Tree Island Wire Income Fund
TSX : TIL.UN

Tree Island Wire Income Fund

May 11, 2006 16:00 ET

Tree Island Reports First Quarter 2006 Results

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - May 11, 2006) -

Attention: Business/Financial Editors

Tree Island Wire Income Fund (TSX:TIL.UN) will hold a conference call and webcast to discuss first quarter 2006 financial results on Friday, May 12, 2006 at 8:30 a.m. Pacific Time (11:30 a.m. Eastern). The call can be accessed by dialing: 1-800-766-6630 or 416-695-9753. A replay will be available through May 19, 2006 at: 1-888-509-0081 or 416-695-5275, passcode: 621614.

The live and archived webcast can be accessed at: http://www.vcall.com/IC/CEPage.asp?ID=104620

Tree Island Wire Income Fund (the "Fund") today announced results for the first quarter of 2006. For the three months ended March 31, 2006, the Fund generated distributable cash of $0.379 per unit, and declared distributions of $0.375 per unit, for a payout ratio of 99%. As expected, distributable cash generated did not match the $0.4837 per unit recorded in the first quarter of 2005, when the Fund experienced a carry-over benefit from the exceptionally strong 2004 year. Since inception, the Fund has generated $6.37 per unit in distributable cash and paid out $4.67 per unit for a payout ratio of 73%.

The Fund's results are based on the performance of Tree Island Industries Ltd. ("Tree Island" or "the company")-one of North America's largest producers of wire and fabricated wire products.

"Overall, our financial results were weaker than in the first quarter of 2005, primarily due to lower volumes and prices resulting from increased import competition in the upholstery spring wire and bulk nail segments of our business," said Ted Leja, President and CEO of Tree Island and a trustee of the Fund. "This was partially offset by the very favourable trend in our gross profit per ton. After three quarters of declining profitability, our gross profit per ton rebounded strongly in the first quarter. Although not quite up to Q1 2005 levels, gross profit of $143 per ton compared very favourably to $117 per ton in Q2, $108 per ton in Q3 and $80 per ton in Q4 2005, reflecting significant efficiency improvements, as well as lower rod costs."

"I am pleased to report that we introduced a new program in the first quarter which is starting to provide customers access to outsourced, lower-priced products, in addition to our own premium-brand products," added Leja. "Focusing initially on certain commodity nails, this initiative is designed to provide customers with a broader range of quality and price points, while offering the full support of Tree Island's highly efficient distribution network and service package across all product lines. Customer response to this combination of choice and service has been favourable, and we expect this program will become a key competitive advantage for us once it begins to ramp up in the latter half of 2006."

"In our fourth quarter 2005 press release, we indicated we were comfortable with our level of monthly distributions," said Leja. "Although we anticipate business conditions will continue to present challenges through the balance of 2006, we remain comfortable with distributions at the current level."

Operating Results

For the three months ended March 31, 2006, the Fund generated total distributable cash of $8.3 million or $0.379 per unit. Of this, $7.6 million, or $0.348 per unit, was generated by operations. Gains from foreign exchange conversion activities contributed the balance of $0.7 million, or $0.031 per unit, net of taxes. The Fund declared distributions of $0.125 per unit in each of January, February and March, totaling $8.2 million, or $0.375 per unit, over the three-month period.

First quarter revenue was $79.2 million, down 11.4% from $89.4 million during the same period in 2005. This reflects a 4.2% decrease in volume, and a decrease in average pricing of 5.2% in Canada and 2.6% in the U.S. The most significant decline in volume was in upholstery spring wire to U.S. mattress manufacturers, which continued to be impacted by the increase in import of finished bed springs from China. Sales of fencing products in Western Canada were also unfavourably affected by a carryover of high inventory levels from 2005, when poor weather delayed fencing projects in various regions. The volume decline in these segments was partially offset by an 8% increase in nail volumes, with growth in collated and packaged nails offsetting a decline in bulk nails. Sales of collated nails and packaged nails benefited from Tree Island's strategic initiatives. In addition to new marketing and outsourcing programs, Tree Island reduced prices on selected products during the quarter to protect market share and to reflect lower prices for wire rod.

