Tree Island Wire Income Fund

Tree Island Wire Income Fund

January 05, 2008 19:09 ET

Tree Island Completes Baoan/USA Wire Integration as Part of Three-Step Strategy

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Jan. 5, 2008) - Tree Island Wire Income Fund (the "Fund") (TSX:TIL.UN) said today that, as part of its three-step strategy, it has completed the integration of its recently acquired Baoan International Investment Co. and USA Wire facilities with Tree Island's other operations in California.

The consolidation, as previously disclosed, involved the closure of two of Tree Island's six California manufacturing plants. In addition, Tree Island consolidated its US sales, purchasing and administrative functions, closing the Covina, California office. The total integration and restructuring represents an overall reduction of 22% of the US workforce and 6% of its Canadian workforce since July 2007.

"As planned, all the people and equipment have now been relocated," said Daniel McAtee, President and CEO of Tree Island Industries Ltd., and a Trustee of the Fund. "The acquisition and the successful implementation of the consolidation are part of a three-step strategy adopted a year ago that is focused on growth by building a stronger, more flexible Tree Island that can better withstand challenging and ever changing market conditions in the wire products industry."

The three-step strategy is diversifying Tree Island's business beyond its sole reliance on North American manufactured products, primarily geared towards the US housing market, to one that is more competitive across the entire wire products market in both North America and internationally. The July 2007 Baoan/USA Wire acquisition accelerated the implementation of this strategy by establishing a Tree Island operations base in China, providing access to new products and an international trading operation, and adding additional concrete reinforcing mesh capacity in the US.

Market challenges

Tree Island has faced challenges in the first nine months of 2007 with a cumulative negative impact of $28.5 million including:

- Approximately $16 million in raw material cost increases:

- Approximately $10 million of market decline; and

- Approximately $2.5 million resulting from a stronger Canadian dollar.

For the first nine months of 2007, Tree Island generated $22.2 million of earnings before interest, taxes, depreciation and amortization (EBITDA) plus foreign exchange gains, compared with $32.7 million a year earlier.

"Had Tree Island maintained the status quo, we would undoubtedly be in a very difficult financial position," said Mr. McAtee. "Instead, for the third quarter of 2007, we reported top line growth of approximately 11% in volume and 13% in revenue from a year earlier, even as US residential construction declined by more than 26%. The third quarter of 2007 was the third straight quarter of top line growth, reversing a declining trend in volume and revenue over more than eight quarters prior to that."

"With our three-step strategy we have been able to increase volume and revenue, minimize the decline in short-term profits and set the stage for medium to long-term growth in profitability," said Mr. McAtee. "These are important accomplishments in the face of extremely difficult market conditions."

New flexibility to grow and adapt

"Overall we are ensuring that we have the flexibility to offer our customers a choice of imports and/or North American produced products," said Mr. McAtee. "Both choices are at a competitive level with Tree Island quality and service advantages. At the same time, we are taking advantage of strategic international opportunities that present themselves."

"We expect to see continued growth in our international business, both from new products and from imports, and growth in new market areas of North America" said Mr. McAtee. "Simultaneously we have been increasing efficiency and reducing costs throughout our operations through the consolidation of our US operations and a number of other internal initiatives. We are committed to further reducing inefficiencies in 2008 to drive out additional cost."

The US housing market remains very important to Tree Island and the downturn remains a matter of concern. In late December, the US Commerce Department reported a continuation of the weakness. New-home sales in November 2007 declined 9% from October 2007 and declined 34.4% from November 2006. Problems in housing are expected to persist well into 2008.

Also important is a US Department of Commerce anti-dumping duty investigation into the import of nails from China and the United Arab Emirates. Tree Island, which manufactures nails only in North America, is monitoring the situation closely and expects a decision by the US in mid-January.

"While we cannot predict with any assurance how difficult the US housing market will be in 2008, whether the anti-dumping decision will be favourable, whether the Canadian dollar will rise or fall, and how much further raw material prices will rise, we believe Tree Island has flexibility to adapt, change and grow with its customers," said Mr. McAtee.

