's sales blend continued to favour contract sales.

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

Coast's third quarter cost of sales was $28.5 million, or 76.4% of sales. This resulted in a gross margin of $8.8 million, or 23.6% of sales. The gross margin percentage, while slightly improved from the first two quarters of 2009, was down from the third quarter of 2008, when Coast's cost of sales was $28.9 million, or 74.9% of sales, resulting in a gross margin of $9.7 million, or 25.1% of sales. The 1.5% reduction in gross margin was mainly due to the year-over-year decrease in retail sales and a generally more competitive retail pricing environment.

EBITDA for the third quarter was $3.1 million, up by $0.1 million from the $3.0 million recorded in 2008, resulting in an EBITDA margin of 8.3%, compared to 7.7% last year. Third quarter 2009 net income before non-controlling interest of $2.2 million, or 6.0% of sales, was in line with the $2.4 million, or 6.1% of sales, reported in the same period of 2008.

"While we began to see signs of economic recovery in the third quarter, the major household appliances industry continued to be challenged by extremely difficult market conditions. Consumer confidence remained low, our builder and developer customers continued to face tight credit markets for financing of new projects, and the number of building permits issued and housing starts recorded remained below last year," said Blain Lawson, President and CEO of Coast. "In light of these factors, we have kept a tight rein on operating costs, and we are pleased to have held our sales to within 97% of the level recorded in the third quarter of 2008, the best sales quarter in our history."

As part of its strategy to drive up its comparable store sales, Coast completed the planned relocation of its Edmonton North store to new, smaller premises in a higher-traffic area at the end of the third quarter. The new store will mark its official grand opening on November 20, 2009.

Lawson noted that the Fund has continued to make good progress in strengthening its balance sheet. "In addition to significantly improving our year-over-year cash position, we are happy to report that we paid down $3.3 million on our acquisition term debt during the quarter," he said.

Nine-Month Operating Results

Revenue for the nine months ended September 30, 2009 was $108.4 million, down by $2.3 million, or 2.0%, from $110.7 million in 2008. Cost of sales was $83.1 million, or 76.6% of sales, resulting in a gross margin of $25.4 million, or 23.4% of sales. This compares with cost of sales of $83.1 million, or 75.1% of sales, and a gross margin of $27.6 million, or 24.9% of sales, in 2008. As with the quarterly result, the decline in the nine-month gross margin was due to the shift in Coast's business mix in favour of contract sales and a more competitive retail pricing environment. Nine-month EBITDA was $7.9 million, down by $1.4 million from $9.3 million in 2008, bringing Coast's EBITDA margin down to 7.3% from 8.4% in 2008. 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 $5.3 million, or 4.9% of sales, compared to $7.0 million, or 6.4% of sales, in the first nine months of 2008.

Cash Distributions

For each of the months of July, August and September 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 51 consecutive monthly cash distributions to its public unitholders, and equivalent cash distributions to the non-controlling interest held by CWAL.

During the third quarter, the Fund generated adjusted distributable cash (before non-controlling interest) of $2.3 million, or $0.23 per unit. This compares to $2.5 million, or $0.25 per unit, in 2008. The amount distributed and accrued for payment to unitholders and the non-controlling interest in the third 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 third quarter of 2009 was 53.6%, down from the 121.8% 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, its adjusted payout ratio is 93.6%.

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 final quarter of 2009 remains very cautious. In the contract segment, while Coast has benefited from strong project completions over the past 15 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.

"Over the near term, we do not anticipate any significant changes to the business environment. However, 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."

Lawson noted that Coast will experience higher than normal inventory levels through the end of the year, due to a full product line changeover by its largest supplier. In addition to introducing technological advances and streamlined designs, the updated line responds to growing consumer demand for increased energy efficiency in major home appliances. The higher demand from end users is positively impacting Coast's sales in both the builder/developer and retail markets. In the coming months, Coast expects that its retail business will continue to benefit from provincial government rebate programs that offer consumers incentives to move to energy-saving appliances, particularly in BC and Ontario.

Lawson added that Coast will continue to evaluate opportunities to generate incremental revenue growth without adding to its fixed costs. "We expect to continue to do very well with the Miele product line we added at the beginning of this year. The Miele appliances are sold on a consignment basis and thus do not add to our inventory costs," he stated. "Similarly, on a more modest vein, we anticipate that the sales arrangement we established in the second quarter with an independent Nova Scotia-based agent will continue to contribute favourably to our contract sales revenues." This agreement has expanded Coast's geographic coverage to the Maritime region. These sales are administered under existing corporate systems, with deliveries flowing through a third-party warehouse.

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 prior to the end of the year.

A more detailed discussion of the Fund's financial results can be found in its 2009 third 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 November 10, 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: slow economic growth over the coming months in both Western Canada and the Greater Toronto Area (the Fund's current market areas) following the recent end to the Canadian recession; 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; low levels of consumer confidence in light of the slow resumption of economic growth, as reflected in a continued reluctance on the part 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 third quarter 2009 Management's Discussion and Analysis posted on the Fund's website and SEDAR.

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