Revenue was also affected by the negative impact of a 5.8% increase in the value of the Canadian dollar compared to the U.S. dollar between the two periods. Had exchange rates remained consistent with Q1 2005 levels, revenue would have been $82.9 million.

Selling, general and administration expenses were $4.3 million, down 8.7% from the first quarter of 2005. The improvement mainly reflects the benefit of the stronger Canadian dollar on the conversion of Tree Island's U.S. division costs.

Gross profit was $9.4 million, compared to $10.5 million in the first quarter of 2005, reflecting the change in sales volumes and lower gross profit per ton. On a per ton basis, gross profit of $143 per ton was higher than in the previous three quarters, but lower than the $153 per ton achieved in Q1 2005.

EBITDA was $9.9 million, compared to $10.9 million in the first quarter of 2005. The change in EBITDA reflects the reduction in sales volumes and somewhat lower gross profit per ton. Gains on foreign exchange conversions added an additional $1.1 million to EBITDA, down from $2.7 million in Q1 2005. Net income for the period was $5.3 million ($0.24 per unit) compared to $6.6 million ($0.30 per unit), reflecting the decrease in EBITDA.



Results from Operations
(In thousands of dollars except for tonnage and per unit figures)

---------------------------------------------------------------------
3 Months Ended March 31
---------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------
Sales Volumes - Tons 65,908 68,779
Revenue 79,229 89,377
Cost of Goods Sold (64,993) (73,718)
Depreciation (4,810) (5,115)
-----------------------
Gross Profit 9,426 10,544

Selling, General and Administrative Expenses (4,320) (4,728)
-----------------------
Operating Profit 5,106 5,816

Foreign Exchange Gain 1,099 2,702
Financing Expenses (891) (1,072)
Provision for Income Taxes (43) (838)
---------------------------------------------------------------------
Net Income 5,271 6,608

---------------------------------------------------------------------
---------------------------------------------------------------------
Operating Profit 5,106 5,816
Addback Depreciation 4,810 5,115
-----------------------
EBITDA 9,916 10,931


Foreign Exchange Gain 1,099 2,702
-----------------------
EBITDA Plus Foreign Exchange Gains 11,015 13,633

---------------------------------------------------------------------
---------------------------------------------------------------------
Distributable Cash Generated per Unit (1) 0.3790 0.4837
Distributable Cash Paid or Payable per
Unit (1) 0.3750 0.3750
Distribution Payout % (2) 99% 78%

---------------------------------------------------------------------
---------------------------------------------------------------------
Total Assets 257,284 311,247
Revolving Credit 25,668 18,806
---------------------------------------------------------------------
Long Term Debt 248 185
---------------------------------------------------------------------


Balance Sheet

Tree Island's balance sheet remains strong, with total debt of $25.9 million, of which $25.7 million is in the operating loan. While the operating loan was higher than at December 31, 2005 due to normal seasonal increases in accounts receivable, it is down $22.8 million from March 31, 2005. This decrease is the result of a focused effort over the past year to reduce inventory levels.

Outlook

Management anticipates a reduction in demand during the second quarter with unusually wet weather in California and increasing caution in the U.S. market tempering new housing starts in the United States. This should be largely offset by continuing strong residential housing activity in Western Canada, and by increases in non-residential construction and renovation spending forecast for both the U.S. and Canadian markets.

The nail and spring wire segments are expected to come under continued pressure from import competition, however, Tree Island's strategic initiatives are expected to have an increasingly positive impact on nail market share as the year progresses. The outlook for other segments, including stucco reinforcing products, weld mesh and stainless steel, remains positive.