Tree Island's three-step strategy

"We adopted the three-step strategy to strengthen our business for the long term," said Mr. McAtee.

The first step, completed in 2007, was to better align the core business to the market. Tree Island reorganized itself from a group of fragmented and largely independent businesses into a unified global business focused on five key markets that we believe offer long-term growth potential:

- Residential construction;

- Commercial construction;

- Industrial/original equipment manufacturers;

- Agricultural; and

- Specialty wire products.

The second step, mostly completed in 2007, involves expanding market reach both regionally and with new products related to the existing business. Tree Island is expanding North American regional coverage through new products produced in its factories and imported from third-party factories abroad. Moreover, Tree Island is opening up broader international markets to follow its customers from North America to China and other oversees markets, including Dubai and New Zealand.

The third step in the strategy is to better balance the portfolio to reduce the influence of any one market. Tree Island intends to optimize its presence in existing markets while exploring and developing new markets that tie into Tree Island's strengths. Implementation of this step, which may involve acquisitions as well as organic growth, is expected in 2008 and 2009.

Advantages of the Baoan acquisition

Completed in July 2007, the Baoan acquisition accomplished many of Tree Island's second-step strategic initiatives in one transaction. In addition to bringing with it an experienced Chinese management and international trading team, the Baoan acquisition enabled Tree Island to:

- Diversify its sources of supply to include both its newly acquired operations in China as well as from additional third-party Chinese factories;

- Reduce raw material costs by gaining access to Chinese-made, lower-cost raw materials;

- Expand its product portfolio into new product lines such as expanded metal lathe, for which there is demand for stucco construction in the Central Southwest US;

- Open new market opportunities in China; and

- Deliver approximately $2.5 million of cost synergies from the consolidation of adjacent Tree Island and Baoan facilities in California.

"We believe we are certainly better off than we would have been without the strategy and the acquisition, and we anticipate long-term gains from our initiatives," said Mr. McAtee. "We have the right team, the right structure and the right strategy in place."

About the Fund

The Fund was launched on November 12, 2002, with the completion of an Initial Public Offering. There are 21,918,400 units of the Fund outstanding, representing a 100% ownership interest in Tree Island.

The Fund's performance depends entirely on the performance of Tree Island.

Tree Island Profile

Headquartered in Richmond, British Columbia, Tree Island Industries produces wire products for a diverse range of construction, agricultural, manufacturing and industrial applications. Its products include bright wire, stainless steel wire and galvanized wire; a broad array of fasteners, including packaged, collated and bulk nails; stucco reinforcing products, engineered structural mesh, fencing and other fabricated wire products. The company markets these products under the Tree Island, K-Lath, Halsteel, Tree Island Wire, Industrial Alloys and USA-Wire brand names. Tree Island also owns and operates a Hong Kong-based trading company that provides internationally sourced products to Tree Island and its customers worldwide.

Forward-Looking Statements

This press release contains forward-looking statements based on assumptions considered reasonable at the time they were prepared. Any statements that are contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements speak only to the conditions in existence as of the date of this press release, and the Fund maintains no obligation to update such statements.

Forward-looking statements, by their nature, necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by the statements. Such risks and uncertainties include, but are not limited to, risks associated with operations such as competition, dependence on the construction industry, market conditions for our products, supplies of and costs for our raw materials, dependence on key personnel, labour relations, regulatory matters, environmental risks, the successful execution of acquisition and integration strategies, foreign exchange fluctuations, the effect of leverage and restrictive covenants in financing arrangements, product liability, the ability to obtain insurance, energy cost increases, the ability to fund necessary future capital investments, changes in tax legislation, and other risks and uncertainties set forth in our publicly filed materials including our Annual Information Form.

Contact Information

  • Tree Island Industries Ltd.
    Brian Irving
    Chief Financial Officer
    (604) 523-4516
    Longview Communications Inc.
    Alan Bayless
    Media Contact
    (604) 694-6035
    Georgeson Shareholder Communications
    Unitholder Information
    North American Toll Free: 1-866-725-6498