After three quarters of declining prices, rod costs are increasing. Both domestic and import producers of rod have announced price increases for deliveries in the second half of 2006. Zinc, which is used in the manufacture of galvanized nails, galvanized fencing and galvanized wire, has also become increasingly expensive and prices are projected to continue climbing. Although zinc represents a relatively small percentage of Tree Island's cost of sales (1.7% in 2005), zinc costs could have an unfavourable impact on results in the second half of the year. Tree Island, along with other import and domestic manufacturers, has responded to the higher raw material costs by announcing price increases for finished products. These increases should help to offset some of the impact of higher raw material costs.

Operationally, the consolidation of Tree Island's U.S. facilities is now complete, and generating anticipated savings in leasing, power and employment costs. An automation project at the welded reinforcing mesh facility in Richmond, B.C. was also completed in the first quarter of 2006, and is providing increased production volumes and enhanced efficiency. Installation of the $1.2 million hot dip nail galvanizing facility in Richmond is on track for completion in the second quarter of 2006. Once online, the new facility will increase Tree Island's galvanizing capacity and nail quality, and continue to enhance operating efficiency.

Fund Profile

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

Tree Island Industries produces a diverse range of products including nails, bright wire, stainless steel wire, galvanized wire, stucco reinforcing products, fence products and other fabricated wire products primarily for customers in Western Canada and the Western United States. Headquartered in Richmond, British Columbia, the company markets these products under five highly respected brand names: Tree Island, K-Lath, Halsteel, Tree Island Wire and Industrial Alloys.

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, supplies of 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, and changes in tax legislation.

Unaudited Interim Consolidated Financial Statements of

TREE ISLAND WIRE INCOME FUND

March 31, 2006



TREE ISLAND WIRE INCOME FUND
Interim Consolidated Balance Sheets (Unaudited)
(In thousands of dollars)
---------------------------------------------------------------------

As at As at
March 31 December 31
2006 2005
--------- -----------
Assets

Current
Cash $ 3,077 $ 1,718
Accounts receivable 36,034 25,757
Future Income Taxes 2,483 2,280
Income and other taxes receivable 1,579 2,132
Inventories 83,137 93,054
Prepaid expenses 1,838 2,476
--------- -----------
128,148 127,417
Property, plant and equipment 89,136 90,885
Deferred charges 875 1,008
Goodwill 42,131 42,111
--------- -----------
$ 260,290 $ 261,421
--------- -----------
--------- -----------


Liabilities

Current
Revolving credit $ 25,668 $ 18,806
Accounts payable and accrued liabilities 45,214 50,014
Income taxes payable 523 -
Interest payable 220 195
Current portion of long-term debt 85 83
--------- -----------
71,710 69,098
Long-term debt, net of current portion 163 185
Other non-current liabilities 511 551
Future income taxes 17,883 18,703
--------- -----------
90,267 88,537
--------- -----------

Unitholders' Equity 170,023 172,884
--------- -----------
$ 260,290 $ 261,421
--------- -----------
--------- -----------

See accompanying Notes to Unaudited Interim Consolidated Financial
Statements.



TREE ISLAND WIRE INCOME FUND
Interim Consolidated Statement of Operations (Unaudited)
For the three month period ended March 31, 2006 and March 31, 2005
(In thousands of dollars, except per unit amounts)

---------------------------------------------------------------------
Three Months Three Months
Ended Ended
March 31, March 31,
2006 2005
---------------------------

Sales $ 79,229 $ 89,377
Cost of goods sold 64,993 73,718
Depreciation 4,810 5,115
---------------------------
Gross profit 9,426 10,544
Selling, general and administrative
expenses 4,320 4,728
---------------------------
Operating profit 5,106 5,816
Foreign exchange gain 1,099 2,702
Financing expenses (891) (1,072)
---------------------------
Income before provision for income
taxes 5,314 7,446
Provision for income taxes (note 3) (43) (838)
---------------------------

Net income for the period $ 5,271 $ 6,608
---------------------------
---------------------------

Basic and diluted net income
per unit $ 0.24 $ 0.30
---------------------------
---------------------------

Weighted-average number of units
(Basic and diluted) 21,918,400 21,918,400
---------------------------

See accompanying Notes to Unaudited Interim Consolidated Financial
Statements.



TREE ISLAND WIRE INCOME FUND
Interim Consolidated Statements of Unitholders' Equity (Unaudited)
For the three month period ended March 31, 2006 and March 31, 2005
(In thousands of dollars)

---------------------------------------------------------------------
Cumulative
Unitholders' Accumulated Translation
Capital Earnings Distributions Adjustment
------------ ----------- ------------- -----------

Balance,
beginning
of period $ 209,857 $ 67,621 $ (82,247) $ (22,347)
Activity
for the
three months
ended
March 31 - 5,271 (8,219) 87
--------- --------- --------- ---------
Balance,
end
of period $ 209,857 $ 72,892 $ (90,466) $ (22,260)
--------- --------- --------- ---------
--------- --------- --------- ---------


Total for Total for
three months three months
ended ended
March 31, March 31,
2006 2005
------------ ------------
Balance,
beginning
of period $ 172,884 $ 188,875
Activity
for the
three months
ended
March 31 (2,861) (1,219)
--------- ---------
Balance,
end
of period $ 170,023 $ 187,656
--------- ---------
--------- ---------

See accompanying Notes to Unaudited Interim Consolidated Financial
Statements.


TREE ISLAND WIRE INCOME FUND
Interim Consolidated Statement of Cash Flows (Unaudited)
For the three month period ended March 31, 2006 and March 31, 2005
(In thousands of dollars)
---------------------------------------------------------------------
Three Months Three Months
Ended Ended
March 31, March 31,
2006 2005
---------------------------
Operating Activities
Net income for the period $ 5,271 $ 6,608
Items not involving cash
Depreciation 4,810 5,115
Amortization of deferred charges 132 135
Future income taxes (1,030) (1,064)
---------------------------
Net cash flow from operations 9,183 10,794

Change in non-cash operating assets
and liabilities
Accounts receivable (10,277) (13,770)
Inventories 9,917 10,991
Accounts payable and accrued
liabilities (4,800) (9,244)
Income and other taxes 1,067 (3,738)
Other 693 (73)
---------------------------
Cash provided by (used in)
operating activities 5,783 (5,040)
---------------------------

Investing Activities
Purchase of property, plant and
equipment (3,047) (465)
---------------------------
Cash used in investing activities (3,047) (465)
---------------------------

Financing Activities
Repayment of long-term debt (20) (20)
Drawdown of revolving credit 6,862 13,916
Distributions to unitholders (8,219) (8,219)
---------------------------
Cash (used in) provided by financing
activities (1,377) 5,677
---------------------------

Increase in cash 1,359 172
Cash, beginning of period 1,718 2,186
---------------------------
Cash, end of period $ 3,077 $ 2,358
---------------------------
---------------------------
Supplemental Cashflow Information:

Interest paid $ 734 $ 919
---------------------------
---------------------------

Income taxes paid $ 47 $ 5,715
---------------------------
---------------------------

See accompanying Notes to Unaudited Interim Consolidated Financial
Statements.



TREE ISLAND WIRE INCOME FUND

Notes to the Unaudited Interim Consolidated Financial Statements
For the three month period ended March 31, 2006 and March 31, 2005
(In thousands of dollars, except per unit amounts)


1. UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying Unaudited Interim Consolidated Financial Statements of Tree Island Wire Income Fund (the "Fund") have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP") on a basis consistent with those followed in the most recent audited annual consolidated financial statements. These Unaudited Interim Consolidated Financial Statements do not include all the information and note disclosures required by GAAP for annual consolidated financial statements and therefore should be read in conjunction with the December 31, 2005 audited consolidated financial statements of the Fund and the notes below.

Operating results for the interim periods are not necessarily indicative of the result that may be expected for the full fiscal year ending December 31, 2006. Our operations are impacted by the seasonal nature of the various industries we serve, primarily the Canadian construction and agriculture industries. Accordingly, fourth quarter results are traditionally lower than other quarters due to the onset of Winter and the corresponding reduction in consumer activities.

Certain of the comparative figures have been reclassified to conform to the current interim period's presentation.

2. FORMATION OF THE FUND

The Fund is an unincorporated open-ended, limited purpose trust established under the laws of the Province of British Columbia pursuant to a Declaration of Trust dated September 30, 2002.

Each unitholder participates pro rata in distributions of net earnings and, in the event of termination of the Fund, participates pro rata in the net assets remaining after satisfaction of all liabilities. Income tax obligations related to the distribution of net earnings by the Fund are the obligations of the unitholders.

The Fund owns 100% of the common shares of Tree Island Industries Ltd. ("TIL").

3. INCOME TAXES

Income tax obligations relating to distributions from the Fund are the obligations of the unitholders and, accordingly, no provision for income taxes on the income of the Fund has been made. A provision for income taxes is recognized for TIL and its subsidiaries, as TIL and its subsidiaries are subject to tax, including large corporation taxes. The provision for the period is divided between current and future taxes as follows:



Three Months Three Months
Ended Ended
March 31, March 31,
2006 2005
------------ ------------

Current tax expense $ (1,073) $ (1,902)
Future tax recovery 1,030 1,064
------------ ------------
$ (43) $ (838)
------------ ------------
------------ ------------


The provision for income taxes varies from the amount that would be expected if computed by applying the Canadian federal and provincial statutory income tax rates to the earnings before income taxes as shown in the following table:



Three Months Three Months
Ended Ended
March 31, March 31,
2006 2005
------------ ------------
Income before provision for
income taxes $ 5,314 $ 7,446
Income of the Fund subject
to tax in the hands of the recipient (5,913) (5,909)
------------ ------------

(Loss) income of subsidiary companies
before income taxes (599) 1,537

Tax Rate 34.1% 35.6%

Expected (recovery) provision for
income taxes $ (204) $ 547
Increased (Reduced) by:
Expenses not deductible for tax 23 91
Differential tax rates on U.S.
subsidiaries 111 84
Differential in current income tax rate (34) -
Other 147 116
------------ ------------
Income tax provision $ 43 $ 838
------------ ------------
------------ ------------


4. POST-RETIREMENT BENEFITS

(a) The Fund has four defined contribution pension plans. Contributions made by the Fund amounted to $406 for the three months ended March 31, 2006 ($445 for the three months ended March 31, 2005). Funding obligations are satisfied upon making contributions.

(b) The Fund has one multi employer defined benefit pension plan. Contributions made by the Fund amounted to $7 for the three months ended March 31, 2006 ($6 for the three months ended March 31, 2005).

(c) The Fund has one senior executive retirement plan which is unfunded. The cost expensed in the three months ended March 31, 2006 is $48 ($52 in the three months ended March 31, 2005). At March 31, 2006, the estimated amount payable under the plan of $2,394 ($2,342 as at December 31, 2005) is included in accounts payable.

5. SEGMENTED INFORMATION

(a) General information

The Fund operates primarily within one industry, the steel wire and fabricated wire products industry with no separately reportable business segments. The products are sold primarily to customers in the United States and Canada.



(b) Geographic information

Three Months Three Months
Ended Ended
March 31, March 31,
2006 2005
------------ ------------
SALES (i)
Canada $ 21,481 $ 24,152
United States 57,254 64,896
Other 494 329
------------ ------------
$ 79,229 $ 89,377
------------ ------------
------------ ------------


As at As at
March 31 December 31
2006 2005
------------ ------------

PROPERTY, PLANT AND EQUIPMENT (ii)
Canada $ 59,542 $ 59,373
United States 29,594 31,512
------------ ------------
$ 89,136 $ 90,885
------------ ------------
------------ ------------

GOODWILL (ii)
Canada $ 23,463 $ 23,463
United States 18,668 18,648
------------ ------------
$ 42,131 $ 42,111
------------ ------------
------------ ------------

(i) Sales are attributed to geographic areas based on the location
of customers.

(ii) Property, plant and equipment and goodwill are attributed to
geographic areas based on the location of the subsidiary company
owning the assets.


Contact Information